Superior Industries International Inc (SUP) 2024 Q1 法說會逐字稿

Welcome to Superior Industries first-quarter 2024 earnings call. We are joined this morning by Majdi Abulaban, President and CEO; Tim Trenary, Executive Vice President and CFO. My name is Ellen, and I will be your coordinator for today's event. Please note this call is being recorded and for the duration, your lines will be on listen only. (Operator instructions)

Call will be started with Tim Trenary.

I now hand over to Tim Trenary.

Good morning, and welcome to our first-quarter 2024 earnings call. During our call this morning, we will be referring to our earnings presentation, which, along with our earnings release, is available on the Investor Relations section of Superior's website. I am joined on the call by Majdi Abulaban, our President and Chief Executive Officer.

Before I turn the call over to Majdi, I 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. Please refer to slide 2 of this presentation for the full Safe Harbor statement and to the company's SEC filings, including the company's current annual report on Form 10-K for a complete discussion of forward-looking statements and risk factors.

We will also be discussing various non-GAAP measures today. Non-GAAP measures exclude the impact of certain items and therefore, are not calculated in accordance with US GAAP. Reconciliations of these measures to the most directly comparable US GAAP measures can be found in the appendix of the presentation.

I'll now turn the call over to Majdi to provide the business and portfolio update.

Thanks, Tim, and thanks, everyone, for joining our call today to review our Q1 2024 results. I will start on slide 5.

I am pleased to share with you today that the Superior team has delivered on our announced strategic action in Europe as planned. In the first quarter, we successfully exited our high-cost German operations and relocated production to Poland.

Now in my almost 40 years' experience in automotive, this stands out as a one-of-a-kind level of execution in manufacturing transformation in a challenging one. One carried out with precision and teamwork with outstanding collaboration with our customers and with no disruptions or impact on delivery. This will not only provide a significant profitability uplift, but has also advanced our local-for-local footprint to 100% low-cost manufacturers.

In addition, we are well positioned to deliver value to our OEM customers seeking localized de-risked supply chain. With this milestone in the transformation completed, we expect to exit the year with substantially improved earnings power along with a strengthened competitive footprint that no other supplier can offer.

Looking at our broader operating environment, industry production declined 2% in our market and production at our top customers actually declined 8%. While value added sales and adjusted EBITDA were pressured in the quarter due to lower volumes as well as lumpy customer recoveries in fact, and encouragingly, we saw more than 400 basis points sequential margin improvement in adjusted EBITDA on similar volume and value-added sales to Q4 of last year. Tim will provide more color on this.

I would further note that our results in the quarter on a year-over-year basis have been temporarily, temporarily distorted by the transformation. The transfer of wheels to Poland impacted content, cost absorption, and volumes. For example, high volume we have in Germany are temporarily deconsolidated from our figures until we complete the transfer to the Polish facility. We were also impacted by costs associated with the reorganization of our European administration and logistics functions. We anticipate these factors dissipate in the coming quarter.

Our team continues to do an exceptional job with continued focus on cash generation through working capital management and capital prudence. Despite of the actions in Germany, which require temporary safety inventory that is being drawn down as we speak and contraction of supplier terms, our net debt of $439 million remains near historical low.

Further, we maintain ample liquidity, and we're also gaining traction with our pursuit of refinancing and capital structure solutions. We are affirming our guidance for 2024 despite declining industry volumes for the full year. In this regard, as we previously stated, we are on track to see significant improvement in margins in the back half of 2024.

Slide 6 highlights the significant uplift in profitability that result from the completion of the European transformation. Our guide assumes the $165 billion in adjusted EBITDA generation in 2024 at the midpoint. However, with the transformation having been completed in the first half, we expect an improved run rate of approximately $190 million in adjusted EBITDA upon exiting 2024. This significant improvement will be driven largely by low-cost wheel manufacturing at our Polish facility. We will also achieve cost savings via consolidated administrative functions in Europe and overall improved utilization in Poland.

