Superior Industries International Inc

Welcome to Superior Industries' second quarter 2024 earnings conference call. This call is recorded. We are joined this morning by Majdi Abulaban, President and CEO, Tim Trenary, Executive Vice President and CFO, and Tom McGill, Vice President, Investor Relations. I will now hand you over to your host, Tom McGill, to begin today's conference. Thank you.

Good morning, and welcome to our second quarter 2024 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'm joined today on the call by Maji Aboulavan, our president and chief executive officer, and Tim Trenary, executive vice president and chief financial officer. Before I turn the call over to Maji, I remind everyone that a new 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. Non-GAAP measures exclude the impact of certain items and therefore are not calculated in accordance with U.S. GAAP. Reconciliations of these measures to the most directly comparable U.S. GAAP measures can be found in the appendix of this presentation. I now will turn the call over to Majdi to provide a business and portfolio update.

Thank you. Thank you, Tom. Thank you all for joining our call today to review our second quarter 2024 results. I will begin with slide four. This quarter highlights the culmination of our efforts in recent years to position the company for sustainable growth and profitability. We have refocused our portfolio on winning products and have transformed our manufacturing operations into a best-in-class competitively advantaged local footprints. Combined, these actions have put Superior in a strong, sustainable position and earned our place as the premier wheels solutions provider to lead the industry. In the second quarter, our team delivered a solid performance. Adjusted value added sales outpaced the broader industry, despite softer production. and adjusted EBITDA margins significantly expanded on a sequential basis. As we previously highlighted, we have executed on our strategic action to transform and elevate our footprint by transitioning all our global manufacturing capacity into low-cost locations, advancing our local for local footprint, and creating additional value for our OEM customers seeking shorter, the risk supply chains. In this regard, execution of our European transformation remains on track. We have now completely exited our German manufacturing operations and are well on our way ramping up in Poland. This will position us for a significant profitability uplift by the end of this year. I am proud of our team's flawless execution on this transform so far. Our customers actually have been very, very pleased with these results and have recently recognized Superior with business wins and expansion of our technology partnership. I'll give you more color on this in a bit. In terms of the operating environment this quarter, industry production declined 3%, with key customer production declining 5%. In contrast, Superior's value-added sales adjusted for foreign exchange and the consolidation in the quarter increased by 1%. Encouragingly, we delivered solid adjusted EBITDA with 400 basis points sequential margin expansion. This performance was supported by the successful negotiations with our customers for real price increases for cost inflation. On this point, I would like to highlight that we have successfully pivoted pricing dialogues with OEMs from one-time price recoveries to permanent price increases. Now, with regard to our plans to address our capital structure, we are in advanced discussions with lenders to retire our senior unsecured nodes in the very near future. This action will strengthen our balance sheet and position the company for long-term growth. We expect to announce more information on this in a couple of weeks. As we look at the remainder of 2024, we are updating our four-year outlook. We are reducing outlook for net sales and value added sales due to lower aluminum pricing and declines in industry production volumes. While our teams have done an excellent job flexing costs and recovering price from customers for inefficiencies and inflation, We are reducing, disproportionately that is, our adjusted EBITDA guide while maintaining margins. We are laser focused on cash flow in a lower volume environment. Unlevered free cash flow remains unchanged as we reduce our capital expenditure output. Tim will provide more cover on this later. Moving on to slide five, we have some very, very exciting news to make. which underscore the momentum we are gaining in Europe with our customers as they recognize our unique competitive position as a technology leader with a competitively advantaged manufacturing footprint. Starting on the left of the slide, we were awarded a record 1.7 billion wheel program with our longstanding premium customer Volvo on a midsize crossover platform. This program includes our premium aerodynamic and light-weighting technologies. It's valued at about $100 million and is expected to launch in the fourth quarter of 2025. Our team is very proud of this achievement with Volvo. We look forward to a winning relationship with them. Now, on the right side of this slide, we have received an A rating in research and development from Alm. A technology leader in the automotive space, This is a significant achievement and positions us as a top-ranked supplier with this major OEM for innovation, reflecting the strength of our portfolio as well as our industry-leading R&D capabilities. We're very grateful for this recognition from Augur. Again, this underscores our momentum with European customers as they recognize the strength of our recently transformed footprint our leadership in technology, and our long-standing customer relationships. Slide 6 provides further detail on our European transformation. As we ramp up production in Poland, we will be closing the margin gap between North America and Europe in the second half of this year. We will benefit from higher cost absorption and improvement in our Polish operations as production ramps up. In addition, We are continuing to improve our overall cost structure in Europe by consolidating aftermarket warehouses and rationalizing overhead. Further, we are pleased with the progress our teams have made in recent times negotiating with all European OEMs to implement real price increases to recover inflationary costs. These conversations reflect the collaboration with our customers and our long-term nature of the relationship. Turning on to slide seven, to further highlight our current operating environment, the industry continues to face a complex landscape shaped by ongoing volume volatility and key customer shutdowns, higher dealer inventories, unfavorable production mix, and increased inflation in Europe. While industry recovery versus pre-COVID level continues, we are seeing a slowdown. Industry production in our two regions declined 3%, while production on our key customers declined 5%. That said, production remains below COVID levels. We expect in the long term continued industry recovery supported by pent-up demand tailings. The case in point here is that the U.S. fleet age remains at an all-time high. Turning on to slide eight, which highlights Superior's growth compared to the broader industry in the second quarter. Global industry production, as well as production among key customers, both declined while we delivered 1% increase in value-added sales adjusted for foreign exchange and deconsolidation. Regionally, North American OEM production increased, but was offset by software production among European OEMs. Now that said, both our North American and European operations grew ahead of their respective markets in the quarter. Further, we have strategically pruned parts of our portfolio and exited underperforming programs. We are seeing the benefit of these actions in our results. Overall, we are performing well in a challenging environment. Moving on to slide nine, which highlights the continued positioning of our portfolio of premium technologies and how they accelerated adoption of these products is driving growth. The left side of the slide highlights some exciting launches in the second quarter. The right side of the slide highlights the historical trends with long-term content growth per wheel of 34% since 2019. We expect these macro trends driving the wheel space to continue well into the future. In closing, I am grateful to the Superior team for the position we have created for our company. We have refocused our portfolio on winning products, transformed our manufacturing footprint to the best in class, competitively advantaged local footprint, and we are strengthening our balance sheet as we retire our notes. Through outstanding execution of our team, Superior, now more than ever, is positioned for sustainable, profitable growth. Now I will turn the call over to Tim to provide more detail on our financial results. Ken? Thank you, Mahdi.

