Superior Industries International Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 7, 2024

There are 5 speakers on the call.

Operator

Thank you for standing by and welcome. My name is Albert and I will be your conference operator today. At this time, I would like to welcome everyone to the Superior Industries Third Quarter 2024 Earnings Call. We are joined this morning by Maji Abulaban, President and CEO Dan Lee, Senior Vice President and CFO. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Dan Lee. Please go ahead.

Speaker 1

Good morning and welcome to our Q3 2024 earnings conference 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 by Maciej Bhullavan, our President and Chief Executive Officer. Before I turn the call over to Majdi, I remind everyone that any forward looking statements contained in this presentation or commented on today are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to Slide 2 of this presentation for the full Safe Harbor statement and to the company's SEC filing, including the company's current annual report on Form 10 ks for a more complete discussion of forward looking statements and risk factors.

Speaker 1

We will also be discussing various non GAAP measures today. 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.

Speaker 1

S. GAAP measures can be found in the appendix of this presentation. I now will turn the call over to Maji to provide a business and portfolio update. Maji?

Speaker 2

Good morning, all, and welcome to our Q3 2024 earnings call. Before I begin, I would like to introduce Dan Lee, our new Chief Financial Officer. Dan has over 30 years of global finance leadership experience, including several years as an automotive leader with Aptiv and Tenneco. He joined Superior in 2023 as Vice President of Finance and CFO of our European business, where he played a key role in the strategic transformation of that business. He was also instrumental in the successful execution of our recent debt refinancing.

Speaker 2

I am thrilled to welcome Dan to the executive team. I would also like to thank Tim Traner, our prior Chief Financial Officer, for his leadership and his many contributions to Superior over the years. We wish him the best in retirement. Moving on to our Q3 results on Slide 4. I am proud of our team's performance this quarter.

Speaker 2

Solid results in a very challenging demand environment. While production at key OEM customers has continued to soften, pressuring value added sales, we delivered strong EBITDA growth and strong margins. Our performance this quarter highlights the strength of our competitive position, which we have established through the transformation of our global operation. Our robust manufacturing footprint now with all production consolidated in Mexico and Poland gives us a distinct advantage over competitors who rely on imports from China or production in high cost locations in Europe. This is actually a powerful combination when combined with our comprehensive portfolio of premier technology, supporting customer demand for lightweight and aerodynamic wheels in Europe and premium larger wheels in North America.

Speaker 2

In this challenging operating environment, we achieved a major milestone through the refinancing of our debt, attracting $520,000,000 in new capital and extending our debt maturities to 2028. We also reduced our total debt by 100 and $17,000,000 With this refinancing completed, we have significantly strengthened our balance sheet and competitive standing positioning our company for sustainable long term growth. Back to results, value added sales adjusted for foreign exchange and deconsolidation declined 2% year over year, outperforming therefore, industry production, which was down 6%. Our North America business delivered a strong quarter, benefiting from earlier wins with Japanese OEMs in North America and stronger key customer production volumes compared to the prior year. This was offset by lower customer production volumes and lower adoption rates in our European business.

Speaker 2

Adjusted EBITDA increased 6% year over year with margin expanding by 200 basis points sequentially and year over year. This margin expansion was primarily supported by favorable performance, including the $7,000,000 benefit in lower conversion costs at our OSHA facility, which by the way was offset with volume declines in that region. We've also continued to make progress in negotiations with customers on price increases to recover cost inflation. However, these recoveries were comparatively lower than the prior year, which included one time recovery for prior periods. I am pleased though that we have been successful in negotiating reoccurring price increases with customers to recover inflationary costs.

Speaker 2

Permanent price increases are now reflected in more of our contracts as we go forward into 2025. We are also pleased with the successful execution of our transformation in Europe. Despite lower production volumes, we are seeing benefits from this action. Our customers are recognizing the improved strategic position we have created in our localized low cost footprint. In fact, we are in advanced discussions with several customers seeking accelerated localized low cost solutions.

