Q3 2024 Superior Industries International Inc Earnings Call

Moving onto slide what.

We have some very very exciting news to me.

Which underscore the momentum we're getting in Europe without customers as they recognize our unique competitive position as a technology leader with a competitively advantaged manufacturing footprint.

Starting on the left of the slide.

We were awarded a record $1 7 billion wheel program with our longstanding premium customer a global on a mid sized crossover platform.

This program includes a premium aerodynamic unlike weighting technologies is valued at about $100 million and is.

<unk> to launch in the fourth quarter of 2025.

Our team is very proud of this achievement with Volvo, we look forward to our winning relationship with them.

Majdi Abulaban: We look forward to a winning relationship with them. Now, on the right side of the slide, we have received an A rating in Research and Development from UND, a technology leader in the automotive space. This is a significant achievement and positions us as a top-ranked supplier with this major OEM for innovation. reflecting the strength of our portfolio, as well as our industry-leading R&D capability. We're very grateful for this recognition from all. Again, this underscores our momentum with European customers, as they recognize the strength of our recently transformed footprint, our leadership in technology, and our long-standing customer relationship.

Majdi Abulaban: Slide 6 provides further detail on our European transformation. As we ramp up production in Poland, we will be closing the margin gap between North America and Europe in the second half of this year. We will benefit from higher cost absorption and improvement in our Polish operations as production ramps up. In addition, we are continuing to improve our overall cost structure in Europe by consolidating aftermarket warehouses and rationalizing overhead. Further, we are pleased with the progress our teams have made in recent times negotiating with all European OEMs to implement real price increases to recover inflationary costs.

Majdi Abulaban: These conversations reflect the collaboration with our customers and our long-term nature of the relationship.

Majdi Abulaban: Turning on to slide 7, to further highlight our current operating environment. The industry continues to face a complex landscape shaped by ongoing volume volatility and key customer shutdowns, higher dealer inventories, and more. unfavorable production mix and increased inflation in Europe. While industry recovery versus pre-COVID level continues, we are seeing a slowdown. Industry production in our two regions declined 3%, while production on our key customers declined 5%. That said, production remains below COVID level. We expect, in the long term, continued industry recovery supported by pent-up demand tailoring. The occasion point here is that the U.S. fleet age remains at an all-time high.

Unfavorable production mix and increased inflation in Europe.

While industry recovery versus pre COVID-19 levels.

Three corporate level continues we are seeing a slowdown.

Industry production in our two region declined 3% well production on our key customers declined 5%.

That said production remains below corporate level, we expect in the long term continued industry recovery supported by pent up demand tailwind.

Acacia point here is that the U S fleet age remains at an all time high.

Majdi Abulaban: Turning on to slide eight, which highlights superiors' growth compared to the broader industry in the second quarter. Global industry production, as well as production among key customers, both declined, while we delivered 1% increase in value-added sales, adjusted for foreign exchange and deconsolidation. Regionally, North American OEM production increased but was offset by softer production among European OEMs. Now, that said, both our North American and European operations grew ahead of their respective markets in the quarter. Further, we have strategically pruned parts of our portfolio and exited under-performing programs. We are seeing the benefit of these actions in our results.

Turning on to slide eight which highlights superior growth compared to the broader industry in the second quarter.

Global industry production as well as production among key customers both decline, while we delivered 1% decrease in value added sales adjusted for foreign exchange and deconsolidation.

Regionally North American OEM production increase but was offset by softer production among European Oems now that said, both our North American and European operations grew ahead of their respective markets in the quarter.

Further we are we have strategically prune parts of our portfolio like exited underperforming programs.

We are seeing the benefit of these actions in our results.

Majdi Abulaban: Overall, we are performing well in a challenging environment.

Overall, we are performing well in a challenging environment.

Majdi Abulaban: Moving on to slide 9, which highlights the continued positioning of our portfolio of premium technologies and how the accelerated adoption of these products is driving growth. The left side of the slide highlights some exciting launches in the second quarter. The right side of the slide highlights the historical trends with long-term content growth per wheel of 34% since 2019. We expect these macro trends driving the real space to continue well into the In closing, I am grateful to the Superior team for the position we have created for our company. We have refocused our portfolio on winning products.

