Superior Industries International Inc

Please stand by, we're about to begin. Good day and welcome to the Superior Industries fourth quarter and year-end 2021 earnings teleconference. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Clemens Dinks. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to our fourth quarter and full year 2021 earnings conference call. During our discussion today, we will be referring to our earnings presentation, which, along with the earnings release, is available on the investor relations section of Superior's website. I'm joined on the call by Majdi Aboulaban, our President and Chief Executive Officer, and Tim Trenary, our Executive Vice President and Chief Financial Officer. Before I turn the call over to Majdi, 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 1995. Please refer to slide two of this presentation for the full Safe Harbor statement and to the company's SEC filings, including the company's current annual report on Form 10-K for a more complete discussion on 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. The conciliations of these measures to the most direct comparable U.S. GAAP measures can be found in the appendix of this presentation. With that, I'll turn the call over to Marci to provide a portfolio and business update.

Hey, thanks, Clemens, and thanks, everyone, for joining the call today as we review fourth quarter and full year 2021 results. 2021 marked a year of significant progress for Superior as our team demonstrated great agility in delivering profitable growth in a challenging production environment. We are now realizing the benefits of several years of execution against our value creation roadmap. In terms of revenue, this is the third consecutive year of growth above markets. And in terms of profitability, our earnings in 21 are at pre-pandemic earnings levels, despite substantially reduced industry volumes. I will now start on slide five with our full-year highlights. In 2021, we delivered double-digit year-on-year increases in revenue, earnings, and continued growth of our market. This clearly is the result of our operational strength in an environment with OEM production volatility and decline and elevated raw material costs. Our performance was also further enabled by the continued shift to premium products, enabling us to deliver an impressive 29% increase in EBITDA in 21 on 6% increase in unit shipments. We are. successfully capturing the growing demand for premium, larger, and lighter wheels as OEMs seek products to meet secular trends for electrification, CO2 reduction, and vehicle customization. Our portfolio of differentiated technologies has supported content growth and, in turn, long-term margin expansion. Further, we maintained a strong cash balance of $113 million despite the decline in full-year operating cash flow driven by increasing material costs, which in turn impacted our working capital requirements. This combined with our revolvers provide ample liquidity to support our business and make Superior exceedingly well positioned to drive further growth in 2022 and beyond. Slide six highlights production levels over the last year across our manufacturing operations. Truly an impressive testament to how our differentiated portfolio of product technologies is enabling us to capture content growth in both regions for a combined growth over market of 17% in 21, continuing the trend we have delivered since 2019. Slide seven illustrates how years of operational focus have paid off for Superior. In 2021, volumes for both Superior and the larger automotive industry were significantly lower than 2019, which is the last full year of normal operations prior to the onset of the pandemic. Despite this substantial decline, we achieved EBITDA and EBITDA margins nearly in line with our 2019 results. These figures are most encouraging, and in addition to demonstrating our ability to drive performance in the face of a volatile macro environment also convey how well positioned Superior is to deliver earnings growth once industry volumes return to pre-pandemic levels. I'll now move to slide eight to address the current state of our operating environment. Looking at the left side of the chart, many of the same challenges and tailwinds that impacted our operations during 21 will continue into 2022. As I addressed on the last slide, demand for premium wheels continues to support a favorable shift in product mix. Further, we have also seen solid performance from our aftermarket business driven by strong European demand, which is benefiting from our localized footprint in Europe. As the industry continues to look to de-risk long supply chains, we expect to continue to benefit from our footprint of being local for local for our customers. This is another favorable tailwind that we expect to continue in the coming years. As you can see on the right, 2021 industry production fell significantly short of what we expected earlier in the year due to the lingering effect of macroeconomic challenges. We are taking a conservative approach for forecasting our estimates for the industry in 2022. And our forecasts are well below that of IHS current predictions. Should industry production recover faster than our current estimates, there will be a substantial upside for our performance during the year. As shown on the right side of the chart, current production remains far below that of historical levels in 2019. And as such, we are confident that underlying consumer demand remains quite strong. That said, I will provide further detail on our 2022 expectations later in my remarks. Moving on to slide nine. Our legacy of consistent