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spk01: Good day and welcome to the Superior Industries first quarter 2022 earnings teleconference call. Today's call is being recorded and at this time I'd like to turn the call over to Clemens Densk. Please go ahead, sir.
spk02: Thanks, Anna. Good morning, everyone, and welcome to our first quarter 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 more complete discussion of forward-looking statements and risk factors. We will also be discussing various non-GAAP measures today. These non-GAAP measures exclude the impact of certain items and therefore are not calculated in accordance with U.S. GAAP. Reconciliations of these measures to the most directly comparable US 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.
spk06: Thanks, Clemens, and thanks, everyone, for joining our call today to review our first quarter results. I will begin on slide five with the highlights. Our team delivered strong results, achieving solid revenue growth out of market coupled with strong profitability and cash generation. This while navigating through an incredibly challenging operating environment with lower volumes, production volatility, and continuing inflationary pressures. Most notable, we have been able to generate EBITDA and profit margins on par with pre-pandemic levels, and that is on lower volumes. Here, we have continued to collaborate with our customers and suppliers on price recoveries and cost reduction solutions to mitigate the impact of ever-persistent inflationary pressures. These results underscore both the operational strength of our teams, as well as our continued ability to capitalize on demand for premium wheels, extending our trajectory of growth above market and expanded content per wheel. Further, our performance this quarter resulted in significant cash flow from operations, supporting a decrease in net debt to $477 million, and enabled us to further invest in the business. Slide 6 details industry production by region, specifically the significant industry declines in Europe, which was impacted by the Ukraine conflict. Despite these declines, we delivered 5% growth over market on a combined basis. We saw continued favorable mix during the quarter supported by increased adoption of lightweighting technologies and larger wheels with premium finishes. Slide seven summarizes our current operating environment. Reiterating my comments from the first slide, first quarter industry production levels fell another 10% compared to the first quarter last year. In fact, we continue to see many of the same challenges that impacted production in 2021, further exasperated by the conflict in Ukraine and a heightened inflationary environment. With that said, the strong tailwinds shown on the left side of the chart have supported our growth over market and expanded profitability against depressed industry production levels. Actually, Superior is incredibly well positioned to deliver earnings growth once Industry volumes begin to recover, and should this recovery begin earlier than expected, we anticipate substantial upside to our performance for the year. Moving on to slide eight, we continue to stay focused on our value creation roadmap through consistent execution on our operational excellence and profitable growth initiatives. Our team's commercial discipline has been critical in working closely with customers to recover inflationary cost increases through price, while offsetting others by identifying cost reduction solutions. While we are pleased with the progress in the quarter, we clearly have more work ahead. At the same time, our procurement team has leveraged our longstanding relationship with our supply base to manage volatility and cost. The regional nature and diversified nature of our supply base has been a great asset for us. I do want to share with you a good example of the collaboration between our customers, suppliers, and our manufacturing teams, which is the increased use of recycled aluminum in our manufacturing processes. I would tell you that this type, this type of collaboration efforts on the customer and supplier front have been across the entire superior enterprise. And I am very proud of how our team has responded. Another challenging aspect of the quarter is the continued last minute volatility that our operating team have had to deal with. This is clearly more heightened in Europe with the Ukraine war. From a customer standpoint, we have focused on diligently planning volumes based on buying behaviors with the goal of offsetting order volatility and ensuring stable production levels. We are also engaging with customers on cost recoveries for extreme last minute production releases and with suppliers to mitigate disruption. Finally, Internally, we have enacted both short- and longer-term strategies, flexing labor costs while also driving structural enhancements through operational excellence and continuous improvement initiatives. In terms of profitable growth, Our product portfolio of differentiated technologies and capabilities has continued to enable us to capitalize on the macro trends driving increased demand for lightweighting technologies and for larger wheels with premium finishes. This is evident in our consistent growth over market over the last four years. The collective results of all of these actions is illustrated on slide nine. As I stated