Turning on to slide 7, which highlights the progress of our European transformation in more detail. As we ramp up production in Poland, we will be closing the margin gap between North America and Europe in the second half of the year. We expect to see approximately a $23 million to $25 million in annualized EBITDA [uplift]. We also anticipate a cash benefit as we continue unwinding $12 million in safety stock while recovering $15 million in supplier terms.

We will transfer benefit from higher cost absorption and improvement in our Polish operations. And in addition, we are continuing to improve our overall cost structure in Europe by consolidating aftermarket warehouses and rationalizing [overhead]. We are making progress in our conversations with key customers regarding further cost recoveries for labor and energy inflation. This is in addition to costs already recovered associated with the transformation. Lastly, we feel good about the current portfolio we have in this region in Europe now that we have exited underperforming programs.

Turning on to slide 8 with an overview of our current operating environment. As I mentioned earlier, industry production in our regions is down 2%, while production declines with key customers such as GM and Audi are more pronounced. This, coupled with volume volatility, higher dealer inventories and unfavorable production mix, has created a challenging backdrop. Now despite the challenges, we feel good about the position we have created for our business through our successful transformation. The tailwinds, including industry preference for localization and our portfolio of differentiated technology, which are aligned with consumer preference for larger and light -- and lighter premium wheels will continue to play out. Further, we see further growth tailwind as the average age of the USA carpark is at the historical lows.

Slide 9 provides an overview of Superior's growth compared to the industry in the quarter. In addition to industry production declining 2% in our market, production of our top customers declined 8%, which was driven by launch delays and software issues at these OEM. Our value-added sales adjusted for foreign exchange and the consolidation was down 6%, which is generally in line with our customer mix. The impact of the consolidation of our German operations and lumpier customer recoveries have also impacted our value-added sales.

Moving on to slide 10, which highlights the accelerated adoption of our portfolio of technology. Larger and lighter wheels with premium finishes continue to make up a larger proportion of our launches. This will further drive content growth in the future and more technology applications. We're also highlighting a few launches in the first quarter, including the exciting for Spyder and the GM Honda EV. The right side of the slide highlights the historical trend with long-term content per wheel growth of 31% since 2019.

I'd like to conclude with slide 11 which I shared with you during our last call, a powerful illustration of our competitive position, unmatched capabilities in many ways, strong market leadership. We are a leader in Europe, and we are a leader in North America with the most diversified customer base in the wheel space. We are with the winning OEMs in both regions, unrivalled manufacturing leadership, no other supplier can offer 100% long-haul and local footprint.

And finally, unparalleled technology and portfolio leadership. A broadest and most comprehensive portfolio in the industry. So we are excited about where we are. We have executed on a key milestone that has now culminated in a business that is well positioned for long-term profitable growth. And behind all this is the team delivering exceptional execution. I'd like to thank them all for their hard work and effort and for their results.

Now I will turn the call over to Tim to provide more detail on our financial results.

Tim?

Thank you, Majdi.

A recall on August 31 of last year, we announced an important strategic action for continuation of our local-for-local manufacturing footprint optimization strategy and the transformation of the remaining 6% of our manufacturing footprint to a more competitive cost structure.

More specifically, our production facility in Werdohl, Germany, otherwise known as the Superior Industries Production in Germany or SPG, entered Protective Shield Proceedings, a German court administered reorganization process. Generally accepted accounting principles require that SPG statement of operations and balance sheet beginning with the commencement of the proceeds be deconsolidated from Superior Industries financial statements.

Accordingly, the income statement of SPG is excluded from the first quarter 2024 financial results as is the balance sheet of SPG as of the end of the quarter. The deconsolidation effects the year-over-year comps. More specifically, in the first quarter of 2023, approximately 255,000 wheels were produced at SPG. The associated net sales and value-added sales were $34 million and $21 million respectively.

Year-over-year first-quarter 2024 financial results and therefore, adjusted EBITDA, capital expenditures, and working capital benefited from the closure of that facility. Adjusted EBITDA was [$3 million, capital expenditures and working capital were $1 million and $15 million less], respectively.

