Superior Industries International Inc (SUP) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to the Superior Industries Third Quarter 2016 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 and good morning, everyone, and welcome to our third quarter 2016 earnings call. During our discussion today, I will be referring to our earnings presentation, which is available on the Investor section of our website at www.supind.com.

Joining me on today's call 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 also, 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 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 third quarter 2016 earnings press release and in the appendix of this presentation.

I now would 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. If you would, please turn to Slide 3 of the earnings presentation.

This quarter marked the fifth consecutive quarter where we outpaced year-over-year market growth and did so with an increasingly favorable value-added mix of our products. However, despite our market share gains, our profitability in the quarter was negatively impacted by operating inefficiencies in one of our Mexican manufacturing plants, which I will discuss in further detail in a moment.

In the third quarter, we shipped 2.9 million wheels, a 4.8% increase year-over-year, outpacing North American light vehicle production growth of 1.7%. This was primarily a result of higher demand in our passenger car wheel programs.

Net sales were flat over the prior year at $176 million, despite the strong increase in value-added sales due to the pass-through of lower aluminum costs, while value-added sales increased 12% to $99 million, reflecting higher volume in unit shipments as well as favorable product mix. Importantly, this quarter we continued to make progress in diversifying our business at the higher value-added wheels as evidenced by a 7.2% increase in value-added sales on a per wheel basis. This was supported by a 51% increase year-over-year in wheels 19 inches or greater in diameter.

While I'm encouraged by our strong unit shipment volumes and product mix improvement this quarter, I'm disappointed by our operational performance. Although earnings increased by 21% to $0.23 per share, costs related to operating inefficiencies at one of our plants negatively impacted earnings by $0.27 per share.

Let's turn to Slide 4. Operating inefficiencies at this particular facility stem from a variety of issues that reduced the plant's production rates. As we mentioned in our last quarter call, the operating inefficiency began late in the second quarter and increased significantly as the third quarter progressed. These issues included equipment reliability that was exacerbated by an interruption to our plant's power.

During the quarter, we were also ramping up production on several new programs which, coupled with these equipment challenges, resulted in elevated scrap rates, further reducing the plant's production levels. And all of these challenges occurred at a time when we were experiencing high demand for our products.

As you know, our objective is to become an absolutely world-class supplier, and as such we are working hard to ensure customer delivery schedules are met, regardless of our challenges. Therefore, as a result of the lower production rates and subsequent loss of inventory, we incurred significant incremental cost including $5.9 million in expedited freight. We also incurred an estimated $4.5 million of production cost inefficiency for increased labor, maintenance and other related expenses for a total of $10.4 million in operating inefficiency costs in the quarter.

Please turn to Slide 5. In light of these challenges, we are currently executing an action plan to bring plant productivity back to normalized levels in order to meet customer delivery schedules without the need for expedited freight and to rebuild our inventory positions. This plan includes approximately $4 million in capital investments to address the equipment reliability issues at the facility, further supported by additional maintenance spending.

In addition to our internal team on the ground, we have hired external resources to improve the plant's operating processes and increased production efficiency and productivity. We have also leveraged our manufacturing platform by moving some production between our facilities as well as quickly initiating our new manufacturing relationship in China to provide additional capacity.

While we made a great deal of progress through the third quarter, we believe we will continue to incur expedited freight and other inefficiency costs in our manufacturing footprint throughout the remainder of the year. These factors are reflected in our updated 2016 outlook.

Over the last four weeks, overall production levels have shown solid improvement but remain below normalized levels. I'm cautiously optimistic that we'll be able to return to our targeted production yield in the first quarter of 2017, thereby significantly reducing incremental operating inefficiency costs.

Despite these near-term challenges, our long-term strategic plan and basic business fundamentals remain strong. We continue to see robust demand as well as a solid long-term pipeline, supported by our new program wins. To put this in perspective, excluding the inefficiency costs we incurred in the third quarter, adjusted EBITDA would have increased 41.4% year-over-year and expanded by more than 500 basis points as a percentage of value-added sales. On a year-to-date basis, adjusted EBITDA would have increased by 58% and margins would have expanded by 680 basis points.

