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Superior Industries International, Inc. (NYSE:SUP)

Q2 2008 Earnings Call

August 7, 2008 1:00 pm ET

Executives

Steve Borick - President, Chief Executive Officer and Chairman

Erica Turner – Chief Financial Officer

Analysts

Joe Durham – Credit Suisse

David Leiker – Robert W. Baird & Co. Inc.

Joe Amaturo – Buckingham Research

Brandon Ferro – KeyBanc Capital Markets

Jake Crandlemier – Ramsey Asset Management

Adam Comora – EnTrust Capital

Operator

Welcome to the Superior Industries second quarter 2008 teleconference. (Operator Instructions) For opening remarks I would like to turn the call over to Steve Borick, President, CEO and Chairman.

Steve Borick

We are proud to release earnings this morning. As most of you saw, having a $0.19 earnings in this environment, we feel very good about and I'm going to at this point turn the meeting over to our CFO, Erica Turner and then of course, we'll all be available for questions and answers after Erica's statements.

Erica Turner

Any comments made in this webcast are subject to the Safe Harbor for forward-looking statements at defined by 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. Issues and uncertainties that are of particular significance at this time relate to global competitive pricing, customer schedule volatility, potential declines in the production of cars and light trucks and the successful completion of our strategic and operating plan. Please refer to the company's annual report on Form 10-K for a complete write up on forward-looking statements and other factors.

This morning we reported net income for the second quarter of 2008 of $5.1 million, or $0.19 per diluted share compared to a net income in 2007 of $3.2 million or $0.12 per diluted share. Consolidated revenues decreased $37.8 million, or 14.8% to $217.4 million from $255.2 million in the same period a year ago. Despite this lower volume, income from operations was $5.2 million compared to income from operations of $4.5 million in 2007.

The major factors contributing to the increased profitability in 2008 compared to 2007 were higher tooling reimbursement revenues of $4 million, a favorable inventory adjustment of $1.3 million and a $2.6 million reduction in losses on the sale of imported wheels from our joint venture in Hungary. In addition, SG&A expenses decreased by $2.1 million primarily attributable to decreases in professional fees, bonus expense and taxes other than income.

These changes were offset by a $1.3 million increase to income due primarily to a slight reduction in interest income due to lower interest rates, and an increase in foreign exchange transaction losses.

As indicated in the earnings release, the income tax provision in this year's first six months of $2.5 million includes a tax benefit of $3.7 million for discrete tax liability adjustments applicable to the current year. We had recorded an income tax provision of $2.6 million in the first quarter of 2008, resulting in an income tax benefit of $79,000 for the second quarter of 2008.

The $187,000 income tax benefit for the first six months of 2007 included a tax benefit of $1.7 million for discrete tax liability adjustments applicable to that year. We had recorded an income tax benefit of $2.8 million in the first quarter of 2007, resulting in an income tax provision of $2.6 million for the second quarter of 2007.

As you all probably know, we adopted [Fin 48] on January 1, 2007, which required us to book a liability for any tax positions which might be challenged under audit. As those uncertain tax positions passed through audit, or when they related to years which are no longer subject to audit, we reversed the related liability. The discrete tax adjustment in each period under discussion are primarily attributable to reversal of such uncertain tax positions, or adjustments related to prior year tax returns and changes in valuation reserves.

Our tax expense as a percentage of income before income taxes will not compare to the U.S. Statutory rate of 35% due to differing tax rates in our taxing jurisdictions and our mix of income and losses within those jurisdictions.

Overall, North American production of passenger cars and light trucks in the second quarter was reported by industry publications as being down approximately 15% versus the same period a year ago. However, production of the specific passenger cars and light trucks using our wheels decreased 22%. This compares to our 17% decrease in unit shipment, signifying improved market penetration.