growth over market has been continually supported by execution on our value creation roadmap. Throughout the year, we work to drive enterprise-wide operational improvements to mitigate ongoing industry headwinds with the goal of positioning Superior for long-term profitable growth. Actions taken in 2021 have included flexing manufacturing costs at facilities in Mexico and Germany and enhancements of both costs and commercial discipline to mitigate the impact of increasing operating costs without compromising product quality and to enable commercial recoveries of inflationary costs. We have also focused on development of our culture of continuous improvement by utilizing Six Sigma training, graduating 125 green belts and black belts during the year. While we have been focused on improving operating metrics in the business, we have not taken our eye off the ball on ensuring the right investment in manufacturing capability to allow us to continue to deliver products that enable our customers to differentiate their vehicles. We have invested in more lightweighting capabilities in Mexico and Poland to enable electrification, more painting and machining capabilities to enable 24-inch wheel and ultra-premium paint finishes, and greener products with low carbon footprint that enable us to execute on our ESG strategies. Slide 10 makes the point further. Our broad portfolio has been the cornerstone of our growth over market. We expect to continue growing each of these technologies further in the coming years, positioning Superior to increase its penetration in the premium wheel space while expanding margins along the way. We will continue to leverage this content growth well into the future as OEMs continue to seek larger, lighter, and more premium wheels. Flag 11 showcases several of our product launches during the year and highlights the speed with which OEMs are continuing to adopt our technologies in North America and in Europe. These product launches continue to reflect the increasing diversity of our customer base, the continued growth of our premium technologies, and our success in adapting to the evolving trends in the industry. During the year, we continued to leverage our innovative portfolio with over 50% of launches incorporating lightweighting technologies, over 60% utilizing premium finishes, over 70% with larger diameter wheels, and over 25% for electric vehicles. Turning to slide 12, before moving on to our 2022 outlook, I would like to address the progress we have made towards environmental, social, and governance initiatives throughout 2021. This includes the establishment of our goal to be carbon neutral by 2039, the implementation of our Global Diversity, Equity, and Inclusion Council, and the launch of our inaugural UN Global Compact Sustainability Report. Further, I am pleased to announce that Superior recently joined the Aluminum Stewardship Initiative, a global organization dedicated to bringing together shareholders and stakeholders involved in the aluminum value chain to help drive responsible production and sourcing of aluminum within the industry. Slide 13 highlights the fact that our ESG focus and particularly the environment has been multifaceted. We are in the process of launching our R4 strategy. We're excited about that. Which will further enhance the sustainability initiatives of our operations and diminish the emissions produced in our manufacturing processes. With a focus on utilization of clean energy sources Coupled with our local-for-local manufacturing footprint, Superior is actually far ahead of global competitors on the emissions front. We currently deliver wheels with roughly 60% lower CO2 footprint than the global average and aim to achieve further reductions by 2025. In addition to helping us advance the sustainability of our operations, this progress also makes us an attractive partner to major OEMs that are looking to reduce the carbon footprint of their supply chains. We look forward to driving further progress in our sustainability efforts in 2022. I will now address our full year 2022 outlook on slide 14. Although we are seeing some stabilization of OEM production levels, visibility for the full year remains limited due to supply chain headwinds and uncertainties regarding inflationary cost pressures. Given these factors, we have taken a conservative approach to our industry assumptions for the year, which is reflected in our guidance. Further, we do anticipate some level of disruption associated with the Russia-Ukraine conflict. the full impact of which is currently unknown as the situation continues to evolve. Regardless, once the industry recovery accelerates, the high levels of pent-up consumer demand will materialize into substantial growth for both Superior and the wider automotive space. For the year, we expect continued industry recovery over 2021 with mid to high single digit growth in global light vehicle production. Adjusted EBITDA is anticipated to be in the 160 to the 190 million range with cashflow from operations between 105 and 150 million. This includes the expected benefits from further accelerating our cost recovery and continuous improvement efforts to mitigate inflationary headwinds. That said, we see substantial upside potential to earnings and cash flow should industry production volumes return stronger than anticipated. In closing, I am incredibly proud of the superior team for the progress we achieved in 2021. Heading further into 2022, I look forward to the many opportunities that lie ahead, and I am excited about our position as the industry rebounds and accelerates growth. With that, I will turn the call over to Tim.

