Superior Industries International, Inc.

Good morning, everyone, or good afternoon, depending on the time zone that you're in. As usual, during the discussion today, I'll be referring to a PowerPoint presentation, which is available on our website at www.supind.com.

And as usual, I'm going to start with Slide 2 of the presentation, where I would like to remind everyone that any forward-looking statements made in this webcast or contained in the presentation are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially because of issues or uncertainties that need to be considered in evaluating our financial outlook.

We assume no obligation to update publicly any forward-looking statements. Conditions, issues and uncertainties that may be discussed from time to time include, but are not limited to, global competition, product pricing and mix, domestic and foreign market demand, commodity prices, including metal and energy, foreign currency, manufacturing capacity and productivity, capital investments, operating and manufacturing challenges and our strategic and operating plans.

Please refer to the company's SEC filings, including our annual report on Form 10-K for a complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

I just want to let you know at the outset that our Chief Executive Officer, Stephen Borick, was not able to join the call today due to a schedule conflict, which just absolutely could not be resolved. Steve has asked me to offer his apologies but also wanted to express his confidence in having his team handle this call in his absence.

So why don't we begin the discussion, which will follow the same format we have been using for the past several quarters? I will begin with a very quick overview.

As you may have seen in this morning's press release, our second quarter results for 2012 were improved on the top line due to a rather substantial year-over-year increase in unit volume. The volume increase, however, did not translate into earnings improvement for the quarter.

As a point of reference, you may want to turn to Page 11 of the slide deck, which shows the condensed comparative income statement for Q2. What you see is that the total revenues for Q2 of 2012 improved about 3% on a 14% increase in unit volume.

As you work your way down the income statement, you can see evidence that the volume increase made it a challenging quarter, operationally. We also have some higher costs outside of gross profit, the majority of which were episodic in nature.

And finally, the income tax change drove a significant difference into the year-over-year comparison over $0.11 per share on a nominal basis. With all these factors combined, income per diluted share for Q2 of 2012 was $0.23, which compares to $0.53 for the prior year.

So with this brief overview in mind, I now would like you to turn back to the beginning of the slide deck, please. The majority of my comments will be focused on comparisons of second quarter results.

So if you would turn to Slide #3, which is titled North American Vehicle Production versus Superior Shipments. This is where we frame the market environment in which we operated during the second quarter.

The slide format is the same as we have been using in the past. The charts at the top show North American light vehicle production on the left and the company's unit sales volume on the right.

Because our business is focused on North America, the graph on the left provides an overall indicator of the demand driver for our products.

As you can see in this graph and in the data table just below, the market in Q2 reached almost 4 million units, up roughly 27% year-over-year. This level of vehicle production put a new high watermark going back to the second quarter of 2007.

On a sequential basis, Q2 production was up very slightly over what also was a very strong Q1. While the expectations for the back half of the year to cool down a bit from the pace of the first 6 months, the marketplace remains very solid.

Although not shown on the chart, second quarter passenger car volume increased almost 33% year-over-year, while production in the light truck category grew about 23%.

Turning to the chart on the right, you can see that Superior sales volume increased roughly 14% year-over-year. Our overall mix shifted very slightly towards passenger cars, reflecting dynamics I will discuss in just a minute.

You can surmise from this data that we experienced a decline in share, which we estimated between 3 and 3.5 percentage points year-over-year. The sequential analysis shows us regaining close to 2 points a share from the first quarter.

The share decline from Q2 of last year primarily reflects the significance of Ford and GM as the largest 2 customers in our portfolio. Both of these customers themselves gave back several share points compared to last year.

As you know, this dynamic reflects recovery of key Japanese brands from the impact of the 2011 natural disaster.

Slide #4 provides some detail about production rates for our significant customers. I have carried over the data table from the prior slide as an overall point of reference.

As just mentioned, Ford and GM are the #1 and #2 customers in our portfolio. Production rates for both of these companies increased at substantially lower rates than for the industry overall.

