Superior Industries International Inc (SUP) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Superior Industries first-quarter 2015 earnings call. For opening remarks, I would like to turn the conference over to Kerry Shiba, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to our first-quarter 2015 earnings call. During our discussion today, I will be referring to a PowerPoint presentation, which is available on our website at www.SUPIND.com. Joining me on the call today is Don Stebbins, our President and Chief Executive Officer.

I will start as usual with slide number 2 of the presentation, where I would 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 update publicly any forward-looking statements. Specific conditions, issues, and uncertainties that may represent forward-looking statements are noted in detail on the slide.

I would also like to point you to the Company's SEC filings, including our 2014 annual report on Form 10-K, 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, EBITDA, and adjusted EBITDA. Reconciliations of these measures to the most directly comparable data presented in accordance with GAAP may be found in our first-quarter 2015 earnings press release.

I now would like to turn the call over to President and CEO Don Stebbins for his opening remarks. Don?

Thanks, Kerry. Hello, everyone, and thank you for joining us today. Turning now to slide 3, I would like to begin with an overview of our first-quarter financial results.

Consolidated net sales were $173.7 million, down 5% from $183.4 million in the first quarter of 2014. Value-added sales, which is a new non-GAAP metric we are reporting this quarter, declined 12.4% to $82.3 million from $93.9 million in the same period last year. Value-added sales remove from net sales the value of aluminum and outsourced process costs that are passed through our customers. Despite the over 12% decline in value-added sales, we saw a 52-basis-point improvement in adjusted EBITDA highlighting our continued commitment to implementing operational improvements throughout our business. Adjusted EBITDA was $13.4 million, or 16.3% of value-added sales, compared to $14.8 million, or 15.7% during the prior-year period. We believe measuring margin as a percentage of value-added sales is a more accurate measure of profitability because of the pass-through or non-margin nature of the aluminum and associated revenue.

Net income for the quarter was $4.3 million, or $0.16 per diluted share, compared to net income of $4.8 million, or $.18 per share in the first quarter of 2014. The quarter was marked by lower unit volumes, which was partially driven by lower demand in two of our largest programs and restructuring costs from the closure of our Rogers facility.

As a reminder, our sales cycle is such that today we are selling and shipping product for programs that we bid on two or three years ago. Today, we continue to bid aggressively on programs for which we will start shipping product in late 2017 and 2018. We feel confident in the programs we are winning and look forward to our future market share reflecting today's strategic investments and hard work.

Kerry will provide more detail around the financials in a minute, but I would first like to offer some color on the first quarter of 2015. While our financial performance was lower than last year, we continue to make excellent progress in executing against our strategic initiatives and improving operational efficiencies throughout the business. The ramp-up of our new plant in Mexico remains on track. As we mentioned on our last call, we began shipping limited wheel models at the end of the fourth quarter. We have begun shipping our full range of wheel models as planned.

Expansion of the facility to allow for an additional 500,000 wheels per year is also progressing smoothly, and our target date for completion remains early 2016. In addition, we will soon be opening a new finishing facility in Mexico with our long-term supplier partner. And we are pleased to announce that we recently won a new Conquest wheel program because of the increased competitiveness that this facility represents. This light truck wheel program is set to begin in the fourth quarter of 2015 and represents an annual increase of 200,000 wheels per year.

As part of our commitment to continuous improvement, I'm pleased to announce that year to date we have realized a 20% improvement in safety and a 50% improvement in quality. These increases reflect operational improvements across the business and our promise to our employees and to our customers to produce industry-leading products in the safest possible manner. We look forward to continuing to improve on these metrics.

During the quarter, we also successfully moved our headquarters from Van Nuys, California, to Southfield, Michigan. I'm pleased to announce that we recently signed a lease on new office space in Southfield and look forward to creating jobs and strengthening our relationships here in Michigan.

As you know, we declared a quarterly cash dividend on January 16 of $0.18 per share, highlighting our continuing commitment to returning capital to shareholders. I'm also pleased to announce that during the quarter we repurchased 109,000 shares for a total of $2.1 million as part of our share buyback program approved by the Board in October of 2014.

