Superior Industries International Inc

Thank you for standing by and welcome. My name is Albert, and I will be your conference operator today. At this time, I would like to welcome everyone to the Superior Industries Third Quarter 2024 Earnings Call. We are joined this morning by Maggi Aboulaban, President and CEO, Dan Lee, Senior Vice President and CFO. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, Simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Dan Lee. Please go ahead.

Good morning, and welcome to our third quarter 2024 earnings conference call. During our call this morning, we will be referring to our earnings presentation, which, along with our earnings release, is available on the investor relations section of Superior's website. I am joined on the call by Majdi Bulaban, our President and Chief Executive Officer. Before I turn the call over to Majdi, I remind everyone that any forward-looking statements contained in this presentation or commented on today are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to slide two of this presentation for the full safe harbor statement and to the company's SEC filing, including the company's current annual report on Form 10-K, for a 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 Majhi to provide a business and portfolio update. Majhi?

Good morning, all, and welcome to our third quarter 2024 earnings call. Before I begin, I would like to introduce Dan Lee, our new chief financial officer. Dan has over 30 years of global finance leadership experience, including several years as an automotive leader with Aptiv and Teneco. He joined Superior in 2023 as Vice President of Finance and CFO of our European business, where he played a key role in the strategic transformation of that business. He was also instrumental in the successful execution of our recent debt refinance. I am thrilled to welcome Dan to the executive team. I would also like to thank Tim Sinear, our prior chief financial officer, for his leadership and his many contributions to Superior over the years. We wish him the best in retirement. Moving on to our third quarter results on slide four. I am proud of our team's performance this quarter. Solid results in a very challenging demand environment. While production at key OEM customers has continued to soften, pressuring value-added sales, we deliver strong EBITDA growth and strong margins. Our performance this quarter highlights the strength of our competitive position, which we have established through the transformation of our global operations. Our low-cost manufacturing footprint now with all production consolidated in Mexico and Poland, gives us a distinct advantage over competitors who rely on imports from China or production in high-cost locations in Europe. This is actually a powerful combination when combined with our comprehensive portfolio of premier technology, supporting customers' demand for lightweight and aerodynamic wheels in Europe, and premium larger wheels in North America. In this challenging operating environment, we achieved a major milestone through the refinancing of our debt, attracting $520 million in new capital and extending our debt maturities to 2028. We also produced our total debt by $117 million. With this refinancing completed, we have significantly strengthened our balance sheet and competitive standing, positioning our company for sustainable long-term growth. Back to results. Value-added sales adjusted for foreign exchange and deconsolidation declined 2% year-over-year, outperforming, therefore, industry production, which was down 6%. Our North America business delivered a strong quarter, benefiting from earlier wins with Japanese OEMs in North America and stronger key customer production volumes compared to the prior year. This was offset by lower customer production volumes and lower adoption rates in our European business. Adjusted EBITDA increased 6% year-over-year, with margins expanding by 200 basis points sequentially and year-over-year. This margin expansion was primarily supported by favorable performance, including the $7 million benefit in lower conversion costs at our Polish facilities, which, by the way, was offset with volume declines in that region. We've also continued to make progress in negotiations with customers on price increases to recover cost inflation. These recoveries were comparatively lower than the prior year, which included one-time recovery for prior periods. I am pleased, though, that we have been successful in negotiating reoccurring price increases with customers to recover inflationary costs. Permanent price increases are now reflected in more of our contracts as we go forward into 2025. We are also pleased with the successful execution of our transformation in Europe. Despite lower production volumes, we are seeing benefits from this action. Our customers are recognizing the improved strategic position we have created in our localized low cost footprint. In fact, we are in advanced discussions with several customers seeking accelerated localized low cost solutions. We already realized short-term wins in both regions with OEMs and in the aftermarket. We have delivered sustained margin improvements in recent quarters despite stopping industry demand. In fact, industry production has declined worse than previously expected due to key customer shutdowns, higher dealer inventories, and vehicle affordability issues. Overall, we expect a 6% decline in industry production in the second half of 2024, and this is supported by recent IHS estimates. In response to challenging industry-wide operating