Q1 2020 Earnings Call
It's Tom I'll like to turn the conference over to Mr. Troy for please go ahead Sir.
Thank you good morning, everyone and welcome to our first quarter 2020 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 section of superior website.
I'm joined on the call by must be a bull about our president and CEO and Matti Masanovich, our executive Vice President and CFO.
Before I turn the call over to manage the I would like to remind everyone that any forward looking statements contained in this presentation or common to non today are subject to the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
Please refer to slide two of this presentation for the full safe Harbor statement ended the company's SPC 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 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 can be found in the appendix of this presentation.
With that I'll turn the call over to modestly.
Thanks, Thanks, Colin good morning, everyone and thank you for joining us today.
You are first quarter 2020 results not before I begin my remarks, I would like to first.
Thank our global team was showing tremendous resiliency throughout these challenging times.
And then I have been many shirt sacrifices across the organization on the bottom of the page here you see one of our employees back to work. After we started production in Germany. My had goes off to the men and women have kept this company moving forward during these challenging times.
Now moving on to slide four I will discuss the highlights for the quarter as well as the impact that we have seen from the covert pandemic. I'll then provide you an update on our operating strategy in the current economic environment.
In line with a larger automotive industry, our first quarter results were significantly impacted.
Bye bye convinced them as nearly all of our customers.
Shutdown.
However, prior to the escalation of this global crisis.
We delivered significant progress on various key metrics of our value creation roadmap.
And we were actually on track to deliver on the targets, we shared with you earlier.
First we continue to execute on our portfolio of differentiated and premium technologies.
This resulted in growth above market on value added sales of about 5%.
With 32% of our portfolio, consisting of 19 inch meals and greater substantially.
Higher than where we were last year.
Our efforts to enhance our margins in North America by reducing structural costs.
Rationalizing our footprint expensing, it expanding our product portfolio and fixing troubled product lines deliver an 80 basis point margin improvement across the entire business. Despite a 15% year on year decline in volume.
Finally, we ended the quarter with $296 million of available liquidity.
And and 11 million dollar reduction in net debt.
Our current liquidity position is very strong.
And we believe it allows us to weather the storm ahead.
Now regarding corporate 19 in the first quarter. The impact is a pandemic was actually significant.
In response, we immediately implemented measures to ensure the health and safety of our employees, including that that the temporary suspension of production at our facilities.
Our unit shipments were actually negatively impacted by 11% and EBITDA by about $7 million.
At the environment changed drastically late in the quarter, we moved quickly.
Taking actions to align our cost and preserve our financial flexibility.
To augment our liquidity position, we drew down on our revolvers.
Turing up our cash balances.
We remain in compliance with all debt covenants and we do not see we do not foresee a scenario, where we are not in compliance with these.
I will elaborate on the details of these actions in a moment.
As it is difficult to predict this will impact to covert 19 will have on the industry and our business. We suspended full year 2020 outlook near the end of March.
That said I checked is currently estimating a 25% decline in production for 2020.
However that could change materially as we move through the second quarter and Oems and supplies begin to restart production.
Without clear visibility into the timing of the recovery in production. We are planning, we're planning for and on Rightsizing cost assuming production remains depressed compared to pre covered losses.
He covered levels.
Ultimately we are focused on controlling what we can.
The health and safety of our workforce superior financial flexibility aligning cost and restarting production in a more safe and efficient manner.
Turning to slide five.
Our efforts, which we started discussing with you mid last year are focused in three primary areas.
These actions are yielding positive results.
Creating a 20 million dollar run rate improvement.
And closing in the margin gap between the two regions.
We advanced our technology with the commercialization of PVD.
Improved our polishing product line profitability.
And launched new premium platforms.
We also reduced expenses and optimize our North America footprint, which is now 100% in low cost.
Further our facilities have been certified for European requirement.
Enabling new business was with these customers in North America.
As I stated last quarter from a margin standpoint, we expect many of these initiatives to narrow the gap between our North American operations and European operation.
While these initiatives represents significant progress.
We still have more room for manufacturing improvement.
Moving onto slide six.
As mentioned earlier in my remarks in response to the ongoing covert pandemic, we decisively move to ensure the health and safety of our employees.