2008 North American automobile production and our unit shipments were impacted negatively by the continuation of the United Auto Workers strike against American Axle and Manufacturing Holdings which impacted approximately 30 GM plants beginning in late February. Approximately 55% of our decrease in unit shipments in both the second quarter and year to date period was caused specifically by this strike.

Our three biggest customers, GM, Ford and Chrysler have had a tumultuous quarter as evidenced by their recent announcements. Just as the American Axle strike was ending in mid to late May, Ford announced that due to severe pressures on the U.S. automotive industry, they were reducing North American production and were planning further manufacturing capacity realignments, additional cost reduction and changes to their model mix in order to bring more fuel efficient passenger cars and cross over's to the market faster. Later announcements by Ford included additional production cut backs in 2008 and delaying the public introduction of the 2009 F-150 by approximately two months. We have been informed that this program will launch in the fall.

In early June, GM disclosed similar restructuring plans, including the closure of four truck and SUV plants beginning in 2008 through 2010 or sooner depending on customer demand, and at the same time, adding shifts to keep car plants to support increased demand for more fuel efficient vehicles. In addition, GM announced the consolidation of specific production capabilities where feasible and a strategic review of the Hummer brand ranging from a full revamping of the full product line or sale of the brand. In mid July, GM also announced further reduction of truck and SUV production and the possibility of accelerating the plant closures previously announced.

At the same time, Chrysler announced forthcoming plant closure later in 2008 and production cut backs in another plant.

Simply stated, we and our customers are confronting a weak economy and record high fuel prices that have reduced demand, especially for SUV's and light trucks. We have a lot of information to consider and we are assessing a variety of additional cost cutting initiatives required to address these changing circumstances. We expect to finalize our near term strategic plans within a very short period. As in the past, we do not provide specific guidance, nor are we today in a position to provide any plan details.

Consistent with the industry's trends, we are seeing a shift to the lower consuming vehicles. We experienced market share gains in the passenger group as our shipment of these wheels increased in the second quarter of 2008 by 32% compared to the second quarter of 2007. Shipments during the quarter to Ford under the redefined focus increased 120% over the second quarter of 2007. As we reported in the first quarter, the second quarter shipments of Ford Fusion and Mercury Mohan wheels remain strong at all levels, well over 100% from a year earlier. Altima shipments to Nissan increased by 88% in the second quarter of 2008 compared to the second quarter of 2007.

New business on the Pontiac side also helped to boost our passenger business in the second quarter of 2008, and we continue to enjoy strong business with Toyota. We continue to see strong weekly shipments on the GM on the redesigned Chevy Malibu and Cadillac CTS through the quarter and recorded increased shipments to Chrysler on the 300, the Dodge Caravan and Jeep Liberty. These increases were the result of incremental business wins over the last two years. We also continued to see strong initial shipments to Chrysler for the Dodge Journey cross over vehicle that launched in the first quarter of this year.

Unfortunately, these increases do not offset the large drop off in production of light trucks and SUV's. As previously mentioned, over 50% of our volume loss this quarter compared to the same quarter of 2007 was directly attributable to the American Axle strike.

We do have several new launches in process including the F-150, refreshed wheels for GM 900, new programs for Pontiac G-6 and Chevy HHR. While these new programs are encouraging, they are not currently providing significant volume projections for Superior. We are seeing some cost pressures facing our Asian competitors, particularly in the logistics costs which may be to our advantage in the long run. But short term, we are indeed, facing the toughest automotive market in over 17 year.

We believe however, that our performance in the second quarter demonstrates our ability to react to the ever changing demands in the markets that we serve. As previously stated, we also believe that the heightened contraction of the market requires an elevation of our efforts to remain lean and we are preparing ourselves for the times to come. We have a relatively new senior management team who's focused on furthering our process improvements and delivering strong operating results.

