Shiloh Industries' (SHLO) CEO Ramzi Hermiz on Q4 2016 Results - Earnings Call Transcript

| About: Shiloh Industries, (SHLO)
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Shiloh Industries, Inc. (NASDAQ:SHLO) Q4 2016 Earnings Conference Call January 17, 2017 5:00 PM ET

Executives

Gary DeThomas - Vice President and Corporate Controller

Ramzi Hermiz - President and Chief Executive Officer

Jay Potter - Senior Vice President and Chief Financial Officer

Analysts

Alan Weber - Robotti & Co.

Kurt Caramanidis - CMH

Edward Hemmelgarn - Shaker Investments

Operator

Good day, ladies and gentlemen and welcome to Shiloh Industries’ Fourth Quarter and Full Year Fiscal 2016 Results Conference Call. Today’s call is being recorded and we will be conducting a question-and-answer session immediately following management’s prepared remarks. I’d now like to turn the call over to Mr. Gary DeThomas, Vice President, Corporate Controller for the company. Please go ahead, sir.

Gary DeThomas

Good day. Thank you, operator and thank you all for participating in Shiloh Industries’ fourth quarter and full year fiscal 2016 conference call. I am joined on today’s call by Ramzi Hermiz, our President and Chief Executive Officer and Jay Potter, our Senior Vice President and Chief Financial Officer.

I will begin by reviewing our legal disclosure regarding forward-looking statements. I would like to remind all participants that certain statements made during this conference call may constitute forward-looking statements. Although such statements reflect our current reasonable judgment regarding the direction of our business, actual results might differ materially from those in forward-looking statements. You can find information concerning why the actual results might differ from statements made today and in our management discussion and analysis of financial condition as well as the results of operations in our annual report on Form 10-K for the 12 months ended October 31, 2016 and other filings with the SEC.

Our earnings press release was issued today and has been posted to our website at shiloh.com on our Investor Relations page. The press release contains reconciliations of certain non-GAAP numbers presented on this call today, including EBITDA, adjusted EBITDA, adjusted EBITDA margin and adjusted earnings per share. Our Form 10-K was filed with the SEC today. A replay of today’s call will be available. Instructions for the replay are included in today’s press release.

I will now turn the call over to Ramzi Hermiz, our President and Chief Executive Officer. Ramzi?

Ramzi Hermiz

Thank you, Gary. I would like to welcome you to today’s call to review Shiloh’s fourth quarter and fiscal year performance and provide an update on our transformation to one of the leading lightweighting technology providers in the automotive space.

I am pleased with our continued improvement during the fourth quarter. In short, our year-over-year growth in gross profit increased by more than 50% and our adjusted EBITDA more than doubled. Margins expanded meaningfully, with 400 basis points of improvement in our gross margin as well as our adjusted EBITDA margin, both finishing at the highest levels of the year. The momentum in the fourth quarter was building throughout the year as the gross margin expanded sequentially during each quarter of 2016. We are excited about this positive trend as we begin fiscal 2017. We also made solid gains with key metrics when looking at our full year 2016 results.

Total revenue for the year, excluding currency translation, was flat at $1.07 billion. Importantly, our automotive revenue growth was 3.6%, outperforming market production growth of 2.4%. The overall strength of our automotive business offset weakness in the commercial vehicle market and production wind-down of the Dodge Dart and Chrysler 200 that we have mentioned on previous calls.

For the year, we grew gross profit by 11.6% to $96.2 million and our adjusted EBITDA by 7.9% to $63.3 million. We generated cash from operating activities of $69.4 million, a significant improvement over $3.4 million in 2015. As I have articulated in the past, we are transforming Shiloh from a coil processor and build-to-print fabricator to a technology-minded, product-focused company. Our solutions enable our customers to lightweight their vehicles in order to meet stringent regulatory emissions and fuel economy targets, thus providing benefits to the environment through reductions in greenhouse gases and energy consumption. Today, we provide a variety of product solutions in body structures, interior systems, chassis systems and powertrain systems. This is demonstrated by a number of new successful business developments.

