Superior Industries International Inc

welcome to superior industry full year and fourth quarter 2023 earnings call we are joined this morning by majid abulaban president and ceo tim tannery executive vice president and ceo my name is alan i'll be your coordinator for today's event please note this call has been recorded and for the duration your line will be on listen only however you will have the opportunity to ask questions at the end this can be done by pressing star 1 on your telephone keypad If you require assistance at any time, please press star zero and you'll be connected to an operator. I'll now hand you over to your host, Tim Tenery, to begin today's conference. Thank you.

Good morning. Welcome to our full year and fourth quarter 2023 earnings call. During our call this morning, we will be referring to our earnings presentation, which, along with our earnings release, is available on the Investor Relations section of Superior's website. I am joined today by Mashti Abuloban, our President and Chief Executive Officer. Before I turn the call over to Mashti, 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 two of the presentation for the full State Barber Statement and to the company's SEC filings, including the company's current and report on Form 10-K, for a more complete discussion of forward-looking statements and risk factors. We will also be discussing various non-GAAP measures today. These non-GAAP measures exclude the impact of certain items and therefore are not calculated in accordance with U.S.

GAAP.

Reconciliations of these measures to the most directly comparable US GAAP measures can be found in the appendix of the presentation. I'll now turn the call over to Majdi to provide a business and portfolio update.