Moving on to slide nine which highlights the continued positioning of our portfolio of premium technologies and how they accelerated adoption of these products is driving growth.

The left side of the slide highlights some exciting launches in the second quarter.

The right side of the slide highlights the historical trends with long term content growth per wheel of 34% since 2019.

We expect these macro trends driving the wheel space to continue well into the future.

In closing I.

I am grateful to the superior team for the position we have created for our company.

We have focused our portfolio on winning products.

Majdi Abulaban: transform our manufacturing footprint to the best-in-class, competitively-advantaged local footprint. and we are strengthening our balance sheet as we retire our group. Through outstanding execution of our team, Superior, now more than ever, is positioned for sustainable, profitable growth.

Transform our manufacturing footprint to the best in class competitively advantaged local footprint.

And we are strengthening our balance sheet as we retire our routes.

From a standing execution of our team superior now more than ever.

Positioned for sustainable profitable growth.

Majdi Abulaban: Now I will turn the call over to Tim to provide more detail on our financial results.

Speaker Change: Now I will turn the call over to Jim to provide more detail on our financial results.

Tim: Thank you, Majdi. On page 11, your transformation update. I recall that on August 31st last year, we announced an important strategic action, the continuation of our local-for-local manufacturing footprint optimization, and the transformation of the remaining 6% of our manufacturing footprint to a more competitive cost. More specifically, our production facility in Brno, Germany, otherwise known as Superior Industries Production Germany, or SPG, entered productive shield proceedings in German court-administered reorganization process. Generally accepted accounting principles required an SPG statement of operations and balance sheet beginning with the commencement of the proceedings to be deconsolidated from Superior Industries financial statement.

Jim: Thank you Marci.

Jim: On page 11, Europe transformation update.

Speaker Change: Recall that on August 31st last year, we announced an important strategic action the continuation of our local for local manufacturing footprint optimization.

Jim: The transformation of the remaining 6% of our manufacturing footprint to a more competitive cost structure.

More specifically our production facility in <unk>, Germany otherwise.

Jim: Carrier industry's production in Germany or S. B G.

Jim: Protective shield proceeds and German court administered reorganization process.

Jim: Generally accepted accounting principles required an S. P. G statement of operations and balance sheet, beginning with the commencement of the perceived you consolidated from superior industries financial statements. Accordingly in the income statement of SPG is excluded from the second quarter 2024 financial results.

Tim: Accordingly, the income statement of SBG is excluded from the second quarter 2024 financial results, as is the balance sheet of SBG at quarter end. The deconsolidation affects the year-over-year cost. More specifically, in the second quarter of 2023, 245,000 wheels were sold by SVG. The associated net sales and value-added sales were $31 million and $20 million respectively. year over year, second quarter 2024 financial results and therefore adjusted even Capital expenditures and working capital benefited from the closure of the facility. Adjusted EBITDA was $1,000,000 more, capital expenditures and working capital were $1,000,000 and $22,000,000 less respectively. We size the step change benefit of the transfer of wheels from Germany to Poland at $23 to $25 million annually.

Speaker Change: The balance sheet of SPG a quarter right.

Jim: With regards to the deconsolidation of <unk>.

Jim: The year over year comps.

Jim: More specifically.

Jim: In the second quarter 2023.

Jim: 245000 wheels were sold by SPG.

Jim: The associated net sales and value added sales were $31 million $20 million respectively.

Jim: Year over year second quarter, 2024 financial results and therefore, adjusted EBITDA capital expenditures and working capital benefited from the closure of the facility.

Jim: Adjusted EBITDA was 1 million more capital expenditures and working capital of a 1 million to $42 million less respectively.

Jim: Besides the step change benefit of the transfer of wheels from Germany to Poland at $23 million to $25 million annually.

Tim: Capital expenses should be approximately $10 million less per year. Superior's European Variable Contribution Margin should approach that as Superior North America. We expect the cost to complete the wheel transfer to be $20 to $35 million.

Jim: Capital expenditures should be approximately $10 million less per year.

Jim: Superior's European variable contribution margin should approach that is superior in North America.

