Superior Industries International Inc (SUP) 2021 Q3 法說會逐字稿

Good day, and welcome to the Superior Industries Third Quarter 2021 Earnings Teleconference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Clemens Denks. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to our third quarter 2021 earnings call. During our discussion today, we will be referring to our earnings presentation, which along with the earnings release is available on the Investor Relations section of Superior's website.

I'm joined on the call by Majdi Abulaban, our President and Chief Executive Officer; and Tim Trenary, our Executive Vice President and Chief Financial Officer.

Before I turn the call over to Majdi, 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. 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 more complete discussion of forward-looking statements and risk factors.

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

With that, I'll turn the call over to Majdi to provide the portfolio and business update.

Thanks, Clemens, and thanks, everyone, for joining our call. I will begin by providing an overall summary of our results on Slide 5.

This quarter, as you are probably aware, we saw unprecedented industry volume declines and volatility caused by OEM chip shortages and other supply chain constraints. At the same time, inflationary pressures drove raw material prices higher, particularly aluminum and impacted other cost factors. Our team responded with agility by executing on several cost reduction actions as well as commercial initiatives to protect our margins, this while maintaining laser focus on our long-term value creation road map.

Despite these headwinds and with markets declining 28%, we reported another quarter of sustained double-digit growth over market, 13% growth over market to be specific. Superior is capturing the accelerated demand towards premium content driven by secular tailwinds, including electrification, CO2 reduction and vehicle differentiation.

A case in point, 19-inch and larger wheels represented more than 48% of our OEM shipments in the third quarter. Further, our commitment to expand our product portfolio continues through various product launches that I will discuss later.

For the quarter, we delivered $30 million in EBITDA. The year-on-year decline is attributed to the 20% decline in our unit volumes. Further, the rapid increase in the cost of aluminum and volatile schedules have increased our working capital, which we expect to normalize over time.

While the industry is being impacted by severe volume declines due to supply chain disruptions, we believe that the underlying consumer demand for vehicles is very strong. And as transitory headwinds subside, we expect strong growth across the industry to fulfill backlog and pent-up demand, a tailwind, we are well prepared to capitalize on.

For the full year, we have adjusted our outlook to reflect lower industry production volumes. We are narrowing our adjusted EBITDA guidance to the low end of our previous range and adjusting cash flow guidance to reflect escalating commodity costs. Our refreshed guidance reflects the same EBITDA margins of 22% at midpoint, and is in line with our guidance provided at the beginning of the year. I will discuss this in more detail in a later slide.

Overall, our team continues to demonstrate remarkable ability to remain nimble and flex costs to match declining volumes.

Slide 6 specifically highlights the severe OEM schedule volatility and volume declines we experienced during the quarter and the expectation for the remainder of the year. This is reflected in the IHS volume on the right side of the chart. At the same time, an increase in global demand, combined with supply constraints such as delays at ports and energy shortages in China, have driven significant increases in aluminum prices and to a lesser extent other costs, impacting our cash flow and profitability. Tim will provide further details on this.

In addition, our operations in Europe were impacted by a partial shutdown of our German manufacturing operation earlier in the quarter that was caused by severe flooding in the city of Werdohl. While we anticipate strong tailwinds from pent-up demand as well as the move to premium wheels, we expect the macro challenges impacting the industry to persist for the balance of 2021.

Slide 7 highlights industry production across our manufacturing regions. Our value-added sales were down 16% compared to the prior period, but still represent 13% growth over market. We have continued a legacy of consistent growth over market for several years now.

We are responding on multiple fronts, as highlighted on Slide 8, with measures to flex manufacturing costs at our operations, to exercise commercial discipline, to reduce cost and to ensure prudent capital and inventory management. In a post-COVID world, we have a tried-and-true operational playbook that we are putting into action.

Our response included temporary layoffs in Mexico, short-time work program in Germany and hiring freezes. We are also prudently planning operating volumes based on experience and visibility on the ground so that we can most efficiently meet the production needs of our customers and avoid inventory pileups.

We are also focused on commercial discipline by ensuring timely recovery of aluminum escalation in line with our contracted terms. Furthermore, our forward-looking purchasing execution has provided protection against the recent manufacturing cost increases.

At the same time, we remain focused on continuous improvement at the enterprise level. As an example, just last week, we had our first class of Six Sigma Black Belt graduates in Mexico. This is an important milestone in creating a continuous improvement culture across our entire enterprise.