Tim? Thank you, Mashti, and good morning, everyone. 2021 was a year of improvement for Superior in a challenging business environment, especially so in the back half of the year. More specifically, 2021 reflects operating discipline and the cost structure benefit of our enterprise cost improvement and continuous improvement programs. The top line reflects our product portfolio supporting growth over market of 17% and 9% content per wheel growth for the year. Interestingly, the 12 months ended June 30th, 2021 informs the financial performance Superior can put up considering the improvements in the company. For the 12 months ended June 30th, 2021, a period of relative normalcy Notwithstanding the pandemic, the semiconductor, and other supply chain disruptions, Superior did 193 million of adjusted EBITDA on 797 million of value-added sales for a margin of 24%. This was accomplished even though wheels sold were down 9% from pre-pandemic levels, that is 2019, and light vehicle production in our markets was down 12%. This is a testament to the earnings power of Superior in more normal times. Let's begin on page 16 with the regional unit shipments, net sales, value added sales, and earnings for the fourth quarter and full year 2021 as compared to the prior year period. In the fourth quarter, wheel unit shipments were 3.9 million units, down 12% compared to the prior year period. But for the full year, wheel unit shipments were 16.1 million units, up 6% from the prior year. This contrast, the fourth quarter versus the full year, reflects a tale of two business environments in 2021, a fairly robust first half of the year and a rather miserable back half of the year. Net sales increased to $368 million for the quarter compared to $338 million in the prior year. For the full year, net sales were $1.4 billion compared to $1.1 billion in the prior year. The increase in net sales reflects higher shipments because of the pandemic-induced 2020 manufacturing shutdowns and higher aluminum costs passed through because of an approximate 45% increase in the cost of aluminum during the year. Favorable foreign exchange, primarily the relative strength of the Euro during the year, also held. Value-added sales decreased to $189 million for the quarter compared to $202 million in the prior year. But for the full year, value-added sales were $754 million compared to $648 million in the prior year, primarily due to higher shipments, favorable product mix, and higher content per wheel. In the fourth quarter, we reported a net loss of 4 million or loss per diluted share of 48 cents compared to a net loss of 21 million or loss of $1.16 per diluted share in the prior year period. In the fourth quarter, we incurred a 4.5 million charge for costs associated with the restructuring of our manufacturing facility in Germany. For the full year 2021, we reported net income of 4 million but a loss per diluted share of $1.17 because of accretion of and dividends on the preferred stock. The net loss in the prior year period was $244 million or loss per diluted share of $10.81. The improvement in net income is largely due to a $194 million impairment charge in 2020 and more operating income in 2021 resulting from the higher sales. Take 17 highlights some of the actions executed throughout 2021 to improve our business and to mitigate the impact of a difficult business environment on our financial performance. As you might expect, many of these actions are reflected in the company's value creation roadmap that Majdi spoke of. Effective centrally led procurement, a disciplined enterprise cost improvement program, an acceleration of our Lean Six Sigma, continuous improvement are examples. Noteworthy are the actions beginning in the third quarter to address the business environment. To size our manufacturing cost structure more appropriately to the almost 20% decline in light vehicle production in our markets in the back half of the year, we implemented temporary layoffs in our Mexican facilities and utilized a government-funded short-time labor program in Germany. Page 18. Fourth quarter year-over-year sales bridge. Improved mix and higher content per wheel offset much of the impact of a 21% decline in year-over-year light vehicle production in our markets. Value-added sales, before giving effect to currency, declined only 8 million or 4%. Note the 43 million increase in aluminum pass-through. The cost of aluminum rose by about 45% by year-end. The full year 2021 year over year sales bridge can be found on page 19. Value added sales before giving effective currency are up 88 million or 14% despite light vehicle production in our markets being down 3%. Again, we delivered favorable mix and a higher content per wheel in large part thanks to our premium wheel making capabilities and product portfolio. On page 20, Adjusted EBITDA decreased to $37 million for the fourth quarter of 2021, compared to $47 million in the prior year period, primarily because of the 21% decline in year-over-year light vehicle production in our markets. Metal timing helped in the quarter compared to the prior year, but was offset by manufacturing performance, a reflection of the difficult business environment. The full year 2021 year-over-year adjusted EBITDA bridge is on page 19. Adjusted EBITDA increased to $167 million for the full year 2021 compared to $129 million in 2020. Higher production volumes, improved mix, higher content per wheel, and favorable currency and metal timing all contributed to this increase. An overview of the company's cash flow is on page 22. Although free cash flow of $40 million was very satisfying in the fourth quarter, full-year 2021 free cash flow was a negative $28 million. All of this may be attributed to higher investment in working capital, more specifically the higher cost of aluminum as depicted on page 23. This will come back to us once the cost of aluminum normalizes. Capital expenditures of $65 million were more normal this year than last year, but still a bit below historical trends and 10 million below our 2021 financial plan. An overview of the company's capital structure may be found on page 24. Funded debt was 616 million at year end 2021 compared to 643 million at the end of 2020. The 27 million decrease reflects principal payments and the depreciation of the Euro denominated debt because of the Euro weakening against the U.S. dollar toward the end of the year. As of the end of 2021, liquidity, including availability under the revolving credit facilities, was $309 million. The debt maturity profile is depicted on page 25. Revolving credit facilities were undrawn, and we remained in compliance with all loan covenants and had no near-term maturities of funded debt. The company's 2022 outlook is on page 26. For 2022, we expect unit shipments to be in the range of $16.4 to $17.7 million, net sales to be in the range of $1.6 to $1.7 billion, and value-added sales to be in the range of $780 to $840 million, resulting in adjusted EBITDA of $160 to $190 million. We model a 25 to 30 percent effective tax rate in 2022. These figures assume light vehicle production in our markets in the mid to high single digits. Further, these estimates do not reflect the impact of the Russia-Ukraine conflict, which we are monitoring closely and will assess as the conflict evolves. The growth in net sales is expected to result from higher production volumes and the elevated cost of aluminum. The increase in value-added sales assumes continued growth over market in 2022. Cash flow from operations is expected to be in the $105 to $150 million range, a substantial increase over 2021, as we expect the increasing cost of aluminum to moderate, and we continue to focus on cash generation. With respect to capital expenditures, we plan to invest $80 million in our business this year, including some carryover from 2021 as we continue to strategically invest in the business, especially finishing capabilities. This amount of spend will depend, however, in part on the evolution of the business environment during the year. Back to the 2022 outlook for adjusted EBITDA and cash flow from operations for a moment. The low end of these ranges reflect some stranded inflationary cost pressures in the P&L in 2022. We are and will continue to vigorously pursue customer recovery of the impact of inflationary cost pressures on our business in order to preserve margins. The timing of these recoveries may be lumpy and there is no assurance we will be able to completely recover these costs. On the other hand, this is a business with good operating leverage. Our premium wheel making capabilities and therefore our product portfolio coupled with our disciplined operating teams and a return to more normal light vehicle production levels in our markets, could result in our business recovering very handsomely from the semiconductor shortage. As I mentioned at the outset, this is a business that did $193 million in adjusted EBITDA and $797 million in evaluated sales for the 12 months ended June 30, 2021, a period of relative normalcy for a margin of 24%. Mashi, back to you.

