Superior Industries International, Inc. (SSUP) Earnings Call Transcript & Summary

Hi, good afternoon. I'm Ryan Brinkman, the automotive equity research analyst at JPMorgan. Thanks for joining us for the 2020 JPMorgan Automotive Conference being held virtually this year. We're going to get going soon with our next discussion, which is with Superior Industries. I did want to remind the investors before we start that you're able to ask a question of management via the conference website. If you submit your question there, I will ask it to our guests without identifying your name or firm. And also, there is a presentation accompanying this discussion that can be accessed at the Superior Industries' website at supind.com under the Investor Relations section under Events, I'm looking at it now. So with that being said, I did want to turn it over to Majdi Abulaban, the President and Chief Executive Officer of Superior Industries; as well as Troy Ford, Interim Chief Financial Officer. Majdi and Troy, thanks so much for joining us today.

Thanks, Ryan, and good afternoon, everyone. It's great to be with you today. Again, I'm Majdi Abulaban, President and CEO. With me is Troy Ford, our Interim CFO, VP of Finance and Investor Relations. Let me first provide you with a quick introduction of Superior. We are -- for those of you who are following charts, we are on Chart 2. Superior is one of the world's largest aluminum wheel suppliers. We are #1 in North America. We are a leader in Europe. About 8,000 employees globally. Long-standing history in the business, 60 years experience in dealing with OEM customers and the Tier 1 suppliers. We are well established with the world's global OEMs, we're #1 or #2 position with Ford, GM, BMW, Audi, VW just to name a few, Volvo as well. In 2019, for those of you familiar with the wheel industry, we shipped about 20 million wheels, $1.4 billion in revenue. And uniquely positioned here in Europe as an aftermarket leader. We're #1 positioned there with many, many brands, including a couple of racing brands that have been around for many, many years. Fundamentally, a business really differentiated, differentiated on 2 aspects that you need in the Tier 1 space. I've been 35 years, going on 36 years in the Tier 1 space, a very challenging space. To win you need really 2 things. One, first and foremost, a long-standing customer intimacy with customers, and this is where we're at with all of them globally, in Europe and North America especially. And you need technology and portfolio that is differentiated, and I will talk about this in a minute. Finally, in terms of macro trends, we are very well positioned to benefit from secular trends that are fundamentally driving our market. And if you go to Chart 3, so we're actually in the midst of a major paradigm shift in the wheel industry. And this is fundamentally driven by, a, consumer preference; and b, government regulations. So let me talk about those 2. First and foremost, consumers want larger wheels with more premium finishes. If you sample a set of vehicles now versus 5 years ago, you would see a marked difference in the size of the wheels and in the finishes on these wheels. Fundamentally, today's OEMs are using wheels to differentiate their vehicles and just cars. I would tell you personally before joining Superior, I did buy -- purchase my vehicle because of the wheels. So at the same time, with electrification, you need these wheels to be lighter, more aerodynamic, and hence, you need the right technology to make that happen. So in orders of magnitude, so if you cast a wheel, now you need to stretch it to make it 15% lighter. You need quite a bit of technology to maintain the mechanical integrity. And obviously, you're adding more content. So on these 2 fronts, larger wheels and premium finishes, [indiscernible] wheels. This gets to be our sweet spot, we're very much differentiated. And these secular trends are really what are driving growth for content in our products. And this is what makes Superior a growth-above-market company. And as our industry evolves, we are staying ahead of the curve with our portfolio. If you go on to the next chart, Chart 4, we are a technology leader, having pioneered many industry-firsts. We actually brought the first low-pressure casted aluminum wheels to the industry, more recently tire printing. We are proud to have the industry's most comprehensive portfolio of technologies. If you look at the left side of the chart, many, many premium finishes. And on the right side, many advanced process technologies. You see our diamond cut and ultra-bright finishes, mirror finishes on BMWs and Daimler vehicles in Europe and many in the U.S. Most recently, probably the most advanced wheel in the industry we launched on the newly launched mid-engine Corvette, where we are the main supplier. It's a super lightweight 21-inch wheel with the most advanced finishing technology and a first-to-market printed logo, the Corvette logo on the wheel. Really a great-looking car and a great-looking wheel, if you haven't had a chance to see it. We also recently launched PVD, which is physical vapor deposition, technology on F-150. It's on the roads now. This is a most environmentally friendly product that is lower-cost alternative to chrome. And you will see it, by the way, on the