Lastly, we are reprioritizing capital expenditures and are further adjusting production levels to align with our customers' conservative production schedule, which will enhance our cash flow.

Slide 9 highlights our long-term initiatives that are critical to driving profitable growth. A key component to our continued growth over market is our differentiated portfolio of products. We continue to innovate and produce technologies that capture the secular tailwinds of tomorrow, including expanding upon our electrification portfolio of lightweighting and aerodynamic features as well as advancements in our more sustainable products such as PVD technology, which I will speak to later.

Slide 10 further highlights the attractive space where we have positioned our business. The automotive wheel industry continues to shift to premium wheels, and this shift is expected to accelerate over time. Here, we are incredibly well positioned with one of the broadest portfolio of premium products, larger, lighter and more aerodynamic wheels with premium finishes. This will ultimately continue to drive more content for Superior.

Here is another proof point on Slide 11 of how our portfolio of differentiated technologies continues to globally be recognized. Our award-winning PVD technology we previously discussed is an environmentally friendly, highly durable, complex coating process that offers an average mass reduction of 10 pounds versus chrome, improving fuel efficiency and reducing CO2 emissions.

It has passed some of the most demanding stress tests the auto industry has to offer. I am pleased to report that this technology has gained approval from a second major North American OEM. This is a testament to Superior's innovation and differentiation and is the foundation for future sustainable growth over market.

Slide 12 makes the case further and showcases some of our product launches for the quarter, our content on Audi, Aston Martin, BMW and other models. Once again, these launches speak to the continued adoption of our portfolio of differentiated technologies. For example, 7 of the 9 launches you see on this chart have large wheels. 8 are premium finishes. 6 are electric vehicles. And 8 have lightweighting technologies. Fundamentally, our portfolio of technologies continues to be a competitive advantage.

I will now address our full year outlook on Slide 13. Our outlook has largely been affected by unpredictable decline in production in both regions, North America and Europe. As such, we are narrowing the range for adjusted EBITDA to the range of $160 million to $165 million for the year and expect cash flow from operations to be $25 million to $55 million at the end of 2021.

As I mentioned earlier, our narrowed adjusted EBITDA guidance represents an EBITDA margin in line with our guidance issued earlier this year, despite a 9% decline in unit shipments, underscoring the strength of our team and their execution in an incredibly challenging environment. While we anticipate supply chain headwinds and rising raw material costs to persist through the remainder of the year, we believe these challenges are temporary. As conditions improve, we expect overwhelming demand across the industry to fulfill backlog and support pent-up demand.

In conclusion, I am pleased that the continued response of our team to this very, very challenging environment we're facing. I am confident that once economic conditions return to normalcy, Superior will capitalize on the pent-up demand for our portfolio and the continued secular trends for premium content. I would like to thank the entire Superior team for their hard work this quarter, and I look forward to finishing the year off strong.

I will now turn the call over to Tim to walk through the financial results. Tim?

Thank you, Majdi, and good morning, everyone. This quarter's financial results include another consecutive quarter of growth over market for Superior despite supply chain disruption within the auto industry.

The global semiconductor shortage has increasingly impacted our customers' vehicle production, especially the number of vehicles manufactured and the stability of production schedules. This, in turn, has affected automotive suppliers' top line and manufacturing costs.

Furthermore, certain commodity costs and utility and freight costs are up. Superior is not immune to these challenges. However, manufacturing and administrative cost structure actions have permitted the company to protect margins to the extent practicable.

By way of example, temporary layoffs, a short-time labor program in Germany and a hiring freeze are contributing significantly to minimizing labor costs. Other step changes to the cost structure have been implemented and more are being considered.

But we intend to strike a balance here. We do not want to unduly compromise the ability of the company to respond should light vehicle production surge post the semiconductor shortage. Our ECI program, or enterprise cost improvement; and our Lean Six Sigma program, what we call continuous improvement, both launched late last year and are gaining momentum and driving waste out of our company.

Absent these programs, Superior's financial results would have been more adversely impacted by the current business environment. Perhaps more importantly, these programs, when coupled with the company's sales growth over market trajectory, should bring value accretion to our stakeholders in the future.

Our financial results on Slide 15 reflect the difficult business environment in which Superior operates today. Unit shipments decreased year-over-year by 20%, with net sales down 2%, resulting in a 16% decline in value-added sales. The company delivered $29.8 million of adjusted EBITDA on $162.2 million of value-added sales, a margin of 18.4%. We reported net loss of $7.2 million or a diluted loss per share of $0.61 compared to net income of $11.1 million or earnings of $0.12 per diluted share in the prior year period.

