Tower International's (TOWR) CEO Mark Malcolm on Q1 2016 Results - Earnings Call Transcript

| About: Tower International, (TOWR)

Tower International, Inc. (NYSE:TOWR)

Q1 2016 Earnings Conference Call

April 28, 2016 13:00 ET

Executives

Derek Fiebig - Head, Investor Relations

Mark Malcolm - President and Chief Executive Officer

Jim Gouin - Executive Vice President and Chief Financial Officer

Jeff Kersten - Senior Vice President and Corporate Controller

Analysts

Mike Ward - Sterne, Agee

Itay Michaeli - Citi

Rich Kwas - Wells Fargo Securities

Ryan Brinkman - JPMorgan

Carl de Jounge - BlueMountain Capital

Dan Drawbaugh - FBR & Company

Operator

Good afternoon. Thank you for standing by and welcome to the Tower International First Quarter 2016 Earnings Conference Call. [Operator Instructions] I would now like to hand the floor to Derek Fiebig, Head of Investor Relations. Thank you. Mr. Fiebig, the floor is yours.

Derek Fiebig

Thanks, Latonya and good afternoon everyone. I would like to welcome you to the Tower International first quarter 2016 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. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP are included in the appendix to 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 relative to revenue, revenue growth, adjusted earnings per share, adjusted EBITDA, cash flows, leverage, trends in our operations, potential divestitures 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 obligation to update or revise the forward-looking statements. Additional information and risk factors are available in 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 will open up the phone lines for questions and answers.

Now, I will turn the call over to Jim.

Jim Gouin

Thanks, Derek and good afternoon everyone. Slide 3 shows summary financial information for the first quarter. Revenue of $511 million was $6 million above our guidance and up 3% from the first quarter of last year. At constant exchange, it would have been up 5% from a year ago. Adjusted EBITDA of $46.2 million was about $1 million ahead of our guidance, but as expected down from $48.1 million a year ago, reflecting the planned and anticipated upfront cost associated with the major new business awarded to Tower North America in 2015. Positive volume and mix was a partial offset.

Adjusted EBITDA margin for the quarter came in as expected at 9%. Adjusted EPS of $0.63 was $0.08 ahead of guidance, reflecting primarily higher EBITDA, lower interest expense and lower taxes. Last year, we reported $0.82 of adjusted EPS for the quarter as our profits in the U.S. were not taxed because of our valuation allowance, which was reversed in the fourth quarter of last year. First quarter 2016 adjusted EPS would have been $0.85 at the 2015 U.S. tax rate.

Slide 4 shows our free cash flow for the first quarter. Capital expenditures were $26 million for the quarter. Working capital, excluding customer tooling, was a use of $26 million for the quarter consistent with Tower’s typical seasonal cash flows. Adjusted free cash flow was a use of $12 million and customer tooling was an outflow of $10 million, resulting in a total free cash flow use of $22 million. Although not shown on this slide, as previously mentioned, we paid down $50 million on our term loan in January and gross debt leverage improved by 0.2 of a turn to 2.2x. Net leverage was 1.8x as of March 31. Based on our outlook, for the full year 2016 and 2017, which Mark will discuss in a moment, we expect to make significant progress towards our long-term target of 1x net leverage.

And with that, I will turn the call over to Mark.

Mark Malcolm

Thanks, Jim. As summarized on Slide 5, we have completed our evaluation and have decided to retain Tower Europe as a long-term core business. As stated at the outset of the process, there was no requirement to sell. Tower Europe is a strong and competitive business. So, for a sale to take place, the price had to be high enough to satisfy our view of fair value and accelerate prospects for the remaining business in North America sufficiently enough to offset the loss of the European business, which provides benefits in the form of customer and geographic diversification as well as earnings and cash flow. None of the offers we received reached the disciplined target that we set. In addition, our view of the future outlook and intrinsic value of our European business has actually increased in recent months, reflecting significant potential net new business opportunities that have arisen with multiple customers. Simply put, we are confident that significantly more longer term value will be created by retaining Tower Europe, which as we will soon discuss dovetails well with an excellent near-term outlook for the total company.