Additionally, we are pleased with the outcome of our annual meeting yesterday. The preliminary results show that all of Superior's nominees received overwhelming support from our shareholders, thus resulting in all seven of Superior's director nominees getting reelected to our Board of Directors. Excluding shares voted by GAMCO or its affiliates, all of GAMCO's nominees received votes equating to less than 3% of the outstanding shares. We look forward to building on our achievements in the second quarter with our highly qualified and experienced Board of Directors and continue to work proactively with our investors going forward.

Turning now to slide 4, I would like to remind you of our five strategic priorities for 2015. We remain committed to improving our global competitiveness, building on our culture of product innovation and technology, evaluating opportunities for disciplined growth and value creation, maintaining a balanced approach to capital allocation, and increasing visibility within the financial community.

As I just described, we continue to make solid progress towards achieving these goals and, looking ahead to the second quarter and the back half of the year, continue to execute against these initiatives. We will bring our new facility in Mexico the full operating capacity by the end of the year to improve our competitiveness and global positioning. We will continue to work with our customers to provide industry-leading products and services. We will invest prudently in our people and our technology. We will remain committed to returning capital to our shareholders through our dividend and share buyback programs. And we will increase our attendance at conferences and non-deal road shows in order to better educate the investment community on our story. We now have the right leadership team in place and have set the groundwork for future success and growth throughout the business.

With that, I will now turn the call over to Kerry.

Thank you, Don. And, again, good morning to everybody. I'm going to spend a few minutes providing you a bit deeper look into our financial results for the first quarter of 2015. If you would now please turn to slide number 5, we can take a look at our unit sales volume.

Superior shipments totaled 2.5 million units for the quarter, compared to 2.8 million units in the first quarter of 2014. As usual, let's take a brief look at some of the underlying reasons for the change in sales volume.

Overall, changes in our unit volume are reflected in year-over-year differences in vehicle production rates for the programs we participate on. Our largest units shipment decline occurred on the Ford F-Series program, which was down 160,000 units or 32% and represented over one-half of the total unit volume decline we recognized in the period. As I expect you are aware, the pace of ramping up production for the new Ford F-Series program has been reflected in a decline in vehicle production year over year and thus has been a negative impact on Superior's shipments. Our second largest unit shipment decline occurred for the Ford Edge, where vehicle production levels also were down significantly when compared to the first quarter of 2014.

Similarly, significant declines in our volume for the Nissan Maxima and the Chrysler Town and Country were reflected in similar declines in production levels for these vehicles. On a positive note, our year-over-year sales were up 82,000 units as we reestablished business on the Ford Focus. And we were plus-46,000 units, or 31%, on the Ford Explorer. Our 10% increase on the K2XX program was right in line with the change in vehicle production levels. Finally, the growth in shipments for the Toyota Highlander was at about twice the rate of the increase in vehicle production.

Our current expectation is for the shipment comparison in the second quarter to remain challenging. However, we also are looking towards second-half improvement in demand for our products reflected to a great deal in expected growth in F-Series and Chrysler Town and Country production rates. As a result, we expect year-over-year shipment volume comparisons to also improve, which also keeps us within the financial targets we provided at the beginning of the year.

While we don't have a slide in the deck, I would also like to comment briefly on the sequential comparison. Our first-quarter unit sales volume was down roughly 6% from the prior year. There are some differences in the underlying factors and the sequential comparison in contrast to the year-over-year look. Our sequential F-Series shipments were about flat, as were our overall shipments to Ford. While we were down significantly on the Edge program, where we fundamentally are rolling off, we had a significant shipment increase on the Focus as we reentered that program. As with the year-over-year comparison, another major driver of the overall sequential volume decline was for the Chrysler Town and Country, also reflective of the decline in vehicle production rates. Same goes for the Nissan Maxima.

Turning now to slide 6, you can see the current-year net sales of roughly $174 million were down 5% from the prior year. Two key things stand out in the analysis.

