Superior Industries International, Inc. (SUP) CEO Timothy McQuay on Q4 2018 Results - Earnings Call Transcript

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About: Superior Industries International, Inc. (SUP)
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Earning Call Audio

Superior Industries International, Inc. (NYSE:SUP) Q4 2018 Earnings Conference Call March 7, 2019 8:00 AM ET

Company Participants

Troy Ford - VP, Treasury & Corporate Development

Timothy McQuay - Chairman, CEO & President

Matti Masanovich - CFO & EVP

Conference Call Participants

Christopher Van Horn - B. Riley FBR, Inc.

Gary Prestopino - Barrington Research Associates

Richard Phelan - Deutsche Bank

Hamed Khorsand - BWS Financial Inc.

Brian Sponheimer - G. Research

Raymond Kramer - Seix Investment Advisors

John Sykes - Nomura Securities

Steven Borick - Texakota

Operator

Good day, and welcome to the Superior Industries Fourth Quarter and Full Year 2018 Earnings Teleconference. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Troy Ford. Sir, please go ahead.

Troy Ford

Thank you. Good morning, everyone, and welcome to our fourth quarter and full year 2018 earnings call. During our discussion today, we will be referring to our earnings presentation, which is available on the Investors section of our website at www.supind.com. Joining me on the call today are Tim McQuay, our Executive Chairman; as well as Matti Masanovich, our Executive Vice President and Chief Financial Officer.

I will start on Slide 2, where I'd like to remind everyone that any forward-looking statements contained in this presentation or commented on today are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially because of issues and uncertainties that need to be considered in evaluating our financial outlook. We assume no obligation to publicly update any forward-looking statements. Specific conditions, issues and unknown factors that may represent forward-looking statements are noted in detail on the slide. I would like to point you to the company's SEC filings, including the company's annual report on Form 10-K for the year ended December 31, 2017, and soon to be released Form 10-K for the year ended December 31, 2018, for a more complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

We also will be discussing or providing certain non-GAAP financial measures today, including value-added sales and adjusted EBITDA. These non-GAAP financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. Reconciliations of these measures to the most directly comparable data presented in accordance with GAAP may be found in the financial tables included with our fourth quarter and full year 2018 earnings press release and in the appendix of this presentation.

As a reminder, comparative results for the full year 2018 were impacted by the inclusion of an additional 5 months of Superior's European operations compared to 2017 and an additional week of North American operations in 2017 compared to 2018 to align the fiscal year of our North American operations with the calendar year.

I would now like to turn the call over to Tim McQuay, our Executive Chairman. Tim?

Timothy McQuay

Thanks, Troy. Good morning, everyone, and thank you, all, for joining us today. I'll begin with an overview of our full year 2018 results, starting on Slide 3 of the presentation. 2018 marked our first full year as a diversified and globally competitive company with the addition of our European operations. We did, however, face some headwinds in terms of softening year-over-year industry production in both our regions, particularly in the second half of the year, due in part to the implementation of WLTP. In addition, we also experienced electrical rate increases in Mexico and new product launch challenges in the third quarter of the year.

Despite these challenges, net sales reached $1.5 billion with 21 million units shipped in 2018. In addition, value-added sales were $797 million with value-added sales per wheel increasing $1.71 to nearly $38. Additionally, we reported adjusted EBITDA of $186 million. All of these items were favorably impacted by the additional 5 months of European operations in 2018 compared to 2017. Also, during the year, we generated $156 million of cash from operations, driven by favorable working capital during the quarter. We invested $78 million in capital expenditures, leaving $78 million available for debt reduction, the acquisition of minority shares and dividends.

Turning to Slide 4. Let me touch on our unit shipments as compared to the overall market. As noted, comparative results on this slide have been adjusted to show calendar year 2017 shipments in North America, which prior to 2018 did not align to the fiscal year. The results are also adjusted for units produced in Europe and then shipped to North America for assembly. We believe this provides a better basis for comparison to Superior's year-over-year performance versus the market.

Our North American shipments declined in line with overall industry production for the region, driven by a strong first half offset by a softer fourth quarter. While select North American OEMs did see growth over the year, softer volumes for Superior in the fourth quarter were primarily due to lower production volumes by our primary North American OEM customers. Matti will provide additional detail in a moment when he discusses the company's financial outlook. However, we expect this trend to continue into 2019.

That said, the diversification of our operations with the addition of Europe proved to be beneficial as Superior delivered a slight increase in shipments, despite a decline of over 2% in Western and Central European light vehicle production. This growth was bolstered by programs with German premium OEMs on which we saw higher-than-expected demand. Furthermore, our plant in Poland that opened in 2016 helped add to our capacity and enabled further gains in market share, which we expect to continue into 2019.

In terms of industry performance, in 2019, we're expecting industry production declines in both North America and Europe compared to 2018. Despite these headwinds, we will continue to execute on our strategy to leverage the shift towards larger, more complex wheels, which will support continued growth in value-added sales per wheel.

In terms of new program launches, we are anticipating several firsts, including our first 23-inch production wheel launch with a premium OEM in Europe. Also we were recently awarded new programs that include our first flow formed wheel for Toyota as well as laser etch and AluLite premium wheels for a North American OEM. We remain committed to enhancing our operational efficiencies, specifically in North America, and we'll continue to invest in future capabilities to support our global customer base and deliver shareholder value.