As outlined on Slide 6, we have however concluded that our remaining businesses in Brazil and China, which together represent less than 5% of total company revenue, are no longer core for Tower. And these businesses will be sold in the next 12 months. As shown in the second bullet point, projected 2016 financials for combined Brazil and China, including revenue of about $100 million and adjusted EBITDA of $3 million, with a net loss per Tower share and negative free cash flow. Since the decision to sell was made at our April board meeting, the first quarter results that Jim presented included the results for Brazil and China as do our first quarter financial statements. In next quarter’s financial statements, Brazil and China will be accounted for as discontinued operations. To clarify as much as possible, we are providing updated outlooks to conform with the prospective accounting for continuing operations beginning with the outlook for full year 2016 on Slide 7.

This slide shows a lot from our prior guidance to the present outlook for the continuing operations in North America and Europe. Adjusted EBITDA, as displayed in the bar chart and revenue, margin, adjusted earnings per share and free cash flow are shown below the chart. As just discussed and shown in the second column, the discontinuation of Brazil and China reduces adjusted EBITDA and revenue, but it improved this year’s outlook for earnings per share and free cash flow. The third column shows that we are raising our outlook for the continuing operations with adjusted EBITDA of $3 million, revenue of $25 million, adjusted earnings of $0.10 per share and free cash flow better by $5 million. That brings us to the present absolute full year outlook for continuing operation in the far right column. Compared with prior guidance for the total company, EPS is up $0.20 and free cash flow is up $10 million.

Slide 8 provides the second quarter outlook for continuing operations. In our prior guidance for 2016, we advised that the timing and size of the upfront launch related cost associated with the major new business in North America were expected to result in unfavorable quarterly earnings comparisons versus 2015 in the first half of the year and then turn into strongly favorable comparisons in the second half as some of the cost pressures dissipate and margin improves along with the revenue. As shown on this slide, that’s still how we see 2016 developing.

Slide 9 provides our preliminary directional outlook for continuing operations in 2017. The improvement in margin that we expect to occur in this year’s second half provides strong earnings momentum in the form of the full year effect on next year’s results. As shown in the far right column, we presently anticipate adjusted EBITDA in 2017 to increase by about 10% from projected 2016 to $225 million and adjusted EPS to increase by about 16% to $3.70 per share. Adjusted EBITDA margin in 2017 is presently projected at approximately 11% and free cash flow is projected at a robust $70 million as some of the customer tooling that is being spent by us in 2016 is reimbursed by customers in 2017. Bottom line, I believe we are about to enter a sweet spot for combined Tower North America and Tower Europe, the strongest and best performing Tower ever.

That concludes today’s presentation. Now, let’s please turn to Qs & As.

Derek Fiebig

Latonya, if you could please remind participants how to get in line for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Mike Ward of Sterne, Agee.

Mike Ward

Good afternoon everyone. Thanks for taking my question.

Mark Malcolm

Sure Mike. Good afternoon.

Mike Ward

Mark, if you couldn’t get the right price for Tower Europe, does that suggest there might be opportunities out there for you from an M&A standpoint to maybe look for acquisitions to grow that business?

Mark Malcolm

Maybe at a point in time Mike, but what we have seen up till now in North America and what I think was going to start seeing in Europe is the opportunity for organic growth. And as you recall, the business we have been able to win organically in North America has been at multiples, if you will, that are even lower than the absurdly low multiple that Tower trades at today. It’s also really less risk involved, if you think about it in terms of doing organic growth, you don’t have to bring in different systems, deal with different potential cultural issues, etcetera. So could we buy, but you are talking about multiples and in around where we are, don’t think that’s going to be as good a use as pursuing organic growth opportunities.

Mike Ward

And those opportunities are both here and over in Europe?

Mark Malcolm

Yes. And that’s the interesting change. We are feeling it. And I think we are starting to see it even show up in better results from the OEMs, if I am following correctly. There has been what feels like a meaningful pivot in Europe in the – and a mood and posture of the OEMs. It may be that the recovery has now lasted long enough and has gotten far enough along in Europe that people are feeling better about the future. But we are literally seeing more potential. I use the word potential, new business opportunities right now in Europe than at any time since I have been at Tower. And that’s not a bad thing. We will see how long these turn out, but that’s – that makes me feel really good about Europe. Won’t show up with the lead times still 2018, 2019, but you see we are already looking through 2017. So that certainly influences our view of the future going forward.

Mike Ward

Thank you. Jim have you seen any meaningful change in the price down behavior from the vehicle manufacturers?

Jim Gouin

No.

Mike Ward

Thank you very much. Thanks Jim.

Mark Malcolm

Okay. You bet, Mike.

