Q2 2023 Superior Industries International Inc Earnings Call
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Welcome to superior Industrial's second quarter 'twenty to ensure your skull.
We are joined this morning by.
President and CEO , Jim driven me execute his wife's precedent and CFO I'll now hand over the call to Jim.
Okay.
Good morning, everyone and welcome to our second quarter two.
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'm joined today by Marcia bullet bonds, our President Chief Executive Officer.
Before I turn the call over to Mark 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 <unk>.
But securities Litigation Reform Act of 1995.
Please refer to slide two of this presentation for the full safe Harbor statement and other company 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.
Found in the appendix of this presentation.
I will now turn the call over to <unk> to provide a business and portfolio walked it.
Thank you Tim and good morning, everyone. Thank you for joining our call today to review our second quarter results I will begin on slide five.
This while our portfolio continues to drive growth.
We are delivering value added sales and margins above pre COVID-19 levels.
We are seeing signs of recovery in industry production, both in North America, and Europe reflective of the continued easing of supply chain constraints and semiconductor shortages.
During the quarter, we saw strong growth with nearly all of our OEM customers.
However, as in the last for a substantial portion of the growth in North America was driven by bleach sales to run the company.
An area, where we do not have significant content.
Maybe the European aftermarket remains soft due to the looming recessionary concerns.
Inventory at wholesalers and rising interest rates.
Despite these challenges our FX adjusted value added sales grew by 7% in the quarter.
Reporting the 17th consecutive quarter of year over year content growth.
We also achieved a strong adjusted EBITDA of $52 million.
Along with an EBITDA margin of 26%.
All time high.
We have been successful in a collaborative dialogue with customers in aligning our pricing with rising input costs.
This combined with portfolio driven content growth has resulted in strong and by the way also near an all time high value added sales for the quarter.
Further we are continuing to optimize our portfolio to support long term profitability.
Last quarter, we discussed our 80 20 approach, where we are further assessing our current book of business to strategically prune part that are underperforming.
We have done this in North America, North America business, and our shifting focus now more holistically to our European operations.
I will speak to this later in the presentation.
In addition, our global focus on overhead cost reduction continues we are on track with our plan to achieve a 10% reduction in overhead expenses.
Demand for Libra wheel and larger wheels with premium finishes continues.
Content per week per vehicle grew 13%.
Basic and.
And large diameter premium wheels, now represent over 50% of our shipments to OEM customers.
Finally, our ability to capture the secular tailwind combined with a disciplined approach to working capital management and capital expenditures continues to enhance our overall financial profile.
For the quarter, we maintained a strong liquidity position of almost $100 million.
Cap ex Cuda is contributing to this effort with yesterday's capital spending had a low $22 million.
The significant reduction in payables, which by the way Tim will speak to later will reverse in the third quarter.
Slide six highlights the strong performance, we have achieved since 2019 compared to the broader industry.
The key point here is that while production remains production remains down 12% versus four years ago, we delivered substantial growth in value added sales expanded our margins reduced net debt and increased content cost.
<unk> per vehicle.
All of this in the same timeframe.
These results underscore the meaningful improvements to our operations that are in a very challenging environment.
Moving on to slide seven which showcases a few of our launches this quarter and how commercial discipline combined with our differentiated portfolio has resulted in sustained content growth.
These launches illustrate the accelerated adoption of our product technologies and how premium content.
Business wins there.
Alright side highlights the combined success, we've had in improving pricing to reflect input costs and the continued adoption of content drivers a strong 16% increase since 2021.
We expect to continue this trajectory well into the future and our content story plays out.
Moving on to slide eight which provides perspective on the current operating environment.
Global industry production driven by the easing of supply chain constraints has continued the momentum from the first quarter Q.
Q2 production in our two regions increased 14% over the previous year.
Yes, it remains below pre COVID-19 levels, having said that volatility unfavorable mix in North America and the decline in the aftermarket segment in Europe continued to challenge.
Okay.
As we move into the second half we are guarded in our assumptions given the looming UAW contract negotiations in North America.
And the potential pullback in Europe as we believe that recent gains there were driven by backlogs and inventory destocking.
Despite these challenges we are pleased with the stabilization of supply chain constraints the industry preference for a localized footprint.
And the pent up demand for like and larger premium wheels.
We see.
Supporting our long term profitable growth.
Slide nine highlights our growth in relation to the wider industry during the quarter.
Industry production in all regions again grew 14% in the second quarter and production from our key customers grew around 13%.
In contrast, our value added sales grew by almost 7% in the quarter and when adjusted for declines in Europe , Our core OEM business grew 11% most of the market.
The GM for Loveland shutdown in the second quarter further pressured our top line as we have a significant share of the human X X produced in that plant.
These factors combined with the unfavorable fleet mix in North America are expected to.
So our base in the second half.
Further we have continued to prune our portfolio with a focus on profitability. Throughout 80 20 approach. This is a subset of our broader efforts related to our focus on improving overall business performance in our European region I'm going to speak to this net again it is important.
To note that we delivered significant growth in value added sales in recent years, which the rest of the industry is now catching up to.
