Q3 2021 Superior Industries International Inc Earnings Call
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Good day and welcome to the Superior Industries third quarter 2021 earnings teleconference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Clemons Stinks. Please go ahead Sir.
Thank you good morning, everyone and welcome to our third quarter 2021 earnings call.
During our discussion 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 on the call by Master ample upon our President and Chief Executive Officer, and Tim Trenary, Our executive Vice President and Chief financial.
Uh huh.
Before I turn the call over to Marty 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 1995 piece refer to slide two 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 a more complete discussion of forward looking statements and risk factors.
We will also be discussing various non-GAAP measures today.
These non-GAAP measures exclude the impact of certain items and therefore.
Not calculated in accordance with U S. GAAP be conciliations of these measures to the most directly comparable U S. GAAP measures can be found in the appendix of this presentation.
With that I'll turn the call over to Marty to provide the portfolio and the business update.
Thanks, Thanks, Clemens and thanks, everyone for joining our call.
I'll begin by providing an overall summary of our results on slide five.
This quarter as you are probably aware, we are unprecedented industry volume declines and volatility caused by an OEM chip shortages and other supply chain constraints.
At the same time inflationary pressures drove raw material prices higher.
Ya Li aluminum and impacted other contractors.
Our team responded with agility by executing on several cost reduction actions as well as commercial initiatives to protect our margins.
This while maintaining laser focus on our long term value creation roadmap.
Despite these headwinds.
And with market declining 28%.
We reported another quarter of sustained double digit growth in one market.
13% growth over market to be specific.
Superior is capturing the accelerated demand towards premium content, driven by secular tailwind, including electrification Q2 reduction and vehicles differentiation.
A case in point 19 inch and larger wheels represented more than 48% of our OEM shipments in the third quarter.
Further our commitment to expand our product portfolio continues.
Through various product launches that I will discuss later.
For the quarter, we delivered $30 million in EBITDA.
The year on year decline is attributed to the 20% decline in our unit volumes.
Further the rapid increase in the hospital aluminum and volatile schedules and increased our working capital which.
Which we expect to normalize over time.
Well the industry is being impacted by severe volume declines due to supply chain disruptions, we believe that the underlying consumer demand for vehicles is very strong.
And as transitory headwinds subside, we expect strong growth across the industry backlog and pent up demand.
And we are well prepared to capitalize on.
For the full year, we have adjusted our outlook to reflect lower industry production volumes.
We are narrowing our adjusted EBITDA guidance to the low.
And of our previous range and adjusted cash flow guidance to reflect escalating commodity costs.
Our refreshed guidance.
The same EBITDA margins of 22% at Midland and he has been in line with our guidance provided at the beginning of the year.
I will discuss this in more detail in a later slide.
Overall, our team continues to demonstrate remarkable ability to remain nimble and flex costs to match declining volumes.
Slide 10.
Clean you highlight the severe OEM schedule volatility and volume declines.
Experienced during the quarter.
And the expectation for the remainder of the year.
This is reflected in the IHS volume on the right side of the chart.
At the same time and increasing global demand combined with supply constraints, such as delays at ports and energy shortages in China have driven significant increases in aluminum prices and to a lesser extent other car <unk>.
Impacting our cash flow and profitability.
Tim will provide further details on this.
In addition, our operations in Europe impacted by a partial shutdown of our German manufacturing operation earlier in the quarter that was caused by severe flooding in the city of Purdue.
While we anticipate strong tailwind from pent up demand as well as the move to premium wheels.
We expect the macro challenges impacting the industry to persist for the balance of 2020 one.
Slide seven highlights industry production across our manufacturing regions.
Our value added sales were down 16% compared to the prior period, but still represents 13% growth over market.
We have continued a legacy of consistent growth over the market for several years now.
We are responding on multiple fronts as highlighted on slide eight with managers to flex manufacturing costs at our operations.
The exercise commercial discipline to reduce costs and to ensure prudent capital and inventory management.
In a post Covid world, we have a tried and true operational playbook that we are putting interaction.
Our response included temporary layoffs in Mexico short time work program in Germany, and hiring freezes.
We are also prudently planning operating volumes based on experience and visibility underground.
So that we can most efficiently meet the production needs of our customers and avoid inventory pilots.
We are also focused on commercial discipline by ensuring timely recovery of aluminum escalation in line with our contracted terms.
Furthermore.
Our forward looking purchasing execution has provided protection against the recent manufacturing cost increases.
At the same time, we remain focused on continuous improvement at the enterprise level.
As an example, just last week, we had our first class of <unk>.