Thanks, Tim. In closing, I would like to thank our teams for their contribution to our strong performance this year. We look forward to continuing our momentum and driving further shareholder value in 2022. Operator, I would like to turn the call back over to you for Q&A.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star 1 for any questions or comments. Our first question comes from Gary Prestapino at Barrington Research. Your line is open. Please go ahead.

Good morning, everyone. Good morning, Gary. Hi. A whole series of questions here. I guess, first of all, with this issue in the Ukraine, I don't recall that you had any kind of facilities there, but I would assume a lot of components are produced for your European OEMs that you're supplying wheels to in the Ukraine. Is that kind of correct?

Yeah, not components from us, but specifically in my prior life, wiring harnesses is quite concentrated in Ukraine.

Right. Okay. And are most of these, do you know, are most of these in the western part of the country, these production facilities?

Yes, they are actually. They're spread over, but the bulk of the employment, especially in the wiring harness business area, with Aptiv, Leone, and others are in the West.

And right now, from what I've read, a lot of these things have shut down production, or is that incorrect?

Partially. Not a lot, I would say. So, PW has announced the closure of their Porsche plant, and that's largely because of wiring harnesses out of the Ukraine. It remains to be seen. The European automotive industry is is highly dependent on Ukraine because of the concentration of that commodity. But again, plants are located in remote locations. You know, from what I understand, some have been able to continue production, some have not. So this thing is, we're watching it closely as it plays out. Our exposure is really raw material, Gary, and, you know, we... 20% of our aluminum buy comes from one supplier in Russia, and our teams are doing a good job putting in place plans to de-risk and making sure we have the right inventories on hand to continue to support our customers.

Okay. And then, you know, now it's become very evident we're in an inflationary environment. Tim, one of your comments was, I guess, recapturing costs or inflation from your customers. Could you maybe explain how that works? I mean, this is really the first time we've had to deal with something like this for almost 30 years.