F-250 as well. Lastly, when you think of wheels and how big they can get, well, we recently launched a 23-inch wheel on the Audi. So this is why actually, what I just cited, despite global production volumes declining, we continue to see the content growth story play out. And again, these secular trends are creating opportunities for us to grow content and also for our customers as well. Shifting on to Chart 5, our customers. We're very proud of our portfolio of customers across nearly all of the global OEMs. We are a top 3 supplier to the majority of the OEMs. We serve with deeply entrenched relationships, as I mentioned, #1 or 2 with Ford, GM, Audi, Daimler, Volvo. We're actually #1 with Toyota in North America. And we see more opportunity to expand these relationships across the region, especially growing with European premium OEMs in North America, where we're underpenetrated and where we have a strong position in Europe. Moving on to Chart 6. In terms of product mix, we are solidly positioned in SUVs and pickups with 60% of our volume coming from that segment. And in terms of geography, evenly split between North America and Europe to mitigate risk. Moving on to Chart 7. We feel very good about our competitive position. Our footprint actually delivers -- 80% of our wheels come from low-cost manufacturing locations. So in -- both about 10 million wheels. All of our North America production comes out of our cluster of plants in Mexico. We actually exited our last plant in North America back in -- in the U.S., sorry, back in October. And in Europe, we service our customers out of Germany, but 90% of our production comes out of our cluster of plants in Poland. A highly automated, efficient set of operations and again, in a low-cost location in Europe. And if you go to Chart 8, this kind of really, in my view, sums up what we're really all about. A leading Tier 1 wheel solutions company that is differentiated on technology, on customer intimacy, very globally competitive, globally competitive footprint and a leading market position. [ If you go to ] Chart 9. Just a few words on our response to our -- the challenging macro environment with COVID. Our focus -- the team has been razor-sharp focused in these 4 areas. You see, first and foremost, ensuring the health and safety of our employees. Second, reducing costs, and we'll talk about that. Sustaining liquidity has been a major, major focus for us. And finally, efficiently utilizing production capacity as we restart. I tell you our global team's commitment to executing to safety and executing what we call is our safe work playbook in all of our facilities has been tremendous, and we've seen the results of that. From a cost standpoint, we have implemented north of $40 million of permanent and temporary cost reductions that are going to carry into next year. Permanent reductions in Europe, in North America, in the U.S. and in Europe -- and in Mexico. And here, we continue to pursue more opportunities. The same goes for our cash focus, and Troy will add more color to that. We have strong liquidity. As of June, we have $245 million. We've been all over CapEx, working capital. Leveraged government subsidies, both in Poland, in Europe in a very, very good way. And finally, our focus on utilizing capacity efficiently, we're extremely proud. And with the restart of our production facilities, we're all back up and running on all of them. We're almost at capacity here in North America and both Europe -- both Germany and Poland back up and running. And if you look at the operating metrics, in terms of scrap, throughput and others, really pleased with the level of performance. It really [ puts us at ] with an improvement versus pre-COVID level. So while our focus has been on running the business, we really haven't lost sight of positioning Superior to deliver value in the [ long ] term, and that takes me to Chart 10. We have made, as you know, those of you following us, we've made significant strides. The improvements in our North America operations, optimizing our footprint and reducing structural costs. And here, you'll see it in the numbers, we're aligning our margin profile, which was substantially lagging in North America to our Europe business which was more profitable. So we're aligning that by north of 400 basis points, and we're pleased with that progress there. Moving on to the right side of that Chart 10. We're continuing to emphasize operational excellence here by focusing on ongoing operational improvements, commercial discipline and strengthening our premium capabilities, some training and knowledge transfer from Europe. We've made good progress getting our teams integrated between Europe and North America and bringing that know-how and technology from Europe into our Mexican operation. And finally, with the demonstrated capability to flex costs here as a result of the COVID crisis, we feel very, very well positioned to do more and to respond to whatever comes at us. At the same time, I would tell you, we are maintaining focus on our portfolio. We are winning with the target customers and launching absolutely the right product. And personally, I feel very, very confident that Superior is uniquely positioned over the long term to win in this market segment. With that, I would like to turn it over to Troy Ford.