Jim: We expect the cost to complete the wheel transfer to be 14% to 35 million.

Tim: Bottom line, regarding the closure of SVG and transfer of the wheels to Poland, the company successfully executed on a cost-effective facility closure in a high cost country that resulted in a significant increase in unloaded free cash flow because of the reduction in capital employed and higher earnings.

Jim: Bottom line.

Jim: The closure of SPG and transfer group that will support that.

Jim: The company successfully executed on a cost effective facility closure and the high cost countries. The resulted in a significant increase in unlevered free cash flow because of the reduction in capital employed and higher earnings.

Tim: Let's look at the quarter on page 12. second quarter, 2024 financial. That sale decreased to $319 million per quarter compared to $373 million in the prior year period. The normalization of the cost of aluminum and deconsolidation of SPG accounts for slightly more than all of this $54 million decline, or $55 million. Value Added Sales decreased to $189 million. compared to $200 million for the prior year period. The deconsolidation of SVG and foreign exchange accounts for $19 million of this $20 million decline. Justin Evenstad was $40 million. The associated margin expressed as a percent of value-added sales, 22%.

Jim: Let's look at the quarter on page 12.

Jim: Second quarter of 2024 financial summary.

Jim: Net sales decreased to $319 million for the quarter compared to $373 million in the prior year period.

Jim: The normalization of the cost of aluminum and deconsolidation of SPG accounts for slightly more than all of this $54 million decline or $55 million.

Jim: Value added sales decreased $280 million for the quarter compared to 200 million from the prior year period.

Jim: The deconsolidation of SPG and foreign exchange accounts for $19 million of this $20 million decline.

Jim: Adjusted EBITDA was $40 million associated margin expressed as a percent of value added sales 22%.

Tim: For the quarter, net loss was $11 million.

Jim: For the quarter net loss was $11 million.

Tim: The second quarter of 2024 year over year sales bridge is on page 13. As just mentioned, value added sales declined $20 million compared to the prior year quarter, reflecting deconsolidation of SPG and impact of foreign exchange. To the far right, aluminum cost passed through the customers was down $34 million because of the lower cost of aluminum and deconsolidation of SPG. On page 14, second quarter of 2024, year over year, adjusted even. Just an year and a half to the quarter decrease to $40 million compared to $52 million in the prior year period. The adjusted EBITDA margin for the quarter was 22% compared to 26% last year.

Jim: The second quarter of 2024 year over year sales bridge is on page 13.

Speaker Change: I was just about your value added sales declined 29 compared to the prior year quarter.

Jim: Fucking deconsolidation of SPG and impact of foreign exchange.

Jim: Alright.

Jim: Low cost pass through to customers was down $34 million because of the lower cost of aluminum of deconsolidation of STG.

Jim: Yeah.

Jim: On page 14 second quarter 2024 year over year adjusted EBITDA Bridge.

Jim: Adjusted EBITDA for the quarter decreased to $40 million compared to $52 million in the prior year period.

Jim: The adjusted EBITDA margins for the quarter was 22% compared to 26% last year.

Tim: Lower unit sales partially offset by favorable price and product. And, to the far right, lower performance primarily because the second quarter of last year benefited from non-recurring recovery of postage. are the primary reasons of Justin Bieber's decline. Importantly, the company has substantially completed the pivot to incorporating into mill pricing amounts necessary to offset in large part the impact on the cost structure of extraordinary cost inflation and other factors. The impact of foreign exchange and battle timing on the quarter compared to the prior year period is in the jurisdiction.

Jim: Lower unit sales, partially offset by favorable price and product mix.

Jim: And to the far right lower performance, primarily because of the second quarter of last year.

Jim: For nonrecurring recovery of cost inflation.

Jim: The primary reasons adjusted EBITDA decline.

Jim: Importantly, the company has substantially completed the pivot to incorporate it into your pricing amounts necessary to offset in large part.

Tim: An overview of the company's second quarter 2024 unleveraged free cash flow is on page 15. Cash use by operating activities was $8 million for the quarter compared to $28 million in the prior year period. Lower investment in working capital in the second quarter of this year, partially offset by lower earnings in the quarter, are the primary reasons for a decrease in cash use by operators. That's used by investing activities for the quarter of a day. $2 million more than the prior year period because of a somewhat higher capital expenditure. There were no cash payments for non-debt financing activities in the second quarter of this year because the dividends paid of all the preferred shares were paid in kind.