Additionally, we took action to enhanced financial flexibility by showing about liquidity reducing costs.
And efficiently managing our production capacity.
Now these four areas you see on the chart, we'll continue to be our primary focus.
Turning onto slide seven.
As I mentioned, we suspended production in late March to ensure the safety of our employees.
And put in place our health and safety playbook.
As the pandemic escalated our leadership team began meeting daily.
I was on the phone with my team everyday to ensure that we are implementing the necessary precautions at our facility.
As we slowly restart production at our facilities, we will continue to put heightened health and safety measures interactions.
[noise], we've modified our practices in all our facilities such as in common areas cafeterias and conference rooms to mitigate risk of covered 19.
We do not believe these initiatives will have a significant impacts on our cost structure capacity or ability to meet production demand.
To drive consistent health and safety protocols and all of our sites across our global footprint, we created an employee health and safety steering committee responsible for overseeing these actions.
This committee will also continue to drive consistent health and safety measures as production ramps back up.
Moving on to slide eight.
We are confident in our current liquidity position and have taken decisive steps.
To ensure that.
We have eliminated all non essential capital expenditures and continue to focus on any actions. We can generate we can take to generate further cash flow through working capital management and other cost reduction initiatives.
As noted previously in an abundance of caution we drew down on our revolving credit facilities to shore up our cash balances and liquidity.
We ended the first quarter with $296 million of available liquidity and as of April Thirtyth, we maintain liquidity of $260 million.
These figures were bolstered in part by the upsizing of our European revolving credit facility, we completed in January.
Turning onto slide nine.
From a cost management standpoint, we have taken the necessary steps to reduce our operating costs based on the current environment.
We took broad based cost reduction measures by aligning our headcount across the footprint.
To better fit current and anticipated industry production.
Along with reducing salaries and executive compensation and temporarily following workers.
For example, in North America will reduce our as Ginny headcount by approximately 15%.
Additionally, in Germany, we have taken advantage of short time will programs were employees received the majority of their salary from the government.
This is put on production associates in Germany.
And much of our salaries workforce in Eric across our position there.
In Mexico will do so workforce through a combination of releasing contract workers workforce reductions and temporary layout.
Finally in our us locate locations.
All associates received the reduction in pay and are taking temporary hurdle.
Turning on to slide 10.
We have responsive we have responded decisively to each of our manufacturing sites.
By ensuring the health and safety of our employees.
And to maximize efficiency of our facility.
In Mexico, our facilities stop production in early April and in Europe, our facilities stop production in mid March.
We have already opened three of our facilities in Europe and anticipate opening the fourth this summer in line with inventory levels and demand.
We anticipate reopening our facilities in Mexico in the coming weeks, we're actively watching and monitoring the government degree in Mexico, which by the way. We heard this morning that we have the greenlight for restart of our operations and Chihuahua on May 18, the world. We're happy to hear this service news.
Moving onto slide 11.
As we open our facilities in North America, and Europe in accordance with federal state and local guys guidelines.
We're currently seeing the ongoing positive trends.
And product mix, continuing DCN article there on the right right side of that the chart relative to mix.
Now that our facilities in Europe have been through the reopening.
We will use this as a blueprint for North America.
We have seen we have been includes contract with our customers and suppliers to understand requirements and we will be working closely to ensure our supply chain is ready to ensure to proceed according to demand.
We are anticipating restarting production in North America in the coming weeks and will be closely managing inventory production inefficiencies through the restart.
Again, while we cannot predict the full impact of Cobot 19, we're operating under the assumption of reduced production volumes worldwide.
Our ramp up will be measures.
And we will utilize all strategies to mitigate the negative impacts of restart.
Turning on to slide 12.
In the coming months, our main priority as we manage to the crisis and returned to full production.
We will be to focus and execute on each of these four areas.
Catherine safety, maintaining liquidity controlling cost and efficiently managing production.
In Q1 industry volumes declined 10% in North America, and 21% in Europe totaling 16% in our markets.
During the second quarter, we are anticipating a 70% drop in OEM vehicle production in North America, and 60% in Europe.
With the full year down in both regions by about 25% based on the latest paycheck forecast.
