Superior Industries International Inc (SUP) 2017 Q3 法說會逐字稿

Good day, and welcome to the Superior Industries Third Quarter 2017 Earnings Teleconference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Nadeem Moiz. Please go ahead.

Thank you, and good morning, everyone, and welcome to our third quarter 2017 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'll start on Slide 2, 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 unknown factors 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 unknown factors 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 report on Form 10-K for the year ended December 31, 2016, and our Form 10-Q for the quarter ended June 25, 2017, for a more complete discussion of forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

We will also be discussing or providing certain non-GAAP financial measures today, including value-added sales, adjusted EBITDA and adjusted EBITDA as a percentage of value-added sales. These non-GAAP financial measures exclude the impact of certain items and therefore have not been calculated in accordance with GAAP. 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 2017 earnings press release and in the appendix of this presentation.

In addition, in line with our integration of our European operations, which maintains a calendar quarter and year-end close, the third quarter end date of our North American operations was adjusted to October 1, 2017, from September 24, 2017, resulting in 14 weeks for the third quarter of 2017. Due to our convention of 13-week quarters, this additional week would have otherwise fallen in the fourth quarter of 2017. Going forward, we will have a calendar quarter and year-end close.

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

Thanks, Nadeem. Good morning, everyone, and thank you for joining us today.

Starting with Slide 3 of the presentation. For the third quarter of 2017 driven by our acquisition of UNIWHEELS, we reported significant increases in unit shipments, net sales, value-added sales and, as a result, adjusted EBITDA. We have embarked on a new era for our organization, establishing Superior as a global supplier of aluminum wheels for OEMs and the European aftermarket. We have significantly diversified our revenues by geography with 54% of our third quarter revenues generated from our North American operations and 46% from Europe. But also by vehicle segment, with almost 60% of our shipments for light trucks and crossover vehicles and the remainder supporting the passenger car segment. In addition, we increased our customer diversity as prior to the acquisition our top 3 customers represented roughly 82% of our revenue in 2016, and in the third quarter of 2017 it was just over 40%. And more importantly, value-added sales per wheel over the last 12 months has continued its upward momentum driven not only by the addition of our European operations, but by the continued product portfolio shift in North America.

For the quarter, we shipped 5 million units and reported net sales and value-added sales of $331 million and $187 million respectively. Despite softer year-over-year industry production levels in North America, we saw overall shipment outperformance led by our European operations as well as an improvement in mix year-over-year, which highlights the value of the diversification I just mentioned.

Third quarter adjusted EBITDA was $43 million or 23% of value-added sales compared to 14% of value-added sales in the prior year period. Adjusted EBITDA benefited from the addition of our European operations as well as higher year-over-year adjusted EBITDA in North America. As a result of the initiatives taken by our restructuring North American operations team, we have seen improvement over the past couple of months in important metrics such as weekly financial performance, levels of production, cost per wheel and inventory levels.

Turning now to the integration of our organization on Slide 4. We made excellent progress since closing approximately 160 days ago. Our teams have focused on defining the future state of our organization along with the near-term critical business initiatives and synergy opportunities. Today, we're in execution mode and our integration efforts focus on 3 primary areas: The expansion of our customer relationships, operational enhancements, and leveraging our increased scale.

We have a unique opportunity to leverage long-term relationships with our global customers. And in particular, those that have been established by UNIWHEELS as we work closely with European OEMs to support their objectives in North America.

We're also excited, and I believe our customers are as well about the technologies our North American and European teams have developed that can help our customers address their needs in the marketplace and allow them to bring differentiated wheel styles to the market while meeting fuel efficiency and carbon emission requirements through new wheel innovations.

Additionally, we're also exploring distribution channels for our European aftermarket brands in North America. Second, our European and North American businesses continue to evaluate their operations to identify and implement best-in-class manufacturing processes across the business while also combining our engineering and research and development resources. Our goal is to drive operational excellence and continuous improvement throughout the organization. And we have made progress in identifying activities that will allow us to leverage and share the expertise across our European and North American operations.

And finally, our increased scale should continue to drive supply chain and corporate synergy opportunities. To date, on a combined basis, we have actioned more than $5 million in run rate synergies. And as a result, we remain confident in our ability to achieve annual run rate synergies of $15 million by 2020.

Moving on to Slide 5. We have a number of key priorities that are positioned Superior to drive long-term success. While the overall production in the marketplace in North America has softened compared to last year, our company is significantly stronger today, substantially more diversified and providing our customers with a broader range of innovative products. As we've discussed in the past, there are a number of secular trends that continue to create opportunity for Superior. The move to larger diameter wheels with differentiated finishes as well as lighter weight and more fuel-efficient designs are driving conversations with customers and providing expansion opportunities for our partnerships. Our North American customers have been excited to see our European technologies, while our European customers have been excited to see our North American product offerings.

