Q3 2019 Earnings Call
Good day and welcome to the Superior Industries third quarter 2019 earnings teleconference call.
This conference is being recorded.
I would like to turn the conference over to Mr. Troy Ward. Please go ahead Sir.
Thank you good morning, everyone and welcome to our third quarter 2019 earnings call.
During our discussion today, we will be referring to our earnings presentation, which along with the earnings release are available on the Investor Relations section of superior website.
This morning, I'm joined by Mafia Blue Burns, our president and CEO .
Matti Masanovich, our executive Vice President and CFO .
Before I turn Niccolo de Masi I'd 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.
1995.
Please refer to slide two of this presentation for the full safe Harbor statement ended the Companys FCC filings, including the company's annual report on Form 10-K for a more complete discussion of forward looking statements and risk factors.
We also will be discussing non-GAAP measures today, including value added sales and adjusted EBITDA.
These non-GAAP measures exclude the impact of certain items and therefore, not calculated in accordance with U.S. GAAP.
Reconciliations of these measures to the most directly comparable us GAAP measures are found in the appendix. This presentation with that I'll turn the color Demosky.
Thanks, Troy and good morning, everyone and thank you for joining us today to review our third quarter results.
Let me begin by taking you through the highlights for the third quarter. I'll, then provide you an update on our progress relative to the strategic priorities I've discussed previously and finally I will take you through the actions, we're taking to drive improvements.
I'll begin on slide three of the earnings presentation. During the third quarter, we shipped 4.9 million units globally, that's an increase of 2% versus the prior year.
The year over year increase was supported by recovery in our European business, including in the aftermarket.
In addition, the third quarter of 2018 was impacted by W. LTP.
Partially offsetting the strong performance in Europe , what the ongoing weakness we have seen in North America.
We also felt some effects on the strike a general motors.
Which negatively impacted our North America shipments in Q3 by 75000 units were 5 million in that tails.
We will continue to see an impact in the fourth quarter, which is reflected in our revised outlook.
Despite the mix volume results globally.
Our performance reflects the continued momentum of our positioning as a premium wheel solutions provider.
During the quarter net sales and value added sales increased to 352 million and 196 million respectively.
Well, the combined North America, and European markets were actually essentially flat year over here I want to value added sales grew 12%.
Significantly ahead of markets.
This girl's underscores our progress on capitalizing on the secular shift to larger more complex wheels and premium finishes.
Additionally, we are encouraged by that is also global team delivered during the quarter.
This is reflected in the 27% increase in adjusted EBITDA, Despite the impact from the GM strike.
In line with these results.
Josh initiatives, we executed enabled us to reduce no principal debt by $12 million during the quarter.
Versus the prior year, we have reduced net debt by 114 million. He very strong results over the past 12 months.
We remain laser focused throughout the organization on driving incremental cash initiatives to enable further debt reduction.
As a result of these efforts we are increasing our full year 2019 outlook for cash flow from operations.
At the same time due to the impact to the GM strike, we are narrowing our outlook for unit shipments net sales value added sales and adjusted EBITDA, while maintaining our outlook for capital expenditures.
How do you will elaborate more on this Sean.
Moving on to slide four I.
I would like to touch again on our operational priorities more broadly and then I'll speak specifically about the activities were executing in the near time to improve North America profitability.
As I mentioned earlier, we are focused on cash generation as well as improving adjusted EBITDA.
Many of these priorities and value creation opportunities apply to both regions.
First driving operational excellence remains a key focus for US. This includes rightsizing, our production and aligning our operational costs to current industry production levels.
In regard to start operating system, we are taking a holistic approach improvements and putting in place the tracking and accountability and all functional areas.
From commercial to purchasing and from operations engineering in order to drive value creation.
Second we remain focused on strengthening our operational leadership team.
This includes our recent announcement on Mr. Andreas Myers as the president of our European operations.
And dress has deep experience in operation on leadership roles within automotive sector.
And our track record to delivering results.
He will play an integral role and leading our European organization.
Championing cross regional collaboration which is very important in our business.
And will strengthen our global team.
