Tower International's (TOWR) CEO Mark Malcolm on Q4 2015 Results - Earnings Call Transcript

| About: Tower International, (TOWR)

Tower International, Inc. (NYSE:TOWR)

Q4 2015 Earnings Conference Call

February 11, 2016, 11:00 ET

Executives

Derek Fiebig - Head, IR

Mark Malcolm - President & CEO

Jim Gouin - EVP & CFO

Analysts

Ryan Brinkman - JPMorgan

Michael Ward - Sterne, Agee

Carl de Jounge - Blue Mountain Capital

Christopher Van Horn - FBR & Company

Operator

Good morning, my name is Karen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tower International Fourth Quarter 2015 Earnings Call. [Operator Instructions]. Thank you. Mr. Derek Fiebig, Head of Investor Relations. Go ahead, sir.

Derek Fiebig

Thanks, Karen and good morning everyone. I'd like to welcome you to the Tower International Fourth Quarter 2015 Earnings Call. Materials for today's presentation were posted to our website this morning. Throughout today's presentation, we will reference the non-GAAP financial measures of adjusted earnings per share, adjusted EBITDA, adjusted free cash flow and free cash flow and 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 the 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 related to revenue, revenue growth, adjusted earnings per share, adjusted EBITDA, cash flow, leverage, trends in our operations, potential divestures 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 development and their potential effects on us. Such forward-looking statements are not guarantees of future performance and we do not assume any obligation to update or revise the forward-looking statements. Additional information on risk factors are available on today's materials and in our regular filings with the SEC.

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

And now I'll turn the call over to Mark.

Mark Malcolm

Thanks, Derek, and good morning. Slide 3 summarizes some of Tower's key actions and accomplishments during 2015. Early in the year we closed on the sale of one of our three factories in Italy, rationalizing capacity in Europe without incurring significant social related restructuring cost is no small feat. This action also was a key enabler in lifting our EBITDA margin for Tower Europe in 2015 by over 100 basis points compared with 2014. The action by Jim and the finance team to partially hedge our economic exposure to the euro by swapping a portion of our U.S. term debt proved to be precious with timely repricing providing about a $1.50 per share in cash plus a lower interest rate.

Following cumulative multi-year improvements in company leverage and confidence in our sustained outlook, we loosened the reins on the North American team in terms of pursuing new business and they absolutely knocked the ball out of the park. To book new business in 2015 alone that was equivalent to over 20% organic growth and that above average margin is the best possible testimony to the strength of the competitive position of Tower North America. On the in-organic front we stuck to our guns in terms of remaining cheap and patient but we were able to complete an accretive acquisition in the high growth Mexico market.

At the beginning of the fourth quarter we initiated a quarterly dividend, a nice milestone measure of the company's progress. Midway through the fourth quarter we announced plans to investigate the potential sale of Tower Europe that remains on track for a go no-go decision by about late first quarter. We see this as a no lose proposition with Towers owners, customers and colleagues. If a transaction occurs we expected to be a major positive transformative action, if not we will retain a fundamentally good business.

Later in the fourth quarter we follow through by completing the sale of two joint ventures in China and we also sold one of our two operations in Brazil. Those were accretive dispositions which we believe also better position Tower's portfolio of regional businesses in 2016 and the longer term. I must admit that I started 2015 unaware that there were studies that ranked the most trustworthy companies, but if Forbes ranked Tower the number one most trusted company who am I to argue?

And last but not least on this recap list the fourth quarter results announced today extend Tower's streak of meeting or beating the earnings consensus to all 22 quarters since our IPO in 2010. In my opinion it was a heck of a year. And I'd like to acknowledge and thank the extended Tower team for their skill dedication, execution, accountability and teamwork in making it happen. There is no better team in our business and the Tower team I know will use these successes as motivation to achieve even more in 2016 and beyond.

Now I'll turn it over to Jim to go through the financial details for the fourth quarter and full year 2015. Jim?