On page 11, Europe Transformation Update. Recall that on August 31st last year, we announced an important strategic action, the continuation of our local for local manufacturing footprint optimization and the transformation of the remaining 6 percent of our manufacturing footprint to a more competitive cost structure. More specifically, Our production facility in Brno, Germany, otherwise known as Superior Industries Production in Germany, or SPG, entered productive shield proceedings in German court-administered reorganization process. Generally accepted accounting principles require that SPG's statement of operations and balance sheet, beginning with the commencement of the proceedings, be consolidated from Superior Industries financial statements. Accordingly, the income statement of SPG is excluded from the second quarter 2024 financial results, as is the balance sheet of SPG at quarter end. The deconsolidation affects the year-over-year comps. More specifically, in the second quarter 2023, 245,000 wheels were sold by SPG. The associated net sales and value-added sales were $31 million and $20 million, respectively. Year over year, second quarter 2024 financial results, and therefore adjusted EBITDA, capital expenditures, and working capital benefited from the closure of the facility. Adjusted EBITDA was $1 million more, capital expenditures, and working capital over $1 million and $22 million less, respectively. We sized the step change benefit of the transfer of wheels from Germany to Poland at $23 to $25 million annually. Capital expenditures should be approximately 10 million less per year. Superior's European variable contribution margin should approach that of Superior North America. We expect the cost to complete the wheel transfer to be 20 to 35 million. Bottom line, regarding the closure of SVG and transfer of the wheels to Poland, the company successfully executed on a cost-effective facility closure in a high-cost country that results in a significant increase in unloved free cash flow because of the reduction in capital employed and higher earnings.

Let's look at the quarter on page 12, second quarter 2024 financial summary.

Net sales decreased to $319 million per quarter compared to $373 million in the prior year period. The normalization of the cost of aluminum and deconsolidation of SPG accounts for slightly more than all of this $54 million decline, or $55 million. Value-add sales decreased $280 million per quarter, compared to $200 million for the prior year period. The deconsolidation of SPG and foreign exchange accounts for $19 million of this $20 million decline. Adjusted EBITDA was $40 million the associated margin expressed as a percent of value-added sales, 22%.

For the quarter, net loss was 11 million. The second quarter 2024 year-over-year sales bridge is on page 13.