Compared to the 27% industry growth rate, Ford was at plus 4% and GM was at plus 2%. It is worth noting that GM's light truck volume was almost flat.

Chrysler was up significantly year-over-year, with production of plus 22%. This growth was strongest in light trucks, with Van programs, the Dodge Ram Truck and the Jeep Compass and Liberty programs all up nicely.

Production for the international brands grew at a rate well exceeding the overall market, increasing about 65% compared to last year. Toyota's current volume was almost 2.4x the prior year rate, with growth rates at Volkswagen, Nissan and Subaru also well into double-digit rates.

Turning to Slide #5 now, which is titled Superior Shipments Year-over-Year Comparison. Let's take a look at what growth Superior's year-over-year volume changes for the second quarter.

I already commented on the overall dynamics affecting our Q2 market share, so let's focus on a bit of the detail to give you some understanding of what our customer and product mix is all about.

Overall, our Q2 sales volume improved with all major customers, with the exception of GM. We were up strongly at Ford.

Far in excess of their production rate increase, shipments to international brands were up almost 50% overall. More specifically, our penetration at Ford was most significant in the light truck category.

Most notable was the ramp-up of our participation on the Escape program. We also had nice increases on the Flex, the F-Series and the Explorer.

In passenger cars, we were up significantly on the Taurus. With Toyota, our volume more than doubled, with increases seen across virtually all the programs we participate on.

The specific models are noted on the slide. We were plus 36% at BMW based on our position on the X3 program.

Our rate of growth with Nissan was roughly the same in passenger cars and light trucks. However, unit growth was much higher in passenger cars, where almost 85% of our mix with Nissan exists.

Maxima, a program that for us really didn't kick off until Q3 of last year, was the big volume gainer. We also experienced a nice increase for the Xterra, Frontier program.

Shipments to Chrysler were up 8%, driven by minivan programs and the Jeep Compass. Program mix and some impact of timing explains why we lag Chrysler's overall rate of production increase.

And we'll not go into the detail now, but Mike O'Rourke and I can discuss this in more detail during the Q&A session, if you desire.

There are a few factors affecting the GM story for Q2. Let's start with the GMT900.

The T900 is, by far, our largest single program with GM. As we noted 3 months ago, we have strong first quarter shipments on this program.

Q2 assembly volume was expected to decline due to a retooling at GM, so our second quarter decline largely mirrors what occurred on the T900 platform. Also, in the light truck category, we did have a large increase in shipments for the Cadillac SRX.

Moving to passenger cars, we have nice growth on the Impala and also on the Camaro, which was just ramping up for us at this time last year. There are 2 programs, the HHR and the Cadillac DTS, that have gone out of production since this time last year.

Finally, our volume for the Malibu also went down year-over-year, although it is being compared to an exceptionally strong Q2 of 2011.

If you will now turn to Slide #6, we can look at the sequential comparison. The changes going from Q1 to Q2 for this year tell a bit of a different story for both the market and Superior.

Let's start with the context of what happened in the market. As I mentioned, the strong Q2 assembly rates were higher than for the prior quarter but not by much.

The sequential increase was only 40 basis points. There was slight improvement in passenger cars, with a very small decline in the light truck category.

The domestics collectively gained back about 1 share point of the industry production mix. Ford's production was up 9%, with Chrysler at plus 4%.

GM production was down about 3%, reflective of the reduced GMT900 build rates. Production for the international brands was down 2% in aggregate, with an increase in light trucks more than offset by a decline in passenger cars.

Now let's take a look at Superior shipments. As you can see in the data table, our shipments were up 8.3% sequentially.

Q2 of this year now represents our highest shipment level since Q2 of 2007. Our growth against a relatively flat market resulted in an estimated 1.9 percentage points of sequential share growth.

We experienced a very strong quarter with Ford where our shipments grew 29% over Q1 and were strong in almost every program in which we participate. I already mentioned the Q2 ramp-up for the Escape program, and volumes for F-Series also increased significantly.

