Superior Industries International Inc (SUP) 2016 Q1 法說會逐字稿

Good day everyone and welcome to the Superior Industries first-quarter 2016 earnings call. For opening remarks, I would like to turn the conference over to Kerry Shiba, Executive Vice President, Chief Financial Officer. Please go ahead sir.

Thank you Maria, and good morning, everyone, and welcome to our first-quarter 2016 earnings call. During our discussion today, I 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 is Don Stebbins, our President and Chief Executive Officer. I'm going to start as usual with the second slide 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 like to point you to the Company's SEC filings, including our annual reports 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 the financial tables included with our first-quarter 2016 earnings press release.

With that, I would now like to turn the call over to Don Stebbins, our President and CEO. Don?

Thanks Kerry. Good morning, everyone, and thank you for joining us. Please turn to Slide 2.

Our strong first-quarter results reflect the continued momentum in unit volume and the efficiency gains that we experienced in the fourth quarter of 2015. We shipped 3.2 million wheels in the first quarter, a 25% increase year-over-year, outpacing production growth of 5% in the North American light vehicle market. This increase was driven by our new passenger car programs as well as sustained shipment increases in many of our largest light truck programs.

First-quarter value-added sales increased 24% to $102 million, reflecting higher unit shipment volume and favorable product mix partially offset by the negative impact of foreign exchange.

Turning to net sales, due to the pass-through of lower aluminum value partially offsetting unit shipment growth, net sales came in at $186 million, increasing at the pace of 7% year-over-year. The solid increase in profitability this quarter underscores the progress we've made in our strategic initiatives and the benefit of our capital investments since our transformation began over a year and a half ago.

First-quarter adjusted EBITDA more than doubled to $28 million driven primarily by higher shipment volume, favorable product mix and continued cost improvement. As a percentage of value-added sales, adjusted EBITDA margin was almost 28%, expanding by over 1,100 basis points year-over-year. Similar to what we experienced last quarter, the improved cost performance was primarily driven by our new facility which operated near full production capacity as compared to the ramp up it underwent during the first quarter of last year. The combination of these drivers allowed us to deliver first-quarter net income of almost $15 million, or $0.56 per diluted share, a greater than threefold increase compared to the $4.3 million or $0.16 per diluted share in the prior-year period.

Operating cash flow improved to $16 million compared to a negative $1 million for the same period last year.

Turning to Slide 3, during the quarter, we continued to maintain a balanced approach to capital allocation. We paid a quarterly cash dividend of $0.18 per share and repurchased over 672,000 shares for $11.9 million. Through April 26, we have returned approximately $22 million to shareholders through dividends and share repurchases. The increase in our share buyback activity combined with the raise in our full-year 2016 financial outlook is reflective of the confidence we have in our long-term strategic plan.

I continue to be encouraged that, despite the challenges of significant levels of production this quarter, we were able to execute at improved levels of efficiency and profitability. We believe this is a direct result of the many initiatives we have highlighted in the past.

Please turn to Slide 4. The completed 500,000 wheel expansion in our New Mexican facility which was partially utilized in the first quarter, our ability to effectively move labor scheduling to 24/7 as needed, and the leverage of our recently expanded program and process management capabilities, as well as the continued increase in production at our partner polishing facility.

Superior's continuous improvement and expanded value capabilities also are being recognized by our customers, as shown on Slide 5. We are very proud to be the recipient of the General Motors 2015 Supplier of the Year Award, which was announced last month and selected based upon outstanding performance, quality and customer-centric innovation. This is the first time in over 10 years Superior has received this award.

Despite the significant progress we've made, we have a long journey ahead to become the highly efficient well-run company we aspire to be. Moving forward, we will continue to drive profitability through our ongoing focus on better aligning capacity and cost with unit demand while driving incremental capacity across our existing manufacturing platform.

Additionally, to further expand and differentiate our competitive offering, we are embarking on two new capital projects to further enhance our in-house capabilities with a focus on higher value-add products. Specifically, in the second quarter, we will begin investing in advanced finishing capabilities that will be added in Mexico. These new offerings are expected to launch in 2018. We currently expect the total cost of these projects to be in the neighborhood of $25 million, roughly split between 2016 and 2017. The spending is already included in our current outlook for 2016. We believe this, combined with our other investments, will allow us to further enhance our global competitiveness and drive long-term market share gains by bringing higher margin and more advanced models in a multitude of custom finishes to our customers, allowing us to continue to drive profitability well beyond 2016.