Thanks, Tim, and thanks, everyone, for joining our call today to review our full year and fourth quarter results. I will begin on slide five. In 2023, the Superior team, successfully executed on a key transformation that positioned the company as the leading global real solutions provider, competitively advantaged in many ways, and well positioned for profitable growth. This was tackling a very challenging macro environment that weighed in on our top line, especially in the back half of the year. The strategic action we took in our European operations and the portfolio focus on profitability put us on track to continue to deliver operational excellence and profitable growth. While we saw continued recovery in automotive industry production in 2023, some of our key customers were challenged, especially our largest customer, GM, which was down for the year. This was most pronounced in the fourth quarter where production amongst the Detroit three declined 7% due to the UAW strike. This along with actions we have taken to exit unprofitable programs in Europe to restructure our German operations, as well as the slowdown in the aftermarket business in the first half of the year have weighed in on our revenues. Despite these macro challenges, value added sales was flat for the year while we delivered strong EBITDA margins of 21%, which is in line with 2021. Our adjusted EBITDA for the year was $159 million. This was impacted by lower volumes as well as lumpy customer recoveries in the fourth quarter. Tim will provide more cover on this. Further, I am pleased with our execution on our strategic initiative that has positioned Superior as a competitively advantaged leader in the wheel industry. The restructuring of our German plant will be completed by the end of this quarter, and with that, the transfer of all production from Germany to Poland will be behind us. This will not only provide a significant profitability uplift, as our cost to produce wheels in Poland is half of that in Germany, but will also have advanced our local-for-local footprint to 100% low cost based in Mexico and based in Poland. Said another way, the transformation we executed in North America four years ago by migrating all production from the US to Mexico is now in place in Europe with the migration of production from Germany to our highly automated low cost plants in Poland. In an industry, that is highly reliant on imports from China or production in high cost locations like Germany, Spain, and Italy, we have put our business in an excellent position to compete and deliver long-term growth. Further, our portfolio strategy continues to play out. We are capturing demand for larger and lighter wheels through our differentiated portfolio driving consistent content growth. Content per wheel grew 3% compared to 2022, and 19 inches of larger wheels now exceed 51% of OEM shipments. Other significant content drivers are also accelerating even further, especially lightweight. I will discuss this a bit later. Further, our team, has done an exceptional job with continued focus on cash generation through cost control, working capital management, and capital prudence. Despite our actions in Germany, which required investment in safety inventory and contraction of our supplier terms in the fourth quarter, our FX-adjusted net debt declined to an all-time low of $429 million. This is down from early 2019, of 620 million. To highlight the cash generating strength of our business, excluding the impact of our capital structure, we are introducing a new metric, unlevered free cash flow. Tim will provide more detail on this metric. Excluding the impact of our Europe transformation, we delivered $129 million in unlevered free cash flow in 23. and 132, by the way, in 2022. Looking ahead in 2024, we expect industry volumes in our combined markets to decline in the low single digits, with Europe experiencing declines, while North America industry production is expected to remain flat. Having said that, we expect our portfolio to continue to deliver growth over market in our 2024 revenue, And as the European transformation would have been completed, we expect significant margin expansion in the back half of the year. Moving on to slide six, which further supports Superior's growth and profitability narrative. While industry production since 2019 has declined 9%, Superior's value added sales as seen on the top right of this slide has consistently outperformed with growth over market of more than 10%. This outgrowth versus market actually would have been more pronounced if we consider the portfolio pruning actions we have executed in the last three years. We actually exited close, we haven't advertised this before, but we've exited close to 1.2 million wheels, mostly in Europe. Equally important is our track record of delivering performance as measured in EBITDA profitability. both, by the way, as a percent of value-added sales and as a percent of net sales, which we don't spend enough time on. This is highlighted on the bottom left and right of the slide. While customer recovery lumpiness, you see that in 22, impacted our profitability as a percent of value-added sales, our average adjusted EBITDA as a percent of that since 2020 has been 22%. Actually, more salient is the bottom right. It's superior average adjusted EBITDA as a percent of net sales, which has consistently hovered around 12% despite customer volatility, supply chain disruption, and inflationary pressure. This is at the top end, at the top end metric of the European. So moving on to slide seven, to provide an update on our European transformation. Our teams have successfully executed on this initiative. We expect to complete the wind down of our German operations by the end of the first quarter. And with that, all production will have been relocated from Germany to Poland. As I mentioned, this will not only provide a significant profitability uplift as our cost to produce wheels in Poland is half of that in Germany, but we'll have advanced our local for local footprint to 100% low cost in Mexico and in Poland. In addition to realizing a 23 to 25 million EBITDA uplift, we also expect a cash benefit as we unwind 14 million in safety inventory and recover $15 million in supplier service. We also expect further cost absorption and improvement in operations in Poland as we absorb volume from Germany. we are continuing to consolidate aftermarket warehouses and rationalize administrative overhead to improve our overall cost structure in Europe. Finally, we have executed well on commercial recovery and are continuing dialogues with customers to recover labor and energy inflation from 2020-4. On a combined basis, these actions should have a significant impact on the margins of the European operations Our focus here has been on aligning the margins of that region with North America. So in the second half of the year, we expect to see at least a 500 basis point improvement in margin in Europe, substantially narrowing the margin gap between our two regions. And actually, this will be the first time since I've been here where we are looking to the margins of both regions to be the same. So we're very excited about that. Turning on to slide eight, which highlights the incredible impact that the European transformation will have on our EBITDA generation. While we are guiding midpoint of 165 million adjusted EBITDA in 24, we expect our run rate in the back half of the year to reach approximately $191 million as we will have completed the European transformation in the first half. This improved profitability is driven by the transfer of wheels to Poland a lower cost region, along with SG&A savings from the consolidation of administrative functions and higher operating leverage from improved utilization of our Polish manufacturing facility. Slide nine highlights the tailwind of the secular trends that continue to drive our portfolio, and hence, growth over market. The combination of continued industry recovery, as well as the accelerating adoption of Leiser larger wheels with premium finishes will continue to enable us to outpace market growth. As we capitalize on these trends, we expect to achieve a 4.4% value-added sales category over the next four years, equating to a 4.1% annualized growth over market through 2027. The next couple of slides are really historical proof points to support our growth narrative. Slide 10 highlights the accelerating adoption of our technology as a percent of our revenues versus where we were in 2019. The strategy to capture demand for our differentiated portfolio has continued to play out. Each of our premium technologies listed here has continued to grow as a percent of our total portfolio of ship products. In fact, while the adoption of larger wheels with premium finishes has continued to grow, Lightweighting and aerodynamics, a significant content adder, has accelerated. For example, lightweighted wheels as a percent of our portfolio have doubled from 12% in 2019 to 24% in 23. Slide 11 highlights this further, looking at our launches in 23. These are wheel programs that will be in production in 24 and beyond. You can see further the acceleration of lightweighting. More than half of wheels we launched in 23 have lightweighting technologies. So said another way, we expect to continue the growth trajectory on the right side of the slide, where you see our content per wheel has risen by 21% since 2020. So slide 12 sums it all up. Our exciting position in the wheel space. we are unmatched in many ways. So if you look at Europe and North America as a combined market, we are the unmatched number one leader from a market standpoint. As you look at customer diversity, we are in the top three suppliers to US car makers, German car makers, Japanese car makers, and especially North America. From a manufacturing footprint, I am comfortable saying that no other supplier can offer the low-cost footprint we have, 100% in Mexico and 100% in Poland. This wheel industry relies heavily on imports from China or manufacturing in Germany, Spain, and Italy. We're very much in that position. And finally, unmatched technology. When you look at our library, we have the broadest and most comprehensive portfolio in the industry. Advanced lightweight and aerodynamics demanded by European carmakers, and then larger wheels with premium finishes in North America and the US. Most importantly, I will tell you that behind what I will call, I'm going to call it the new superior, is a team that has executed day in and day out, and the results show it. Slide 13 is what we expect our business to deliver by 27. Growth over market driven by our portfolio, EBITDA north of $200 million beginning in 2025, growing further through our operating leverage. This, along with a disciplined approach to capital expenditures, will drive strong, strong unlevered free cash flow generation well into the coming years. So now I will turn the call over to Tim to provide more detail on our financial results. Tim?

