Superior Industries International Inc (SUP) 2017 Q4 法說會逐字稿

Good day, and welcome to the Superior Industries Fourth Quarter and Full Year 2017 Earnings Teleconference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Troy Ford. Please go ahead, sir.

Thank you, good morning, everyone, and welcome to our fourth quarter and full year 2017 earnings call.

During our discussion today, we 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 are Don Stebbins, our President and Chief Executive Officer; and Nadeem Moiz, Executive Vice President and Chief Financial Officer.

I will 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 can 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 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, our Form 10-Q for the quarter ended October 1, 2017, and the company's forthcoming annual report on Form 10-K for the year ended December 31, 2017. For 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, adjusted EBIDTA 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 including with our fourth quarter and full year 2017 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, Troy. Good morning, everyone, and thank you for joining us today.

Starting with Slide 3 of the presentation. We delivered strong financial results in 2017, with net sales reaching more than $1.1 billion with over 17 million units shipped. Value-added sales increased 51% to almost $617 million. And adjusted EBITDA grew 58% to $140.1 million.

For the full year, value-added sales per wheel increased nearly $3 to $36.27. Despite softer year-over-year industry production levels in North America, we saw overall unit shipment outperformance led by the addition of our European operations which included 7 months of results, as well as an improvement in the North American mix year-over-year. We're also reaffirming our 2018 outlook, which we originally provided on January 17 of this year.

2017 marked an historic point in the long-term trajectory of our business. With the acquisition of UNIWHEELS AG, we established our company as one of the largest aluminum wheel suppliers in the world. We're the leading OEM aluminum wheel supplier in North America, the third largest supplier in Europe and the leader in the European aftermarket. Today, we have a diversified and more extensive geographic footprint with almost 50% of our sales now coming from Europe. The strength and portfolio of innovative products, enhanced manufacturing processes that will allow us to drive manufacturing improvements across our footprint and more diversified relationships with global OEMs in North America and Europe. As a result, we're now better positioned to compete and serve our global customer base with a broaden portfolio of differentiated technologies and capabilities.

Turning to Slide 4. Over the last several quarters, we have communicated several priorities as we look ahead for our business. To date, we have made significant progress and I now would like to provide additional details on these initiatives before turning the call over to Nadeem.

First and foremost we continue to position ourselves to capitalize on the secular tailwinds in Europe and North America, including increasing wheel diameters, the growing importance of lightweighting and the move towards more sophisticated designs and finishes.

In 2014, 13% of Superior's product portfolio was 19 inches and larger in diameter. Today, this group makes up 70 -- 17% of our current volume, and by 2020, 19-inch and larger wheels are expected to represent more than 1/3 of our global product portfolio. Additionally, the need for lighter weight wheel designs is becoming increasingly critical for our customers to meet fuel efficiency standards and in the case of electric vehicles to achieve their vehicle range objectives. In late 2017, we received our first patent for our lightweight wheel design and our first wheel will launch in 2019 on a North American program.

Based on the strong interest and positive feedback received from our customers, we expect additional growth opportunities with this technology.

Second, we're expanding our customer opportunities by providing solutions to the evolving needs of our global OEM customers. We have the benefit of a fresh set of eyes, our R&D perspective with the merger of 2 excellent engineering teams. As our teams come together, our combined technical expertise offers innovative solutions to our customers and in turn provides opportunities for expansion.

We continue to make additional investments in new technologies and capabilities to ensure we're ahead of the industry trends and bringing relevant solutions to our customers. We are also continuing to focus on building a best-in-class organization and are seeing solid improvement from the organizational changes that we made since mid last year. More specifically, in our North American manufacturing operations, we are seeing progressive improvement. Production levels at each of our facilities in Mexico has improved, quality incidents are down substantially from last year and scrap rates are at the lowest in the year. We recognize that to achieve our objectives, 1 quarter or 1 month in the right direction is not enough and we continue to focus on making ongoing improvements.

Lastly, we're committed to further driving margins and improving cash flow. The manufacturing initiatives coupled with the growing percentage of our product towards larger diameter wheels and premium finishes lead us to expect to see positive margin expansion over the next several years.

Looking ahead, I believe we're in an 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 turn the call over to Nadeem.

Thank you, Don, and good morning, everyone. I will now provide a more detailed overview of our financial performance for the fourth quarter and full year 2017.

Moving to Slide 5. North American light wheel production levels for 2017 were down roughly 4.3% compared to 2016. This was mainly driven by decline in passenger car sales. Superior's North American shipments were down approximately 6.4%, which was also driven by lower passenger car sales. More specifically, we supply certain customer programs that were down more than the overall market.

European light vehicle production grew 0.3% on a year-over-year basis. Our European shipments increased by 9.2% as we grew with the market and ramped up our newest facility in Poland.