In addition, Mr., Kevin Burke was appointed as Chief Human Resources Officer.
Kevin has a strong track record and leading edge heart function globally.
He will play a key rule and leveraging and developing cross regional talent.
We are excited about having both and dress and Kevin on the team.
With respect to our North America region, the segment of our business acquired in the most attention.
I personally have been overseeing our initiatives.
At the same time, we have also strengthened our operational leadership team in Mexico.
Third as.
With respect to customers, we continue to execute our strategy to pursue a balanced portfolio across premium and base level wheels to maximize utilization.
We also are making progress with European Oems in North America, Okay based on that a bit later.
Also from a commercial standpoint, we are focused on creating a profit minded organization, what do we deliver value to customers want to value chain.
We are putting in place operating systems in our commercial side of the business with metric visibility on accountability for profit enhancement.
Fourth.
We remain focused on enhancing our portfolio and improving underperforming product line.
For example.
Well it improving profitability on our polishing product line by consolidating and shifting production to lower cost service providers.
Yes, we're continuing to enhance our financial position to focus on cash flow generation.
We have made tremendous improvement in our working capital efficiency across all metrics.
Further we continue to focus on capital resources on our highest priority initiatives.
Where we see strategic value and where do we see clear paybacks.
Finally, as it relates to capital allocation as you know we announced the suspension of the common dividend in the third quarter.
This reduction will enhance our ability to reduce debt or invest in the business by approximately $11 million.
Our view here is that this will translate into incremental equity value for our common shareholders.
Moving onto slide five.
I'll now speak more directly to the actions would aggressively pursuing to drive improvement in North America.
We've talked extensively about the opportunity ahead of us.
Just to provide you a benchmark or <unk> point of reference.
Our margin on value added sales in our European segment is about 400 basis points higher than on North America segment.
We are focused on narrowing this gap.
We won't go to all these actions, but I'll give you a few highlights.
First and foremost we're setting the immediate turnpike warranties and rallying the team are on the most critical execution areas and operations with customers and portfolio.
From an operation standpoint, given the volume outlook, we announced the reduction of our manufacturing operations in Fayetteville.
And the team is executing very well here.
With this action, we now have a more competitive footprint to North America.
But also one that is agile and able to respond to market dynamics.
Further we are placing significant emphasis on improving foundry capabilities inside the plant.
Including more job and casting process controls.
The entire foundation of the wheel process actually starts here.
It is critical that we have stability and solid execution in this area of our facility.
And quite frankly this area of many pashley in North America has been a weakness and we must corrected.
Enabling this improvement is also a deduction in attrition.
We are currently implemented targeted plans to improve retention in the most critical areas of the plants.
Relative to customers, we are working to get out of Mexico facility validated to serve our European Oems in North America. The call. We mentioned last time European Oems manufacture 1.2 million vehicles in North America and that is an opportunity for us in this regard we have made significant progress in the quarter.
We have been leveraging.
The expertise actually we had been leveraging the expertise of our European team and strengthening our leadership team in Mexico.
We've also been focused on several complex.
Launches and have successfully executed key milestone in readiness and productivity and here I'm, referring to productivity before launch not after.
And finally relative to portfolio.
We have made significant progress in the validation of PVD.
Finishing technology that the company has invested significant resources to develop.
We now I'm pleased to the throughput that we now have to release.
From one of our major customers to launch this product. So the technologies released in the process is released.
Needless to say that is still significant work to be done to launches.
But this is a very positive step forward and broadening and expanding our portfolio so premium wheel finishes.
Let me finish by saying, we're making progress we are executing on our initiatives, but we have substantial work ahead.
Our priorities are because hopefully.
Our team is aligned and we are establishing a bright operating structure that will drive shareholder value. Ultimately, we are going back to basics in many areas of our business.
With that he was matti, who will provide details on our financial results for the quarter Mehdi.
Thanks, Marcy before I get into the detail I'd like to emphasize the positive momentum we have seen in the organization on cash flow versus our internal expectations.
As Marty mentioned since the third quarter of last year, we've seen a dramatic improvement in net debt, which is favorable by $113.6 million supported by a focus on cash by the entire organization.