As we move on to slide 10.
Want to just kind of our near term initiatives for narrowing the margin gap between our North American business in Europe .
We see a significant opportunity as we look at the region on a holistic basis.
This is similar to our approach we had in North America, a few years ago.
It starts with our operations.
Carefully assessing capacity and utilization.
Using the 80 20 approach to optimize our portfolio and business placement.
We are improving our capabilities in all of our plans to create flexibility.
Another way, eliminating constraints, where plants are specialized for one product or customer.
An example of this is improving our payment capabilities in all of our plants.
Relative to pruning the portfolio our focus is on quality not the quantity of wheel.
An example here is extremely complex low volume, we'll then consume excessive capacity in high cost locations.
In addition, we will be optimizing the warehousing operations about aftermarket business around our manufacturing footprint in Poland.
And here, we are reviving our approach to wholesalers.
Further we will be consolidating our administrative functions around low cost service centers.
In terms of customers, we have seen the benefit of commercial discipline and the focus on improving pricing to reflect input costs.
We are also leveraging our local for local footprint to capitalize on short term wins with the recent position of anti dumping duties on wheels produced in Morocco, our Colo footprint becomes a competitive advantage as Oems look to further localize the real supply.
Lastly, as it relates to Europe , we are commercializing our L. W. P C technologies to enable lower cost light weighting for OEM customers.
This further broaden the light weighting options available for our customers, especially as electrification momentum accelerate.
Yeah.
We are a technology leader in Europe .
With a diversified customer base of leading premium customers. We are confident that these actions will further enable us to serve our customers by elevating our competitive position in this region.
In conclusion.
I am pleased with our results this quarter.
Our portfolio strategy continues to deliver growth and our team continues to execute and manage the business.
As we move through the second half of the year, we are squarely focused on optimizing costs strengthening cash generation and capitalizing on the industry recover.
Now I will turn the call over to Tim to provide more detail on our financial performance.
Tim.
Thank you Marci.
The recent supply chain constraints with the automotive industry citizens or continue to moderate.
Gold production for 2023 Forks.
Forecasted by IHS market is forecasted to be up but still about 10% below pre COVID-19 levels in our markets.
Elevated vehicle prices in vehicles.
Consumer inflation and recession concerns continued to be a drag on the industry.
We have and will continue to pursue opportunities to adjust our manufacturing and administrative cost structures.
It reflects the reduced level of light vehicle production.
This quarter, we recognized a $2 6 million charge arising from a further reduction in force in Europe .
Yes.
Annual payroll costs by approximately $2 2 million.
This reduction enforce in Europe as part of a larger initiative to reduce manufacturing and administrative overhead by $10 million annually.
Our cost structure in Europe , especially in Germany.
Not as flexible as in North America, we are exploring additional actions in Europe to further adjust our manufacturing and administrative cost structures.
Let's look at the quarter on page 12.
<unk> quarter financial summary.
Net sales decreased to $373 million for the quarter compared to $432 million in the prior year period and value added sales increased to 200 million for the quarter compared to whatever to 86 nine in the prior year periods.
Adjusted EBITDA was 52 million or 26% of value added sales.
We incurred a net loss of $100000 for the second quarter or a loss per diluted share of <unk> 35.
Compared to net income of 11 million more hernias seven cents per diluted share.
Prior year period.
Second quarter year over year sales bridge is on page 13.
To the far right.
Cost pass through to customers was down $74 million or by 30% compared to the prior year period.
The cost of aluminum has declined significantly from a year ago and is almost normalize.
Value added sales increased by $14 million or 8% compared to the prior year.
More than all of this increase is recovery of cost inflation and higher content per wheel.
He is the corridor.
Our pivot late last year to negotiate an appropriate price increases.
The cost inflation.
Cost of already in the production schedule volatility.
And lower fixed cost absorption on lower light vehicle build.
Brought to a close.
Elevated fleet sales in North America, they were soft aftermarket in Europe continued to be everyones.
And currency benefited net sales by $3 million.
On page 14 second quarter 2023 year over year adjusted EBITA Bridge.
Adjusted EBITDA for the quarter increased to $52 million compared to 51 million in the prior year.
The adjusted EBITDA margin for the quarter was 26% compared to 28% in the prior year period.
The margin in the second quarter of last year was boosted somewhat by the timing of customer recoveries.
An overview of the company's second quarter 2023 free cash flow was on page 15.
Cash flow from operating activities was a use of 28 million of cash.
Cash flow from operating activities of $12 million in the prior year period.
This decline is primarily attributable to a reduction in payables at quarter end.
Most of which is a little bit of payables because of a pull back on aluminum purchases in the back half of the quarter.
We sized the aluminum payables impact at approximately $30 million, which should snap back in the third quarter.
Cash used by investing activities was 6 million compared to 16 billion in the prior year.
Decline represents a decrease in capital expenditures in the quarter compared to the prior year period.
Cash payments for non debt financing activities were $3 million compared to 4 million in the prior year.
Free cash flow for the quarter was negative $37 million or then all of which may be attributed to the afore described enables contraction at quarter end.