Thank you, Marshall. Let's begin with an update on the transformation of our European operations on page 15. Generally accepted accounting principles require a deconsolidation of the income statement and balance sheet of the German manufacturing facility, SPG, beginning with commencement of the protective shield proceedings on August 31st. Accordingly, the financial results of SPG for the last four months of 2023 are excluded from the company's financial as is the balance sheet of SPG at year end. The deconsolidation of SPG devised to an 80 million non-cash charge in 2023. 318,000 wheels produced at the facility in the last four months of the year are excluded from superior unit sales. And approximately 50 million and 32 million, respectively, of net sales and value-added sales are excluded from Superior's 2023 results. The deconsolidation of SPG had very little impact on adjusted EBITDA. Notwithstanding that the transfer of wheels from SPG to our Polish operations has taken longer than we had planned, this strategic action and the associated reorganization of the European administrative support functions, R&D, engineering and commercial functions, and the aftermarket sales, administration, and logistics is a very valuable creative event for the company. We expect a step change in annual adjusted EBITDA on completion of the transfer of wheels of $23 to $25 million and a reduction in annual capital expenditures of approximately $10 million. Importantly, we expect the variable contribution margin in Europe to improve and to be in line with that of North America, 35 to 40 percent. The expected cost of the transfer of wheels from SPG to our Polish operations is 20 to 35 million. We are very pleased with the payback on this investment. The fourth quarter and full year 2023 financial summary is on page 16. Net sales decreased to $209 million for the quarter, compared to $402 million in the prior year. For the full year, net sales were $1.4 billion, compared to $1.6 billion in the prior year. Value-added sales in the quarter decreased to $169 million, compared to $218 million in the prior year. And for the full year, value-added sales were $748 million, compared to $771 million in the prior year. Adjusted EBITDA increased to $23 million for the quarter compared to $58 million in the prior year period. And for the full year, adjusted EBITDA was $159 million compared to $194 million in 2022. Color on the financial performance to follow momentarily. In the fourth quarter, we reported net loss of $2 million or loss per due share of $0.44, compared to net income of $17 million or income of $0.25 for diluted share in the prior year period. $7 million of restructuring charges contributed to the net loss for the quarter. For the full year of 2023, we reported net loss of $93 million or loss for diluted share of $4.73 compared to net income of $37 million and earnings per diluted share of $0.02 in the prior year. The 80 million non-cash charge arising from the deconsolidation of SPG and 23 million of restructuring charges contributed very significantly to the 93 million net loss for the year. The fourth quarter 2023 year-over-year sales bridge is on page 17. To the far right, aluminum costs passed through to customers decreased 44 million compared to the prior year period, to $140 million due to lower aluminum prices and therefore a lower pass-through of aluminum costs to OEM customers. To the far left, the SVG deconsolidation amounts to $26 million of the decline in value-added sales to $169 million for the fourth quarter of 2023. Lower unit sales and lower recovery of cost inflation from customers, partially offset by favorable product rates, amounts to a $29 million decline in value-added sales compared to the prior year period. The stronger year-old resulted in $6 million of foreign exchange bank. The full year 2023 year-over-year sales bridge is on page 18. The SBG deconsolidation, $32 million, amounts to more than all of the $23 million decline in value-added sales in 2023, to $748 million. Lower unit sales and low recovery of cost inflation to customers, offset by favorable product mix and the stronger euro, had a 9 million favorable impact on 2023 value-added sales. Aluminum costs passed through to customers decreased 232 million to 637 million in 2023 because of lower aluminum prices. On page 19, The fourth quarter, 2023, year-over-year adjusted EBITDA average. Adjusted EBITDA for the quarter decreased to $23 million compared to $57 million in the prior year period. Because SPG is a loss-making facility, fourth quarter adjusted EBITDA benefits $5 million from the deconsolidation of the entity. Volume, price, and mix was minus $5 million, primarily because of lower unit sales in the quarter compared to the prior year period. Performance and inflation recoveries at minus $34 million is primarily the result of very significant recovery of cost inflation from customers in the fourth quarter of last year, 2022. Also impacting year-over-year fourth quarter 2023 financial results are various manufacturing and other inefficiencies associated with the transformation of the European business and the UAW strikes. The full year 2023 year-over-year adjusted EBITDA bridge is on page 20. Adjusted EBITDA decreased to $159 million, a 21.3% margin expressed as a percent of value-added sales, to $194 million, a 25.2% margin. The same can be said for the full year 2023 results as was said for the fourth quarter financial results. More specifically, the full-year results benefited from the SPG deconsolidation. That's 8 million. Lower unit sales is the primary reason volume, price, and mix was minus 10 million. And performance and inflation recoveries of minus 32 million is primarily the result of more recovery across inflation from customers in 2022 than in 2023. In the back half of the year, various manufacturing and other inefficiencies associated with the transformation of the European business and the UAW strikes also impacted financial results. An overview of the company's fourth quarter and full year 2023 unlevered free cash flow is on page 21. We are introducing a new cash flow metric, unlevered free cash flow, because of the impending refinancing of the secure unsecured notes. Unlevered free cash flow is cash provided by operating activities, less capital expenditures, plus cash interest pay. It is the cash generating power of the enterprise and therefore the amount of cash available for debt service and or shareholders. Cash flow provided by operating activities was $44 million for the fourth quarter and $64 million for the full year, both lower compared to the