Finally, let me provide a brief update on our search for a new Chief Executive Officer. Our focus is on finding an individual with manufacturing expertise and a proven track record of operational success. We've been very pleased with the interest and strengths of the candidates thus far.

With that, let me turn the call over to Matti for a closer look at the company's financials. Matti?

Matti Masanovich

Thanks, Tim. I'll now provide a more detailed overview of our financial results for the full year and fourth quarter 2018. Turning to Slide 5. We have provided a breakdown of unit shipments, net sales and value-added sales by region for both the quarter and full year 2018. As you can see, the benefit of our more diversified business has helped to bolster our overall results as strength in Europe has offset some of the weakness in North America. Earnings per share for the fourth quarter and full year 2018 were impacted by acquisition and onetime benefits of $0.77 and $0.34, respectively. Specifically, the primary benefit of the fourth quarter and full year was the impact of a correction to the redemption rate for the preferred stock, which had a $15.3 million -- $15.3 million onetime impact or $0.61 per diluted share.

The fourth quarter was also impacted by a valuation allowance on a deferred tax asset for interest expense, which was recorded in 2018. Superior determined the deferred tax asset for interest expense to be not allowed based on revised guidance from the IRS in November related to the Tax Cuts and Jobs Act. Given this was recorded during 2018, there was no impact to the full year. The provision for income taxes for 2018 was $6.3 million, resulting in an effective tax rate of 19.5% for the year.

Turning to Slide 6. Let's take a closer look at sales for the fourth quarter of 2018. Net sales for the quarter were $379 million, an increase of approximately $17 million from the prior period, while value-added sales increased $2 million on a year-over-year basis to $206 million. The increase during the quarter was driven by higher aluminum prices and improved mix, partially offset by a weaker euro to U.S. dollar exchange rate and lower volumes.

Turning to Slide 7. Adjusted EBITDA for the fourth quarter 2018 was $46 million compared to adjusted EBITDA of $49 million in the fourth quarter of 2017. The decrease in adjusted EBITDA was primarily driven by lower production and sales volumes in North America, offset partially by lower compensation accruals, improved product mix and strong performance in Europe. As Tim mentioned previously, our North American production in the fourth quarter was primarily impacted by lower market production by our OEM customers in addition to roll off of certain passenger car programs.

On Slide 8, cash provided by operating activities for the fourth quarter was $92 million. This compares to cash from operating activities of $47 million in the prior year period. The increase in net cash from operating activities was driven by favorable working capital during the quarter, primarily lower accounts receivable and inventory. Cash used for CapEx during the quarter to support expansion and enhancement of the company's portfolio of products and technologies as well as ongoing maintenance totaled $22 million. During the fourth quarter, we paid dividends of $7.1 million and acquired an additional $6 million of shares from minority shareholders of Superior Industries Europe. The amount still outstanding related to the minority interest in Superior Industries Europe is approximately $14 million.

Moving to Slide 9. Net sales were $1.5 billion for the year, an increase of $394 million from 2017, and value-added sales were $797 million, an increase of $180 million from 2017. The increase in sales was driven by the inclusion of an additional 5 months of Superior Europe operations in addition to stronger product mix comprised of larger diameter wheels and high aluminum prices. These benefits were partially offset by a weaker euro to U.S. dollar exchange rate.

As you can see on Slide 10, adjusted EBITDA for 2018 was $186 million compared to $140 million in 2017. The increase in adjusted EBITDA was primarily driven by the inclusion of 5 -- additional five months of European operations in 2018 as well as improved wheel mix on larger diameter wheels, partially offset by lower volumes. In addition, stronger first half operational performance was offset by higher electrical and launch costs in Q3 and North America production inefficiencies in Q4, specifically production of incremental wheels in our U.S. facility rather than in Mexico.

Turning to the cash flow slide on Slide 11. For the full year 2018, cash provided by operating activities was $156 million. The increase in net cash from operating activities was driven by an additional 5 months of European operations and favorable working capital management, including the introduction of an accounts receivable program in North America. Globally, the increase in factoring from December 31, '17 to December 31, '18, generated approximately $32.5 million of incremental cash flow. We continue to focus on ways to optimize our working capital globally.

Cash used for CapEx during the year to support expansion enhancement of the company's portfolio of products and technologies as well as ongoing maintenance totaled $78 million. This was up from $71 million in the prior year due to the additional 5 months of European operations. During 2018, we paid dividends totaling $28.8 million with dividends to common stockholders of $9 million, preferred dividends of $18.8 million, which includes $1.9 million of participation on the common dividends as well as $16.9 million of preferred dividends at a 9% interest rate. Note that in 2018, during the timing -- due to the timing of the business days in the year, there was 1 additional preferred dividend paid. Normally, the 9% preferred dividend will result in a $13.5 million of dividends per year.

We also paid $1 million of dividends to minority stockholders of Superior Industries Europe in conjunction with our repurchase of $39 million worth of shares during the year. With only $14 million remaining of Superior Industries Europe minority shareholders, dividends to minorities will be relatively small on a go-forward basis. In terms of liquidity management, our total available liquidity at the end of 2018 was $239 million inclusive of cash on hand and the unused portions of our committed credit facilities in the U.S. and Europe. Both debt reduction and profitable investments in the business remain our top capital allocation priorities.

