Superior Industries International Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

There are 5 speakers on the call.

Operator

Welcome to Superior Industries First Quarter 2023 Earnings Call. We are joined this morning with Majdi Abulaban, President and CEO and Tim Trenner, Executive Vice President and CFO. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded. Aghdur.

Operator

And you will be connected to an operator. I will now hand over the call to your host, Trim Traneri to begin today's conference. Thank you.

Speaker 1

Thank you, Caroline. Good morning, everyone, and welcome to our Q1 2023 earnings call. Abdul. 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 Amulavan, our President and Chief Executive Officer.

Speaker 1

Before I turn the call over to Majdi, I would like to remind everyone that any forward looking statements contained in this presentation Abdul. Commented on today are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Abdur. 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 Abdul on Form 10 ks for a more complete discussion of forward looking statements and risk factors. We will also be discussing various non GAAP measures Aghdur today.

Speaker 1

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.

Speaker 1

GAAP measures can

Speaker 2

be found in the appendix of this presentation.

Speaker 1

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

Speaker 2

Thanks, Tim, and thanks, everyone, for joining Abdul. I will begin on Slide 5. We are pleased with our Q1 results. We delivered strong growth in a tough environment and maintained focus on customer recoveries, while generating cash Abdul. Although our environment remains volatile, We have seen a modest recovery in industry production in North America and Europe as supply chain constraints begin to ease.

Speaker 2

That said, a significant portion of industry growth in North America was driven by fleet sales to rental companies, an area where Superior has limited content. Further, we have seen declines in the aftermarket in Europe Abdul. That said, in the quarter, we grew year on year FX adjusted value added sales by 9% and content per wheel by 16%. Our team I am especially pleased with the progress we have made to align pricing with our input cost reality, which has supported ongoing growth in value added sales, while mitigating the impact of continued macro headwinds and unfavorable Abduh. As a result, over the last 12 months, our value added sales have outgrown the larger markets.

Speaker 2

Adjusted EBITDA in the Q1 of $46,000,000 remains near historically high levels despite lower unit shipments. However, margins as a percent of value added sales contracted year over year largely due to the substantially higher recoveries we captured in the Q1 of 2022. In addition, we continue to take the necessary actions to enhance our portfolio to support long term profitability. Here, we are taking a close look at our offerings and book of business to prune parts that are underperforming and to cultivate those that are supporting long term growth. We refer to this as our eightytwenty process.

Speaker 2

Abdul. Further, our strategy to capture secular demand for our differentiated portfolio has continued to play out. Abdul. Content per wheel has grown year over year for 16 consecutive quarters with large diameter wheels now Abdul, bolstered by the secular shift to EVs. Our lightweighting content has increased roughly 20% annually since 2020.

Speaker 2

Abdul. Our efforts to capitalize on these secular trends, while also taking a disciplined approach to working capital management and capital expenditures have translated to solid cash generation, in turn, strengthening our financial profile. In Q1, we delivered $39,000,000 in operating cash flow, reducing net debt to $421,000,000 the lowest level in over 5 years. In terms of what we see in the industry for the remainder of 2023, We remain concerned. Given the mix challenges we are seeing in North America, coupled with lower aftermarket sales in Europe And an increasingly uncertain macro environment, we are narrowing our full year outlook.

Speaker 2

We believe it is prudent to be conservative until we have more clarity on the trends within our regions. As such, We now expect limited vehicle production growth in our markets and are narrowing our sales, value added sales and adjusted EBITDA ranges. Our cash flow guidance remains unchanged, which we plan to maintain through disciplined working capital management and lower CapEx spend. Tim will provide more details on this. Moving on to Slide 6.

Speaker 2

Abdul. Our strong position on premium platforms has continued as consumer preference moves towards larger, more sophisticated wheels with premium finishes. Abdul. This is evidenced by some of the recent launches you see on the left side of this chart. Abdul.

