Q3 2022 Superior Industries International Inc Earnings Call
Hello, and welcome to Superior Industries third quarter 2022 earnings teleconference call. My name is special and I'll be a coordinator for today's event.
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We are joined today this morning by much Diablo, but president and CEO , Tim Trenary, Executive Vice President and CFO , and Joanne Finarte Senior Vice President Investor Relations.
I will now hand, you over to your host Ms. Joanne <unk> to begin today's conference. Thank you.
Good morning, everyone and welcome to our third quarter earnings call.
During our call. This morning, we won't 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 my simple, Gabon, our President and Chief Executive Officer, and Tim Trenary, Our executive Vice President and Chief Financial Officer 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.
Private Securities Litigation Reform Act of 90 to 95.
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 are not calculated in accordance with U S. GAAP reconciliations 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 a business and portfolio update.
Thanks, Joe Thanks, Joann and thanks, everyone for joining our call today to review our first quarter results.
I'll begin on slide five with the highlights.
Our team delivered another quarter of solid results.
<unk> double digit growth in value added sales and adjusted EBITDA.
Along with substantial margin.
A real expansion.
This while facing continue with industry supply chain disruption.
Depressed volumes and commodity cost savings.
And more in line with the plans, we laid out a value creation roadmap. We have remained focused on driving operational improvements across the enterprise, while continuing to collaborate with customers and suppliers on inflationary cost recovery and other cost reduction solutions.
We also continued to leverage our differentiated portfolio to capture demand for premium news.
Expanding content, where we are in the quarter by 10%.
These combined efforts have enabled us to achieve EBITDA margins on par with pre pandemic levels, while overcoming persistent macroeconomic headwinds, including inflationary cost increases as well as unfavorable FX.
This is a testament to the capabilities of our leadership team as well as our operational strength.
While these headwinds continue to weigh in on our operating environment. We are seeing some signs of improvement in industry production.
Which we expect to continue heading into 2023.
During the quarter. We also maintained focus on cash generation and preservation through prudent with capital expenditures and working capital management.
This has enabled us to achieve a historic low net debt of $456 million and to maintain strong liquidity of $283 million.
Moving onto slide six which highlights regional industry production.
The industry production is improving with notable increases on a year over year basis in both North America and Europe .
Sequential comps actually point to continued industry supply chain challenges.
Having said that demand for our innovative portfolio of products continues to play out.
Manifesting itself in sustained growth above market.
As I mentioned last time this trajectory has not necessarily been linear.
But it has equated to long term outperformance and profitable growth.
In fact, our portfolio and deliver a compound annual growth rate of 7% since early 2019.
We expect this trajectory to continue as markets recover further.
In addition, the recovery market, our ongoing focus on enhancing our portfolio of technology will continue to serve as a tailwind driving growth over market.
Consumer demand for lighter larger wheels premium finishes has remained strong.
And our ability to meet this demand has been a key driver in our long term outperformance.
Moving on to slide seven to address our current operating environment.
Global industry production remained significantly below pre COVID-19 levels due to the due to the lingering challenges.
The graph on the left side of this chart.
We are beginning to see some improvements.
Compared to prior year global production volumes in all markets increased 28%.
Supported in part by the Eagles semiconductor supply chain constraints.
That said, we expect the tailwind is shown here.
Including low inventory a record aging fleet.
Dan.
And does the man, who continue to propel our business forward.
And while an inflation driven demand destruction scenario is plausible.
We do not see that layoffs.
On to slide eight to discuss our progress against our value creation roadmap.
Our team continues to do an outstanding job executing on the priorities laid out on this slide.
This is evidenced by the strong financial performance, we have delivered throughout the year.
In fact, I just came back from a visit to our operations in Mexico.
Where we are operating at best in class quality levels.
And where our teams have taken continuous improvement to a whole new level.
Dozens of master Black belts, black belts, and green books solving problems and delivering exciting bottom line savings.
Our case in point, our oldest plant in Mexico recently received a quality award for Nissan.
<unk> was named GM supplier of the year, we are very proud of their achievements.
Equally important is the commercial discipline, we have instituted throughout the country.
This is not a priority of our sales seasonally.
It is the priority of the entire organization.
Teaming up with customers on cost reduction ideas as well as collaborating on cost recovery dialogues here.
