Q2 2021 Superior Industries International Inc Earnings Call
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Good day and welcome to the Superior industries second quarter 2021earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Clemons things. Please go ahead Sir.
Thank you.
Good morning, everyone and welcome to our second quarter 2021 earnings Conference call.
Cash flow today, we will be referring to our earnings presentation, which along with the earnings release is available on the Investor Relations section of Superior's website.
I'm joined today on the call by Mike <unk>, Our President and Chief Executive Officer, and Tim Trenary, Our executive Vice President and Chief Financial Officer.
Before I turn the call over to Marc <unk> I would like to remind everyone that any forward looking statements contained in this presentation or commented on today are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of $19.95 per.
Please refer to slide 2 of this presentation for the full safe Harbor statement and to the company's SEC filings, including the company's current annual report on form 10-K for complete discussion for a more complete discussion of forward looking statements and risk factor.
We will also be discussing various non-GAAP measures to day. 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 direct comparable U S. GAAP measures can be found in the appendix of this presentation with that I'll turn the call over to.
<unk> to provide a portfolio and business update.
Thanks, Thanks Clements and.
Good morning, everyone. Thank you for joining our call to review our second quarter results.
I will begin on slide 5 with the highlights.
We are pleased with our results quarter to quarter. Our team responded to industry wide instability and continue to deliver solid operating performance and substantial growth over market.
Our focus on executing against our value creation roadmap has enabled us to deliver growth across the board with value added sales, increasing 121% versus prior year.
Well ahead of market.
Adjusted EBITDA increased by $48 million for the quarter, driven by volume and cost performance.
Our top line growth has consistently been supported by our differentiated portfolio of product technologies, enabling us to capitalize on the secular trends driving our industry, including electrification tier 2 reduction and vehicle differentiation.
Each increasingly demanded by Oems and consumers alike.
During the quarter semiconductor shortages significantly impacted OEM product production schedules presenting operating challenges for us, especially in North America, where sequential volumes declined 14%.
Here, our teams responded very well.
Furthermore, these shortages also drove Oems to shift focus to premium vehicles, which partially by the way supported a payable a favorable mix for us.
This combined with our disciplined portfolio strategy has resulted in continued growth in our larger wheel segment.
19 inch and larger wheels actually represented almost 50% of our shipments to Oems growing both sequentially and year over year.
The same growth trend is reflected in the adoption of light weighting and premium finishes.
Collectively our portfolio delivered.
12% top line growth over market.
As we continue to cultivate our portfolio of premium technologies and execute on our portfolio strategy. We expect to further solidify our leadership position and capture long term sustainable growth.
Turning to slide 6 a few words on our current operating environment to just add more context to our strong results for the quarter.
The right side of this slide highlights that the overall industry recovery in 2021 has fallen well short of initial expectations.
Q2 production levels initially forecasted in January this year have dropped actually double digits in both North America and in Europe, as semiconductor and other supply chain shortages continued to impact OEM production schedules.
We foresee these challenges as well as others, including rising commodity costs and increasing concerns about disruptions due to the delta variant persisting throughout the remainder of the year.
Further we expect some impact from the partial shutdown of our German manufacturing site in the third quarter as it was affected by severe flooding event in July.
I will say that our team there responded admirably.
Despite this challenging environment marked by slower production rates and unstable demand.
We have been able to maintain strong operating performance, while delivering profitable growth.
Slide 7 shows more detail on how our premium portfolio has driven growth over market during the quarter.
Across both of our manufacturing regions value added sales adjusted for FX increased 121% compared to the to the period in the prior year reps.
Representing 12% growth over market.
This trend has been further pronounced with the favorable mix mixed shift I mentioned earlier as Oems shifted focus to premium vehicles.
Now, having said that our growth above market trend as you see on the bottom left of the chart.
Is a continuation of the same we have seen since early 2019.
I will now move to slide 8 which highlights our global product launches in the second quarter and really underpins my prior comments about the secular tailwind, but we electrify patient and consumer preference driving our growth.
In North America, we launched content on the Mustang Mach E G T lucid and Jeep compass.
The wheels for the marquee per the Mustang Mach E are made from low carbon footprint footprint aluminum.
And advanced both Ford and superior sustainability effort.
We're very proud of that.
And we are of course exceptionally excited about welcoming lucid.
It's a new customer of superior.
In Europe, we launched content on a portion of Mccann and Chi and the VW Turan and the Daimler all electric EQM <unk> just to name a few.
Yes.