Given the decline and the potential for a protracted recovery. We are assuming volume will not returned to pre covert levels in the near term.
Before I turn it over to two Matty I would like to make a few final comments.
First I would like to welcome rebel Lady who we plan to a point to the board of directors immediately following our annual meeting.
Ray brings significant operational industrial financial experience to the table.
We are pleased with raise addition to the board.
Next I want to again to thank our associates globally for their dedication in managing through these challenging time.
And finally moving forward based on the steps up offline I am confident in our ability to emerge from this crisis.
Ready to compete and drive growth.
Manny.
Thanks, Marty as Marty mentioned the continued spread of covered 19 is that a widespread and adverse effect on the auto industry on both consumer demand and OEM for automotive production the pandemic negatively impacted our financial results for the first quarter 2001.
Turning to slide 14, our first quarter 2020 value added sales results further outperformed the broader market due to our shifting mix towards larger higher content wheel.
We delivered 5% growth over market and value added sales per wheel growth of 5% excluding FX.
This growth was largely due to outperformance of our European operations. Despite the covert 19 impacted production has to be solidly in the quarter.
In both North America, and Europe value added sales was negatively impacted by the overall decline in the auto industry. As result of production shutdowns, who is the Carbonite team North America, and Europe value added sales declined 11% and 10% respectively.
Despite the macroeconomic headwinds we are continuing to see large diameter wheels penetrate globally with value added sales per well increasing compared to the prior year period as margin noted 19 inch wheels in greater accounted for approximately 30% of our portfolio, which compares to just over 25% in the prior year period.
We expect the penetration of larger diameter wheels to continue in 2020.
The present OEM release schedules.
Our service to change based on demand and market conditions. Currently support this ongoing trend, we expect 19 ish and larger wheels to represent approximately 30% 36% of our portfolio for full year 2020.
On slide 15, we outlined.
The global the regional breakdown of unit shipments net sales and value added sales for the first quarter 2020 as compared to the prior year period in the first quarter, our wheel shipped units decreased to 4.3 million compared to 5 million to the prior period. The change in units was driven by a decline in our key customers primarily related to covert 19.
In the first quarter, we reported net loss of $190 million for a loss of $7, an 84 cents per diluted share compared to net income of $2 million for a loss of 24 cents per diluted share in the prior year period.
Due to the ongoing spread of covered 19 in the first quarter. We were court we were required to test the valuation of our goodwill and indefinite lived intangible assets, which you can see on slide 16.
Based on the on lower 2020 forecasted European automotive production volumes.
Higher discount rates and lower market valuation multiples valuation analysis indicated that these assets were impaired.
Requiring an additional noncash charge to earnings of $194 million during the first quarter.
While we still have a strong business in Europe, the impact of cover 19th and the resulting change in volume expectations as well as the respective valuation imports ultimately resulted in the full write down of these assets.
Starting on slide 16, the impact of covert 19 through our first quarter results was impactful.
Our analysis indicates that unit shipments were negatively impacted by approximately 530000 units or 11% with a corresponding unfavorable impacts on value added sales of $22 million and an unfavorable impact to net adjusted EBITDA of $7 million.
In addition to our net loss for the quarter driven by the noncash goodwill impairment.
Increased volatility in the foreign exchange rates lower the fair value of our hedging portfolio and our Mexican subsidiaries financial statements when translated into us dollars.
The combination of the net loss and foreign exchange impacts reduced shareholders' equity to negative $28 million as of March 30, Onest 2020.
We issued a table in the appendix for the impact of impairments acquisition restructuring and other items on diluted EPS and the reconciliation from net income to diluted EPS.
On slide 17, I'll walk through our change in net sales and value added sales year over year for the first quarter 2020.
You added sales decreased to $170 million compared to $193 million in the prior year period.
The decrease was driven by lower production volume due to covert 19 production shutdowns and delayed shipments.
Offset partially by the continued portfolio shift the larger diameter wheels with more premium content.
On slide 18, adjusted EBITDA was $40 million for the first quarter 2020, compared to 43 million in the prior year period.
The decrease in adjusted EBITDA was primarily driven by lower industry production volumes in North America in Europe, including production shutdowns alluded to covert 19, partially offset by the shift to higher content wheels, as well as lower energy prices procurement savings manufacturing footprint rationalization implemented in the fourth implemented in the fourth quarter.