Thanks, Majdi. In terms of topics today, I want to walk through what we have seen and what we're seeing from a sales perspective, units and value-added sales and add to some of the points that Majdi made. I'll then discuss the actions we've taken on cost and cash flow to respond to the unprecedented situation created by COVID-19 that we're all facing. After that, I'll move on to cash flow and the current status of our balance sheet. And then finally, I'll end with our outlook for the remainder of 2020, which we provided last week on August 5. So if you move to Slide 12, no news to anyone that COVID-19 pandemic severely impacted OEM automotive production worldwide. OEM production in our regions was down nearly 70% in the quarter as a result of the broad [ lockdowns ] in the automotive sector. Unfortunately, we were not immune to these challenges, and we faced some adverse impacts on our financial results for the second quarter. However, despite these headwinds, our second quarter value-added sales results continue to outperform the broader market to the ongoing consumer trends towards larger, higher-content wheels, basically the trend that Majdi discussed in his portion of the presentation. What we've seen in the marketplace is that fleet sales by the OEMs have been the most severely impacted, whereas retail sales, while also impacted, have declined year-on-year to a lesser extent. Ultimately, this benefits us from a mix perspective. With that backdrop, we delivered 11% growth over market for value-added sales as well as value-added sales per wheel growth of 4%, excluding the impacts of FX. So the tailwinds we've discussed in the past regarding the shift to larger wheels with additional content such as lightweighting technology and premium finishes continues to play out at Superior. Essentially, [indiscernible] vehicle story for wheel [indiscernible] shifts in a positive direction for us. Just as a stat, again, 19-inch wheels and greater accounted for roughly 35% of our portfolio in Q2. This compares to 28% in Q2 of 2019. And based on our current order book and the release schedules we are seeing from the OEMs, we anticipate this trend to continue, which is positive. In summary, while our North American, European value-added sales declined significantly [indiscernible] respective -- due to COVID-19, we're pleased with the overall growth over market trend in our business. Moving to Slide 13. We outlined here the regional breakdown of our unit shipments and net sales and value-added sales for the second quarter compared to the prior year. In the second quarter, our wheel unit shipments decreased $2.8 million to $2.1 million. This change, as you can imagine, was primarily driven by COVID-19-related production declines at our key customers. And is in -- and in line with the lower unit shipments, our net sales declined to $145 million for the quarter. Overall, on these lower net sales, our decremental adjusted EBITDA margin was approximately 25% on the change in net sales. The tailwinds of larger wheels with more premium content that we just discussed, unfortunately, was more than offset by the volume and then with net sales, also lower aluminum prices, which were passed through to our customers. If you switch to Slide 14. Despite a very challenging quarter, as Majdi mentioned, we took decisive actions on costs and cash flow to mitigate the impacts of temporary shutdowns and potential restart challenges in the quarter. You can see listed on this page some of the examples of the actions we took during the quarter, which included evaluating basically every single line item in our income statement to find cost opportunities. As Majdi mentioned, if we size these opportunities and initiatives, the benefit to 2020 is approximately $40 million, which consists of -- primarily consists of personnel costs such as furloughs, wage reductions and restructurings as well as items such as IT, travel, third-party expense and consultants. Of course, the $40 million that we identified does not include the direct material and utilities expenses on the lower volume that would benefit us. So despite these actions, unfortunately, COVID-19 negatively impacted our net sales by approximately $200 million in the quarter, value-add sales by approximately $110 million and our adjusted EBITDA by approximately $55 million. Moving to Slide 15. From a cash flow perspective, we reduced inventory during the quarter and accounts receivable was lower due to the reduction in net sales. However, ongoing outflows related to accounts payable payments more than offset these reductions. And these outflows as well as lower profit ultimately drove a [indiscernible] cash flow from operations in the quarter of approximately $38 million. As referenced on the prior slide, CapEx was an area we reduced and refocused during the second quarter amidst the production shutdowns. Year-over-year, our CapEx was lower by roughly $6 million. However, this was offset by a benefit last year from the sale of other assets of $8 million. Overall, net cash used for financing activities increased due to payments on