Superior Industries International Inc. Q1 2023 Earnings Call

Hum.

[music].

Welcome to the superior industries first quarter 2023 earnings call.

We are joined this morning, with Marty I'll do it Abu Lubbock, President and CEO Ed <unk>.

So Judith wife, President and CFO My name is Caroline and I'll be your coordinator for today's EBIT. Please note. This call is being recorded and for the duration of the call. Your lines will be on listen only mode. However, you'll have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad.

To register your questions. If you require assistance at any point, Please press star zero and you'll be connected to an operator I'll now hand over the call to your host tree Trinity to begin today's conference. Thank you.

Caroline Good morning, everyone and welcome to our first quarter 2023 earnings call.

During our call. This morning, we will be referring to our earnings presentation, which along with our earnings release is available on the Investor Relations section of Superior's website.

I am joined on the call are marshy, along our president and Chief Executive Officer.

Before I turn the call over to Marc 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 1990 box.

Please refer to slide two of this presentation for the full safe Harbor statement.

Other companies go through 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 Marcia to provide the best real estate portfolio update.

Thanks, Tim and thanks, everyone for joining our call today to review our first quarter results.

Again on slide five.

I'm pleased with our first quarter results, we delivered strong growth in a tough environment and they've been focused on customer recoveries, while generating cash.

To enhance our financial flexibility.

Although our environment remains volatile we have seen a modest recovery in industry production in North America, and Europe and supply chain constraints begin to ease.

That said a significant portion of industry growth in North America was driven by fleet sales to rental companies and area, where superior has limited content.

We have seen declines in the aftermarket in Europe due to warmer winter than other factors I will discuss later.

That said in the quarter, we grew year on year FX adjusted value added sales by 9% and content per meal by 16%.

Our team continues to stay focused on what we can control commercial discipline and operational performance, while continuing to execute our portfolio strategy.

I am, especially pleased with the progress we have made to align pricing with our input costs, we have it.

Which has supported ongoing growth in value added sales.

The mitigating the impact of continued macro headwinds and unfavorable shift in product mix.

As a result over the last 12 months our value added sales have outgrown the larger market.

Adjusted EBITDA in the first quarter of $46 million remain near historically high levels.

Despite lower unit shipments.

However margins as a percent of value added sales contracted year over year, largely due to the substantially higher recoveries recapture in the first quarter of 2000 to 2022.

In addition, we continue to take the necessary actions to enhance our portfolio to support long term profitability.

Here, we are taking a close look at our offering and local business to prune parts that are underperforming and to cultivate those that are supporting long term growth.

We refer to this as our 80 20 process.

Further our strategy to capital capture secular demand for our differentiated portfolio has continued to play out.

<unk> certainly have grown year over year for 16 consecutive quarters with large diameter wheels, now, making up over 52% of our shipments.

Further as demand for lighter wheels have grown.

Most of by the secular shift to Evs, our light weighting content has increased roughly 20% annually since 2012.

Our efforts to capitalize on these secular trends, while also taking a disciplined approach to working capital management and capital expenditure.

Translated to solid cash generation.

In terms of strengthening our financial profile.

In Q1, we delivered $39 million in operating cash flow, reducing net debt.

$441 million.

The lowest level in over five years.

In terms of what we see in the industry for the remainder of 'twenty three we remain concerned.

Given the mix challenges, we are seeing in North America.

Coupled with lower aftermarket sales in Europe .

It is an increasingly uncertain macro environment.

We are narrowing our full year outlook.

We believe it is prudent to be conservative until we have more clarity on the trends within our regions.

As such we now expect limited vehicle production growth in our markets and are narrowing our sales value added sales and adjusted EBITDA ranges.

Our cash flow guidance remains unchanged.

We plan to maintain through disciplined working capital management and lower Capex spend.

Tim will provide more details on this.

Moving on to slide six.

Our strong position on premium platform has continued as consumer preference moves towards larger more sophisticated wield with premium finishes.

This is evidenced by some of the recent launches you see on the left side of this chart.

Importantly, as you can see on the right side of the chart, we have been successful with customer in aligning product pricing with input cost of our business.

This improved pricing combined with growth in premium Clinton has resulted in substantial growth in content per wheel.

Specifically content growth and price has improved our content per wheel by 17% compared to 2021.

Fundamentally portfolio and commercial discipline continue to underpin the long term trajectory of our content expansion and profitability of August .

Moving on to slide seven.

We wanted to give some perspective on the current operating environment.

We are seeing global industry production improve with Q1 volume growing 17% over the previous year.

Yet still remaining below pre COVID-19 levels.

This recovery has been supported by the easing of supply chain headwinds.

Now, having said that volatility volume uncertainty and persistent inflation continued to challenge our operating environment.

