Q3 2020 Superior Industries International Inc Earnings Call
Before I turn the call over to modesty I would like to remind everyone that any forward looking statements contained in this presentation or commented on today.
Our subject to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Please refer to slide two of this presentation for the sales for the full safe Harbor statement and in the company's FCC 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 non-GAAP measures today, including value added sales and adjusted EBITDA.
These non-GAAP measures exclude the impact of certain items and therefore are not calculated in accordance with us 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 Marty. Thanks.
Thanks drew and good morning, everyone. Thank you for joining us today to review our third quarter results before we begin I would like to welcome our new Chief Financial Officer, Tim Trenary disappearing Tim.
Tim is an accomplished executive with a strong track record of financial leadership and significant experience in the automotive industry.
We are thrilled to have them on the team.
With that I will now provide an overview of our third quarter.
Beginning on slide three we are pleased with the results and the superior team delivered a strong quarter in the face of a challenging environment.
Recall when the endemic began we laid out our priorities in four key focus areas.
People on liquidity and efficiency.
I am proud of how our team has executed on these filings.
Ensuring the health and safety you want employees has been and continues to be our top priority.
I want to see where labor is in place which includes clear protocols.
Every aspect of our operations from business from I think two cafeterias to production.
These measures have proven highly effective today and will continue to be honest books.
Also in response to cool that we implemented several temporary and permanent cost saving measures.
These cost saving initiatives. In addition to the structural cost reductions we executed throughout 2019.
Have enabled us to significantly expand earnings and improved margins.
Further these decisive cost saving measures coupled with diligent management of working capital and capital expenditures, we were able to maximize cash flow enabling record liquidity.
Finally, I am pleased that today, we have successfully restarted production with no disruption I.
Our team has been able to positively respond discussion with volatility and reliably deliver to a customer needs.
Having said that little bit uncertainties, and the potential impact on our production supply customers and the broader market remain.
We will continue to be vigilant in managing our business and given the success. We've had today we are confident that what we have a robust response plan for these challenges.
Slide four.
I wouldn't even on cash has been and continues to be the main priority for us.
In the quarter EBITDA grew by 20% and EBIT margin improved by 440 basis points compared to the third quarter of last year.
This was driven by structural cost improvements as well as the ongoing portfolio shifts towards higher contented wheels.
Actually 19 inch and larger wheels comprised of an unprecedented 40% on volume for the quarter.
In addition, we were able to deliver enough debt reduction of $77 million, resulting in the lowest level of net debt since the acquisition of our European business in 2017.
We also improved our liquidity position to a record level of $336 million as.
As a result, we are now well ahead of our prior guidance to be cash flow neutral for fiscal year 2020.
As I mentioned, the health and safety modern fleet has remained a top priority.
And we continue to sell the value to ensure we are doing everything we can to provide a safe work environment.
In addition to delivering top customers with no disruption.
I'm pleased that our manufacturing metrics are tracking ahead of prequaled levels due to the alignments, we've created around safety quality and delivery.
Further our focus on improving our operating performance in North America is bearing fruit with significant improvement in profitability and margin.
We have now fully closed the gap margins between the two regions.
Now with respect to our outlook during the first quarter of 2020, we suspended our full year outlook due to the uncertain production is about.
With the recent stabilization in industry production and the successful restart of our operations will now be able to provide guidance for the fourth quarter.
Give me provide additional details on our outlook, we remain optimistic and anticipate a robust quarter in terms of sales and EBITDA that is adjusted for the roll off of temporary cost reduction and you can check them.
We also expect free cash flow to be ahead about pipe prior prior guidance of cash flow neutral 20 for the year 2020.
This outlook assumes no corporate related production shutdowns at superior or our customers.
As I mentioned, we are closely monitoring the call that resurgence.
And the potential impact of any mandated shutdowns in all regions, including Mexico, Japan, Germany and Poland.
Moving on to slide five.
The graph highlights the improvement in industry production since the second quarter 2020, which.
Which was down more than 60% in both North America and Europe.
North America had rebounded with production in the third quarter essentially flat to the third quarter of 2019.
While European volumes also improved sequentially the recovery has been slower with production down 9%.
As we look to the fourth quarter I can't forecast in both regions to be relatively flat compared to the fourth quarter of 2019.
Slide six highlights how these secular trends like waiting and premium we'll continue to propel our growth above market.
Well, we are left with markets in the first quarter our year to date value added sales remains ahead of more.
This is driven by the ongoing shift to premium wheels.