Speaker 2

We already realized short term wins in both regions with OEMs and in the aftermarket. We have delivered sustained margin improvement in recent quarters despite stopping industry demand. In fact, industry production has declined worse than previously expected due to key customer shutdowns, higher dealer inventories and vehicle affordability issues. Overall, we expect a 6% decline in industry production in the second half of twenty twenty four and this is supported by recent IHS estimates. In response to challenging industry wide operating conditions, we are taking action to align our global cost structure with the lower production environment and has targeted a 15% reduction in SG and A and manufacturing overhead.

Speaker 2

We expect these actions to deliver approximately $10,000,000 to $15,000,000 in run rate savings once completed in early 2025. This will result in a restructuring charge of approximately $9,500,000 which will be recorded in the Q4. These actions combined with the competitive advantages we have built through the leading portfolio of technology and our localized footprint will position Superior for solid performance and continued margin expansion into 2025. Now with this decline in volume outlook, we are lowering our full year financial guidance, including our expectations for value added sales and adjusted EBITDA. However, we do expect to sustain our improved margin levels.

Speaker 2

Dan will provide more details on the updated guidance ranges in his comments. I will now address our refinancing in a bit more detail on Slide 5. The successful refinancing of our debt this quarter is a testament to the investment community's confidence in our ability to deliver long term growth. It is no small feat to have completed this transaction in such a challenging environment. We have significantly strengthened our financial profile, reducing total debt by $117,000,000 and extending our debt maturities to the end of 2028.

Speaker 2

Our improved financial position and credit rating solidify our competitive standing as a leading supplier to global OEMs with an extensive portfolio and low cost footprint that is unmatched in the industry. These actions combined with the operational improvement achieved through our European transformation have reinforced our relationships with our global customers and in fact, we are in advanced dialogue with several major European OEMs that recognize the savings we're able to deliver through this transformation. In North America, we have line of sight actually to new business wins from 2 OEMs that need accelerated localization of their supply chain footprint. With the refinancing behind us, we are now able to fully leverage our competitive advantage to create new momentum for our business. Slide 6 highlights the accelerating momentum of the tailwinds we highlighted in prior calls, increasingly localized OEM production in the face of long supply chain and geopolitical challenges.

Speaker 2

A case in point on this slide, we are highlighting a recent localization win with a Japanese customer in North America. This customer is localizing its supply chain footprint for one of their top platforms in North America with expected production of around 250,000 wheels annually beginning in mid-twenty 25. In addition, we have had similar success in Europe with a major win in the aftermarket, expecting again to start production in 2025 and anticipating to produce 200,000 wings. Moving on to Slide 7. Here we highlight the momentum of improving adjusted EBITDA margins this year despite declining industry volumes.

Speaker 2

While global production end declined 6% since the beginning of this year, Our value added sales EBITDA margins have expanded by nearly 600 basis points. This margin expansion is driven by improvement across the business, including the transformation of our European business, consolidation of administrative functions and improved fixed cost absorption and manufacturing performance. In addition, we have seen improved production efficiencies in Mexico and savings from global SG and A and manufacturing overhead restructuring. Overall, these combined efforts have resulted in approximately a 14% global headcount reduction to date. That said, we have not reached the full utilization of our Polish operations, which is necessary to achieve the $190,000,000 in adjusted EBITDA run rate that we initially discussed earlier this year.

Speaker 2

The $190,000,000 run rate assumes an underlying production volume of 15,200,000 wheels. However, as current customer production volumes, we are delivering something more closer to 13,900,000 wheels. So despite these lower volumes, the underlying assumption behind the value of our European transformation still stands as we have delivered significantly improved profitability throughout the year, which we will sustain heading into 2025. Moving on to Slide 8, which highlights some of our exciting launches in the quarter. These programs highlight the accelerating adoption of our premium technology, lightweighting, larger wheels and exciting premium finishes.