We're staying ahead of these trends with thoughtful investments in new and enhanced technologies. As an update, our state-of-the-art PVD facility continues to be on track and on budget and we expect a launch of this technology in 2018, which will establish us as the first wheel supplier in our markets to bring this capability in-house. This capability has also been shown to our European customers and many have been interested to learn more.

As I mentioned, enhancing our operations is mission critical to ensuring a strong foundation for Superior over the long-term.

These activities are centered not only on driving earnings growth and margin expansion, but also having the right team in place to deliver innovative wheels and win new programs.

Also important to note is our focus on optimizing our capital structure to support the growth of our business and further investment in new and enhanced technologies. As such, cash flow generation and debt reduction are key priorities.

Looking ahead, I believe we're in excellent position to drive long-term sustainable growth and profitability as we capitalize on the tremendous potential for our transforming organization.

With that, I will now hand the call over to Nadeem.

Thank you, Don. I'll now provide a more detailed overview of our financial performance for the third quarter 2017.

Starting with Slide 6. Superior's North American shipments were down approximately 4% during the quarter over last year, in line with North American production levels. The year-over-year shipments in Europe were increased due to the ramp up of our newest facility in Poland, comparing favorably to European production levels resulting in increased market share.

On Slide 7, you can see our third quarter 2017 financial summary. Total unit shipments for the quarter were 5 million up from 2.9 million units last year, with North America and Europe contributing 2.8 million and 2.2 million units respectively.

For the third quarter of 2017, net sales increased to $331.4 million from $175.4 million in the same period last year. Value-added sales for the third quarter of 2017 increased to $187.4 million compared with $98.8 million in the prior year period. For the third quarter of 2017, net income was $2.6 million. After accounting for dividends and accretion related to preferred shares, we had a loss of $0.22 per diluted share. Net income for the third quarter of 2017 included acquisition-related expenses of $5.1 million or $0.20 per diluted share and the change in the fair value of the preferred equity conversion option. This conversion option will be revalued on a quarterly basis.

Now let's take a closer look at sales for the quarter on Slide 8. Net sales for the third quarter of 2017 were $331.4 million compared to net sales of $175.6 million in the third quarter of 2016, an increase of $155.8 million. $151.3 million of this increase was due to the addition of our European operations and $4.5 million came from North America. The increase in North America was primarily driven by higher aluminum pricing, offset by negative volume and mix of $1.4 million. Our North American mix was favorable as value-added sales per wheel increased. However, our volumes were down in line with the industry.

Turning to Slide 9. Adjusted EBITDA for third quarter of 2017 was $43 million compared to adjusted EBITDA of $13.8 million in the third quarter of 2016, an increase of $29.2 million. $24.7 million came from Europe and $4.5 million came from North America. Again the increase in North America was driven in large part by improved mix, a positive FX position partially offset by lower volumes and elevated costs. The increased cost of $1.5 million for North America was due to higher labor, maintenance, utility expenses of approximately $8 million, partially offset by lower expedited freight, lower SG&A and corporate initiatives. As we discussed last quarter, the continued transformation of our product portfolio to larger, more sophisticated wheel designs has impacted our overall operating efficiency. However, as Don highlighted, we have been actively addressing these costs and continue to make operational improvements.

On Slide 10, let me walk you through the cash flow. For the third quarter 2017, cash generated by operating activities was $27.2 million. This includes onetime costs related to the acquisition and interest expenses. Capital expenditures were $26.8 million during the third quarter of 2017, which includes CapEx for our European operations for the third quarter. During the third quarter of this year, we returned $4.4 million to shareholders through cash dividends. Important to note is that we completed a purchase of additional UNIWHEELS shares for $10.5 million during the quarter, bringing our total ownership to 93.5% and repaid the European term loan.

In terms of liquidity management, we currently have ample available borrowing capacity under our U.S. and European revolvers. As of the end of the third quarter, we had less than $2 million drawn on the roughly $195 million available under our U.S. and European credit lines. Our long-term target leverage ratio is approximately 2x net debt-to-EBITDA by 2020.

Going forward, balancing repayment of debt and continued investment in the business will be our top priorities for the use of our free cash flow. We're confident these steps when taken together will provide the right balance to achieve growth and value of the company while achieve a stronger, more balanced and better diversified platform for the future.