We were plus 6% at Chrysler, primarily again on shipments for the minivans. For GM, we were down about 6%, which also reflects, again, the GMT900 story I described just a minute ago.

We increased very slightly in the international brands based on growth in the light truck category, basically with Nissan.

I next would like to turn to Slide #7, which focuses on net sales dollars and a year-over-year comparison for the first -- for the second quarter. We also included year-to-date data for your reference, but my comments will focus on Q2.

This slide is in the same format we have been using for the past few conference calls, and I think our participation has been relatively consistent on this call. So I'm going to skip the definition of orientation and just move on to the data.

Overall, you can quickly see the relatively large volume increase at plus 14% and a much smaller increase in sales dollars at plus 3%. The 14% unit volume increase translates to about $29 million of sales growth.

If you jump down, I believe it's about 5 lines on the schedule, you will see that the decline in the underlying value of metal is the most significant factor mitigating the volume increase. The metal impact was a negative $13 million for Q2 of this year.

Just as a reminder, changes in the price for aluminum flow through net sales based on the nature of our commercial agreements. These agreements provide for the periodic pass-through of aluminum fluctuation based on changes in published prices for commodity aluminum.

I am not going to address all of the other line items on the schedule on this call, but I would like to point out the line labeled FX impact, which addresses the effect of changes in foreign currency relative to the U.S. dollar.

The value of the Mexican peso, like a lot of foreign currencies, declined somewhat precipitously against the dollar in Q2. Because we have some business priced in pesos, we experienced an estimated $6 million negative impact on sales due to the peso devaluation.

We estimate that about $1.7 million of this impact is associated with metal content. Our commercial agreement provides for this metal-related component to be recovered.

It will occur over the span of the second half of this year.

Finally, we have price mix at the bottom of the schedule. The impact on sales in Q2 was estimated to be about $3.5 million.

There are a variety of programs involved, but generally, this charge again is reflective of the competitiveness of the markets.

So let's now please move on to Slide #8, which addresses gross margins. As you can see from the table at the top of Slide 8, we produced and shipped the same number of wheels in Q2 of this year, our total production for the third consecutive new high watermark since we emerged from the 2009 downturn.

Keep in mind, we are running the business now on 3 less plants than we were prior to the downturn. We were able to meet the 14% increase in shipment volume without a major capacity investment.

To accomplish this increase, we continued to run our plants at very high rates during the second quarter. We also used what I refer to as surge capacity to meet customer requirements, of course, incurring relatively substantial overtimes in the process.

On the lower half of the slide is the year-over-year gross margin comparison in the format we have used previously. In this analysis, we try to point out the key items affecting the comparability of reported results from period-to-period.

So we show the incremental impact of certain key items as we compare one period to the next.

Starting with the first item, we already discussed the impact of changes on aluminum value on sales. Because aluminum carries no margin and changes in value basically are passed through to the market, the Q2 price decline for metal added to the gross margin percent by 40 basis points.

The slide shows a negative 40 basis points as we are removing this impact from the gross margin percent to sales comparison for comparability.

The next item is product mix. We have discussed previously that our product mix has become more challenging both from a pricing and a cost perspective.

Using actual pricing and standard cost as the measuring sticks, we estimate we incurred $3.7 million of profit erosion due to changing product mix, which equals about 170 basis points of margin percentage. If you look back at the sales analysis, the price mix impact was minus $3.5 million.

So for the quarter, it primarily was the sales impact alone which affected gross margin.

The next line item is for foreign exchange. Because of our operations in Mexico, a weakening peso reduces cost incurred when reported in U.S.

dollars peso. But when combining the reduction of reported cost, with a $6 million reduction in sales due to foreign exchange, the net gross margin impact was $2.7 million negative or 130 basis points of margin percentage.

Next on the list is plant performance, fundamentally, measuring cost performance period-to-period. This item excludes the impact of any operating cost items, which we list separately, for example, repairs and maintenance, as shown further below on the schedule.