previously, despite a double digit decline in shipments since the first quarter of 2021, we have maintained strong EBITDA margins at pre-COVID levels, 26%, while meaningfully growing content per wheel. These results are also supported by the 12% growth in net sales, which reflect executing on contract terms and negotiating recoveries with customers. The collective effort demonstrated on this slide gives us incredible confidence in our ability to execute and to accelerate growth in a more normalized industry production environment. Moving on to slide 10 to highlight how our innovative products position Superior for success and help capture the secular tailwind supporting our growth. We have one of the most comprehensive portfolio of technologies in the industry, and the increased demand we are seeing for our premium offerings show we have the right breadth and mix to meet customer needs. Our launch highlights for the quarter further illustrate this point, with a range of our capabilities being utilized on both the Cadillac Lyric and Silverado platforms. Moving on to slide 11 to provide an update on our recent sustainability initiatives. On the environmental front, we are making progress on our R4 strategy as we work towards our goal to be carbon neutral by 2039. In 2021 alone, we were able to achieve a 9% reduction in our carbon footprint and expect to continue this trend through manufacturing enhancements and further development of environmentally sustainable capabilities. On the social front, we highlight our recent Day of Understanding event held across multiple locations and attended by the entire Superior team. This successful event focused on fostering diversity and inclusion within the workplace and featured guest speakers as well as interactive breakout sessions and training sessions. In addition to our day of understanding, we launched a fundraising campaign with company matching contributions to support humanitarian relief for migrants who suffered from the conflict in Ukraine. I will tell you that we are very proud of our team in Poland as they opened their hearts and homes for many of the Ukrainian migrants. I will now address our full year 2022 outlook on slide 12. we are maintaining our current guidance based on the assumption of mid to high single digit growth in North America and mid single digit growth in Europe for the year. Adjusted EBITDA is anticipated to be in the range of $160 million to $190 million, with cash flow from operations between $105 and $150 million. This includes the expected benefits from further accelerating cost recovery and continuous improvement efforts to mitigate inflationary headwinds. While visibility towards recovery has been fairly limited, we currently expect headwinds to begin easing and industry production to increase in the second half of the year. In closing, I am very proud of the hard work of our teams in delivering solid results for the quarter. We plan to continue this momentum as we head further into 2022. And with that, I will turn the call over to Tim.
spk04: Tim? Thank you, Majdi, and good morning, everyone. Commodity cost increases, especially the cost to alloy aluminum and the cost of energy. General inflation and global supply chain constraints make for a very difficult operating environment. This is exacerbated by diminished light vehicle build and fluctuating customer demand schedules. With respect to the cost inflation, to preserve our margins, we have and will continue to vigorously pursue customer recovery of the extraordinary inflation cost pressure on our business. The timing of these recoveries may be lumpy, and there is no assurance we will be able to completely recover these costs. Having said that, and notwithstanding that value-added sales declined by 9% from a year ago, Superior delivered a 26% EBITDA margin, nearly the same margin as a year ago. This is a reflection of the company's commercial, procurement, and operations discipline. Let's take a look at slide 14, first quarter financial summary. Wheels sold in the first quarter were 4.1 million, down 9.5% from the prior year period. Light vehicle build in our markets was down somewhat more, 10.4% compared to the prior year period. Net sales increased to $401 million for the quarter compared to $358 million in the prior year period. The increase in net sales is primarily from higher aluminum cost pass-through, the cost of aluminum is up about 50 percent from a year ago. Value-added sales decreased to $189 million for the quarter, compared to $207 million in the prior year period, primarily due to fewer wheels sold and a weaker euro partially offset by favorable product mix. We reported net income of $10 million for the first quarter, or earnings per diluted share of $0.04, compared to a net income of 13 million or earnings of 18 cents per diluted share in the prior year period. The year-over-year sales bridge is on slide 15. To the far right, aluminum cost pass-through was up 61 million compared to the prior year period. To the left, value-added sales declined by 18 million or by 9 percent compared to the prior year period. Improved mix partially offset the impact of the 10 percent decline in year-over-year light vehicle production in our markets. On slide 16, adjusted EBITDA decreased to 49 million in the quarter compared to 55 million in the prior year period. The EBITDA margin for the quarter was 26 percent, about