Tim: The company opted to pick the dividends to maximize tax. Unleveraged free cash flow for the second quarter of 2024 was $2 million, an increase of $19 million compared to the prior year period, primarily because of the improvement in cash used by operators.

Tim: No review of the company's capital structure as of June 30, 2024, may be found on page 16. That's from the balance sheet at quarter end with $172 million. Funded debt $627 million a quarter end, and net debt was $455 million. deleveraging the balance sheet, and therefore unlevered free cash flow remains a top priority.

Tim: The company's debt maturity profile, at the end of the quarter, is on page 17. As Majdi noted, we are in advanced discussions with lenders to retard and send you unsecured notes in the coming weeks. Revolving credit facility was undrawn at quarter end, and we are in compliance with all loan cuts.

Tim: The full year 2024 financial outlook is on today's agenda. For the full year 2024, we now expect net sales in the range of $1.35 to $1.41 billion and value-added sales in the range of $695 to $725 million. Reduction in expected sales reflects lower aluminum costs and lower expected OEM light vehicles. We are lowering adjusted EBITDA to $150,000 to $165,000 due to lower sales output. We still expect to deliver on mother free cash flow at a range of $110 to $130 million, primarily because capital expenditures are expected to be lower, offsetting the lower adjusted easing. The outlook for capital expenditures is now $40 million, $10 million lower as the company continues to reduce the capital intensity while strategically investing in the business.

Tim: We model a tax expense of approximately $30 million for the year.

Tim: In closing, our teams have done a great job executing our European transformation and keeping us on track to achieve our operational and financial priorities.

Tim: This concludes our prepared remarks.

Operator: Mikey and I are happy to take questions. Thank you. If you'd like to ask a question or make a contribution on today's call, please press star 1 on your telephone key. You'll be advised when to ask your questions.

Michael Ward: We will take our first question from Michael Ward, Freedom Capital, your line is open, please go ahead.

Michael Ward: Good morning, everyone. Majdi, I think you mentioned something and I didn't quite catch it, is there a change in the pricing with the vehicle manufacturers?

Majdi Abulaban: I was really referring to the negotiations, Mike, for price increases. We have, if you recall, we talked about it last year and we shared with you our success. And this year we pivoted to permanent price increases on our wheels with customers to recover inflation. So the answer is yes, I'm referring to negotiations for price increases. And I will tell you that our discussions with customers have been very productive, and we have been successful in reflecting. Now, I would say 90% of the way, we are reflecting inflation in our price through agreements with our customers.

Majdi Abulaban: And the deal with Volvo, is that the sign of more to come with some of these luxury-based manufacturers in Europe, given your new cost structure? Is that what that is? Absolutely, and I think the one, you know, with Volvo, with German customers and with Volvo and JLR, we've always been in a strong position. This is an excellent sign, a culmination a long-standing relationship as well as on our competitive position, by far because of our competitive position. I also shared with you in the presentation new developments with Audi, you know, the A technology rating is the highest with Audi and really indicative of what's to come.

Majdi Abulaban: We have been in dialogue with customers, advanced dialogue actually, to continue to grow the business and leverage what we have from a portfolio standpoint and a footprint standpoint. Mike, you may have heard me refer to this, the majority of the capacity in Europe for wheels resides in either the three countries, right? Germany, Austria, Spain, and a little bit Italy. So it's really all ultra high cost from a manufacturing standpoint, at least for wheels. And we're now 100% in Poland. Customers know it. And, you know, I was telling you the transformation we executed on in a very short time, you know, closing a plant, major operation, moving into Poland without any disruption.

Majdi Abulaban: Now, we just came out of a meeting with Audi a couple of days ago. They were very, very pleased with the execution and quote unquote, they said it's the largest insolvency they've seen in recent times. And they have not seen one that has been executed flawlessly at this one. So this actually elevates, so our competitive position has elevated our position, Mike, with customers and the way this team has executed.

Michael Ward: That's what it sounds like.