2019, SNA savings and other cost savings.
Despite the lower industry production volumes, we work to execute on our strategic priorities to align costs with production levels as margin noted in his comments, we acted swiftly to protect the health and safety of our employees by temporary ceasing production at all of our facilities in Europe in North America.
For reference SDMA expense for the first quarter 2020 was $12.5 million or 5% of net sales flat as a percentage of sales compared to the prior year period.
Our first quarter cash flow is addressed on slide 19.
Net cash from operating activities was $31 million compared to $29 million in the prior period. This improved result year over year was due to improved working capital management, Despite lower earnings.
In the first quarter.
We saw an increase in net cash used for investing activities at $14 million compared to 12 into the prior period capital expenditures remaining relatively flat for the quarter at 14 million as we made cuts to non essential capital investments is the primary driver.
Preferred dividends paid during the quarter totaled $3.4 million and purchases for minority holders of superior industries Europe totaled $4 million.
At the end of the first quarter, we have less than 1% of the remaining minority shares outstanding or approximately $2 million.
Slide 20 provides an overview of our capital structure.
Prior to the pandemic and as part of our capital allocation strategy, we entered into a new low cost financing solution with European equipment loans for $12 million at an interest rate of 2.3% maturing through through 2027.
In line with our strategic priorities, we delivered free cash flow and lower net debt by $11 million during the first quarter.
We utilize new financings and cash generated to pay down our term loan by $23 million in the first quarter.
We remain in full compliance with all lending covenants, including leverage ratio limits on our lines of credit.
Based on various negative forecasted scenarios, we do not currently anticipate any issues and meeting the covenants under the facility.
So you are aware the covenant on our US revolver is foreign a half times net debt to LTM adjusted EBITDA as defined in our credit agreement.
The covenant is only tested if were more than 35% drawn on the U.S. revolver.
On any given quarter end.
Therefore based on my prior comments that we do not foresee a covenant issue, we would expect to reduced borrowings under the U.S. revolver to less than 35%. If our leverage is greater than the then 4.5 times in order to maintain compliance with this requirement.
Turning to slide 21.
In this period of heightened uncertainty our top priority is preserving our financial flexibility.
As a precautionary measure against potential impacts of covert night of of Cowen 19, We drew $208 million net on our us and European revolving credit lines.
As of March 30, Onest 2020, our total cash on hand was $282 million with total availability, including cash and availability on our revolving credit facilities of $296 million.
As of April Thirtyth 2020, we maintain liquidity in excess of $260 million with no near term debt maturities.
Going forward in a non production scenario.
Our cash burn is expected to be less than $25 million per month.
Which implies significant available liquidity.
To manage the business through the crisis.
Slide 22 illustrates our cash breakeven case in the event of an approximately 25% volume decline.
Assuming flat working capital acquisition of the remaining minority shares.
Continued payment of the preferred dividends in cash.
Further base level maintenance Capex capital expenditures, our cash flow should be roughly neutral for the full year.
And finally with regard to our full year 2020 outlook on slide 23, we've previously with through our 2020 outlook due to the uncertainty around production volumes.
Aegis is currently forecasting a 25% production decline in both North America in Europe.
Based on this volume we expect to end 2020, with a strong liquidity position with net debt, peaking in Q2 or Q3, depending on the ramp up schedules.
We also anticipate returning.
Returning to or improving the margins we saw in the first quarter 2020 by the fourth quarter 2020.
With that or open the call for questions and answers.
I'll turn the call back to the operator.
Thank you.
Ladies and gentlemen, if you will like to ask a question. Please signaled by pressing star one on your telephone keypad.
You use any speakerphone. Please make sure your mute function is turned off to let your signal to reach our equipment.
Again press Star one to ask a question.
We'll pause for just a moment a lot everyone and opportunity to signal for questions.
The the leverage so obviously the liquidity position is quite good.
However, you know given multiples.
Three the the suppliers space, then I realized that she chewed Q3 will probably be trough, what what sort of liquidity level are you comfortable with returning back to the proposition that you'd made earlier about repayments, a jet either through bond buybacks or or content.