First, we were awarded a significant new body structure component, an inner door panel, utilizing our advanced curvilinear laser-welded techniques, the first of its kind for the particular OEM, saving 6 pounds per vehicle, a 20% savings compared to their prior technology. With another OEM partner, we developed a rear beam axle housing, which is a chassis component, saving 24 pounds per vehicle, a 43% savings over their prior technology. Finally, we developed the unique powertrain component, an oil containment system comprised of an aluminum cast skirt and a formed cover, utilizing our proprietary ShilohCore acoustic material providing noise reduction and increased torsional stiffness, outperforming their prior technology. We believe that our multi-material, multi-process approach has uniquely positioned us to provide optimal product solutions for our customers.

This quarter, we booked new business worth $83 million of annual revenue, with an estimated life-of-contract value of $361 million. For the fiscal year, we booked new business for $170 million of annual revenue, with an estimated lifetime contract value of nearly $900 million. These recent wins were in Asia, Europe and North America with leading OEMs such as BMW, Daimler, FCA, General Motors, Scania, Tesla and Volvo as well as additional new business wins with our Tier 1 partners. Our mix of new business continues to improve as approximately 75% of our new business wins this year were market share gains for the company and focused on lightweighting technologies for our differentiated products.

Combined with the new business wins from 2015, we now have a strong pipeline of an estimated $2.2 billion in new product revenue in coming years. Along with the pursuit of new business and market share gains, we remain focused on improving profits. Our adjusted EBITDA for the fourth quarter increased by $11 million over the prior year and $2.5 million compared to the fiscal third quarter. I am encouraged by our ability to grow on both the year-over-year and sequential basis. In addition, we have implemented a robust industrialization process, thus improving the efficiency of our product launches versus prior years. We are early in the implementation of the new process and are already seeing positive results.

Also, we continue to reduce our exposure to scrap metal pricing risk. This action is part of our strategy to focus our commercial and operations teams on earning appropriate margins for the value-added technologies. Related, we have restructured select customer contracts to remove the risk of both material acquisition and scrap recovery, leaving technology conversion as the primary economic driver. While we do not see any long-term negative impact to profitability with this change, there was a $3.6 million impact to revenue for the quarter. We view this as a positive tradeoff to eliminate the future scrap market pricing risk. To put our exposure to scrap into perspective, during 2016, scrap recovery had a $6.6 million negative impact to our gross profit and adjusted EBITDA, down from $14 million negative impact in 2015. Importantly, even with this headwind, we grew our overall adjusted EBITDA dollars.

To summarize, we have made great progress in aligning our new and existing business with our assets and our expertise. We improved our overall profitability both in terms of dollars and margins. We exited or decided not to renew select contracts on some non-core but underperforming programs as we continue to take action to improve our mix. While these actions may create some short-term revenue headwinds, our profitability is improving. This disciplined approach is evident in the profitability of our new business wins. The mix improvement reflects the enhanced value add that our differentiated products are bringing to our customers. We are changing how we do work. We are adding skills, some of the best in the industry. We are disrupting traditional views with our Lightweighting without Compromise strategy. Shiloh is demonstrating that we lightweight with benefits for our customers and the environment.

Moving into some comments regarding regional markets, the industry is discussing the plateau of the North American automotive market. We too, anticipate such a plateau. IHS is forecasting North American volume growth of slightly less than 1%. It is too early for us to assess the impact of the new administration on the economy, but proposed tax cuts and infrastructure spending could reenergize consumer spending and may extend the current peak in the North American auto sales. Against this backdrop, Shiloh continued to focus our efforts to improve operating performance while managing revenue close to the industry numbers as we transition and invest in the future.

Europe is an exciting market for Shiloh. With four new magnesium production lines now in place in Poland, we are producing some of the industry’s lightest and strongest cross car beams. With this investment, Shiloh will become the market leader for cross car beam products in Europe. Our automotive business in Europe grew by 14.8% in 2016 compared to the market of 2.2%, driven by the increased demand for our innovative solutions and differentiated technology. Finally, we plan to continue investing in Asia. We expect to see additional revenue growth in the region during the second half of 2017 as recently won business ramps up and that growth is expected to accelerate further in 2018.

With that, I will turn it over to Jay, who will walk you through the financial results in more detail. Jay?