An overview of the company's capital structure as of June 32023 can be found on page six state.
Cash on the balance sheet at quarter end was 181 billion, an increase of $59 million from the prior year.
Attributable to the refinancing of the company's terminal late last year.
Funded debt was $639 million a quarter end net debt was ordered $58 million, a decrease of $14 million compared with the prior year.
Second quarter liquidity, including availability under our revolving credit facility was $199 million.
Superior's debt maturity profile as of June 32023 is on page 17.
The revolving credit facility was undrawn at quarter end.
We're in compliance with all loan covenants.
And the $250 million of sulfur based interest rate swaps, we ever did before.
In anticipation of the term loan refinancing.
Then the money because that's the rate hikes.
Interest expense is about 5 billion less than it would otherwise be.
The company's full year of 2023 financial outlook is on page 18.
Our financial outlook this quarter remains unchanged for the last four.
We are maintaining our guidance ranges for 2023.
15 to $15 eight deals.
Net sales of $1 five five to 1.63 billion.
Value added sales of $755 million to $795 million.
Adjusted EBITDA of 71, rather than $90 million.
We continue to expect cash flow from operations of whatever they tend to order from $30 million.
Capital expenditures of approximately 65 million.
We continue to model, a 25% to 35% effective tax rate for the year.
In closing, we delivered a solid quarter.
Very pleased with our teams, especially the operations procurement and commercial teams.
This concludes our prepared remarks, Marty and I are happy to take questions correctly.
Thank you.
Like to ask a question.
By pressing star one on your telephone keypad.
I'll take the first question from Michael Ward from Benchmark. Your line is open. Please go ahead.
Thank you good morning, everyone.
Motorcycle.
Good morning.
Yeah.
General Motors.
Some issues getting vehicles from Mexico to the U S that you guys have any issues at all at the border.
Actually in addition to the aftermarket business.
The biggest impact we've had is what you just described which is with general motors in North America, because we have significant content.
On the Q&A X vehicles that still.
And so it was unexpected.
Longer than we expected actually.
So the answer is yes, Michael.
Okay. So about general Motors of course, the revenue when it crosses the Brit when did you record the revenue.
Oh, well, we record revenue when they pick up the wheels in Mexico.
Okay.
Cause you guys to either Tim or perhaps you could quantify.
Aftermarket business in Europe .
German production was up 30% or so right.
Well production.
In the quarter.
No.
We've done we've done very well in Europe , I mean, we're right up there with your pump markets from a revenue from that standpoint.
Aftermarket business represents about 10%.
Our business in Europe and Lee.
Really that's been the only bump that that team has had.
What was the aftermarket previously like 20% and it's down as it is.
Okay.
No Michael It was always was always around that rig.
Range.
Okay, and then can you quantify.
The EBITDA performance in Europe .
Europe was down.
Well, we don't report public.
Publicly Mike this is Tim by the way, we don't report publicly.
The EBITDA performance by region, we do provide.
Our SEC statements.
Polio or footprint or pricing or technology. So now we see we see a strong opportunity to improve the performance of that business as we look at it holistically, we've been busy responding to call back to volatility negotiating pricing Guinea performance in the plans now we are shifting to the next phase.
Perfect.
Well, thank you and it sounds like they pay about with just barely a timing number.
Yes.
Perfect. Thank you guys.
Thank you.
Thank you we will take the next question from nine Kinney President Trump Barrington Research. The line is open now. Please go ahead.
Hey, good morning, Tim.
Oh really interesting really interesting to me that.
A couple of years ago was the North American margins that were lower versus the European and now that's kind of flip flopped.
I guess, which is testament to how well you you you fixed what was going on in North America, but in in in Europe .
With what you're doing and looking at your business. When do you think you will have that exercise completed or is that something that is going to continue to.
Low impact physical 24 as well.
No Gary So we just like we did in North America, and you've been there right. We started this process.
Eight months ago, we have it very very clear plan with actions in all dimensions, we know how to get there.
My expectation is.
Similar to North America will be there in less than a year and.
And I'm hopeful already 24.
Okay. So early 24.
And do you feel that you could basically equal liberalize the margin profiles between North America, or Europe or is there always gonna be inherently a lower margin.
In Europe for whatever reason.
Well right now.
Let me step back a bit if you look at Europe , and the complexity we have there.
It's much more complex than North America business.
The technology is complex Parablast, David is different so I can focus really know Gary.
<unk> 400 basis points that if you go through the numbers.
Frankly, you'll see a more opportunity so our our objective is to get as close to that as possible.
Okay, and then lastly would you just remind me you talked about Germany being pretty inflexible from on a labor issue how much of your production in Europe is out of Germany.
What does any of it.
<unk> less than 10% of our capacities in German.
Okay does that sound right.
Yep.
Alright, Thank you very much.
Thank you Gary.
Thank you that's no further question in the queue.
Okay.
Thank you. Thank you everyone for joining our call today.
I would like to pay the superior team for their hard work and efforts. We are operating in a very challenging environment and you continued for us.
Thanks, everyone for it.
Thank you for joining today's call you may know.
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