Now let me review our 2019 outlook on Slide 12. For the full year 2019, we expect unit shipments to be in the range of 19.85 million to 20.3 million units. The decline in expected volumes in '19 versus '18 is driven by our North America business unit, specifically overall market decline in the region as well as market performance on platforms we are on and trim level take rates of our wheels as well as net new programs. The softness in North America is anticipated to be partially offset by higher volumes and market share gains in our European business, notwithstanding the year-over-year production down in Europe. This demonstrates the importance of the diversification in our business.

Net sales are expected to be in the range of $1.42 billion to $1.47 billion. Value-added sales are anticipated to be in the range of $765 million to $805 million. We also expect a year-over-year increase in value-added sales per wheel in 2019 as the guidance ranges would imply. Adjusted EBITDA is expected to be in the range of $170 million to $185 million. The anticipated year-over-year decline in adjusted EBITDA will largely be driven by lower volumes in North America, partially offset with favorable mix in volumes in Europe.

As we take a look at the development of our adjusted EBITDA in 2019, we expect the cadence to be more heavily weighted towards the second half of the year due to improved operational performance in North America, including the higher electrical rate increases we expected to continue into the first half of 2019.

Our outlook for the cash flow from operations is anticipated to be in the range of $125 million to $145 million, while cap expenditures are expected to be approximately $85 million.

And with that, I will now turn the call back over to the operator to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question would be from Chris VanHorn with B. Riley FBR.

Christopher Van Horn

I just wanted to jump in on the guidance. The adjusted EBITDA guidance, the range there, what are kind of the puts and takes that get you for that $170 million to $185 million? And then maybe along with that, how much of that differential is related to North America versus some other things going on?

Matti Masanovich

Well, essentially our range -- we put $15 million range out there from an EBITDA perspective is primarily driven by volume. So it's based off of the unit and the unit ranges we provided. So if you kind of look at -- if you kind of do the math and go back to the unit ranges, you can kind of get to our view. I'd tell you that the volume in North America is probably more of a concern than our European volume as of today.

Christopher Van Horn

Okay. Got it. And then when you look at those volume numbers, are you kind of using IHS as a baseline and then adding anything from mix? Or how are you thinking about your volume projections?

Matti Masanovich

So we use IHS as a basis, as a benchmark, but also you have customer forecast, we've got detailed forecast, able to go 16 weeks out from the customers. We also have longer-range customer forecasts. So we embed what we know. We also know our take rates, so our historical take rates, and we kind of forecast those into the future as well. So we're looking at our actual experience and what we think is going to transpire into the future. Yes, it's actually -- it kind of comes off of IHS, and we do benchmark against IHS. But IHS is the -- at the end of the day, the overall governor for us. We know the programs we're on, we know that take rates, we know how the platforms are behaving. So I think we've got more intelligence than I would say than just taking IHS numbers. As you know, we don't win all the wheels on an entire platform, we win a subset of wheels per platform. So for instance, T1XX might have 40 different wheel variants, we might be on 22 of those wheel variants. So we have to really understand take rates and trim levels, specifically in North America, the different trim levels that provide the take rates for us as we produce our parts and as they get put on vehicles on a go-forward basis.

Christopher Van Horn

Got it. Okay. And it seems like the European business is running really well. Congrats on the share gains. What are some of the driving factors of your ability to get that share? Is it that the Chinese competition is reducing due to -- maybe due to some of the tariff activity here in North America affecting that somehow? Or is it just -- are there other factors that you are able to see that's driving those share gains?

Matti Masanovich

Well, we're the number three OEM player in Europe. So there's two other major competitors that are European competitors ahead of us. And so when we look at how we go to market and how we approach our customers, I think, we've got a natural advantage to being the third largest in Europe. We've got share gains that we can make and inroads we can make with certain customers on certain platforms as well. The other side of that is there's a Chinese tariff in Europe and that tariff they have -- there's a 22.5% tariff on Chinese imports, so aluminum wheels coming out of China into Europe. So that kind of keeps the China competition at bay in Europe. So -- and in addition, we brought on the SPP3 facility that Tim mentioned in 2016 and we have expanded capacity. We're now hitting kind of, what I will say, full run rate capacity as we kind of go through there. So we've booked this business upwards of 1 and 2 years ago. And as that business comes on, we're seeing those the share gains come true for us. So I guess, as a brief outline, that's how I would answer the question.

Operator

Our next question comes from Gary Prestopino with Barrington.

Gary Prestopino

Can you hear me because I'm on a cellphone?

Timothy McQuay

Yes, we can hear you, Gary.

Gary Prestopino

Okay. Great. Couple of questions here. First of all, could you give us a breakdown of the percentage of units that are now 17 inches or higher at the end of the year versus where you were last year?

Matti Masanovich

So I think, you wanted 19 inches or higher, correct?

Gary Prestopino

I'm sorry, correct 19 inches or higher, sorry.

Matti Masanovich

Yes, we're at approximately 20% 19 inches or higher at the end of this year. And we were about...

Timothy McQuay

We were about 17 a year ago.

Gary Prestopino

Okay, that's great, so that's a good shift there. And then a couple of other questions here. In terms of -- I know you're looking for a CEO and all that, but in terms of the issues that hit you guys in 2018, meaning cost on program launches, Mexico, things of that nature, where are you in terms of correcting some of these issues, particularly what was going on in Mexico? I mean, is this an ongoing program or do you think that you basically got most of the kinks worked out that impacted you in 2018?

