Superior Industries International Inc (SUP) 2024 Q3 法說會逐字稿

Thank you for standing by and welcome. My name is Albert and I will be your conference operator today. At this time. I would like to welcome everyone to the Superior Industries third-quarter, 2024 earnings call. We are joined this morning by Majdi Abulaban President and CEO; Dan Lee, Senior Vice President and CFO (Operator Instructions)

Thank you. I would now like to turn the call over to Dan Lee. Please go ahead.

Good morning and welcome to our third-quarter, 2024 earnings conference 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.

Referred 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 more 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 this presentation.

I now will turn the call over to Majdi to provide a business and portfolio update. Majdi.

Good morning all, and welcome to our third-quarter, 2024 earnings call. Before I begin, I would like to introduce Dan Lee, our new Chief Financial Officer, Dan has over 30 years of global finance leadership experience including several years as an automotive leader with active and cynical.

He joined Superior in 2023 as Vice President of Finance and CFO of our European business where he played a key role in the strategic transformation of that business.

He was also instrumental in the successful execution of our recent debt refinancing. I am proud to welcome them to the executive team. I would also like to thank Tim Trenary, our prior Chief Financial Officer for his leadership and his many contributions to superior over the years. We wish him the best in retirement.

Moving on to our third-quarter results on slide 4, I am proud of our team's performance this quarter solid results in a very challenging demand environment while production at key customers has continued to soften freshly value added sales. We deliver from [EBITDA] our growth and strong markets.

Our performance. This quarter highlights the strength of our competitive position which we have established through the transformation of our global operations, our low cost manufacturing footprint now with all production consolidated in Mexico and Poland gives us a distinct advantage over our competitors who rely on imports from China or production in high cost locations in Europe.

This is actually a powerful combination when combined with our comprehensive portfolio of premier technology supporting customer demand for lightweighting and aerodynamic wheels in Europe and premium larger wheels in North America.

In this challenging operating environment, we achieved a major milestone through the refinancing of our debt, attracting $520 million in new capital and extending our debt maturities to 2028.

We also produced our total debt by $117 million. With this refinancing completed, we have significantly strengthened our balance sheet and competitive standing positioning our company for sustainable long term growth.

That's the results value added sales adjusted for foreign exchange and deconsolidation declined 2% year over year, our performing therefore industry production, which was down 6%.

Our North America business delivered a strong quarter benefiting from earlier wins with Japanese and North America and stronger key customer production volumes compared to the prior year.

This was offset by lower customer production and lower adoption rates in our European, adjusted EBITDA increased 6% year-over-year with margins expanding by 200 basis points sequentially and year-over-year.

This modeling extension was primarily supported by favorable performance including the $7 million benefit in lower conversion costs at our [Polish] facility which by the way was offset with volume declines in that region.

We've also continued to make progress in negotiations with customers on price increases to recover contemplation. However, these recoveries were comparatively lower than the higher year which included onetime recoveries for higher periods.

I am pleased though that we have been successful in negotiating reoccurring price increases with customers to recover inflationary costs.

Permanent price increases are now reflected in more of our contracts as we go forward into 2025. We are also pleased with the successful execution of our transformation in Europe. Despite lower production volumes, we are seeing benefits from this action.

Our customers are recognizing the improved strategic position we have created in our localized local footprint. In fact, we are in advanced discussions with several customers accelerated localized low cost solutions.

We already realize short term wins in both regions with OEM and in the aftermarket, we have delivered sustained margin improvements in recent quarters. Despite industry demand, in fact, industry production has declined worse than previously expected due to key customer shutdowns, higher dealer inventories and vehicle affordability issues.

Overall, we expect a 6% decline in industry production in the second-half of 2024. And this is supported by a recent IHS. In response to challenging industry wide operating conditions, we are taking action to align our global cost structure with the lower production environment and have targeted a 15% reduction in G&A and manufacturing overhead.

We expect these actions to deliver approximately $10 million to $15 million in run rate savings once completed in early 2025.