Jay Potter

Thank you, Ramzi. Sales revenues for the fourth quarter of fiscal 2016 were $281.7 million, a reduction of $7.2 million compared with fourth quarter of fiscal 2015. Of the modest decline in revenue, $2.9 million was attributable to the continued weakness in the North American commercial vehicle market and $1 million was from negative currency exchange. For fiscal 2016, revenues were $1.066 billion, which were flat excluding the $5.9 million negative impact from currency exchange. Solid growth in automotive offset $19 million of weakness in the non-automotive markets and $17 million from the wind down of the Dodge Dart and Chrysler 200 models. Gross profit increased by 56% to $30.1 million compared with $19.3 million in the fourth quarter of fiscal 2015. Gross margin expanded by 400 basis points to 10.7% compared to 6.7%, benefiting from favorable product mix and operational efficiencies. We are encouraged by achieving this level of year-over-year improvement and we remain focused on improving our profitability measures as we look ahead.

Selling, general and administrative costs were $21.5 million, an increase of $1.2 million or 6.1% compared to the year ago quarter. We expect SG&A to remain in the range of 7% to 8% of revenue in the coming quarters as we continue to invest in infrastructure, research and development and plant optimization initiatives. We define EBITDA, a non-GAAP measure, as net income plus net interest, taxes, depreciation and amortization expense and other non-cash expenses. Adjusted EBITDA reflects the elimination of certain significant one-time differences between comparative periods. For the fourth quarter of 2016, adjusted EBITDA was $19 million compared to $8 million in the year ago quarter. The adjusted EBITDA margin improved by 400 basis points to 6.8% versus 2.8% in the year ago period, driven by our improving operating performance. Adjustments to EBITDA for one-time items in the fourth quarter included $1.8 million relating to impairment on certain assets not being used in our manufacturing process, $1.3 million for certain professional fees in support of plant optimization activities and $1.6 million primarily associated with VAT and tooling adjustment. We spoke in previous quarters about the first quarter of 2016 being an inflection point with the adjusted EBITDA margin reaching a low point of 3.5%. We made good progress over the remainder of the year with margins in the tight range of 6.6% to 6.8%, demonstrating our ability to deliver more consistent result.

Net income was $5.3 million or $0.31 per diluted share for the fourth quarter, a significant improvement compared to a net loss of $4.9 million or $0.29 per basic share in the year ago period. We generated a sizable tax benefit in the current quarter, mainly due to improved profitability in Sweden and the reversal of a tax valuation allowance against our Swedish deferred tax assets. Adjusted EPS also improved meaningfully to $0.50 in the fourth quarter of 2016 compared to a loss of $0.18 in the year ago quarter. For the full year, EPS was $0.21 compared to $0.34 in 2015, while adjusted EPS, which excludes the one-time items previously mentioned plus the after tax impact of amortization of intangibles from acquisition was $0.59 compared to $0.54 in 2015.

As of October 31, 2016, cash and cash equivalents were $8.7 million. Total debt was $258.9 million, a reduction of $42 million versus the prior year. And stockholders’ equity was $132.8 million. In addition, for the year, we generated strong operating cash flows of $69.4 million, a direct result of our focused efforts to improve working capital. Our efforts to optimize our use of existing capital allowed us to free up capacity and bring more of our key products and technologies to market while reducing capital expenditures. CapEx for the full year was $28.3 million compared to $39.4 million for fiscal 2015. As we mentioned earlier, we filed our 10-K today which will provide additional details on our financial statements.

With that, I will now turn the call back to Ramzi for some summary remarks.

Ramzi Hermiz

Thank you, Jay. Our results for the fourth quarter and the full year of fiscal 2016 demonstrate the progress that we have made with our strategic transformation. We are confident in our ability to deliver profitable growth. We continue to expect further improvements as we introduce higher value add and technology driven products, with the estimated $2.2 billion of life of program, new business wins from the last 2 years, turn into more profitable revenue streams. As we look ahead in fiscal 2017, we remain focused on enhancing our profitability through three key channels. One, we will begin to benefit as some of the new wins from 2014 and ‘15 move into production. Two, we anticipate further gains in our operational efficiencies by focusing on the highest return uses for our assets. And three, we will continue to proactively manage our portfolio and base out business that is generating suboptimal returns as we prioritize profits over revenue.