And lastly, on Slide 11, let me take a moment to walk you through our full year 2017 guidance, which we reaffirmed today. As a reminder, this outlook includes our European operations on a consolidated basis for June through December in accordance with GAAP, as well as our current expectations for our North American operations.

We expect net sales to be in the range of $ 1,095,000,000 to $1,115,000,000 million driven by unit shipments of 16.9 million to 17.2 million. This assumption implies continued overall production growth in Europe and lower North American production relative to last year.

In terms of value-added sales, we anticipate a range of $595 million to $615 million. We expect 2017 adjusted EBITDA to be in the range of $135 million to $145 million. Capital expenditures are expected to be approximately $85 million. A portion of this relates to new finishing capabilities. Working capital is expected to be a net source of funds. We also anticipate our effective tax rate will be a net benefit for 2017 due to the transaction costs and jurisdictions in which our income is taxable.

Interest expense is expected to be approximately $40 million for 2017. And with that, I would now like to turn the call back over to the operator to open it up for questions.

(Operator Instructions) And we'll take the first question from the line of Chris Van Horn with B. Riley FBR.

So just a question on the margins in North America. Looks like really good expansion there. I was hoping to maybe get some additional color and was it primarily mix or volumes or both, or some of the cost-cuttings that you are seeing? Just some additional color there.

Yes. Absolutely. So look at the -- a little bit of all of the above. As you saw on the bridge -- on the EBITDA bridge, mix was favorable. And we continued to transition the product portfolio to increase finishes and bigger diameter wheels. And so that's translating into mix that's obviously favorable. FX was a very big positive this quarter. You saw that on the bridge I covered. Part of that is our FX hedging plan and part of it is -- part of the structure we put in place as part of the transaction. So that's a bit of a onetime in there. And we continue to make progress on the cost, not totally there yet, but definitely making progress.

Okay. Great. And then I just have a question about aftermarket sales during the quarter. Any commentary you can give there? Did you see some good growth in that category? If you would like to break out the revenues that would be great but just some color on the aftermarket side?

So, Chris, look, aftermarket is an important piece of the business, as you know. It is -- third and fourth quarter -- it's a seasonal business in Europe. And third and fourth quarter are the -- sort of the higher selling seasons in particular, as the tires get changed for winter and things like that. That's where we see increased aftermarket sales in Europe. So it's a bit seasonal. So it was definitely strong in third quarter. And we sort of -- would expect to see some sort of similar pattern in the fourth quarter.

Okay. Great. And then final from me. You talked about more distribution possibly in the U.S. on the aftermarket side from UNIWHEELS. How -- what's your initial plan there? Is it hiring more sales people? Is it may be acquiring a distribution business? What's your thought on that?

Haven't decided that yet, Chris. Still all of those options under review at this stage.

We'll now take the next question from the line of Vahid Khorsand with BWS Financial.

My first question though, I don't think I heard you give an update on the PVD plant. So if you don't mind maybe you can give us an update on that?

Yes. On track, on budget, plan to launch in '18. So we're doing the trial runs at this stage. Again on track. So look forward to a good launch in 2018.

Okay. And then, the second question, in regards to the North America market, if you are seeing some softness in the shipments, are you getting any push back on the pricing?

We have -- again, I think the way the market works here is, we're negotiating our productivity commitments for 2018. I would say those are in the normal bounds of what's traditionally happened. So we will go through that progress in the next few months, get that settled. So it -- I certainly don't tie that to softness in the marketplace, no.

Okay. And then my last question. We've spoken before about some of these European manufacturers and any contracts you could land in North American market. Any updates on those?

Not quite yet, not quite yet. So we're still, as I mentioned in my remarks, working very closely with them to support their North American operations and in the bidding process -- we are in the bidding process on a number of programs. So I would expect us to update the market on that in January at the conference -- it's the auto conference here in Michigan.

We will now take the next question from the line of Matthew Paige with Gabelli.

Could you speak to the mix of products that you sell into Europe? Is there a similar trend in terms of moving towards a higher mix product there?

Yes. Absolutely. The trends are the same. Larger wheel diameters, more complex designs, more sophisticated finishes, absolutely. And that's -- it's one of the significant advantages that UNIWHEELS has, is they've got a brand-new facility that we've talked about in terms of being ramped up and launched this past year. It has a state-of-the-art paint line. So when you look at the combination of the 2 companies, we have our paint line here in Mexico, which is essentially 2 years old, and then the UNIWHEELS paint line, which is 1 year old. So in both regions, we have state-of-the-art paint facilities.