Speaker 2

The iconic Porsche Boxster, Audi A7 and the Cadillac OPTECH EV are a few highlights this quarter. The accelerating adoption of our premium technology is evidenced by the continued growth in content per week, 34% growth in content since 2019. In closing, this was a challenging quarter for our entire industry. Our focus all along has been on what we can control. We have transformed our manufacturing footprint.

Speaker 2

We have right sized our cost structure and we have attracted capital and gained financial flexibility well into the future. Fundamentally, we have positioned our business for success. We are delivering solid financial performance and are encouraged by our accelerated momentum with customers in both North America and Europe in driving new business wins. We will continue to leverage our local portfolio footprint and portfolio of premium technology to advance our business and support long term growth. I would like to thank the superior team for their hard work this quarter and look forward to further progress heading into the New Year.

Speaker 2

I'll now turn the call over to Dan to review our financial results in more detail. Dan?

Speaker 1

Thank you, Majdi. Before I go over our financial updates for the quarter, I'd like to say how great it is to be here on the call today. I have been with Superior since July 2023, but in the few short weeks in my new role, it is clear that the team is dedicated, hardworking and aligned with executing our long term vision for the company. I'm excited to be a part of it. It is also great to partner closely with Masdi and the rest of the leadership team.

Speaker 1

Let's look at the quarter on Page 10. Q3 2024 financial summary. As Masjid stated, Q3 was a solid quarter. Net sales were nearly flat at $322,000,000 for the quarter compared to $323,000,000 in the prior year period. Lower unit sales, the timing of lower price recoveries or what we call lumpy recoveries offset by favorable aluminum cost pass through for the primary changes compared to the prior year period.

Speaker 1

Value added sales decreased to $171,000,000 for the quarter compared to $176,000,000 in the prior year period. Again, lower unit volume and lumpy price recoveries account for the decline compared to the prior year period. Adjusted EBITDA was $41,000,000 The associated margin expressed as a percentage of value added sales was 24%. I will provide color on this in the upcoming pages. For the quarter, net loss was $25,000,000 The improvement of $61,000,000 was driven by the deconsolidation loss of $80,000,000 recorded in Q3 2023, offset by the costs related to refinancing our capital structure.

Speaker 1

The Q3 2024 year over year sales bridge is on Page 11. As just mentioned, value added sales declined $5,000,000 compared to the prior year quarter, reflecting the lumpy timing of price recoveries, along with the impact of lower unit sales. To the far right, the higher cost of aluminum led to a $4,000,000 increase in aluminum costs pass through to customers. On Page 12 is the Q3 2024 year over year adjusted EBITDA bridge. Adjusted EBITDA for the quarter increased to $41,000,000 compared to $39,000,000 in the prior year period.

Speaker 1

The adjusted EBITDA margin for the quarter was 24% compared to 22% in the prior year period. This increase was due to favorable product mix, the impact of metal timing and to a lesser degree, foreign exchange tailwinds and favorable performance partially offset by lower unit sales and price. An overview of the company's Q3 2024 unlevered free cash flow is on Slide 13. Cash used by the operating activities was $3,000,000 for the quarter compared to cash provided by operating activities of $9,000,000 in the prior year period, with the decrease driven by a slightly higher investment of working capital as well as the impact of fees related to our refinancing this year. When adjusted for $4,000,000 in refinancing fees, cash flow provided by operations would have been $1,000,000 for the 3rd quarter.

Speaker 1

Capital expenditures for the quarter was $6,000,000 compared to the $8,000,000 in the prior year period. Cash payments for debt financing activities in the quarter were $18,000,000 compared to $11,000,000 in the prior year period. Unlevered free cash flow in the quarter was $9,000,000 a decrease of $3,000,000 compared to the prior year period, primarily due to increased working capital and other balance sheet items. An overview of the company's capital structure as of September 30, 2024 can be found on Slide 14. As mentioned by Majdi in his opening comments in the Q3, we successfully completed our debt refinancing allowing us to attract $520,000,000 in new capital.