And with that, I will now turn the call back over to Kerry.

Thank you Don. The last time I joined you, I was sicker than a dog. Today, honestly, I am feeling better.

I would now like to provide a more detailed overview of our financial results, so if you could please turn to Slide number 6. Superior's shipments increased about 25% to 3.2 million units in the first quarter of 2016, which compares to 2.5 million units in the same period last year. Our rate of volume growth significantly outpaced North American vehicle production, which increased just under 5%. This marks the third consecutive quarter Superior has outperformed the market in unit sales growth.

Let me provide a brief overview of the main drivers of the year-over-year improvement. Similar to last quarter, our largest volume increase was for GM, which was up almost 33%. This was primarily driven by growth in passenger cars and reflected our position on the Chevrolet Malibu, where unit volume increased by 194,000 units over last year when this program first began. We also experienced nice growth on the GM K2XX platform, which was up 56,000 units.

At Ford, our largest customer, we saw solid volume increases with overall year-over-year growth of just under 20%. Similar to the trends we observed last quarter, Ford F-Series was the largest contributor, increasing by 188,000 units or 54% year-over-year. I would like to note that we do expect lower volumes in this program in the back half of the year due to the roll off of specific models. The second largest increase in Ford this quarter was the Fusion platform, up about 40% year-over-year.

At FC&A, our unit shipments increased by 48% overall with strength in both the light truck and passenger car categories. In particular, we experienced a nice increase on the Chrysler Town & Country as well as the Dodge Ram truck and the Challenger.

Finally, we also benefited from a ramp up of new customer programs, including the Nissan Sentra, the Scion IA, and the Toyota Tacoma. Partially offsetting the overall shipment growth year-over-year were declines in our volumes for the Cadillac SRX, the Ford Fiesta and the Ford Focus.

For the sequential comparison, unit shipments were down roughly 1% in the first quarter, but I would like to remind everyone that the volume for the fourth quarter of last year was very strong, the highest single quarter since 2007. The largest sequential increase was for the Malibu program, up 187%, but nice increases also on the Nissan Sentra, the Ford Edge and Fusion, and the Toyota Highlander. The largest declines were for the Cadillac SRX, the Toyota Avalon, the K2XX and the Town & Country.

Turning to Slide 7, let's take a look at the year-over-year change in value-added and net sales. We're using the same format for the sales comparisons that we introduced last quarter. Just to orient you again to the slide, we show a bridge for value-added sales on the top, and net sales on the bottom.

Value-added sales for the first quarter of 2016 were $102.3 million, a $20.1 million or 24% increase compared to the first quarter of 2015. Similar to the last quarter, the headline for value-added sales is higher unit volume, which had a positive impact of $19.7 million. Favorable product price and mix contributed $1.9 million. The other items on the slide were relatively insignificant.

For the net sales comparison, we also have shown a breakdown of the major components within net sales, which includes value-added sales which I just spoke about, aluminum and other upcharges. Net sales were $173.7 million for the first quarter of 2016, a $12.3 million or 7% improvement, when compared to the first quarter of 2015. The benefit of the 25% unit volume growth on net sales totaled $42.2 million. However, the significant benefit of volume growth was partially offset, as Don had mentioned, by a large $31.9 million decline in the value of aluminum, which we do pass through to market. Again, the remaining items on this slide were relatively insignificant.

Moving to Slide number 8, our first-quarter adjusted EBITDA increased 110% year-over-year to $28.1 million. The EBITDA margin reached 27.5% of value-added sales, an increase of over 1,100 basis points when compared to the same period last year. Adjustments to EBITDA, all of which related to carrying costs for a plant closed at the end of 2014, were approximately $1.4 million and $500,000 in the first quarters of 2015 and 2016 respectively.

When looking at the waterfall analysis, the dominating factor driving the EBITDA increase was the growth in unit shipments. Product mix also was stronger, as sales of larger diameter higher margin wheels increased by over 30% when compared to the first quarter of 2015.