prior year due to lower profitability and higher restructuring costs. Net cash used in investing activities of $12 million in the fourth quarter was flat compared to the prior year period, and for the full year, $11 million less, down to $46 million in the various initiatives to reduce the capital intensity of the business. Cash payments for non-debt financing activities were $6 million for the quarter up $2 million because of timing of dividend payments, and $16 million for the full year, flat compared to the prior year. Free cash flow was $26 million in the fourth quarter compared to $63 million in the prior year period. For the full year, free cash flow was $2 million compared to $80 million in the prior year. Unlevered free cash flow was $50 million in the fourth quarter compared to $80 million in the prior year period. For the full year, unlevered free cash flow was $80 million compared to $132 million in the prior year. On page 22, unlevered free cash flow adjusted for a year of transformation. Not unexpectedly, the transformation resulted in a temporary increase in working capital. As of the end of 2023, the company had invested $14 million in safety stock to protect our customers from possible production disruption at SPG. We experienced $15 million in supplier terms contraction associated with the protective shield proceedings and invested $7 million in certain SPG trade supplier claims. We also invested $6 million in tooling and capital equipment and incurred $7 million in closure costs. 2023 unleveraged free cash flow adjusted for the year of transformation was $129 million. about the same as unlevered free cash flow generation of 2022. An overview of the company's capital structure as of December 31, 2023 may be found on page 23. Cash flow balance sheet at year end was $202 million. Funded debt was $638 million at year end and net debt $436 million. At the end of the year, liquidity, including availability under the revolving credit facility, was $219 million. On page 24, year-end 2023 net debt adjusted for the year of transformation. We expect a temporary investment of $14 million in safety stock to come back to us this year as the stock is depleted. There's every reason to believe that supplier terms will normalize to pre-SPG protective shield proceedings levels as we put the proceedings behind us. That's $15 million. Accordingly, year-end of 2023 net debt adjusted for the year of transformation is $407 million, $27 million less than net debt at year-end of 2022. Also note the free cash flow generation and therefore deleveraging of the balance sheet the company has enjoyed over the past three years. notwithstanding COVID, cost inflation, supply chain disruption, UAW strikes, and rising interest rates. Superior's debt maturity profile as of December 31, 2023 is on page 25. The revolving credit facility was undrawn at quarter end, but we are in compliance with all loan covenants. The senior unsecured notes mature in June, 2025. The company has engaged an independent financial advisor to advise on refinancing of the notes. In conjunction with our advisor, we are evaluating refinancing opportunities in the capital markets. Refinancing of the notes will likely involve a preferred equity. It is too early in the process to discuss the capital structure this process might deliver. The full year 2024 financial outlook is on page 26. For the full year, 2024, we expect net sales in the range of $1.3 to $1.48 billion, and value-added sales in the range of $720 to $770 million. The sales reflect the impact of having addressed underperforming parts of our real portfolio, thereby optimizing the profitable utilization of manufacturing capacity and also light vehicle production in our markets generally consistent with IHS forecasts. We expect adjusted EBITDA of $155 to $175 million. We anticipate that cost inflation, especially labor and energy, will persist. However, we have ongoing negotiations with OEM customers to recover in wheel price their fair share of inflation. We expect to deliver unlevered free cash flow in the range of $110 to $130 million, highlighting the cash-generating power of the enterprise. Finally, we expect approximately $50 million in capital expenditures as we strategically invest in our business, in particular, finishing and lightweighting capabilities. We model a 25% to 30% expected tax rate for 2024. Note that we expect the first quarter of 2024 to be difficult as we wind up the transfer of wheels from SVG to our manufacturing facilities in Poland. Also impacting the early part of 2024 is labor and energy inflation, which we intend to recover from customers. Furthermore, costs associated with the reorganization of the European administrative support and certain other functions and the reorganization of aftermarket sales, administration, and logistics post the completion of the transfer of wheels to Poland will impact expected performance in the early part of 2024. On page 27 is the 2024 adjusted EBITDA guidance adjusted for European transformation. Once again, the European transformation, when complete, is expected to be very valuable to the company. Because the transfer of wheel production from SBG to Poland has bled into 2024, the four-year effect of making the wheels in Poland at very significantly lower cost is not fully reflective in the 2024 financial outlook. That amount approximates $12 million. The full-year benefit of the reorganization of the European administrative and other functions and the aftermarket business approximates $5 million. We also expect an improvement in fixed cost absorption and manufacturing performance in the Polish facilities, which amounts to approximately $9 million. Accordingly, we expect Superior to exit 2024 with a business generating approximately 190 million of adjusted EBITDA on unit sales of just over 15 million. Considering the company's current and expected product list, Superior has approximately 19 million wheels of installed manufacturing capacity. Recall that an important benefit of the European transformation is the variable contribution margin in Europe approaching that of North America. 35 to 40 percent expressed as a percent of value added sales. As we develop the book of business in Europe, the improved variable contribution margin should result in improved earnings for superiors. In closing, we look forward to wrapping up the transformation of Europe so our manufacturing, engineering, and commercial teams can turn their full attention to providing value to our customers and shareholders. This concludes our prepared remarks. Marci and I are happy to take questions. Alan?