As we progress on our journey to become a world-class supplier, we will continue to make improvements by strengthening our manufacturing platform and driving wheel innovation through expansion of our in-house capabilities.

I would now like to hand the call back to Kerry, who will provide additional details on the quarter.

Thank you, Don. Don mentioned I'll go into a little bit more detail on our financial performance right now.

Starting with Slide number 6. Superior shipments increased 4.8% to 2.9 million units in the second quarter compared to 2.8 million units in the same period last year. As it did in prior quarters, our rate of volume growth significantly outpaced North American light vehicle production, which increased at 1.7%.

Similar to what we saw in the two prior quarters, the year-over-year improvement was mainly driven by significant growth in passenger car programs, which increased by 34% year-over-year. The growth in passenger car programs was driven by the Chevrolet Malibu program, where our volume increased 225,000 units over the prior year period when the program was in the early stages of its launch. Volume also was higher for the Nissan Sentra and Ultima.

Sales in the light truck category, which includes pickups and SUVs, were down slightly with a decline of 10,000 units compared to the third quarter of last year. Growth in our largest platform, the K2XX, increased 99,000 units while sales for the Toyota Tacoma and Highlander, the Dodge Ram truck and Ford Explorer also improved. Offsetting this growth was a volume decline from the Ford F Series, which was down 191,000 units, reflecting the pent-up demand for the new generation vehicle that occurred last year and resulted in very high production in Q3 of 2015.

We've begun this quarter to break out the crossover category, which includes minivans as well as vehicles designated as crossovers. In this category, sales were down 21% compared to the third quarter of last year due to the wind-down of our participation on the Cadillac SRX as well as the Town and Country, a trend we mentioned last quarter. We did experience solid volume and a nice increase in this category with the Nissan Kicks, a new program, as well as the Ford Edge and the Lincoln MKZ.

Our largest percentage increase by customer was for Nissan, which was up 150%. Additionally, overall shipment growth for both GM and Subaru was strong with shipments up 31% and 29%, respectively.

We also had solid growth at Toyota, which is at plus 16%. Reflective of the change in our sales for the F Series, sales to Ford, which still is our largest customer, declined by 22% overall. Shipments also were down for the Fusion, Fiesta and Focus as a result of an anticipated roll-off of certain wheel styles as these programs shift to their next model year.

I also want to comment briefly on the sequential comparison. As anticipated, due to the timing of the roll-off of certain programs and reflective of plant shutdowns at our customer facilities, unit shipments were down roughly 5% in the third quarter when compared to the second quarter. This decline was slightly over the 4% sequential decline in vehicle production. We saw increases in several programs, including the Ultima, the K2XX, the Kicks, the Malibu, the Journey and the Traverse that were offset by declines that I just mentioned on the F Series, Fusion, Fiesta and Focus as well as the Ram truck.

Turning to Slide number 7, let's take a look at the year-over-year change in both net sales and value-added sales. The first chart also shows the reconciliation of net sales to value-added sales as it displays the value of metal and third party upcharges passed through to our customers, which are excluded from value-added sales.

Net sales was $175.6 million in the third quarter of 2016, almost identical to net sales in the prior year period. The benefit of volume growth and favorable product mix, which contributed $7.8 million and $4.6 million, respectively, was more than offset by a $14.1 million decline in lower aluminum value and third-party upcharges, both of which we pass through to our customers. The comparison was also impacted by $900,000 in negative currency changes due to the lower Mexican peso versus the U.S. dollar on peso-denominated sales contracts, as well as $2.5 million positive from higher project development revenues and the year-to-year change in sales adjustment.

Value-added sales were $98.8 million this quarter, an increase of $10.9 million or 12.3% when compared to the third quarter of 2016 -- or of 2015. The increase was driven by higher unit volume, which contributed $4.7 million to the improvement, as well as favorable price and mix, which had a positive impact of $4.6 million. The remaining differences affecting the comparison were relatively minor.