Overall manufacturing costs also contributed to higher EBITDA. Our newest plant in Mexico ran at high volumes in the first quarter of this year. You may recall this plant was just beginning to ramp up during the first quarter of 2015. So, the related efficiencies are significantly improved year-over-year. As the year progresses, this comparison will become less pronounced. More broadly, we also manufactured a higher proportion of our overall volume in Mexico this year where our costs are lower than in the US.

And finally, we also continue to benefit from lower energy prices, particularly in Mexico, as shown in the next bar on the slide. A weaker Mexican peso also contributed to the EBITDA improvement.

SG&A expenses in the first quarter were $1.3 million higher in 2016 than in the prior year. The largest single item affecting the comparison was a $523,000 gain on the sale of idle real estate which was recognized in the first quarter of 2015. Higher consulting expenses, primarily for tax projects, (inaudible) Accounts Receivable adjustment and increased legacy workers compensation costs together resulted in about $600,000 of higher costs in the current year.

As in the past, we also included a sequential EBITDA comparison in the appendix for your reference. Very briefly, the sequential change differs from the year-over-year comparison primarily due to the volume impact, which was a modest decline from the strong quarter of Q4 last year in contrast to the significant year-over-year growth.

Turning now to Slide number 9, I would like to conclude my comments with a brief look at cash flow and capital allocation. We saw a significant improvement in cash generation for the first quarter of 2016 as we generated operating cash flow of $16 million, which compares to a $1 million net use of cash on operating activities in the same period last year. The change primarily reflects improved net earnings and lower working capital which was aided by the reduced cost for aluminum.

Capital expenditures were approximately $6.1 million in the first quarter of this year compared to the $15 million we spent in the first quarter last year. Almost $6 million of last year's spending was for the new manufacturing facility in Mexico. I'm sorry, it's almost $7 million.

Finally, as Don mentioned in the beginning of the call, we continue to return cash to our shareholders as part of our capital allocation. During the first quarter of 2016, we repurchased close to 672,000 (technical difficulty) shares for a total of $11.9 million, which exhausted a previous $30 million share repurchase program and started into a newly accrued $50 million program. Of our new $50 million share repurchase program, $47.5 million remains available. Through April 26, we have repurchased 712,000 shares for a total of $12.8 million during fiscal year 2016. We also paid $4.7 million of dividends during the quarter.

With that, I would now like to turn the call back over to Don to walk you through our 2016 expectations.

Thanks Kerry. Moving to Slide 10, let me walk you through our 2016 outlook which was raised on April 19 when we provided preliminary first-quarter results. In my discussion, I will compare our revised guidance to the guidance we provided on January 14.

In light of the volume growth in the first quarter and in anticipation of continued momentum, we now expect to report value-added sales in the range of $380 million to $395 million driven by unit shipment growth of approximately 3% to 6% and favorable product mix. This compares to our initial full-year 2016 outlook of $370 million to $390 million driven by unit shipment growth of approximately 1% to 4%.

We have also raised our expectations for adjusted EBITDA margin measured as a percentage of value-added sales to a range of 24.1% to 24.8%, an increase of 300 to 370 basis points year-over-year, compared our initial guidance of 125 to 200 basis points. Net sales are now expected to be in the range of $690 million to $710 million compared to our initial guidance of $720 million to $740 million, reflecting a lower assumption for aluminum prices as compared to the outlook provided in January. Adjusted EBITDA margins as a percentage of net sales are expected to be in the range of 13.3% to 13.8%, representing an increase of 285 to 335 basis points year-over-year compared to our initial guidance of 100 to 175 basis points. We continue to expect annual capital expenditures of approximately $40 million, and we now expect working capital to be a net source of funds.

Additionally, we anticipate an effective tax rate in the range of 25% to 27% compared our initial guidance in the low 20% range, reflecting our expectation of higher earnings versus our previous guidance.

Lastly, we continue to expect to return approximately $20 million in cash to shareholders in the form of dividends.

So, in closing, we are off to a solid start in 2016. Our performance in this quarter underscores the progress we have made in strengthening our manufacturing platform and refining our operating processes, which, combined with our targeted initiatives, gives us confidence in our ability to continue to drive profitability in 2016 and beyond. I am pleased that our investors share this confidence. Based upon our preliminary vote count provided by a proxy solicitor, all eight of Superior's director nominees were reelected to the Board of Directors at yesterday's annual shareholder meeting by an overwhelming margin. We want to thank all of our shareholders for their trust and continued support.