Thank you. Ladies and gentlemen, if you'd like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. You'll be advised when to ask your question. Our first question comes from the line of Michael Watt, Freedom Capital. Your line is open. Please go ahead.

Thanks very much. Good morning, everyone.

Good morning, Michael.

From what I can tell with the SPG and the European restructuring, you have two parts. You have the cost of the closure, and then you have the transition. And it sounds like some of those transition costs are going to be a little more severe in the first half of 2024. Is that the right read?

That is correct, Michael. Tim, do you want to comment on that?

Yeah, Mike, you're right. What is happening is that with respect to the reorganization of the administrative and other support functions, to a little bit lesser extent, the aftermarket business, as we organize ourselves in Poland more so rather than Germany, we will be obliged to basically run two sets for a short period of time, a few months. of personnel because we cannot release the folks in Germany until we have the folks in process in place in Poland. So the first half of the year, we get a little burdened with that. That's correct.

Hey, Michael, just a couple of other points. Just a couple of other points. When you think of that transformation that we're communicating about Europe, it's multifaceted, right? It's manufacturing, but it has other elements. It's the backbone of the aftermarket business. It's the administrative cost. So there are quite a few transitions that are taking place. And quite a bit of that will be over in the first quarter. And most of it will be behind us in the first half. So that's point number one. But point number two, and I think you've heard me say it, this is absolutely transformational for this company. It will create capabilities unmatched by any and will enable us to grow and use this capacity that that Tim talked about. We have 19 million wheel capacity. We're a little bit north of 15. The operating leverage on this business is 35 to 40%. So I would tell you this thing is coming together in a very, very good way. And by the way, our customers are helping us, Michael. When we undertook this, it was a massive undertaking for many reasons, right? But also because of what we had to do to take care of our customers. So I would say they were very helpful in that process.

And you mentioned, I think, in your comments, Majdi, that the operating costs in Poland were about half the level in Germany?

Yeah, I took a safe note spot on that one. Absolutely. That is correct.

On page 19, Tim, in your comments, you talked about the performance costs, $34 million were negative in the fourth quarter. And I think you mentioned that $29 million from customer recoveries. Is that the $29 million is the bulk of that $34? Is that what that is?

Yeah, I didn't specifically mention any customer recoveries. But, Mike, if you were to go back and look at this exact slide a year ago, the fourth quarter of 22, instead of a – A red blotch here, you see a big green blotch, okay? And as I called out or he called out a year ago, the recoveries, it's just the way they manifest themselves quarter to quarter. We use the term bumping. They were extraordinary in 2022. And so compared to 23, disadvantage.