conditions, we are taking action to align our global cost structure with the lower production environment and have targeted a 15% reduction in SG&E and manufacturing overhead. We expect these actions to deliver approximately $10 to $15 million in run rate savings once completed in early 2025. This will result in a restructuring charge of approximately $9.5 million, which will be recorded in the fourth quarter. These actions, combined with the competitive advantages we have built through the leading portfolio of technology, and our localized footprint will position superior for solid performance and continued margin expansion into 2025. Now, with this declining volume outlook, we are lowering our two-year financial guidance, including our expectations for value-added sales and adjusted EBITDA. However, we do expect to sustain our improved margin level. Dan will provide more details on the updated guidance ranges in his comments. I will now address our refinancing in a bit more detail on slide 5. The successful refinancing of our debt disorder is a testament to the investment community's confidence in our ability to deliver long-term growth. It is no small feat to have completed this transaction in such a challenging environment. We have significantly strengthened our financial profile, reducing total debt by $117 million and extending our debt maturities to the end of 2028. Our improved financial position and credit rating solidified our competitive standing as a leading supplier to global OEM with an extensive portfolio and low cost footprint that is unmatched in the industry. These actions combined with the operational improvements achieved through our European transformation, have reinforced our relationships with our global customers, and in fact, we are in advanced dialogues with several major European OEMs that recognize the savings we're able to deliver through this transformation. In North America, we have blind sights, actually, to new business wins, from two OEMs that need accelerated localization of their supply chain footprint. With the refinancing behind us, we are now able to fully leverage our competitive advantage to create new momentum for our business. Slide 6 highlights the accelerating momentum of the tailwinds we highlighted in prior calls. Increasingly, localized OEM production in the state of one supply chain and Geopolitical challenges. A case in point on this slide. We are highlighting a recent localization win with a Japanese customer in North America. This customer is localizing the supply chain footprint for one of their top platforms in North America, with expected production of around 250,000 wheels annually beginning in mid-2025. In addition, we have had similar success in Europe with a major win in the aftermarket, expecting again to start production in 2025 and anticipating to produce 200,000 wheels. Moving on to slide seven. Here we highlight the momentum of improving adjusted EBR margins this year, despite declining industry volumes. While global production has declined 6%, Since the beginning of this year, our value-added sales EBITDA margins have expanded by nearly 600 basis points. This margin expansion is driven by improvement across the business, including the transformation of our European business, consolidation of administrative functions, and improved fixed cost absorption and manufacturing performance. In addition, we have seen improved production efficiencies in Mexico and savings from global SG&E and manufactured overhead restructuring. Overall, these combined efforts have resulted in approximately a 14% global headcount reduction today. That said, we have not reached the full utilization of our Polish operations, which is necessary to achieve the $190 million in adjusted EBITDA run rate that we initially discussed earlier this year. The $190 million run rate assumes an underlying production volume of 15.2 million wheels. However, as current customer production volumes, we are delivering something more closer to 13.9 million wheels. So despite these lower volumes, the underlying assumption behind the value of our European transformation still stands as we have delivered significantly improved profitability throughout the year, which we will sustain heading into 2025. Moving on to slide 8, which highlights some of our exciting launches in the quarter. These programs highlight the accelerating adoption of our premium technologies, like weighting larger wheels and exciting premium finishes. the iconic Porsche Boxster, the Audi A7, and the Cadillac Optic EV of a few highlights this quarter. The accelerating adoption of our premium technology is evidenced by the continued growth in content per week, 34% growth in content since 2019. In closing, this was a challenging quarter for our entire industry. our focus all along has been on what we can control. We have transformed our manufacturing footprint. We have brightened our cost structure. And we have attracted capital and gained financial flexibility well into the future. Fundamentally, we have positioned our business for success. We are delivering solid financial performance and are encouraged by our accelerated momentum with customers in both North America and Europe in driving new business wins. We will continue to leverage our local footprint and portfolio of premium technology to advance our business and support long-term growth. I would like to thank the Superior team for their hard work this quarter and look forward to further progress heading into the new year. I'll now turn the call over to Dan to review our financial results in more detail. Dan?