In aggregate, we estimate the plant performance comparison had a positive $1.5 million. However, underlying this net favorable amount, are rather disparate comparisons between operations of our 3 plants in Mexico and our 2 plants in the U.S.

We operate our companies one segment, so I'm not going to disclose cost data specific to each location or country. However, I will say that we are very pleased with improved efficiencies being achieved in our Mexico operations.

These improvements are being achieved in some cases despite having a product mix, which is increasingly more challenging to manufacturer, and also in the midst of executing on a relatively high number of program launches that have occurred this year.

We face a very challenging set of operating conditions with respect to our U.S. operations, and cost performance here reflects the higher difficulty factor involved.

We have spoken previously about these challenges which fundamentally include facilities age, equipment reliability and product mix. Issues that impede efficiency translate into overtime premiums because of the continued high level of demand.

Equipment disruptions also result in higher maintenance costs. I am mentioning these items again not to offer them as excuses to you, but because they are real challenges we face and are factors impacting our financial results.

We continue to address these challenges, at least those that we can affect with urgency and with commitment. While our year-to-date cash flow does not yet reflect this, we already have appropriated and continue to identify several capital projects focused on the most problematic of issues in our 2 Midwest plants.

We expect that over the span of 2012, a full 1/2 of the company's capital allocation will be directed towards these 2 facilities, but there are lead times involved with fixed capital investments. But we are focusing to ensure we continue to stabilize near-term financial results on these locations, while at the same time, implementing needed capital improvements for which the benefits should provide payback over time.

Overall, we will continue to meet the commitment we have made to our customers served from these facilities no matter what it takes. At the same time, our organization in Mexico stays focused on continuing to deliver and to improve the already high level of performance to which we have become accustomed.

We are proud of what is being accomplished in these plants.

Next on the list is repairs and maintenance. The costs ran about $1 million higher in this year's second quarter, not surprisingly with the increased focus in our 2 plants in Arkansas.

The difference in our net real development expense was minimal year-over-year, and lastly, we took a relatively good-sized charge this year for an updated valuation of our workers' compensation liability. The vast majority of this liability relates to closed operations in the State of California.

Turning next to Slide #9. I have a few further comments regarding income performance when comparing Q2 of this year for the same period in 2011.

At this point, you also may want to refer to Slide #11, the first quarter income statement. SG&A expense was up about 12% in amount year-over-year and 30 basis points higher when measured as a percentage of sales.

There were a variety of items leading to the increase which categorically fell into legal, audit and consulting baskets. These costs were somewhat episodic in nature and do not point to a systemic change in expense levels.

The effective income tax rate for Q2 of 2012 was 24%, which compares to a net benefit of about 8 percentage points for Q2 of last year. As usual, there are a variety of items affecting Superior's effective tax rate.

With current year and Mexican statute tolled for 2006, which triggered a reversal of related FIN 48 liability and lowered the effective tax rate, there also were some discrete items partially offsetting the benefit from this reversal. The net benefit in 2011 primarily reflected a reduction in foreign taxes due to new information that we received during the second quarter of last year.

1.

Slides #11 through 14 are the various data tables we have referred to.

So finally, in conclusion, if you could turn to Slide #15. To quickly summarize today's discussion, Q2 vehicle production growth in North America reached robust levels for the second quarter in a row.

Q2 production also was at the highest level since the second quarter of 2007. The Q2 decline in our market share primarily reflects our customer mix and concentration at Ford and GM.

Plant utilization remained very high, and surge capacity has been used successfully to meet strong customer demand evidenced in our 14% volume increase. Margin pressure in Q2 reflects pricing, product mix, foreign currency impact and higher operating cost.

Our operations in Mexico continue to run smoothly and provide stable and strong results. Our U.S.

operations continue to address a number of issues affecting costs and efficiencies. And our liquidity remains strong to support continued investment and, of course, our dividend.