Sigma Black belt graduates in Mexico.
This is an important milestone in creating a continuous improvement culture across our entire enterprise.
Yeah.
Lastly, we are re prioritizing capital expenditures and are further adjusting production levels to align with our customers' conservative production, which.
Which will enhance our cash flow.
Slide nine highlights our long term initiatives that are critical to driving profitable growth.
A key component to our continued growth over market is our differentiated portfolio of products.
We continue to innovate and produce technology that capture the secular tailwind of tomorrow.
Including expanding upon our electrification portfolio of light weighting and aerodynamic features as well advancement in our more sustainable products.
Such as PV technology, which I'll speak to later.
Slide 10 further highlight.
Attractive space, where we have positioned our business.
The automotive industry continues to shift to premium wheels, and this shift is expected to accelerate over time.
Here, we are incredibly well positioned with one of the broadest portfolio of premium products.
Larger lighter and more aerodynamic wheels with premium finishes.
This will ultimately continue to drive more content for superior.
Here's another proof point on slide 11 of how our portfolio of differentiated technology continues to globally recognized.
Our award winning <unk> technology. We previously discussed is an environmentally friendly highly durable complex quoting process, then offer an average mass reduction of 10 pounds versus chrome improving fuel efficiency and reducing C. O two emissions.
It has passed some of the most demanding track that the auto industry has to offer.
I am pleased to report that this technology has gained approval from our second major North American OEM North American OEM.
This is a testament to the superior innovation and differentiation.
It's the foundation for future sustainable growth over market.
Slide 12 makes the case further.
And showcases some of our product launches for the quarter.
Our content on Audi Aston Martin BMW and other models.
Once again these launches speak to the continued adoption of our portfolio of differentiated technologies.
For example.
Seven of the nine now seven of the nine launches you see on this chart had large wheels.
As our premium finishes kicks in electric vehicles, and eight have light weighting technologies.
Fundamentally our portfolio of technologies continues to be a competitive advantage.
I will now address our full year outlook on slide 13.
Our outlook has largely been effected by unpredictable decline in production in both regions North America and Europe.
As such we are narrowing the range for adjusted EBITDA to the range of 160 million to 165 million for the year and expect cash flow from operations to be 25 million to $55 million at the end of 2021.
As I mentioned earlier, our narrowed adjusted EBITDA guidance represents an EBITDA margin in line with our guidance issued earlier this year.
Despite a 9% decline in unit shipments.
Underscoring the strength of our team and their execution and an incredibly challenging environment.
While we anticipate supply chain headwinds and rising raw material costs to persist through the remainder of the year. We believe these these challenges are temporary.
As conditions improve we expect overwhelming demand across the industry to fulfill backlog and support pent up demand.
In conclusion I am pleased that the continued response of our team.
Very very challenging environment, we're facing.
I am confident that once economic conditions return to normalcy superior will capitalize on the pent up demand for our portfolio and the continued secular.
Trends for premium content.
I would like to thank the entire superior team for their hard work this quarter and I look forward to finishing the year off strong.
I will now turn the call over to Tim to walk through the financial results Tim.
Thank you Marty and good morning, everyone.
This quarter's financial results include another consecutive quarter of growth over market for superior despite supply chain disruption within the auto industry.
The global semiconductor shortages increasingly impacted our customers' vehicle production, especially the number of vehicles manufactured in the stability of the production schedules.
This in turn has affected automotive suppliers top lines or normal fracturing costs.
Furthermore, certain commodity cost and utility and freight costs.
Superior is not immune to these challenges, however, manufacturing and administrative cost structure actions that permitted the company to protect margins to the extent practicable.
I wanted example, temporary layoffs or short time labor program in Germany.
And a hiring freeze or contributing cause you got to get through.
Minimizing labor costs.
Other step changes to the cost structure has been implemented and more are being considered.
But we intend to strike a balance here, we didn't want to unduly compromise the ability of the company.
Respond should light vehicle production surged post the semiconductor shortage.
Our E C I program or enterprise cost improvement.
Sigma program, what we call continuous improvement both launched late last year and are gaining momentum and driving waste out of our company.
Absent these programs superior financial results would have been more adversely impacted by the current business environment.
Perhaps more importantly, these programs when coupled with the company sales growth over market trajectory.
Should bring value accretion to our stakeholders in the future.
Our financial results on slide 15.
Reflect the difficult business environment with superior operates today.
Unit shipments decreased year over year by 20% with net sales down 2%, resulting in a 16% decline in value added sales.
The company delivered $29 8 million of adjusted EBITDA.