Matti Masanovich

So we had two primary issues impact us and that's primarily in Q3 of 2018, and that was electrical rates, which we're still a headwind in the Q4. And I think, as we've discussed, and I'll say that, we've applied and we've gotten permission now to buy electricity in the secondary markets. So we're buying traditionally directly from CFE, which is the public utility in Mexico. We've been out, got those applications that allows us to now go out and proffer and get bids and then engage. We had suggested that will be in the second half of 2019. We'll see those, buying electricity in the secondary markets. So we'll see some natural improvement in our earnings from an electrical rate decrease in the second half of 2019. And that's -- so that plan is in place, and that is working and being executed. So we have good confidence around electrical rate increases as well as the electrical rates have subsided somewhat off of their high at the end of Q2 -- end of Q3. So we've seen about 10% to 15% decline in the actual rate, and we saw a spike or 70% in electrical rate in Q3. So as we ended Q3, we were at all-time high, so we've had a natural rate increase. Now before, as I mentioned, the ability to buy in the secondary market, and we have the approvals for and now we're entering into those contracts to try and buy electricity in the secondary markets and that's primarily impacting the second half of '19.

So I think we're in a good position there. As well as we're also spending some of our CapEx on what I'll say usage decreases. So we've got as basic as lighting, bulbs for lighting, lighting facilities, either running our machines, looking at our shift patterns and if can we turn off machines, et cetera. So we're looking at how to decrease the usage. And then focusing in on launches, the other issue we had. I think, as we mentioned, we didn't impact one customer, it was performance and it was internal to us, and we never -- we didn't impact the performance. But our scrap rate continues to remain high, and I think that's a function of the higher premium wheels, the larger wheels, and the dynamics around those in the premier finishes that we're launching. But we figured out the North American operations has been stabilized. We didn't impact the customer in Q3, unlike historically back maybe 2016 where we had airfreights issues in the second half of '16. So I think we've got a good handle on it from a program management perspective. But now it's up to us now to get those operational improvements and execute on those and kind of leverage what I would say is one of the reasons we did the UNIWHEELS acquisition was to bring that expertise in place. And I can tell you that there's action plans, there is meetings in Mexico, so in Chihuahua. We've got the European team engaged, and so, I think, we're going to start to see some of those gains in the second half of '19.

Gary Prestopino

Okay. That's great. And then in terms of -- I don't know if you mentioned this in the call, I didn't get it, in terms of new product launches, this year coming up, I mean, last year was a record. How are those looking for you relative to 2018?

Matti Masanovich

Well, it's a little -- so there's two issues, Gary, it's a good question. Two issues is our launches in North America are higher than the prior year. They're modestly lower in Europe. And that's really just a cycle issue as to when those programs were one and where the OEMs were at launching. So as you know, and I think I've mentioned, we're subject to a model refresh timing on launches. So when they do a midcycle model refresh, so it's -- say it's 5- to 7-year program around year -- between year 3 and 4, they're subject to a model refresh and where they refresh the wheels. And so I think we're going to continue to see good launch experience and good -- and launches kind of, what I will say, on a global basis. But just to directly answer your question, we're higher in North America in 2019 and we're modestly lower in Europe in 2019 versus '18.

Gary Prestopino

And then the last question I have is regard to CapEx. I mean, it's obviously going to be a sluggish year, but I think you did about $75 million of CapEx last year and now you're going to do $85 million. I mean, what leads to that increase and what's -- in during a pretty sluggish time period for the auto industry?

Matti Masanovich

Well, as I think, I have mentioned, we did $78 million in 2018 of CapEx and we're planning to do $85 million. Obviously, we'll look at it on a case-by-case basis. Even though we plan for $85 million, it still has to come for approval to Tim and myself and to the SLT, the kind of our Executive level, to review and approve all CapEx projects. What I'd tell you is there's a natural cycle of aged equipment. So from repairs and maintenance standpoint, we have to spend money to continue the operations, so that's a healthy slug. I think we've discussed about $5 million per facility to kind of repairs and maintenance CapEx type of issues and with the balance being on expansion and growth. And when I say growth, new finishes, new paint booths, new liquid paint booths, et cetera, those come with a price tag. And so as we kind of look and we have to continue to invest in the future of this company. And so it really comes on the back of, what I will say, growth program for OEMs. And so you can target individual programs, you can target individual finishes that we're trying to accomplish to generate the balance of the CapEx. But I can tell you that the CapEx goes through a high level of scrutiny here in the company, and we're looking at it and we've looked that from a shareholder return perspective, so -- and from a payback perspective.

Operator

Our next question comes from Richard Phelan with Deutsche Bank.

Richard Phelan

Couple of questions. First, factoring. What was the amount outstanding at year-end or the receivables that were sold into the program in total?

Matti Masanovich

We had a total between Europe and North America of about $53 million total outstanding that we have sold.

Richard Phelan

Great. And the additional $5.7 million of minority shares in UNIWHEELS, that was completed in fourth quarter. I thought the stake after the $33 million of purchases in Q3 had taken the stake up to $97.8 million. So where do you stand now? And sort of what is the plan to do? Or is there a need from a process point of view to do anymore at this point as you look to 2019?

Matti Masanovich

So we've got $14 million worth outstanding, that represents about 1.5% outstanding today. So -- and we can give you the exact number -- the exact percentage, I'm just going from memory, but I know it's $14 million worth. It's put to us, and so we're not out there soliciting it, they get put to us and then we make the payment. So that's how the shares come in here as they get -- as and if they trail in. So from a cash planning perspective, I always put them in the next quarter and kind of playing around that, that $14 million, but there's $14 million remaining outstanding.