I'd like to now reference a few of the more significant financial highlights from our income statement and balance sheet for the second quarter. Beginning with OEM's units shipped, these are our shipments, for the second quarter of 2008, we shipped 2,861,573 units compared to the second quarter of 2007 3,459,288 units, and that's a reduction of 17.3%. Year to date, those shipments for 2008, 5,968,600 compared to last years year to date of 6,904,239 for an overall reduction of 13.6%. If you compare that to our net sales, net sales for the quarter, $217,385 compared to $255,217. That's a reduction of 14.8%. Year to date our EOM wheel net sales are down 12.1%.

That moves us to the gross profit margin for 2008, the quarter our gross profit margin was 5.5% compared to 5.3% second quarter of 2007. Year to date our gross profit margin is 4.9% compared to 3.1% last year. Our net income is $5,095,000 for the second quarter compared to $3,232,000 for the second quarter of 2007. Year to date net income, $8,274,000 compared to $5,283,000.

If you move then to SG&A as a percentage of net sales we ran a little bit higher than our norm this quarter at 3.2% of net sales compared to 3.5% of net sales a year ago. But for the year, we're right around where we expected to be at 3% of net sales compared to 3.2% of net sales a year ago.

Our CapEx spending is down. We're at about $5.8 million year to date compared to $29 million year to date last year and that was reflecting some of our purchases for our plant 10 development. Current ratio is 4.3 to 1 year to date compared to 2.7 year to date a year ago. And that brings me to a couple highlights from our balance sheet.

Our total current assets are $372.1 million at the end of the second quarter compared to $356.1 million at the end of the fiscal and compared to $386.1 at the end of the second quarter last year. The major drivers there are cash. Cash is up by about $14 million from last year at the same time and accounts receivable are down by $14.7 million from a year ago second quarter.

Our accounts payable is down from a year ago by nearly $56 million primarily due to the timing of our aluminum payments and clearing out some of our construction and process from last year. Our total current liabilities are $85.9 million at the end of the second quarter compared to $95.6 million at the end of the fiscal year and compared to $142.1 million a year ago.

With that, I'd like to open up the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe Durham – Credit Suisse.

Joe Durham – Credit Suisse

Can you give us a little further color on the $2.6 million reduction in losses on the sale of imported wheels from the JV? Is that covering up a deeper loss in the quarter?

Erica Turner

No, that's actually a reduction in our program on GMT-800. We were purchasing the wheels from our joint venture and because of the – twofold, because of the exchange rate between the Euro and the dollar we had an impact from that on the U.S. side, and also the profitability of that program itself. The reason the losses are down is because the program is winding down.

Joe Durham – Credit Suisse

On the physical inventory gain, is that $1.25 million? Where does that come from?

Erica Turner

It's primarily resulting from basically improved metrics from our standard costs. When we revalued the inventory at the end of the period, we had better results than our standard cost.

Joe Durham – Credit Suisse

The increase in the commodity price kind of drives that then?

Erica Turner

No, it's actually technically less aluminum consumption in our production process. That's the easiest way to describe it. We set our standards assuming that we're going to consume so much aluminum. If we're very efficient, we consume less.

Joe Durham – Credit Suisse

Can you talk a little bit about the effect of the mix shift that we're seeing on your margins> If we take out the $1.25 million and the $4 million tooling reimbursement, what would be the gross margin effect of a smaller wheel? If you can speak either generally or specifically about the margin differential on a 20 inch wheel versus a 16 inch wheel or 19 versus 15. How does that work?

Erica Turner

Strangely enough, we've seen a shift towards larger wheels this period which kind of surprised us. We don't disclose individual margins but in terms of our product mix, we've had a lot of 18 inch wheels coming through this car.

Joe Durham – Credit Suisse

On pass cars?

Erica Turner

Yes.

Joe Durham – Credit Suisse

Can you quickly touch on what the capacity utilization looked like in the quarter both in the United States and down in Mexico.

Erica Turner

Clearly it's down because of the volume.