Sure, Gary. The first thing I would note, and as evidenced by the company's financial performance in 2021, we really had very little margin compression resulting from inflationary pressures until the back half of the year. and most of that manifested itself in the fourth quarter and in Europe. So very little total impact during the year, but coming out of the year, some inflationary pressure. This was primarily as a consequence of increases in the cost of resins, which go in our coatings, and some increase in energy costs and transportation costs. We have, as I think you know, commercial arrangements with all of our customers whereby the customers are responsible for paying for the cost of aluminum and associated with those agreements are mechanisms whereby we actually compute and pass those costs on to the customers. With respect to 2022, this year, the The cost to alloying the aluminum has risen, and we are in the process of having discussions with our customers around adjusting the mechanisms to reflect the changing cost of the alloying of the aluminum. I would tell you that we have today agreements in hand or certainly agreements in principle to do that. With the majority of our customers and the handful that we haven't run that to ground yet with, we will. So there's the aluminum alloying, which we believe we are well on our way to addressing. And then to the extent we continue to have cross pressures from, let's say, the resins or utilities, and to the extent we can – arrive in an agreement with our customers to share that cost with them. That will be great. Absent that, as you know, in this industry, we have productivity, what are called productivity pricing adjustments, and the practice is as we improve our productivity, we pass some of those savings on to the customers in the form of price downs. We have that lever and that flexibility, so to the extent we have inflationary pressures that the customers can't see their way through to the share, and we have the pricing lever. So suffice to say that not much of an issue in 21, coming into 22, a little bit of an issue, but we are pursuing the recovery of these costs vigorously, and we expect our customers to pay their fair share.

Hey, Gary, let me add something that I think would be helpful as well, and it's relative to 2021. which kind of shed light on what I would call the resiliency of our profile as a company on this question and the exceptional ability of our team to execute, right? So commercially, as Tim said, we're naturally hedged on aluminum. We have to address the alloying portion, but in 21, we are naturally hedged. we had established fixed positions on energy and that is the main reason why we did not see any of that. And on other commodities, our teams have done very well either negotiating, pushing back, indexing, or fixing prices, while at the same time driving continuous improvement to offset these pressures. And the net of all that is very little margin compression in 2021. as a result of all the inflationary movements you described. But I think the takeaway for me is what I would call the resilient profile of our company and the ability of this team to execute.

Okay, I'll let somebody else go. Thank you.

We'll take our next question from Mike Ward at Benchmark. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Mashti, that page 10 says a lot. And when I look at that, there's a couple of things I'm curious about. The 19-inch wheels, as you're going above 50%, is there a difference between basically the level of percentage in North America versus Europe?

Well, actually, just directionally, I'll give you the data maybe at the end of the call, but directionally in North America, wheels tend to be larger than Europe. than in Europe, but the growth profile and the trend has been consistently the same.

And the premium finishes, the lightweighting technologies, any differences between the two regions, or are they pretty consistent?

So the characteristics of the two regions, Mike. So I would say that North America tends to be, because of SUVs, slightly larger wheels, right? I would say that North America has a lot more variety on premium finishes. I would say that Europe really started very heavy and very fast on lightweighting technologies, which North America, I think, is catching up with that trend. And as you know, lightweighting technology for us is a big content adder. And the reason is it's on all these performance vehicles. And you consider 75% of our revenue is with German car makers and premium car makers. That explains it. So premium finishes, sizing on the U.S. side, lightweighting technologies on the European side.

Okay. And then on the EV side.

I have the number. I just found it. It's very close. In the high 40s in Europe, in the low 50s in North America.

Okay. All right. And on the EV side, you know, Europe is ahead of the U.S., so I assume you're getting a lot of that growth there. When you look at this 37% type growth, is that with content and wins, or is it both? Is there a breakdown between, like, how much added content you're getting with some of the wheels? I mean, every EV I've seen has got bigger wheels.

No, no, exactly. The 37% is really intended to say if you look at where we are today in terms of – wheels that go on electrified vehicles and wheels that receive aerodynamic finishes and inserts, we see that growing 37% in the next three to four years, right? And what is that? Within that is the lightweighting technologies and the aerodynamic applications. The 37% is purely the count of growth, but the content is quite significant, Mike.

It is, okay. On the next page, page 11, when you look at some of the new vehicles that you have, I'm assuming of the 90 global launches, there are more EVs there. Can you say if you're on the F-150 Lightning or the GM electrified full-size pickup trucks?