Richard Phelan

Got it. okay, that's clear. Thirdly, just in terms of the outperformance in terms of growth that you achieved in Europe. Obviously, the third quarter was negatively impacted by WLTP and also you mentioned in the last call JLR. On those 2 issues, would you say that those have ebbed or behind the company in terms of sort of the impact because of the growth that you experienced?

Matti Masanovich

I don't think so. So I think we saw some easing in WLTP as more cars move into the process, primarily for one of our largest customers in Europe and the customer group in Europe. But I think WLTP will fully subside through the first half of 2019. And so as we exit Q2 of '19, I think we'll be back to, what I'll say, normalized rates and WLTP. As for JLR, I'm sure you've seen recent news that they've shut a factory down again in Europe in April for 1 week, so they've announced that. And so I don't think with Brexit issues and, I guess, pending the outcome of that will determine how JLR works through it. But JLR is a very small customer of ours, they represent about 3% of our sales. So it's certainly manageable within our portfolio.

Richard Phelan

Okay. And last question, if I might, for the 2019 guidance sort of at the midpoint of the wheel numbers, that's a 4.4% decline in volumes, which arguably is worse than market consensus. Obviously, you'd expect that there would be continued penetration of aluminum wheels, a shift to higher diameter wheels as well, which all other things being equal should help your demand versus general market. So I guess what I'm trying to get a sense of here is this seems somewhat bearish in terms of the volume expectations. Are there certain factors driving that amongst some of your key customers? Some of those have, obviously, announced restructuring actions, too.

Matti Masanovich

Yes, so I think, as I mentioned in my section, but it's primarily take rates. And so when you kind of get into, there's, obviously, market decline and you are seeing negative growth in each region, so there's an element of market decline. There's also the platforms and the platform penetration of those -- of the platforms that we're on. And so on a year-over-year basis, we're seeing softness in the ultimate overall platform. And as you know, this is all in North America right now, okay. And the market -- there was a market decline in Europe, although we're beating that because we're growing above market. So I think we've got a good story with the offset in Europe. But there's the market -- so there's a market decline in North America as well. There's also a platforms that we're on in North America. So we're seeing a decline year-on-year on the platforms. So that's primarily, as you know, trucks, SUVs and crossovers, that's 60% of our business. So -- and that's primarily GM, Ford and Toyota. So you can go in and look at from the overall platform perspective what I just explained. And when you peel back getting even further, there's take rates on the platforms that we're on, and so to the extent that we believe they're going to order more premium wheels if we're on the premium side of that segment versus lower-end wheels and if we don't have the lower-end program because we're selling into the more premium segment, but they're going to build more lower end, I think we're going to be -- we'll be on the wrong side of that. So as I originally said, it's a primarily North American issue and it's being offset with favorable volume in Europe and then -- from a units perspective.

Operator

Our next question comes from Hamed Khorsand with BWS financial.

Hamed Khorsand

First question. How many program launches are you scheduled for this year? And if you could give a breakdown on when they fall in, in the quarterly cycle?

Matti Masanovich

I can tell you that I don't want to give the exact number of program launches, that's not something we've historically given from a forecast perspective or guidance perspective. But I can tell you that they primarily fall in Q2 and Q3.

Hamed Khorsand

Got it. And then just looking at your performance in North America, it looks like the North American unit volume is at its low it has been since 2015. But I know in prior calls we've talked about how the industry moves and your output moves to larger wheels, that unit volume would drag lower because of what's required to build the larger wheels. Is that still true?

Matti Masanovich

So I'm going to -- yes, so we are targeting to move up the ladder in premium bills, 19 inch or bigger in premium finishes. As you kind of look at North America unit volume in Q4, if you're looking at the Q4 numbers, you'd have to go through the specific customers and look at what they produced versus the prior year. And I think you'll see a direct correlation as to our unit numbers from a Q4 perspective.

Hamed Khorsand

I got that. I was trying to circle back to your previous conversations of as you move to larger wheels, it just takes more manpower and equipment usage to build those larger wheels, so the unit volume necessarily wouldn't be the same even though your value-added sales goes higher?

Matti Masanovich

No. I think that's fair. I mean, I think as we -- as the plants evolve and as we put more larger size wheels and premium finishes, it takes longer, so our capacity does come down somewhat. Now at the same time, we can invest in more automation, and we can make strategic pinpoint investments on the production floor to increase cycle times. So as we launch these more premium wheels and as, I think, as we get better at it, and we strive for more operational improvements, that capacity should return. But over the medium term and short term, I absolutely agree with your comment, and that's what we've previously discussed.

Hamed Khorsand

Okay. And then my last question. Given everything that happened in North America in Q3 and, I guess, still there is an overhang there on the performance side, what are you learning that you can apply going forward so maybe you can even out performance going forward and hit adjusted EBITDA margins of above 20% in North America on a consistent basis?