Jim Gouin

Thanks, Mark. Good morning everyone. Slide 4 shows summary financial information for the fourth quarter. Revenue of $494 million was down from the fourth quarter of last year. However at constant foreign exchange revenue was up about $20 million or roughly 5%. Adjusted EBITDA of $45.5 million was down from $48.8 million a year ago. Adjusted EBITDA margin for the quarter was 9.2%. Adjusted EPS of $0.67 was down from year ago reflecting primarily lower EBITDA.

Slide 5 shows our results compared with our guidance, revenue of $6 million - revenue was $6 million favorable. Adjusted EBITDA was $700,000 higher and adjusted EPS was $0.07 higher than our guidance of $0.60 as the company benefited from a greater mix of earnings coming from North America.

Slide 6 shows summary financial information for the full year 2015. Revenue of $1.956 billion was down about 5% in 2014. However, at constant exchange revenue would have been up about $55 million or 3%. Adjusted EBITDA was a $190.7 million, at constant exchange that would have been down $2.3 million compared with 2014. Adjusted EPS was $3.22 for the full year, a 7% increase from 2014 as Tower benefited from lower depreciation and amortization, lower interest expense and lower taxes.

Slide 7, explains the year over year change in adjusted EBITDA compared with 2014. The volume mix was $9 million favorable for the year as North American and Europe more than offset declines in Brazil and China. Foreign exchange translation negatively impacted results by $11 million as the U.S. dollar was significantly stronger than the euro. And net cost performance was negative $11 million for the year.

As discussed in previous quarters the ramp up and launch costs related to our North America new business served to dampen near term results. This represented an $8 million headwind when compared with 2014. As shown on slide 8, adjusted free cash flow for the year was positive $11 million which was better than our guidance of breakeven. As a reminder our adjusted free cash flow excludes the impact of customer tooling which as noted on the slide was an outflow of $33 million.

Capital expenditures were a $125 million for the year which included $44 million related to the major new business wins in North America.

Slide 9, provides our year end net debt and leverage. As of December 31, our net debt was $306 million which represents a decrease of $52 million from September 30, the change reflects the funds received in late December from the previously announced divestures of the China JV's and an operation in Brazil.

Compared to September 30, gross debt leverage at year end was unchanged at 2.4 times and net debt leverage of 1.6 times improved by 0.2 of a turn. Our year-end liquidity was a record high $372 million. As noted on the slide the company made a payment of $50 million on its term loan in January which is in addition to the $25 million paid down in early 2015.

Slide 10 shows the changes in the pension plan for the year. The year began with the liability of $69 million, our plan income and contributions reduced the liability by $14 million during the year. Unfortunately, like many pension funds returns for the full year were negative. This resulted in a $75 million liability before assumption changes. Planning assumptions going forward keep long term expected asset returns unchanged at 7.4%. The discount rate assumption was increased from 3.65% just over 4%.

This decrease liability by $11 million and updated census data increased the liability by $2 million. In aggregate this reduced the plan’s net GAAP liability to $66 million at year end.

Before turning the call back over to Mark, I wanted to spend a moment discussing a couple of notable improvements with the balance sheet that occurred during the fourth quarter. As you can see Towers year-end stockholders equity improved by about $131 million compared with September 30. This reflects primarily the reversal of U.S. deferred tax asset valuation allowances of a $124 million and the fourth quarter gain associated with the sale of the China JVs. This sale also reduced non-controlling interest in joint ventures by $47 million.

Now I will turn the call back over to Mark.

Mark Malcolm

Slide 12 recaps our capital generation and capital deployment during 2015, we have shown this format previously with forecasted data now with the actual results. The bottom line is that Tower delivered significant operating cash flow and deployed capital consistent with our priorities to further strengthen the business and add shareholder value. That included accretive growth both the organic major new business in North America and the acquisition in Mexico. And a return of capital to shareholders through the dividend initiation with the remainder mainly used to reduce net debt. I believe the scorecard for 2015 is a good indicator and reminder of our mindset and action oriented result, opportunistically and relentlessly strengthened Tower's business and reward Tower's owners.