Okay, so it's the bulk of it.

Yes, the bulk of this is the disparity in customer recoveries in the quarters.

So Michael, just two bookends on that. Q4 last year was absolutely extraordinary. Our margins were north of 27%. When we announced Q4 last year, we did say that it has outside recoveries from 2021. So that's one point, right? It was extraordinary. But the other piece of it, Michael, is recoveries in the fourth quarter of 23. Listen, our customers have been good to us. They've cooperated in this transfer, and these dialogues about customer recoveries tend to be very, very lumpy, right? So this is another factor why you see that level of customer recoveries in the fourth quarter of 23. So it's really on both sides of the bookend, okay?

Okay. It sounds like that lumpiness comes back the other way in the second half of 24. between the transition with SPG and then also some of the cash recoveries and also from the transition costs and the supplier and those sorts of things, the stock. So it sounds like the first half is when you're, right? No, you finish up, go ahead. Oh, no, that was it. It sounds like a lot of that lumpiness turns positive in the second half.

That is a correct conclusion, Michael.

Okay. Just lastly, with your guidance, you mentioned capacity at 19 million, but with your guidance going out the next couple of years, you talk about 15 million. So you're basically saying, here's what we think we can perform from an earnings standpoint in a flat industry environment or flat unit environment. Is that the right read-through?

That's right.

I think what he's So he's wondering aloud in a flat light vehicle build. Is that what your guidance is saying?

I think the guidance you have for longer term, the 27 performance.

Okay. That is correct. Obviously, there's puts and takes on mix, Michael, but the conclusion is correct. And the earnings and margin uplift is very much tied to this transformation we're seeing in Europe.

Right. So the upside you're talking about are the benefits you're getting from this transformation in Europe. If we get a return to more normalized volume levels in Europe and North America, that provides additional upside on the revenue and earnings. That's correct. Perfect. Thank you, everyone.

Thanks, Michael. Our next question comes from the line of Gary Prestopino, Barrington Research. Your line is open. Please go ahead.

Hey, good morning, all. Good morning, Gary. A number of questions here. First of all, just from my understanding, and I think you might have touched on this, in this transformation in Q4 and basically into Q1 or even Q3, Q4, Q1, you are running two factories in tandem, right? until you can actually get everything transferred to Poland and shut down Germany. Is that correct?

That is correct.

Okay. So that accounts for a lot of the inefficiencies that we saw here in Q4. One thing I wanted to ask, though, your content per wheel was down somewhat dramatically, 20%. And you're saying that's primarily due to lower recovery of cost inflation from customers. I'm trying to understand just what is going on there for that number to decline so dramatically. Is that factoring in, obviously, maybe running the two factories in tandem?

So, yeah. It's a very, Gary, it's a very noisy year, right? With the deconsolidation of SPG, with the mix that's coming from GM and the UAW strike. Actually, if you just peel the onion on content per wheel in 2023, average content per wheel has gone up by 3%. Once you adjusted for, okay, we don't have the revenues in the fourth quarter that we had in Germany, and you make the comparison year on year, and you make other adjustments for FX and such, it's not as impressive as we used to have in terms of what we looked at for the year, but it is 3%.

The reason Mashti is suggesting you look at it over a longer period of time is over the last two years, as this inflation has increased, has occurred and the industry's had to deal with it in many ways, including, by the way, recovering this cost inflation through pricing and one-off recoveries, et cetera. The bookkeeping for the recoveries is such that it gets binned or bookkept in our books in value-added sales. So if you look at our content per wheel, which by definition includes pricing and the recoveries, From quarter to quarter, it can whipsaw, okay? So it's sort of better looking at it over a longer period of time. Did you follow that?

No. Gary, I think you're 20%. Gary, I think I just figured out you're 20%. I was talking for the whole year. You're talking for the fourth quarter.

Right, yeah, that's what I'm getting at. I mean, that's a rather dramatic decline, and I realize there's a ton of noise out there, I guess maybe I should have phrased the question, is there anything that has changed in the industry that would cause that to happen, or is that just a function of what's going on with what you're doing with the transformation? And I think it's more of the latter, right?

It's more of the latter, absolutely, absolutely.

Okay.

I mean, we've always talked about looking at content per wheel. By quarter, we like to look at the trend. But I can assure you the fourth quarter has got so much noise that looking at content per wheel is the last metric. you'd want to look at for the fourth quarter. Okay.

And then I would assume you're using IHS numbers to lead you to your guidance for 2024. Is that kind of correct? Or at least IHS numbers for your markets?