our revolving credit facility, which I'll discuss in just a moment on the next slide. And then we continue to pay our preferred dividends in cash, which totaled $3 million during the quarter. And we purchased $1 million worth of additional shares from minority holders, leaving a nominal $2 million left outstanding of the minority shares. Moving to Slide 16. This provides an overview of our capital structure. Now the key elements of our capital structure are a U.S. $160 million revolving credit facility, a $60 million European revolving credit facility, a current outstanding amount on our term loan B of $349 million and $244 million on a euro-denominated bond. We also, as you can see on the chart, have preferred equity in the capital structure, raised as part of the acquisition of the European operations in 2017. Through this period of uncertainty, we've been focused on maintaining our financial flexibility and liquidity. As of June, total liquidity, including cash and amounts under our revolving credit facilities, was $245 million. And total cash on hand as part of that $245 million was $131 million. Based on our liquidity position and outlook, at the [indiscernible] second quarter, we repaid $101 million on our U.S. revolving credit facility. And after this payment, as you can see on the capital structure on the left-hand side of this page, we had $108 million still borrowed under our revolving credit facilities. Subsequent to the quarter end, we repaid $69 million on the U.S. and European revolving credit facilities. And I'll say this in terms of outlook, in line with expectations of positive cash flow for the second half of 2020 and neutral overall cash flow for the full year 2020, we'll continue to pay down these revolvers as appropriate and minimize cash interest expense as we look at the third quarter and fourth quarter. From a covenant standpoint, we remain in full compliance with all the lending covenants, including leverage ratios, limitations on lines of credits. And based on various financial forecasts and more conservative scenarios, we don't currently anticipate issues meeting any of the covenants under any of these facilities. Additionally, one thing I'll note regarding our covenants. After paying -- repaying our U.S. revolving credit facility at the end of the second quarter, we were less than 35% [indiscernible] on our U.S. facility and therefore, not required to test our net leverage covenant of 4.5x. But just to note, even if we had been more than 35% drawn on the facility and were we required to test that covenant, we would have been in compliance. And just one final comment. We do have, under the covenants, additional flexibility to add back certain items that we typically do not do for external adjusted EBITDA reporting. Turning to Slide 17. This slide provides a picture of our debt maturity profile. In summary, as you can see on the page, we have no significant near-term debt maturities. Our most significant funded debt maturities occur in 2024 and 2025. And with respect to our revolvers, which both mature in May of 2022, we will look to amend and extend those at least 1 year in advance of their maturity. Moving to Slide 18. You can see here a historical progression of our free cash flow and liquidity. Since the third quarter of 2018, we have generated positive cash flow every quarter, and we were on track for the same as we looked at 2020 until the effects of COVID-19 came into play. But as mentioned, our target for cash flow for the full year is cash flow breakeven. And based on this level of cash flow, we are projecting in 2020 with roughly $285 million of total available liquidity. So again, the focus is to continue to increment from where we are today on a liquidity perspective. And then finally, turning to Slide 19, I'll talk about our full year 2020 outlook. And as the pandemic continues, the impact on the automotive industry is still very uncertain, so I'll leave that as a backdrop. But we've seen this from the fact that there's been little public guidance from peers or customers beyond the third quarter of this year. IHS' forecast currently is a -- it currently indicates a 23% decline in North America in terms of unit production and a 25% decline in Europe, basically a 24% decline overall in our regions. And under this scenario, we're targeting, as I mentioned, to be cash flow neutral for the full year. So that basically implies roughly $40 million of cash flow in the second half of this year. In addition, based on our current release schedules from customers, we anticipate value-added sales to decline in the low teens percentage range year-over-year in the third quarter. Finally, as Majdi noted, as we look forward, we remain focused on executing our key priorities during this very challenging time. First and foremost, we want to make sure we're ensuring the health and safety of our employees. And then we're going to continue to target cost, cash flow and efficiency at the facilities in order to maintain our financial position and liquidity. With that, Ryan, I'll turn the call back over to you for any questions.