We will begin the review of our preliminary outlook for 2016 with the planning assumptions on slide 13. Looking first at revenue our present view on industry production is pretty well aligned with the forecast by IHS. On exchange rates we presently forecast the euro to average a $1.5. On that basis and with the other exchange assumptions on the slide unfavorable currency translation would reduce our dollar revenue by about 55 million versus 2015. As a reminder when you're updating your revenue models. The sale of the Brazil operation late last year will reduce this year's revenue by about 30 million. Regarding new business of customer launch ramp up volumes are achieved we will add about $125 million of revenue in North America.

Turning to margin and earnings calendarization, the upfront costs and inefficiencies associated with new business ramp up are expected to negatively affect our results in the first two quarters of 2016. As a result we anticipate that adjusted EBITDA will be lower than a year ago in the first half and significantly better than a year ago in the second half which I presently believe will result in continuing positive earnings momentum for Tower heading into 2017. As previously discussed we will begin accruing U.S. corporate income tax this year. The projected effective bookkeeping rate is 35%. Positive update on the tax front however is that we presently do not expect to pay cash taxes in the U.S. until 2019 or a year later in the previously disclosed forecast of 2018.

Explaining [ph] assumptions result in the 2016 revenue and earnings outlook summarized on slide 14. Despite the projected currency translation headwind and the sale of the Brazil operations revenue growth is projected at a healthy 5% to 2.05 billion. For those of you keeping score this would be 8% organic growth, 8%. Despite the new business cost penalties this year and a currency headwind adjusted EBITDA is projected to be 7% higher than 2015 to 205 million including higher margin for the full year. To maintain margin while all this new business is launching is no mean trick let alone increase it.

As shown in the far right panel adjusted earnings per share is projected at $3, it's down a bit from 2015 because of the increase in the U.S. tax bookkeeping rates. At last year's tax rate we would be projecting a 21% increase in earnings per share. And we all know that exchange rates have been volatile so to provide a quick sensitivity if the euro were to remain at its present spot rate of about a $1.12 throughout 2016 that would improve the outlook shown on this slide by about $40 million of revenue, $4 million of EBITDA and $0.10 per share.

The present outlook for 2016 adjusted free cash flow is shown on slide 15. Total adjusted free cash flow is projected at $35 million as shown on the bolded line. As shown on the second roll of the chart that bottom line cash flow is net of an anticipated $35 million of this year's CapEx spending to support last year's major new business awards in North America. So the way we look at it is the underlying business is providing about $70 million of adjusted free cash flow in 2016 and we’re deploying about half of that to achieve above industry organic growth. We are presently forecasting customer tooling to be a net outflow this year but that will of course eventually zero all with offsetting cash inflows when we are reimbursed by the customers.

Slide 16, provides the financial outlook for the first quarter. Revenue is projected at 505 million, as previously mentioned earnings in the first half of the year will be negatively affected by new business costs and other calendarization effects resulting in anticipated adjusted EBITDA of 45 million and adjusted EPS of $0.55 per share. Anticipated negative adjusted free cash flow in the first quarter includes the normal seasonal working capital we built following the industry's year-end shut down.

Final thoughts are summarized on slide 17, based on recent accomplishments and a promising outlook we believe that Tower's relative competitive position is the strongest it has ever been and we have positive momentum that can carry us to much higher heights thanks to the capabilities we have developed on the engineering and technical front in program management, in operational execution and with continued financial discipline. We will not let success breed complacency or arrogance. The journey to continuous improvement at Tower is self-nurturing and has no end.