Joe Durham – Credit Suisse

I wondered specifically about the Chihuahua plant that had been ramping. What kind of volumes are you getting through that plant? Do you have any kind of update on that?

Erica Turner

The mix that we were hoping for right around now was 50% and it's running under that certainly because of the changing climate. So that's the best statistic I can pull right now for you.

Operator

Your next question comes from David Leiker – Robert W. Baird & Co. Inc.

David Leiker – Robert W. Baird & Co. Inc.

In your release you say margin was negatively impacted by lower margin wheels yet you're saying your mix of wheels is positive. You had a better mix of large wheels but in the release it says that margins declined because of a shift in sales mix of lower margin wheels. I think larger wheels are more profitable aren't they? It's in the second paragraph under second quarter results, unless I'm reading this wrong but the gross margin paragraph.

The operating of our plants decreased because of sales volume shift in mix, lower cost absorption.

Steve Borick

It was more so on the cost absorption than the mix. In the previous sentence to that we do show that our average selling price is increasing. Part of it is because of the larger diameter wheels. As far as the mix specifically, you can have a higher mix of 18 inch wheels on passenger cars which does help you, but it's not necessarily going to totally offset a 20 inch truck wheel. It's fairly complex, and I think absorption is really more key here in the margins than actual mix of the diameter of the wheels.

David Leiker – Robert W. Baird & Co. Inc.

In your Mexico plant, how flexible to do smaller wheels? I know you put it together specifically to do larger wheels.

Steve Borick

We're going to remix the plant. Number one, we're going to look at as many 18 plus wheels which are still out there to ship into plant 10, the newest plant, and we will remix 7 and 9 to take 16 through 18's. But from a flexibility standpoint, other than cost of plant and the ROI's that we're looking for, that plant can make as many 15 inch wheels as it can 20 inch wheels. That's the way the plant was set up. Our opportunity is to continue to try to put larger, higher sales price product into that plant. So that's part of the strategy that we're working on right now that we haven't fully finalized nor announced.

David Leiker – Robert W. Baird & Co. Inc.

And then, as you say, you're seeing more 18 inch wheels that what you thought? Is that passenger cars? Is that cross over driven?

Steve Borick

It's both.

Operator

Your next question comes from Joe Amaturo – Buckingham Research.

Joe Amaturo – Buckingham Research

With the tooling reimbursement, where is that recorded on the income statement?

Erica Turner

In sales.

Joe Amaturo – Buckingham Research

I assuming you received the cash.

Erica Turner

That's not necessarily cash. It's revenue recognition which is not precisely cash. We get to book the revenue and we have an accounts receivable, and whenever we collect a receivable, it's cash.

Joe Amaturo – Buckingham Research

Did you receive most of that yet or in the third quarter?

Erica Turner

Honestly, we haven't traced that through. It's just a revenue recognition. And our cash collections are pretty good, actually.

Joe Amaturo – Buckingham Research

Are we to expect similar type of recognitions for tooling?

Erica Turner

No. The timing of that is highly dependent on when we complete the development of a line and it was a little bit of a fluke to have it spike that big this quarter.

Joe Amaturo – Buckingham Research

Is the inventory gain non cash?

Erica Turner

Right. Non cash. It's a bookkeeping adjustment.

Joe Amaturo – Buckingham Research

You had mentioned re-evaluating your restructuring efforts. Could you just give us some broad characterization of what actions you're entertaining at this time given the significant production declines for full sized pick ups and SUV's? Is it additional plant rationalization, closures?

Erica Turner

We're just not in a position to announce anything right now. We're looking at a number of options and we hope to finalize our plans very shortly.

Operator

You have a follow up question from David Leiker – Robert W. Baird & Co. Inc.

David Leiker – Robert W. Baird & Co. Inc.

This tooling reimbursement, what size does that usually run for you?

Erica Turner

It's usually between $3 million and $4 million. It was a big swing this quarter.

David Leiker – Robert W. Baird & Co. Inc.