Enabled by our portfolio of differentiated technology, which has long been a competitive advantage for superior and is core to our strategy.
We expect this trend to continue as we seek opportunities to serve our customers desire for increased we have content [noise].
Turning on to slide seven.
We continue to stay focused on our shareholder value creation roadmap out.
Our immediate focus has been on improving operating performance through cost management efficiency and manufacturing excellence.
These efforts are bearing fruit and I'll hit on your results.
But we recognize that there is more opportunity ahead for us to improve.
At the same time, we continue to stay focused on well above market by executing on portfolio and leveraging the secular trends for premium wheels.
Slide eight actually highlights two recent positive examples of the successful execution of this strategy.
As we previously discussed earlier and the early this year, we launched our physical vapor deposition particle Pee dee.
On the Ford F 150.
We are pleased that this past week at 422nd annual World Excellence Award, we received an award from for recognizing the flawless launch the exceptional performance of this product.
And the production continuity in these challenging times.
We are proud of this recognition of our differentiated portfolio of products.
And we're continuing to grow here with wins on other programs.
Further we continue to grow our robust portfolio of electric vehicle programs.
We were recently actually awarded key program with a North American OEM, who announced major advancements and investments in this segment.
In closing our progress in executing our near term priorities during the quarter has enabled us to move along our shareholder value creation road map and to emerge as a stronger company understand them.
This performance.
He is a testament to our team I would like to thank everyone at superior for their unwavering commitment and some performance as we continue to navigate these challenging times.
With that I will turn it over to Tim.
Thank you much.
Turning to slide two.
We delivered 192 million in value added sales during the third quarter.
This represents a 4% decline excluding FX compared to the prior year period.
And is equal to the industry production decline of 4%.
As previously mentioned the trend toward larger diameter wheels has continued in the global marketplace.
During the COVID-19 inch wheels in greater accounted for approximately 40% of our portfolio.
Pair to just over 30% in the prior year period.
Our third quarter value added sales in North America were flat year over year, reflecting the strong industry recovery following the downturn experienced in the second quarter of 2020.
Europe's third quarter value added sales strongly improved sequentially from the second quarter, but the impact of cold at night team continues to be seen in Europe.
Well you added sales decreased 8%, excluding the impact of FX compared to the prior year period.
On slide 11.
We outlined the regional breakdown of unit shipments.
Sales in value added sales for the third quarter 2020, as compared to the prior year period.
In the third quarter, our wheel unit shipments decreased to 4.4 million compared to 4.9 million in the prior year period.
The change in units was primarily driven by lower production levels at our key customers in Europe.
Coupled with a decrease in aluminum prices net sales decreased to 317 million for the quarter compared to 352 million in the prior year, which was partially offset by the shift toward larger wheels with more premium content and a stronger euro.
We reported net income of 11 million.
Core earnings of 12 cents per diluted share compare.
Compared to a net loss of 7 million or a loss of 57 cents per diluted share in the prior year period.
Please see the table in the appendix for the impact of acquisition.
Restructuring and other items on diluted Dps.
A reconciliation from net income to deliver D. P S.
Turning now to slide 12.
As Mike You mentioned the company took decisive actions to mitigate the impact of covert nineteens and enabled us to better align costs to our customers production levels.
These temporary and permanent initiatives resulted in higher margins as compared to the prior year.
In addition to these cost initiatives.
We enhanced cash flow by improving supplier payment terms you.
Efficiently managing inventory expanding accounts receivable factoring arrangements to offset higher accounts receivable balances.
Reducing capital expenditures versus the prior year period to align to the current production environment.
On slide 13.
Value added sales decreased 192 million compared to 195 million in the prior year period.
The decrease was primarily driven by lower production volume at our key customers in Europe, offset partially by the continued portfolio shift to larger diameter wheels with more premium content and a stronger euro.
On slide 14, adjusted EBITDA increased to 47 million for the third quarter of 2020 compared to 39 million in the prior year period.
The increase in adjusted EBITDA was primarily driven by our strong stronger product mix.
Favorable foreign exchange rates.
Margin enhancement initiatives.
Clearly permanent and temporary cost reductions.
Rationalizing our manufacturing footprint.
Lower energy prices and temporary government incentives.
Third quarter cash flow was addressed on slide 16.
Net cash from operating activities was 100 million compared to $33 million in the prior year the.
This increase was primarily driven by working capital improvements, including supplier term extensions and its expands factoring of receivables offset higher accounts receivable balances, thereby enhancing our free cash flow and placing US ahead of our 2020 targets.