Operator

Thank you. Your next question comes from the line of Itay Michaeli of Citi.

Itay Michaeli

Hi, good afternoon everyone.

Mark Malcolm

Good afternoon.

Itay Michaeli

Maybe just on Europe, Mark, you just maybe just describe how the business generally performed in the first quarter and then in the 2017 outlook that you provided, roughly kind of how the Americas versus – North America versus Europe, what the expectations there are?

Mark Malcolm

You won’t have to wait long to be able to see the numbers as we change things here in the continuing operations that become much more transparent. Really, in Europe right now, Europe’s margin has held in there. It got the improvement last year as we shutdown and sold the factory and consolidated our operations in Italy, which we had talked about was the one area where were over-capacitized. It’s not really getting much top line at this point in time and that’s two reasons. One is that we were pushing our CapEx dollars towards all the opportunities in North America and basically holding flat in Europe. And additionally, it just so happens while the overall environment is improving in Europe, we happen to have some customers with key platforms who are on the back end of their cycle. So we will pick those up in the next 1 year or 2 years to get it. So we have got kind of the mix issue in terms of our platforms. So revenue is relatively flat in Europe right now and that’s what’s embedded in through 2017. So the pickup through 2017 is still predominantly the pull-through of the business we have talked about previously that we won in North America. And as I say going forward, all the numbers would become a lot more transparent.

Itay Michaeli

That’s very helpful. And then just on the Brazil and China operations, as I know it’s not too material, but as you look to divest those, I mean do you expect you may need to contribute cash just given the slight free cash flow use or do you think you may even donate some proceeds?

Mark Malcolm

I am hoping we will get some proceeds, to be honest with you. The assets are still in place. And you got two different markets going on over there, right. Brazil is the basket case, everyone knows. Our customer list is very good. Our assets are very good. We have been a good performer. It’s pretty amazing for where we are at right now that you are not seeing worse losses or at least an EBITDA loss overall. So the team has done a good job of rightsizing its way along. It’s just – we are just too small in those countries Itay and they are now too smaller relative to total Tower for us to hang around and wait for a recovery, which even when it happens would not be meaningful to us overall. I can tell you, the net book value of the assets combined approaches $50 million. We are not putting a number on it yet as to where we will come out given that we just took the official decision. We will either if we think – our best guess is there will be some write-down, we will have to record that in the second quarter. But that’s the net book value of the assets and liabilities is the combined $50 million.

Itay Michaeli

Great. Just lastly on the launch related costs and I apologize if I missed this, but can you just quantify what the full year impact in 2016 that would not recur in 2017, what that number is?

Mark Malcolm

Well, I think you are seeing a lot of incrementality, you guys like to use that terminology and you are seeing a $20 million pickup on $50 million of revenues. So 40% incrementality isn’t normal. That’s the costs going away. I think that’s probably the best way to look at it Itay, in terms of the cost that won’t happen. And certainly, you have never seen us at 11% on a combined basis. So you see in the pull through of that higher margin business that we said we brought in and again, those costs dissipating.

Itay Michaeli

Great, that’s very helpful. Thanks so much Mark.

Operator

Thank you. Your next question comes from the line of Rich Kwas with Wells Fargo Securities.

Rich Kwas

Hi, good afternoon. Mark, wanted to just see, get your thoughts on what happened with the process with Europe, so it seems to me if you would have – by announcing this, you thought there was probably a better than even chance that the business would ultimately be divested by announcing those back in November. And there is a transaction that was done towards the end of the last year by one of your larger competitors, suggest there is interest in the marketplace. And I was just curious, what transpired here over the last few months given that Europe is getting better, right, production wise and the asset itself is generating pretty good margin. And there is obviously, a sale could have created some optionality for you and the management team, so just curious can you give us any more detail on what transpired?

Mark Malcolm

Yes. I will give it to you and at the end it comes out where it comes out. So some of it is going to be my judgment and what I was hearing and how it went through the process. But I think that’s what you are asking for. The deal was done and it was bought by one of the very largest competitors, right, Magna, bought at a multiple, as best I understand, at less than I would have found acceptable for our business. But so be it. I can tell you, the largest competitors, including Magna had stated itself, if you will and our business overlaps a lot with Magna’s and with GameStop who is the other big player. They are the big player in Europe, which made us a very difficult acquisition for those two big guys, because the customers would not have liked it. And if they pulled back any business, it would have made it – not make business. We didn’t expect. I didn’t expect the big guys to play. What I expected was that the number of companies that are similar size to Tower Europe would see this as a once in a lifetime opportunity and would come in. And that was why you are right I thought there was more than a 50:50 chance to get it. And we got reasonable initial bids. And my honest takeaway is as these companies went through the process and they realized that frankly we run better than they do, I felt like they almost got intimidated. They were afraid they would not be able to run the combined business and pull through the results that we do, never mind make the synergies needed for them to pay the necessary price.