The unfavorable mix in North America, and the decline of the aftermarket in Europe .

That said, we continue to be well positioned to leverage industry preference for sure the supply chain through local for local footprint, along with secular demand for premium wheels.

On to slide eight.

Here, you can see our growth in relation to the wider industry during the quarter.

In the global regions, where we operate industry production growth grew almost 17% with production among our key customers growing 13%.

As noted here we are currently training.

With our FX adjusted value added sales growing 9% during the quarter.

Adding further color on the right side of the chart.

North America growth is mostly driven by fleet sales with superior has low content.

Our largest customer G M a.

A 2% decline in production in the quarter.

In Europe as I mentioned earlier, the aftermarket has seen a significant decline driven by general unwind post COVID-19 gains higher wholesale inventory wholesaler inventory.

A warm winter and consumer affordability issues.

In summary, after market declines and North America mix has been the main drivers here.

Moving on to slide nine.

Candidly, we are not betting on industry recover.

We are taking action.

We have launched several initiatives in response to these macroeconomic shifts that have impacted our business.

Through execution of the priorities laid out on this chart, we plan to drive improvements to both our portfolio and our overall operations.

This begins with reducing overhead and administrative expenses.

Our target here is 10% and we are well on our way.

We have taken a restructuring charge in the quarter.

Further we continue to use the 80 20 approach to prune our portfolio and further focus on profitability.

We will continue to aggressively manage working capital, while optimizing capital expenditures to strengthen cash generation.

For example, we are consolidating our aftermarket warehouses in Europe to reduce inventory.

In terms of Capex, we are focused on investments with short payback periods.

These initiatives are being implemented to offset the impact of wage inflation.

D and continuous improvement capabilities have been achieved in our business and we are reaping the benefits of our investments in Greenville and Blackberry.

Finally, we are driving flexibility in our plans to support business across the portfolio.

For example, all of our plants in Mexico now can support 20 inch mill production.

And Colby.

I am pleased with how we started the year and how our teams have continued to manage cooperating headwind.

Our content story is playing out.

And we are making great progress on getting our pricing right.

Moving ahead, our focus is on shifting to optimize path pruning, our portfolio and strengthening cash flow.

We look forward to building on this momentum to create greater shareholder value in the coming quarters.

And now I will turn the call over to Terry to provide more details on our results.

Thank you Marcy and good morning, everyone.

The recent supply chain constraints, the automotive industry has endured a moderated somewhat.

Now the light vehicle production, perhaps returning to pre COVID-19 levels.

Significantly higher new vehicle prices.

Higher financing costs, the consumer inflation and recession concerns.

Vehicle production in all of those somewhat improved.

Still about 13% below pre COVID-19 levels in our markets.

We have and will continue to pursue opportunities to adjust our manufacturing and administrative cost structures to reflect the reduced level of light vehicle production.

This quarter.

Ignite a $5 3 million charge arising from a reduction in force throughout the country, which will reduce the annual payroll cost by approximately $4 4 million.

This reduction in force as part of a larger initiative to reduce manufacturing and administrative overhead by $10 billion annually.

Let's have a look at the quarter page 11 first quarter financial summary.

We all sold in the first quarter were $3 9 million in Europe down 6% from the prior year period.

With respect to North America production of fleet vehicles was higher than usual and Rockwell cars tend to have an unfavorable mix of premium and standard wheels.

In Europe year over year decline in units was due to the aftermarket business, which is very soft because of warmer weather increased use of all season tires, the consumer inflation and recession concern.

Net sales decreased to $381 million for the quarter compared to $401 million in the prior year period and value added sales increased $203 million for the quarter compared to $198 million in the prior year period.

<unk> incurred a net loss of 4 billion for the first quarter or a loss per diluted share was <unk> 49 cents compared with net income of $10 million.

Earnings per.

Per diluted share in the prior year period.

The first quarter year over year sales bridge is on page 12.

To the far right aluminum cost pass through the customers was down $33 million or by 16% compared to the prior year period.

A aluminum has declined significantly from a year ago.

Value added sales increased by $14 million or 7% compared to the prior year period.

More than all of this increase is recovery of cost inflation.

Higher premium wheel content.

The impact of currency on net sales were $7 million.

On page 13 first quarter year over year adjusted EBITDA Bridge.

Adjusted EBITDA for the quarter decreased to $46 million compared to $49 million in the prior year period.

The adjusted EBITDA margin for the quarter was 22% compared with 26% in the prior year period.

The margin in the first quarter of last year was boosted by the timing of customer recoveries.

Fewer real sales in the quarter compared to the prior year period and metal timing contributed to this decline.

A quick review of the company's first quarter 2023 free cash flow is on page 14.