the same as the prior year period, notwithstanding the lower sales. That's quite an accomplishment in this environment. Slide 17, first quarter cash flow. Cash flow provided by operating activities was $45 million compared to $18 million in the prior year period. Substantially all of this improvement is working capital management. Net cash used in investing activities increased to $18 million compared to $10 million in the prior year period as capital spending normalized in the quarter. Cash payments for non-debt financing activities was flat compared to the prior year period. Free cash flow was therefore $22 million, substantially greater than the prior year period. An overview of the company's capital structure can be found on slide 18. Funded debt was $611 million at quarter end compared to $616 million in the prior year period. The decrease results primarily from the weaker Euro and therefore depreciation of the Euro denominated debt. Liquidity was 328 million at quarter end and net debt 477 million, 23 million less than year end 2021. At the present elevated cost of aluminum, the company has a larger investment in aluminum on the balance sheet than is normal. We sized incremental investment at about $20 million at quarter end. We believe this will come back to us as aluminum cost normalizes. Were it not for this incremental $20 million investment in aluminum, net debt at quarter end would have been at the lowest level in Superior's recent history. The debt maturity profile is depicted on slide 19. We have no near-term maturities of funded debt. revolving credit facilities, which mature in May and October 2023, were undrawn. The company is in compliance with all loan covenants. We recently entered into 250 million of interest rate swap agreements in anticipation of a refinancing. The capital markets, however, are choppy, especially the leveraged finance market. Fortunately, the company isn't compelled to do anything at this time, And with the passage of time, we expect to continue to prove out the operating model and therefore improve financial performance. We stay close to our banking partners and expect to pursue a refinancing of the company when the time is right. The company's 2022 financial outlook is on slide 20. As Mashni noted, we are reaffirming guidance. For 2022, we expect to sell 16.4 to 17.7 million wheels. We expect next 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. This results in expected adjusted EBITDA of from 160 to 190 million and cash flow from operations from 105 to 150 million. The expected impact throughout the second quarter of the Ukraine conflict is included in this outlook. Capital expenditures are expected to be about 80 million this year as we continue to strategically invest in our finishing capabilities and advance our portfolio of technologies to capture the secular trends of tomorrow. We continue to model a 25 to 30% effective tax rate for the year. To sum it all up, it was a good quarter, but the work is not done. Our continuing objective is to cover extraordinary inflation costs with customer recoveries. We expect the discussions with our customers to extend throughout the year, and as I said earlier, the recoveries may be lumpy. We intend to continue to supplement these cost recoveries with our enterprise cost improvement and continuous improvement programs. This, taken together with the company's demonstrated ability to maintain commercial, procurement, and operations discipline, should put Superior in a position to benefit significantly from the operating leverage in our business when light vehicle build recovers, and also from the company's evolving wheel-making technologies and product portfolio. This concludes our prepared remarks. We're happy to address any questions you may have. Turning the call back to the operator, Ana.
spk01: Thank you. If you would like to ask a question, you can do so now by pressing star 1 on your telephones. That's star 1 if you'd like to ask a question. We will now take our first question from Gary Prestopano from Barrington Research. Please go ahead.
spk05: Hey, good morning, everyone. Good morning, Gary. Several questions. First of all, if we could refer to slide 10, Maggie. Yes. In each of those categories, lightweighting, premium finishes, electrification, especially large diameter wheels, 19-inch or greater, could you give us some idea of the percentage shifts year over year in your portfolio that are moving to each of these four categories?
spk06: Yeah, Gary, if you recall, we actually laid out not only the current growth rates, but also the projected growth in each of these in our earnings call last quarter. I would tell you that light weighting continues to be very strong, actually, very strong. specifically the flow forming technologies. I'll get you the exact numbers, but that's north of 25% growth year on year. Okay. The premium finishes also as well. Large diameter wheels, 50% of our wheels now are 19 inches or larger. When you look back in 2019, less than 28% were 19 inches or larger. One thing we're seeing now even more prevalent, Gary, is the use of inserts to make wheels more aerodynamic. This is an emerging technology. It adds a lot of content to the wheel, and we're quoting on a lot of businesses now where customers are requiring that technology. But I'll get you the exact numbers on all these four segments. It's in our prior earnings call.