In the third quarter net cash used for investing activities decreased to 10 million compared to 19 million in the prior year period.
The decrease was primarily driven by an $8 million reduction in capital expenditures versus the prior year period.
We have carefully managed capital spending throughout 2020.
Net cash used for financing activities increased primarily due the payments on our revolving credit facilities, which all curious zero balance at the end of the third quarter.
Also paid preferred dividends of $3 million during the quarter.
In total we generated 86 million free cash flow in the third quarter.
Turning now to slide 16 for an overview of our capital structure.
We made significant strides toward our goal of generating cash flow to reduce that strong.
Strong cash flow in the third quarter also boosted our liquidity to a record level as.
As of September Thirtyth, 2020, total liquidity, including cash and available amounts under our committed revolving credit facilities was 336 million.
Total funded debt as of September 32020 was $630 million compared to $635 million in the prior year period.
Net debt decreased by $77 million compared to the second quarter.
Net debt down to 519 million a record low since the acquisition of our European operations in 2017.
Slide 17 summarizes our debt maturity profile.
We have no significant near term maturities of funded debt with the next significant financing of that beat the extension of our U.S. and European revolving credit facilities.
Which mature in May 2022.
Our revolving credit facilities currently haven't zeroed down.
Our term loan does not mature until 2024, and our senior notes mature in 2025.
We remain in full compliance with all loan covenants.
Our historical progression of free cash flow and liquidity is depicted on slide 18.
We achieved free cash flow of 86 million third quarter, driven by the cost and cash flow actions previously described.
We are on track to beat our prior free cash flow outlook issued on August 15th this year, a big free cash flow neutral in 2020.
In addition, our current liquidity is a record standing at 336 million.
We believe superior is well positioned to continue to manage in this challenging economic environment, resulting from the pandemic.
Our outlook for the fourth quarter of 2020 is on slide 19.
And reflects the latest I it just industry production forecast for the fourth quarter.
Assumes no production shutdowns arising from the virus.
Hi, Jeff its current production forecast is for the first fourth quarter in North America to be relatively flat and an increase in Europe of 1%.
Resulting in a flat quarter across our footprint.
As a result, we expect shipments to be in the range of 4.15 to 4.45 million units.
Net sales to be in the range of 305 to 325 million.
And value added sales to be in the range of 175 to 195 million.
Resulting in adjusted EBITDA.
40 to 46 million.
Based on these estimates we anticipate free cash flow to be positive for the full year 2020, an improvement to our prior outlook of free cash flow neutral for the full year.
We anticipate maintaining most of the free cash flow achieved to date in 2020 through year end.
I would like to address our New York stock exchange listing.
On June 5th Superior received notice that it was not in compliance with the listing standards due to the decrease in the company's market capitalization and shareholders equity.
We submitted a remediation plan on July 20th and announced at the New York Stock Exchange and accepted that plan on September eight.
The plan lays out our strategy to increase the market capitalization within the required timeframe.
We are confident that by executing our plan, we will deliver market capitalization greater than 50 million.
In closing, we continue to execute our safe work playbook to ensure the health and safety of our employees.
Other key priority is to continue to improve superior financial position and to drive shareholder value.
That concludes our prepared remarks, I'll turn the call back to David to open the call for questions David.
Thank you.
Ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question you may do so by pressing star one that now because you're on a speaker phone. Please make sure that your mute function is disabled to allow your signal to reach our equipment again to ask a question. Please press star one now.
Our first question comes from Gary Prestopino with Barrington Research.
Hey, good morning, all.
Oh, good morning, Great results.
Hey.
A couple of questions here and I couldn't keep up with Oh, how fast you are going in terms of some of the slides, but you repaid 114 million of debt in the quarter right.
In how much of that was the revolver and how much of that was actually your your your.
Party or other debt structure.
Hi, Gary its 10 that we can all log new payment already.
All repayment or the revolvers, okay, well repayment of the revolvers okay.
That's that's great.
And you guys basically tap those little ball, there's just as a as a source of liquidity going into the pandemic right.
Yeah, I mean, you saw that in our cash on the balance sheet is a source of our liquidity. The company did a drawdown on on the revolver is in the midst of the pandemic just to assure our liquidity, but as production came back up we're we're comfortable now that we cannot pay.
Them down and they are paid down a zero balances and we have.
North of $100 million of cash on the balance sheet. So as the cash flow improves then you obviously start paying down some term loan b right.
Well, that's certainly as an option.