Moving to Slide 8. Our adjusted EBITDA was $13.8 million this quarter compared to $17.1 million in the third quarter last year. As you can see from the waterfall chart, there was a nice contribution by the sales volume increase and improved product mix. Offsetting this improvement, cost performance was the factor driving the year-over-year decline. As Don mentioned at the beginning of the call, we incurred an estimated $10.4 million of negative cost performance due to operating inefficiencies in one of our five manufacturing facilities. Cost performance in two other facilities was also slightly weaker.

SG&A costs for the quarter were lower than in the prior year, primarily reflecting a reduction made to accruals for incentive compensation expense. There also was a favorable currency impact of $2.4 million driven by the lower Mexican peso-U.S. dollar relationship. And again, the remaining items on the chart were relatively minor.

As noted in the bottom of the slide, adjustments to EBITDA are related to carrying costs for a plant we closed at the end of 2014 and were approximately $300,000 in the third quarter of this year as compared to $800,000 in the prior year period.

Before moving to the next slide, I would also like to note that as you look at the income statement, you'll see that net income for the third quarter was $6 million compared to $4.9 million in the prior year period. Net income for Q3 of 2016 includes the impact of a $1.1 million net tax benefit, largely resulting from an adjustment to reflect a decrease in taxable income for the full year due to the reduced level of earnings. The net third quarter tax benefit also reflects the reduction of a reserve for uncertain tax benefits that was recognized during the quarter.

Turning to Slide number 9. We have included an adjusted EBITDA comparison for the first nine months of the year. I think it's worth noting that despite the previously mentioned $10.4 million of negative cost performance incurred in the third quarter, year-to-date adjusted EBITDA was improved 37% to $70 million, and adjusted EBITDA as a percentage of value-added sales expanded by 340 basis points to 23.1%. This truly highlights the overall transformation of our business that has been taking place over the last few quarters.

The overwhelming majority of the EBITDA increase was driven by higher volume and favorable mix. We also have included a sequential quarterly EBITDA comparison in the appendix of the presentation, which is back on Page 16. The change primarily reflects the impact from the previously discussed third quarter operating inefficiencies as well as the anticipated sequential sales volume decline. I'm not going to review this chart in detail, because I believe the explanations offered on the slide are reasonably self-explanatory.

Turning to Slide number 10. I would like to conclude with a few remarks on our cash flow and capital allocation. Operating cash flow is $39.3 million in the nine months of 2016 compared to $39.2 million in the same period last year. The change primarily resulted from higher net income, partially offset by higher working capital year-over-year.

Capital expenditures were approximately $12.5 million in the third quarter, compared to $9.3 million in the same period last year. Current year quarter includes approximately $4 million of investments to add needed capacity and to address the third quarter equipment reliability issues discussed previously. As we previously shared with you, we initiated investments on two new capital projects last quarter, which will expand our in-house finishing capability in Mexico, and these projects are expected to launch mid- to late 2018.

Lastly, I would like to comment on our capital allocation strategy. We are focusing on driving value through a balanced approach of returning excess cash to our shareholders while maintaining the flexibility to invest in ourselves and grow inorganically. During the quarter, we paid a cash dividend of $0.18 per share for a total cost of $4.6 million. Year-to-date through October 26, we have returned approximately $31.8 million to shareholders through dividends and share repurchases. We have approximately $46.7 million still available under our share repurchase program, which was approved at the beginning of 2016. The near-term challenges we've discussed today do not change our favorable outlook overall that we have for our company nor our healthy approach to dividends and share buyback.

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

Thanks, Kerry. Turning to Slide 11, let me take a moment to walk you through our expectations for 2016. We now expect 2016 net sales to be in the range of $715 million to $725 million compared to our previous outlook of $710 million to $725 million. This is driven by unit shipment growth of approximately 7% to 8% compared to our previous outlook of 6% to 8%. This outlook implies units in the fourth quarter of between 2.9 million and 3 million, which at the midpoint is in line with the unit demand we experienced in the third quarter compared to record unit volume in the fourth quarter of last year.

We're also raising our outlook for 2016 value-added sales to $398 million to $403 million, an increase of 10.3% to 11.5% year-over-year due to unit shipment growth and continued favorable product mix.