Slide 16 is a year-over-year sales bridge. The associated adjusted EBITDA bridge is on Slide 17. Both bridges reflect the lower vehicle production. On the sales bridge, to the far right, the magnitude of the cost of aluminum in the Q3 2021 sales bar. Compared to the same metric in the left most bar, the Q3 2020 sales, almost 20% higher than 2021. This is finding its way on to the balance sheet in the form of higher investment in working capital.

On the EBITDA bridge, the company benefited year-over-year from high-cost aluminum in inventory last year coming out of the COVID-19 shutdowns, and the inability, at that time, to pass those inflated aluminum costs through to the OEM. Also on the EBITDA bridge, year-over-year results were adversely impacted by COVID-related temporary cost structure actions coming out of the shutdowns that remained last year in the third quarter and also manufacturing inefficiencies arising from the difficult business environment today, more specifically lower vehicle production and unstable OEM production schedules.

Slide 18. Free cash flow for the quarter was negative. Most noteworthy, as depicted on Slide 19, the size and impact of the higher cost of aluminum on working capital and, to a lesser extent, higher finished goods and work-in-process inventory from the unstable production schedule at approximately $50 million. Were not for this, net debt would have been flat. This should be temporary. That is the high cost of aluminum and supply chain disruption impact on production schedules should normalize in time. Moreover, this will result in a release of working capital in the future with an [automatic] boost in cash flow.

The company's capital structure is outlined on Slide 20. Funded debt was $624 million at quarter-end, cash on hand $76 million. Net debt was therefore $548 million. Deleveraging the balance sheet remains the key objective. As of September 30, 2021, liquidity, including cash and available amounts under our committed revolving credit facilities, was $273 million.

The debt maturity profile is depicted on Slide 21. The company is compliant with all loan covenants and has no near-term maturities.

Moving on to the full year 2021 outlook on Slide 22. We are adjusting 2021 guidance due to the significant decline in light vehicle production expected this year, the impact on manufacturing operations of unstable production schedules and the about 50% increase in the cost of aluminum. This refreshed guidance assumes somewhat lower light vehicle production in the fourth quarter than what IHS has advertised. It also reflects the elevated cost of aluminum today.

Accordingly, we now expect real unit shipments in the range of 15.6 million to 16 million, net sales in the range of $1.33 billion to $1.36 billion, value-added sales in the range of $725 million to $740 million and adjusted EBITDA of $160 million to $165 million, the lower end of the EBITDA guidance at the beginning of the year.

Using the midpoints of the ranges, the refreshed guidance reflects the same EBITDA margin as at the beginning of the year, that is 22%, on a 4% decline in value-added sales and a 9% decline in unit shipments. I'm pleased with this margin protection.

Cash flow from operations is expected to be in the $25 million to $55 million range, significantly below our prior guidance, primarily because of investment in working capital due to the elevated cost of aluminum. We expect approximately $75 million in capital spending for the year, some of which is carryover from 2020. This investment is largely for extending our premium wheel finishing capabilities and expanding premium wheel manufacturing capacity.

A small portion is for repairs to our German facility, a victim of the floods in Europe earlier in the year. We model a 35% to 45% effective tax rate for the year and $10 million to $13 million in cash taxes.

In closing, I'm pleased with the manner in which our facility management and operators, the men and women who make our wheels in these challenging times, have risen to the occasion. And although we expect the semiconductor shortage and other supply chain disruption to persist heading into 2022, we believe lower dealer stocks and pent-up vehicle demand will support industry recovery in the not-too-distant future, which we intend to be prepared to capitalize.

With that, I'll turn the call back to you, Majdi.

Thanks, Tim. I'd like to turn it over to the operator for Q&A now.

(Operator Instructions) Our first question comes from Gary Prestopino with Barrington Research.

Could you guys possibly explain a little bit more of this whole issue with metal timing, price increases in aluminum? My understanding was that this was just a pass-through, but it seems to me in some of your narrative that at least on a working capital basis, it's certainly a bigger use of working capital than it had been in the past. So could you just explain how that all works?