Matti Masanovich

That's a good question. So I think what we need to do is it starts at 101, what I will just -- I'll just go back, it starts at 101 manufacturing and driving the efficiencies on our scrap rates or, what I'll call, our yield rates down. So as we look at and we compare key metrics across our European business versus our North America business and, what I'll say, our manufacturing plant is to drive the efficiencies through the process, we have to align those and we have to get better at manufacturing the parts and manufacturing it quicker with less scrap, less rework, less over time. It's as simple as that. I mean, I think I had mentioned historically that the scrap or the yield rates are almost 2x as high for scrap in North America as is in Europe, and the yield -- offsetting the yield is then -- is higher in Europe than it is in North America from a yield perspective. So I mean, I think, ultimately that's our challenge and that's up to management. The only good thing about that is it's all internal, it's up to us to fix. We bought UNIWHEELS. So we've got the resident knowledge in-house. We've got manufacturing expertise, it does it and lives it every day. I think UNIWHEELS is bar none probably the best manufacturing for wheels on the globe. And so we've got them in place. And now, like you said, we're now across pollinating. We've had meeting. We brought the European teams down into Mexico, and now replacing this ownership and execution is being managed on a daily and week-to-week basis such that we're going to start to see improvement. And I said -- as I mentioned, we've baked in some of those improvements into the second half -- in North America second half performance.

Operator

[Operator Instructions]. Our next question comes from Brian Sponheimer with Gabelli.

Brian Sponheimer

Couple of questions. One, just on the search process. Can you talk to whether you're past the first round of kind of reading through candidates just where you are in that process?

Matti Masanovich

Do you want to answer that, Tim? I'll take that. What he asked is from a search perspective, are we past the first round? I think -- so I said -- I'm not going to answer yes. I think as I understand it -- go ahead, Tim.

Timothy McQuay

I apologize. I was reading a note. We're well past the first phase. And we, as I said, have had very qualified candidates, and we are moving with purpose and with as much speed as we can to move towards the preferred candidates and complete the process. So we're doing everything in our power to move that along expeditiously.

Brian Sponheimer

Okay. And when you're being at the board level, just looking at the numbers, you've got at the low end $40 million and free cash flow at the high-end $60 million and you got $40 million in dividends between the preferred and the common dividends. So at least, very little for debt pay down. What's the thought on how you address your capital structure, if we're at the top of the cycle and this is effectively the best free cash flow will be. Well, what's the thought there?

Matti Masanovich

Well -- so I'll just -- let's just reset those numbers for a moment, but if we take the midpoint of our cash flow from operations guide at $135 million, and we assume CapEx at the $85 million and the dividends are $25 million because we had an extra dividend, as I mentioned, in '18 that doesn't recur in '19, so total dividends are $25 million. So that would leave $25 million for debt pay down. And that is -- and there is other actions we can take. So from a working capital perspective, from a cash management perspective, there's other things we can accomplish. And so I don't think we're done. It's not -- that's not where the conversation ends for us as well as enhancing earnings in North America, again to drive performance in North America. So that's what I would say. From a capital structure standpoint, our debt, if you look at the maturity schedule, when I put the maturities on the list, it was on Slide #11, our maturities are well out in the future. So our term loan is up in '24, and the -- sorry, the term loan is out in '25 and the -- '24 and the unsecured notes are in '25. So we've got lots of time and ample time to pay down debt and see the operational improvements in North America. So I think from a capital structure standpoint, there's not a lot I can do today, but I also think enhancing earnings and enhancing cash flow is our focus and to drive more debt pay down clearly.

Operator

Our next question comes from Raymond Kramer with Seix Investment Advisors.

Raymond Kramer

Most of my questions have been answered. Just a couple of other things I have here. One, with respect to tariffs, did you benefit at all in the second half of the year from either tariffs or the threat of tariffs on Chinese imports?

Matti Masanovich

No. So the Chinese tariff was 10%, still is 10%. There was rumor they would go up to 25%. And we did actively quote OEM customers here in North America on the back of a rumored 25% increase in tariffs from 10% to 25%. But we did not benefit per se, in that we've not won any programs. And now given the current situation, it appears that the 25% is going to be off the table. We don't believe it's going to happen. So if the 10% stays, and then we'll see if the government gets a deal with China, that 10% would go away. But no there's been -- and that 10% was pretty much eaten by the Chinese competitors. So there was no benefit to us in the second half of '18.

Raymond Kramer

All right. And I just wanted to come back to something that's I know been discussed a couple of times today. But the North American volume, I -- just triangulate the numbers, it looks like North America could be down, I don't know, 8% or so in terms of volume this year, that's just kind of the way I work out the math, maybe I'm off by a little bit, but it's going to be down. And I understand take rate in the fourth quarter was impacting you, but what are the assumptions there in terms -- because it would clearly be a market share loss. Is it that your -- even your premium wheels were the nonpremium or favored? Or -- I mean, how do you look ahead of year to kind of say you're going to lose that much North America.

Matti Masanovich

Well, some customers will tell us, so they said we've got there. Some of them have come out and communicated with our commercial team that -- so for instance, there's 1 customer that had a -- we had a 60-40, 60% low end, 40% premium wheel, we're making the premium wheel. We do not have the lower end 17-inch wheel, and there was a 60-40 split of production, and we've come through January and early February, and they came out and said, "Listen, we're going to sell that car, that vehicle, that platform. We're going to sell it to the fleet -- as a fleet vehicle, and we're only going to put on 17-inch rims, and we're going to reduce the share of the 19-inch and bigger to 5%." So we went from a 60-40 split to 95-5, as an example. So we actually -- as I said, we're very close to the customers. We have customer intimacy. We know what they're going to build, and so there's some underlying issues, and we can -- we have the ability to understand and forecast what those changes are. We also have this history on our fleet -- on our side as well. So we know what the historical take rates were on those vehicles.