Similar to 2016, we expect to accomplish this despite an environment of modest industry growth, continued softness in the commercial vehicle segment and potential currency headwinds. We do expect to meaningfully outperform the market in Europe, given our momentum in the region, including our continued progress with customers, such as JLR. As we look further to 2018 and ‘19, we expect an improving top line environment as we will receive a more meaningful contribution from our previous contract wins and expect to have made further gains, improving our existing mix of business. Our focus on lightweight technology products is visible in our growth as we transition to a differentiated multi-product and multi-material offering. Shiloh continues to make a difference, continues to make the environment better and continues to improve its operations.

To wrap up, our strategy to improve our profitability is working. We made excellent progress in 2016 and we ended the year with strong momentum heading into 2017. There is more work to be done, but the strength of our team and our enhanced product offering has us well positioned to succeed.

Operator, we are now ready to go to Q&A. Thank you.

Question-and-Answer Session

Operator

Sure. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Alan Weber with Robotti & Co. Please go ahead.

Alan Weber

Good afternoon. When you talk about – I think you mentioned into 2018 and ‘19, as you talk about some of these contracts that you have won coming online, can you talk about the magnitude in terms of revenues? How much of that actually comes on in ‘18 and ‘19? And what you would expect operating margins to be at that point?

Ramzi Hermiz

Good afternoon, Alan. From a standpoint of booked business, one of the things that we talked about over the past couple of years, we have booked revenue – total contract value revenue of approximately $2.2 billion and that’s over of the life of contract. So while our contracts typically would run between 5 years to 7 years. So from that perspective, we have strong momentum going forward. That business is going well, number one. From a – our focus is on managing that more profitable mix, that newer technology and roll that in. So we don’t talk about operating incomes in the sense of, here is our number, but I have previously stated, I do feel over a longer period of time, Shiloh is clearly – has the potential to be a double-digit EBITDA company. We feel that these programs will lead us to that direction and move us forward in that way. So, we are comfortable with the type of technology, the new product mix that is all designed. We talk about the disruptive technology. 75% of our new business was lightweighting type of technologies. So, we feel really good about that direction of that business as it rolls in.

Alan Weber

And when you talk about the new product win – the new contracts, is any of that replacing – or what amount of that actually is replacing content that you currently have in production?

Ramzi Hermiz

When you look at the replacement of, let’s say, net new business, some of this is replacement or rollover business or in many cases, some technology changes. For example, we have been – we maybe making a cross car beam that’s made out of steel or steel hybrid solution, replacing it with a magnesium type of solution. So in some cases, they are pure market share gains. Other cases, it’s replacement of technology. If you look at a broad perspective and you said that a 5-year program roughly 20% of your book of business every year is being replaced with business. So as you look at that rollover, we do refresh our product offering, our revenue, roughly 20% every year.

Alan Weber

Okay. And then my final question is what do you expect – actually two questions. What do you expect capital expenditures to be in 2017? And also directionally, what do you expect from working capital, which was a big contributor to cash flow in ‘16?

Ramzi Hermiz

In general, from a capital standpoint, we see capital expenditures in the range of 3% to 4% as a safe number to use if you were to be looking at it. Obviously, we generated some good progress in working capital. And this year, we would hold that number. We feel comfortable that we can hold that working capital number. We do feel that there is still incremental opportunities as we improve our business and manage those activities. So, we still feel there is opportunities. We feel very comfortable that we will hold that benefit that we generated this year and again capital in the range of 3% to 4% is a good number to use.

Alan Weber

Okay, great. Thank you very much.

Ramzi Hermiz

Thank you.

Operator

And our next question comes from the line of Kurt Caramanidis from CMH. Please go ahead.

Kurt Caramanidis

Hi, guys. Congratulations on the quarter. A question for you. Traditionally, this is a low point in the year, but that would seem maybe unlikely with as good as the quarter was. Things have been kind of lumpy. How should we look at 2017 knowing that Q4 – I think December was a phenomenal month for vehicle sales and things. Should this be a low point as in prior years or is that going to be different this time?