I do need to comment that the last page of this presentation addresses the non-GAAP financial measure we have presented today. And also, I will mention that our second quarter 2012 Form 10-Q will be filed in the very near future.

Before I close, I do want to take a minute to thank our employees everywhere for the continued hard work and the incredible commitment that they continue to give to the company and our customers. We're very pleased about the strength of the market.

However, the current level of demand has presented many challenges this company did not face the last time volumes were at today's levels. But we are not satisfied with our financial results, and we are, of course, committed to achieving better.

We continue to see incredible efforts put forth by all of our people.

So I would like to thank each of you for attending our conference call today and for your kind attention. And Brandon, we will now open the lines to take questions.

Kerry, this is actually Rob Moffatt on for Chris. So it sounded like T900 was really the only dark spot on what was otherwise a very good volume quarter.

But looking at inventories on that platform at 136-day supply, it looks like it may be challenged in the back half of the year. So what are your thoughts on volume changes there in 3Q, 4Q?

And when should we be expecting a tailwind from the K2XX changeover?

Okay. Mike, do you want to address that?

Sure. Well, Rob, in the third quarter, we continue to see the impact of the, what we call, what we're referring to, I think Kerry referred to as GM's retooling efforts in a variety of different plants.

So that's going to continue. It seems to taper off into the fourth quarter.

The truck volumes seem to come back pretty strong. It's way too early for us to really have a feel for how the K2XX is going to roll in, starting in, I want to say, the mid to late first quarter of '13.

We've been through this -- these transitions before with GM going from the 400 to the 800 to the 900. It's like taking one of the largest ships in the world and trying to turn on a dime.

It just doesn't happen very quickly. It's a slow transition, so we kind of expect that same effort and outlook with K2XX.

Rob, I guess one of the other overall perspectives not to lose sight of, when we were talking and looking, coming into the beginning of 2012, we are sort of just gnashing our teeth and clenching our fist trying to figure out how we were even going to meet this demand that we saw, that was staring us in the face for the first 6 months, evidenced [ph] Ultimately by the 14% increase in volume. Our plants did a great job in meeting those commitments, but it placed a lot of operational stress on us also.

So even relative to the first half, if the sales number or the volume number comes off a little bit, it actually gives us a little bit of, I guess, I don't want to say needed, but certainly, welcome breathing room, gives us a little bit of chance to start to address some things at our plants, with a little bit less strain around it. So -- but we are -- from a second half perspective, every time we look at some of the declines that you point to on T900, there's also other items coming in the door, too, which are going to help balance this off here.

Sure. That makes sense.

That's actually a good segue to my next question. The utilization rate this quarter at 101%, can you guys help me understand that?

Is that 3 shifts? Does it include weekends?

How high can that number go?

We fundamentally are computing that number based on 5.5 shifts in -- or 5.5 days in Mexico. There's a little bit of a mix on how we handled -- computing this in the Midwest because we're using what we refer to as a continental staffing approach in certain of the operations, not all of them.

Continental staffing basically really assumes you're going to run your equipment 7 days a week and balances your manpower and your shifting to achieve that without incurring overtime. That has not obviously eliminated over time from our process.

So we do change our capacity estimates also based on the wheel mix we have coming through because some things run faster than others. So we do have the ability to continue to operate in excess of that 100% number to meet volume surges as we need.

As I mentioned, it's going to -- it will cost us some profitability to do that.

Okay. And is there room for another shift in that calculation or is this kind of -- is max capacity essentially kind of maxed?

We have some headroom over the 101%. I would say, at this point in time, if you look at the volume levels that we produced for Q2, we're kind of running at the upper end, where we would like to be.

But if we had to get a little bit more volume out the door, I'm comfortable we'd find a way to do it.

And I guess if we saw another step-up in production and we kind of exceeded whatever that top-end range is, whether it's 105% or 110%, what happens then? Do you guys have to outsource business at that point?