The loss on the wheels here, the joint venture, did you say T-800 wheels?

Steve Borick

It's a forged wheel David, that we've been making out of Tatabanya for seven, eight years and that program is winding down, and we took a significant amount of that product into the U.S. We booked the FX differential and we're no longer technically producing that wheel in Hungary, and we're going to feed off of inventory going forward. So we're not going to have that significant loss in the future on sale of product because we now booked it already.

Operator

You have a follow up question from Joe Durham – Credit Suisse.

Joe Durham – Credit Suisse

Are you seeing any increased instability among your competition recently? And increased bidding on take over business? Anything there?

Steve Borick

What we're seeing is a concern by the OEM's because of logistics increases and the opportunity between logistics currency. I can't speak to quality but I can speak to the other two and the impacts that the landed costs are having. One of the things that I've been saying for many years, is that I believe the product overall is not sustainable at some of these low price levels. I still believe that, even though we're living with it.

Number two, with landed cost increasing relatively significantly over the last six months with the price of energy moving up, I believe we're going to see more product coming back into North American production. That's a positive long term for Superior. Secondly, the players that are left in the field in North America, whether it is the U.S. or Canada continues to decline and we don't see obviously, any new volume being brought into either of those places.

Joe Durham – Credit Suisse

There's been recent announcement that the Tundra's going down for a couple of months here in the third quarter, maybe into the fourth quarter. Can you remind me of your penetration rates on those vehicles?

Steve Borick

We don't give that specifically, but the Tundra has not been a big volume for us. Any volume hurts us. The DMT-800 existing and the new model 900 of course is significant. The F-150 launch and I've got to remind you that that is going to launch. In fact, it was even stated today in the press. That will be a good launch. How the sales will go I think is going to be dependent on some of the external factors that we have no control over.

What is good is that we're seeing a lot of tooling increases on small passenger vehicles and those tooling increases are coming pretty rapidly, and I believe the OEM's are trying to attack it very rapidly. I think over the next 12 to 24 months here at Superior some pretty significant shift in our volumes to passenger car and we're going to continue to be the mainstay where we can, for the truck business and SUV's business however it may play out, and I believe what we'll see is some consolidation from some other wheel players bringing that product to us because of our abilities in the U.S. to land it at a much more efficient cost than people outside of the U.S.

So that's why we're looking strategically at all of these variables. We're in a very tumultuous period and our motto at Superior is, we're going to the last man standing. We're going to continue to do that. I looked at our cash this morning. We had $144 million in the bank as of this morning and we are going to stay cash flow positive. We have for the first two quarters and will continue to be very cautious.

We're going to continue to look at rationalization in all respects where we need to and increase the value and opportunity with our management team up and down the ladder to do a better job as we go forward and that's the direction we're going to keep taking here.

Operator

You have a follow up question from David Leiker – Robert W. Baird & Co. Inc.

David Leiker – Robert W. Baird & Co. Inc.

One of the things we've seen or have heard is as consumers are moving from these larger vehicles to smaller vehicles that there's a tendency to put more content on them. Are you seeing that as your customers look to put sales on vehicles over the next couple of years that they're putting in larger wheels and more higher value added wheels? Is that showing up in your demand flow?

Steve Borick

Some of it is. We're seeing flow forming for example because of weight, stay very active, and we've moved a line down to Mexico so we're continuing to prepare for that. Next, specialty paints. We're seeing requests for more polish. Overall I think there's a mix. The platforms want to beef the vehicles up. The management wants to beef everything down and have more commonality and it's going to be who wins at the end of the day.

For us, either way we feel like we're going to win because if we get into more commonality, lug size, brake size, wheel size, it's going to allow us to produce a product more efficiently which will reduce costs, which we can pass on to the OEM's which will continue to make us more competitive long term.

Erica Turner

Also, some of the 18 inch wheels we were referring to are for differentiation.