First, the sales decline was driven by lower unit sales volume. However, an increase in the value of the aluminum component of sales offset over 80% of the volume impact.

Moving to slide 7, we can look at the year-to-date EBITDA comparison. In the first quarter of 2015, EBITDA was $12 million, equal to 14.6% of value-added sales. If you remove the current-year impact of continuing restructuring costs for the closed Rogers, Arkansas, manufacturing facility, adjusted EBITDA for the current year was $13.4 million, or 16.3% of value-added sales. The current-year results compare to EBITDA of $14.8 million, or 15.7% of value-added sales in the prior-year period.

As you can see from the analysis on slide number 7, the largest driver of lower EBITDA was a decline in unit shipments, which, when coupled with a change in sales mix, negatively impacted EBITDA by $4.5 million when compared to the prior year. Next, there was a negative impact in the quarter due to the timing of aluminum pass-through in sales versus cost of sales.

First-quarter cost performance in our manufacturing operations was significantly favorable when compared to the prior year, especially in the framework of the unit volume decline. The improvement partially reflects the benefit from the realigning of our manufacturing footprints as well as lower energy, maintenance, and labor costs in our factories.

Finally, the Rogers restructuring cost, I believe, is self-explanatory, while there is a long list of both positive and negative items falling into the other category. Also on EBITDA -- once again, we don't have a slide on sequential comparison in the slide deck, but the themes of the sequential comparison are somewhat similar to the year-over-year comparison. Volume clearly was a major driver of the fourth-quarter to first-quarter decline. Cost performance in our factories -- the improvement was not as large as we saw in the year-over-year comparison but still was -- marked the beginnings of our improved cost performance in our factories.

Turning now to slide number 8, I will discuss a few more income statement items for the first quarter. First, to ensure the impact on gross profit, operating income, and pre-tax income is clear, the Rogers restructuring cost was $1.9 million including the impact of depreciation. SG&A expense was down about $300,000, reflective of reduced severance costs and a current-year gain on the sale of an idle facility, partially offset by increased legal and employee transition-related costs.

As I looked at the slide this morning, the next comment on slide number 8 is misplaced, as it does not refer to a P&L impact. However, we did generate $1.8 million in cash proceeds from the sale of idle assets.

Finally, we recognized an income tax benefit of $800,000 in the current year. The net benefit resulted from the reversal of a reserve for uncertain tax positions, which yielded an overall effective tax rate of negative 21% for the quarter. The effective tax rate for the same period last year was 40% expense and was impacted by changes in Mexico tax law limiting the deductibility of certain employee benefits expense, the unavailability of US federal R&D credits, and increases in reserves for uncertain tax positions.

Slide number 9 addresses a few perspectives on first-quarter cash flow. The improvement in year-over-year operating cash flow was $9.7 million. Use of cash for operating working capital, which we define as accounts receivable, inventory, prepaid aluminum, and accounts payable, was $15 million less than in the prior year. Capital expenditures still were impacted by spending on the new factory in Mexico but were down $10.4 million from the first quarter of last year.

Finally, as Don mentioned, we repurchased shares from the new $3 million program that was improved and announced last year. Don gave you the first-quarter buyback. Through yesterday, we repurchased 319,000 shares for about $6.1 million.

With that, I will now turn the presentation back over to Don to walk you through our expectations for the year. And then we will open it up for Q&A.

Thanks, Kerry. So now turning to slide 10, let me walk you through the guidance for 2015, which remains unchanged from when we issued it back in January. We expect net sales in the range of $725 million to $800 million, with EBITDA margins improving 100 to 200 basis points. We expect value-added sales to be in the range of $325 million to $360 million, with EBITDA margins as a percentage of value-added sales improving 350 to 500 basis points. Capital expenditures are expected to total around $40 million, and working capital is expected to be a use of $10 million, and dividend payments are expected to approximate $20 million. Underpinning these expectations is the assumption that North American light vehicle production will be approximately 17.4 million units.