Of those 90 launches, 25 of them are on electric vehicles. Wow. And as you look at the wins that we've had with the OEMs both in Europe and in North America, we're winning our first share. I mean, you step away from it, Mike, in terms of where is this company going in terms of capitalizing on where the industry is going, right? So you look at our standing from a market share standpoint with customers. You know, market share-wise, we're number one with GM, number two with Ford. We're in a very top one, two position with Toyota in North America. And with the German car makers, you know, when you think of Audi, Daimler, BMW, Volvo, we're number one, two, and maybe one of them, we're number three. So we're just going to go right along for the ride. And as a technology company, You know, while we are a global leader in the top three market share-wise, we are actually, we could argue that we are the number one producer of premium wheels. When you think of just take the premium segment, larger wheels with premium finishes, we're a global leader hands down. So as you think of that industry and where it's going, the car makers, where they're going, our position with the car makers and how that enables us to grow with them, it's a great story.

Yeah, it certainly is. Tim, on page 23, one of the things you talked about, there are transitory items, and I'm assuming that's the timing. I think you called it out as that's the pass-through. Is that what you said?

Yeah, the transitory items here, Mike, this is really, by and large, the value of aluminum. At year end, it finds its way into our working capital and therefore into our balance sheet. So we are obliged to make an investment in that. We refer to them as transitory items. I guess the plural part here is, in addition to the aluminum cost, a little bit elevated inventory levels. But the lion's share of this is the cost of aluminum. And I think the point I want to make here is that absent that investment and that modestly higher inventory level because of the manufacturing environment, you know, the debt would have been at least $30 million lower.

And so then as you look forward and, you know, as you look at page 25 and you have no near-term maturity issues, the term loan B is fully outstanding. You haven't tapped that at all, right? So the only near-term, I guess, you have senior notes that come due. and then you have potentially the preferred redemption, right? That's it?

Yeah. All the maturities of the funded debt are two-plus years out. That would be the term loan and the senior notes. The revolvers, of course, are undrawn, and we have $100 million of cash on the balance sheet. That's why they're undrawn. And you mentioned the preferred equity. The redemption date there is at the back half of – 2025, so three plus years away.

And how exactly would that work and what are your options as far as cash impact?

Options with respect to the preferred equity?

Yeah.

Well, first of all, it's an optional redemption so that the paper is redeemable at the option of the holder, TPG. Should the option be triggered, The company, to the extent it has at that point in time the financial wherewithal to redeem the stock, the preferred stock, it has an obligation to do so. This is three and a half years away. We'll see what transpires. In the event, however, that the company did not have the financial wherewithal at that time to fully redeem the stock, since it's equity and not debt, there's certain provisions whereby we would only be obligated to redeem that portion of which we could do without jeopardizing the company's financial condition. So there's a redemption there, but the important thing I think here potentially, if it ever gets to be an issue, is that this is equity and not debt. So it's not a contractual obligation to actually pay off the full value if the company does not have the financial wherewithal to do so.

Okay, and so then what would happen then? You would issue them equity, or would you have to continue to pay the dividend on it?

It's redeemable in cash, okay? So we would pay cash. And my recollection is that whatever portion that would not be redeemed, if that were to be the case, we would continue to pay dividends on it.

All right. Just one last question on the aftermarket. I think, Majdi, you mentioned that the aftermarket business had some pretty good performance in 4Q. Is that correct?

Yes, very good performance.

Was it up in line, above market growth that you're seeing with the rest of the place? Are we up double digits?

Is it coming back strongly? Very strong, Gary. Let me say, for the entire year, north of 15% year-on-year growth, and the trend continues. Listen, we have said, Mike, you know, this The wheel industry, especially in North America, has been always, always exposed to long supply chains from the Far East, and especially China, right? And this is now, you know, very evidently becoming problematic. Long supply chains don't make sense, they're disruptive, you've got geopolitics, you've got freight costs, you've got all kinds of things going on. And you've got container availability, so you are going to see a big push for localizing in region where the car makers make their vehicles. And the same thing for the aftermarket, except the aftermarket can turn on a dime faster than the OEM side, right? And that's what you're seeing. The guys out of Thailand, out of China couldn't get the wheels into Europe. Our customers just, you know, shifted temporarily to us earlier in the year in aftermarket. And then finally, frankly, and even we see it in continuation now, They're very comfortable with working with Superior, with the technology, with the service they get, and I believe you're going to see that tailwind continuing very much. I think it's a manifestation of what we're seeing with long supply chains and geopolitics, and I think it's a tailwind that is going to stay for the aftermarket business and it's going to begin to take hold in our OEM side as well, Mike.