This will result in a restructuring charge of approximately $9.5 million which will be recorded in the fourth-quarter.

These actions combined with the competitive advantages, we have built through the leading portfolio of technology and our localized footprint will position superior for solid performance and continued margin expansion into 2025.

Now with this declining volume also, we are lowering our two year financial guidance including our expectations for value added sales and adjusted even up. However, we do expect to sustain our improved margin level.

Dan will provide more details on the updated guidance ranges in his comments. I will now address our refinancing in a bit more detail on slide 5, the successful refinancing of our dentist order is a testament to the investment community's confidence in our ability to deliver long term growth.

It is no small piece to have completed this transaction in such a challenging environment. We have significantly strengthened our financial profile, reducing total debt by $117 million and extending our debt maturities to the end of 2028.

Our improved financial position and credit rating solidify our competitive standing as a leading supplier to global OEM with an extensive portfolio and low cost footprint that is unmatched in the industry.

These actions combined with the operational improvements achieved, achieved through our European transformation have reinforced our relationship with our global customers. And in fact, we are in advanced dialogues with several major European audiences that recognize the savings we are able to deliver. Through this transformation in North America, we have lion sites actually to new business wins from two OEMs that need accelerated localization of their supply chain footprint.

With the refinancing behind us, we are now able to fully leverage our competitive advantage to create new momentum for us.

Slide 6 highlights the accelerating momentum of the tailwinds. We highlighted in prior hall, increasingly localized oleum production in the state of long supply chains and geopolitical challenges.

A case in point on the slot. We are highlighting a recent localization win with a Japanese customer in North America. This customer is localizing the supply chain footprint for one of their top platforms in North America with expected production of around 250,000 wheels annually beginning in mid-2025.

In addition, we have had similar success in Europe with a major win in the aftermarket, expecting again to start production in 2025 and anticipating to produce 200,000.

Moving on to slide 7, here we highlight the momentum of improving adjusted margin this year despite declining industry volumes while global production and declined 6%. Since the beginning of this year, our value added sales, our margins have expanded by nearly 600 basis points.

This margin expansion is driven by improvements across the business including the transformation of our European business consolidation of administrative functions and improved fixed cost absorption and manufacturing.

In addition, we have seen improved production efficiencies in Mexico and savings from global SG&A and manufacturing overhead restructure. Overall, these combined efforts have resulted in approximately a 14% global head count reduction today, that said we have not reached the full utilization of our Polish operations, which is necessary to achieve $190 million and adjusted even our run rate that we initially discussed earlier this year, the $190 million run rate assumes an underlying production volume of 15.2 million wheels.

However, as current customer production volumes, we are delivering something more closer to 13.9 million wheels. So despite these lower volumes, the underlying assumption behind the value of our European transformation still stands as we have delivered significantly improved profitability throughout the year which we will sustain heading into 2025.

Moving on to slide 8, which highlights some of our exciting launches in the quarter. These programs highlight the accelerating adoption of our premium technologies, lightweighting larger wheels and exciting premium finishes.

The iconic Porsche Boxster, the Audi A7 and the Cadillac-Optic EV are a few highlights the score. The accelerating adoption of our premium technology is evident by the continued growth in content per week, 34% growth in content since 2019.

In closing, this was a challenging quarter for our entire industry. Our focus all along has been on what we can control. We have transformed our manufacturing footprint. We have rightsized our hospitals and we have attracted capital and gained financial flexibility well into the future.

Fundamentally, we have positioned our business for success. We are delivering solid financial performance and are encouraged by our accelerated momentum with customers in both North America and Europe. In driving new business wins, we will continue to leverage our local for local footprint and portfolio premium technologies to advance our business and support long term growth.

I would like to thank the Superior team for their hard work this quarter and look forward to further progress heading into the new year.

I'll now turn the call over to Dan, to review our financial results in more detail. Dan.

Thank you, Majdi. Before I go over our financial updates for the quarter. I'd like to say how great it is to be here on the call today.