Now it seems to be involved these days to declare that the U.S. auto cycle has peaked. My personal view is that industry production will continue to increase modestly or at worst it will remain plateaued for at least the next couple years at a very supportive level for generating earnings and cash flow. Only time will tell whose view of the industry is more correct, but an important fact seems to me to be too often ignored these days is that not all auto companies will fare the same regardless of how the industry turns out.

The above industry profitable growth already booked in North America plus the significant new business opportunities we continue to be presented by customers make us confident that Tower's future is brighter than ever and our peak results are still out in front of us.

That concludes today's presentation. Let's please turn to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. And your first question comes from the line of Ryan Brinkman of JPMorgan.

Ryan Brinkman

Firstly just on maybe mix, there has been a lot of discussion included on the 4Q earnings calls about the increasing mix of SUVs and pickups in the North American market especially given you know lower gas prices or other factors, if you had Chrysler on their earnings call spoke about emphasizing trucks, Ford's got a press release out this morning about four new sport utility vehicles. So can you remind us of your exposure in North America to light trucks versus passenger cars and then how should we think about this trend impacting your business?

Mark Malcolm

We’re heavy Ryan certainly on SUVs and we have got trucks for multiple of the OEMs. We've got a mix as well I mean we've got some smaller cars but overall I would say between SUVs and trucks, it's certainly more than 50% of our lineup. So we're titled more in that direction probably even heavier than the industry overall. Frankly everything that we have is about flat out at this point in time.

Ryan Brinkman

And I think part of the story - you tried to make a big part of the story I think you know the ultimate free cash generation potential, particularly if you weren't reinvesting that into strong organic growth, and you’ve called out that the major new business awards for a 44 million drag on cash, the good investment obviously in CapEx in '15 and you've got some guidance here for '16 now too. What about beyond that? Did the new business wins that you've got and the organic growth that you’ve got booked, does that require higher spending in '17? Also do you think that the CapEx can then taper and free cash notably improve?

Mark Malcolm

Before where we are right now and it was in January I believe that we showed kind of the outlook for North America and went out to 2017 and we've talked a bit then about the outlook in terms of the spending so we get much closer to trend in 2017 absent any additional new programs we may choose to pursue. We were tad a little bit high but next year but very close to coming back to trend where we would expect to be next year. So this is the bulk of it. So last year and this year are the bulk of the spending related to that new business.

Ryan Brinkman

And just my last question is to ask you to elaborate a little bit further on your closing remarks about the North American market and the investor sentiment about what's happening with U.S. light vehicle sales etcetera. In the past you’ve talked about using IHS primarily in North America, Europe and China, these other regions are less important for you, I mean Europe might be less important going forward, still Brazil, So I would just be interested in your outlook particularly in the U.S. and I mean are sectors that [indiscernible] 30% year-to-date, can you just talk about where you see the U.S. cycle going and what is embedded in your estimates relative to the cycle?

Mark Malcolm

Yes, we have in the last slide in our deck this repeats for those who aren't as familiar what IHS sees in terms of the industry production, for the year up 4% in North America and again that's pretty close. As you rightly pointed out we go apply that to our mix of vehicles and we’re in a good portion of the market in that regard. Modest growth, I think I personally believe is what the economy will sustain for where we’re. Again if in fact it turns out that we're not going to continue growing at what I fear is people hear the word peak and it just gives a mental picture that somehow you are at a peak and you come sliding down. And if in fact the growth is over, my personal view is I will just go a couple years at a time. It's going to be a couple years plateaued, up around where we are and that is a beautiful place to do business certainly a much better place to do business than the markets seem to be anticipating where things will be.

Now we're resilient on the way down as we were you know in the last recession but I frankly just don't see that, people want to emphasize the negative. I don't see it in anything from the customers. I don't see it in anything in the market and after starting to get closer to 40 years in the business while I'm wrong a lot, I'm not wrong every time. I just don't see the problem.

Operator

Your next question comes from the line of Michael Ward of Sterne, Agee.