Ramzi Hermiz

Well in – Kurt, by the way, Happy New Year and thank you for the compliments on the quarter. When we look at quarter four from a revenue standpoint, traditionally, our quarter four is a weaker revenue quarter – or I am sorry, strong revenue quarter as we go forward. So, we had good revenue in quarter four. Our quarter one is our traditionally weaker quarter from a revenue standpoint because of customer shutdowns. You have Thanksgiving. You have Christmas. And so that quarter four revenue – I am sorry, quarter one revenue, is typically weaker. In our quarter four, what we saw is strong performance versus year-over-year. As we discussed last – a year ago this time, our quarter four was a challenge and actually, our quarter one was, when we talked about this being an inflection point and a chain. We have to work through that. We knew that. And what you have seen really sequentially in quarter two, quarter three and going into quarter four is positive momentum and us moving forward in a number of ways. We feel comfortable that the momentum will continue. We do have to acknowledge that from a seasonality standpoint. Our quarter one is a lighter revenue. Now, you mentioned December being a strong sales month for the OEMs. And that is correct. It was positive sales, but what we really have to look at is production numbers. And so a lot of the OEMs, while they moved a lot of steel, a lot of vehicles off their lots, from a production standpoint, they are actually shutdown a lot of December. So that’s where the seasonality of our business comes in.

Kurt Caramanidis

Got it. Yes and I do see that on the revenue. I guess I was looking at profitability and maybe that’s due to one-time issues the last couple of years, Q4 has been not as good and then things have ramped throughout the year. So...

Ramzi Hermiz

That is correct. So what you see is the, I will say, positive momentum us putting some of our challenges behind us. We have talked about a number of the – not only the margin improvements from an efficiency standpoint, but also strong mix of business going forward. I mean, when you look at the adjusted EBITDA year-over-year, we are at 2.8% in 2015, in quarter four, we are at 6.7%. So, obviously, nearly a 400 basis point improvement year-over-year.

Kurt Caramanidis

Yes. And Jay, could you – oh, go ahead.

Ramzi Hermiz

No, please. Please, Kurt.

Kurt Caramanidis

Well, you brought in some processes that are part of the reason for this improvement you came from outside the company. Is that right?

Ramzi Hermiz

Kurt, can you repeat the first part of that question?

Kurt Caramanidis

It was for Jay kind of for both you guys. But Jay, have you brought in new systems to help run the operation more efficiently or financially more efficiently. You have been kind of alluding to that in pieces throughout your commentary. But I am just curious how that evolution came to be if Jay you brought in things that you had from other prior experiences that you saw areas for opportunity improvement?

Jay Potter

Good afternoon. Happy New Year as well. I would say that I think what we have focused on reestablishing is the financial discipline of the company and solid operational reviews at all levels within the company. With respect to working capital, we definitely enhanced the number of our processes around our internal operational efficiencies as well as around the process of our tooling aspect. So, definitely focused on the aspect of getting some cash off the balance sheet initially and we see that being very sustainable with some slight improvement opportunity going forward. So really, I think there has just been a reestablishment of good financial discipline.

Kurt Caramanidis

Terrific. Congratulations. And it will be good to see that as now you are starting to ramp a lot of new programs and then have a good grip on efficiency as well, so appreciate it.

Operator

And our next question comes from the line of Edward Hemmelgarn from Shaker Investments. Please go ahead.

Edward Hemmelgarn

Yes. I just wanted to focus a little bit on the gross margin, first of all, congratulations on the improvement in the negotiations for the scrap metal pricing, is that all over with now – I mean, have you renegotiated all those contracts?

Ramzi Hermiz

No, we have not. We have made progress. That will be something, as contracts roll over, we will be going – we will be doing that and approaching that. We are doing – focusing on some areas where we are – where I spoke of more of a technology conversion focused on the value added. There is the value added aspects of it. But that’s going to be a process that’s going to come over years. What we did see is we reduced the impact year-over-year. While there was still a headwind to it, we did reduce the impact from ‘15 versus ‘16. We reduced – that’s a progress, but this will be something that comes over a couple of years. So it’s not a zero factor yet, but – in reality, it probably never will be because there will be – just by the subset of the business being engineered off while there is going to be some part of that, some of those contracts. But again, our goal is to find a way to balance the acquisition risk or reduce the acquisition risk of materials linked to the scrap risk. So at least they move in parallel and that we avoid what happened to us in 2015. And clearly, in ‘16, we reduced that impact. But equally important is even though – what you saw was even though we still had an impact, operational efficiencies, product mix changes still allowed us to carry through that – absorb that and still show year-over-year and quarter-over-quarter progress.