Looking ahead to quarter two, in the second half of the year we are confident will be able to achieve these targets. We fully expect to see our shipment volumes improve in the second half of 2015 as a number of our customer programs conclude their ramp-up and become fully launched.

These factors, coupled with our commitment to executing against our five strategic priorities, position Superior for further improvement.

With that, I would now like to open the call for questions. Dana?

(Operator Instructions) Jimmy Baker, B. Riley and Company.

The cost performance in the quarter is very impressive. Could you just break down that $6.8 million benefit between -- the benefit between the Rogers closure and then some of the other items you discussed? And I guess embedded in that is just -- I'm just wondering if the new Mexican facility is a tailwind yet or if that is still a headwind during the ramp-up.

Jimmy, let me try to take that one first. It's a few items for you. First off, the ramp-up of the new facility in Mexico clearly is in a ramp-up phase, as you would expect. There is going to still be some inefficiencies in that period that we are having to invest in labor for training, et cetera, prior to really running the commensurate production across the production lines.

This is a very, very rough estimate, Jimmy, but I would say in the first quarter the impact of the operational inefficiency was somewhat in the range of $1 million. That will improve steadily as we progress through the year, and volume continues to ramp up in that facility as we progress.

The bulk of the cost performance really was spread over several categories in spending in the factories. But there were some significant labor reductions, and that's really excluding the impact of the Rogers shutdown. That's decreases really across all of our facilities, but particularly in the Fayetteville facility in the US. Fringe benefits went down as a result of that. I'd mentioned repairs and maintenance were down quite a bit. And then in utilities, we had some nice reductions and saw, quite honestly, some favorable rates from the prior year.

So what we're showing to you on the slide for cost performance, I would characterize primarily as, again, just good operations focus; and hopefully with some for the upside as the new facility in Mexico continues to ramp up.

A couple of, let's say, specifics regarding that, Jimmy. I think we talked about the Mexican work force on average. I would say the supplier community has somewhere in the neighborhood of 20% to 25% of the work force as temporary employees. We started that journey just recently. We were at 3%; we're at 17% now. So clearly, we're moving in the right direction. Not only does that give us flexibility as our volumes change throughout the course of the year or two years or whatever that period may be, but also we get some initial cost benefit as well.

The other thing that's occurring is our productivity as we measure it -- wheels per hour -- is up 10% so far this year. So that's running through there as well.

So the underpinnings, as I mentioned, in terms of the operational efficiencies and what we're doing inside the plants is starting to come through, as Kerry mentioned on that line.

Okay, great. And then could you just talk a little bit about the progress you have made filling the -- not just the incremental capacity from the Mexican facility but also this additional 0.5 million wheel expansion. Have you been able to pick up any, let's say, one-off programs that maybe you could slide in quicker than that typical two- to three-year lead time and how we should think about your ability to backfill that capacity when it comes online next year?

Yes. So as I mentioned, we have picked up a wheel program -- a light truck wheel program, about 200,000 units, from one of our competitors in part because of our competitiveness and our new facility in Mexico, as well as a new finishing joint venture that we are establishing down in Chihuahua.

Today, we finished most of our wheels -- polish most of our wheels in Arkansas, and we are just starting training in a new polishing facility in Mexico, which is going to reduce our costs somewhere in the neighborhood of 20%. So obviously a significant sum makes us more competitive than we have been, and it's already showing in terms of that program being one.

There's another program that we had that we thought was going to go away. But, again, we're going to keep that through 2016, so that also reflects the increased competitiveness. I would caution everyone in that those are, let's say, rarer than the norm. Those normally -- we have very good competitors out there. And so the ability for us to pick up a program of any significant size is more in the extraordinary category then in everyday opportunity.

Okay, thanks. That's very helpful. Then just lastly, Don, how active would you say you are in the M&A markets today? And I guess if it's too early for you, could you maybe just talk about when or if you anticipate acquisitions being a more strategic focus for you?