Steve Borick

You're going to see as an example, the new Focus line out you'll see a standard 16 inch all the way up to 18 inch for the specialty models. And you're going to continue to see some of that. Content on smaller cars by the American public, there's going to be a demand because the philosophy is always small is cheap, and that's no longer going to be the way that the OEM"s are going to run their product line ups.

I had the opportunity just recently to look at some new product line ups at one of the OEM's and I was really impressed with what I saw both with content and styling. I think five years from now we'll look down the road and see a lot of small vehicles no matter what happens with energy. Psychology is definitely changed.

Operator

Your next question comes from Brandon Ferro – KeyBanc Capital Markets.

Brandon Ferro – KeyBanc Capital Markets

I wanted to clarify the tooling revenue. I think in the press release you said that the $4 million provided an offset as far as operating margins go which were down otherwise. Doesn't tooling revenue typically carry low if any margins on it? Was there a good deal of margin on that for some reason?

Erica Turner

Actually, the way we book keep our tooling is we period expense the cost as we incur it and we don't book revenue until we have a purchase order in hand from the customer, so they're not necessarily well matched. That did provide straight pass through actually.

Brandon Ferro – KeyBanc Capital Markets

I know you don't want to elaborate potentially some of the restructuring activities that are going to take place in the future. Can you put whatever those activities are in the context of your U.S. property plant and equipment, meaning, can you give me what that number was at the second quarter? And is there any reason to expect that those activities would result in a reduction of the carrying balance of that, meaning a write off?

Steve Borick

You're very good as asking a question that we're not going to answer.

Erica Turner

Our attorney's are in the room. I think that was a leading question.

Steve Borick

You will hear more about these activities and opportunities in the very near future. And when I say near future certainly prior to the end of the month of August.

Brandon Ferro – KeyBanc Capital Markets

Can you provide a U.S./Mexico capacity split? Maybe not production, but where you stand on capacity?

Steve Borick

Our split is about 50/50 right now, and our intention is to continue to increase the Mexico to the U.S. capacity over time.

Brandon Ferro – KeyBanc Capital Markets

Is the total roughly $14 million?

Steve Borick

Capacity opportunity?

Brandon Ferro – KeyBanc Capital Markets

Existing capacity.

Steve Borick

Depending on how you look at it, 14 million to 15 million.

Erica Turner

As we improve our operations we improve our capacity, always.

Brandon Ferro – KeyBanc Capital Markets

If we were to assume at any point in the future that was a reduction in the U.S. portion of that capacity, do you see yourself offsetting that with a one for one increase elsewhere, whether it be Mexico or somewhere else, or less than that? What I'm asking is where do you see yourself settling out? Do you see yourself being a more profitable small supplier?

Steve Borick

We really haven't gotten to that final picture, but I've always said that if I have to be smaller and have the capacity to make more profit, that's okay with me as we look to re-grow in the future. We had a philosophy that we played off and we're still there, called shrink to grow, and we will continue to look at that as an opportunity for our future.

We also are really seriously in the midst of looking at all types of other opportunities that we're not ready to discuss yet that could include different plant set ups and better efficiencies in plants, more automation, some capital expenditure, because as I say, we're sitting on plenty of cash and we want to spend it properly for the future.

The OEM's are in a position, and this is very clear, where they are looking to bring some content back into the U.S. and it's quite clear that that's a direction that we're going to see.

Brandon Ferro – KeyBanc Capital Markets

Working off your comment about domestic auto makers bringing wheels back into North America from Asia, I'm just wondering, have you actually seen any examples of that happening to date?

Steve Borick

Yes, we have. There's opportunities that are playing out as we speak.

Brandon Ferro – KeyBanc Capital Markets

I think you added about 300,000 units in terms of organic unit shipment growth in the quarter. Is that a reasonable number and can I annualize that?