Can some of that aftermarket... can some of that magic turn into the North American market as well?

That's what I mean. I mean, remember, we don't do much in the aftermarket in North America.

Because of all the exports, right, right.

Yeah, so my point is, yeah, I mean, my point is if you want to look for a point of reference, you know, what is the benefit to Superior of being local for local for our customers? We're in region in the U.S. for our customers. We're in region in Europe. You see that trend going in aftermarket. My point is you're going to see that not today, but in the coming months and maybe a couple of years as the North American car makers begin to localize their footprint of supply chain and shift that risk.

Just out of curiosity, I know there are dozens of these wheel manufacturers in China Do they have the capabilities for some of these larger diameter wheels and premium finishes?

No, no. I mean, Mike, it's only recently the Chinese entered the market, mainly in North America, in the U.S., and I think they did a good job of building a beachhead in the base wheels, okay? Only recently have they acquired, in our view, listen, in our view, have they acquired technology for premium finishes and larger wheels? I still say hands down, you know, Superior has the best capability of any new supplier when you get... Now, but even within that, there's only a couple of them that have come close to acquiring that capability. There's more than 20 wheel suppliers, north of 20, actually, but they all play in the aftermarket, right? All play in the aftermarket, right? Lower performance, all... It's all driven by price, price, price. And actually, interestingly, Mike, the Chinese aftermarket wheel suppliers do not have much of a presence in Europe. Their presence really is in the aftermarket in North America. The reason for that is obviously the technology nature of the wheels in the aftermarket in Europe.

Interesting. Thank you. Thank you both very much.

Mike, we feel good about our footprint. This footprint is going to be a competitive advantage, hands down, hands down.

And the technology and all the capabilities on page 10, because it sounds like that part of the aftermarket will continue to grow as well.

We have always been sharing with you how we view our technology, and we're shifting – The dialogue now, in addition to that, that footprint is actually more and more of an enabler and a competitive advantage as well. So it's both.

Absolutely. Well, thank you. Thank you very much.

Thank you. Thank you.

We'll go next to Richard Phelan at Deutsche Bank. Your line is open. Please go ahead.

Hey, good morning, guys. Two questions from my side. Good morning, Richard. It would be useful to get an update with respect to the Mexican operations, just in terms of sort of scrap rates and sort of the employee turnover retention issues that you've had. You know, what progress has been made year on year?

Yeah, so I would tell you with Omicron, right, It was a challenge earlier in the year for us in January. We had north of 900 cases. Our team in Mexico is vaccinated, almost 100%, 97% actually vaccinated. The biggest impact we have seen really is in only a couple of months where we had a higher infection rate. whereby people had to stay home. We had to, you know, volumes were up. We had to bring people to supplement. So that was a disruption in itself. But if you look at the last couple of years, Mexico operations performance, and actually surprisingly, our turnover rate actually has consistently declined. And in 2021, our turnover rate overall was the lowest we have had in four years. Now, recall in Mexico, we tend to pay way higher than minimum wage, right? Our workforce tends to be skilled. So turnover is not as big of a problem as it would be for, you know, in my prior life in wiring harnesses where you have 3,000 people in a wiring harness plant. So it's not huge, but it's a problem still. It has improved, and our focus is to continue to improve it. Now, as you look at overall the Mexico operations, listen, if you look at the last couple of years and the evolution of our product line, Richard, in terms of size and premium finishes, the complexity is absolutely monumental. And what that team in Mexico had to undertake to deliver product quality and deliver that complexity while at the same time reducing scrap. is really impressive. I'm very, very proud of what they've been able to accomplish. So we are good with turnover. We are making progress on scrap. And most importantly, we're delivering X, 2X, 3X complexity out of those operations.

Understood. Understood. And that turnover rate, you know, where would it be sort of as a percentage, you know, where it stands at the end of 2021 sort of?

For the year, the turnover is north of 25% for the entire year, including direct hourly.

North of 25%. Okay. And the second question I had is, I thought I heard you say earlier on the call that 40% of your aluminum needs are sourced from a Russian supplier. I fully understand all the price through... No, 20, 20%, Richard, 20%. 20, okay, 20, all right. So, you know, even factoring in all the price through mechanisms that you have built in, it's still a significant exposure. So how do you intend to address that, I guess, you know, in the absence of that supplier? Because presumably... Yeah, other competitors would also be looking for the same material.