Thank you, Majdi. Before I go over our financial updates for the quarter, I'd like to say how great it is to be here on the call today. I have been with Superior since July 2023, but in the few short weeks In my new role, it is clear that the team is dedicated, hardworking, and aligned with executing our long-term vision for the company. I'm excited to be a part of it. It is also great to partner closely with Moxie and the rest of the leadership team. Let's look at the quarter on page 10, third quarter 2024 financial summary. As Moxie stated, Q3 was a solid quarter. Net sales were nearly flat at $322 million for the quarter compared to $323 million in the prior year period. Lower unit sales, the timing of lower price recoveries, or what we call lumpy recoveries, offset by favorable aluminum cost pass-through for the primary changes compared to the prior year period. Value-added sales decreased to $171 million for the quarter compared to $176 million in the prior year period. Again, lower unit volume and lumpy price recoveries account for the decline compared to the prior year period. Adjusted EBITDA was $41 million. The associated margin expressed as a percentage of value added sales was 24%. I will provide color on this in the upcoming pages. For the quarter, net loss was $25 million. The improvement of $61 million was driven by the deconsolidation loss of $80 million recorded in Q3 2023, offset by the costs related to refinancing our capital structure. The third quarter 2024 year-over-year sales bridge is on page 11. As just mentioned, value-added sales declined $5 million compared to the prior year quarter, reflecting the lumpy timing of price recoveries, along with the impact of lower unit sales. To the far right, the higher cost of aluminum led to a $4 million increase in aluminum costs passed through to customers. On page 12 is the third quarter 2024 report year-over-year adjusted EBITDA rate. Adjusted EBITDA for the quarter increased to $41 million compared to $39 million in the prior year period. The adjusted EBITDA margin for the quarter was 24% compared to 22% in the prior year period. This increase was due to favorable product mix, the impact of metal timing, and to a lesser degree, foreign exchange tailwinds and favorable performance partially offset by lower unit sales and price. An overview of the company's third quarter 2024 unlevered free cash flow is on slide 13. Cash used by the operating activities was $3 million for the quarter compared to cash provided by operating activities of $9 million in the prior year period. With the decrease driven by a slightly higher investment of working capital, as well as the impact of fees related to refinancing this year. When adjusted for $4 million in refinancing fees, cash flow provided by operations would have been $1 million for the third quarter. Capital expenditures for the quarter was $6 million compared to the $8 million in the prior year period. Cash payments, for debt financing activities in the quarter were $18 million compared to $11 million in the prior year period. Unluttered free cash flow in the quarter was $9 million, a decrease of $3 million compared to the prior year period, primarily due to increased working capital and other balance sheet items. In overview of the company's capital structure as of September 30th, 2024, can be found on slide 14. As mentioned by Majdi in his opening comments in the third quarter, we successfully completed our debt refinancing, allowing us to attract $520 million in new capital. Our new terminal facility now matures in December 2028. This debt refinancing has bolstered our balance sheet, improved liquidity, and enhanced our financial flexibilities. This strategic action enhances our financial standing, enabling us to optimize operations and positions us for long-term success. Total cash in the balance sheet at quarter end was $24 million. With the completion of our refinancing, the proceeds for the new term loan was used in part to retire $240 million of senior unsecured notes that were due in 2025. Total debt was $521 million at quarter end, marking a $117 million decrease since the end of 2023. Net debt was $497 million and represents a $61 million increase since December 31, 2023. This increase is primarily driven by $33 million in refinancing costs paid in addition to the impact of increased fortune capital. Superior's debt maturity profile as of September 30, 2024, is on slide 15. Again, our debt refinancing effectively strengthens our balance sheet, extends debt maturities to 2028, and positions us for long-term growth. As a part of our refinancing agreement, we will begin paying $1.3 million in quarterly payments towards our senior secured term loan beginning in Q4 2024. The full year 2024 financial outlook is on page 16. As Majdi noted, due to the challenging OEM production environment, we are lowering our full year 2024 outlook. For the full year, we now expect net sales in the range of $1.25 to $1.33 billion, and value-added sales in the range of $680 to $700 million. This reduction reflects lower aluminum costs and lower expected OEM production volumes. We now expect full-year 2024 adjusted EBITDA to be in the range of $146 to $154 million. This range was also lowered due to lowered anticipated production volume against global OEMs. We expect to deliver unlevered free cash flow in the range of $50 to $80 million. The revision to our guide is related to higher working capital and the impact of additional restructuring costs. In addition to these items, our management of unlevered free cash flow has been modified to reflect the liquidity requirements of our new terminal. With the completion of our debt refinancing, we are focused on balancing the maximization of unlevered free cash flow with the liquidity requirements for our new term loan to enable financial flexibility. Capital expenditures are now expected to be $35 million, approximately $5 million lower than the prior outlook, as we continue to reduce our capital intensity of the business while making strategic investments for growth. In closing, I want to thank the entire Superior team for their hard work this quarter. We are executing well within a challenging operating environment and are continuing to use our competitive footprint and unmatched wheel portfolio to capture new growth opportunities. I look forward to continuing to work with the team to make progress on our operational and growth priorities. This concludes our prepared remarks. I want to thank everyone for joining us today, Magi and I are happy to take questions.