Speaker 1

Our new term loan facility now matures in December 20 28. This debt refinancing has bolstered our balance sheet, improved liquidity and enhanced our financial flexibility. This strategic action enhances our financial standing, enabling us to optimize operations and positions us for long term success. Total cash on the balance sheet at quarter end was $24,000,000 With the completion of our refinancing, the proceeds for the new term loan was used in part to retire $240,000,000 of senior unsecured notes that were due in 2025. Total debt was $521,000,000 at quarter end, marking a $117,000,000 decrease since the end of 2023.

Speaker 1

Net debt was 497,000,000 dollars and represents a $61,000,000 increase since December 31, 2023. This increase is primarily driven by $33,000,000 in refinancing costs paid in addition to the impact of increased working capital. Superior's debt maturity profile as of September 30, 2024 is on Slide 15. Again, our debt refinancing effectively strengthens our balance sheet, extends debt maturities to 2028 and positions us for long term growth. As a part of our refinancing agreement, we will begin paying $1,300,000 in quarterly payments towards our senior secured term loan beginning in Q4 2024.

Speaker 1

The full year 2024 financial outlook is on Page 16. As Masjid noted, due to the challenging OEM production environment, we are lowering our full year 2024 outlook. For the full year, we now expect net sales in the range of $1,250,000,000 to $1,330,000,000 and value added sales in the range of $680,000,000 to $700,000,000 This reduction reflects lower aluminum costs and lower expected OEM production volumes. We now expect full year 2024 adjusted EBITDA to be in the range of $146,000,000 to $154,000,000 This range was also lower due to lowered anticipated production volume against global OEMs. We expect to deliver unlevered free cash flow in the range of $50,000,000 to $80,000,000 The revision to our guide is related to higher working capital and the impact of additional restructuring costs.

Speaker 1

In addition to these items, our management of unlevered free cash flow has been modified to reflect the liquidity requirements of our new term loan. With the completion of our debt refinancing, we are focused on balancing the maximization of unlevered free cash flow with the liquidity requirements for our new term loan to enable financial flexibility. Capital expenditures are now expected to be $35,000,000 approximately $5,000,000 lower than the prior outlook, as we continue to reduce our capital intensity of the business while making strategic investments for growth. In closing, I want to thank the entire Superior team for their hard work this quarter. We are executing well within a challenging operating environment and are continuing to use our competitive footprint and unmatched real portfolio to capture new growth opportunities.

Speaker 1

I look forward to continuing to work with the team to make progress on our operational and growth priorities. This concludes our prepared remarks. I want to thank everyone for joining us today. Maji and I are happy to take questions.

Operator

Our first question comes from the line of Gary Prestopino from Barrington Research. Your line is now open, Gary. Please go ahead and ask questions.

Speaker 3

Thank you. Good morning, all.

Speaker 2

Good morning, Gary. Good morning, Gary. Good morning, Gary.

Speaker 3

Good morning, Dan. Welcome. Could we drill down on both your North American and European market? Are the real issues with the declining or production being less than expected, is that mostly a European phenomenon or is that really split between both regions?

Speaker 2

Gary, actually it is split between both regions. I mean, we're no different than the rest, Gary. It's a very challenging volume environment for all the Tier 1 suppliers. A couple of stats for you, right? If you go back to when everyone guided versus where we're at now, the 2 combined regions from a volume standpoint, volumes are down in the second half 9%.

Speaker 2

And if you look on a year over year basis, in both regions actually, they're down 6%. So North America was down year on year 5%, and Europe was down 6.5%. Now in our presentation, we highlighted that actually our North America business has done very well. It outperformed. And in Europe, if you make some minor adjustments for the deconsolidation and ramp up, we're right in line with market.