Now, other things happened like credit markets tightened a little bit. I don’t think that’s what undid it. But it came up just a bit short, not a lot short, but it’s a bright line test for us. You know, Rich, everyone knows, we are disciplined in everything we do. And you are right we did it because I thought it might create some near-term opportunities that also bolstered the long-term. But in the end, it’s got to be able to be good enough to be the long-term. And I maybe the largest individual shareholder and I guess that’s the best evidence I can tell anybody that I think the best long-term value creation and the fundamental value creation for Tower is to hold on to this business rather than make a near-term transaction that might just feel good in the near-term.

Rich Kwas

And then I mean I know you talked about growth opportunities in Europe out in the next few years, but it sounds like you are pretty confident that this uncertainty here in the last few months is not going to have any negative impact on your position to win new business?

Mark Malcolm

Just the opposite and I am really glad you brought that up. As it’s been a fair question we have had over time, because it’s not been our modus operandi on some of the deals that we have done to declare us and put them out there, who knows maybe that dynamic affected some of the bids that we got as well, but this business is so big for us. It didn’t have 100% confidence on how it would turn out. The customers if, in fact, we had tried to do this behind the steel curtain, it would have gotten out and we would have been put in the penalty box. We would have been forced to sell regardless of price at that point in time. We spoke with people beforehand. We said what we are doing and why. And in fact, we have had a chance to make the calls around the customers and we are getting thanked. It may turn out – one of two things is happening, either this is just an interesting point in time when the majority of our customers say they want to talk to us about new business, which has only been bolstered by the way we treated them in this process. And I have said it. Every one of them has said that today let’s not guess anyone, that’s what they said today.

I think it’s something more than that. I really do think there is more new business coming on in the market in Europe and we have seen for quite a long period of time. I think you can see that in an improved OEM results would trickle downhill and BW having to spend $20 billion or thereabout on diesel means that some of their other spending is not going to be done that they would normally do inside. And they are the number one player in Europe. And they are our number one customer and our footprint fits beautifully. So I have got a lot of optimism about opportunities here going forward.

Rich Kwas

Okay. And then just one last one for me, on the 2017 outlook, well, a), I guess any change for this year on currency assumptions? And then, b), on the 2017 outlook, what’s the assumption behind the revenues with regards to North America and European production? Because obviously in North America, there is some costs we are concerned around where current inventories are and as we move into the second half of this year in ‘17 around production?

Mark Malcolm

Yes, sure. We are not far off. Our view pretty much blank, it’s where IHS is on industries. That’s about 1% up next year. The numbers we recognize, which is actually our last exhibit attached in the appendix and 2% up in Europe. So, we are not dependent on much in that regard. If it goes down, it will go down for everybody. I can tell you again and nobody has got a perfect crystal ball, we don’t feel it right now anywhere in North America. And possibly Europe will be even a little bit better than that 2%. Currencies for us, we are not betting on currencies one direction or another. So, our ‘16 and ‘17 basically reflect the existing currency translation rates.

Rich Kwas

So, you had $1.05 I think for the year or is that…

Mark Malcolm

Yes, we are taking it up now.

Rich Kwas

Okay, thank you.

Mark Malcolm

You bet.

Operator

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

Ryan Brinkman

Thanks. As you look at those potential organic growth opportunities in Europe that you mentioned that maybe the potential acquirers weren’t giving you sufficient credit for or that made holding the operations incrementally more positive, what is the potential timing of any such opportunity there? Is this kind of a couple of years out? And then what kind of upfront investment would be needed? Would it sort of be like in North America? And then sort of lastly, what kind of IRR would be possible in that investment? Could it approach the attractiveness of your recent investments to grow organically in North America?