Our concentration is now on sustaining and enhancing these improvements.
Also during the quarter, our large diameter wheel mix increased a roughly one third of our overall portfolio up more than 10% from the third quarter of 2018, highlighting the secular tailwinds in the market and our ability to be in front of these trends.
Let me now provide a more detailed review of our financial performance for the third quarter and the first nine months of 2019.
Turning to slide six our North America shipments declined more than the overall market due to the items Margie mentioned earlier, including reduced share take rates and lower production at our key customers year over year, our customers were down 4% versus the overall north American market, which was down <unk>, 0.4%.
Superiors units were down 2.3% year over year in the region.
Note that this year over year percentage changes adjusted for superior units shipped in Europe .
Hey, produced in Europe , and shipped in North America for Assembly.
You added sales per wheel results were favorable due to <unk> due to our mix of larger higher content wheels and resulted in value added sales per will increase of 6.5% in the region.
In Europe , despite the market being flat, we saw higher production at our key customers, which were up 6% year over year and resulted in superior unit growth of 5.9% in the region.
Including higher volumes that are in our aftermarket business again as much as as I mentioned superior is year over year unit growth figures, our adjusted for shipments from the European segment to North America for Assembly value added sales per wheel is up 9.4% driven by our shift towards larger more complex wheels.
Turning to slide seven sites slide seven reflects a breakdown of unit shipments net sales and value added sales by region for the third quarter of 2019 as compared to the prior year period as Marty mentioned previously our unit shipments increased to 4.9 million units compared to 4.7 million units in the prior year period.
The increase in shipments was driven by higher volumes in Europe , including our aftermarket business, partially offset by lower shipments in North America.
Our North America unit shipments were negatively impacted by approximately 75000 units due to the way W. strike.
For the quarter, we reported a net loss of $6.6 million equating to a loss of 57 cents per diluted share, including a nonrecurring loss of 49 cents per diluted share compared to a net loss of $700000 or a loss of 37 cents per diluted share in the prior year period.
Please note at the third quarter included net adjustments to net income totaling $15 million. This $15 million includes expenses, which relate to the restructuring of our fit for location, which totaled $13 million that $13 million is comprised of $7.6 million of accelerated depreciation on assets.
And a total of $5.4 million for severance for the workforce in Fayetteville write downs on supplies and other consumable inventory and other costs. Please see the appendix, where the reconciliation dividend income to diluted earnings per share and the table with the adjustments to net income.
Year to date net income for the first nine months of 2019 was $2.6 million or a loss of 84 cents per diluted share, which includes acquisition restructuring and other net costs of 49 cents per share.
This compares to net income of $17.8 million or a loss of 32 cents per diluted share in the prior period. Please note that the adjustments include include adjustments totaling $14.7 million to net income.
The income tax benefit for the third quarter was $4.8 million on a pre tax loss of $11.4 million compared with an income tax benefit of $7.1 million on a pre tax loss of $7.8 million in the prior year period.
The tax benefit them out is primarily due to the effects of U.S. taxation on foreign earnings under global intangible low tax income or guilty provisions of tax reform.
End of the forecasted valuation allowance on non deductible interest, partially offset by a benefit due to the mix of earnings amongst tax jurisdictions.
The income tax provision for the first nine months of 2019 was $7.7 million, a pretax income of $10.3 million compared to an income tax provision of $1.1 million on pretax income of $18.9 million for the first nine months of 2018.
The year to date tax provision was driven primarily by guilty.
Which now includes the taxation of the company's full foreign operations as compared to a phase 100 guilty in 2018.
As well as the previous mentioned impacts to the third quarter.
Due to these mentioned impact for the quarter and year to date period, our effective tax rate remains high we expect a high effective tax rate for the full year 2019 in terms of cash taxes. We continue to expect approximately $10 million of cash taxes for the full year, which has already incorporated into our full year outlook for cash flow from operations.
On slide eight let me walk you through our change in net sales and value added sales year over year for the third quarter of 2019 value added sales increased to 195 point $8.5 million compared to $179.1 million in the prior year period, driven by improved product mix comprised of larger diameter wheels and premium.