Steve Borick

No. It's too volatile right now. Until we get some idea as to how quickly the OEM's are going to retool and bring new product into the U.S., it's too volatile to be able to schedule that out right now. I think we'll have a much better picture as we see plant closures and the timing of those plant closures by the OEM's. I asked today, there was a GM meeting, and I asked today when did they anticipate that they would have a closure of the Marine plant. They can't give you and answer but they're working on it, and as they say, you'll be the first to know.

It makes a huge difference in how we schedule our production, and these open issues are something that are very, very fast parts. On the other hand, if you look at some of the OEM's, they're making a lot of noise about how quickly they're going to retool and bring smaller vehicles in from Europe like the Fiesta, the Mondeo on the Ford side and some of the new platforms at GM and how quickly that's going to take place. And then you hear things about Chrysler and Nissan may be joining up today in the Journal about making smaller vehicles.

All of those moving parts are going to continue to move at a crazy pace as everybody tries to reassemble their balance sheet and make sure they're surviving. It's important to realize that one of the mainstays for us is that we are going to stay cash flow positive through this process. That's a mandate that I've put forward in this corporation, and I hate to say, but none of the OEM's can talk about that. They can only talk about cash burn.

Brandon Ferro – KeyBanc Capital Markets

In the quarter, North American car production was flat year over year, and it looks like you lost maybe a million units in terms of light truck, and then picked up 300 on the car side. Given that production was flat on cars year over year, it looks like that was probably all take over business? And I understand going forward we'll see additional production declines on light truck. I guess to the extent that we are comfortable with what those production declines might be, is it fair to assume that we might see the same type of organic passenger car growth on a quarterly basis going forward?

Steve Borick

We hope so, but I can't respond to that because a lot of what you saw was the American Axle impact and that along with trucks which was mostly GM on the truck side, it's just hard to come up with that conclusion yet. I think you're going to have to wait until we're out a couple of quarters to really get a better handle on that.

I know you're trying, but we're not ready. It's the most wild thing I've ever seen since I've been around Superior.

Brandon Ferro – KeyBanc Capital Markets

As you survey the landscape, Canada and then the U.S., what's the existing production volumes that is coming out of your competitors today, meaning what's the remaining take over opportunity from the volume basis?

Steve Borick

You've got your Toyota captives and we really don't know what their volumes are, but they're going to continue to play out their own captives. Then you've got just a handful of players that are left. They're all private companies except for Alcoa. They have one aluminum plant left in Beloit, Wisconsin which is probably about $1.2. There's nothing left. Everybody else is $1 million, $1.5 million max, and there's two or three players left.

You've got three players left in Mexico, Superior [inaudible] with one plant of Europe and Hays that's got one plant in Chihuahua. That's it. Everybody else is gone.

Brandon Ferro – KeyBanc Capital Markets

It sounds like you've got the $1.2 at Alcoa.

Steve Borick

Alcoa is going to stay in business from what I know. No change that I know about. Hays has closed all their U.S. plants. Gainesville is the last one. They have one plant in Mexico. You have Hitachi with one plant. Henke has one plant, and there's a takeover from a European company that has a plant in Kentucky which are Alabama, which is ATS. And then you've got Prime Wheel out here in the U.S. and most of their production has gone to China. And that's the end of the game.

Operator

Your next question comes from Jake Crandlemier – Ramsey Asset Management

Jake Crandlemier – Ramsey Asset Management

How should we think about the profitability for your plants this quarter? You made mention in your release on a year over year basis it would have been down 3% on an operating margin line, and it sounds like the wheels coming from Europe is probably going forward as well. Is that the right way to think about this quarter, the kind of operating margin is down 3% last year plus the benefit ongoing from the winding down of the GM 800 program?

Steve Borick

That's a very tough question right now, because if you project out third quarter is always an odd quarter because of shut down, so it's hard to get any handle. We don't want to talk about that too much. It's going to depend on how these OEM's decide to shift their volumes and you can tell me that, because no one's willing to answer that question. So it's going to be very difficult to answer that.