Michael Ward

Two things, first off one of the things you said in your release is you see significant opportunities from your customers. Is there something different there or am I reading that wrong?

Mark Malcolm

No, I mean we are seeing significant opportunities again, Mike, we’re built in the numbers we just showed here had -- you take strip away the currency and we’ve got 8% year-over-year organic growth and frankly that's more than explain in North America and obviously it's having some above trend CapEx for. We’re literally sitting and looking at programs that if we chose to pursue them hard I think we could do two things. I think we could commit all of our free cash flow out through 2019 and book incredible rate of organic growth through 2020. Now that's not necessarily the smart thing to do and we weigh those things and we just don't chase growth just because it's there, but we're literally in the position where we are and I think it's two things. Well you know this going to be a hard thing I'm going to challenge you Mike. You can be the first one of your esteemed group to use the word grow-thy for Tower. We’re in one of these sections that actually it's growing. If you're really good for where we are and don’t have to worry about some technology to be invented. The trends are all going our way and we’re getting opportunities to take share in terms of how we have performed and with the always you know little bit by little bit pushing more and more of this outside. It's just tangible and it's real growth and those of the trade-offs we’re making.

We keep these terrifically high rates of organic growth or do we temper it to make sure that we can maintain free cash flow. Our mindset is to temper things a little better, but you know it's a new world here.

Michael Ward

Is it unique to North America where you are having those opportunities?

Mark Malcolm

This is unique for us in North America right now. I think the overall North American market is still on the OEM side is healthier than the rest of the world. So certainly that's part of it and our relative position within the sector is much stronger in North America.

Michael Ward

So we do assume then if you’re successful in selling the European business, that some of that capital would be redeployed to take advantage of some of these opportunities?

Mark Malcolm

It gives us incredible flexibility between accretive growth and/or, and might be and, returns of capital to shareholders, that's correct.

Michael Ward

And just a second, have you guys ever looked at like how much volume would have to go down to get to breakeven type level like in North America?

Mark Malcolm

Well, I will tell you this way we did in 2008-2009 which good lord that goes beyond what anybody would ever expect to happen again. Our overall EBITDA margin was in the seven. So I don't know how we ever get down to the zero. We can work things out, we have got some resilience in our model.

Operator

And your next question comes from the line of Rich Kwas of Wells Fargo Securities.

Unidentified Analyst

This is [indiscernible] for Rich Kwas. You highlighted in the release the margin for the first half of 2016 will be negatively impacted by new business costs. Yet the year-over-year CapEx number related new businesses is going down. Should we expect to see a similar benefit in the first half of 2017 as you've outlined in the second half of 2016?

Mark Malcolm

Directionally speaking, yes.

Unidentified Analyst

Okay. And then on they use of proceeds you guys touched on it from the European business in the event that you do reach the go decision. Do you have a level the you kind of think about conceptually where you'd be willing to leverage the business given that the North American businesses the higher margin and the trends are more positive?

Mark Malcolm

For long term target it's kind of tradeoff between optimizing cost of capital and having a healthy balance sheet for what is still a cyclical business right, it's been one time net debt. I don't see that changing whatever region we would be operating in.

Operator

And your next question comes from the line of Carl de Jounge of Blue Mountain Capital.

Carl de Jounge

Just a couple of quick questions. First on cash flow I want to just, Ryan touched on this I just wanted to follow up on the customer tooling piece and what I'm curious about as you've laid out on slide 15 obviously you’ve funded 33 million of customer tooling in '15. I think it was 6 million that you funded in 2014 and then another 25 in '16 which. I would think means that on the customer tooling side you should sort of repatriate a lot of that cash starting in 2017. So maybe you could touch on how those cash flows from customer tooling will pan out in '17 and '18.