$162 2 million of value added sales a margin of 18, 4%.
We reported net loss of $7 2 million or a diluted loss per share of <unk> 61.
Compared to net income of $11 1 million or earnings of <unk> 12 per diluted share in the prior year period.
Slide 16 is a year over year sales bridge.
Associated adjusted EBITDA Bridge on Slide 17.
Both were just reflects the lower vehicle production.
On the sales bridge no to the far right the magnitude of the cost of aluminum in the Q3 2021 sales box.
Compared to the same metric in a lot more spire.
Q3 2020 sales.
Most 20% higher in 2021.
This is finding its way onto the balance sheet in the form of higher investment in working capital.
On the EBITDA bridge the company benefited year over year from high cost aluminum in inventory last year coming out of the COVID-19, shutdowns and one ability at that time to pass those through slated aluminum costs through to the OEM.
Also on the EBITDA bridge.
Year to year results were adversely impacted by Covid related temporary cost structure actions coming out of the shutdowns that we made last year in the third quarter.
And also manufacturing inefficiencies arising from the difficult business environment today, more specifically lower vehicle production and unstable OEM production schedules.
Slide 18.
Free cash flow for the quarter was negative most.
Most noteworthy as depicted on slide 19.
We size the impact of the higher cost of aluminum on working capital and to a lesser extent higher finished goods or work in process inventory from the unstable production schedule at approximately $50 million.
Not for this net debt would have been flat.
This should be temporary that is the high cost of aluminum and supply chain disruption impact on production schedules should normalize and permanent. Moreover, This will result in a release of working capital in the future with a nice boost in cash flow.
The Companys capital structure is outlined on slide 20.
Funded debt was $624 million, a quarter and cash on hand and $76 million.
Net debt was therefore $548 million.
Leveraging the balance sheet remains a key objective.
As of September 32021, liquidity, including cash and available amount under our committed revolving credit facilities was $273 million.
The debt maturity profile is depicted on slide 21.
The company is compliant with all loan covenants and has no near term maturities.
Moving onto the full year 2021 outlook on slide 22.
We are adjusting 2021 guidance due to the significant decline in light vehicle production expected this year.
The impact on manufacturing operations of unstable production schedules.
Andy about 15% increase in the cost of aluminum.
This refresh guidance assumed somewhat lower light vehicle production in the fourth quarter and what IHS is advertised.
It also reflects the elevated cost of aluminum today.
Accordingly, we now expect real unit shipments in the range of $15 six to 16.
Net sales in the range of $1 three three to $1 3 billion.
<unk> added sales in the range of $725 million to $740 million.
Adjusted EBITDA of 160 $165 million, the lower end of EBITDA guidance at the beginning of the year.
Using the midpoint of the ranges.
Guidance reflects the same EBITDA margin is at the beginning of the year that is 22% on.
On a 4% decline in value added sales and a 9% decline in unit shipments.
Pleased with this margin protection.
Cash flow from operations is expected to be in the $25 million to $55 million range significantly below our prior guidance, primarily because of investment in working capital given the elevated cost of aluminum.
We expect approximately $75 million of capital spending for the year, some of which was carryover from 2020.
This investment is largely for extending our premium wheel, finishing capabilities and expanding premium wheel manufacturing capacity.
What portion is for repairs to our German facility a victim of the floods in Europe earlier in the year.
We model, a 35% to 45% effective tax rate for the year and $10 million to $13 million in cash taxes.
And causes.
I'm pleased with the theater in which our facility management and operated as the men and women, who make our wheels in these challenging times.
Risen to the occasion.
Although we expect the semiconductor shortage and other supply chain disruptions of prescriptions heading into 2022, we believe lower dealer stock and pumped up vehicle demand will support industry recovery in the not too distant future and which we intend to be prepared to capitalize.
With that I'll turn the call back to Boston.
Thanks, Tom Thanks, Tim.
Tim I'd like to turn it over to the operator for Q&A now.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. The mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Our first question comes from Gary <unk> with Barrington Research.
Good morning, everyone.
Good morning, everybody.
Could you guys, possibly explain a little bit more of this whole issue with metal timing of price increases on aluminum.
My understanding was that this was just the pass through but it seems to me in some of your narrative that at least on a working capital basis. It certainly.
A bigger use of working capital that had been in the past. So could you just explain how that all works.
Sure Hi, Jerry it's been I'm happy to do so.
We have what I would characterize as very effective mechanisms agreed with our Oems in both North America, and Europe with past rising or declining.
Mining cost of aluminum.
Through to them.