Raymond Kramer

Okay. I mean, would you do anything different going forward to -- how you'd position your wheels are just a matter, the market is going to move one way -- one year, one way or the other.

Matti Masanovich

Yes. So I mean, I -- would I do anything different? I mean, it's you're out. You're 2, 2.5 years in advance when you're winning and sourcing wheels and you have a strategy around it. And our strategy, I think, our thesis is pretty good. I mean, I think, the strategy ultimately is the market is moving to larger wheel sizes. Temporary blips 6, 12 months here and there, on certain programs are going to happen. And so I don't think it's a wave of the future. I think the future is larger wheels, more complex finishes. And so as we're building towards that, as I have mentioned, I think our trying -- we're trying to get our total 19-inch or bigger wheels by '22 up to 30%, so as part of our portfolio. So our portfolio is evolving clearly, and I think that strategy is fully endorsed by our board, and we're executing at a management team level. And so I think, nothing changes in that regard. Yes, would I like to hit that 17-inch wheel? Absolutely.

Raymond Kramer

And here's just another thing, I just wanted to ask on the -- I just did a quick calculation of just EBITDA per wheel, and it looks to me roughly that maybe the $12 million of manufacturing inefficiencies that you show in the walk cuts about $0.50 per wheel of EBITDA that was kind of lost to that if I am doing the math right. But when I look to your 2019 guidance, it looks like you're keeping the EBITDA per wheel flat. I'm just trying to understand is that implying that maybe some of those manufacturing issues like you said, the electricity, whatever, will not be addressed till maybe late in the year or is that just because of lower volumes in North America maybe you're going to have an absorption issue? Because I would expect to see the wheel size moving up and things like that to be working the other way, yes.

Matti Masanovich

No, clearly, wheel size from a value-added sales perspective, that helps us, and we generate more margin off the larger size wheel. So there's a definite benefit there in the portfolio. But then also just also overall down volume is not going to be helpful from an absorption standpoint as well to your point. But then we also have the European business, which is somewhat partially offsetting it, so from an overall perspective. But I think everything you just said is fairly accurate. I mean, I think, sitting here today, knowing what we know about take rates, knowing where we're going, I think to put together the best forecast that we can come up with and created the EBITDA range based off of that.

Raymond Kramer

Okay. And last one for me and it's sort of follow-up to some prior questions. But your leverage is somewhere in the mid-3s right now, might go a little bit higher next year depending on EBITDA and cash flow. But do you have a target leverage or is there a leverage that you'd like to operate at? Or how do you approach that question?

Matti Masanovich

Sure. We ended the year at 3.4x. And yes, I mean, I think, ultimately I feel really comfortable getting down to lower 2s. And so over the course of next cycle, I would say, so the next three years, that's our goal. Our goal is to get down to low 2s. I'm not going to reconfirm what we've put out previously from a longer-term perspective, but, yes, I feel comfortable at a lower leverage basis than we are today. Now keep in mind, we just did the acquisition, we closed in January of 2018, so that's when the acquisition was actually closed. So we're 1 year out from the acquisition date. Our leverage is sitting at 3.4x. We're going to ebb and flow through this year as the working capital and CapEx get spent in -- by quarter. I talked about the cadence of our earnings kind of being back half generated, specifically in North America, as we looked at getting around those electrical rates and some of the headwinds, so from a volume perspective. So I think, overall, yes, I want leverage to come down, absolutely, and that's the key priority for management is to pay down debt.

Operator

Our next question comes from John Sykes with Nomura.

John Sykes

Just kind of picking up on that. Have you given any thought to buying back the bonds? It's -- the bonds now I think are 88 area.

Matti Masanovich

Yes.

John Sykes

Seems you got to pay them back at some point, so why not get them at a discount.

Matti Masanovich

Yes. I think it's a balancing act as to if I buy the bonds, then I cancel them. So I'm putting -- I have to permanently pay down debt, right? So once it goes -- once I pay out the money, it goes down, there's no ability to borrow it back. So that's a key consideration for us. But yes, I mean, I think that is -- it's -- when we discuss it, we look it, we evaluate it, and we will continue to evaluate it. So nothing is off the table, put it that way.

John Sykes

Okay. And I don't know if you mentioned this before, but in terms of pricing, are you seeing more aggressive like price downing from the OEMs or has that been holding up relatively well even whether it's value-added or non-value-added, 17-Inch or above that type of thing?

Matti Masanovich

I think the pricing requests have been pretty stable year over year over year. We quote on a global basis. So they leverage global buy when we negotiate pricing on wheels. So it's a very competitive environment with which we bid for wheels. And so that's started some 8, 9 years ago when the Chinese competitors entered the market in North America. Specifically 40% of the wheels come from China today. So they're in place and they're serving the market. Generally, they service the lower -- the smaller wheels. It doesn't mean they can't go up, but the shipping and logistics of larger wheels is probably more difficult to manage from China as they ship across the ocean. But our ability, where we see the future going is larger wheels and more premium finishes, and that's we've -- our core investments have been around as we've kind of looked at the business model. And so, I think, less and less smaller, 16, 17-inch wheels for us on a go-forward basis and more larger premium finishes.

John Sykes

Can you talk a little bit about that in terms of the Chinese competition? I mean, is it a lower quality wheel or is it just a size issue or -- because I guess, it's more not so much the business you have now, but the business you might get in the future?