Michael Ward: Tim, do you have the... Unit shipment data separated between North America and Europe. I do have it, I don't have it with me right now, it is in total, Mike, on one of the pages. I saw the total number, I was just curious by region. I don't have it by region. Okay, will it be in the queue or? I believe it is, yeah. Okay, and when you talk about...

Michael Ward: Okay, when you talk about the margins, it sounds like the margins in the second half in Europe will be getting closer to North America. And that's a substantial change. You know, what would it look like in the first half? And what type of is we're getting the annual rate of the 23 to 25 million in savings? Is that what we're going to see in the second half? We're going to start to see that pretty quickly. Yeah, the wheels, the wheels are starting to, the launches are ongoing right now, very heavy right now. Okay. So the guys in Poland are extremely busy right now, consumed with launching these new wheels.

Tim: I mean, we know how to build these wheels. We've built them before, but we're going to turn them. to the guys in Poland, so it's not quite as...

Tim: The Colt is a brand new launch, but it does require the retention, so we expect to have all of those launches done by the end of the third quarter. and you know, in fairness, it'll take them a little while probably to get their arms around some of the processes. So, you know, all the wheels will be manufactured in Poland by the fourth quarter and this step change, the 25 $23 to $25 million annually will present itself. for the full year 2025. We won't have a full depth of it. Right, right. Okay.

Michael Ward: And just lastly, is there any implication with the notes coming current on the balance sheet or is that just all part of the negotiation, which sounds like it's pretty close to getting results? Yeah, the notes being current on the downsheet have not affected the discussion. Great.

Michael Ward: Thank you very much, everyone. Thanks, bye.

Gary Prestopino: We will take our next question from Gary Prestopino, Barrington Research, your line is open. Good morning, Majdi. Good morning. Several questions here. First of all, on the pricing that you've negotiated with the OEMs. Do these negotiations, in terms of how you're structuring, I guess, your contracts or whatever, are they going to be tied to some kind of...

Majdi Abulaban: prices change, again, going forward in terms of whatever inputs you're putting in there, that you automatically get an escalation, or do you have to go back and renegotiate the So Gary, when you think of pricing and price transfer as customers, two elements, right? You're very well aware of the aluminum contractual relationship, aluminum pass for a cost. and Automanix. You know that everything else we have negotiated is really for mostly for labor costs and other inflationary costs in manufacturing. So those are those are permanent. There are some some price increases, but I'll see less than 20% of the price.

Majdi Abulaban: are related to Energy Index. So for the most part, the price increases that are built in our plan, and actually you see them in Q2, Gary, I mean. and the audibility to get price in the quarter enabled us to offset some of these volumes we've seen in the industry. So the direct answer is, for the most part, these prices have increased. are permanent and not one-offs and not indexed. So they're permanent. but not in depth. Most of them, yes. A small, a small element.

Majdi Abulaban: All elements, Gary, primarily in Europe is indexed to energy, and that's because the energy costs, gas and electricity in Poland are volatile in North America.

Gary Prestopino: And then let's jump to the win with Volvo. That, obviously, the data you share with us, that's over the life of the program. So how long would that program run? All of these programs carry on between three to five years, right? So this one is a brand new platform. I mean, you know, it's really localization out of China, it's a mid-sized... SUV. It's actually going to be manufactured not too far from our plants in Poland. Okay.

Gary Prestopino: And it's a, um, is this an EB? Because I think Bobo said they're going entirely EB eventually. Is this an EB? Thanks for... I'm sorry, I didn't hear you. Yeah, that's correct, Gary. It is an EEP. Okay.

Gary Prestopino: And then could you, in terms of retiring these notes...

Gary Prestopino: which is great you've made the progress in, but could you give us conceptually... what the retirement is going to be. I mean, you're going to replace the notes with something, I guess. I'm trying to get a feel for. how this is going to work. You know, is there going to be a step change if you have to replace them with some kind of another debt structure or whatever? What's going to be the step change up in interest, the interest rate on? the new debt.

Majdi Abulaban: Gary, we're not done with this transaction yet, and as we said, we're characterized as being in advanced discussions, which we are, so I'm not at liberty, frankly, until we conclude these discussions and complete this refinancing to discuss the construct of the capital. Okay, thank you.