Now here are a few interesting statistics from this slide.
3 out of our 8 launches support electric vehicles.
5 our wheels 19 inches or greater.
Another 5 apply premium finishes.
And 7 out of 8 use our light weighting technologies.
You can see the proliferation of our portfolio fundamentally is accelerating.
Moving on to slide 9.
We remain committed to executing our strategy to deliver shareholder value.
Our focus now is on driving operational excellence across all of our business units and on executing our strategies to deliver profitable growth.
In this regard.
We are making progress on all of the strategies to highlighted on this slide.
In terms of operational excellence.
Our teams have done an exceptional job driving efficiencies leveraging global procurement, improving quality and instilling commercial discipline before and after launch.
This is reflected in our gross margins globally, but especially in North America.
We have also invested in improving our manufacturing capabilities to support premium finishes and larger sized wheels.
And most recently, we initiated a cultural transformation to continuous improvement.
This started with the deployment of our fully staffed organization of lean expert in both regions driving lean 6 sigma and problem solving across the business.
We see much opportunity in this journey and are well underway with many green belts and black box certifications in both regions driving process improvements and eliminating waste.
Okay.
We are also focused on executing our strategy to deliver long term profitable growth.
Here, we are well positioned to respond to the macro trends driving our industry.
Electrification tier 2 reduction and consumer preference for premium finishes and larger wheels.
In this regard we now believe that we have the most comprehensive portfolio of technologies in the industry.
This has manifested itself in.
Consistent growth above market that is now accelerating.
A solid book of business for the coming years.
Continued growth in electrification segment through our light weighting and aerodynamic portfolio of products.
Finally, most recently our advancements on the front of offering green products with low carbon footprint.
To this point slide 10 highlights.
Highlights the progress we have made towards our environmental social and governance initiatives, which are critical in driving sustainable growth.
Furthering our long term value creation.
Our efforts.
So through these initiatives, we are focused on reducing our environmental footprint, increasing safety standards and protecting the health of our employees.
Our efforts are now in full swing with our progress to date captured in our UN Global compact sustainability report published in June.
We look forward to reporting on the advancement of our sustainability efforts as we further realize our commitments and enhanced our corporate stewardship practices well into the future.
I will now address our full year outlook on outlook on slide 11.
While we expect the industry recovery to continue, albeit at a slower pace than originally anticipated we are maintaining our guidance for the year.
Our focus remains on driving enhanced profitability and cash flow.
For the full year, we expect to deliver adjusted EBITDA in the range of $160 million to $180 million and cash flow from operations in the range of $110 million to $130 million.
Yes.
In closing despite the current industry headwinds.
I'm very pleased with our results for the second quarter and remain.
Confident that we will continue our momentum of growth above market margin expansion and cash flow generation as the year continues.
With that said I would like to thank the entire superior team for their unwavering commitment and hard work during the quarter as we continue to deliver value for our shareholders.
With that I will turn the call over to Tim Tim.
Thank you Mark and good morning, everyone.
Second quarter of 2021 was another quarter of growth above market for superior.
Premium mix and enterprise cost structure improvements supported financial performance and an unstable vehicle production environment and in the face of a 14% sequential decline in North America shipments.
Slide 13 is the second quarter 2021 year over year financial results.
These results reflect the pandemic induced collapse of vehicle production in the second quarter of last year.
Unit shipments increased year over year by 102%.
Value added sales increased by 132% a reflection of the continuing shift to premium content and wheels.
Net sales are up 140% on the 132% increase in value added sales, reflecting the run up in the cost of aluminum.
Superior delivered $44.6 million of adjusted EBITDA and $195.5 million of value added sales a margin of 22, 8%.
We reported net income of $1.717 million.
Diluted loss per share of <unk> 26 cents because of dividends on an accretion of the preferred stock.
This compares to a net loss of $43.2 million or a loss of $2 per diluted share in the prior year period.
As regards to the 14% sequential decline in North America shipments in the quarter.
This significant decline in such a short period gave rise to stranded manufacturing cost.
Further impacting the quarter is the instability in the OEM production schedules, which resulted in more frequent mold and equipment changeovers, which in turn resulted in elevated labor scrap and other manufacturing inefficiencies.
More specifically the Oems continue to shift production to their premium vehicles capitalizing to the extent practicable on the limited availability of semiconductors.
Our product mix shifts in concert with the Oems and has put some constraints on certain manufacturing process capacity, which the operators have managed well.
Importantly, premium mix and enterprise cost structure improvements offset some of these challenges, thereby supporting financial performance.