Erica Turner

Our operating profit is very volume driven because of the absorption factor, so as the volume peaks and valleys, so goes our margin too.

Jake Crandlemier – Ramsey Asset Management

On the tax issue, should we be thinking about it as the tax rate should be around 50% for the full year as you talked about on earlier calls?

Steve Borick

It's as convoluted as I've ever seen anything.

[Unidentified Speaker]

We expect to be a little lower than 50% for the year.

Jake Crandlemier – Ramsey Asset Management

By a little lower, you're talking 40%, somewhere in that range?

Steve Borick

We'll say somewhere between 40% and 50%, how's that? It's a tough one with the [inaudible] also.

Erica Turner

There are so many events. There are binary events that could swing it in one direction or another. That's why we hesitate predicting.

Operator

Your next question comes from Adam Comora – EnTrust Capital.

Adam Comora – EnTrust Capital

The $1.25 million that came in from the inventory adjustment, I assume that was pure margin?

Erica Turner

Yes.

Adam Comora – EnTrust Capital

So in theory in the quarter, it was about $5.2 million of margin from both that inventory adjustment and the $4 million tooling revenue.

Erica Turner

Correct.

Adam Comora – EnTrust Capital

In the press release it sounded like the tooling revenue was non recurring, but earlier on this call, you said each quarter its $3 million to $4 million. Should we expect $3 million to $4 million in each quarter going forward?

Erica Turner

It's the delta that's non recurring. We had just an unusual pike of revenue and dip and spending that came about at the same time, so the net was unusual.

Adam Comora – EnTrust Capital

And that $4 million that you're referring to is the net delta, so in the quarter, it was really $7 million or $9 million?

Steve Borick

No. That's not correct. The net delta was far less than that. The revenue side was about $4 million. I don't know why we even put this in quite frankly. It was a mistake in my opinion, but we wanted to be transparent about where some of the excess income came from. On a normalized basis, the tooling revenues against tooling expenses always creates a loss per quarter hands down. So if you get a pick up once in awhile, it's an oddity, and normally that never happens. I think we're playing it out way too much. It's not significant. I'm sorry that we brought it up quite frankly.

Adam Comora – EnTrust Capital

So the $4 million was the income this quarter from tooling?

Steve Borick

No, do not go to the bottom line.

Erica Turner

You should not expect that to be an ongoing event. You've seen our previous quarters which are more normalized.

Steve Borick

We don't spell out tooling at all. $800,000 went to the bottom line.

Adam Comora – EnTrust Capital

It sounds like our volumes will probably drop in the third quarter relative to the second quarter because in the prepared remarks, some of those other accelerated programs shut down that you were elaborating on?

Steve Borick

I'm not sure if we can answer that that way at this point because the car side is really picking up and we may see offsets as we see some of these launches starting out on system build like on the F-150. We're going to see some pretty good increases as we head into the third and fourth on these system builds, and along with increases in the passenger side. Malibu, the Ford Focus are huge increases. So it's hard to get a full handle on that right now.

Operator

You have a follow up question from Brandon Ferro – KeyBanc Capital Markets.

Brandon Ferro – KeyBanc Capital Markets

The $300,000 may be an organic growth in the quarter. I'm just wondering given that production was flat year over year, was that in source from Asia? Was that take over business from Asia?

Steve Borick

No it was not.

Brandon Ferro – KeyBanc Capital Markets

You said that you are starting to see an increase in potential opportunities coming back from Asia. Are we starting to see that activity accelerate or are we at the beginning of that curve?

Steve Borick

I'd say we're at the very beginning of the curve.

Operator

We have no further questions.

Erica Turner

Thank you all for joining us.

Steve Borick

Thanks everybody. We appreciate your support and look forward to talking to you in the third quarter.

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Source: Superior Industries International, Inc. Q2 2008 Earnings Call Transcript
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