I think it is a strategic focus for us. I think we are in the loop, so to speak, in terms of what is for sale. My view on this is you've got to be in the pipeline to see what's coming at you, and you don't quite know whenever the right opportunity is going to come our way. So I think you have to be ready to do things. Certainly from an operational standpoint, we are putting a lot of things in place that would allow us to more seamlessly integrate an acquisition. But to be able to pick a point in time when that acquisition comes our way, that's very, very difficult to do.

Got it. Thanks very much for the time.

Mark Close, Oppenheimer & Close.

Congratulations on the proxy outcome.

Thank you very much.

One question about the headquarters move. Was there any meaningful expenses this quarter? And what do you expect for the full year for that?

The expenses for the move are embedded in the guidance. We do have a significant opportunity given to us from the state of Michigan in terms of a $900,000 grant that is based upon -- that will come in based upon hiring levels. So, as an example, after the first 15 new jobs are created in the state of Michigan, we will receive some -- approximately $150,000. Then after the next 15, you receive a different installment. So we don't see a measurable impact on the earnings stream this year or next year as we transition.

Okay. Thanks. On the value-added sales, Kerry, can you give us what Q4's value-added sales were and what the adjusted EBITDA margin was for those?

Let's see, the adjusted EBITDA margin for the fourth quarter would have been 17.5%. The value-added sales number would have been just short of $89 million.

Okay. Thanks. That's helpful.

Brian Sponheimer, Gabelli & Company.

A couple of questions here. If I'm looking at $6.8 million in cost performance in the quarter, that really stands out, and you kind of bucketed it before for the quarter. I'm just wondering as we go through Q2, Q3, Q4, how much of that can we potentially see be a recurring benefit? Does this annualize out to $25 million, or is it something that is significantly lower?

I would not annualize that number. I think, again, we gave you -- that was in the year-over-year comparison. If, for example, you look sequentially from the fourth quarter of last year to the first quarter, the number was much lower -- I would say south of $3 million, somewhere between $2.5 million to $3 million. So that trend will continue to narrow. Again, that's reflective of the fact that we begin to see some improvements -- some steady improvement starting in the fourth quarter last year. So please don't take the number and multiply it by 4.

No, that's what we're trying to figure out. So basically, the comps get a little more difficult starting in the December quarter.

Yes.

All right. Kerry, could you take a couple of minutes to go over the tax items again in the quarter and just explain how much of that is potentially recurring and what we should expect there?

Well, I think maybe to try to shortcut it without going through all the detail, obviously the first quarter again was hit with the anomaly of the discrete reversal of the accruals. So I would love to be able to tell you we got a benefit every quarter going forward; that's not close. I think right now overall looking at an effective tax rate in the range of 35% is a fair outlook. I always have to caveat, Brian, there can continue to be some discrete items that get recognized in the future. I'm not going to be able to provide you specific amounts, but there's still a couple things that are on the shelf that is -- statutes expire, still could come down and hit the tax provision favorably. But for a medium-term outlook, 35% is probably a fair number to use.

Okay. And I guess last one for me, you've got about $45 million or so in net cash. You are seeing a pretty significant ramp down in CapEx. How are you thinking about -- I guess this question is for Don -- where you stand with the balance sheet right now, what you want to do from a strategic perspective, and what the right leverage ratio as you see for this Company as we look into 2015, 2016, 2017.

Brian, I think it dovetails Jimmy's question about acquisitions and certainly the timing of something like that. If for some reason we saw that the opportunity for us wasn't available, then I think we have to shift our focus a little bit in terms of using that cash. But I would also say that -- totally understand that the balance sheet today is in a very conservative spot. But I would also say that we need to address in order to serve our customers some global issues that may generate a use of cash flow in the beginning.

I think we have also commented, Brian, overall, being an auto supplier, I think just philosophically we are conservative -- or on the conservative side of the spectrum with respect to the view of use of leverage. I think keeping dry powder for the opportunities we do think is important. If a deal does arise and it's out there, we want to have access to liquidity to be able to execute on these opportunities whether they be M&A or, as Don offered, look towards more global needs of our customers.