Jim: So it's.

Jim: Liberty frankly until we conclude these discussions and complete this refinancing.

Jim: To discuss the construct of the capital structure.

Speaker Change: Okay. Thank you.

Mehmet Dere: We will take our next question from Mehmet Dere, Dutch Bank, your line is open, please go ahead. Hey guys, can you hear me well? Yes. Hello. Thank you. Yeah, fantastic.

Speaker Change: We will take our next question from Dan Dutch Bank. Your line is open. Please go ahead.

Speaker Change: Hey, guys can you hear me well.

Jim: Yes.

Jim: Yes.

Jim: Okay.

Jim: Okay.

Mehmet Dere: I have a very simple question actually, again, on the redemption of the bonds. Can you give us the main reason behind the delay for the redemption or the refinancing? That's the first question.

Speaker Change: Yeah Fantastic I'm, a very simple question actually again on the on the redemption of the bonds.

Speaker Change: Can you give us the.

Jim: The main reason behind the delay for the redemption of the refinancing.

Mehmet Dere: The second question is... You started talking about the redemption of the bond. And then after that, you said a few seconds ago about refinancing. the new form of this new debt structure. Are they going to be new bonds involved or are you going to refinance this with a loan? Can you give us a broad... guidance for this.

Jim: That's the first question and the second question is.

Speaker Change: I was talking about the redemption of the bonds and then after that you said.

Speaker Change: A few seconds ago about refinancing.

Speaker Change: The new form of of this new debt structure, I think going to be new bonds involved or are you going to refinance this with it but the loan can you give us a broad guidance.

Majdi Abulaban: Thank you. Yeah, Mehmet, as I just described, we're just not prepared to make any comments with respect to this new capital structure until we've completed the the activities in the recent past. Okay, great.

Speaker Change: For this thank you.

Speaker Change: Yeah Amendment as I, just as I just described.

Speaker Change: We're just not prepared to make any comments with respect to this new capital structure until we've completed the.

Speaker Change: The activities of the refinancing.

Mehmet Dere: And then in terms of timing, you said you will come out with more details in a couple of weeks or in a few weeks. Can you give us a bit more of, you know, more guidance here, more color? Is this going to be more in September, October-like? Again, I'm going to suggest that we wait to complete the discussion and then we can discuss the catalyst. Okay. All right.

Speaker Change: Okay, great and in terms of timing is that you will come out with more details.

Speaker Change: Couple of equal to or a few weeks can you give us a bit more.

Jim:

Speaker Change: More guidance here more color is this going to be more in September October like.

Speaker Change: Again, again I'm going to.

Jim: Im going to suggest that we wait to complete the discussions.

Jim: And then we can discuss.

Speaker Change: Capital structure.

Operator: Thank you very much. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. We'll pause for just a quick moment to allow everyone an opportunity to signal for questions.

Jim: Okay, Alright, thank you very much.

Speaker Change: As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad now we'll pause for just a quick moment to allow everyone an opportunity to signal for questions.

Jim: Okay.

Jim: Okay.

Operator: There are no further questions on the line.

Speaker Change: And no further questions on the line I'll now hand, you back to Maggie we'll open for.

Majdi Abulaban: I will now hand you back to Majdi Abulaban for closing remarks. Thank you. Thank you, Alan.

Maggie: For closing remarks.

Maggie: Thank you thanks Alan.

Majdi Abulaban: And thank you, everyone, for joining our call to the to the Superior team. Thank you. Everything that we have done, everything that you have done has been extremely difficult and close to impossible. That is also really a product of your unwavering commitment. So thank you, and thanks, everyone, for joining.

Alan: Thank you everyone for joining our call to the to the superior team. Thank you.

Maggie: Everything we have.

Jim: On everything that you have done has been extremely difficult and close to impossible.

Jim: The results.

Jim: Really a product of your unwavering commitment.

Jim: Thank you and thanks, everyone for joining have a great day.

Operator: Have a great day.

Operator: Thank you for joining today's call. You may now disconnect.

Speaker Change: Thank you for joining today's call you may now disconnect.