Here, we have made very good progress.
In terms of profitable growth.
Our portfolio continues to play out.
And as I mentioned last time now more than ever.
<unk>, our local for local manufacturing footprint continues to be the choice for customers pursuing localization in region.
In fact, just this week, we launched a localization effort in North America will have a major program.
Our European Oems operating in the U S.
Another exciting evolution here of the strategic value of our footprint.
Our in region footprint.
Slide nine provides a bit more a bit more color on the drivers of our long term content for real growth.
So adoption of electrification like waiting aerodynamics and consumer preference for larger wheels with premium finishes continues to accelerate.
Case in point.
Since 2019, we have tripled the number of wheels with light weighting applications in North America.
<unk> doubled the same in Europe .
Further our premium wheel mix grew from 35% in 2019 and.
49% right now.
In fact, if you look at the wheels larger than 19 inches that has gone from 19% to 52%.
So in global adoption of these technologies has enabled us to deliver a staggering 30% increase in content per wheel over the last few years.
Slide 10 showcases some of our most recent launches, reflecting increasing adoption of our premium offerings amongst key OEM customers.
Actually on a wide range of platforms.
From traditional internal combustion vehicles to electric vehicles and <unk>.
<unk> the Ford Mach E.
And Mercedes G glass shown on this slide.
These product launches continue to reflect the evolution of consumer preference.
And as the market continues to move towards our premium offerings.
Turning on to slide 11.
Which highlights the collective effort of the superior team.
These are tangible results tangible results of executing on our strategic priorities.
With unit shipments still historically low compared to pre COVID-19 levels we.
We expanded EBITDA margins.
Net sales for Liam and content per vehicle.
This demonstrates the agility of our business as we are achieving these results in a volatile market environment.
And also demonstrates the substantial upside ahead.
And industry volumes improve.
So slide 12 is absolutely the same information, but it's on a year to date basis.
And highlight a couple of things.
This highlights the lumpy nature.
Of customer recovery.
But more importantly highlights the run rate EBITDA of our business.
Which if you go back historically.
In a normal volume environment is about 25% year.
So are there.
Okay.
Slide 13 addresses our full year 2022 outlook.
We are maintaining a conservative view of industry.
Industry vehicle production volumes versus CT at IHS Hustle.
And we expect modest industry improvements for the remainder of the year.
In line with these expectations our guidance remains unchanged and it has not changed all year.
With adjusted EBITDA and anticipated in the range of 165 million to $185 million.
And cash flow from operations of 105 million to $150 million.
Jim will elaborate on our expectations further in his remarks.
In closing.
I am proud.
Our team's performance in this past quarter and throughout the year.
We are in the third year of industry depressed volumes and supply chain disruptions.
We have.
Executed.
And Dallas in the face of these challenges.
We look forward to continuing this momentum and to generating further value for our shareholders.
As the year comes store close.
And now I will turn the call over to Jim Jim.
Thank you Marcy and good morning, everyone.
Commodity cost increases, especially in the costa alloy aluminum and the cost of energy.
General inflation.
We'll supply chain stability and constraints.
Continue to burden our company's cost structure.
The cost of energy has however come down from recent highs and.
The stability of global supply chains has generally improved.
Light vehicle production in our markets continues to be depressed due to component shortages affecting our customers' vehicle production.
Do you see I are established and disciplined enterprise cost improvement program.
Supported by our expanding lean six sigma capabilities, what we refer to internally as ci or continuous improvement.
Continues to support our financial performance and operations in this business environment.
We are pleased with the execution of our cost out programs and the performance of our manufacturing commercial and procurement teams.
Let's look at slide 15.
Third quarter financial summary.
The company sold 3.8 million wheels in the quarter, 8% more than in the prior year period.
Net sales increased to $406 million for the quarter compared to 311 million in the prior year period.
The increase in net sales is primarily from higher aluminum cost pass through to our customers.
The cost of aluminum in the cost of the algorithm that'll remains elevated.
It's come down from recent highs.
Value added sales increased to 178 million for the quarter compared to whatever it was 62 million in the prior year period, due enlarge part to more real soul.
Also a customer recoveries of our inflation offset in part by the weaker euro.
We reported a net loss of <unk> 4 million for the third quarter or a loss per diluted share a 35 cents.
Compared to one that will also 7 million.