As just mentioned, value-added sales declined 29 compared to the prior year quarter, reflecting deconsolidation of SPG and impact of foreign exchange. To the far right, Aluminum cost passed through to customers was down 34 million because of the lower cost of aluminum and deconsolidation of SPG. On page 14, second quarter 2024 year-over-year adjusted EBITDA average. Adjusted EBITDA for the quarter decreased to 40 million compared to 52 million in the prior year period. The adjusted EBITDA margin for the quarter was 22% compared to 26% last year. Lower unit sales partially offset by favorable price and product mix. And to the far right, lower performance primarily because the second quarter of last year benefited from non-recurring recovery of cost inflation are the primary reasons adjusted EBITDA declined. Importantly, the company has substantially completed the pivot to incorporating into real pricing amounts necessary to offset in large part the impact on the cost structure of extraordinary cost inflation and other factors. The impact of foreign exchange and battle timing on the quarter compared to the prior year period was immaterial. An overview of the company's second quarter 2024 unlevered free cash flow is on page 15. Cash used by operating activities was $8 million for the quarter compared to $28 million in the prior year period. Lower investment in working capital in the second quarter of this year, partially offset by lower earnings in the quarter, are the primary reasons for the decrease in cash used by operating activities. Cash used by investing activities for the quarter was $8 million, $2 million more than the prior year period because of the somewhat higher capital expenditures this quarter. There were no cash payments for non-debt financing activities in the second quarter of this year because the dividends payable in the preferred shares were paid in kind. The company opted to pick the dividends to maximize cash. Unlevered free cash flow for the second quarter of 2024 was $2 million, an increase of $19 million compared to the prior year period, primarily because of the improvement in cash use by operating activity. An overview of the company's capital structure as of June 30th, 2024 may be found on page 16. The cash on the balance sheet at quarter end was $172 million. Funded debt, $627 million at quarter end, and net debt was $455 million. Deleveraging the balance sheet and therefore unlevered free cash flow remains a top priority. The company's debt maturity profile at the end of the quarter is on page 17. As most of you know it, we are in advanced discussions with lenders to retire the senior unsecured notes the coming weeks. The revolving credit facility was undrawn at quarter end, and we are in compliance with all loan companies. The full year 2024 financial outlook is on page 18. For the full year 2024, we now expect net sales in the range of $1.35 to $1.41 billion, and value-added sales in the range of $695 to $725 million. Reduction in expected sales reflects lower aluminum costs and lower expected OEM-like vehicle production. We are lowering adjusted EBITDA to $150 to $165 million due to lower sales output. We still expect to deliver on lever-free cash flow in the range of $110 to $130 million, primarily because capital expenditures are expected to be lower, offsetting the lower adjusted EBITDA. The outlook for capital expenditures is now $40 million, 10 million lower as the company continues to reduce the capital intensity while strategically investing in the business. We model tax expense of approximately 30 million for the year. In closing, our teams have done a great job executing our European transformation and keeping us on track to achieve our operational and financial priorities. This concludes our prepared remarks. Monica and I are happy to take questions. Alan?

Thank you. If you'd like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. We will be advised when to ask your questions. We will take our first question from Michael Watt, Freedom Capital. Your line is open. Please go ahead.

Good morning, everyone. Mashi, I think you mentioned something, and I didn't quite catch it. Is there a change in the pricing with the vehicle manufacturers?

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

And the deal with Volvo, is that the sign of more to come with some of these, the luxury based manufacturers in Europe, given your new cost structure? Is that what that is?

Absolutely. And I think the one, you know, Volvo would, With German customers and with Volvo and JLR, we've always been in a strong position. This is an excellent sign, a culmination of the longstanding relationship, as well as our competitive position, by far, because of our competitive position. I also shared with you in the presentation new developments with Audi. The A technology rating is the highest with Audi and really indicative of what's to come. We have been in dialogue with customers, advanced dialogue actually, to continue to grow the business and leverage what we have from a portfolio standpoint and a footprint standpoint. Mike, you may have heard me refer to this. The majority of the capacity in Europe for wheels resides in either the three countries, right? Germany, Austria, Spain, and Italy. So it's really all ultra high cost from a manufacturing standpoint, at least for wheels. And we're now 100% in Poland. Customers know it. And, you know, I would tell you the transformation we executed on in a very short time, you know, closing a plant, major operation, moving it to Poland without any disruption. You know, we just came out of a meeting with Audi a couple of days ago. They were very, very pleased with the execution, and quote, unquote, they said it's the largest insolvency they've seen in recent times, and they have not seen one that has been executed flawlessly as this one. So this actually elevates. So our competitive position has elevated our position, Mike, with customers, and the way this team has executed it has come back.

That's what it sounds like. Tim, do you have the unit shipment data separated between North America and Europe?

I do have it. I don't have it with me right now. It is in total, Mike, on one of the pages.

I saw the total number. I was just curious by region.

Yeah.

I don't have it by region, Mike. Okay. Will it be in the queue or...? I believe it is, yes. Okay.