We have also mentioned before that I think right now at the top of the list of our focus in this Company is to improve our earnings generation rate, which is reflected in our guidance and the growth in EBITDA returns that we are projecting. No news to anybody is you generate more EBITDA, or debt capacity is going to increase.

Right. Yes, so last question from me. Should I infer from those comments that there is actually a pipeline of potential acquisition that are out there that you are potentially waiting to pounce on, without tipping your hand too much?

There are transactions that we're looking at. Absolutely.

All right. Thank you, guys.

(Operator Instructions) Tristan Thomas, Sidoti & Company.

Just a couple questions. I'm not sure if you mentioned this, but the polishing operation in Mexico, do you have a time frame on that?

It's going to be up and running by September 1. We are training some of the employees beginning Monday, I believe it is.

It won't be at full capability yet. It will be an operation that we can see expanding in capability in phases. So this will be the first phase where the initial, if you will, rough-cut part of the operation is going to be the first focus. We do expect to garner savings from that. Nonetheless, it's still being phase 1, and that will continue on into the future to expand the amount of operation in the polishing function, if you will, that is going to be run by that operation.

Okay. Could you also maybe provide a little more color on what you could do either in terms of improving operations or cutting costs at Fayetteville and your other Mexican facility. What else can you kind of try to wring out of the business?

I guess to start, one of the things that we're totally focused on is, let's say, the use of capital in terms of trying to be -- provide more creative solutions rather than using capital as a way to solve issues. So from our perspective -- from my perspective, some of the issues that we have are indirect. To direct labor ratio is a little bit out of whack, so we've got to address that. Certainly we are in the process but not complete yet in addressing the temporary work force. I mentioned the productivity increase of about 10% in terms of our wheels per hour. That gets to the machine -- the cycle times, both at the cast operation and the machining operation.

So we are working through just about every item in the factory to see how we can improve it, reducing bottlenecks, increasing uptime. One of the things that we are evaluating to see if it makes sense for us is to go to a 24-hour, seven-days-a-week shift. If so, which plants do we put that in? That certainly is going to add capacity to our plants.

And so there are a number -- any number of items that we're looking at to improve. So if the question is do have a ways to go, yes, we have a ways to go. So there's, from my perspective, significant upside in the operations of the business.

And I think one of the other advantages that we have now is our new head of operations brings a fresh-eye look, a fresh approach. And whenever you bring in a new individual, he brings with it new ideas and new looks to things. I think when you combine that with the experience of some of our guys who have been in the business for 25 years, it's a really good blend.

We've also made additional personnel changes throughout the ranks. One of the reasons why our safety numbers are improving is because we changed out some of our safety managers in our plants. And our head of ops is doing safety walks once a week through the facility.

So all of those types of things are going on at our plants.

The quality improvement of 50%, again, that's going to flow through in the operating margin as well. Not only do you get a customer benefit, but you certainly get a production efficiency benefit. And that's due in part due to some different equipment. We've upgraded our x-ray machines to the latest technology; that certainly plays a role. Working with our customers on specification, that plays role. So there's a lot of things going on.

Okay. And then just one final question for me. Can you maybe comment on if any of your North American competitors -- are they at capacity, are they adding capacity? Maybe provide a little color there.

Certainly there -- Mexico both from an OE perspective and a competitor wheel perspective have added capacity. So if you look at -- we went back and if you look at the last 12 months, our customers have committed to adding some $12 billion of capacity in Mexico. Now, that's not all assembly capacity, but certainly there are a number of new entrants, be it a Kia or be it an Audi. Ford expanding there, as GM has committed $5 million to expand their Mexican facility. So certainly the OE's are committed to Mexico. Along that line, some of our competitors have expanded or have plans to expand in Mexico to cover their customers.

Okay, great. Thank you.

And, gentlemen, we have no further questions at this time. I will turn the call back to you for any additional or closing remarks.

Appreciate the support, and thanks for your questions. And we will talk to you next quarter. Thank you. Bye-bye.

Thank you. And that does conclude today's conference. Thank you for your participation.