Sure. It's Tim. I'm happy to do so. We have what I would characterize as very effective mechanisms [agreeing] with our OEMs in both North America and Europe to pass rising or declining cost of aluminum through to them as they occur. So therefore, the effect of changing aluminum prices on the P&L is not very great at any point in time. However, to the extent aluminum costs go up, they -- those increased costs are resident in our working capital. More specifically, they will reside in inventory and receivables and, to some extent, are offset in payables to the extent we're able to [spend] this money.

So while there's very little impact on the P&L, there can be an impact favorable or unfavorable on the balance sheet and working capital. And that's the environment that we're in today. Just to give you an idea, aluminum was about, round numbers now, $2,100 per metric ton at the beginning of the year. It rose to as high as $3,150 a couple of weeks ago, and it's pulled back a little bit to $2,900. So it was up as much as 60% a couple of weeks ago and today is about 40%, so on average, about 50%. Very little impact on our income statement, but an impact on our working capital.

So you said you think this whole issue with aluminum prices or aluminum will begin to normalize as we go forward. Is that just a function of flows in and out will equilibrize? Or are you anticipating that aluminum prices are going to come down?

I anticipate that aluminum will be as it has in the past, and that is when there's some shock to the global economy. Generally, aluminum will go up or down dramatically, but it will over time, I think, as the supply chain disruption is behind us and other disruptions, I believe it will normalize back towards a number, I think, more closer to $2,000 a metric ton. So I think what we're experiencing today is an aberration. It's temporary.

Okay. And then, Majdi, on Slide 12, you went through all of your new product launches, but I couldn't write it down fast enough. You said 7 of the 9 were larger wheels, which I assume are 19-inch or greater. And then you had -- 8 of the 9 were what, 6 of the 9 were what, 8 of the 9? There was just some things there that I couldn't capture.

Yes, sure. So we said 7 of the 9 have larger wheel sizes, Gary. 8 have premium finishes, 6 are electric vehicles. And 8 of the 9 have lightweighting technologies.

Okay. So you're still seeing a good proliferation there. And then the key would be you got -- I am sorry, go ahead, Majdi.

Yes. No, the adoption continues to exceed our expectations. It's a very exciting space.

That's great to hear. And then lastly, you said you got PVD approval from a second major OEM. Are you actually producing wheels now with PVD? Or are you waiting for doing business on...

We absolutely are, Gary. We -- this product has been on the F-150 since January 2020 and actually won an award from Ford, Global (sic) [World] Excellence Award. Subsequent to that award from Ford, it's qualified as a finalist in the PACE Awards, which is the highest innovation recognition in automotive industry, in the fourth quarter. So we were a finalist, which is really a great recognition of Superior as a technology company. And now, the most -- really a very exciting step is this is a major OEM that is excited about the product.

Ford will tell you, it is the best PVD technology in the industry. And now I was talking to our guys that we're speaking to the customer where we got the second approval. They were just astonished at -- in many aspects of the technology, and we're excited, and we're going to have another OEM here soon, very soon and more to come, more to come on that front.

(Operator Instructions) Our next question comes from Michael Ward with Benchmark.

Majdi, just a follow-up there on line -- to follow up on line or on Page 12. What is kind of the average content? If you're looking at those wheels compared to where you are today, if you're looking at the overall business, are we going -- I think if you look at the global average, you're somewhere in that -- if you take the total units and the revenue -- the value-added revenue, you're somewhere around the $46, $47 range.

That's correct.

What is the average of these vehicles compared to what you are historically?

Mike, it really, really depends. So now it tends to be significantly higher than a base-level wheel. So orders of magnitude, our PVD technology is a chrome replacement. Chrome is extremely an expensive application. With PVD, you get north of a 60% increase in the value of the wheel. When you lightweight a wheel, so we said 8 of the 9 have lightweighting -- actually, we said -- yes, 8 of the 9 have lightweighting.

That process essentially what it is, it's scratching a wheel, taking mass out, but it adds -- it's an added cost because it does require a special process. So lightweighting on average adds close to 20% to the value of the wheel. So it really depends across the board, but on average, if the company is at $45, the premium wheels could go anywhere between $60 to $100.

And on the EV side, I mean, the F-150 Lightning, one of the things that stands out to you is the wheels are much larger. They need to be, I guess, to carry the weight. Is there similar type increase in the cost for those types of vehicles as well?

Yes, it is significant. And listen, I mean, you talk about sizing. We have just -- we won the 24-inch, believe it or not, 24-inch wheels. We never thought that they would come on the Navigator. So sizing is moving fast. In 2019, 28% of our wheels were 19 inches or larger. We used to use 19-inch as a line of demarcation, Mike. Now I think we would have to change that. Now it's close to 50%. And most of the time, we're talking 21-inch, 22-inch. And now we're talking 24-inch wheels, substantially more added content.