That would be an option for us certainly at that point in time. And obviously, Rob, we have to continue to look at investments to try to handle potential market share issues going forward.

And then on the investment front, could you tell us a little bit more about maybe some of the costs and the capacity impacts, the second half and maybe even some of your plans for '13, how fast that'll come on?

Yes, it's -- we have a reasonably substantial number of investments, especially in the Midwest, that are slated to start off sort of end of third quarter into the fourth quarter of this year. I don't expect, quite honestly, that we're going to see a great amount of short-term improvement in our income statement as a result of these investments coming in.

We expect that we'll appropriate somewhere in the range of $25 million to $30 million worth of capital for this year. I'm not entirely sure, quite honestly, what the capital, the expense number, the cash flow number is going to be yet, but that'll give you some sense of the pace of money that we intend to invest coming up here in the near future.

So Kerry, in the past, you've seen some fairly significant volatility around your margin as your capacity has been tight. And lately, over the past several quarters, you've been trending within this 3% to 5% range.

I'm just curious to get your thoughts and your expectations over the long term. Do you expect to stay within this range, given what will continue to be ongoing capacity constraints?

Or could margins potentially improve in the next year? I know you said this year, you don't expect any near-term improvement.

But in the next year, maybe some of the larger capital projects are complete and perhaps it could reduce maintenance costs, operating efficiencies and such. Any granularity here?

I'm not going to give you a quantitative prediction, Anthony. I'll help you out directionally though, that, clearly, the capital that we put into the Midwest is, obviously, with full intention, that we're going to achieve some improved operating efficiency.

We're targeting, I think, a couple areas categorically. As I mentioned, these are aged facilities.

Equipment reliability is an issue, has been an issue. Equipment reliability hits you 2 different ways.

It's not just the cost to repair and get things back in the operation, it's the disruption that it causes in your product flow and in your ability to get wheels out the door. That all translates, as we said, many times over the last few months into overtime expense.

So when it comes to the Midwest, do we expect to see directional improvement? The answer is absolutely yes.

A lot of it is capital-reliant, so I think that's going to feather in somewhat slowly over the next several months. But directionally, we expect that we should begin to see some improvements.

From a product mix perspective, there's a little bit of pluses and minuses. We continue to see the mix get a little bit more challenging from an operational perspective.

That's caused some additional cost friction for us. But directionally, do we expect that we will continue to improve our manufacturing capability to deal with these difficult wheels?

The answer is absolutely yes. We've demonstrated that already in Mexico, I think, about where we were about a year ago with some very tough programs from an operational perspective and where we're at today.

And clearly, once we get out the learning curve, we're doing much, much better with some of those challenging programs. I expect that's going to continue also.

Foreign exchange is the wildcard. It was a big impact for us in this quarter.

And if you can tell me where the peso is going against the dollar, just tell me if you're putting your money there and then I'll follow you in that bet.

I can't help you there. So -- okay, that's actually really helpful.

And then a few follow-ups here. I was also curious to get some overall thoughts on your shipment outlook.

Is there an expectation on your part to grow in line with the market sometime after third quarter, perhaps once we begin to see some normalizing comparisons here in North America on vehicle production or any overall thoughts there?

Well, if you're talking longer-term and you're kind of thinking about what some of the market prognostication still is for 2013, 2014 and the strategic view, we've been pretty open about the fact that we're running our plants pretty much at full tilt at this point in time. So the implications as you start to move out 1, 2 and 3 years in the future, if everybody remains right about where things are going, the implications are that we're going to experience some share loss going forward.

We have proven that we have 14% -- accommodating a 14% increase in production and shipment volume year-over-year. Without making a major capacity investment, is a pretty significant increase when it comes down to it.

It's not as profitable an increase as we need to see, and we are working on improving that. So we'll continue to push incremental volume out the door, I would imagine.

At some point, does it make sense to relinquish some programs to give yourself some breathing room? Or your thoughts along those lines?