Edward Hemmelgarn

You indicated that it was – the effect was about $6.6 million for all of 2016, what was it in the fourth quarter?

Ramzi Hermiz

The fourth quarter, we had more of a balanced and even level.

Edward Hemmelgarn

An even level, okay. What are your – you keep talking about your improved pricing with the light weighting approach and more technology oriented, what kind of – or what are your targets for improvements in gross margin moving forward here and it – you did about, if you back up the $6.6 million, you had an adjusted gross margin for the year of about 9%, what should we expect for – for the year of 2017, ‘18, ‘19, what are – what kind of your targets do you have?

Ramzi Hermiz

Well, as I hate to sound like a broken record on – that we don’t provide guidance and we don’t provide future visibility, what I will again reiterate, we would be very – we feel comfortable and confident that Shiloh has the ability over a period of time to be a double-digit EBITDA company. We feel that with the technology, with the products that we have, the engineered solutions, the work that we are doing upfront with our customers on developing and really focusing our business on a product technology versus necessarily going after to become [ph] commodity business. So we do feel that there still is margin opportunity and the team is focused on achieving that result both from an engineering activities and our work with the OEMs. And with the targeted pursuit plans of our – by our business development teams with our customers and again, driving to a stronger mix of product mix that is also going to drive that improvement. So it’s not only operational type of initiatives, which we saw a lot this year is – as we look forward, is this improved mix of business driven by our solutions. So we feel – again, we feel good about the direction and the momentum that we generated through the second half of this year and clearly into quarter four.

Edward Hemmelgarn

Most of the – I guess, what was the income tax, I mean you took a big income tax credit this year, I didn’t hear what you were saying or I mean in the fourth quarter, what was the cause of that?

Jay Potter

Yes. We had a valuation allowance related to our Swedish business that dated back to the acquisition. And due to our improved operating performance there, we no longer have to hold that valuation allowance against that business. So that’s the nature of the impact.

Edward Hemmelgarn

Okay. So – but absent that, it would have been basically about breakeven for [Technical Difficulty] I mean test that…?

Jay Potter

It will become…

Edward Hemmelgarn

I said [indiscernible] have been value or the benefit, I mean it would have been about breakeven for the quarter to your results?

Jay Potter

Yes. Correct, yes.

Edward Hemmelgarn

I guess, as I know you are – you keep trying to say you are not trying to provide guidance or you don’t want to provide guidance, but could you give us some kind of hope here, too, is that – it’s really been difficult to understand where the business may go, I mean it’s…?

Ramzi Hermiz

Well, I would say, I would – the way to look at it, again, as we have traditionally said, we don’t provide guidance. But what I would say is we saw some strong trends coming into quarter four. And when you really look at the momentum, while the year was a gross margin at 9% quarter four, we saw gross margin about 10.7%. So we do feel that there is momentum going forward and that momentum can continue. Alan was asking about on one of the first questions of quarter one and things like that, I do acknowledge quarter one revenue is lighter, but again I still feel strong about the margin that we – that that trend and that progress that we are making both operational and mix through the course of ‘17 is going to drive us to those numbers. Again, I still feel we are a double-digit – we have the capability to be a double-digit EBITDA company and we are focused in that direction.

Edward Hemmelgarn

Okay, alright. Thanks.

Ramzi Hermiz

Alright. Thank you.

Operator

We have reached the end of our question-and-answer-session. I would like to turn the call back over to management for any closing remarks.

Ramzi Hermiz

Again, I would like to thank everyone for participating on the call today. Again, the Shiloh team has worked hard through the course of 2016 and we are really committed to continuing to drive that improvement and we see that improvement happening. We are excited about the opportunities in 2017. We feel that they are – with our gains in our customer relationships and the strength of our technology, the strength of our portfolio, we still feel strong about the momentum going forward. And I appreciate everybody’s time this afternoon and we look forward to speaking to you with our Q1 results. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this does conclude the call for today and we thank you for your time and participation. You may disconnect at this time. Have a wonderful rest of the day.

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