Great. Thanks, Majdi and Troy. We've been asking each of the suppliers at the conference if they could comment on the impact of coronavirus on their business in a couple of different ways. Firstly, is on profitability. Just sort of thinking how the margins of the industry improved coming out of the global financial crisis after first collapsing. We're just curious if you think that when all was said and done, considering all of the headwinds associated with coronavirus that may remain like supply chain compression, et cetera, but also the tailwinds like, for example, learning to do more with less, battening down the hatches on SG&A, et cetera, when the volume does return and we eventually move past this present situation, what do you think will be the lasting impact on margin for Superior? Would it ultimately be higher, lower or the same, do you think?

So Ryan, let me take that. And I think this is uniquely important for us at Superior. As you know, when we met last [indiscernible] focus in the last 12 months was on improving North America performance, EBITDA growth, cash flow. As we came into the year, Q1, we really had some solid momentum, again, and operations improved, and COVID hit and the team reacted and responded in a very good way. We've implemented close to $40 million in cost reduction. Quite a bit of it is permanent. Going into next year, we have $5 million in quarterly cost reductions that are going to be in our run rate. So I would tell you that as [indiscernible] second half of this year, I'm very confident of our ability to improve our margins.

Great. And then maybe a similar question, whether the coronavirus crisis causes you to think any differently about capital allocation going forward. So are you thinking differently than before the crisis about how much capital cushion is appropriate with the right debt-to-equity level or targeted leverage ratio is or about return of capital to shareholders?

Yes. So I mean, our view -- our focus has continued to be on our capital structure, specifically, Ryan, addressing EBITDA growth, cash flow is really important for us. We took down debt by about $100 million in the last 12 months. And as we move forward, debt reduction would be the main focus for us. But clearly, it's going to be measured as we look at performance and generate cash flow, we'll come back to that. I don't know, Troy, if you want to add anything to that?

Yes. Just a couple of things, Ryan. In the short term, as Majdi discussed and I discussed, really the focus is going to be on maintaining our level of liquidity. Earlier, prior to COVID, we had opportunistic [indiscernible] a portion of our bonds, our euro bonds, we have paid down -- repurchased on the open market, I should have said. And then we opportunistically repaid some of our term loan B. We basically put that on halt, right, during the COVID situation. At some point, when we repay our revolver, we'll want to start chipping away at that again on an opportunistic basis. We certainly felt that we should have more liquidity and conserve every dollar of cash as we move through this crisis. But as Majdi mentioned, ultimately, our focus is on debt reduction, and that's going to remain the focus. And as we look at 2021, once we maintain a certain level of base liquidity, we're going to want to use every single dollar [indiscernible] reduce our cash interest expense.

Got it. I have received a question from an investor here. He asks, is the company experiencing pricing pressure in China on the 70% of wheels that do not fall into the premium category?

Ryan, I'll take that question, and perhaps I'll need clarification. Is the question related to China wheels coming into the U.S.? Because we do not operate in China.

I'm not sure. Yes, perhaps.

I'll assume it is that. So all wheels now coming into the U.S. are subject to 25% duty. For those of you familiar with the wheel market, 50% of the market comes out of China. I would tell you, Ryan, we haven't seen a major change. Theoretically, we would have expected some to come our way in terms of opportunities. But my view is that with geopolitics and what's going on, I think you're going to see OEMs reassessing their supply chain, and that's obviously going to change our landscape for us.

Got it. Yes. And the client did ask pricing pressure from China, to be clear. And then just lastly here, on the shift toward larger wheels, it just seems like the gift that keeps on giving. I think that it's now like about 1/3 of your portfolio, 19-inch and greater, versus only 1/4 a year ago. So it keeps on growing. Just -- is that being driven more by the intersegment shift toward more full-size trucks, SUVs, et cetera? Or are you seeing larger wheels even within certain categories?

It's actually a segment shift, and it's a general preference driven by consumers wanting larger, more premium wheels on their vehicle and the penetration of electrification. I'd tell you, Ryan, I think for us, we continue to see that growth in content. And since I joined Superior, we have been saying that we are a growth-above-market company because of these secular trends and the numbers speak for themselves. And my view is if you look at, let's say, larger size wheels, 19-inch and above, they're very much underpenetrated globally. They're still below 15% of global production. So there is more opportunity for continued growth in that segment. Obviously, we're very well positioned with our 35%, but our view is that, that growth in content is going to continue.

Okay. Great. And it does look like we're out of time here but thank you, Majdi and Troy, for your insights today. Very helpful.

Thanks for the opportunity.

Thanks, Ryan.