As you can see from the slide, our outlook for 2016 adjusted EBITDA is now $80 million to $88 million compared to our previous outlook range of between $102 million and $108 million. This decline reflects the operating inefficiencies incurred in the third quarter and anticipated in the fourth quarter. The wide range in the adjusted EBITDA outlook is primarily driven by expedited freight and is dependent upon how quickly we can bring our manufacturing platforms production back to normalized levels.

Our 2016 outlook for capital expenditures at approximately $40 million remains unchanged and reflects the increased investments made during the third quarter that Kerry mentioned, as well as the timing of cash payments for other projects that will be in 2017. We continue to expect working capital to be a net use of funds and now anticipate an effective tax rate in the 21% to 23% range for 2016, compared to our prior outlook for a range of 27% to 29%. This is reflective of our reduced expectations for 2016 pretax income.

Lastly, we expect to return approximately $20 million in cash to shareholders in the form of dividends, unchanged from our previous outlook.

In conclusion, we believe we have the right resources in place to solve our near-term challenges and the right strategic plan to continue to drive long-term share market gains and return our path to solid earnings growth.

And with that, I'd now like to turn the call back over to the operator and open it up for questions.

(Operator Instructions) And we'll go first to the line of Vahid Khorsand. Please go ahead. Your line is open.

First question, we're a month into the fourth quarter and I guess if you could kind of -- and you were talking about operational inefficiencies possibly continuing and the expedited cost. My concern is on the expedited cost. Can you kind of give us some color on where that is now for the quarter and where it could be headed and how soon really it could be all resolved?

Yes, what we've assumed in the guidance is that it will be approximately at the level that it was in the third quarter. So $6-ish million is the number that we used in the guidance.

And have you paid for expedited freight in the past to such a high level? And if not, I mean, what would an average quarterly expedited freight cost be?

Vahid, I think I can speak to the longer-term since I've been here longer than Don. But this is, quite honestly, a rare experience for us. If we've had an expedited freight in the past on kind of sporadic situations, it tends to be ground, not air shipments. The air shipments are obviously much more expensive. To kind of look at a financial trend, this is just -- it's really an occurrence that there's hardly any cost in the prior years. I think I have to go back to probably 2011, I think, to find a time, in at least my history here, that we had any degree of expedited freight. And it was, I think, even for the year substantially lower than what we're seeing right now.

Okay. And my next question was, on the last call you talked a little bit about the new China venture that had just started and then you just touched on it now. Is there any more color you can add to that?

No. I think it's been an important piece in the third quarter of increased capacity for us. So we started kind of at a 500 wheels per week. We're now at 2,000 with them, moving to 4,000 wheels per week in late November. So it's just starting. And we look at that as an incremental piece of our manufacturing footprint.

Okay. And my final question, yesterday or a couple days ago Fiat/Chrysler was talking on their conference call about Ram production going into the fourth quarter. They're not going to slow down, so they say. Is that something that you're already seeing? And I only ask that because I saw you had Dodge Ram sales down 29,000 wheels.

Yes. In terms of the releases for the fourth quarter, we haven't seen any significant change. That may have been, to the point that they were making on the call, that may have been that they were already included in the numbers.

And we'll go next to the line of Jimmy Baker. Please go ahead. Your line is open.

Actually, a couple of my questions were just answered. But I was hoping you could walk us through the jump in value-added sales per wheel during the quarter, I guess some color behind the combined $7 million gain from price mix and other in the EBITDA, or in the value-added sales walk rather.

And then I guess when we look at the change in guidance, the value-added sales improvement is relatively consistent with the increase in unit volume expectations. So is that just kind of conservatism on your behalf? Or was there something unusual in Q3 that we should not think about as sustainable?

Well, I think the change in the outlook from what we had offered, Jimmy, last quarter until now, I think our view of mix in Q4 is relatively consistent with what we had originally thought. So that's the why not any significant change there.

The jump in what we've seen in the third quarter, beginning in the third quarter is something that -- it's just consistent with the strategy we've been talking about. We've had year-over-year a nice increase in some wheels that are kind of a special manufacturing form and have higher content involved in the manufacturing process, therefore carrying more value in the marketplace.