Loss of 61 cents per diluted share in the prior year period.
The year over year sales bridge is on slide 16.
Volume price and mix benefit of value added sales by 31 million in the quarter in large part because of the higher wheel sales compared to the third quarter of last year.
Recoveries of cost inflation alumina.
Aluminum costs passed through to our customers was up $79 million compared to the prior year because of the elevated cost of aluminum and the weaker euro burden value added sales by $15 million.
On slide 17.
Adjusted EBITDA increased to $36 million in the quarter compared to $30 million in the prior year period.
The adjusted EBITDA margin for the quarter was 20% an acceptable margin of $178 million of value added sales.
Volume price and mix and foreign exchange were inconsequential.
Recovery of extraordinary cost inflation from our customer's supplement our Q3 performance of $12 million.
Little tiny it was a 6 million burned in the quarter compared to a $7 million benefit in the prior year.
Period.
The impact of metal timing tends to net out over time.
Slide 18.
Third quarter cash flow.
Cash flow provided by operating activities was $17 million compared to a negative cash flow provided by operating activities of 46 million in the prior year period.
This improvement is largely due to significantly better working capital performance in the quarter comparable to prior year period.
Net cash used in investing activities decreased to 11 million compared to $20 million in the prior year period.
Capital spending this quarter as well because of timing of expenditures.
We still expect capital expenditures on the order of $75 million for the year.
Cash payments Fernanda financing activities was 4 million flat compared to the prior year.
Free cash flow for the quarter was therefore 2 million compared to negative free cash flow of $70 million in the prior year period.
Global deal in the company's capital structure on slide 19.
Funded debt was $577 million, a quarter and $39 million less than year end 2021.
The decrease results primarily from the weaker euro and therefore depreciation of the euro denominated debt.
Net debt decreased to $456 million $47 million less than year end 2021.
Funded debt and net debt has continued to decline this year and are the lowest since the <unk> acquisition.
At the present somewhat elevated cost of aluminum in the company as a larger investment in level on the balance sheet that is normal.
<unk> is an incremental investment at about 8 million a quarter.
This will come back to our press aluminum costs continues to normalize.
Liquidity was $283 million at quarter end.
The debt maturity profile as depicted on slide 20.
We have noted that inventories are funded debt revolver.
Our revolving credit facilities, which mature in may and October of twenty-three Oren Bryan.
The company is in compliance with all loan covenants.
The capital markets that have pulled back, especially the public leveraged finance market.
It's really the company isn't compelled to do anything at this moment.
And with the passage of time, we intend to continue to prove out the operating model improve our financial performance.
The level of the balance sheet.
We stay close to our financing relationships and intend to pursue a refinancing of the company at the appropriate time.
The company's 2022 financial outlook is on slide 21.
The timing of the interest recovery in the Ukraine conflict could have a meaningful impact on light vehicle production in the remainder of the year and therefore, our financial performance.
The Euro has depreciated and these are either dollar against adversely affecting sales and EBITDA.
<unk> benefited the funded debt.
Global supply chains continue to be unstable and there are sometimes constrains, but have improved.
Cost of manufacturing airports, especially energy are uncertain.
Energy prices have however come down from recent highs.
And timing of the recovery of extraordinary cost inflation from our customers is also uncertain.
We do expect a modest recovery in light vehicle production in the remainder of the year or beginning of next year.
All of that we expect to sell 16 to 17 million wheels in 2022.
Net sales in the one six to $1 7 billion range of value added sales in the southern reported 800 million range.
We expect adjusted EBITDA in the range of 165 to 185 million in cash flow from operations to be $105 million to $150 million.
We expect capital expenditures on the order of $75 million.
We now model, a 35% to 45% effective tax rate for the year.
The colon.
We delivered a solid quarter.
Value added sales were up.
EBITDA was up content per wheel was up.
That was down.
Discussions with our customers regarding recovery of extraordinary cost inflation are ongoing.
There can be no assurance that we will have continued success in our recoveries may be lumpy.
Customer recoveries of extraordinary cost inflation supplement our self help programs PCI NCI.
Taken together with the company has demonstrated an ability to maintain commercial procurement and operational discipline should put superior in a position.
Benefit significantly from the operating leverage in our business, where light vehicle build recovers.
This concludes our prepared remarks last year and I are happy to take your questions.