(inaudible)

Wheels are selling (inaudible)?

Yes, absolutely. Yes. And as we look out over the next 3 to 5 years, the average is going to go north of 50%.

Yes. So we have a study of the IHS data. We believe that between '19 and '25, premium wheels will grow at an average of 6%. And we see ourselves growing at 12%. So the subset of the industry, which is the fastest growing subset, premium wheels, is going to grow at 6% and we're going to be at 12%. And we have the history for the last 4 years to support that we've even exceeded that.

Mike, it's Tim. To Majdi's point, when you look at any one platform or collection of platforms, the incremental content per wheel across that vehicle compared to another or one portfolio of vehicles compared to another can vary dramatically. If you're looking for some economic measure of how this premium content in our industry on our wheels is affecting our business, one measure is what we refer to as the VAS or value-added sales per unit.

So this just one simply takes the value-added sales over any period of time divided by the number of units, some of which are premium and some are standard, what you'll find is that over the last 3 or 4 or 5 years that I've looked at it, that VAS per unit is up. Let me just give you 2 numbers.

The VAS per unit for the third quarter of '21 was about $46.35. That same number a year ago was $43.75. So it's up in excess of $2, call it, $2.5, more than 5%, call it, 6%. Again, that's the content spread not only over the premium wheels, but the standard wheels in the portfolio. But if you look back, what you'll see is a steady progression of this VAS per wheel, which reflects that additional content.

And so it sounds like if I look back, I mean, you -- basically from 5 years ago, you've gone from $37, so you're up at $47. And It sounds like over the next 5 years, the increase is going to be bigger than that. And it just sounds like there are a number of factors that line up and another one at least in North America moving away from cars. And this acceleration towards light trucks and crossovers and EVs, all of them have higher content for you, correct?

I'm inclined to agree with you. And frankly, I mean, in terms of internally here, when we plan and model, we actually have underestimated the impact of this in our business, have actually been very pleasantly surprised. And having done some study on this that Majdi referred to, we find ourselves in a certain and a premium wheel segment that's growing very handsomely, and we're growing quite well inside that growing segment. So I don't have any reason to believe that this would decline anytime in the next year or 2.

It certainly seems like it. And so, Tim, on the working capital and the transitory items you cited the $50 million, is this -- I assume just as it unfolds, is it -- are you looking at a normal like 2 to 3 quarters where that unfolds? Is that what you're looking at?

Yes. So you're wondering when this $50 million as of the third quarter that has -- we've invested in the balance sheet in aluminum and a little excess inventory, extra inventory than we'd like to have because of the production schedule.

Right. You're not alone with that one.

Yes, yes. Look, I don't -- and when it is released, it will be a boost to the cash flow. I can't tell you exactly when it's going to -- we'll get some relief from that. I will tell you that about 1/3 of that $50 million is finished goods and, to a lesser extent, work in process that we are managing down. And while I can't tell you definitively that it will be all gone at year-end, I believe that, that 1/3 will come down a bit.

Now having said that, in fairness, Mike, on the other side of the equation, in this past month, as I think I mentioned with respect to aluminum prices, they actually went up a little bit. So by year-end, they may be offsetting. I don't know exactly when it will be released from the balance sheet. It's a...

It's a nice tailwind for the next 2 quarters at least.

It will come back to us.

Okay. And just lastly, have you heard any -- have you seen any firming up in production schedules?

Yes. That's a good question, Mike. I would tell you that maybe the takeaway is that we haven't seen the bottom yet. So IHS has got -- if you look at the numbers, they got some recovery in Q4 by about a million vehicles in our markets. We really don't see that. We're seeing more like a flat market.

You can extrapolate from our numbers. We're saying market is going to be down 30%. We'll continue to be ahead of that in the high teens as we've done for the last -- for several quarters. It will normalize probably more in the first half of next year. And I think maybe perhaps the real recovery will be in the second half of 2022.

And there are no further questions at this time. I will turn the conference back to our speakers for any additional or closing remarks.

Thank you. Thanks, everyone, for joining our call today. We look forward to updating you on our progress next quarter as we continue to drive value for Superior and our shareholders. Have a good rest of the day. Operator?

Thank you. This concludes today's call. You may now disconnect.