I have been with Superior since July 2023. But in the few short weeks in my new role, it is clear that the team is dedicated, hardworking and aligned with executing our long term vision for the company. I'm excited to be a part of it.

It is also great to partner closely with Majdi and the rest of the leadership team. Let's look at the quarter on page 10, Third quarter, 2024, financial summary as much she stated Q3 was a solid quarter. Net sales were nearly flat at $322 million for the quarter compared to $323 million in the prior year period.

Lower unit sales, the timing of lower price recoveries or what we call lumpy recoveries offset by favorable aluminum cost pass through for the primary changes compared to the prior year period.

Value added sales decreased to $171 million for the quarter compared to $176 million in the prior year period.

Again, lower unit volume and lumpy price recoveries account for the decline compared to the prior year period adjusted EBITDA was $41 million. The associated margin expressed as a percentage of value added sales was 24%.

I will provide color on this in the upcoming pages. For the quarter, net loss was $25 million. The improvement of $61 million was driven by the deconsolidation loss of $80 million recorded in Q3 2023 offset by the cost related to refinancing our capital structure.

The third-quarter, 2024 year over year sales bridge is on page 11. As just mentioned, value added sales declined $5 million compared to the prior year quarter, reflecting the lumpy timing of price recoveries along with the impact of lower unit sales to the far right. The higher cost of aluminum led to a $4 million increase in aluminum costs passed through to customers on page 12 is the third quarter, 2024 year over year adjusted EBITDA coverage adjusted ed quarter increased to $41 million compared to $39 million in the prior year period.

The adjusted EBITDA margin for the quarter was 24% compared to 22% in the prior year period. This increase was due to favorable product mix, the impact of metal timing and to a lesser degree foreign exchange tailwinds and favorable performance partially offset by lower unit sales and price.

An overview of the company's third quarter, 2024 unlevered free cash flow is on slide 13, cash used by the operating activities was $3 million for the quarter compared to cash provided by operating activities of $9 million in the prior year period.

With the decrease driven by a slightly higher investment of working capital as well as the impact of fees related to our refinancing this year.

When adjusted for $4 million in refinancing fees, cash flow provided by operations would have been $1 million for the third-quarter.

Capital expenditures for the quarter was $6 million compared to the $8 million in the prior year period. Cash payments for debt financing activities in the quarter were $18 million compared to $11 million in the prior year period, unloaded free cash flow in the quarter with $9 million a decrease of $3 million compared to the prior year period, primarily due to increased working capital and other balance sheet items.

An overview of the company's capital structure as of September 30, 2024 can be found on slide 14, as mentioned by Majdi in his opening comments in the third quarter, we successfully completed our debt refinancing allowing us to attract $520 million in new capital.

Our new term loan facility now matures in December 2028. This debt refinancing has bolstered our balance sheet improved liquidity and enhance our financial flexibility. This strategic action enhances our financial standing enabling us to optimize operations and positions us for long term success.

Total cash in the balance sheet at quarter end was $24 million. With the completion of our refinancing, the proceeds for the new term loan was used in part to retire $240 million of senior unsecured notes that were due in 2025 total debt was $521 million at quarter end, marking a $117 million decrease since the end of 2023.

Net debt was $497 million and represents a $61 million increase since December 31, 2023, this increase is primarily driven by $33 million in refinancing costs paid in addition to the impact of increased working capital.

Superior's debt maturity profile as of September 30, 2024 is on slide 15. Again, our debt refinancing effectively strengthens our balance sheet extends debt maturities to 2028 and positions us for long term growth as a part of our refinancing agreement, we will begin paying $1.3 million in quarterly payments towards our senior secured term loan beginning in Q4 2024.

The full year 2024 financial outlook is on page 16. As Majdi noted due to the challenging OEM production environment, we are lowering our full year 2024 outlook for the full year. We now expect net sales in the range of $1.25 billion to $1.33 billion and value added sales in the range of $680 million to $700 million. This reduction reflects lower aluminum costs and lower expected OEM production volume.