Hum.
They occur that so therefore the effect of.
Of changing aluminum prices on the P&L.
We've not very great any point in time.
However to the extent.
Aluminum costs go up.
Those increased costs.
Our residents.
And our working capital more specifically.
They will reside in inventory and receivables and to some extent are offset in payable for the export meal. The smell of those months. So while there is very little impact on the P&L.
Randy.
And impact favorable or unfavorable on the balance sheet and working capital net fee environment.
We're in today.
To give you an idea.
Aluminum was about round numbers now 2100.
U S dollars per metric ton at the beginning of the year It rose to as high as 3100 $50. A couple of weeks ago, and it's pulled back a little bit to 2900. So it was up as much as 60% in a couple of weeks ago and today is about 40%. So on average about 50% and very little impact on our income statement.
Our working capital.
So you said you think there is this whole issue with aluminum prices or aluminum will begin to normalize as we go forward.
Is that just a function of flows in and out will equal liberal equal liberalize R.
Are you anticipating that aluminum prices are going to come down.
I anticipate that aluminum will it has as it has in the past and that is when there's some shock.
Mhm.
The global economy.
Generally aluminum will go up or down dramatically.
It will over time, I think as the supply chain disruption is behind us and.
And other disruptions I believe it'll it'll normalize back towards a number I think more closer to $2000 a metric ton. So I think what we're experiencing today.
Is that was an aberration it's temporary.
Okay.
And then Matthew on Slide 12, you went through all of your new.
Product launches, but I couldnt write it down fast enough you said seven of the nine where larger wheels, which I assume are 19 inch or greater and then you had 888 of the benign worldwide six of the nine mile. One eight of the nine there was just some things there that I couldnt capture.
Yes, sure. So we said seven of benign larger deal sizes.
Gary a premium finish at.
600 electric vehicles and eight of the nine have light weighting technologies.
Okay.
So so you're still seeing good proliferation there.
And then the PBGC you've got.
Sorry go ahead Matthew.
Yeah, I know good that these adoption continues to exceed our expectations, it's a very exciting space.
It's great to hear and then lastly, you said you've got pvt approval from a second major OEM or are you actually.
Reducing wheels, now with PV D or are you waiting for.
Yes.
Absolutely our Gary.
This product has been on the F 150 since January 2020.
Okay and actually won an award from Fortinet Global Excellence Award subsequent to that award from Ford.
It quantified as a finalist in the pace of awards, which is at the highest innovation recognition in the automotive industry.
In the fourth quarter. So we were a finalist which is really a great recognition.
Theory, as a technology company and.
And now the multi screening at a very exciting step is this is a major OEM.
He is excited about the product.
I will tell you. It is the best Pvt technology in the industry and now.
No I was talking to our guys that were speaking to the customer.
When we got the second approval.
They will just as punished at.
And many aspects of the technology and with Titan.
We're going to have another OEM here soon very soon.
And more to more to come more to come on that front.
That's good news alright, thank you very much.
Youre welcome.
As a reminder, if you do have questions. Please dial star one on your telephone keypad.
Our next question comes from Michael Ward with benchmark.
Thanks, and good morning, everyone, just one follow up Mike.
Good morning.
Follow up on line on page 12.
What.
The average contract if youre looking at those wheels compared to where you are.
Today, if you're looking at the overall business.
Are we going.
I think if you look at the global average or somewhere in that if you take the total units and the revenue.
The value added revenue year somewhere around the 40.
$647 range what is it.
These vehicles compared to two which are historically.
Mike It really really depends so now tends to be significantly higher than our base level wheel. So orders of magnitude on our PPD technology ease of chrome replacement.
Crummack extremely an extensive application.
With DVD you get.
And notably 60% increase in the value of the wheel.
When you last week and we are so we said eight of the nine have light weighting.
Actually we said, yes, Kato benign of light weighting.
That process essentially what it is is stretching a wheel picking mass out but it adds it's an added cost because it does require that.
A special process, so light weighting on average add close to 20% to the value of the wheel.
So it's really it depends across the board but.
On average.
The company had 45 no.
<unk> could go anywhere between 60 to 100.
On the EV side, I mean, the F 150 lightning one of the things that stands out to you as the wheels are much larger they need to be I guess to carry the weight.
Similar type of increase in the cost for those types of vehicles as well.
Yeah. It is it is significant and listen I mean, you talk about sizing. We have just we won the 24 inch believe it or not 24 inch wheels, we never thought that day would come on the on the navigator.
So sizing.