Finishes in both segments as well as higher volumes, which had a positive impact of $22 million.
These improvements in mix were partially offset by weaker euro which impacted value added sales by $5 million.
On slide nine adjusted EBITDA was $38.9 million for the third quarter of 2019 compared to $30.6 million in the prior period. The increase in adjusted EBITDA was primarily driven by improved mix and higher volume the foreign exchange impact was negligible as the weaker euro was offset by that.
So U.S. dollar effects rate, including the impacts of our foreign exchange hedge programs.
Cost performance was slightly favorable with higher energy prices in Europe , specifically in Poland being offset by global procurement savings lower energy prices in North America and other performance initiatives in North America since the Spike in energy prices in the third quarter of 2018, we have seen electric or rates declined by approximately 15.
Present.
As discussed previously we had made capital investments in our locations in Mexico to enable the purchase of electricity on the secondary markets. At this time, we expect these systems to be fully operational early in the first quarter of 2020 and will result in reduced electric costs in North America.
In Europe , we have seen an increase in natural gas and electric rates by approximately 35% specifically in Poland.
We had been focused on offsetting this increase through our through other efficiency initiatives, but it was a headwind in the third quarter and year to date periods.
For reference SGN expenses for the third quarter, 2019 were $16.3 million or 4.6% of net sales compared to $16 million in the prior year period.
For the quarter adjusted EBITDA as a percentage of value added sales improved by 2.8% to 19.9% year over year, driven by operating leverage on increased volume improved mix of larger more complex wheels, and performance initiatives, including procurement savings offsetting higher energy prices in Europe .
Moving to slide 10, I'll take you through a walk of value added sales for the first nine months of 2019 value added sales for this period were $581.9 million compared to $590.9 million in the same period in 2018.
The reduction in sales was primarily driven by a weaker euro which had a negative impact of $19 million lower volume, partially offset by improved mix comprise a larger diameter wheels and premier finishes in both regions had a net favorable impact of $10 million.
Turning to slide 11, adjusted EBITDA was $131.3 million for the first nine months of 2019 compared to $140 million in the prior periods.
The decrease in adjusted EBITDA was driven by lower volume and higher energy prices in both regions, while energy prices in North America were lower compared to the third quarter last year on a year to date basis. It is still at has still been a headwind also as previously mentioned the rates in Poland are also higher than last year. These energy these higher energy prices constitute most of the.
A negative cost performance year over year.
All these items were partially offset by an improved product mix consisting of higher content wheels and material procurement savings year to date adjusted EBITDA as a percentage percentage of value added sales decreased by 1.1% to 22.6% driven by negative year over year performance in the first half of 2019, including volume and higher energy costs.
Partially offset with favorable mix and procurement savings.
As you know expenses for the first nine months of 2019 were $46.7 million or 4.4% of net sales compared to $60.6 million in the prior year period. The decrease is primarily due to reduction in acquisition integration expenses and the alignment of reporting for SGN day, and both of our regions.
I will address our third quarter cash flow and capital structure on slide 12.
Net cash from operating activities was $32.7 million compared to $33.5 million in the prior prior period. This result is very strong compared to the other prior.
Compared to that of the prior year as last year's cash flow from operations was largely driven by the usage of the accounts receivable factoring program.
Net cash used in investing activities was $18.9 million for the third quarter of 2019 compared to $17.3 million in the prior year period.
During the quarter superior assist suspended as quarterly common dividend, allowing the company to reallocate approximately $11 million annually inclusive of dividends to common shareholders and the participation of the preferred shareholder to invest in the business and reduced net debt.
Dividends paid during the quarter totaled $6.3 million.
This will be the last quarter for the payment of the common dividend.
Purchases from for minority holders of superior industries, Europe totaled $2.5 million in the quarter as of the ended the third quarter, we had approximately $9.1 million or 1% of the minority ownership outstanding.
Also during the quarter superior repurchased 7 million euro face value of at 6% senior unsecured notes on the open market for 5.9 million Euro, resulting in a pretax net gain of $1 million, which is included in other income and has been deducted to arrive at our adjusted EBITDA.
