Superior Industries International Inc (SUP) 2020 Q4 法說會逐字稿

Good day, and welcome to the Superior Industries Fourth Quarter and Year-End 2020 Earnings Teleconference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Troy Ford. Sir, please go ahead.

Thank you. Good morning, everyone, and welcome to our fourth quarter and full year 2020 earnings call. During our discussion today, we will be referring to our earnings presentation, which, along with the earnings release, is available on the Investors section of Superior's website. I'm joined on the call by Majdi Abulaban, our President and CEO; and Tim Trenary, our Executive Vice President and CFO.

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 therefore, are 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 an update on our business.

Thanks, Troy, and good morning, everyone. Thank you for joining us today to review our fourth quarter and full year results. First, I do hope that you and your families are staying safe and healthy during these challenging times.

Before I start my presentation, a few words on my side. From my perspective at Superior, as we emerge from a very challenging year, we are absolutely excited to have a business built for profitable growth as the industry recovers. We have been executing on our growth strategy, delivering and enabling portfolio while driving cost and cash discipline. So with that, I would like to take a few minutes to talk about our growth enablers before reviewing our financial results.

Beginning on Slide 5, I am pleased to say that 2020 marked a third consecutive year of growth above market for Superior, underscoring Superior's position as a premium wheel solutions provider. Fundamentally, we are seeing the acceleration of the secular trends for premium and lighter wheels. And this is driving more content in our business.

Here, you see some of our exciting launches in 2020. Our wheels on the GM Full Size SUV, the New Ford Bronco Sport, BMW's X7 and the Mercedes S Class. Our premium technology offerings on these vehicles as well as on other platforms, is really our growth driver.

As you can see on this page and the coming pages, our technology solutions are enabling all vehicle segments. More than ever, consumers and OEMs has a tremendous opportunity to customize their vehicles today that did not exist too long ago.

Moving on to Slide 6. The secular trends driving growth in our business do not spot with consumer preference and differentiation. They extend to enabling CO2 reductions through lightweighting and electrification. As highlighted on this slide, we continue to expand our presence in the EV segment, launching various wheel styles on key high-profile EV platforms.

Here, you see our wheels on Ford's iconic Mach E and programs for leading and well-positioned European OEMs. As we discussed previously, we continue to demonstrate our position and relevance on both internal combustion engine and electric vehicle platforms through new programs and now through new launches.

Moving on to Slide 7. Throughout 2020, we've continued to expand our product portfolio. In addition to technologies we have discussed in the past, such as AluLite, laser etching and various lightweighting processes, we launched several exciting new products. One such example is Deco Tech, a unique patent-pending technology. We also launched our thin RIM lightweighting process on the Porsche Cayenne Spyder.

And last, our previously announced award-winning PVD product, a more environmentally friendly alternative to a chrome finish. This expanding portfolio of technologies is truly our enabler and differentiator in the marketplace.

Before I move on to our financial results, I would like to pause on Slide 8 and say thank you to our team. The individual and collective effort was instrumental in responding to an unprecedented year, clearly outstanding focus on safety, on cost and on efficiency. Thank you.

Now moving on to Slide 9. I will review our financial and other operational highlights. As I mentioned earlier, we are excited about our position as we emerge from this crisis. We have a business built for profitable growth as we move into the recovery. We executed at the bottom of the cycle with cost and cash discipline and strengthened our balance sheet while investing in technology.

During the fourth quarter, we grew value-added sales by 12%, outperforming the global market. Improved performance and restructuring delivered a 25% increase in adjusted EBITDA and expanded margins by 160 basis points. This is a combination of our efforts in 2019 and our team's response to the COVID pandemic.

We substantially reduced our net debt in 2020, ending the year with $491 million in net debt, the lowest level since the acquisition of the European operations and well ahead of our previous guidance. Further, in the face of a pandemic, we delivered 10% more free cash flow than the entire calendar year of 2019.

As I discussed earlier, the secular trends for lightweighting and premium wheels are accelerating and driving our growth. During the quarter, our content per wheel increased 12%, and our growth above market in value-added sales was 11%.

For the full year 2020, our growth above market was 7%. Impressively, 19-inch and larger wheels represented over 40% of our total shipments. We expect these trends to continue as we execute on new opportunities to meet customer demand for increased wheel content.

In terms of operations. We have been very pleased with the success at ensuring our facilities are safe places to work, not only with respect to COVID but also general safety. In fact, during the year, we achieved an industry best-in-class TRIR, a key safety metric.