Speaker 2

But collectively, if you add those 2 together, we're 400 basis points ahead of the market. Now as you look at the Q4, Gary, the outlook is quite challenging for the industry. IHS, both regions combined declining 7%. And if you peel that further, IHS got Europe being down 11%, which is quite significant, and they got North America being 3%. If you look at the guide that Dan shared with you, you back into what we're looking at in Q4, Q3 were ahead of market, Q4 will be ahead of market.

Speaker 2

North America will continue to outperform North America for the entire year. Production in the industry will be down 1.5%. We'll probably be up. We have several points ahead of market in North America. Europe should be ready to move in.

Speaker 2

And the key for us here is, I think, to understand the volume environment, the margin profile. We like the development on Europe. We like the execution. We like the reduction in costs and especially SG and A and overhead. North America, actually, Mexico is doing well from a productivity standpoint.

Speaker 2

So that's what converged on these margin expansions you see. So we are doing 24% in Q3, even this is on the high end. 25% and the same, you can extrapolate a little bit higher even in Q4 on margins. And as we go into 2025, we expect to continue with this level and improving on this level of margin north of 24%. Okay.

Speaker 2

Thank

Speaker 3

you. And then, Dan,

Speaker 2

do

Speaker 3

you have the units shipped in terms of wheels or will you put that in your queue?

Speaker 2

Gary, on the unit, well, if you look at the core development on the margin side, it shows you the units. We normally don't dispose the units, but we chose to include it. It's on Slide 7. But in the Q, we have removed units because our focus, Gary, has been on just value added standard content. I cited several times examples where a suburban wheel is 4 times the price of a Nissan Sentra wheel.

Speaker 4

So

Speaker 2

using unit analytics for executing on the strategy can be problematic and cause unnecessary noise. So that's why we backed away from.

Speaker 3

Okay. And then lastly, I was trying to write this down. You mentioned that did you do another RIF restructuring that you said is going to have the potential to capture $10,000,000 to $15,000,000 of expenses?

Speaker 2

That is correct, Kerry. I would emphasize that it's above and beyond that the execution we have completed in Europe, which by the way, we're going to see the benefit of that even more. It's not fully baked in the Q3, Q4 results as we go into Q1, 2025. You'll see significantly more savings as a result of the Europe transformation. Q1, the restructuring is really overhead and it's global overhead in nature.

Speaker 2

It is the number we just guided. We expect to see $10,000,000 to $15,000,000 in EBITDA improvement in 2025. But recall now, the volume environment is really challenging here. Actually, more volumes are down more than anyone expected in my industry. As we move to 25, we really want to get ahead of it, Gary.

Speaker 2

And we feel good. This restructuring, we're highlighting, we said early 25. By end of this year, it will still happen in Q2. And we'll really announce the year that's the bottom line of the company.

Speaker 3

Okay. Thank you.

Speaker 2

Thank you, Gary.

Operator

Thank you. Our next question now comes from the line of Michael Ward. Your line is now open, Michael. Go ahead and ask your questions.

Speaker 4

Thanks very much. Majdi, maybe just a follow-up on those actions you announced for, I guess, the charges in 4Q. Where is that centered? Is that North America or Europe, the additional savings?

Speaker 2

That's actually both in North America and Europe. And I would say, it's more weighted towards the global operating structure. But then maybe you can add a little bit more on that. You want to avoid that?

Speaker 1

No, it's Juan, good morning. The actual execution restructuring is actually happening in all facilities globally. So, this is really an attempt for us to resize our organization to adjust to the volume and the challenge of volume activity that we're seeing globally. So, we are trying to fit our company into that new environment.

Speaker 4

Okay. And so if I'm reading this correctly then, when we get a normalized basis with the actions in Europe along with this new restructuring, a more normalized run rate on the margin is somewhere in the 26% to 27% range?

Speaker 2

Well, I think it depends on what volume assumptions you would Yes.

Speaker 4

No, assuming status quo

Speaker 1

on volumes.

Speaker 2

Listen, it's really excellent margin profile as we go into next year. So we're not providing guidance for 25 yet. No, I understand. I understand.