Speaker 2

Importantly, as you can see on the right side of the chart, we have been successful with customers in aligning has resulted in substantial growth in content per wheel. Specifically, content growth and price Abdul. Portfolio and commercial discipline continue to underpin the long term trajectory of our content expansion and profitability of our business. Moving on to Slide 7. We wanted to give some perspective on the current operating environment.

Speaker 2

We are seeing global industry production improve with Q1 volumes This recovery has been supported by the easing of supply chain headwinds. Now having said that, volatility, Volume uncertainty and persistent inflation continue to challenge our operating environment, particularly the unfavorable mix in North America and the decline of the aftermarket in Europe. That said, we continue to be well positioned to leverage Industry preference for shorter supply chain through local for local footprint along with secular demand for premium wheels. On to Slide 8. Here, you can see our growth in relation to the wider industry during the quarter.

Speaker 2

Adding further color on the right side of the chart. North America growth is mostly driven by fleet sales where Superior has low content. Abdul. Our largest customer, GM, saw a 2% decline in production in the quarter. In Europe, as I mentioned earlier, the aftermarket has seen a significant decline driven by general unwind of post COVID gains, Abdul, higher wholesale inventory, a warm winter and consumer affordability issues.

Speaker 2

In summary, aftermarket declines and North America business mix has been the main drivers here. Moving on to Slide 9. Trendedly, we are not betting on industry recover. We are taking action. Abdul.

Speaker 2

We have launched several initiatives in response to these macroeconomic shifts that has impacted our business. Through execution of the priorities laid out on this chart, we plan to drive improvements to both our portfolio and our overall operations. This begins with reducing overhead and administrative expenses. Our target here is 10% and we are well on our way. Abdul.

Speaker 2

We have taken a restructuring charge in the quarter. Further, we continue to use the eightytwenty approach Abdul to prune our portfolio and further focus on profitability. We will continue to aggressively manage working capital, Abdul. While optimizing capital expenditures to strengthen cash generation. For example, we are consolidating our aftermarket warehouses in Europe ECI initiatives are being implemented to offset the impact of wage inflation.

Speaker 2

NIA's continuous improvement capabilities have matured in our business and we are raising the benefit of our investment in Greenbelt and Blackbelt. Finally, we are driving flexibility in Abdul. For example, all of our plants in Mexico now can support 20 inches wheel production. Abdul. In closing, I am pleased with how we started the year and how our teams have continued to manage through operating headwinds.

Speaker 2

Abdul. Our content story is playing out, and we are making great progress on getting our pricing right. Moving ahead, our focus is on shifting to optimize cost, routing our portfolio and strengthening cash flow. We look forward to building on this momentum to create better shareholder value in the coming quarters. And now I will turn the call over to Tim to provide more details on our results.

Speaker 2

Tim?

Speaker 1

Thank you, Masjid, and good morning, everyone. Abdul. The recent supply chain constraints the automotive industry has endured have moderated somewhat. The barrier now to light vehicle production perhaps returning to pre COVID lows Agdur. The significantly higher new vehicle prices, higher financing costs and consumer inflation and recession concerns.

Speaker 1

Abdul. Vehicle production, although somewhat improved, is still about 13% below pre COVID levels in our markets. We have and will continue to pursue opportunities to adjust our manufacturing and administrative cost structures to reflect the reduced level of light vehicle production. This quarter, we recognized a $5,300,000 charge This reduction in force is part of a larger initiative to reduce manufacturing and administrative overhead by $10,000,000,000 annually. Let's have a look at the quarter, Page 11, Q1 financial summary.

Speaker 1

Wheels Sold in the Q1 were 3,900,000 units, down 6% from the prior year period. With respect to North America, Production of fleet vehicles was higher than usual and rental cars tend to have an unfavorable mix of premium and standard wheels. In Europe, year over year decline in units is due to the aftermarket business, which is very soft because of warmer weather, Abdur, $381,000,000 for the quarter compared to $401,000,000 in the prior year period and value added sales increased Abdul $203,000,000 for the quarter compared to $198,000,000 in the prior year period. We incurred a net loss of $4,000,000 for the Q1 The Q1 year over year sales bridge is on Page 12. Aghdur.