We also successfully managed through very volatile market and customer conditions. In Q4, we navigated through mandated closures and capacity restrictions due to COVID in Mexico. There, we have 50% of our global manufacturing operations. These efforts enabled us to successfully support our customers while delivering improved margins.

Further, we continue to execute on our strategy to leverage our know-how in Europe to support our European customers in North America. Our operations in Mexico are continuing to launch programs and deliver for BMW, for Audi for VW and Volvo, just to name a few. We are very pleased with the progress we achieved on these priorities. I will now address our current operating environment, along with our 2021 outlook on Slide 10.

As noted on the left side of the chart, recovery for the broader automotive industry is well underway. While production levels in North America are rebounding more quickly than in Europe, we still anticipate overall production levels to be down from 2019. So more recovery opportunity still does exist. We expect the industry to be supported by several tailwinds in 2021, including low inventories at our customers in North America, the ongoing favorable shift towards premium product mix that we've discussed and widespread distribution of the COVID vaccine. That said, we are cognizant that some challenges still exist, including the impact of the ongoing pandemic and the semiconductor shortages.

Also of note, during the first quarter, all of our operations in Mexico was temporarily impacted by the cold weather power outage that disrupted Texas and North Mexico. We were able to serve our customers out of our finished goods inventory. We missed very, very limited shipments to date as some of our customers are also shipped out. Tim will provide additional background on the financial impact when he reviews our guidance.

With these expectations in mind, we will continue to focus on enhancing profitability and driving cash flow. For the full year 2021, we expect to deliver a range of $160 million to $180 million in adjusted EBITDA, along with $110 million to $130 million of cash flow from operations. These ranges contemplate the previously mentioned impact.

Moving ahead to our value creation road map on Slide 11. We continue to make progress on our long-term priorities and are well on our way into the second and third places, operational excellence and revenue growth. We are focused on transformation of our business around the culture of lean and continuous improvement while expanding our customer base and portfolio to deliver revenue growth.

These efforts will continue the momentum from 2020, solidifying our competitive position and moving us along this road map in 2021 and beyond. With that, I'll turn the call over to Tim. Tim?

Thank you, Majdi, and good morning, everyone. 2020 was another year of growth above market for Superior. As reflected on Slide 13, we grew value-added sales adjusted for FX by 12% in the fourth quarter compared to the prior year period, whereas the industry was up 1%.

For the full year 2020, value-added sales adjusted for FX declined 15% versus the prior year, but grew 7% above market. Our growth above market has been driven by the ongoing increase in larger diameter wheels with more premium content in our portfolio. And recently, in part as a consequence of the COVID-19 pandemic, an exaggerated shift in our portfolio mix to premium wheels as OEM sales mix tilted towards premium vehicles.

Slide 14 outlines the regional breakdown of unit shipments, net sales and value-added sales for the fourth quarter and full year 2020 as compared to the prior year period.

In the fourth quarter, our wheel unit shipments were 4.5 million units, flat compared to the prior year period and essentially in line with industry production levels. For the full year, wheel unit shipments were 15.2 million units compared to 19.2 million units in the prior year. This decrease was largely driven by OEM production shutdowns due to the pandemic and was in line with overall industry production levels.

Net sales increased to $338 million for the quarter, compared to $310 million in the prior year, which was primarily driven by the ongoing portfolio shift to larger diameter wheels with more premium content as well as a stronger Euro-U. S. dollar rate.

For the full year, net sales were $1.1 billion compared to $1.4 billion in the prior year, primarily driven by decreased production volumes, partially offset by the benefit of mix. In the fourth quarter, we reported net loss of $21 million or a loss per diluted share of $1.16 compared to a net loss of $99 million or loss of $4.25 per diluted share in the prior year period.

The fourth quarter loss included a $26 million tax provision, $24 million of which arose from an allowance for deferred tax assets, the noncash charge does not affect our ability to utilize these assets to offset taxable income in the future period.

For the full year 2020, we reported a net loss of $244 million, or a loss per diluted share of $10.81 compared to a net loss of $97 million or a loss per diluted share of $5.10 in the prior year period. A net loss for the year included an income tax provision of $15 million. This provision, despite a pretax loss was primarily due to the noncash and nondeductible impact of the goodwill impairment in the previously mentioned noncash valuation allowance on deferred tax assets. Cash taxes for 2020 approximated $7 million.

Slide 15 is the change in net sales and value-added sales year-over-year in the fourth quarter. Value-added sales increased to $202 million compared to $173 million in the prior year period. As noted previously, this increase was primarily driven by the continued portfolio shift to larger diameter wheels with more premium content, which benefited value-added sales by $22 million.