Mark Malcolm

These are items, Ryan that are really just starting to become clearer in terms of details right now. So, I can’t answer that with any precision. In fact, I got to tell you we have said all along we wanted to end this process by about the end of the first quarter, because we know we were kind of on new business hold and other things along with it. That’s why we kind of drew the curtain down and said we had to either say yes or no. And we made the decision right about now in part because for these opportunities that I am discussing, we are being told by each of the customers, hey, we want you in this process, but we can’t include you in the process if we don’t know who is going to own you. So, we are literally right at the front end and they are inviting us in for meetings right around now. So, I am guessing some here. Our best estimate is you are really not talking about any meaningful revenue growth until ‘18, during the ‘18, ‘19, but maybe a tale of some cash out in ‘17, but probably bigger in ‘18. And I just don’t have enough other detail to answer that anymore precisely right now.

Ryan Brinkman

No, that was actually very helpful. And then just maybe one more question kind of on the near-term guide and clarification there, just looking at like Slide 9, it talks about how you are looking for $55 million of higher revenue. And was it on another slide, I think it was on Slide 8. So, you got the $55 million higher revenue and then there is the $5 million lower year-over-year EBITDA. You mentioned before 20x and again today that this is because there is the launch cost associated with the ramp of organic growth. But with that said to try to better gauge performance of the underlying business kind of hard in the second quarter, can you say what sort of incremental margin you expect to earn on the growth in the base business or maybe said differently, can you call out the launch costs?

Mark Malcolm

Yes. I am going to give it to you. I want to keep giving it through your blended here right now, because it will always start moving around the pace depending on the product mix. Now, the fully accounted returns that we talked about on the business that we brought in, in North America, which is driving a lot of this revenue growth, averaged about 15% when it’s there. You are certainly not seeing that fully in the second quarter, because we still have these costs coming rolling in, but you see due to the same comparison, I would ask you, Ryan, for the second half of the year and you’d see in total, it’s not bad and it works its way out. So really, what we are seeing is a pull-through as our costs are rolling in. The prices are set when we go ahead and do it. The numbers we provided further that the new business is coming in at about 15% is exactly what we are seeing.

Ryan Brinkman

Okay, great. Thank you very much.

Mark Malcolm

You bet.

Operator

Thank you. Your next question comes from the line of Carl de Jounge of BlueMountain Capital.

Carl de Jounge

Yes, thanks for taking my questions.

Mark Malcolm

Good morning, Carl.

Carl de Jounge

I guess, good morning or good afternoon, the first one is on capital allocation. So, you did a good job on Slide 9, I think laying out the 2017 numbers, including earnings and cash flow, which is obviously very robust. And if I am doing the math right, you are looking at $42 million of free cash flow here in the remaining three quarters. You mentioned the $70 million for 2017 and talked prospectively about some potential proceeds from Brazil and China. So, when I do the math there, I mean I actually get to less than a turn of leverage by the end of ‘17 just below a turn of net leverage. And so with that context and knowing where your stock is trading and arguably one could argue I think you agree with this that you are not really being rewarded maybe fully or fairly by the market, when would you – is that one turn of net leverage, is that target sort of drawn in the sand and you have to get there before you consider other uses of your excess cash or should we think that perhaps a buyback, as you get better line of sight and directionally see your net leverage come down rapidly, is that something that could be tabled you think by the Board?

Mark Malcolm

And it’s a thoughtful question. So I am going to give you an answer that isn’t definitive, but you are asking what I think and how we think about it. You are absolutely right Carl, that 1x is where we think we need to be on a going basis. And if we talk about deployment of capital, return of capital to shareholders, we have shown. We went on dividend before we got there. We could see it coming reasonably on the horizon. That’s a lesser amount obviously we had to do. We do anything meaningful there for on a share repurchase, I view as we will have to be a little closer than we are right now. Do we have to be all the way across the threshold, I think that’s being – I wouldn’t say that at this point in time. That’s something that the Board will have to make that final call on. It will depend on where the stock is. I am not naïve to expect that the stock wouldn’t react negatively today in terms of what we did. Some people who are in there looking for a transaction and they are headed to the exit.