We now expect full year 2024 adjusted EBITDA to be in the range of $146 million to $154 million. This range was also lowered due to lower anticipated production volume against global OEMs. We expect to deliver unlevered free cash flow in the range of $50 million to $80 million.

The revision to our guide is related to higher working capital and the impact of additional restructuring costs. In addition to these items, our management of unlevered free cash flow has been modified to reflect the liquidity requirements of our new term loan.

With the completion of our debt refinancing, we are focused on balancing the maximization of unlevered free cash flow with the liquidity requirements for a new term loan to enable financial flexibility, capital expenditures are now expected to be $35 million approximately $5 million lower than the prior outlook as we continue to reduce our capital intensity of the business while making strategic investments for growth.

In closing, I want to thank the entire superior team for their hard work. This quarter, we are executing well within a challenging operating environment and are continuing to use our competitive footprint and unmatched real portfolio to capture new growth opportunities. I look forward to continuing to work with the team to make progress on our operational and growth priorities.

This concludes our prepared remarks. I want to thank everyone for joining us today. Majdi and I are happy to take questions.

Gary Prestopino, Barrington Research.

Good morning. Hey, could we, could we drill down on your both, your North American and European market? Is, are the real issues with the declining or production being less than expected? Is that mostly a European phenomenon? Or is that really, you know, split between both regions.

Gary? Actually, it is split between both regions. I mean, we're no different than the rest, Gary. It's a very challenging volume environment for all the tier one suppliers, couple of stats for you, right? You know, if you go back to when everyone guided versus where we're at now, combined regions from a volume standpoint volumes are down in the second-half, 9%. And if you look on a year over year basis, you know, in both regions, actually, they're down 6%

So North America was down year on year, 5% in Europe was down 6.5%. Now, in our presentation, we highlighted that actually our North America business has done very well in our form.

And in Europe, if you make some minor adjustments for the deconsolidation and the ramp up, we're right in line with the market. But collectively if you add those two together with 400 basis points ahead of the market. Now, if you look at the fourth floor, the outlook is quite, quite challenging for the industry. If I got both regions combined, declining 7%.

And if you feel that further, IHS got Europe being down 11% which is quite significant and they got North America being 3%. If you back, if you look at the guide that I shared with you, you're back into what we're looking at in Q4, you know, Q3, we're ahead of market Q4 will be ahead of market, North America will continue. So I performed North America for the entire year. Production in the industry will be down 1.5%. We'll probably be up, we have several points have market North America, you ready to go.

The key point here is I think the whole environment, the margin profile we like, the development on, on Europe. We like the execution, we like the reduction in cost and especially SG&A and overhead. North America. Actually Mexico is doing well from a productivity standpoint.

So that's what converged on these margin expansions, you see. So we are doing 24% in Q3, the high end and the same, you can extrapolate a little bit higher even in Q4 on margins. And as we go into 2025 we expect to continue with this level and improving on this level of margin north of 24%.

Okay. Thank you. And then, Dan, do you have the units shipped on terms of wheels or will you put that in your [que].

Gary on the unit, well, if you look at the, the poor development on the margin side, it shows you the units, we normally don't disclose the units, but we chose to include it. It's on slide 7. But in the queue, we have, we have removed units because our focus Gary has been on, you know, just value added sales and content. I cited several times examples where a suburban wheel is four times the price of a Nissan central wheel. So, you know, using unit and analytics for executing on the strategy can be problematic and cause unnecessary noise. So that's why we backed away from.

Okay. And then lastly, I was trying to write this down, you mentioned that did you another restructuring that you said is going to have the potential to capture $10 million to $15 million of expenses.

That is that is correct, Gary, I would, I would emphasize that is above and beyond that, the execution we have completed in Europe, which by the way, we're going to see the benefit of that even more. It's not fully based in the Q3, Q4 results as we go into Q1, '25 the more savings as a result of your transformation to question, the restructuring is really over headed.