The stronger euro also benefited value-added sales, a benefit of $7 million. On Slide 16, adjusted EBITDA increased to $47 million for the fourth quarter of 2020 compared to $38 million in the prior year period. The increase in adjusted EBITDA was primarily driven by favorable product mix, improved operating performance and foreign exchange rates. These benefits were partially offset by the timing of the aluminum pass-through to our customers and the negative impact of the pandemic on our operating costs.

The incremental operating costs from COVID-19 in the fourth quarter included disruptions to our production and the associated overtime and higher personal protective equipment and safety costs.

An overview of our cash flow is on Slide 17. We ended the year well ahead of our guidance provided at our third quarter earnings call. Starting with the fourth quarter. Net cash from operating activities was $58 million compared to $61 million in the prior year period. This decrease is primarily the result of a lower source of working capital, partially offset by growth in earnings and lower taxes during the quarter.

Net cash used for investing activities decreased $11 million compared to $17 million in the prior year period. This improvement was driven by managing down capital expenditures by extending projects and by extending payments. Cash payments used for non-debt financing activities is primarily preferred dividends. The decrease compared to the fourth quarter of 2019 is primarily due to the acquisition of $3 million of minority shares in 2019.

In the fourth quarter, the company generated $42 million of free cash flow, a strong finish for the year. On a full year basis, net cash from operating activities was $150 million compared to $163 million in the prior year. This decrease was driven by lower earnings as a result of the pandemic, partially offset by improvements in working capital. Net cash used for investing activities was $44 million compared to $55 million in the prior year.

Again, this improvement resulted from managing down capital expenditures, extending projects and by extending payments. The prior year investing activities also benefited from the sale of other assets of $10 million. Cash payments for nondebt financing activities were $19 million compared to $29 million in the prior year. This improvement was primarily due to the suspension of common dividends in 2019 as well as the acquisition of $7 million of minority shares in 2019 compared to $5 million in 2020.

Taken together, the company generated $87 million in free cash flow in 2020, in part, a reflection of permanent and temporary cost structure actions, cost and capital expenditure discipline and effective working capital management.

Slide 18 provides some context for this free cash flow performance. Over the past 2 years, we have delivered significant free cash flow, enhanced liquidity and reduced our net debt. Of note, Superior achieved the lowest level of net debt, $491 million since the acquisition of the European operation.

Turning now to Slide 19, an overview of the company's capital structure and liquidity position. As of the end of 2020, liquidity, including cash availability under the revolving credit facilities was $381 million. Funded debt was $643 million compared to $631 million in the prior year period.

The increase in funded debt year-over-year reflects term loan paydown, which was more than offset by the translation of euro-denominated debt as the euro strengthened relative to the U.S. dollar.

Slide 20 is the company's debt maturity profile. We have no significant near-term maturities of funded debt. The revolving credit facilities mature in May of 2022 and are undrawn. The term loan does not mature until 2024, the senior notes mature in 2025. We are in compliance with all loan covenants.

The full year 2021 outlook is on Slide 21. We expect wheel unit shipments to be in the range of 16.9 to 17.7 million, net sales to be in the range of $1.30 billion to $1.37 billion and value-added sales to be in the range of $740 million to $780 million, resulting in adjusted EBITDA of $160 million to $180 million.

This outlook is based on industry production recovery in the mid-teen percentage range across our global footprint, an increase in aluminum prices and content growth in driving higher net sales.

The continued shift to premium, high-content wheels also supports growth to value-added sales. This guidance includes the anticipated impact of the semiconductor shortage and the shutdown of our North American operations in February due to weather. With respect to cash flow from operations, we expect $110 million to $130 million for the year.

Finally, capital expenditures should approximate $75 million for the year, a portion of which is carryover from 2020. These expenditures are, in part, strategic investments in our finishing capabilities as we continue to develop our portfolio. That concludes our prepared remarks. Katie, I'll turn the call back to you for questions.

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

Several questions here, so I'll try and get through them fairly quickly. Wheel shift were 40% with premium content or 19 inches or higher. What was the corresponding percentage for Q4 of '19? And then how much 19-inch wheels were a part of the portfolio for the full year versus 2019?

So I would -- if you're going back to 2019, it was -- it's actually -- the shift is quite staggering hearing, and it was 30% in 2019. And if you adjust that number you just gave me for the aftermarket, which doesn't swing that fast on the large-sized wheels, it's actually 47%. So we are very, very pleased with the shift.