Speaker 4

Idea of your capabilities. Is 26%, 27%, is that out of the question if things go well?

Speaker 2

If things go well, it's not out of the question at all. But recall, if you look at IHS volumes are going to be down year on year versus 2024. If we have these volumes decline for material life, then your caps are right on, Mike. Yes, we make wheels works well with us when we make more wheels.

Speaker 4

Perfect. Dan, I wonder if you can provide a bit more color on the refi. What is the rate of the term loan? And when you talk about this $1,300,000 a quarter in pay down of the term loan, is that in addition to interest costs? What is what are the thinking and what were the terms for that?

Speaker 1

So the terms on the refi is silver plus 7.50 dollars is the interest rate. And in Q3, you'll see in our Q that our effective rate was 12.6%. And then the 1.3

Speaker 2

payments. Okay.

Speaker 4

And as we look at your cash flow, working capital, I think it was about a $30,000,000 the way I the numbers that I see. You got about $30,000,000 hung up in working capital and it looks like it's just timing. Should that unwind in Q4? Is that what your assumptions are assume? Is that what you're assuming?

Speaker 1

That's yes. With the exception, if you saw the guidance that we gave on the unlevered free cash flow and the range of the unlevered free cash flow, what you're noticing there is there are complex terms in our new term loan on what our liquidity requirements are. And we're trying to manage through those as we speak. The breadth of that range is on the high end. If we maximize cash, then it would be towards the high end of the range.

Speaker 1

If we need to provide additional liquidity flexibility for Q1, because we're coming off a high cash quarter into a low cash quarter, we'll be closer to the lower towards the lower end of that range. So we're managing through the liquidity requirements of the new term loan.

Speaker 4

Okay. All right.

Speaker 1

And But you're also asking about whether sorry, the but to answer your direct question is the expectation in the working capital, yes, it is timing. We had some pretty sizable revenue and specifically in the month of September, which drove receivables up and we expect those to unwind in Q4.

Speaker 4

In Q4. Perfect. Okay. And any timing on when the Q will be filed?

Speaker 1

It should be filed later at the end of the day today.

Speaker 4

Perfect. Thank you and welcome, Dan. Congratulations on your position. Thank

Speaker 2

you. Thanks, Manjdi.

Speaker 4

Thanks, Manjji.

Operator

Thank you. We don't have any questions on the line at this time. I will now turn the call back over to Magi for our closing remarks. Go ahead, Magi.

Speaker 2

Thanks again for joining our call today. I want to thank our teams for their consistent execution in a very challenging environment. We have the right strategy in place to drive long term growth for our business and it's centered around our portfolio, our simple customer relationships, our footprint and all other capabilities we have created. I do look forward to sharing further updates on our progress with you next year and in our Q4 call. Thank you very much for joining.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for joining. You may now disconnect.

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Key Takeaways

  • In Q3, value-added sales declined 2% year-over-year (ex-FX/deconsol) but adjusted EBITDA rose 6% with a 200 basis point margin expansion, outperforming the 6% industry production drop.
  • Completed a $520 million debt refinancing, extending maturities to 2028, reducing total debt by $117 million and significantly strengthening the balance sheet.
  • Consolidated manufacturing in Mexico and Poland delivers a low-cost localized footprint, securing new wins including 250,000 wheels for a Japanese OEM in North America and 200,000 aftermarket wheels in Europe starting in 2025.
  • Launched a global cost reduction plan targeting 15% SG&A and overhead cuts to achieve $10 million–$15 million in annual run-rate savings, with a ~$9.5 million restructuring charge expected in Q4.
  • Pushed premium technology adoption with launches on the Porsche Boxster, Audi A7 and Cadillac OPTECH EV platforms and achieved 34% growth in content per wheel since 2019.
AI Generated. May Contain Errors.
Earnings Conference Call
Superior Industries International Q3 2024
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