On Slide 6, you can see our fourth quarter 2017 financial summary. Total unit shipments for the quarter were 5.4 million, up 2.3 million units from the fourth quarter of last year. Net sales were $361.8 million compared to $188.3 million last year. Value-added sales were $203.5 million compared to $106.4 million last year. I will provide additional commentary on changes in sales as we get to the sales page.

For the fourth quarter of 2017, we reported a net loss attributable to Superior of $4.6 million or $0.50 per diluted share. This includes $5.2 million or $0.21 per diluted share for one-time acquisition-related expenses and the revaluation of preferred equity conversion option that is part of the capital structure post acquisition. As a reminder, this conversion option will be revalued on a quarterly basis.

In addition, for the quarter and year ended December 31, 2017, company's net income includes a provisional income tax expense related to the impact from the U.S. Tax Cuts and Jobs Act of approximately $16.6 million or $0.67 per diluted share. This is comprised of $9.3 million related to one-time transition tax in foreign undistributed earnings and $7.3 million related to the remeasurement of our deferred tax assets.

(inaudible) few other points to highlight from the full P&L that you can reference in the appendix. SG&A expenses for the fourth quarter of 2017 were $25.9 million compared to $6.9 million in the prior year period. The increase is primarily due to the inclusion of our European operations and one-time costs related to integration totaling $7.2 million. Interest expense for the fourth quarter of 2017 was $11.6 million. And depreciation and amortization was $23.5 million.

In summary, SG&A excluding integration, interest expense, and depreciation and amortization expense during the fourth quarter are good reference points in terms of current run rate.

Now let's take a closer look at sales for the quarter on Slide 7.

Net sales for fourth quarter of 2017 were $361.8 million compared to net sales of $188.3 million in 2016, an increase of $174 million. $171 million of this increase was due to the addition of our European operations and $3 million came from North America. The increase of $3 million in North America was driven primarily by higher aluminum prices, which is a pass-through offset by impact of lower volumes.

Turning to Slide 8. Adjusted EBITDA for the fourth quarter of 2017 was 48 -- 408 -- $48.9 million compared to adjusted EBIDTA of $18.7 million in 2016, an increase of $30.2 million driven by $28 million from our European operations. In North America, we had the impact of lower volumes, positive FX and improving year-over-year cost performance. As Don noted, while we've more work to do, we're seeing steady, sequential improvement in overall operating efficiencies in North America.

On Slide 9 let me walk you through cash flow. For the fourth quarter of 2017, cash from operating activities was $46.5 million. We continue to identify initiatives to enhance cash generation opportunities from working capital management and global tax planning. CapEx was $14.1 million during fourth quarter of 2017. This includes CapEx for our European operations. In addition, we purchased 5.5 million in outstanding shares from minority shareholders of UNIWHEELS, bringing our total ownership to 94.1%. During the fourth quarter, we paid $2.2 million in common dividend and $3.9 million in preferred dividends.

In terms of liquidity, at the end of fourth quarter, we had ample liquidity as we had no drawings on the roughly $195 million available under our U.S. and European credit lines.

Our long-term target leverage ratio remains at 2x net debt to adjusted EBIDTA by 2020.

In the next few slides, I will cover full year 2017 performance. Turning to Slide 10. Net sales for the full year were $1.1 billion compared to net sales of $732.7 million in 2016. As you can see on the bridge, increase of $375 million is due to the addition of our European operations. North American sales were relatively flat as a result of lower volumes, offset by higher aluminum prices.

Turning to Slide 11. Adjusted EBITDA for full year 2017 was $140.1 million compared to adjusted EBITDA of $88.5 million for 2016, an increase of $51 million. The increase in adjusted EBITDA was driven by inclusion of $61 million from our European operations.

North American adjusted EBITDA decreased by about $10 million on a year-over-year basis. This decrease was driven by lower volumes in specific programs, negative performance in the first half of 2017 and favorable impacts from FX and timing of aluminum flow-through.

And lastly on Slide 12, let me take a moment to walk you through our full year 2018 guidance, which we reaffirm today.

We expect unit shipments of 21.25 million to 21.6 million and net sales to be in the range $1.45 billion to $1.5 billion. The increase in sales for 2018 includes a full year of European operations, volume growth in Europe and full ramp-up of our facility in Poland relative to 2017.

In terms of value-added sales, we anticipate a range of $800 million to $835 million. And we expect 2018 adjusted EBITDA to be in the range of $185 million to $200 million. Capital expenditures are expected to be approximately $95 million, which includes maintenance and growth. Cash flow from operations is expected to be between $160 million and $180 million. We also anticipate our effective tax rate to be in the 10% to 15% range.