We believe these challenges are temporary and will subside with the resolution of the semiconductor shortage.
When that day comes pent up customer demand must be satisfied and vehicle inventories replenished.
Likely resulted in outsized vehicle production.
There is a second quarter or towards the 21 year over year sales bridge on slide 14, the associated adjusted EBITDA Bridge is on slide 15.
Both bridges reflect the recovery from the Q2.2020 collapse of industry production.
The richer product mix from the shift to premium wheels, and some benefit from favorable foreign currency currency exchange year over year.
Additionally, the sales bridge reflects the rising cost of aluminum.
Free cash flow for the quarter depicted on slide 16 was neutral.
Somewhat by inventory build resulting from the production environment, but benefiting from improved payables and favorable capital expenditure timing in the quarter.
The company's capital structure is outlined on slide 17 funds.
The debt was $633 million at quarter end cash on hand $149 million.
Net debt was therefore $484 million.
Deleveraging the balance sheet remains a key objective of superior as.
As of June 32021, liquidity, including cash and available amounts under our committed revolving credit facilities was $348 million.
The company's debt maturity profile as depicted on slide 18.
We have extended the maturity dates of our U S and European revolvers. There are no near term maturities the term loan matures in 2024 and the senior notes in 2025, we are compliant with all loan covenants.
Our full year 2021 outlook is on slide 19.
Notwithstanding the ongoing adverse impact from the semiconductor shortage on vehicle production, we are reaffirming our prior 2021 guidance.
More specifically, we continue to expect industry production volumes to recover to pre COVID-19 levels over time and believe our wheel units' shipments will therefore be in the range of 16, 9% to $17.7 million net.
Net sales in the range of $1.3 to $1.$3.7 billion and value added sales in the range of $740 to $780 million, resulting in adjusted EBITDA of $160 million to $180 million.
The sales outlook assumes industry production recovery in the high single digit percentage range across our global footprint.
An increase in aluminum prices and a continuing shift to larger diameter wheels with increasingly premium content.
We model, a 15% to 20% effective tax rate for the year.
This guidance. In addition to include an estimate of the impact of the semiconductor shortage on our business.
Also includes the impact of the previously described temporary shutdown of our German operations because of the recent flooding in Europe.
We expect cash flow from operations to be in the $110 million to $130 million range.
Capital expenditures should approximate $75 million some of which is carryover from 2020.
A portion of this spend is for investments in our wheel, finishing capabilities as we continue to develop our portfolio of premium wheels.
Finally, we have now heard back from both of our ratings agencies, Moody's and standard <unk> Poor's I am pleased to report that both agencies have upgraded superior to a stable outlook.
With that I'll turn the call back to the operator surgery for questions.
Thank you, Sir ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad.
Make sure you mute function on your phone is switched off to allow your signal to retail equipment again. Please press star 1 to ask a question. We'll now take our first question from Gary <unk> from Barrington Research. Please go ahead.
Yes.
Good morning, everyone couple of questions here.
First of all Gary.
Yeah.
That's kind of allowed Maggie that was great.
As a German factory is that up and running now post the flooding or you're still.
Under duress there.
Yes, Gary we are right now in a shutdown period.
For a couple of weeks in August.
Fortunately it was planned we expect to have the plant up and running in mid August right now I would say, 70% of the equipment is running in preparation and will be fully running by mid August.
Okay. So that was a normal summer shutdown, which happens in Europe right.
Yes.
Okay and then.
Good statistics on the.
Percentage of 19 inch wheels or greater.
But if you look across your portfolio.
Besides the 19 inch.
If you add 19 inch light weighting premium finishes.
What percentage of your units going out.
Have those characteristics and how has that changed year over year.
Yes. So good question and we will be providing more stats on of those let me call when we talked Gary last week.
We talked about light weighting.
It was 6% of our shipments in 2019, it's now 12% of our shipments.
Talk about aerodynamics, which is very fairly new almost nonexistent in 2019, it's now 6% of our shipments for both those 2 stats, we expect that to grow to about 30% of our shipments in the next couple of years premium finishes actually has followed a very similar trend.
2 the larger wheel size, it's been ongoing for a while but overall as I look at our plan and forward.
Forward looking top line I see all of these trends accelerating in all of them an average growth rate in the next 4 years between 10% to about 25%.
Okay. That's very helpful and then.
Okay.
Lastly in terms of the.
The guidance obviously you can appreciate given the environment you guys are working in.
Given the shutdowns.