Speaker 1

To the far right, aluminum cost passed through the customers was down $33,000,000 or by 16% compared to the prior year period. The cost of aluminum has declined significantly from a year ago. Value added sales increased by $14,000,000 or 7% Abdul. More than all of this increase is recovery of cost inflation and higher premium wheel content. The impact of currency on net sales was $7,000,000 On Page 13, 1st quarter year over year adjusted EBITDA bridge.

Speaker 1

Adjusted EBITDA for the quarter decreased to $46,000,000 compared to $49,000,000 in the prior year period. The adjusted EBITDA margin for the quarter was 22% compared to 26% in the prior year period. Abdul. The margin in the Q1 of last year was boosted by the timing of customer recoveries. Fewer wheel sales in the quarter compared to the prior year period Abdul, and metal timing contributed to the decline.

Speaker 1

Our full review of the company's Q1 2023 free cash flow is on Page 14. Cash flow from operating activities was $39,000,000 compared to $45,000,000 in the prior year period. This decline reflects the lower earnings net of improved working capital performance compared to the prior year period. Cash used by investing activities declined to $16,000,000 from $18,000,000 Cash payments for financing activities increased to $7,000,000 from $5,000,000 Free cash flow for the quarter was therefore 17,000,000 An overview of the company's capital structure as of March 31, 2023 may be found on Page 15. Cash on the balance sheet at quarter end was $229,000,000 an increase of $95,000,000 from the prior year.

Speaker 1

Funded debt was $650,000,000 at quarter end and net debt was $421,000,000 a decrease of $56,000,000 compared to the prior year and the lowest since 2017. The decrease is partially attributable to a decrease in the euro denominated notes due to the weaker euro. Aqdur. As of the end of the Q1 liquidity including availability under the revolving credit facility was 246,000,000 Superior's debt maturity profile as of March 31, 2023 is depicted on Page 16. The revolving credit facility was undrawn at quarter end.

Speaker 1

We are in compliance with all loan covenants and have no significant near term maturities of funded debt. Aghdur. The $250,000,000 of sulfur based interest rate swaps we entered into a year ago in anticipation of the term loan refinancing this past December are The company's full year 2023 financial outlook is on Page 17. We enjoyed Abdul. We are committed to delivering cost inflation in 2022 and pivoted late last year to negotiate appropriate price increases To offset the cost of inflation, the cost of OEM production scheduled volatility and lower fixed cost absorption on lower light vehicle build.

Speaker 1

These negotiations are ongoing. While the cost of energy, gas and electricity has come down dramatically. It does remain elevated in Europe. Conversely, the cost of energy in North America has normalized. Abdul.

Speaker 1

We continue to be somewhat pessimistic with respect to recovery of light vehicle production in our markets, In part because of significantly higher new vehicle prices, higher financing costs, consumer inflation recessionary concern Value added sales of $755,000,000 to $795,000,000 and adjusted EBITDA of 170,000,000 to $190,000,000 We continue to expect cash flow from operations of $110,000,000 to 130,000,000 Abdull. We are lowering expected capital expenditures to approximately $65,000,000 We continue to model a 25% to 35% Abdul. In closing, we delivered a solid quarter, but are wary of increasing macroeconomic uncertainty Aghdur. This concludes our prepared remarks. Majdi and I are happy to take your questions.

Speaker 1

Caroline?

Speaker 2

Abdul.

Operator

We will take the first question from line Gary Prestopino from Barrington Research. The line is open now. Please go ahead.

Speaker 3

Hey, good morning all.

Speaker 2

Hey, Gary.

Speaker 3

Couple of questions here. Number 1, Maggie, when you're talking about pruning the portfolio, Agdur. I believe a while back you had said that you would be willing to put more lower or some lower margin wheel production into the mix just to sap up some overhead capacity. And I'm just wondering, is that what you're looking to prune out at this point? Or maybe you could help us just understand what you're doing there?