Note for 2018, the impact from the accretion of our preferred stock is expected to be at similar levels to the fourth quarter of 2017 on a quarterly basis. In addition, we expect one-time acquisition related cost to be in the $3 million to $5 million range.

Finally, I would like to highlight our longer-term goals. By 2020, our goal is to achieve value-added sales of approximately $950 million, adjusted EBITDA margin as a percent of value-added sales of 25%, and net leverage of 2x.

And with that, I would like to turn the call back to the operator for questions.

(Operator Instructions) We will take our first question from Gary Prestopino from Barrington Research.

Couple of questions here. Number one, Don, you mentioned that you're making progress in Mexico. Are you like in the seventh or eighth inning there? Or are we still like in the third inning in terms of getting it to where you want to be?

Yes. I would say this, Gary, we're in the third inning. We came out of the holiday shutdown the best since I've been here. Production levels are stable and on plan. Both quality and scrap are improving. Cost controls that we put in place are having an effect. Employee turnover is down substantially from the beginning of last year. So a lot of trends moving in the right direction. But still early stages from where we want to get to.

Okay. So given that you are anticipating seeing an improvement throughout the year for your North American operations, given that it looks like you're doing more passenger cars than light trucks, do you think that you'll be able to see an increase in adjusted EBITDA year-over-year? And I'm not going to -- I'm not asking for any kind of magnitude. I'm just trying to get an idea of directionally what you guys are thinking for North American operations.

So in the fourth quarter, light truck I think was about 56% of the revenue in North America. The number of wheels and passenger car was 27% and the crossover's was 17%. So I would say more heavily weighted to the light truck area. In terms of margin improvement throughout the year, if it was a static level of launches I would say, yes, we fully expect that in North America and year-over-year we expect margins to be up in North America. That's going to be impacted though by the number of launches that we have in the second quarter. And so depending on how those launches go with our customer in terms of their ramp-up and the schedules that will impact the sequential quarter-over-quarter margin look.

Okay. And then, lastly, when is that PVD facility scheduled to come online or is it already online?

It should be starting -- it's one of the launches in the second quarter. So we're starting to run product through there now.

And our next question is from Chris Van Horn from B. Riley FBR.

So when I look at the 2020 revenue outlook, are you kind of using basic industry forecast for production and then overlaying some of the things you see in the pipeline? And do you have any sort of variable for adoption of higher -- bigger rims in that forecast? Just kind of trying to piece apart how you get to that 950 number.

So we do use the industry volume outlook, IHS, in particular. And then we also use our look at the backlog, so to speak, that we have the programs that we won. And so, as an example, 18 inches and below in terms of wheel diameters in 2017 for the combined company was about 85%. We think in 2020 that's going to be somewhere in the 65% range. So absolutely we're going from 15% 19 inches and above in 2017 or around that number to, call it, 35% in 2020, plus or minus a percentage point.

Okay, perfect. And then are there -- is that kind of driving the growth in the margins for the same outlook? And then a little bit, could you get into some of the puts and takes for your guidance for 2018 on margins, because what has to happen to get to that 24% level?

Yes. So I will do kind of the longer term 2020 look. Certainly, the -- as we've been talking about for a couple of years now, the shift in larger wheel diameters and different axis and more sophisticated finishes adding pad printing or PVD, those types of things certainly play a role in the ability to increase the margins. I would also add that the synergies of the acquisition also start to really kick in that 2020 time frame, and you also have a better performing operation in Mexico along the way as well.

Okay. Got it. And then last one from me. I think some of your larger programs are slated to change over here in the coming years. And I just was wondering do you see kind of a short hiccup in downtime and maybe margins get affected there? But is -- just some idea of the cadence of when those new launches happen. Is there any big -- is there any disruption to operations that we should be thinking about?

Largest launch near-term is the T1 that's beginning this summer for us. And so our guidance incorporates that, I think. The only hiccup let's assume that we launch well and then the hiccup would be if General Motors has some issues with the launch. We built in kind of their launch schedule and we expect them to be on that track or better. And so really then it comes down to our performance in launching the vehicle.

Our next question is from Hamed Khorsand from BWS Financial.

Question on going back to the ARPU. Looks like your North American ARPU from Q3 went down in Q4. Is that because of the volume mix?

I'm sorry, I didn't catch it, I'm sorry.

Repeat your question please.

The ARPU in North American production seemed to have come down in Q4 from Q3. So is that because of the production mix you were just talking about?

Okay. I think you are referring to value-added revenue per unit. Is that what you're referring to?

Right.

Right. Okay. Sure. So if you look at revenue per unit or value-added sales per unit for North America, on fourth quarter '16 versus '17, is relatively flat, so that's the value-added sales per wheel. I think that's what you're referring to. So on a year-over-year basis, it's flat in North America. Clearly, when you look on a combined company basis, when you look at sales per wheel -- value-added sales per wheel on a combined company basis, there is a big uptick. It's almost $3.75 or so, because of the European add and the accretion there.