And with that, I would now like to turn the call back over to Maria to open it up for questions.

(Operator Instructions). (technical difficulty), Gabelli and Company.

Good morning guys. Congratulations on a great quarter. You showed strong improvement year-over-year, but you also had those -- the tailwinds that you mentioned from energy and the peso. Could you try to quantify how much of the improvement was driven by factors that you can control versus temporary factors that might reverse?

As far as the year-over-year improvements, the majority of the improvement that we saw year-over-year was from the improvement in our manufacturing footprint, the improvement in our performance. We did have some improvement in energy. We would say roughly in the $1 million, $2 million range, but it was primarily driven from our cost improvement due to our change in manufacturing.

Great. Appreciate it and congratulations again.

Vahid Khorsand, BWS Financial.

Thanks for taking my call. The first quick question, I wanted to get a clarification on your flex scheduling in Mexico. Did you utilize that in Q1 at the 24/7 pace?

Yes, yes, we did utilize some of that. Some of the plants -- and it's really done by operation, so some of the operations in some of the plants run 24/7 while we work to call it eliminate bottlenecks in some of those factories, and some of the facilities didn't utilize 24/7 at all.

Okay. My next question was about guidance. It looks kind of like you're guiding for a drop off in unit volume. Is that what you are doing?

We think, at this point in time, the front half of the year will be stronger than the back half of the year by 1 percentage point or 2. We have visibility clearly through the remainder of the second quarter, not that that can't change, but we have better visibility in terms of the production schedule there. And the further you go out, we become less certain about that.

Okay, thank you.

(Operator Instructions). Tristan Thomas, Sidoti and Company.

Thank you guys. Great quarter. Two quick questions, one kind of a follow-on question regarding the capacity. Could you maybe quantify what percentage of capacity you're operating at?

Probably operating today at somewhere in the high 90s%, mid to high 90s% of capacity. But again, I think it's important to understand that for us and what we are doing, the capacity is moving higher based upon us creating efficiencies in the facility moving to 24/7, etc. So what we would have told you 18 months ago was a capacity number making 3.2 million wheels annualized that to over 12 million units, that we would not have believed that 20 months ago that we were in line with capacity there. Today, as I mentioned, every part of our operation is not running 24/7, so we do have uplifts. And so we are thinking that, from our perspective, it is somewhere -- 13 million to 14 million units is where our true capacity will be as we get up to where we -- how we want to run the facilities.

Don has offered this comment before anecdotally also, but if you go back to the fourth quarter of last year, which was very, very busy, a little bit above where we were at in Q1 of this year, we used to say the ops guys were sort of running around with their hair on fire trying to handle the volume. There were schedule changes. There were shifts to programs from week to week, and even day to day, but a lot more frenzy. If you look at the first quarter of this year, that type of activity has really declined significantly, much more control. So even going from one quarter to the next at about the same volume level, our ability to handle that kind of volume continues to get easier and easier.

Okay, got it. And then one additional question. I know Don mentioned the emphasis on the higher value-added sales with I guess the higher-end finishings. Is that something the OEMs are demanding or consumers are demanding? I'm just trying to see what's really driving that.

I think both is the answer. Certainly the wheel is becoming more and more important in the differentiation of the vehicle. And I think it's fair to say that the OEs are not only trying to serve their customer, but also capture let's call it what used to be aftermarket revenue and bring that into the mainstream for them. And so our conversations with the OEs have been exciting in terms of what their hopes are for us in terms of supplying the wheels, and so certainly this is a reaction both for them and what the market is demanding.

Okay. Thanks guys.

Jimmy Baker, B. Riley & Company.

Good morning Don. Good morning Kerry. Congrats on the quarter. I guess I just have a couple of bigger picture questions. So, first, I guess if you were to look let's say a couple of years out and, market willing, your annual shipment volume is at or above the annualized Q1 rate here, let's say closer to the 13 million or 14 million capacity number you mentioned, is it fair to say that, if you are running at that clip for a full year, that you believe your full-year margin profile should be above what you delivered here in the first quarter?

Yes. Absolutely. Absolutely. So we would be -- if you take your scenario, we are pushing more unit volume through. Over the next couple of years, you will see the -- you'll start to see the transformation to larger wheel programs becoming a larger percentage of our product. You'll see the introduction of higher finishes coming through, so as well as all of the seeds that have been planted in terms of how we run the business everywhere from quote through collect cash. Yes, I absolutely am confident that you will see higher margins than where we are today.