And when you talk about... Okay. When you talk about the margins, it sounds like the margins in the second half in Europe will be getting closer to North America. And that's a substantial change. Okay. What did it look like in the first half? We're getting the annual rate of the $23 to $25 million in savings. Is that what we're going to see in the second half? We're going to start to see that pretty quickly?

Yeah, the wheels are starting to... The launches are ongoing right now. Very heavy right now. We started a little bit in the second quarter. The guys in Poland are extremely busy right now, consumed with with launching these new wheels. I mean, we know how to build these wheels. We've built them before, but we've built a majority of them, so it's new for the guys in Poland. So it's not as difficult as a brand-new launch, but there is some... It does require the retention. So we expect to have all those launches done by the end of the third quarter. And, you know, in fairness, it'll take them a little while probably to get their arms around some of the processes. So all the wheels will be manufactured in Poland by the fourth quarter, and this step change, the $23 to $25 million annually, will present itself for the full year 2025. We won't have a full decade of it in the fourth quarter.

Right. Okay. And just lastly, is there any implication with the notes coming current on the balance sheet, or is that just all part of the negotiation, which sounds like it's pretty close to getting resolved?

Yeah. The notes being current on the balance sheet are not affected the discussions.

Great. Thank you very much, everyone. Thanks, Mike.

We will take our next question from Gary Prestopino, Barrington Research. Your line is open. Please go ahead.

Good morning, Matt. Hi, Gary. Several questions here. First of all, on the pricing that you've negotiated with the OEMs, do these negotiations in terms of how you're structuring, I guess, your contracts or whatever, are they going to be tied to some kind of – inflation metric that if prices change, again, going forward in terms of whatever inputs you're putting in there, that you automatically get an escalation, or do you have to go back and renegotiate the contract?

So, Gary, when you think of pricing and price transfer as customers, two elements, right? You're very well aware of the aluminum contractual relationship, aluminum passable costs. That's an automatic, you know that. Everything else we have negotiated is mostly for labor costs and other inflationary costs in manufacturing. So those are permanent. There are some price increases, but I'd say less than 20% of the price increases negotiated are related to energy index. So for the most part, the price increases that are built in our plan And actually, you see them in Q2, Gary, I think. Our ability to get price in the quarter enables us to offset some of these volumes you've seen in the industry. So the direct answer is, for the most part, these price increases are permanent and not one-offs and not indexed for now.

So they're permanent but not indexed. Most of them, yes.

A small element, Gary, primarily in Europe is indexed to energy, and that's because the energy costs, gas and electricity in Poland are more volatile than North America.

Okay. And then let's jump to the wind with Volvo. Okay. That, obviously, the data you share with us, that's over the life of the program. And so how long would that program run?

You know, all of these programs carry on between three and five years, right?

So this one is a brand new plant. I mean, you know, it's really localization out of China. It's a midsize SUV. It's actually going to be manufactured not too far from our plants in Poland.

Okay. And it's a, is this an EB? Because I think Bobo said they're going entirely EB eventually. Is this an EB?

That's correct.

I'm sorry, I didn't hear you.

Yeah, that's correct, Gary. It is an EB.

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

Gary, we're not done with this transaction yet. As we said, we We characterize them as being in advanced discussions, which we are. So I'm not at liberty, frankly, until we conclude these discussions and complete this refinancing to discuss the construct of the capital structure.

Okay. Thank you.

We will take our next question from there. Dutch Bank, your line is open. Please go ahead.

Hey, guys, can you hear me well? Yes. Hello? Hey.

Yeah, fantastic. I have a very simple question, actually, again, on the redemption of the bonds. Can you give us the main reason behind the delay for the redemption or the refinancing? That's the first question. And the second question is, you said I was talking about the redemption of the bonds, and then after that you said a few seconds ago about refinancing. The new form of the new debt structure, are there going to be new bonds involved, or are you going to refinance this with a loan? Can you give us a broad guidance for this? Thank you.

Yeah, Mehmet, as I just described, we're just – not prepared to make any comments with respect to this new capital structure until we've completed the activities and the refinancing.

Okay, great. And in terms of timing, you said you will come out with more details in a couple of weeks. Can you give us a bit more of, you know, more guidance here, more color? Is it going to be more in September, October-like?

Again, I'm going to suggest that we wait to complete the discussions, and then we can discuss the capital structure.

Okay. All right. Thank you very much.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. We'll pause for just a quick moment to allow everyone an opportunity to signal for questions. There are no further questions on the line. I will now hand you back to Majdi Abulaban for closing remarks.

Thank you, Alan, and thank you, everyone, for joining our call to the superior team. Thank you. Everything that we have done, everything that you have done has been extremely difficult and close to impossible. The results are really a product of your unwavering commitment So thank you and thanks everyone for joining. Have a great day.

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