It's global overhead in nature. It is the number we decided we expect, expect to see $10 million to $15 million in even our improvement in 2025. But recall now the volume environment is really challenging here. Actually, more, you know, volumes are done more than anyone expected in my industry.

[In Q1, '25] we wanted to get ahead of it to get ready and we feel good. This is restructuring we're highlighting, we said early '25 by end of this year, it'll happen in and really a new to the bottom line of the company.

Okay. Thank you.

Thank you, Gary.

Michael Ward, Freedom Capital Markets.

Thanks very much. Hey, Majdi, maybe just to follow up on those actions you announced for, I guess the charges in Q4. Where is that centered? Is that North America or Europe? The additional savings.

That's actually, both in North America and Europe. And I would say it is more weighted towards the global operating structure, but then maybe you could add a little bit more on that.

Well, Michael, good morning, the actual execution restruction is actually happening in in all facilities globally. So this is really an attempt for us to resize the organization to adjust to the volume and the challenge of volume activity that we're seeing globally. So we -- we're trying to fit our company into that new environment.

Okay. And so if I'm reading this correctly, then when we get a normalized basis with the actions in Europe, along with this new restructuring, a more normalized run rate on the margin is somewhere in the 26% to 27% range.

Well, I think it depends on what volume assumptions you would have--

No assuming status quo and volume.

You know, I'm getting ahead of it. Listen, it's really excellent margin profile as we go into next year. So we're not providing guidance for '25 yet, but we're saying the second time.

I understand I'm just trying to get an idea of your capabilities is 26%, 27%. Is that out of the question? If things go well.

It didn't go well, but I have no question at all. But, but recall if you look at IHF volumes are going to even be down here on here versus 2024. If we have these volume decline on material line, then your cap are right on like yes, we make wheels. What's well with us when we make more wheels?

Perfect. Dan, I wonder if you can provide a bit more color on the refi what is the rate of the term loan. And when you talk about this $1.3 million a quarter and pay down of the term loan. Is that in addition to interest costs, what, what is, what are the thinking and what were the terms for that?

So the terms on the refi is a silver plus 750-is the interest rate. And in Q3, you'll see in our effective rate was 12.6%. And then the one, the $1.3 million in addition to this part of the principal payment.

Okay. And as we look at your cash flow, I, I think working capital, I think it was about a $30 million, the way I, the numbers that I see, you got about $30 million hung up in working capital and it looks like it's just timing. Should that unwind in Q4? Is that what your assumptions are assumed? Is that what you're assuming?

But that's yes, with the exception, if you saw the, the guidance that we gave on the unlevered free cash flow in the range of the unlevered free cash flow, what you're noticing there is there are complex terms in our new term loan on what our liquidity requirements are and we're trying to manage through those as we as we speak, the breath of that range is on the high end.

If we maximize cash then it would be towards the high end of the range if we need to provide additional liquidity flexibility for Q1 because we're coming off a high cash quarter into a low quarter will be closer to the lower towards the lower end of that range. So we're managing through the liquidity requirements of the new term loan.

Okay. Alright--

Sorry, but to answer your direct question is the expectation on the working capital. Yes, it is timing. We had some pretty sizable revenue and in specifically in the month of September which drove receivables up and we expect those to unwind in Q4

In Q4. Perfect. Okay. And it is any timing on when the [cue] will be filed.

The should be filed later at the end of the day today.

Perfect. Thank you and welcome Dan, congratulations on your position.

Thank you.

Thanks, Mike.

Thanks, Majdi.

Thank you. We don't have any questions on the line at this time. I will now turn the call back over to Majdi for our closing remarks. Go ahead, Majdi.

Thanks again for joining our call today. I want to thank our teams for their consistent execution in a very challenging environment. We have the right strategy in place to drive long term growth for our business and it's centered around our portfolio, our simple customer relationships, our footprint and all the other capabilities we have created. I do look forward to sharing further updates on our progress with you next year and our protocol. Thank you very much for joining.

Ladies and gentlemen, that concludes today's conference call. Thank you for joining. You may now just to connect.