Jim Gouin

Carl, we don’t give more wholesome guidance on '17 as we get further into the year. You're right it absolutely positive, it should be positive next year. A lot of this get into the timing of when things go into production for the various models and when we sign up. So it's all the program, not just the new business that are impacted in that customer tooling. Frankly we will work to get some of our things certified and beat the number that we have this year, maybe even beat the number that we have in for this year. I'm just not prepared to be more precise on what that number will be next year at this time.

Carl de Jounge

Okay, but at least positives that’s a good thing. And then my second question was on Europe, of course I saw the slide that you touched on there. My question was simply back in November you laid out what you call directional financial data on Europe. You know you projected at the time for 2015, 650 of revenue, 70 million of adjusted EBITDA and then sort of the unlevered cash flow excluding customer tooling of about 5% of revenues. So that's about 32 million. Could you touch on directionally since you sort of laid out '15. How do you see those metrics in 2016? I know you didn't break out Europe in your 2016 guidance but I'm just trying to understand if you think given that you're using IHS projections you think those are accurate here, looking forward Europe I think is maybe enjoying slight uptick in production and I'm curious if you think those metrics are stable going forward or maybe have a little room to the upside for Europe?

Mark Malcolm

Yes, Europe directionally we do have between industry and our share performance in industry. We anticipate both higher revenue and higher EBITDA at constant currency, so in local currency we expect further improvements in '16 versus '15. The cash flow has to do with the CapEx etcetera, so I will just say it's still positive free cash in Europe in 2016.

Operator

[Operator Instructions]. Your next question comes from the line of Christopher Van Horn with FBR & Company.

Christopher Van Horn

I wanted to ask you, are the cost that you’ve seen kind of hitting the EBITDA line in line with what you’re expecting and then you talk about significant back half 2016 EBITDA growth relative to back half of 2015. I don't know if you would like to put a number on it that would be great but if not is that kind of a run rate we could expect as we head further around the future?

Mark Malcolm

Other than the kind of typical lumpiness that we would have, yes I mean we have certainly and I think North America is kind of the big part of our business now that’s kind of wagging the whole dog if you will right, and so if you think about it those cost hit primarily in North America now this year and this is typical for our business. The revenue comes before the margin and if you can just hold that through there that's pretty darn good and then that business is on then the margin will actually pull forward and then the directional guidance we’ve given for North America where we purposely skip '16 when we did it because we didn’t want to have the overall discussion on '16 at the time, we said from '15 to '17 we will pick up 50 basis points of margin in North America. And I'm telling you that part isn't being picked up this year what the cost would have to go in.

So that will give you a sense at the overall gain that we would anticipate in margin heading into next year, other things being equal.

Christopher Van Horn

And then can you comment briefly on the European macroenvironment that you saw in the fourth quarter. We've seen registrations just be very impressive over there for new vehicles and are you seeing that kind of flowing through to the European business?

Mark Malcolm

Yes, not certainly the way the registrations the production that you see is obviously what drives our revenue in the region. Certainly I would say that the sales are supporting the level of production that's in the forecast although it's very modest, right? You know if it's a couple percent for the year that's kind of in-line with what we're feeling over there. We're not feeling it down nor are we feeling some explosive growth either. So it's steady as it goes and that's okay. Again we picked up over 100 basis points in Europe between industry, our normal improvements and what was that we restructuring or the sale that we did in Italy and things continue to progress forward so it's -- right now knock on wood it's all green lights over in Europe.

Christopher Van Horn

And then one last one. Any of the new business specifically the market share gains that you saw, were any of those new business wins dual sourced or you kind of the sole guy on those market share gains?

Mark Malcolm

I don't get into specifics Chris, only because it kind of leads to other specific questions and you know I'm not trying to hurt your ability to see our business I just I'm very cautious about saying things that the customers don't want me to say.

Operator

There are no further questions at this time.

Mark Malcolm

Okay, thanks Karen, and thanks to everyone for your participation in the call today. I'll be around the rest of the day for questions and answer if you’ve any follow ups. Thanks.

Operator

This concludes today's conference call. All participants you may now disconnect.

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