I'm going to give you another stat, Gary, because I know you've asked me about this before, which is when you think of electrification and the content is driving, we didn't have that in the script. In our business -- so if you look at an operation we call (inaudible), which makes wheels lighter, right? If I go back to 2019, 6% of our wheels both combined North America and Europe were flow form. This year, we expect that number to be 12% of our total production. What that does, when you flow form a wheel, you make it flatter, you had 20% of value-added sales to that wheel.

So that's a very -- I mean, these 2 trends of sizing, premium finishes, lightweighting, the portfolio is really, really at a point of inflection now, Gary, and it's showing up in the numbers. We're excited about that.

Right. And that was going to be the follow-on question in terms of -- right now, if you look across your entire portfolio of wheels, like, what percentage of them are going out with some kind of -- with these new technologies, like, physical vapor deposition, Deco Tech, the lightweight technology custom finishes? First...

I mean that -- yes. No, that's -- I mean, it's across the board. So we give you the 19-inch and larger wheels in that privately driven part consumer preference for larger wheels. The same trend goes for premier finishes. We define premium finishes, machine wheels, special paints, special coatings, etching, that trend drives -- is driving the portfolio. I mean, we've said, you picked 10 cars, 5 years ago versus now, and the contrast is stock on the wheels. And the size of the wheel and the finishes on the wheel.

But one of the specifics that we never gave you is this one on electrification that I'm sharing with you, which is an indication. If you think about the EV market continuing to take hold and the need for lightweighting of vehicles, this is quite an exciting trend that's coming our way.

Right. Yes, I understand that. And then let me just ask one more, and I'll jump off and let somebody else go. A while back, I remember we talked about -- one of your goals was to support the technology from UNIWHEELS into North America. You said there was about 1.2 million vehicles produced by European companies in North America, and you really had just started scratching the surface of winning new programs.

Can you give us some idea of where you stand right now within that universe of, say, 1.2 million vehicles? I know you cited a couple of entities that you're supplying for -- out of Mexico. But what percentage of those European manufacturers are you currently capturing now in the U.S.?

Yes. So this has really been a highlight in the transformation of our business on the execution front. We are now really accelerating performance in Mexico. We're shipping to just about all of the European carmakers in North America. It's just the beginning.

If I look at '21, probably less than 5% of my business in North America is supporting European OEMs. I'd like it to be substantially higher. So if you say -- what have we said are sites on the numbers we're looking for about 12% market share of that business. And we have the makings of it, and we have the plan. We know what we need to do.

We have the credibility with these carmakers. You cannot ship wheels out of a plant in Mexico without having an army of people from Europe into your plant auditing you. And that has been a tough, tough call, and we are very pleased with the progress. All of our friends now are certified to ship to the European carmakers.

(Operator Instructions) Our next question comes from Stephanie Vincent with JPMorgan.

Majdi, Troy, congratulations on 2020. I just had a few questions, 2 housekeeping and 1 on outlook. So we had Spilanthes come out earlier this week. And at least, their industry outlook for North America was around 8%. It seems like your outlook is more in line, at least, from what I understand from IHS, which is looking for around 20 to even low 20s percent.

I guess my question is, obviously, there's a huge amount of uncertainty and volatility. How much cushion do you have in your 2021 outlook for that sort of spread of automated production for 2021?

And then my next question, a really housekeeping question. And I'm asking pretty much everyone this in my coverage space is -- thank you for disclosing your use of factoring.

Is there any supply chain, financing or reverse factoring that you've been using over 2020 or planned due in 2021? And then on your view on debt repayment, preference between term loan or bonds would be super useful as well.

Okay, Stephanie. I'll take the first one and turn the last two to Tim. It's an interesting development when you think of the outlook for '21 and how the entire industry, the Q1 industry is differing on opinion, right? Just about everyone, frankly, it's of the view, including us, that IHS is very optimistic. I mean north of 20% -- 24% in North America, 15% in Europe. We've taken a more conservative position, we're thinking 20% in North America, 10% in Europe, that averages to 15%.

I think if you scan, Stephanie, the -- if you scan the supply of community, you'll see a big range, (inaudible), you said 8%. You'll see a big, big variation, but nobody is really agreeing with IHS right now, and we do not. And there's a lot of uncertainty with COVID.

We had the power outage recently in Q1 in Mexico. We have all of these chip shortages that are impacting in the industry in a very severe way, actually. And I don't know if the car makers will be able to recover from that. Now having said that, in our -- I know that a question will be coming up relative to how the chip industry is impacting us. I would tell you that as I look at my mix, the carmakers want to make the higher-content larger SUVs, the big vehicles.

And this is where our position. We're very strong on those platforms. And as I look at Q1, I don't see myself impacted versus my plan. I think it eventually will catch up with us. But in the short term, we are well-positioned as it relates to that chip shortage. Tim, you want to take the 2 questions?