We [signed] the step change benefit of the commencement of wheels from Germany to Poland at $23 million to $25 million annual. Capital expenditures should be approximately $10 million less per year. Superior Europe durable contribution margin should approach that of Superior North America, and we expect the cost to complete the wheel transfer to be $20 million to $35 million.

Let's look at the quarter on page 14. First-quarter 2024 financial. Net sales decreased to $316 million in the quarter compared to $381 million in the prior year period. Normalization of the cost of aluminum and deconsolidation of SPG accounts for substantially all of the $65 million decline or $52 million. Value-added sales decreased 200 -- to $172 million for the quarter compared to $203 million in the prior year period. The deconsolidation of SPG and foreign exchange accounts for $21 million of the $31 million decline. Adjusted EBITDA was $31 million and the associated margin expressed as a percent of value-added sales, 18% for the [follow-up] among tariffs. For the quarter, net loss was $33 million.

The first quarter 2024 year-over-year sales bridge is on page 15. As I just mentioned, value-added sales declined $31 million compared to the prior year quarter, reflecting deconsolidation of SPG and lower unit sales. To the far right, aluminum costs passed through to customers was down $34 million because of the lower cost of aluminum, the consolidation of SPG and lower unit sale.

On page 16, first-quarter 2024 year-over-year adjusted EBITDA. Adjusted EBITDA for the quarter decreased to $31 million compared to $45 million in the prior year period. The adjusted EBITDA margin for the quarter was 18% compared to 22%. Lower unit sales, partially offset by favorable product mix and to the far right, lower recovery of cost inflation from customers, partially offset by lower conversion costs on primary reasons adjusted EBITDA decline. The impact of foreign exchange and metal timing on the quarter compared to the prior year period was de minimis.

An overview of the company's first-quarter 2024 unlevered free cash flow is on page 17. Cash flow from operating activities was $4 million for the quarter compared to $39 million in the prior year period. Lower earnings of $29 million, $14 million of which is higher non-cash taxes and lower sources of cash provided by trade payables of $16 million in other assets and liabilities of $7 billion are the primary reasons for the decline in cash flow from operating activities.

Cash used by investing activities for the quarter was $7 million compared to $16 million in the prior year period. Capital expenditures were lower in the first quarter 2024. Cash payments for non-debt financing activities were $5 million, comparable prior year period. Unlevered free cash flow for the first quarter of 2024 was therefore $8 million, a decrease of $26 million compared to the prior year period, primarily because of the lower cash flow from operating activities offset in part by fewer capital expenditures.

An overview of the company's capital structure as of March 31, 2024, may be found on page 18. Cash on the balance sheet at quarter end was $191 million, funded debt was $630 million at quarter end, and net debt was $439 million. Deleveraging the balance sheet and therefore unleveraged free cash flow remains a top priority.

Superior's debt maturity profile as of March 31, 2024, is on page 19. The revolving credit facility was undrawn at quarter end. We are in compliance with all loan covenants. The senior unsecured notes mature in the year. The company has engaged an independent financial adviser to advise on refinancing of the notes. In conjunction with our guide, we'll evaluate refinancing opportunities in the capital markets. It is too early in the process to discuss the capital structure in this process (inaudible).

For the full year 2024, the full year 2024 financial outlook is on page 20. For the full-year 2024, we expect net sales in the range of $1.38 billion to $1.48 billion and value-added sales in the range of $720 million to $770 million. The sales reflect the impact we've had to address underperforming parts of the wheel portfolio, thereby optimizing the profitable utilization of our manufacturing capacity. And light vehicle production in our markets generally consistent with IHS forecasts.

We expect adjusted EBITDA of $155 million to $175 million. However, because of the Europe transformation, we expect to exit 2024 with adjusted EBITDA of approximately $190 million. We anticipate the cost inflation, especially labor and energy will persist. However, we have ongoing dialogue with customers to recovery wheel price [share of inflation]. We expect to deliver unlevered free cash flow in the range of $110 million to $130 million, highlighting the cash generating power of the enterprise. Finally, we expect approximately $50 million in capital expenditures as we strategically invest in our business, in particular in finishing and light weighting capabilities.