<unk>.
Paydowns, a a term loan and I know you have done some of that this quarter, but it would just be helpful to know what you consider your minimum liquidity threshold to do that and then my next question is on keeps you Q3, because it's very difficult for us analysts to really think about you know.
The absolute level of working capital swing can you just talk about when your customers are coming back on line early may mid may.
What sort of working capital swing could you see in in these in the summer months as the production schedules are quite erotic I think that's quite helpful.
<unk>.
Thank you for the question is Maddie speaking so the first question what how do we feel about death continued to pay down either bond buybacks richer Moby repayment in the current environment.
Mention I think that'd be we've moved through the year and then you kind of look at what I framed up from an I.H.F. perspective with 25% down.
And how we're going to.
We're gonna antennas here.
People will be cash flow breakage.
<unk> I don't anticipate further down pay down this year in 2020 from what we pay down first quarter, we're going to preserve our liquidity and build build cash who's been possible. So I don't I don't anticipate you know going forward with any further deputy though that's number one.
Working capital swing in the second and third quarter honestly as much as you mentioned were trying to manage that working capital swing really where it comes out as you know our ability to continue to factor receivables our ability to continue to harvest D.B.O.'s or from our supply base and then obviously with the inventory.
Coming back on line, we ended March with a reasonable inventory position and so you know we ended up with about a week and a half where the finished goods and so I tell you that I think rented good spot as we kind of begin to launch and with a start up here in may and so we started you know last week in in Europe.
Getting things up and running or we can half ago in Europe, I think as we kind of move forward here I. My view is we're trying to hold the inventory levels, where they are and not have to kind of rebuild inventory levels.
Initially come and go we're seeing stronger demand in Europe, which is good just kinda went from a customer released perspective versus what we were thinking so I think that's a a good start but it's gotta stick and as you know when we build inventory you know we have a rough boundaries, we start with melting meddling with all the way through finished good. So we carry a lot of whipping raw.
As we sit as we sit here. So we're looking at all avenues to reduce our our inventory positions as we go forward and kind of B.S. thrifty as we possibly can and our start up.
That's great and if I can slip another one in there some suppliers have talked about you know not even having a week or choose worth the visibility as you stand today, how good do you feel about how the schedules are ramping up.
May g. feel like even over the past week, that's and praised or not.
We're in constant communication with the R.O.M. customers with the schedulers <unk> and so I'll tell you that we are very close tracking of what their ordering were reconfirming via via a phone calls with them. So we're not just taking their broadcast it verbatim and so I think we have very good visibility in what they're going to order now over the mid term here.
As consumer sentiment consumer demand as I mentioned I think if I do think it's it's gonna be choppy you know as a kind of moving into the summer months, but we're hopeful clearly that then we're going to have stronger to man and the economy bounces back, but I'll tell you that from the visibility standpoint, we get really good visibility to 12 to 16 weeks when.
The customers they give us those schedules and we actually confirmed that that's what they're ordering and they're going to take it. So that's that's where we're we're not we're we're pushing.
Stephanie. This is this is my D. I, just actually I just got off the phone this morning with them.
My President in in Europe and.
Talking about the restarting how well, it's going and so in from the visibility standpoint would actually please we're seeing more stability than we expected.
Slightly above what are we thought we would be you know if we see a lot of facilities in Europe, it back up and running Germany's up.
Running 724, so yeah. The visibility is getting a lot better and more stability mid term I think it's remains to be seen right. So from our manufacturing standpoint, we really we really in our business needs to be very flexible we were staying very very close to our customers and well not just relying on on on the C.D. I.
We're calling and we're making.
To the forecast so things like we can just thought back up and Todd plant operations, where where are being favorite cautious with that.
That's great I'll get back in case, thank you so much.
Exactly.
Thank you.
Once again, ladies things element if people like to ask a question you May press Star one now.
Mm.
[noise] at this time there no further questions into cue.
I would like to turn the call back over to my G. about a month for closing remarks.
Thank you two that are no more questions. We'll go ahead and clothes on the calls tanks, everyone for joining we hope you stay well I'm not saying in these challenging time. Thank you.
[noise] <unk> today's conference you may now disconnect.
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