Bill back to you.
Thank you, ladies and gentlemen, as a reminder, if you would like to ask a question I'll make a contribution on todays call. Please press star one on your telephone keypad to withdraw your question. Please press star two well pause just for a moment to allow everyone an opportunity to signal for questions. We will now take our first quest.
<unk> from Gary <unk> from Barrington Research. Please go ahead your line is open.
Hi, good morning, everyone.
Hey, Jerry.
Sure.
Just fine.
And speaking with some some other tier one suppliers they've said that they're your order patterns have been very erratic and are.
Starting to improve I would assume that.
You are starting to feel that same thing less erratic orders and.
Uh huh.
From your end users even some of these tier ones are saying the automakers water things and then just don't pick them up in time.
Yeah, Gary I.
Just two things and I'll speak to the eradication.
With words actually is.
This year has been surprising I mean, we all felt that the automakers would get a handle on this.
Microchip shortages volumes.
Come in short of what you expected, what I expected far shorter than a cure rate.
It's supposed to be at 20%.
It could be it could be just supply for 10 years I would say that the erratic nature of orders has moderated a bit but it's surprisingly still there and I think.
Gary.
Largely because the problem it is now.
Not only a microchip problem, it's actually broader two other supply chain factors that some customers that youre aware of have run into a couple of months ago, adding to those 50000 vehicles.
And not be able to ship them.
So I would say it has moderated but it's still there and the issue for US the issue for us is.
This the erratic nature of these orders caused us.
So any increase to incur costs.
Cost frankly that we cannot afford in cost that we are in discussions with our customers.
On recovery.
Okay.
And then on slide nine.
When you you highlight all of the.
Various growth aspects there.
With light weighting premium finishes et cetera is that is that within your actual portfolio or is that just within the industry.
No no that's actually they've done.
The blue bar that our portfolio the industry versus this data Gary versus 2019. So if I was to ask 1019 on market you would show that that's down 15% right. So the market is down 15%.
<unk> weighting applications are up 15%.
Exciting story and actually our view is when you look at these drivers.
Both of our businesses that actually accelerated.
And my.
In my remarks, I pointed to a couple of statistics about.
If you compare light weighting, where it was just 24 months ago versus now.
In some cases, a double than others.
But I didn't see your launches what percent of our portfolio has light weighting applications and it is less than 15%.
So we're far far from where we can be and where we will be as these technologies continues to be adopted by our customers.
Okay, that's great to hear and then.
Lastly, and I'll, let somebody else jump in you signed a pretty big deal with Toyota you announced that last quarter when does that start ramping up in 2023.
Yeah. It starts up ramping up in Q, it's nothing euro by the way.
We didn't disclose the customer actually.
Sorry about that given that we did not disclose that.
But it started in Q2 of the of next year.
Okay, I don't know, where I got Toyota that Thomas muster heard something from somewhere else. Okay. Thank you.
Okay.
Thank you Garo.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Let me ask Gerry again.
Please go ahead.
Yes.
Thank you.
Obviously, some questions on the proverbial elephant in the room Youre your balance sheet.
Giovanni any number on what the senior notes are trading at in the market right now there are denominated in euros correct.
Yes, they are Gary it's Tim.
Hello.
Alright.
Got it.
Okay.
Gary.
Both are elements of our funded debt the term loan and the bonds over in Europe , you referred to a senior notes unsecured notes.
The fact that they trade at book.
Are a reflection of the capital markets in general in other words, if you look at a map.
By which those securities have traded down.
Broadly reflects the amount of decline necessary in order to reflect the yield in the marketplace today, but those types of securities said another way, it's a reflection of the marketplace not a reflection of the marketplaces perception of our paper.
Yes.
Right, but if I see on slide 19, you've got them on the books at $213 million. There you are.
Oh $2 17, that's a translation thing, but what do they trade in the market at all.
I guess, what I'm trying to get at.
Uh huh.
Okay, yes are they trading above.
No they are trading below par or a discount to par.
Okay.
Any thoughts to maybe starting to use a little bit of excess cash flow to start buying back some of those notes if at all possible given where the dollar is relative to the euro.
Yeah. So we have given that some consideration.
There are at least two.
Ah.
Downsides, if you will to doing that because they are so closely held and therefore the market for them is so illiquid.