We modeled tax expense of approximately $30 million for the year. The tax provision for the year reflects the impact of $18 million of cash restructuring charges in the first quarter. In closing, the strategic action to close SPG in transfer wheel production to Poland is expected to be significantly value accretive to the company. We're very pleased with our team's involvement in this transaction, especially our operations and commercial teams.

This concludes our prepared remarks. Majdi and I are happy to take questions.

Alan?

(Operator instructions)

Michael Ward, Freedom Capital.

Majdi, you've talked about a couple of things with the European transformation. So operations were deconsolidated. When would they be put back in your numbers?

You mean when will the transfer of wheels begin to show up in our numbers, correct?

Okay. So now, but it's deconsolidated. So it's out. So you took those numbers out and when will you -- when will they start showing back up in your numbers, yes?

It will begin to start showing up in Q2 and they will fully stabilize in Q3. Tim?

Yes, that's right. So the financial results of the German facility SPG are out forever, Mike. So now what we're doing as we transfer that production almost over the Poland, the benefit will show up in our existing -- in our remaining financial results.

Okay, got it. And (multiple speakers)--

-- (multiple speakers) the benefit, Mike -- the benefit revenue as well. And if you recall when we talked previously, the German facility had an outsized number of wheels that are much, much higher content. So that will show up as well in metal feed to our content portfolio.

Okay. And then the $20 million to $35 million of cost to complete, that's just showing up on some of these revenue numbers or is that actual? Yeah, how does that -- how do we see that?

Those are restructuring -- by-and-large restructuring or other charges associated with this activity, so you will see that in (technical difficulty) so they are not reflected in adjusted EBITDA. We set them aside.

Okay, that's fine.

German production was down, I think, 8% in the first quarter. And you mentioned about your key customers and everything -- was there something going on in Germany in January and February in particular? And what are you customers telling you for the rest of the year?

Mike, I mean the [VW] -- this is public information. I'm not giving you anything proprietary here. So the VW was down significantly. In fact, albeit just by in sales production lines were down 26%. Now it's really a combination of factors, right? The major factor is disruption. The second one is if you look at the launch cadence of VW Group, especially Audi and Porsche, it's quite front-loaded. Then there are other factor dynamic on China. The imports of Porsche and high-end vehicles into China has been challenging for them and the last piece is obviously no secret that the Chinese are taking share in Europe. That's not the major driver, but that's part of (technical difficulty) --

Okay. So now the schedules they've given you though is that what gives you confidence in the stronger second half?

That's correct. If you look at -- I mean, we look at IHS, Europe is supposed to be down in the first half. Probably Q2 is similar to Q1, a little bit better, but you'll see it beginning to ramp up in the second half and largely again, in my view because the supply chain disruptions will have been passed, but also the launches that I mentioned earlier. So in the second half, you'll see a little bit of growth versus prior year in both Europe actually and North America.

Okay. So in some respects, the timing of your transition was fortunate with German being down (multiple speakers) --

-- (multiple speakers) actually that's an excellent point. I mean the -- no, like I said in my script, Mike, this is no simple undertaking. We have 550 (technical difficulty) These are the most complex wheels we manufacture in the world. There are Porsche wheels, there are Audi wheels. Our consumers are absolutely impressed with the execution. In fact, the Porsche gentlemen there was in our facility stated that it's the first time he has ever seen such a reorganization without disruption. So you hit the nail on the head, Mike. It's been an exciting story, but it's really a measure of the capability of this team at Superior and our ability to actually --

So the second half you get the combination of production coming back online, low-cost facility, get rid of the inventory. So two, three, four things started to really set up nicely late '24 into 2025. That's what you're looking at.

That is well said.

Well, thank you very much. Good luck with it.

Gary Prestopino Barrington Research.