The repurchase of our senior unsecured notes and other debt payments resulted in a total reduction of $12.4 million.
In debt principal during the quarter.
Currently we have available liquidity of more than $250 million, which includes cash and availability under our revolving credit facilities and no near term maturities of our funded debt.
We also have an incremental availability under our accounts receivable factoring program.
As of the ended the third quarter, our net leverage was approximately 3.3 times down nearly half a turn from the prior year period.
Finally, I'll move on to our outlook on slide 13, looking ahead to the remainder of 2019, we're increasing our outlook for cash flow from operations, which is now expected to be a $135 billion to $155 billion for the year due to due to the progress of our working capital initiatives. So far this year, reflecting the impact of the UAE W. strike.
General Motors, we are narrowing the range for units net sales value added sales and adjusted EBITDA. This outlook reflects our current view of the ramp up rate at general Motors and sustained production for the remainder of the year.
Finally, we are maintaining the range for capital expenditures.
Ill now turn the call back to the operator and open up for questions.
Thank him if he would like to ask your question. Please signal by pressing star.
Telephone keypad, if you're using a speakerphone. Please make sure your mute function is turned off too.
To reach our equipment.
Sorry, one to ask a question.
Our first question comes from Gary Prestopino with Barrington Research.
Good morning, everyone.
Hi, good morning, Gary.
Hey.
Just a couple of things here, you said Youre 19 ensure higher wheels got up to 33% of units in the quarter.
Hi notes that I had that you had said that that would view target.
By the ended the year, so I mean, what.
What would be realistic.
Run rate of that as we go forward I mean, you've already hit your target one quarter earlier, I mean can it get up to 40% or higher over time.
I think the future Gary is larger and more premium we'll we'll it's all about content and the in the favorable mix and so we do think it'll continue to proliferate, we haven't put out guidance and we will put out guidance when we give our.
In early next year after the Q4 call, but we do think it's going to continue to penetrate and 19. It the phenomenon of 900 Inge wheels with Premier finishes is certainly a certainly alive and well and we did get to the target that we had said early in the year at the in Q3. So we're happy about that I don't see a major shift from where we.
Our Q3 into Q4 in the year end. So we're kind of thinking that it will be about the same kind of penetration as we exit the year.
Okay.
And then Matt mentioned something about the fact that Youre trying to get I think I was writing this down you're obviously working real hard to get Mexico, where you wanted to be you're also working to get some kind of certification is that correct to be able to do.
European.
Based manufacturers that are in the us to produce wheels for them for the US market is that correct that's right.
Gary that is there is absolutely correct and it's an area that we have been focused on over the last four months, we've had we've had a.
A few launches on the docket with European Oems and those were critical because fundamentally you know they get our plants released to quote on future business and recall that is a substantial opportunity for us to grow with Underpenetrated customers in North America, and Thats, specifically European Oems So having on plan certified.
To support and the and quote and source with BMW with Volvo with dominant it's very very important so really good progress in the quarter that the team has done.
Can you give us some idea of are you certified with any of those even like already.
What do you cant as well right absolutely absolutely, yes. So so in the quarter. We we were certified with Audi BMW with Volvo and with VW.
Those for customers.
Okay.
And that means that you can.
Start producing wheels are then you just have to when the business right.
Well a couple of things on a few of those customers. We had already been sourced what I would call incubation business for the for us to try.
To demonstrate our capability in other cases, we are we have transmitting localizing business and units that are coming out of Europe . So in both cases with these four customers we should be in production and then up before the end of the.
Okay. Thank you.
Our next question comes from Glenn.
With Buckingham research.
Mr. Chen your line is life. Please.
Oh, sorry about that generally good morning.
Morning.
So thank you for the detail regarding the impact from the GM Schrader can you share what profitability in fact was from it.
Yeah, I mean, yes, so directionally, it's approximately $1 million of lost a loss profitability.
Okay.
And then.
So I'm encouraged to see the operating cash so that was a big benefit from.