Matti Masanovich

Yes, I don't -- I mean, I think our Chinese competitors are very well qualified and capable. They -- we don't have -- we've got a few technologies that I think we're head on, but overall, I mean, I think, they make very good wheels and need all the specs for the OEMs and have to go through the same kind of testing requirements we do to service those -- the market. So it's -- there is nothing new about China competition from where we are today from where stood a year or 2 ago. So the big three is Prime, Dicastal and us. We suggest we're #1 in North America, we're followed closely by Dicastal and Prime. We're all about 20% shares. So we're about 60% of the market. And we make our wheels primarily in Mexico. And they make their wheels primarily out of Asia. So I mean, they do -- there's niche manufacturing here in North America. So U.S. base, we've got Fayetteville, Arkansas. I think each of our competitors have a facility in North America or in the U.S. But there is nothing new out there that I would tell you about from a China competition standpoint. We've been living it and winning and win successful competing against the Chinese. I don't see any reason why we wouldn't -- for that one to continue.

Operator

Our next question comes from Gary Prestopino with Barrington.

Gary Prestopino

Just a quick question. Based on your prior regime there had said that it would be realistic to have over 30% of your [Technical Difficulty] sorry, 35% of your [Technical Difficulty] 19 inches or higher by 2020. Is that still a realistic goal?

Timothy McQuay

Yes. I think you're breaking up a little bit. I think the question is, do we still expect a portfolio wheels to be of 19-inch and greater to be above -- to be 30% of our portfolio by 2020?

Gary Prestopino

I said 35%, I think that's what the prior regime used to say. Is that still a realistic percentage?

Matti Masanovich

I think it's a little closer to 30% of the portfolio. I don't know where the 35% came from. That may have been discussed with you historically. But I think, it's around 30% as we kind of look forward and look at the book business that we have, it will be about 30% of our portfolio going forward out to 2020.

Operator

Our next question comes from Steven Borick with Texakota.

Steven Borick

For those of you that don't know, I'm the ex-CEO of Superior and my father founded the company some almost 60 years ago. As you can imagine, we're as a family highly disappointed in the stock price action and certainly the cut in dividend. And I'm voicing this opinion on this line for those that are listening that we feel the acquisition was very poorly timed. But be that as it may, we're still a holder of over 1.4 million shares of stock in the company. Quite frankly, wish we weren't, but we are. So I wanted to voice a couple of opinions today and get some comments. You talk about various headwinds, particularly in Mexico with electricity, which we saw coming years ago. But more importantly, when you talk about how to create additional EBITDA for the company in the future, which for our concerns is truly based on the fact that we don't believe you have the real capabilities to without significant increases in earnings, obviously, to pay down any debt of any significance, which means that there will be significant refinancings in the future, which concerns us about what the earnings are or they look like as we go into the future. Obviously, a crystal ball that nobody has. But a couple of big additional significant issues that probably will come up in the future that I want to hear your what your comments are is on the price of natural gas.

As you know, the two largest components of your cost factors other than, obviously, labor in Mexico, on an operational basis, are natural gas, when you look at the melts and the cost of melting aluminum and heat treating and all of the things that go with that and, obviously, electricity running all of your machinery. So you somewhat addressed what you're doing to try to lower your overall cost on electricity. What do you feel is the issue? And are you trying to either through the future's markets or otherwise bring those potential long-term headwinds down on the price of natural gas and how that will affect your EBITDAs into the future?

Matti Masanovich

Yes, so Steven, thanks for the question. It's Matti. We do hedge the natural gas. We started the natural gas hedging program since I have started, and we started looking at -- we placed hedges through 2019 as of now and we're looking at expanding that program into the future for the longer term. So that will protect us using the forward markets from a natural gas standpoint. So we are actively -- we have an active program, we've opened the program, we've bought hedges, driven contracts on natural gas for '19 as of today through the end of '19 and we'll look to continue that program as we assess the exposure and the risk going forward. But you're correct, it is a critical input into the manufacturing process as well as electricity.

Steven Borick

Okay. Yes, well, we had certainly years. Obviously, when things were a lot different in the oil and gas industry, where we were looking at $9, $10, $12 MCF gas, I don't anticipate seeing that, but $3 gas seems to be something that's probably going to be on the low side and those are the things that concern us when we try to look at your EBITDA based on how do you pay down debt, which was what Brian Sponheimer was asking. So I'm not going to reask that question. And then Tim, just quickly on follow-up. Do you have a time line when you would anticipate that you would have a new CEO in place this year?

Timothy McQuay

Well, as I said, Steven, we're moving as expeditiously as we can. And when we first announced the retirement of Don Stebbins and hiring Korn Ferry, we gave a 3- to 6-month time frame to accomplishing that. I would still stick with that and I am hoping that during Q2 of this year we'll be able to complete those negotiations and announce the hiring of a new CEO.

Steven Borick

Great. Very good. Again, I appreciate it. I realize you guys are on a tough uphill battle. And again, we're certainly sorry to see the stock at the level it is. It has had a significant impact on all of our shareholders. But we'll stick with you guys, and hope to see better days ahead. Thanks very much.

Timothy McQuay

Steven, thanks for calling in. We appreciate your support.

Operator

Thank you, ladies and gentlemen for joining us. This will conclude today's teleconference. You may now disconnect, and have a great rest of your day.