The conceptual answer is obviously yes. And in a marketplace where, as a supplier, we have complete control over that choice, that would also be an easy selection.

We just cherry-pick our way up the mix we have and improve our profits from that perspective also. For those that have lived their life in the Tier 1 automotive supplier, we all realize it's not that easy a thing to accomplish.

And as a committed, large supplier, as the #1 market share player in North America, it's very, very clear that the selection process goes both ways, what we would like but also what our customers are going to ask us to do to help them out. So we both work together to balance that as best as we can.

So mix management is great, but this is not like we're just selling as distributors to 10,000 customers out there where you can kind of pick and choose the products you're going to put on the shelf.

Okay. The pricing pressure clearly having an impact.

And can you talk to the competitive landscape for a bit, estimate what you're seeing from competitors, particularly in China, see any acceleration in pricing pressure? How should we be thinking about that from a quoting standpoint?

Anthony, it's Mike. I'll kind of address that.

Well, structurally, this industry is global. We are going to compete.

We have been competing with major suppliers from Asia and, really, other areas of the world. We don't see that changing.

Every opportunity that comes along is marketed on that global basis. So as far as just the continued competitive pressures in this industry, we have to assume that's going to -- that's what this is.

Okay. And then just lastly here.

Can you review some of the priorities for use of cash?

Priorities for use of cash, at this stage, clearly, the focus is on the capital investment side and just making sure that we are in the business. This company, obviously, is very conservative when it comes to its liquidity and its use of cash, and I don't expect that, that personality is going to change.

We obviously have some priorities to address in the -- especially in the Midwest to restore some efficiency to capacity that we have in place. Beyond that, we're talking more strategic issues, Anthony.

And clearly, we're always thinking long-term, but there's nothing that I'm prepared to comment on at this point.

I just had actually a follow-up question to Mike's comments on the competitive pressures. I'm just hoping maybe you could speak to industry capacity utilization, just based on the bidding environment for new business or other intelligence that you have.

Well, there's definitely capacity that we hear about being added in Asia. There's a very limited amount that we've seen here in North America.

There's always a prospect of additional people coming into the market. We're not seeing a lot of that.

But the ones that are there are -- we've been dealing with this now for almost, I won't say a decade but definitely 7 or 8 years. So the players that are in there are established and they're proven, and we go head-to-head on every opportunity that comes our way.

To Kerry's point earlier, as far as mix and trying to balance what works with us, we are working with our customers on their needs. You take a program, it's -- you're really taking, say, a commitment at a certain level, but in many ways on new launches, their requirements will go up.

So we're looking at -- if this is working for us, let's prioritize it, go to the customer and see how we can maybe accommodate that with something that's not working for us. So we are doing some of that.

Okay, that's helpful. And also, just a clarification to some earlier comments.

Can you just talk about your expectations for the sequential change in shipments kind of in aggregate? And then if you might take that opportunity to build some inventory or should I just assume that you'll kind of need that downtime for maintenance shutdowns and so forth?

I see a little bit of both. We're looking in the second half of the year with some softening, let's say, on GMT900 that I mentioned before.

It gives us a little bit of flexibility. So we're trying to take advantage of that, take some of the pressure off, especially at plants that have really worked excessive levels of overtime and so on.

So that's the first priority. Second is, you take advantage of that time if you have it and to what extent you have it to address equipment and upgrade opportunity.

So that's totally what we're focused on with the 5 business units.

We did take some shutdowns in July, so those are already done. And obviously, you can never cut as much costs out as you like to in a maintenance shutdown.

So we'll have some drag in the third quarter financially because of that. It's the right decision.

Our plants have been stressed now for 2.5 years, so we kind of face that as a necessity. That will also impact us a little bit.

Probably, volume-wise, we're able to build some inventories to cover us over that near-term shipment demand. I think that it's interesting, too, when you think about the portfolio of our businesses, Jimmy, because when there's a focus on what's the volume going to be in the third quarter, what's the volume going to be in the fourth quarter, it's kind of a mixed bag for the impact on the company.