Great. And then in regards to the UNIWHEELS minority interest, do you have any plans to squeeze-out the remaining ownership there?

Yes. So where we're in that process is, we expect to have the shares delisted by mid-December and then we expect to have the domination profit-loss transfer agreement in place by the end of January. And then at that point in time, we will evaluate the squeeze-out of the minority shares.

Great. And then in regards to your current NOL position, could you just remind us if there is no federal there, there is state NOLs that you currently have in the U.S.?

Yes, the NOLs that you are referring to are in Europe. And it is around our Polish tax credits that we have there on the balance sheet, it's approximately $35 million. You will see that in the Q. And so that's really what you're referring to. And -- yes, and those are all around the economic zone that the facilities are in.

All right. And the last question from me. I was just curious to get your current view on how NAFTA negotiations have progressed. Obviously much of your Mexican production is sold to customers in Mexico. But do you envision any scenario where trade relationships dictate maybe future plant locations?

Yes, I think it's hard to really definitively say given the fluidity of the discussions and what we hear out of them. I think it's important to level-set a little bit in that. We started with the discussion 8, 9 months ago of a significant border tax and now we've moved all the way to the other end of kind of redoing NAFTA and tweaking NAFTA. So I think we have to wait and see exactly how that comes out. I think it's important to also understand the market dynamic where significant majority of the wheels that are used in U.S. assembly facilities come from outside of the U.S., either from Mexico or Asia. So we need to work. Whatever the decisions are that come through on NAFTA, we absolutely expect to have to work with our customers on getting through that decision.

We'll now take the next question from the line of Bo Hunt with Eaton Vance.

Just one question. Apologies, if you already addressed this. The scrap rates at your North American facilities, what were scrap rates in the third quarter and how has that developed so far in the fourth quarter? That's it from me.

So we don't report out scrap rates every quarter. I would say that they still remain high and that's a significant driver of as Nadeem [when] walked through, increased labor costs, increased energy costs and increased other material costs. This past quarter it certainly a result of higher scrap rates. So we're seeing improvement in the base scrap rate. I would say we are launching new products better, but we have a long way to go on both existing and launch products in terms of the scrap rates.

Okay. In terms of -- -- but I guess the trend is towards improving scrap rates. But still a pretty big delta to close with the European facilities?

Yes. Absolutely significant difference, significant difference. And importantly, the European team has been here, we've developed an exchange program where some of our guys in North America will go to visit our guys in Europe to learn from them and see how they do things there and then reciprocal visits to make sure that the processes are taking hold here in North America.

We'll take our next question from the line of Alex Nordgaren with JP Morgan.

Just 2 really from me. One is on the FX impact in your North American EBITDA adjustment, where exactly is that coming from?

I'll give you the high level, and if you need to go deeper, Nadeem can do it. But there's really 2 pieces. One is the hedge program that we put in place and continue to have in place. We put in place probably a couple of years ago, started to hedge peso-dollar and now we're starting to hedge zloty-euro. And then in terms -- and that represents a little more than half of that delta in the quarter and then the remainder of it the -- a structural issue in terms of buying UNIWHEELS, the transaction nature, we had a little bit less than $2 million of benefit on that. So I would think of that as more of a onetime in nature.

Okay. Great. And then on the -- this accounting, the calendar difference of 13 weeks it would be 14 weeks. So I'm clear, in your North American numbers, you've got 14 weeks for Q3 this year and only 13 weeks for last year, is that right?

That's correct.

That's correct.

So then if you were looking at your units shipments are down like 4% while in the reported numbers. But really you want to factor in the extra week, they're more down like 10% in North America, if you were doing like-for-like.

Yes. And so as we went through the slides what we showed on Slide 6, we've adjusted the North American production numbers. It's put in #1. So if you adjust, sort of normalize it, it's roughly the same, it's 4.2% North America down. If you adjust that we are down 4.1%. So it's relatively in line with the market down. And so that's how we're thinking about it.

Okay. All right, I see that. Apologies I missed that one. And then in Q4 then, we're going to have the offset effect. Are you going to -- can you restate them or will you just do this adjustment again?

No. The Q4 should be fine. It's just that this year in 2017, just the way our calendars always work, we had an extra week and so that ended up coming through Q3. As so we've tried to normalize some of that impact here. But in Q4, we should be fine. And this really lines up with all our integration activities, everything is aligned now in Europe, U.S. and Europe now.

Ladies and gentlemen, this will conclude the Q&A as well as today's conference call. Thank you for your participation. And you may now disconnect your lines.

Thank you.

Thank you.