Having said that, the numbers we have put forward provide more fundamental intrinsic value than has ever existed for Tower. So I think the gap is large. I am very hopeful that when this settles and the sellers go away, that price is going to react appropriately. So that’s part of the war gaming we have to do Carl, we are trying to predict the future is, if I am right there, I would like to see our stock in what, 40s or 50s, before we get to the end of next year, which makes maybe a share repurchase at that point in time less valuable, less needed, probably less asked about. But if the stock continues to lag and we get closer, the more it lags or goes down further from where we are, the closer we get to that time curve where we have that threshold right there in front of us. Certainly, the opportunity and the likelihood increases that we would move to that deployment of capital in terms of a share buyback. That’s one of the things we looked at. We thought it might be positive, it could be positive, if we were able to have a successful transaction for Tower Europe. We said it, if it were it come in at a price that we hoped for, it gave us that optionality to do both organic growth and a share buyback. So, you know the Board considers the deployment of capital and share buyback, one of the tools that it anticipates getting to at some point in time. We are just going to have to wait another year or so versus the transaction we talked about today. But in the end, I think we can get to the same place with a stronger overall business.

Carl de Jounge

Thanks Mark. That’s very helpful and that’s good to hear. I guess it just brings up one follow-up question. And I mean obviously it would be great if the market took note of your accretive and profitable growth going forward. But if it doesn’t, I mean if we find ourselves here a few quarters forward and you are posting numbers which are improving, but the stock sort of refuses to budge, do you think – when do you sort of – when do you think the Board says look, we are not getting fair consideration for the growth or the organic growth, when do you think the Board says it’s time for – it’s time to entertain selling the entire company, because I mean you have told us today that Europe is off the table, but I guess what I am interested in is, when do you think enough is enough, if the market won’t give you fair value, maybe when will the Board consider other strategic options?

Mark Malcolm

Well, I can tell you at this point in time Carl, the company is not being offered for sale. Having said that, the obligatory and proper answer, we care, we take our fiduciary responsibilities very seriously. Any kind of speculation as to what set of circumstances would be to what type of concrete action, I just can’t – I just don’t have any basis to provide anything meaningful in that regard right now. Again you all know, I am there alongside in terms of being a shareholder. And this ticks me off, but we will continue to deliver the results. And there aren’t tools that we don’t consider. And hey, I own this one. I am the one that suggested going out and trying to sell Europe as a way to accelerate value creation. And I apologize that it didn’t turn out. I certainly don’t apologize about trying to do everything we can to realize the value I think that shareholders deserve. And you can rest assure, I am not going to be patient in terms of trying to exact the value that I think is proper.

Carl de Jounge

Great, thanks. I appreciate your candor. Thanks Mark.

Mark Malcolm

You bet, Carl.

Operator

Thank you. Your next question comes from the line of Christopher Van Horn with FBR & Company.

Dan Drawbaugh

Dan Drawbaugh on the line for Chris. First, solid results on the quarter, congratulations.

Jim Gouin

Thank you.

Dan Drawbaugh

Would like to focus a little bit on North America, most of my questions have already been answered. But I am just wondering if you could give a little color on what sort of quoting environment looks like, what the new business pipeline looks like there, I know we have talked a lot about potential opportunities you see in Europe, but what about North America?

Mark Malcolm

North America, the pipeline remains good. We purposely and I think we signaled this previously, taken the business, taken the business pause, so we can pull some of that cash through and that’s what ‘17 has that kind of pause built into it. And now we will start looking into ‘18 and ‘19 and there are opportunities there. It also happens in North America that some of our key existing vehicles come up for replacement right in and around that time. So a portion of our – a bigger portion of our capital spending plan in North America will be devoted to replacement vehicles as we hold off on some of that new business. But overall, the environment is good. We are pacing ourselves, if you will at this point in time.

Dan Drawbaugh

Understood. Thanks for the color. In terms of any of those replacement vehicles, is there any situation in which you would be able to win a bit more content on any of those vehicles when sort of the replacement cycle comes around?

Mark Malcolm

That’s always what we try to do.

Dan Drawbaugh

Right. Sure, understood. And then also I was wondering if you could update us on progress at the Mexican supplier recently acquired, just wondering sort of what the business looks like there at this point?

Mark Malcolm

It’s tracking right along the initial expectations that we had, so it’s – which is good. It’s still small relative to the total. But the direction and everything is tracking as we had hoped. So knock on wood, that’s a good one.

Dan Drawbaugh

Alright, perfect. Thank you, guys for the color.

Mark Malcolm

You bet, Dan.

Operator

Thank you. At this time, there are no further questions. I will return the floor for closing remarks.

Derek Fiebig

Well, thanks everyone for participating on the call. I will be around to answer any additional follow-up questions you might have. Have a great afternoon.

Operator

Thank you for your participation in today’s Tower International first quarter 2016 earnings conference call. You may now disconnect.

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