We well want to manage your through the through the fourth quarter make sure. This virus is behind us make sure. Our cash flow continues to stay strong continued to execute and we will address that due course.
Okay do.
Do your senior secured notes trade.
On the market sorry.
Senior secured notes trade what do they trading at now Troy do you know.
Oh I think the latest I saw was around the mid Eightys 84, and five okay. I've got a couple of more questions here and then I got to jump I don't want to hog the call that I got to nine o'clock call. So hey, Matt maybe the Uh huh.
Yeah chest projections or predictions those will obviously put in or maybe they weren't before the.
New shutdowns on the pandemic in terms of what's going on in Europe.
What's your view on a you know first of all I I would assume that no auto manufacturing has been shut downs and what's your view on what this could cause in Q4 with European operations.
No yeah, Gary listen clearly this last couple of weeks, there's been a lot of action by governments or both in Mexico, frankly entities in Europe.
So far our manufacturing both in Germany, and Poland has not been impacted.
I would tell you that during during cold bid for those operations as we ramped up I wouldn't able to manage very effectively.
Right now we don't we don't see a big disruption to manufacturing in either one of those operations.
Okay. That's good to hear and then.
Just some writing this down here and like I said, I don't want to hog the call, but I got to jump here soon.
You talked about the margin gap closing between North America, and Europe, which.
Which is really a testament to what you guys have done and it's great.
Is that.
They're both on about the same margin levels right now on and that's on an adjusted EBITDA basis Magic.
Yeah, Yeah, I would say that and I know that we expect the same for the balance of the year.
You know Gary North America has performed extremely well right in the face of a challenging environment. I mean, you are very familiar with all the initiatives we put in place.
He is not really doing.
During the pandemic only we took some cost actions, but the plan that was executed prior to the pandemic is panning out as we discussed.
Okay, I guess, what I'm getting at is that obviously, maybe Europe came down because it was it was sluggish U.S. came up or is that one way to look at it plus the fact, you have such great sell through in pickups, and S.U. visas and stuff is that one way to look at it and I'm not belittling you know what you guys have done I'm just trying to get an idea of how these things move.
The way.
You know Gary I would tell you that for the third quarter North America is substantially better than the Europe. We did we did see an impact on Europe from a volume standpoint that Europe has done a very good job of.
Okay. So to do some cost in holding margins.
Again, the story in North America is structural in nature.
Really along all dimensions of the business okay.
Okay.
Oh, and then just in terms of the large large diameter wheels at 40%, where where where can that go to I mean that I think initially you were talking about somewhere in the low thirtys mid thirtys as a percentage of the portfolio and now it's at 40% I mean is there still room to grow that.
Yeah, Gary I mean, this whole this whole trend towards larger wheel more premium wheels.
Actually overall it still represents a small a small percentage of the fleet that content story, we expect to continue for US you know North America was a was off the charts because the mix moved in our favor on the platforms. We're at war on but overall, if you average out the year you know last year to 26% this year.
There weren't a lot on average, 34%, we expect that trend to continue.
Great. That's good news and then lastly can you give us any clue, who was the TV manufacturer that you got the new program Oh.
I would only go as far as saying, it's one of the big free.
Okay. That's great. That's all you know thanks, a lot guys I got to jump, we'll speak to you soon.
Thanks, Gary.
Thank you. Our next question comes from Stephanie Vincent with JP Morgan.
Hi, Thank you very much for taking my questions first.
First off a very good quarter on the margins just wanting to make sure you know when we model you guys going forward, especially into 2021 are there any kind of one time items, either three government support or just keeping.
A very tight rein on costs that maiden can't you next ski or that we should be plugging backend char numbers, either on Cogs or in its DNA that would be my first question. The second question is similar on on Capex.
I mean.
In your view what can we look forward to in terms of a medium term capex outlet per annum for superior.
And then finally I'm very very happy that he knew pay down the revolver from a bondholders perspective, I guess, you had taken excess cash and have and put that into a bond buybacks, but I'm just wanting to know may.
He from your perspective, what you would feel comfortable in this type of environment holding in cash on your balance sheet, realizing that it's going to be higher than in previous years Theres. They're my initial question.
Okay. Thank you for your questions Stephanie it's Tim.
I'll try and chicken here in order.
I think we indicated.
During the call the third quarter did continued to benefit somewhat from a some temporary cost saving actions. They were rolling off during the quarter in it for the most part for example, the.
Compensation and benefits actions that were gone by the end of the quarter, but there was some benefit in the third quarter, there will be a small benefit certain other temporary cost to ash actions. For example, travel obviously will be lower than than it normally would in the in the fourth quarter.