Is moving fast in 2019, 28% of our wheels were 19 inches or larger we used to use 19 inches of line of demarcation. Mike now I think we will have to change that.
Now, it's close to 50%.
Most of the time, we're talking 21 inch 22 inch and now we're talking 24 inch wheels substantially more added content.
Okay.
At least.
We also have.
Yeah, absolutely, yeah, and as we look out over the next three to five years. The average is going to go north of 50.
Yeah. So we have we.
We have.
A study of the.
IHS data.
We believe that between 19% and 25.
Premium.
Yields will grow at an average of 6%.
And we see ourselves growing at 12% for the subset of the industry, which is the fastest growing subset premium wheels. He is going to grow at 6% and we're going to be at 12% and we have the history for the last four years to support that we've even exceeded that.
Yeah.
Mike It's Tim.
Tim to Marty's point, when you look at any one platform or collection of platforms.
Incremental content per wheel across that vehicle compared to another or one portfolio of vehicles compared to another can vary dramatically if youre looking for some economic measure of how this premium content in our industry on wheels.
Effecting our business one measure is what we referred to as the vars or value added sales per unit.
This is just one just simply takes the value added sales over any period of time the divided by the number of units some of which are Paul Newman's from our standards, which youll find is that over the last.
We were four or five years that I've looked at it.
Net loss per unit is up let me just give you two numbers.
The <unk> per unit from.
For the third quarter of 'twenty, one was about $46 35.
That same number a year ago was $43 75.
So it's up in excess of $2 call it two and a half box.
More than 5% call it 6% again with constant spread not only over the premium wheels, but the standard wheels in the portfolio, but if you look back what you'll see is a steady progression of this of those vas, which reflects that additional content.
And it sounds like if I look back I mean, you basically from five years ago, you've gone from 37, so you're up at 47 and it sounds like over the next five years the increase can be bigger.
And it sounds like there are a number of factors that line.
And another one or two at least in North America moving away from cars.
This acceleration towards light trucks and crossovers in Evs all of them have higher content for you correct.
I'm inclined to agree with you.
And frankly I mean.
In terms of internally here, when we plan and model, we truly have underestimated the impact of this in our business. It has actually been very pleasantly surprised we haven't done. Some study are listening Butch modesty referred to we find ourselves in a segment of premium rail segment, it's growing very handsomely and was growing quite well in <unk>.
<unk> growing segments. So I don't have any reason to believe that this would this wood.
With decline anytime in the next year or two.
Certainly seems like it and so Tim on the on the working capital and the transitory items you cited the $50 million.
Is this.
I assume just as it unfolds as it.
Are you looking at a normal life.
Two to three quarters, where that unfolds is that what youre looking at.
Yes.
You wanted to read when this $50 million.
As of the third quarter.
We've invested in the balance sheet in the aluminum.
And then a little excess inventory extra inventory than we'd like to have because of the production schedule right when that because you're not alone.
Yeah look I don't.
When it is released it will be a boost to the cash flow I can't tell you exactly.
Exactly when it's going to.
We'll get some relief from that I will tell you that about a third of that 50.
And.
Finished goods into a lesser extent working process.
We are managing down.
Wow.
Tell you definitively because it'll be all gone by year end I believe that that one third will come down a bit now having said that in fairness, Mike on the other side of the equation.
In this past month as I think I mentioned with respect to aluminum prices actually went up a little bit so a year and we may be offsetting I don't know exactly when it will be released from the balance sheet. If the early read about.
And it's a nice tailwind for the next two quarters at least.
Come back it will come back to us.
And just lastly have you heard any have you seen any firming up and production schedules.
Yes.
It's a good question, Mike I would tell you that.
Maybe they're takeaways that we haven't seen the bottom.
The bottom yet.
IHS has got.
If you look at the numbers they got.
I'm recovering in Q4.
In vehicles in our markets.
We don't see that we're seeing more like a flat.
Excellent.
Market.
You can extrapolate from our numbers, we are seeing market is at.
Going to be down 30% will continue to be ahead of that in the high teens as we've done for.
For the last several quarters.
It will normalize probably more in the first half of next year.
And I think maybe perhaps.
The real recovery will be in the second half of 2022.
Okay.
It sounds like it.
Thank you. Thank you very much.
Thank you.
Okay.
Yeah.
And there are no further questions at this time I will turn the conference back to our speakers for any additional or closing remarks.
Thank you thanks, everyone for joining our call today, we look forward to updating you on our progress next quarter as we continue to drive value for superior and our shareholders have have a good rest of the day operator.
Thank you. This concludes today's call you may now disconnect.
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