spk05: Okay, that would be really helpful just for our knowledge base here. And then if we go to the chart, I'm having a little bit of trouble understanding this chart, and I'd like to explain it on page six with growth over market. Total growth over market was 5%, but it appears that I'm just trying to understand, how does that break down between North America and Europe in the data that you supply here?
spk06: So this quarter, if you peel the onion on the region, you'll see that Europe delivered substantial growth above market, and you'll see that North America was at market, both on units and value-added sales. But you have a comp issue in North America with last year. Last year, North America generated, you know – about 14% growth above market, actually north of that. So there was a big pull on the content in North America, and the comp is weighted in the opposite direction. If you look at our year-to-date growth over market, which is the best measure, I think when you look at growth over market data, Gary, the quarterly look is always, you know, is lumpy. The annual look is always more accurate. So you look at our LTM, our growth over market in the last four quarters is north of 13%. That's really the best measure. The North America comp in this quarter is an anomaly. It's at market, but in reality, it's just coming off of a very, very strong quarter last year.
spk05: Okay. And then specifically, could you just maybe give us some of the ways that you're being impacted by the conflict in Ukraine?
spk06: No, sure. Actually, it's had a little impact on us directly. We don't have any contracts directly with Russia or Ukraine. We have no manufacturing presence in either of those locations. We don't have contracts with suppliers in those countries. All of our contracts from a supply standpoint are outside those countries. The impact we've seen, as you can imagine, is really our customers and the sudden change, not only the drop, Europe for us dropped 25% in March in the last two weeks. So that would be the impact. We see that easing a bit in the second quarter, Gary, but limited impact from our standpoint. It remains to be seen overall where Europe is going in the second half from a growth standpoint.
spk05: Okay, thank you.
spk01: Thank you. We will now take our next question from Richard Phelan from Deutsche Bank. Please go ahead. Your line is open.
spk00: Thank you, guys, and good quarter considering the industry circumstances. First question, you mentioned just now that you've recently entered into some swap agreements in anticipation of refinancing. I was wondering if you could just provide a little bit more detail in terms of what exactly that means and the plans there, and then Second question, obviously, it was good free cash, low quarter. The strong relative improvement in working capital was a big factor, and it looks like specifically there was a big jump in accounts payable. I'm just wondering what is going on on that balance sheet item. Is there something that's changed permanently for the business in terms of payable days?
spk04: Hi, Richard. It's Tim. With respect to the last question, the payables at year end 2021 were unusually low. They did not equal the sort of rhythm of the business. Now, why was that? That was because you may recall in the fourth quarter of last year, we started to manage down some inventory build that we experienced in Q3. In the course of managing down inventory build, a company doesn't buy as much product as it otherwise would buy. So that's a roundabout way of saying that the payables were unusually low at year end, okay, this past year. And then what transpired is when we turned the buy back on in the first quarter, there's two dynamics there. We have now a build of... payables in the quarter, and also much of that buy is aluminum. So if you look at the quarter over quarter results, the cash flow provided by the growth in payables is outsized in the first quarter of 22 compared to the first quarter of 21. There's nothing unusual going on other than that. Does that answer your question?
spk00: Absolutely. That's very clear.
spk04: With respect to your interest rate swap question, we do not have any impending maturities. So we have the luxury, the company has the luxury of accessing the capital markets when the time is more optimal than it is today. Okay. In anticipation of doing so in the not too distant future, we'll see how the market behaves and how our industry behaves. But in anticipation of doing so and in light of the increasing interest rate environment, Clemens and I deemed it appropriate to enter into a series of interest rate swap agreements going out to 2025 that would mitigate the impact of any further increase in interest rates between now and whatever date we might do a refinancing. So it was sort of a preemptive move, if you will, to facilitate any refinancing and to reduce the company's interest burden after a refinancing.
spk00: Understood. Okay, that's very clear. And you said 2025 is the maturity on those interest rate swaps?