And then as Don had mentioned, the diameter mix was up nicely also. So I don't think anything inconsistent with where we've been expecting the business to go and still consistent again, obviously, with the direction we're trying to drive longer term in the marketplace.

Okay. And then more of a housekeeping item, just interested, Kerry, on some color behind the tax rate change in the year and then how we should think about that for '17.

Yes, I think that the tax rate change for this year, the incremental decline had a pretty big impact on kind of the mix of our earnings and the effective rates that are associated with that mix. So hence, that's why we came down several percentage points, because the operational cost challenges, the decline in income for the full year obviously was a big change.

Next year, with an expectation that we will be working consistently to get these kinds of issues behind us, I would expect the rate will move back up more towards where we were with our second quarter outlook.

Okay, got it. Just last one for me. Looking at your guidance, I mean, it looks like clearly the releases are intact or even better-than-expected for you for the year. But just wondering, to kind of comment on just your high-level view on the production environment at your key customers. We've seen incentives tick up lately. Your largest customer idled a few plants. Just wondering if you would characterize risk here as more elevated heading into '17 or if you remain kind of comfortable.

I would say there's a slight element of softness that's sort of appearing here, but I wouldn't say that it's dramatic in any sense. So I wouldn't -- we're monitoring it like everybody else. As we look at it certainly for the fourth quarter and the beginning of the first half of next year, where we see schedules out, it appears to be quite strong.

(Operator Instructions) We'll go next to the line of Brian Sponheimer. Please go ahead.

A couple questions. One, Kerry, you mentioned 2011, 2012. You've dealt with some of these issues three to four years ago on equipment that wasn't up to your requirements. How similar was this problem to maybe what took place then?

I wouldn't say directionally similar but there are also, I think, some key differences overall. The problems that we had back in -- coming out of the industry recession were at the oldest of our facilities, the U.S. facilities. And my view, tackling those problems, resolving those problems back at that time was a longer-term challenge for us. The equipment reliability problems were more widespread throughout the entire factory, and therefore it just took steady, constant but longer-term effort to get it resolved bit by bit by bit.

I think, if you will, the good news about where we're at today is the equipment problems we've had are more focused in nature. So while they obviously have had a significant impact on us because of the expedited freight, expediting [has] resulted from that, I think it's more contained, it's more focused. Therefore, it's not like having to refurbish an entire factory from top to bottom. So notwithstanding the cost impacts that we've incurred, the nature of the issue is different.

Okay. All right. That's certainly more comforting. You spoke to offloading some production to your Chinese partner. What do you think the capacity is from a unit perspective on maybe an annualized basis to have this partner help you out along these lines?

Well, I think at the 4,000 a week level, I think is where we think today is where the capacity is. I mean, we're working with them to see how much they can do and whether or not we would like them to do other wheel styles. It's essentially one program for us today. So that's something as we go forward and they continue to prove themselves that we'll explore, if needed.

Okay. One positive in the quarter was the FX effect on EBITDA. The peso is 16% higher year-over-year in fourth quarter, 20% in the first quarter. Is there any dynamic regarding your cost base relative to your revenue that we should not expect these benefits to continue if currency rates stay where they are?

I guess a couple things. Yes. We have a significant portion hedged for the nearer term going out. And when I say that I mean 2017. We've been putting these hedges in place, as we always do, systematically as we book business. But the direction of the contract rates as you go from 2015 to 2016 to 2017 is directionally favorable because as we were laying these hedges in systematically the peso continued to weaken.

We always have some spot exposure that's sitting out there. And as far as the direction on that, Brian, it depends on where the currency relationship goes. I'm not smart enough to really predict that.

Okay. But if we're in the same places [where] we are now in March of 2017, there should continue to be some sort of benefit?

Yes.

(Operator Instructions) It does not appear we have any questions at this time. I would like to turn it back over to our speakers for any closing remarks.

Great. Thank you for your time this morning and look forward to speaking with you soon. Thank you.

Thank you, everybody.

I would like to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time.