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Superior Hitting Roadblocks on Several Fronts

Superior Hitting Roadblocks on Several Fronts By SHELLY GARCIA Senior Reporter Price cutting, increased competition and automotive design changes are creating a very bumpy environment for Superior Industries International Inc. Net income for the fourth quarter ended Dec. 31 rose by just 2.8 percent to $23.1 million, and for the full year Superior Industries’ earnings dropped to $73.7 million, or $2.73 per diluted share, nearly 6 percent below 2002 levels. What’s more, the bottom line pressure is not expected to let up anytime soon. And despite several dramatic steps Superior has taken to reduce costs and upgrade manufacturing capacity, officials at the Van Nuys-based company nonetheless were downright glum about prospects for the first quarter of 2004, saying they anticipated earnings of $0.50 per diluted share for the period. That would be down from $0.83 for the same period in 2003. “In 2003 we continued to see customer trends toward larger wheel styles, more product offerings and increased pricing pressure,” Superior’s CFO R. Jeffrey Ornstein told investors and analysts in a conference call to discuss the most recent financial report. “These business realities have had an impact on our operational cost structure and this will continue in ’04.” Superior, a maker of automotive wheels, has been hit by a one-two punch as its auto maker customers have cut prices. Superior is not only contending with demands by its customers to provide wheels at lower prices, it is also having to accommodate a heightened demand for larger wheels, sizes and designs that only some of the company’s manufacturing plants are readily equipped to supply. Jon Rogers, director of equity research and an equity analyst with Wachovia Capital Markets LLC in New York, said Superior is facing what he called a “paradigm shift in pricing. “Our underperform rating reflects high valuation relative to operating expectations, a fundamental shift in the pricing environment of aluminum wheels, uncertainty with respect to management’s outlook beyond Q1 2004 and a negative bias toward expected light vehicle production of the company’s key customers ” Rogers wrote in a report downgrading the stock following the conference call. Not only does Superior have to retool some of its production to accommodate the new designs, it has to find ways to reduce overall production costs at the same time. “Without corresponding cost reductions, we’ll be facing significantly lower margins per wheel on larger volumes,” said Ornstein. “These wheels are larger and more complex and they have challenges.” At its Van Nuys plant, Ornstein said production of 17-inch wheels has increased by over 50 percent. As the company has retooled to accommodate the new production needs, it has encountered a series of operating problems that cannot be easily solved. “This is not a black and white issue,” Ornstein said. “Casting is a black art. When we put in a fix, it seems to take for a while, and then something else crops up.” The company has earmarked some $55 million to $60 million in capital expenditures to both expand its capabilities and automate a number of its manufacturing processes. One aspect of the plan calls for the automation of a complete manufacturing process that would virtually eliminate the need for workers on that step, but officials could not provide specifics on the number of workers that might be affected at this time. Superior officials have also been exploring the possibility of manufacturing in Asia through a partnership and building a third plant in Mexico. “I spent a few days in Mexico meeting with government officials and looking at plants all over the country where we can locate,” said Superior President and COO Steve Borick said at the investors’ conference. “We’re moving forward on the operating potential of building a new plant in Mexico.” The company is also planning to bring on several new senior level managers to assist in its efforts. “We are going to move strongly forward with capital expenditures, particularly in the area of automation,” Borick said. “We need to be working on every which way to continue to be the price leader. We’re going to continue to take on more business, bring our costs down and bring our profitability back to where we’re used to it.” Years-long effort But it will likely take several years before many of these changes can be fully implemented. “Unfortunately, global pricing pressure is here today, and the implementation of our programs will take time,” Ornstein said. “However once these cost benefits are realized they are cumulative in nature.” In spite of the difficult environment, including in one case a customer plant that was shuttered for the entire month of January, Superior has managed to eke out considerable sales volume increases. Thanks to new contracts won, revenues increased 17.3 percent for the fourth quarter to $230.7 million and unit wheel shipments rose 12.4 percent. Superior has also increased production capacity by 25 percent since 2000. But faced with what appears to be unrelenting price pressure that company officials called “bloody” in some markets, and continuing operating problems as the company adjusts to the new wheel sizes and designs, officials said the outlook for the coming year is murky at best. “Jeff and I discussed whether to give (full) year guidance,” said Borick. “I’m not ready yet. There are so many things going on that are going to take a little time.” Analysts listening to the presentation were clearly concerned by the prospect of declining margins and squeezed profits continuing indefinitely. It didn’t take long for the street to register its discontent. While cutting the stock’s performance rating, Wachovia also lowered earnings estimates to $2.23 per share for the fiscal year 2004 from a previous estimate of $3.41. David Leiker, an analyst at Robert W. Baird & Co. Inc. downgraded the stock to “neutral” following the conference call. Meanwhile the company’s share price fell nearly 10 percent to close at $36.33 on the next business day after the call, from $40.21 per share on the day prior to the call. As of Thursday, Feb. 12, shares in Superior were trading at XXX.

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