Got it but going into 2021 absent some resurgence some large resurgence of this virus and an impact on our company and our customers you know I would expect for the most part that the a temporary reduction as well will be gone and we will be back to a normal cost structure beginning in two.
2021, if you want to have some indication of what that would look like I would encourage you to look at the fourth quarter guidance that we provided and use whichever party I've always ranges you'd like to but that'll give you some indication as to what we expect the margins to be post the suspension of the temporary.
Gary cost reductions.
With.
Respect the capital expenditures you know you're absolutely right, we watched a very key.
Carefully during the year when this virus. So it was a was a heavily present the capital spending and where we could we we pushed a discretionary spending off a little bit for the most part I would say, it's a it's a bit of a snowplow I mean, I've actually we will we will undertake that capital spending.
We thought it prudent here in the near term to watch our cash in there for our capital spending as closely as we Couldnt until we got our arms around the company's ability to deal with this virus, which as you can see from the financial results. We did very well with respect to the prospective capital spending I would just say that we.
We after the time be we expect to see a annual spending to return to sort of historical levels.
Again, all the revolvers, both revolvers have zero balances and there's a fair amount of cash on the balance sheet at the end of September or we've given you where we thought the cash flow will come out here at the end of the year or so you know Eric again absent some resurgence of the virus, we expect that liquidity position to stay strong.
It gives us a lot of flexibility Stephanie going into next year.
A fair amount of opportunity to manage our balance sheet as a as we might see fit and optimize it depending on the like number of a factor. So I can't be specific at this point because I don't know exactly yet whether this virus is behind us, but more to come on that suffice to say tremendous cash flow.
While remarkable cash flow results here in the third quarter and a pretty good outlook for the remainder of the year and good liquidity position gives us a lot of flexibility.
Thanks, and it can I slip in just a couple more I mean, we we run a conference call with us high or low.
Late last week and they did say that actually Q1 is shaping up to be really strong they have slightly different sort of end markets. Then you guys from a geographic basis, but would you agree with that assessment and then finally, obviously you said three supplier negotiations we saw.
Quarter over quarter decent taken payables I'm, just wondering if that's going to be reimbursed for the major part in Q4 is just something we can also expect spilling into Q1 and Q twos next year and that's it from me.
That's great. Thanks, Stephanie Hi, it's Tim again, I'm not familiar with the tire business and you know.
We don't have any with respect to production volumes next year.
Absent any better information for the moment, we are for the most part agreeable with what I. It just is projecting so I would I would point you towards those projections in terms of.
In terms of Q1.
As regards the company's working capital position at the end of the third quarter, Oh, we increased the factory and as you know to offset the increase in the receivables good management on the inventory the guys. The operators actually did a nice job managing that in light of the uptick in production and finally were.
With respect to our payables, we have over the last few quarters or procurement function has manage the payables terms up quite a bit. So if you do the calculations you'll see the VP sales are up so you know again absent something some exotic this event you know from the virus or otherwise we would expect.
Like those terms to remain in place there may have been a little bit of at the quarter end, a little timing timing with respect to the shared services function and the payment of bills. So there might be a little pull back perhaps in the fourth quarter, but I don't expect anything dramatic.
Karen Thank you very much.
Stephanie I, just the point the Anite chats it relative to outlook.
Hi, Jeff it's fundamentally.
Forecasting has significant recovery next next year are there.
They've continued to improve the outlook than just a data point for your reference and now forecasting a 20% recovery in our markets in North America, and Europe now consider consider that it was down 22%. This year you know if you go back a few months ago. They were forecasting we want to see it.
Property for three to four years. So the outlook appears to be very positive, but it's all hinges on a on the resurgence and how it impacts our business.
Yeah, Yeah, no. Thank you I think I think their numbers in Q1 globally and just looking at now are kind of up 17% for the first quarter I'm I don't have the geographic breakdown in front of me, but it was one supplier in particular that set actually Q1 looks very strong relative to their there.
[noise] expectations.
A few months ago, but I'm thinking for for that guidance.
Thank you at this time, we have no other questions. So I'll turn it back to Mr. Monster <unk> <unk> for closing comments.
Well. Thank you everyone for joining us I want to reiterate how pleased I am with the response of the entire superior team to the pandemic.
We remain focused on executing our value creation roadmap and we're confident that we're taking the right steps to deliver shareholder value. Thank you.
Thank you ladies and gentlemen that concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us today.
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