Sure. Stephanie, it's Tim. I have 2 questions from you. If I missed one, let me know. A question about supply chain, financing and the other, about possibly paying down the debt. With respect to supply chain financing. I think you asked if we had utilized it in 2020, the answer is no in 2020.

We did, however, begin exploring that option and in fact, have put a -- what I would characterize as a modest capabilities/facility in place for this year. And in fact, in the first quarter, we actually have executed on that, just a small amount. So we've tipped our toe in that water.

And if and when the time comes, we may even consider expanding or having discussions with the lenders and the vendors about maybe expanding that. But for the moment, we just tipped our toe in the water and are exploring it in the first quarter of '21.

With respect to the possibility of paying down the company's debt. There's a fair amount of cash on the balance sheet, as you know. For the moment, to be candid, I enjoy that optionality. It's easy to think of this virus being under control and behind us.

That's not all clear to me. And frankly, for the moment, until the future is somewhat more certain with respect to the pandemic and maybe even the semiconductor shortage, I'm happy to have the cash on the balance sheet.

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

Yes. I think, Majdi, you probably answered -- you answered this question from the last question that was asked, but I just want to get a reiteration here. Are you seeing, given the chip shortage, is it possible for the automakers to shift production to more of the higher-end vehicles, SUVs, that you put the wheels on versus more of the -- for lack of a better word, more commodity-type sedans? It seems like what you said is you are seeing that and you're not as affected by the chip shortage that's coming.

Gary, that is correct. And it's -- so far, it's had, frankly, a positive impact on our first quarter outlook because car makers are just shifting to -- they want to sell these higher-content platforms. So it's -- like I said, it's eventually, I think it's going to catch up. IHS thinks it's an 8% impact on the industry. We think it's more like 2%. We're not seeing it now, but we built in a 2% impact for the balance of the year. But the answer to your question is correct. You're right.

So what -- I mean, if we look at your portfolio, what percentage of your portfolio of wheels is going into that market? I mean, 40% are 19 inches or higher. Is that a good proxy for that?

Yes, that is, that is. But even some of the -- some of our wheels that are smaller than 19 inches also go on these premium platforms. Because most -- all of our plants are running. Some are really running above capacity. So it crosses both spectrums, really.

Okay. And then a couple more quick ones here. You said some of the CapEx was catch-up to $75 million this year. What is really your natural level of CapEx per year? Is it about between $40 million and $50 million?

No, Gary. It's Tim. It's higher than that. Just to give you some sort of sense of some way to think about it going forward. This varies a little bit by facility, but generally, on an annual basis, we spend, give or take, USD 4 million a year at each of our facilities. There are 8 facilities.

I would say if you want to sort of think of an annual run rate considering that maintenance and investments for additional capabilities, et cetera, et cetera, on a normalized basis. I'd say it's somewhere between $60 million and $70 million.

We're coming off the year in 2020 when -- as I said in my remarks, we pulled back. I think total CapEx is in the mid $40 million. So we pushed a little bit into 2021. So that's why that $75 million is a little north of what I would -- what I would consider sort of normal run rate of $60 million to $70 million.

Okay. And then lastly, with all these technologies that you have out there, particularly with the lightweighting as we move to more EVs, are there any other -- any of your competitors have these technologies out in the market now? I mean I know there's some European competitors, I know there's Chinese competitors. Is there anybody out there that is doing what you're doing?

Yes. I mean, I would tell you that, listen, flow forming is not a technology that is proprietary to us. All the wheel makers are probably seeing some of that to some extent. I would tell you that when you look at our customer base and platform base, it lends more to the need to flow form these vehicles, especially larger and heavier vehicles. So we get more of a pull on that.

And as I look at our technology portfolio on the lightweighting front, our team has -- Gary, has done a very nice job. We have 6 -- I'm going to say 7 that we can talk about. Lightweighting technology, the most recent one we just talked about is the technology that we put on the Spyder, on the Porsche. It's a lightweighting technology with a low rim, lightweight wheel. So yes, there is many more technologies that our team has done a good job with, and we'll be launching.

Thank you. This concludes today's Q&A. I would now like to turn the call back over to Majdi for closing remarks.

In closing, we are excited about the momentum we have, exiting 2020 and beginning 2021. While challenges persist in the market, we have proven that we can manage through a very volatile operating environment and respond in a way that protects our employees, support our customers and delivers tangible value for our shareholders.

I wish you all the best. Thank you for joining us today. This concludes our call for the day. Thank you.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.