Yes, Gary, that's what we use. Listen, we adjust. In several cases, IHS sometimes tends to be more so we take our knowledge of customers and we make some adjustments, but generally the baseline.

So in 2023, I remember at the beginning of last year when you guys reported Q4, it was kind of a surprise that you were a little bit sanguine. You know, we all thought the industry was going to recover, which it did, but you basically said a lot of the recovery was going to be fleet and you don't participate in fleet. So as you're looking at 2024, what are you anticipating in terms of, do you anticipate that shifting more to production of consumer passenger cars versus fleet?

You know, absolutely. So let me just, let me start with the noise in the 23, okay? GM was a big deal for us. And if you look at IHS data, GM, GM is our largest customer. They were down for the whole year. Then you look at the fourth quarter, all of them were down 7%. And for us, especially if you remember, that Salal plant was down every other week last year, right? And we have a lot of content on the GM Salal plant. And then the aftermarket business as well. So as you go into 24, we expect to see normalization with our North America customers, normalization on the fleet side. And, you know, if you look at our fourth quarter, actually, and the third, the aftermarket is the entire segment, not just us, in the aftermarket is rebalancing in a very, very nice way. Don't forget that, you know, in our top line, as Tim mentioned, there is always the lumpiness and the noise of price recoveries, okay?

Right, right. So then that's fine. I just want to understand where you're coming from. And then as we look at your numbers on page 13, which give a long-term picture of where you think you can be. You're looking at value-added sales up 4.4% on a CAGR. What kind of market environment are you factoring in there in terms of units produced, growth in units produced over that time period when you aggregate it between North America and Europe.

Again, Gary, we use IHS. And again, within that, there is the mix of what we want, the businesses we want, where the content is coming from. And, you know, the underlying overlay of that 227 outlook. So if you look at IHS, it's relatively, it's marginal growth for the next four years in the industry. And when you peel the onion on growth, we've always said 5%, 10%. growth above market from content. If you look at the last 16 quarters, 12 of the quarters of our quarters, 12 of 16 were growth over the market, and the other ones were really just noise. So we're very comfortable with the narrative. The starting point is IHS. If you look at IHS the next three or four years, let's say half a percent to 1%, the balance is really content growth and the visibility we have on content from programs we want.

Okay. And then lastly, and I'm just trying to flip through the slides here, so bear with me. I think you gave a number of like 20 to 35 million of costs associated with what you're doing in Europe. How much of that was taken in 2023 and how much of that remains into 2024? And then as a follow-up to that, You're talking about another challenging quarter in terms of EBITDA for Q1. Would you expect the EBITDA for Q1 to be on par with Q4, lower or a little bit higher? I mean, can you just give us an idea of what you're thinking?

Gary, with respect to your first question, I'm looking at my notes. And we can back into the number because in my comments, my prepared comments, I made reference to how much of the loss was associated with the restructuring charges in the first half of the year. Bear with me just one moment, please. 23, there was 23 million restructuring charges associated, 23 of that total is associated with 2023, and you can think of the rest of it as being in 2024, okay?

Okay, so that helps. And then in terms of, you know, again, I know you don't give quarterly guidance, but I think it's pretty important here that we set the expectations in line with where you think you could be, given all the noise and the numbers. So is it fair to say that we would see maybe flat sequential EBITDA, slightly up, slightly down? Can you just give us an idea of how we should frame that?

Yeah, I'm going to give you an idea. It's very fluid, okay, because of all that's going on with the business. What do I mean by this? Our financial results for the first half of the year are going to be very fluid because of the additional costs of completing the transformation in Europe and also the negotiations that we're undertaking with the customers. And so to sort of demonstrate how you might think of the year evolving quarter to quarter. If you think about using the midpoint of the guidance of $165 million for the year, and then our comments exiting the year of the business generating, let's say, $190 million, what that means is that there's a ramp during the year because of the cost coming out and presumably the additional wheel price that's coming in. That ramp starts very, very modestly in Q2 and gathers steam in Q3 and Q4. So I'm not prepared to give you an exact number because I don't know how the number is because it's so fluid. But the way I've sort of modeled it is that I see the first quarter and second quarter being – somewhat higher, you know, sequentially than it was in the fourth quarter, but not dramatically so.

Okay. No, that's good. No, I appreciate that. Okay. Thank you very much. Thank you, Gary. Thanks, Gary.

Our next questions come from the line of Mohammed Deir from Dutch Bank. Your line is open. Please go ahead.