Cash flow from operating activities was 39 million compared to $45 million in the prior year period.

This decline reflects the lower earnings net of improved working capital performance compared to the prior year period.

Cash used by investing activities declined by 16 million from $18 million.

Cash payments from our debt financing activities increased to 7 million from $5 million.

Free cash flow for the quarter was therefore $17 million.

An overview of the company's capital structure as of March 31, 2023.

Have you found on page 15.

Cash on the balance sheet at quarter end was 229 billion, an increase of $95 million from the prior year.

On the debt was $650 million at quarter end.

Net debt was $421 million, a decrease of 56 million compared to the prior year and the lowest since 2017.

The decrease was partially attributable to a decrease in the euro denominated notes due to the weaker euro.

At the end of the first quarter liquidity, including availability under the revolving credit facility was $246 million.

Superior's debt maturity profile as of March 31, 2023 as depicted on page 16.

The revolving credit facility was undrawn at quarter end.

We are in compliance with all loan covenants and have no significant near term maturities of funded debt.

The 250 million of sulfur based interest rate swaps, we entered into a year ago in anticipation of the term loan refinancing. This past December our in the money because of the fed's rate hikes.

Annual interest expense is therefore about $4 million less than it otherwise would be.

The company's full year 2023 financial outlook is on page 17.

We enjoyed considerable success in recovering cost inflation in 2022, and pivoted late last year to negotiate appropriate price increases to offset the cost of inflation.

Cost of OEM production schedule volatility.

That lower fixed cost absorption on lower light vehicle build.

These negotiations are ongoing.

While the cost of energy gas and electricity.

That's come down dramatically it does remain elevated in Europe .

Conversely, the cost of energy in North America has normalized.

The aftermarket in Europe as far as softer than we anticipated.

And in North America, given our limited participation on vehicle platforms, we are seeing an adverse impact on the wheel sales.

We continue to be somewhat pessimistic with respect to recovery of light vehicle production in our markets.

In part because of significantly higher new vehicle prices higher financing costs consumer inflation, recessionary concern and increasing macroeconomic uncertainty.

Against this backdrop, we are narrowing our guidance ranges for 2023.

<unk> 15 to $15 8 million wheels.

Net sales of 1.55 to $1 six 3 billion.

Value added sales of 755 to 790 $995 million in.

And adjusted EBITDA of $170 million to $190 million.

We continue to expect cash flow from operations of $110 million to $130 million.

We are lowering our expected capital expenditures to approximately $65 million.

We continue to model, a 25% to 35% effective tax rate for the year.

In closing, we delivered a solid quarter, but are wary of increasing macroeconomic uncertainty in the back half of the year.

This concludes our prepared remarks, and Marty and I are happy to take your questions.

Thank you.

I would like to ask a question. Please signal by pressing star one on your telephone keypad.

We will take the first question from Gary <unk> from Barrington Research. Your line is open. Please go ahead.

Hey, good morning, all.

Gary.

Couple of questions here.

Number one Maggie when you're talking about pruning the portfolio.

I believe a while back you had said that you would be willing to put more lower or some lower margin wheel.

Production into the mix just to SAP up some overhead capacity.

And I'm just wondering is that what youre looking to prune out at this point or maybe you could help us.

I understand what youre doing there.

It's an excellent question.

When you do the backdrop person and maybe give you more color on this.

When I think of pruning is fundamentally the best practice carry right.

If you go back to what this team has been focused on and what this team has been executing for the last few years.

You're intimately familiar with it we have been working hard to get the portfolio right. We've been working on.

To get the footprint for us to get the cost right.

And obviously working hard and getting the customer base right.

So maybe you call those loans low hanging fruit I don't know.

We've done very very well and now.

My view and what we're learning is that we see an opportunity to get more granular in our business.

<unk>.

My view of the many times, we deliver the best product in the industry.

I believe that we are the most competitive in the industry because of the things we talk about footprint in Poland. All of the production we have is in Mexico.

So price has to pay the has to deliver the right return on our business now Thats one backdrop right. So moving closely with more granularity at the SKU level with the 80 20. In 2020 is is 20% of your portfolio delivered a profit.

Yes.

This while at the same time, we are concerned about.

Visibility right will continue concerned about visibility and.

Concern about volumes not returning to pre COVID-19 levels.

This is an opportunity to improve margins.

On product that is underperforming.

And.

Without going into detail, we have done well with customers, where we have had the right visibility and we also see this as an opportunity to get threatened when things are going right.

Does that help.

Hmm.

Yeah.

It does I mean, I know you can't go into much granular detail, but.

Alright so.

This $4 4 million reduction in payroll, that's going to annualize or that you took.

Immediately start to.

[music].

[music].