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

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

Gary, actually it is split between both regions. I mean, we're no different than the rest, Gary. It's a very challenging volume environment for all the tier one suppliers. Couple of stats for you, right? You know, if you go back to when everyone guided versus where we're at now, you need to combine regions from a volume standpoint. Volumes are down in the second half, 9%. And if you look on a year-over-year basis, you know, in both regions, actually, they're down 6%. So North America was down year-on-year 5%, and Europe was down 6.5%. Now, in our presentation, we highlighted that actually our North America business has done very well in outperform. And in Europe, if you make some minor adjustments for the deconsolidation and the ramp-up, we're right in line with the market. But collectively, if you add those two together, we're 400 basis points ahead of the market. Now, as you look at the fourth quarter, the outlook is quite challenging. For the industry, IHS got both regions combined declining 7%. And if you peel that further, IHS got Europe being down 11%, which is quite significant. And they got North America being 3%. If you look at the guide that Dan shared with you, you're back into what we're looking at in Q4. Q3, we're ahead of market. We'll be ahead of market. North America will continue to outperform North America for the entire year. Production in the industry will be down 1.5%. We'll probably be up several points ahead of market in North America. Europe should be right in line. The key for us here is, I think, the volume requirement, the margin profile. We like the development. On Europe, we like the execution. We like the reduction in cost, and especially SG&A overhead. North America, actually, Mexico is doing well from a productivity standpoint. So that's what converged on these margin expansions, you see. So we are doing 24% in Q3, which is on the high end. 25, you can extrapolate a little bit higher, even in Q4. on margins, and as we go into 2025, we expect to continue with this level and improving on this level of margin north of 24%.

Okay, thank you. And then Dan, do you have the units shipped on terms of wheels, or will you put that in your queue?

Gary, on the unit, well, if you look at the quarter development on the margin side, it shows you the units. We normally don't disclose the units, but we chose to include it. It's on slide seven. But in the queue, we have removed units because our focus, Gary, has been on just value-added sales and content. I cited several times examples where a Suburban Wheelers is four times the price of a Nissan Central Wheel. So, you know, Using units as analytics for executing on a strategy can be problematic and cause unnecessary noise. So that's why we backed away from it.

Okay. And then lastly, as I'm trying to write this down, you mentioned that did you do another RIF restructuring that you said is going to have the potential to capture 10 to 15 million of expenses? Yes.

That is correct, Gary. I want to emphasize that is above and beyond the execution we have completed in Europe, which, by the way, we're going to see the benefit of that even more. It's not fully baked in the Q3 and Q4 results as we go into Q1-25. It's going to be more saving as a result of the Europe transformation. To your question, the restructuring is really overhead and it's global overhead in nature. It is the number we expected. We expect to see $10 to $15 million in EB&I improvement in 2025. But recall now, the volume environment is really challenging here. Actually, volumes are done more than anyone expected in my industry. As we move to 2025, we really wanted to get ahead of it. And we feel good. This restructuring we're highlighting, we said early 2025. By the end of this year, it will still have been instituted and will really annul to the bottom line of the company.

Okay.

Thank you.

Thank you, Gary.

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

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

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

Well, it's one good morning. The actual execution restart is actually happening in all facilities globally. So this is really an attempt for us to resize our organization to adjust to the volume and the challenge of volume activity that we're seeing globally. So we're trying to fit our company into that new environment.

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

Well, I think it depends on what volume assumptions you would have. Yeah, no, assuming status quo on volumes. Listen, it's really excellent margin profile as we go into next year. So we're not providing guidance for 25 yet, but we're seeing the second half.

I understand. I'm just trying to get an idea of your capabilities. Is 26%, 27% – is that out of the question if things go well?

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

Perfect. Dan, I wonder if you can provide a bit more color on the refi. What is the rate of the term loan? And when you talk about this $1.3 million a quarter in pay down of the term loan, is that in addition to interest costs? What are the thinking and what were the terms for that?

So the terms on the refi is silver plus $750,000. is the interest rate. And in Q3, you'll see in our view that our effective rate was 12.6%. And then the 1.3% is in addition to, is part of the principal payments.

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

Yes, with the exception, if you saw the guidance that we gave on the unlevered free cash flow and the range of the unlevered free cash flow, what you're noticing there is there are complex terms in our new term loan on what our liquidity requirements are. And we're trying to manage through those as we speak. The breadth of that range is on the high end. If we maximize cash, then it would be towards the high end of the range. If we need to provide additional liquidity flexibility for Q1, because we're coming off a high cash order into a low cash order, we'll be closer towards the lower end of that range. So we're managing through the liquidity requirements of the new term loan. Okay. All right. But to answer your direct question, is the expectation in the working capital, yes, it is timing. We had some pretty sizable revenue, and specifically in the month of September, which drove receivables up. and we expect those to unwind in Q4.

In Q4, perfect. Okay, and any timing on when the Q will be filed?

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

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

Thank you.

Thanks, Mike.

Thanks, Majdi.

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

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

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