Okay, great. And then just thinking about it kind of on the flipside, as you look at your new capacity footprint, the changes that you've made or the changes you will make, what do you think is a realistic decremental margin for the business if production does take a step backwards?

My comment would be that -- and Kerry can embellish a bit -- is that it really depends on how much because we do have flexibility in moving wheels around, and so we can reduce the number in the wheels, the number of wheels that we would be producing in our higher cost plants into the lower cost plants. That would be step one. And so you would actually see probably a slight margin increase in that scenario. But it really depends on how far down the market would go. But we are ready for that, and so we would plan accordingly.

I think we've talked before also, Jimmy, we've worked very hard over the last couple of years to increase flexibility in our labor force overall, especially in Mexico. And we've talked about increasing the contractor component for that flexibility. So our contractor workforce is up sort of in the mid to high teens now of our labor force in Mexico, so that gives you some sense of our ability to flex downwards and address that. Obviously, you lose some leverage. There's some degree of semi fixed costs in the business, but I feel a lot better about our ability to handle (technical difficulty) downturn in volume today than I would have been able to tell you three years ago for example.

Sure, okay. Very helpful. Thanks for the time.

(Operator Instructions). Brian Rath, Walthausen & Company.

Thanks for taking the question and congrats on a great quarter. I just had really one question. Looking back at when you preannounced the results (inaudible) and there's a quote in there talking about how you're still in the earlier stages of the business evolution. So just wanting to kind of maybe ask around that, just thinking about what you've accomplished over really the past year and a half to two years with -- you've got the new manufacturing facility open. You've now got the 500,000 expansion up and running. You're working on the polishing JV, move headquarters. Rogers is closed. So I'm thinking you accomplished a lot and for you to say that it's still the early stages of evolution, and I know you just made comments about you'll have larger wheel programs, new finishes, etc. But what else is there? When we think about kind of using that word "evolution", what are you looking at beyond just some of the things you've mentioned? You guys have looked out a few years. What's the next legs of the story if we are still early in that evolution?

I think it's three- or four- or five-fold in terms of the initiatives that we are working on. And some of them aren't as visible to the outside world as they are to us internally. And part of that is, as Kerry anecdotally used the vision of last quarter versus this quarter, you can see, in terms of quality metrics, safety metrics, machine downtime, number of program transfers, launch performance, our OEE, how we P path, how well we P path the product, etc., etc., kind of those fundamental characteristics of how you run the business. Have those improved? Yes, they have improved. Are they near best-in-class? No, they are not near best-in-class. And so that's part of that journey. That's part of that evolution for us, is to become a best-in-class supplier. And that efficiency throughout the operation is going to allow us to again take what is kind of maybe a 12.5 million unit view on capacity up to a 14 million unit view on capacity. That's going to allow us to bring in these higher margin programs, be them wheel sizes or different finishes for the OE, and really I would call it reestablishing Superior as the go-to guy in North America in terms of innovation and technology. So I think those are two things.

Another item that we've talked about periodically, and I think it's an important pillar, is to establish a relationship outside of the United States in terms of supply of wheels. We continue to work on that, and I think that's another important pillar for us to work on.

So, I would also tell you that our scrap, again, although improved from 20 months ago, is still way too high and is going to be another metric that we drive or is a metric that we drive and will increase additional capacity for us. So, a lot to do from that perspective.

I would also tell you that if you look at the amount of business that we have with Mercedes, BMW, Audi, it's very, very small. That's another point of emphasis for us, is how we move forward to broaden the customer base. And certainly winning programs from the likes of those manufacturers is a high priority for us.

Great, thanks. That's really helpful. And then just a small housekeeping question for Kerry. How much was the spend on the proxy contest in the first quarter? And on the proxy contest this year?

A few hundred thousand dollars. Kind of in the $500,000, $600,000 range would be my estimate right now.

Okay, thanks. Hopefully you don't have to see that next year. Thanks guys.

(Operator Instructions). There are no further questions in the queue at this time. I'd like to now hand the call back to our host for any additional remarks.

Thank you Maria, and thank you, everybody, and have a great day. Appreciate your support. Good-bye.

That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.