Capital and inventories, resulting source of cash.
Can you can you tell us was that a function of the strike.
Should we expect it to reverse in subsequent quarters as GM production ramp back so.
Stack up.
Yes, so I'll say that.
Our our Weve advertise this initiatives since beginning of year and we've been focused on taking out or reducing our de Io and.
Specifically North America was a huge contributor in the first six months. The year. We also saw some improvement here in Deo in Europe through Q3, and so we knew as coming and so.
As we sit here and look today I don't sister, certainly see a significant change in inventory D O purchased from Oh perspective.
As we exit Q4, it go through Q4, and actually and execute for so I think we've done.
We are little more work to do in Europe to get our inventory down.
We're focused on the sustainability of the de Io. So we used to carry in North America Advertiser answered a question we use to carry about too little over two weeks of inventory, we're trying to trim down.
To about two weeks worth of inventory today in North America. So we are.
It's a source of cash for us this year clearly.
And we've also benefited from.
Some metal coming down as well metal cost coming down as well, but but overall I think we're adequately sized with our inventory balances we execute three for the GM strike and that $1 million was for Q3 only.
It's going to be a bigger number of impact for for earnings for for the on a full year basis for the impact of the way W. strike.
Yeah that was that was my next question.
Okay, and then can you I don't recall you guys articulating specifically.
Right.
It's true for goals for Fayetteville, what did what exactly is the intent there or how severely isn't being restructured.
Glenn I'll take that Mehdi can add more so they intent is to have them on a production out of Fayetteville before the ended the year and.
When we had left there is basically our technical center and honor our service wheel operations. So we'll still have a presence, but it's mainly.
Engineering and service.
Okay. So we'll no longer function as a.
Overflow capacity so to speak.
Correct correct.
Okay very good.
Okay, great. Thanks, that's it for me.
Thank you effect, but.
Once again, if you would like to ask questions you may signal by pressing star one on your telephone keypad.
Next question comes from Gary Prestopino with Barry 10 research.
Yes, I was going to ask some about Fayetteville as well thats been answered so I guess.
So you're feeling pretty good about what's going on in Mexico as far as getting the quality up.
Relative to not having any kind of production capacity in the us anymore.
No I'm feeling pretty good not only about Mexico, but holistically, Gary about about North America I walked you through the plan.
On chart five the team is just absolutely focus and executing I see us.
Being very well positioned to close that gap I mentioned, typically North America, and Europe up on margins and the hitting the ground running here as we go into the new year.
Alright, and then just lastly, I know you.
Started here and I don't have this on the tip of my tongue, but as far as how your your people are compensated bonus wise ever whatever are you contemplating changing anything that focus is more or less towards.
EBITDA margin EBITDA generation, Oh, and working capital and cash flow things like that.
No weeks I expect we continue so without Altai program is based on earnings per share ROIC, and yes out and we'll continue to do that so that has a cash flow element that is an EBITDA optumhealth and.
And our is element and our annual compensation is based on.
On EBIT ourselves I expect as we continue to in that direction.
Okay. Thank you.
Once again, if he would like to ask a question you may signal by pressing star one on your telephone keypad.
Thanks.
Mr. Im showing no further questions in the queue at this time.
Okay. Thank you.
[noise].
Hi, Thank you everyone.
Thank you everyone. This concludes today's teleconference. You may now disconnect.
[noise].
[noise].
[noise].
[noise].
[noise].
[noise].
[laughter] subscriber you have dialed is not in service. If you feel you have received this message in error. Please hang up and try your call again later message T X one one to 56.
The subscriber you have dialed is not in service. If you feel you have received this message in error. Please hang up and try your call again later message see a one to 456.
The subscriber you have dialed is not in service. If you feel you have received this message in error. Please hang up and try your call again later message see a one to 356.
The subscriber you have dialed is not in service. If you feel you have received this message in error. Please hang up and try your call again later message see a one to 356.
The subscriber you have dialed is not in service. If you feel you received this message in error. Please hang up and try your call again later message T X 109 56.
The subscriber you have dialed is not in service.
If you feel you have received this message.