So from Q3 to Q4 it went down just a little bit. And I'm trying to figure out is that because of shipping more units for passenger vehicles than before?

Yes. That's correct.

Okay. And that is the trend that's going to reverse -- has that reversed in Q1? Or is it looking to reverse in Q2?

Well, the best view is the 2018 view, we have shown. And so if you look at that, for the full year, we're feeling pretty good about our mix of our trucks and crossovers. And so we would expect for it to continue to increase on a year-over-year basis. And so I wouldn't get hung up on the Q3 to Q4.

I think as you look at the product that we're launching in the back half of this year, there is substantial added value on those programs. So you may see relatively flat Q1 and Q2. But I think in Q3, Q4, there should be an uptick in the value-added sales once those products launch.

Okay. And then just one more question, and it's more of a macro question. Both North America and Europe, there are macro factors going on. Here we have the tariffs, there we have Brexit coming up. If you could just give us an overview of how you think those may or may not affect you?

I think near-term what we've seen is some choppiness in North America. Europe remains on its 1% to 2% growth trajectory. As we look at North America inventories, the customers are at healthy levels. The economies are fairly robust. The average car park remains at all-time highs. Unemployment levels are strong. So what we would say regarding, let's say, the tariff situation here is that remains fluid. But bottom line it's not a significant issue for us in that the aluminum tariff applies to primary aluminum and wheel import codes are not subject to the tariff. A little more detail around that is that we have 1 manufacturing plant in the U.S. which manufactures about 10% of our North American wheels and they receive most of their aluminum from Canadian suppliers, which are exempt from the tariff. In terms of Brexit, I think that, that remains to be seen. We don't expect a significant impact there. Substantial portion of our revenues are generated from Germany, and we are manufacturing in Germany and Poland. So I wouldn't -- I don't think there is a significant disruption there.

Do you think on the Brexit side, any changes there might impact European volume sales?

No, I don't think so. I mean all the forecasts that we've looked at and what we've seen in the past few months is that European volumes continue to remain quite strong with kind of a 1% to 2% increase over the next couple of years each year.

Our next question is from Brian Sponheimer with Gabelli.

I want to stay on the tariffs. I'm wondering taking maybe a look in the other direction, is there a market share opportunity for you to potentially grab some share away from imported wheels which are actually going to have higher costs potentially associated with them? Or is this entirely -- go ahead.

It's -- today the way the tariff is structured, it's essentially entirely primary aluminum. And so a wheel from China, a wheel from Mexico is not impacted at all from the tariff that's been put in place.

Okay. So strictly raw material, not finished goods?

Correct, correct. Not on the components, so to speak. That's correct.

Away from that, the stub for UNIWHEELS, can you talk about the mechanics on the domination agreement there and what needs to take place for full conversion?

Yes. So today we own -- as Nadeem mentioned in his remarks, we purchased some more shares last quarter. We're at 94.1%. The domination agreement is in place. The delisting has occurred. We're receiving, I would call it, dribs and drabs of shares coming in. The shareholders have the right at any point in time to flip their shares to us at EUR 62.18. And then we have our choice to try to squeeze out the minority and there's 2 different paths to that. One is if we own 95% or greater, one is a different path if we own 90 -- less than 95%. There are some tax considerations that apply here that's probably more advantageous for us if we were to go down or squeeze our path that we get to 95% first before we do that. And those are the types of things that we're examining. At this point in time we're comfortable where we're at in terms of -- we can stay at 94.1%. That's fine. It doesn't create any operational issues for us at this level with the DPLTA in place.

(Operator Instructions) We will now take our next question from Richard Phelan from Deutsche Bank.

I've 2 questions actually. Just wondering if you could give us an update in terms of the ramp-up of the new Polish site. And then, secondly, the interested area or views in terms of your -- the new competitor plant in Michigan that's having an impact in terms of North American pricing?

Okay. Regarding Poland Line 3, as we refer to it, up and running 100%. No issues. Doing very well as we would have expected. Yes. No issues there. In terms of the Dicastal plant in Western Michigan, haven't really seen any impact in pricing as a result of that. Again, we have been battling Dicastal and Prime and the other competitors for many, many years. And I would say it remains very competitive in this part of the industry and we compete in there every day. So it really hasn't changed. I think maybe for the customers, there's been a shift. Dicastal has probably shifted some of their production from certainly their larger wheel production from -- shipping from China to Western Michigan to save some money on transportation cost would be my guess.

There are no further questions at this time. I'd like to turn the call back to yourself for any additional or closing remarks.

Great. Thanks, Tracy. And thank you everybody for joining us on the call today. Appreciate it. Thank you. Have a good day.

Thank you.

This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.