We are clearly volume-sensitive in Mexico. The operations are running smoothly.

We'll take as much as we can in those factories. And to the greatest extent that we can, and we have some reasonable flexibility as we qualify programs to the point that we can move some product from plant to plant, we will keep our Mexico plants as loaded as possible and take advantage of the -- how well that we're running in that country.

The swing capacity will be a bit more in the U.S., and we kind of went over the line and over the breaking point a little bit with the volume that we're handling right now. So I don't know that the volume sensitivity, if it's a concern that's being indicated, it's not a concern that I'm really sharing with you at this point in time.

Okay, understood. And Kerry, kind of an unrelated question.

The increase in payables in the quarter, both in dollars and days, kind of a positive surprise, given where metal prices are. Have you embarked on a campaign for better terms or is this just kind of a timing issue here in the quarter?

I went out there on my hands and knees to every supplier. In fact, no, it's a little hard to do that with our balance sheet.

So if I could hide our balance sheet or liquidity, I might be more prone to doing that. There's a funny little short-term anomaly that had to do with metal.

Typically, I think you're aware that we prepay metal, and we get a cash discount as a result of that. There's just a funny, little anomaly that occurred at the end of the third -- or end of the second quarter that caused some of our metal purchases to pop out traditionally, showing up in accounts payable.

So it's not something that's systemic or a structural change in what we're doing here. So that will turn around.

I got 2 easy ones here. On the gross profit walk slide, in the FX category, did that include any hedging losses or is that just all transaction and translation?

Basically, it's just translation, really, is what it is.

I guess I was a little surprised that the size of the $2.7 million versus the -- on the revenue walk, the $6 million impact to revenue. I mean, it's nearly half of the revenue impact.

Is there any more color you can give on that so that I can understand a little bit better?

Well, keep in mind, first off, 60% of our capacity is in Mexico. And while labor cost, et cetera, is lower than in the U.S.

that just at least kind of puts a little bit of a marker on how big is Mexico to our overall operation from a cost perspective. And then when it comes to the sales number, it's basically 2 of our customers that we have programs priced in pesos.

So it's not a majority of our portfolio or anything to that extent. So that's quite a relationship sort of tilted that way.

I see. That does help.

And then lastly, the workers' comp number, that's -- is that just this quarter? Will we see any continuation there?

Well, first off, and kind of mechanically, we go through an updated actuarial valuation 2x a year now, so we're not going to be doing this every quarter. But every 6 months, it's like, well, is something going to happen?

This is all related to California, such a wonderful state to do, manufacturing business in. We've been very aggressive in trying to get these old cases closed and off the books.

What's distressing to me, quite honestly, is that despite making an investment to close some of these cases, we had a few big ones that progressed, and they kind of hit a watermark where they went from kind of ongoing medical treatment and then they fell into requiring surgery. And it doesn't take much more than 4 or 5 of those for it to cost you a whole bunch of money when it really comes down to it in today's world.

So I am hoping that, again, aggressive case management will prevent that kind of recurrence coming up. But in the State of California and how workers' comp is handled in the state, I'm certainly not going to give you any assurances there either.

Sure. I can understand.

I mean, theoretically, how long could this be kind of an outstanding issue?

Well, some of these items, as long as the workers' comp bureau supports the fact that an employee was injured on their watch here, and even though our Van Nuys plant has been closed now for 3 years, these could potentially go on. I mean, depending on the claim, they could go on for many, many, many years.

If you read the individual claims, it would drive you off the nut -- off the wall because it's not -- it goes beyond physical, it goes to mental anguish and all kinds of stuff that gets related to that. So the plaintiff's bar is doing their thing.

Okay. Well, once again, thank you, everybody, for your time and attention, and we'll look forward to talking to you in 3 months.

And hopefully, we'll announce into another market that's up 200-plus points when we do. Take care.