Shortly James from whatever.
But it looks like.
Based on your guidance if you hit the top end of the guidance Youre going to have a down 6 months and adjusted EBITDA.
And then obviously the below and it's even down more further.
Are you anticipating things getting much worse from here that the company would not be able to hit that high end of the adjusted EBITDA number.
Awesome.
So let me just step back a bit with some stats from Tim can add to this Gary So right now if you ask IHS they've backed off significantly their outlook for the business.
For the second half they are saying.
Q3 is down 6% Q4 is flat so collectively that's down 3% listen Gary you can really my view on our top line you can work the numbers that will accompany that growth above market.
So if they make cars, we're going to deliver wheels, and we're going to deliver content ahead of market.
So right now.
I would tell you that we are concerned about the second half and I would tell you. If you look at our numbers.
For the year that we flagged we are more concerned the IHS Q3.
The whole Microchip thing has really been underestimated by the entire industry no..1 expected Q2 to come in at that level. We were cautious we're not with our 2021 outlook back in January recall IHS was at 25%, we built our plan around 15% and for the entire year now.
We're seeing more like 8% for the entire year IHS is 10.
Overall I would tell you we are concerned about the second half but.
Hitting the higher range, even beating it.
If the microchip at the Microchip issues are resolved we are there.
Okay. Thank you.
Thank you as a reminder to ask a question. Please signal by pressing star 1 from our next question comes from Mike Ward from Benchmark. Please go ahead.
Thanks, Good morning, everyone.
Hey, Mike Alright.
Sure.
Can you give an update on what's going on with the European aftermarket business.
Yes sure.
Mark.
The European aftermarket business, you know it's been always a.
Diversification.
Element of our business and it's really a bright spot for us in the quarter.
Business grew north of 16% year on year.
As you recall, we talked about this in Q1.
Have been our customers have faced.
Container issues shipment issues out of the far east that have broad business more in our direction.
We're very very pleased with the progress there and the growth and frankly, we're doing our best.
And we'd like to keep a lot of that upside in the coming quarters as well.
Okay.
The second thing on that.
And the chart on page 8 when you were talking about some of the new technologies.
And the 3 of the 8 are evs.
Or the EV wheels higher content or were you just citing that they were evs because I know, there's heavier weight and so it has more impact on the day they are.
Definitely yes, no. Thanks, Thanks, I should explain that.
They are definitely higher content in several ways theyre stronger.
They go through our light weighting flow, forming technology I mentioned earlier.
Average light weighting technology adds 15% to 20%.
The content of the wheel.
Further a lot of the Evs, Mike they tend to use larger wheels.
Again consumer preferences, driving that and they also are driving premium finishes so across the board as an average EV has has a lot of content on the finish side on the on the on the <unk> side as well as in terms of technology to drive light weighting mass out and to bring more strength to the wheel.
Sure check all 3 boxes across the board, yes, Sir.
So if we so we're looking at in North America, So in the second quarter.
Good value added.
Rent of roughly $42 a wheel.
The EBIT wheels or closer to a $50 is that about right.
It depends on the size of the vehicle right, but directionally correct.
Perfect.
Thank you guys. Thank you very much.
Sure.
We have a follow up question from Gary <unk> from banks and research. Please go ahead.
Yes, Matt I just wanted to ask you mentioned, if we look at slide.
Slide 8.
With all of the.
Product launches here, you kind of gave us some statistics and maybe I didn't write this down but.
3 of 8 where electrification 5 of a 19 inch or greater et cetera, et cetera, so, but as I count there on counting.
And vehicles that were launched so.
Im missing something here or you're just going by OEM at that point.
That's a good cash carry.
Let me look here.
Thanks for Mercedes Mercedes Mercedes and <unk> to have 2 models. That's all I'm wondering is.
Just so we have our statistics correctly.
<unk> launch.
If the launch is the largest clearances.
So would you say cable.
In the case of this.
In this case of the <unk> for example to both.
So that would count as 1 launches what youre, saying right.
Yes, yes, we consider that as 1 launch.
Okay.
Fine.
But the fact of the matter is it's it's proliferating across various models.
Within the manufacturers.
That is correct.
Okay.
Alright, thank you.
Youre welcome.
As there are no further questions from the queue I'd like to hand, the call back over to our speakers for any additional or closing remarks.
Alright. Thank you. Thank you very much for your participation in our Q2.2021 earnings Conference call. We look forward to give you. Our Q3.2021 update in early November in the meantime, please please stay safe and thanks for your participation.
Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
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