Richard, it's Tim. Point number one is Mashi's absolutely right. You know, at full production, the sort of normal spend with the Russian supplier is 20%. At the sort of levels that we're experiencing today, it's probably closer to 10% to 15%, but still 10% to 15% matters. And I would tell you that having spoken to our procurement officer just even this morning, here's the status. He has made arrangements with respect to North America to source at our other smelters whatever capacity we may need to source with them away from Russia. So he's made alternative buy arrangements in North America with our other aluminum providers. And with respect to Europe, We've taken delivery of enough metal out of the ports to satisfy that element of our aluminum needs, the Russian needs, through May, I think it is. And he is in the process of making the same arrangements in Europe with the European aluminum providers that he has done with North America. So as of this morning, I'm really reasonably comfortable that we've got that covered.

Got it. Okay. That's helpful. Good luck with that. Thank you very much.

Thank you.

We'll go next to Stephanie Vincent with J.P. Morgan. Your line is open. Please go ahead.

Hi. Thanks so much for Haya and great year given every single thing that's going on. Just on the point that Rich made about the aluminum buy, I'm sorry if I didn't get this in your comments. You said it's about 10 to 15 percent. Is that just your European spends or is that global?

That's global, Stephanie. Global.

Okay. And then my next question is, because we get asked these things now all the time, is just on your cogs, what percentage is aluminum and what percentage is energy? That would be very helpful.

Well, you can certainly get a sense of the element that is metal because, as you know, we report both our net sales, which are the gross sales, if you will, inclusive of the value of aluminum, and then we also report the value-added sales. And so, substantially all, there's a small piece that this isn't true of, but just think of that delta as being the value of aluminum. So that flows through cost of sales. With respect to energy, I don't have that metric, frankly, at hand right now, to be honest with you.

Okay, I just did a quick search for I know it's not a great comp, but American actual, for example, and I think they had disclosed between 0 and 5% of their cost for energy. So I didn't know if that was sort of your view and the ballpark.

I'm sorry, say it again.

They said greater than 0 less than 5 to the CDP. So I didn't know if that was kind of in the ballpark.

Yeah, I just, I'm sorry, I just don't have that metric at my fingertips at this moment.

Sure. Sure. And then my next question has to do with some things that were in the news back in February about some of the, a lot of people have been asking you about cost pass-throughs and other suppliers as well. And there were some articles at the beginning of February, late Jan, about some OEMs actually asking for even more cost savings, which I recognize is part of the course of doing business but given the environment and the stress that not only you know tier one suppliers are under but tier two and tier three do you see this accelerating throughout the industry maybe a bit harsher terms for suppliers which is a bit surprising given the the pricing that's going through vehicles stephanie we

We are probably, all tier ones are probably spending more time with their suppliers at all levels in the last 10 years. And I would tell you just from personal experience, they are very well versed on what the tier one supplier base is seeing from a cost standpoint. They are having serious dialogues with all suppliers, including us, on adjusting indexes and pricing. stepping in where they need to be. These are very, very tough negotiations, but they are constructive negotiations. We are making progress. In this environment, I will tell you, dialogues about price reductions and LTAs are going to be very, very difficult for any supplier.

Right, right. And then my last question is about the Polish facility. You obviously have facilities as well in Germany. Right now, obviously, Poland is seeing, I guess, some fluctuation. I realize that you said part of your expectation for 2022 doesn't include a lot of further disruption. You're sort of taking each day as it comes. Is there any disruption thus far on your part?

You know, Stephanie, that's the question of the day, of the week, of the month now. For us, listen, we had some trucking issues. on aluminum in Poland, but if you ask the specific question, has any of our operations in Poland to date been disrupted? No. Have we seen disruption from our customers? You saw the announcement from Porsche, because I believe because of wiring harnesses, they shut down last Friday. So, Stephanie, it really remains to be seen how this plays out. I think the impact, first and foremost, will be on the car makers, on the OEMs first, because of their dependence on Ukraine. And then, obviously, if it gets more entrenched, you know, you're going to see it in logistics and other parts of the business. But for now, really very limited impact. We are concerned, as you would be as well.

And ladies and gentlemen, that will conclude today's Q&A session. I'd now like to turn the conference back to Majdi for any closing remarks.

Thanks, everyone, for participating in today's earnings call. Please be safe, and we look forward to updating you on our first quarter results of 2022 in early May. In the meantime, please do not hesitate to reach out to us for questions or comments you might have. Have a good, safe day, everyone.

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time.