spk04: Well, they stepped down. So we started at 250, and it steps down to 150 million, I believe, at 2025. Got it.
spk07: Thank you very much. You're welcome, Richard.
spk01: We will now take our next question. Follow-up question from Gary Prestopano from Barrington Research. Please go ahead.
spk05: I just have a quick question on recycled aluminum. Is there much of a differential in the cost of recycled aluminum to the client or yourself versus non-recycled?
spk06: You know, it depends, really. You know, this has always been around. It's always been an initiative. You know, it does require a lot of process discipline. There is a delta. And as time goes by, it depends on what happens with commodities, Gary. Sometimes it's a big bang for the buck. Sometimes it's marginal. In this case, as you know, as you think about all the ingredients that go in aluminum, and aluminum per metric ton being north of 3,000, it's... it's a big opportunity for us. And it takes some work, actually. It takes some work and collaboration. So where it stands right now, it's a significant benefit for us. Okay. Thank you.
spk04: Well, Gary, I might add that it also is, you know, an environmentally conscious thing to do. So it's an opportunity for the company to continue to contribute a bit to reducing the carbon footprint.
spk05: Okay. Thank you.
spk01: Thank you. We will now take our next question from Mike Ward, Benchmark. Please go ahead. Your line is open.
spk03: Thanks very much. Good morning, everyone. I apologize if I missed this. Can you talk about the aftermarket business in Europe and what impact does that have, how it's doing, and what impact does that have on the contemporary unit on the European business?
spk06: So for us, the aftermarket business has been a good balancer of the volatility in the market, Mike. And as you know, the market in general is highly dependent on imports from the Far East, and that supply chain has been a challenge. So for us, if you look at last year, for us, if you look at the quarter, last year was a very strong year for us. This year is fairly solid. Both have been ahead of the OEM side of the business. From a content standpoint, if that's your question, you know, our content per wheel tends to be much higher on the OEM side. But in terms of volume, it's been a big, big positive.
spk03: It has. Okay. So the content that we see is actually understated because of, on a relative basis, the aftermarket's performing a little bit better than the... No, on a volume basis, the aftermarket performs better.
spk06: On a content basis, the European content... No, it's much higher on the OEM side. On the aftermarket side.
spk03: Right. So on a relative basis, did the aftermarket unit volume outperform the OEM business in the quarter?
spk07: Yes.
spk03: Okay. So that drives down. The content per unit we see, the blended content per unit, is actually understated because of the strength of the aftermarket business relative to the OEM business.
spk06: It always is, yes. That's a good question. It always is, Mike.
spk03: Okay. Now, from what I can tell, you used to break it out, but you don't. The EBITDA contribution from your North American operations, just based on your performance in the quarter, it looks like the margin was probably the best you've had in North America since 2016.
spk06: That is correct. I'll let Tim add to this, but as you know, North America performance has been a focus for us, and we're very, very pleased with the progress. I would tell you that, you know, our Mexican operations are delivering the best performance on multiple fronts, the best quality we've had in seven years in Mexico. We have three SparkPort plants, Mike, delivering record level of scrap. The team in general on the enterprise level, both the commercial side, the manufacturing side, and the procurement side are executing on eight cylinders. Just very, very proud of that team. The Europe numbers are obviously very challenged with the volume situation in the quarter. Tim, do you want to add something?
spk04: Well, to Majdi's point, Mike, The region prior to Mashti's joining the company was comparatively underperforming. Mashti brought a collection of activities that the company executed on that started down this path of improving the performance. I would also say that the company was able to attract Michael Dora about a year ago to be the president of the North American region. I'd say Michael has done a nice job of picking up on what Mashti started and The execution, really at all levels, has really been very satisfying.
spk03: Well, that's what it looks like. Well, congrats. It's good news in a very tough environment.
spk07: Thank you. Thanks, Mike. There are no further questions in the queue at this time.
spk06: Thank you. We appreciate your participation in today's earnings call. We're extremely encouraged by our performance in the first quarter. And while operating challenges persist, we are confident in our ability to overcome headwinds and generate shareholder value. Thank you again for joining and have a wonderful day.
spk01: Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.
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