A couple of questions here. First of all, I noticed that you didn't give units by region produced unless I'm missing it. There's a lot of information on both the press release and the deck. Do you have that handy or is that something you're not going to be (multiple speakers)--

Gary, you're asking a very important question is, as we have now completed our transformation in Europe, our focus has always been, Gary, on content. I cited the example, where suburban wheel is could be 5X, say, central wheel, right? So our focus lead is not on how many wheel we make. It's on making the right wheels. The wheels with right contents and right technology and the right returns. So that's why you're seeing a backoff content -- back off putting units in the forefront. But if you go to the queue, you'll find the information there. But in terms of growth and focus, I think the focus in my opinion, Gary, should be on sales and value-added sales. That's what we should focus, but it's (inaudible).

Okay, that's fine.

I just wanted to make sure that something you hadn't pulled back onto it. I still think it's important that you (multiple speakers) those numbers.

And then if I look on page 5 here of the deck, just to understand what's going on. You talked about the impact from the deconsolidation of the Germany production facility, high value wheels I guess that were produced in Germany in the quarter as you've transferred everything, really disrupted production, and there's -- and that's why (multiple speakers)--

No, no, Gary. All I'm saying to you is that our numbers in the quarter do not include those wheels. So all I'm saying is the numbers you see for the quarter here, they do not include. We go to the queue, you asked about the number of wheels we produce, you'll see that those wheels (technical difficulty) in Germany are not included in those data -- in that data. And that distorts our growth. That's all we say.

And then when you consider that those 2,000-some thousand wheels are significantly higher content in wheels that also distorts our content per wheels and our value-added sales.

Okay. It's not included in what you -- you've put out here (multiple speakers)--

Gary, it's Tim. If I may. So I can turn your attention to page 13. So this will help you with the disruption in the year-over-year comps. In 2023, the first quarter of 2023, for example -- can you hear me, Gary?

Mehmet Dere, Deutsche Bank.

Just two quick questions. Just on the cost of $20 million to $35 million for the transfer. Just wanted to clarify, is that cash cost? If so, when is this going to be in the cash flow statement? Because you said you put them aside and will not show up in the adjusted EBITDA.

Right, they are in this -- they're all cash costs at the end of the day and we are at the very end of those cash costs. There's very little yet to spend, you can give some idea of the impact of those. Mehmet, if you look at the reconciliations to the GAAP measures, net income to adjusted EBITDA (inaudible) some indication of what those demand to those cost by period. So (inaudible) for purposes of discussing adjusted EBITDA, we set them aside. They -- (technical difficulty)

Okay, great.

And then well, as I've asked also in the previous calls about the refinancing process. As you also said, you're too early in the process to discuss the cap structure, but you dropped the narrative there where you said in a previous presentation that the refinancing of the notes is likely to involve preferred equity. Is there a reason for the change in the wording or can you give us some color there?

No, (technical difficulty) really. I don't know how he -- refinancing of the notes will -- may have any impact on other elements of the capital structure. So the discussions were ongoing there. We have a complicated capital structure for our company. There's, as you know, the four stakeholders, the preferred equity, the secured debt, the term loan, the unsecured notes and of course, our bank revolving credit facility. So I don't know if that all of those pieces will come together as we focus on the unsecured notes and the preferred equity could very well be a part of the transaction in some form or fashion.

Okay. And then on the timing, since the bonds are becoming current in a few weeks of time, is it likely that you guys will be waiting for the second half of the quarters and so volumes coming back and you will recap the German operations in Poland?

No, no, I would say that we are proceeding as rapidly as is proved and practicable and so we would like to get it accomplished sooner rather than later. We are not targeting any specific point in the back part of the year for sure. And frankly, we'd like to get it done sooner rather than later, to be honest with you.

Okay. Thank you.

Gary, are you back?

I'm sorry. Gary's line is disconnected. There are no further questions on the line, so I will now hand you back to Majdi Abulaban for closing remarks.

Thank you, and thanks, everyone, for joining our call today. Again to the Superior team, thank you for your continued hard work and commitment to the success of our business. We look forward to continuing our momentum to deliver value for all stakeholders throughout 2024 and beyond. Have a great day, everyone.

Thank you for joining today's call. You may now disconnect.