Any transaction in this in this in these securities tends to move the value of the securities significantly. So that's a roundabout way of saying is where are we to undertake that exercise.
Our ability to buy in these notes at a discounted price, which is a meaningful amount of it that is.
Is not very great because it would just in my judgment will just quickly move the value of the securities.
Number one.
Having said that if one considers the value that the company might create word to undertake what I, just said and to bring in what I would consider a small amount of the notes I just think it's better for the company to maintain the flexibility of enjoys with its with its liquidity right now so our balanced debate.
Given where the notes are trading we decided not to do that the notes triggered down further.
The euro depreciated further that might change.
And what's the yield on those notes right now.
Or is it will happen.
Well get that for you before.
Before we end the call here Jack can easily afford it.
Okay no problem.
You can get that on the follow up call.
Thats all I have thank you.
Thanks, Gary.
Thank you once again, if you would like to ask a question. Please press star one.
Yeah.
Well now take.
Our next question from Graham Crammer from Phase investment advisors.
Please go ahead your line is open.
Great. Thank you.
Hey, just a question when I look at the value added sales per wheel.
Obviously, not adjusted for Forex, but the numbers you present here.
It looks like North America.
That has decline, let's say 10%.
This euro 46 to 42.
Whereas in Europe , it's been going up quite a bit.
Could you just comment on that trend is that mix or am I.
Am I doing my math right here.
Yeah.
Great a couple of points first these numbers are adjusted for FX, Okay just to be sure.
Second.
When you look at the year on year comp.
In North America mix was very very strong last year.
These guys blew it out of the water. So they do see some moderation some moderation this year and you see Europe catching up overall Europe has was always a higher contented story on average than North America, but the growth in both sides of the ocean is very very comparable.
Okay, Okay, and just in terms of the <unk>.
Trends I'm, just looking at the unit sales again I see.
I mean, obviously Europe is weak I know theres a lot going on over there, but it's.
You know, we had a pretty big sequential decline in Enel, <unk>, which I I don't think is the norm seasonally.
What are your expectations in the in that part of the world as far as just.
Or what are you hearing about.
Yes.
And with chicken.
I mean, that's a very good question in Europe , obviously has been a surprise for all of us.
Especially given what happened in Ukraine, Ryan So used to date grades you look at Europe .
The industry grew at 2% right.
If you look at North America industry grew at 11%. So when you combine the whole our markets grew about 6% year to date.
We have we have said, we think the year will cause us more like 5% that implied.
Potentially a flat Q4 Q4 last year was stronger than Q3.
What we are seeing is the Oems continue to struggle.
Much more and in Europe , and in North America with supply chain issues actually to Gary's point, not only we're not seeing the volume.
But also the erratic nature of schedules is still there and surprisingly there Greg.
Okay and as aftermarket is that is that a factor here at all or are not as far as Europe goes.
It's a good catch the aftermarket for us last year.
Last year was a phenomenal growth story for us 24% growth year on year.
Largely because of a lot of.
I will say most of that.
The market is served out of out of Asia, not just China, but the rest of Asia and there weren't a lot of transportation issues, and we had to step in and and help our customers. We actually gained quite a bit of share in that process. So what you see really the moderation of where where we where we were.
Sure.
Our position in the aftermarket is very strong overall in Europe .
No market share wise.
We believe we are we are number one.
Our market share in Germany actually is close to 25%.
We continue to maintain.
To maintain that in there.
This has always served as a as an offset to the some of the volume we saw on the OEM side.
This for us, but you've seen a moderation back, let's say, where we were in 2019 levels.
Okay.
Okay. That's great. That's all for me. Thank you.
Thank you.
Area very across the P&L ex tariffs the bonds the euro bonds are yielding today, 15% one five.
Okay.
Thank you for the question.
AWS. There's no further question at this time I would like to turn the conference back to you Mr. Much Diablo <unk> for any additional or closing remarks.
Thanks, everyone for joining our call today and in closing I am very encouraged by our results this quarter and throughout the year, we look forward to continuing to execute on our strategic priorities and delivering long term profitable growth.
So the superior team.
Thank you for your hard work for your perseverance and for continuing to take care of each other during these challenging times.
Thanks, again for joining and have a nice day.
Thank you for joining today's call you may now disconnect.
Sure.
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Yeah.
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