Speaker 2

Abdul. It's an excellent question. Let me just do the backdrop first and maybe give you more cover on this. Abdul. When I think of pruning, it's fundamentally a best practice, Kerry, right?

Speaker 2

So if you go back to what this team has been focused on and Abdul. What this team has been executing for the last 3 years and you're intimately familiar with us. We have been working hard to get the portfolio right. We've been working hard to get the footprint right and to get the cost right and obviously working hard in getting the customer base right. So Maybe you call those long, no hanging fruit, I don't know.

Speaker 2

We've done very, very well. And now my view and what we're learning is that we see an opportunity to get more granular in our business. We my view as I've said many times, we deliver the best product in the industry. I believe that we are the most competitive in the industry because of the things we talk about, footprint in Poland, with all of the production we have is in Mexico. So price has to be has to deliver the right return on our business.

Speaker 2

Now that's one backdrop, right? So looking closely With more granularity at the SKU level with the eightytwenty and what eightytwenty is 20% of your portfolio delivers 80% of your profit. Abdul. While at the same time, we are concerned about visibility, right? We're concerned about visibility and Aghdur, concerned about volumes not returning to pre COVID levels.

Speaker 2

So we see this as an opportunity to improve margins On products that is underperforming and without going to detail, we have done well with customers where we have had the right visibility And we also see this as an opportunity to get ready when things don't go right. Does that help?

Speaker 3

Yes, it does. I mean, I know you can't go into much granular detail, but All right. So this $4,400,000 reduction in payroll that's going to annualize or that you took, Will that immediately start to show up in Q2 numbers or does that look like something that would be more of an impact in the back half of the year as well as your $10,000,000 annual cost savings target. Are we looking at that, Tim, as being more back ended?

Speaker 1

The $4,400,000 reduction in payroll costs, Yuri, starts almost immediately without exception. So We're already benefiting to some extent from that. So basically starting now, we're getting the benefit of that. The $10,000,000 this $4,400,000 is a part of a broader objective as Majdi outlined to reduce our Agdur. Manufacturing and administrative burden.

Speaker 1

That is being layered in. So we already have taken a number of actions even in the Q1 to reduce non payroll Abduh. And some of the incremental payroll expenses over and above the 4.4% that I just mentioned. So this will Agud. Frankly, it's going to be

Speaker 2

a little tough to get there.

Speaker 1

We will get there reasonably quickly, but we won't be running on an annualized basis immediately.

Speaker 3

Abdul. Okay. Okay. That's helpful. And then just one more comment and I've got to jump.

Speaker 3

Throughout your narrative, you mentioned about Vehicle production needs to get back to pre COVID levels to start having a much more positive impact on the company. But I mean in that kind of With that kind of thought process, I mean, what I'm reading is that or possibly seeing, maybe I'm wrong, is that I don't think the OEMs are going to start producing cars at the 16,500,000, 17,000,000 unit level, at least in North America. I think because they're finding the fact that there's scarcity of vehicles out there highly profitable to them. I mean, Do you concur with that? I'm just trying to get an idea of what would be the sweet spot of production at least in North America

Speaker 2

Gary, I mean, this is the old question here that emerged in recent months about Which narrative do you subscribe to? Is it the pent up demand where the fleet is so old and so many vehicle production has been lost? Or is it the fact that those vehicles are getting so expensive that people can't go to buy them, right? The pent up demand clearly is still there. Eventually, it will play out.

Speaker 2

Eventually, it will have an impact on the industry. And the third piece is, will the OEMs have the discipline to do What you just described. I believe that volumes will get back to pre COVID levels eventually. It will take some time. What we're talking about more immediately, Gary, is we had a solid quarter actually on all dimensions on From content growth standpoint, from pricing standpoint, we did grow the business at 9% in a very tough environment for us.

Speaker 2

Abdul. Right. Gas to market business in Europe was not our friend. Mix in North America was surprisingly Not our friend. I mean, we normally do extremely well in North America.

Speaker 2

And frankly, we're still seeing these fleet sales Catching up. So what you're hearing from us is what we'll see. We are being conservative in our guide So that we can go ahead and take action on pause and prepare for the worst and hope for the best.