Hello, guys. Thanks. Can you hear me well? Just on the relocation to Poland, as you guys are looking for completion in Q1, is there any risk for a delay or is there a risk for any legal consequence for you guys which could potentially negatively impact that?

Mehmet, there's always a risk, right? But I would tell you that our customers are in with us. We have a team that has executed on this very, very well. Most of that product has already been relocated to Poland. Our legal team has been on it and starting the eyes and crossing the T's. There is risk, but it's minimal there, Mehmet. We feel good about where we're at.

Okay, that's very clear. Just on... I know that you guys are in the early process of the refinancing because there was a comment that you expect basically a ramp up starting in Q2 and more coming in in H224. Can you give us some color on the timing of the potential refinancing? Is it more expected towards the second half of the year? That's the first question. And you are mentioning the preferred equity to be a part of the process and also mentioning the the notes, but you are not mentioning the term loan. Can we assume that the term loan is going to stay there in place, or what are the plans there?

So the final construct of the company's capital structure coming out of this process is TBD to be determined yet. We are fairly early in the process with our financial advisor exploring the capital markets. The The terminal facility that we put in place 14 months ago now, internally we use the term durable. The facility, to the extent it was practicable to do so, along with the revolving credit facility, was pre-wired. In other words, it contemplated the refinancing of the senior unsecured notes to the extent we could do so within certain ranges. The lenders, Oaktree and the three banks, JP Morgan Bank, American Deutsche Bank, within certain limits, allow for the company to go out and place additional debt to address the rest of its balance sheet. So the term loan doesn't necessarily have to change. That doesn't mean that it won't change. It may change. But it has been pre-wired so that it contemplated we will be undertaking this exercise. In terms of when this exercise might be complete, as I said, we are on our way. It's early in the process. We're probing the capital markets. And we shall see. There will, I think, not necessarily a necessity, but there will likely be incorporated in this process a change, one or more changes to the TPG, the preferred equity security, so that will be a part of this exercise. Having said all of that, the company's intention is to address the senior secured notes timely. We would very much prefer that they not go current, so our intent is to complete this refinancing before the notes go current.

Okay, that's very clear. On the inefficiencies and the UAW strikes, you have already given an EBITDA guidance for 2024, and what I want to ask is, is there any upside potential to what you have already guided, given also ongoing discussions with the OEMs as well, or expecting any unwinding from the challenges you've seen due to the strikes and the inefficiencies?

That's a very good question, Mehmet. Listen, I think, you know, even with our numbers, if you look at the first half, it's going to be choppy from a market standpoint. And if you look at the entire year, I mean, IHS and whatever, what do we know about the car makers? Europe is going to be down, you know, 3% for the whole year. Probably the first quarter, IHS would tell you they're down 8%. We see growth in North America. We are incorporating that. In our guide, and again, if you feel the onion on our guide, we're saying growth over market, right? Market is flat. So it's all in there, Mehmet. It's all in there.

Okay. And my last question on the working capital. You've given already some guidance there. But given that the market volumes are at best flattish for 2024, would you expect some adjustments in the inventory levels you have? So can we expect some inflow maybe from there?

Yes, the company has done really a very nice job in managing its working capital, especially in this very difficult environment the last couple of years. So if you look at our investment in receivables plus inventory plus payables, what we refer to as operating working capital, expressed as a percent of net sales, it's been fairly flat. It's approximately 6% to 7% at the end of the year. we expect that sort of trend to continue. That's number one. Number two, we do expect some benefit in 24 from the improvement we expect in the terms or some of our supplier terms in Europe once we put these protective shield proceedings behind us. And also, as we deplete the safety stock, that will come back to us. Now, having said that, if you're going to sort of compare 24 with 23, we managed very, very, very effectively in 23 the capital expenditures. They were 41 million, and we are guiding to 50 million in 24. So that delta, you know, will consume some of that recovery of working capital off the balance sheet, and also to the extent the sales go up during the year, which they will. I guess the additional volume will consume some of that recovery of the stock and the presumed recovery in terms. So we don't get to put all that in our pocket if we spend a little bit more on capital spending and we do more business in 24. Okay.

Very clear. Thank you very much, guys.

Thank you, Mehmet. Thanks, Mehmet. There are no further questions, so I will now hand you back to your host, Majid, to conclude today's conference.

Thanks. Thanks, everyone, for joining today's call. Listen, we have tackled a very challenging 2023, but we are absolutely excited. We have positioned our company to compete and win, unlike any other period in our history. And for that, I would like to thank the Superior team for their hard work and effort. Just a fantastic team and bringing us to where we're at today. Have a great day.

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