Speaker 3

Okay. Look, I got to jump. I look forward to speaking with you guys later. Thank you.

Speaker 2

Thank you, Rick.

Operator

Thank you. We will take the next question from the line of Mike Ward from Benchmark. The line is open now. Please go ahead.

Speaker 4

Thank you very much. Abdul. Good morning, everyone. Two things. First off, is there any difference I know there's good fleet and bad fleet.

Speaker 4

Big part of the growth in North America in the first quarter was fleet. Is there any difference in content for you for fleet or non fleet or does it depend on the fleet And then the second thing, I'm just curious about what you're seeing in Europe, especially Germany and some of the trends?

Speaker 2

Yes. So there is a big difference actually, Gary. Generally, it's just an overarching statement. Wheels on fleets tend to be lower content, Less premium, much less premium. They tend to be more passenger cars and less larger SUVs.

Speaker 2

So yes, there is a Significant difference. Listen, what we're seeing in Europe, I mean, obviously, you look at IHS numbers, Europe came in Q1 Strong, I mean north of 20%. We came in north of 20%. So I mean both in our case, Abdul. We have a sales segment that is the aftermarket and for the reasons I described And it's really one of the reasons this inventory at the wholesalers of these wheels was so high as we closed out the year.

Speaker 2

And then as to where these affordability issues and the surprisingly warm winter, that had a significant impact on us. So we do see Europe Aghdul. I mean, if you look at the overall forecast for the year, Gary, I mean, IHS would say 8% in Europe, Agdur. Okay. We don't see that because we don't have the right mix and the actual market is not offering.

Speaker 2

So we're guiding for low very, very low single digits.

Speaker 4

Okay. And that's now it In Germany, it looks like they started out incredibly strong in the Q1. And is that just on

Speaker 2

the ground?

Speaker 4

Okay. And now you're not as confident that's going to continue in the second half or?

Speaker 2

No, I think it's going to continue to some extent. Again, I'll go back to the just to quote not my numbers directly, but in terms of outlook, IHS, Agdur. Q1 was 20% in Europe and IHS on average is the same Q2 is 7% and the balance of the year is going to be Fairly flat because last year was the second half was stronger. So are you going to see from a growth standpoint these types of numbers? No.

Speaker 2

In terms of units, similar units in the coming quarters.

Speaker 4

Abdul. Have you seen any change with manufacturers, their behavior as far as looking forward? Abdul. One of the things that's been intriguing to me over the last 4 to 5 years is that the vehicle manufacturers continue to push the envelope As far as technology and content and where in the past they might have been content to take components that were Bookshelf. They didn't want to push the envelope as much.

Speaker 4

Are they continuing to push to higher premium type products wheels? Agdur. Are they backing down a lot because of some of the pushback on the ATPs? Or is it still all systems go on their side?

Speaker 2

No, no. Actually, in Europe, we're continuing to see the push towards premium. And that's where it all started actually. Abdul. And now they're accelerating the EV segments and you see some of our launches In the presentation in Europe, yes, with EVs, we are very well positioned.

Speaker 2

We think we can gain share. We are gaining share. And the technology on those wheels tend to be significantly higher content, lightweight and premium at the same time.

Speaker 4

Yes. I can't even imagine what they are, the content. Do you have the BMW IX? I didn't see that.

Speaker 2

Sorry?

Speaker 4

The BMW iX, is that one of yours?

Speaker 2

Yes, I think we are. I think we are. I will just check on that. Okay.

Speaker 4

All right. Well, thank you. Thank you very much.

Speaker 2

Thank you, Mike.

Operator

It appears there's no further question. We are now passing the call to Majdi Abulaban for closing comments. Thank you.

Speaker 2

Thanks again to all of you for joining us today. I'd like to also thank our Superior team for their hard work in continuing to drive our business forward. We look forward to continuing to execute on our strategic priorities to deliver long term growth. Have a great day everyone.

Operator

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

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Superior Industries International Q1 2023
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