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

Good afternoon. On behalf of Deutsche Bank, I'm very pleased to be able to welcome back Superior Industries International to present at this year's Global Automotive Conference. Superior is one of the world's leading aluminum wheel suppliers. Joining us today from a presentation standpoint are Majdi Abulaban, President and CEO; and Tim Trenary, EVP and CFO. With that, I'll hand off to Majdi to commence the presentation.

[ Thank you ] inviting us today. Good afternoon, everyone. Thank you for being with us. I assume you all have the presentation material. You can see the disclaimer regarding forward-looking statements on Slide 2. I'm sure you are familiar with this. I will briefly hit on the first few charts, then I'd like to focus my remarks on strategy. A few facts and figures on Chart 3. As Brian mentioned, we are a world leader in delivering aluminum wheel solutions to automotive OEMs. We're mainly an OEM business. As you look at us, globally, we're mainly in North America and we're in Europe. From a market share position standpoint, we're #1 in the U.S. And with the acquisition of UNIWHEELS a couple of years ago, we are in the top 3 in that region. While most of our business is with OEMs, we do have -- about 10% of our business in Europe is in the aftermarket, really a market-leading position with premium brands, with mass market brands, well recognized. Overall, we're $1.3 billion in revenue, about 8,000 employees. And a very important fact about Superior, we have been 60 years in the business. I would say that our differentiator in the marketplace is really what it takes for Tier 1 automotive suppliers to win in. And that's my view. I've been 36 years in the business, and you need products and you need long-standing customer intimacy, not just relationship. And this is what we have at Superior. We have a differentiated product portfolio. And I'd like to spend quite a bit of time sharing my perspective with you on our product portfolio. And then the second is really long-standing customer intimacy with most of the global OEMs in North America and in Europe. As you go to Chart 4, we have this long-standing relationship with the top OEMs in Europe and North America. We are #1, 2 or 3 with most of the global OEMs in those 2 regions. Just to give you specifics, share-wise, we're #1 with GM, #2 with Ford. We're -- actually, with Toyota North America, we're in the lead position, Subaru and Nissan. We have a very strong position with German OEMs in Europe. Actually, 75% of our revenue is with German OEMs. And again, we have a lead share position with Daimler, Audi, Volvo and BMW, and we are leveraging this position that we have in Europe to actually grow with carmakers in North America. European carmakers in the U.S. make about 1.2 million vehicles. That's about a 5 million wheel opportunity for us that we have been focused on, bringing the know-how from Europe into the U.S. And we have been successful in the past couple of years. We are now shipping product to BMW out of our Mexico operations, to Volvo, to VW, to Audi soon. We actually were just awarded a major platform with Audi in North America, which is the Audi Q5. So a very strong position with customers globally in these 2 regions. As you go to Chart 5, we are also focused on the right segments of the market. So more than 70% of our volume is in light trucks and SUVs. And actually, if you look on the bottom of that chart, more than 80% of that in North America. So a very, very good segment position, and that's one of the drivers of our growth that I will talk about. And in terms of regions, you could see we're almost evenly split from a revenue standpoint between Europe and North America. In those 2 regions, I would tell you, we feel very good about our competitive footprint, which is on Chart 6. We are low cost. We are low cost in North America. We're low cost in Europe. In North America, which is half of our business capacity again, all of our operations are in Mexico. We exited our last U.S. operation in November of 2019. And that's a very, very important competitive advantage for us. So while we have about 20% market share in North America, we actually have north of 40% of share of the capacity in this region. And when you think about the carmakers now reexamining long supply chains and quite a bit of product wheels coming to the U.S. from overseas and the push for localization and some of the trade issues that we're facing, we feel that our position in North America specifically, with all of our capacity in Mexico, is a very nice competitive advantage. And if you look at our operations in Europe, we have a small operation in Germany, represents about 15% of our capacity, really tailored to high-end premium, super premium wheels for AMG, Audi and others. However, 85% of our capacity is in Poland, highly automated plants, manufacturing the best wheels in the industry, a really very well-run operations, very impressive. As you go to Chart 7. In terms of value creation, I would tell that we are absolutely excited about where we stand as a company today. We have built a business that is very well positioned for profitable growth, especially as the industry recovers. And again, I'll talk about growth in a bit. This team, the Superior team, has executed at the bottom of the cycle with remarkable cost and cash discipline. You'll see it in the margin expansion numbers and the deleveraging numbers that Tim will talk about. And at the same time, I would say despite some of the challenges we have faced over recent years, we have done a very nice job of staying focused on executing our strategy and delivering a differentiated product portfolio, which is the underpinning of the growth numbers that you'll see. And so as I think of where we're at today, I'd like to come at it for you in 2 angles: growth side and then the performance side. And those 2 come together to drive, obviously, value creation. First, on the growth front. As I mentioned, we feel very well positioned. We are a growth above-market company. We don't grow at IHS. We were 5% to 10% growth above-market. And this growth we're seeing is accelerating for several reasons. What is driving it is a portfolio of differentiated technology. And we've seen it in many quarters, in the last few quarters. Q4 of last year, we were 11% ahead of market, Q1 this year with 19%, and we see that trend continuing very much. And Slide 8 really tells the story as to why we are seeing all of this. Our business is very much becoming -- it was and is becoming more and more a secular business versus a cyclical business. We're benefiting from 2 key macro trends that are driving our industry. First, and you see that on the left side of the chart, CO2 and electrification. Yes, we are powertrain agnostic and we like that. But as EVs take hold, we see a significant growth opportunity in both lightweighting a wheel and in making it more aerodynamic. So as a point of reference for you, to make a wheel lighter, one of the technologies we use is called flow forming, which is essentially stretching a wheel to take mass out while maintaining its mechanical properties and making it stronger and more rigid. That specific application of lightweighting, on average, adds about 15% to 20% to the content of the wheel, or you could think of it as the price of the wheel. Where we were with that specific application of lightweighting back in 2019, less than 6% of the wheels we ship globally were lightweighted. As of this year, we are looking at north of 12%, doubling the number of lightweighted wheels. We actually are adding capacity very quickly both in Germany, in Poland and in Mexico to meet the demand. And we see that same trend accelerating very fast. And you all know what's happening with electrification, so a very nice tailwind for us. Aerodynamics, one of the ways you make a wheel more aerodynamic, you put these inserts. And on average, you pick up 3% to the range of the battery when you do that. And that's also a significant content adder. All these content adders, even the ones I'll talk about next which is the premium finishes, the work for the consumer preference, add between 50% -- to 50% to the content of the wheel, which leads me into the second macro trend that is driving our growth from a portfolio standpoint, which is the consumer preference more than ever for larger wheels, for premium finishes. And the best way I could illustrate my point is as you pick 10 vehicles 5 years ago, you look at the size of the wheels 10 years ago versus now, you look at the finish, the finish -- 5 years ago, sorry, would be basically a basic base paint wheel. You look at it now, it's machined. It's got special printing, laser etching and many other applications. A very stark difference in the size of the wheel, consumers want larger wheels and in the finish that you see on those wheels. Not too long ago, less than 30% of our wheels in 2019 were 19 inches or larger. This year, we're closing in on 50%. And the same thing goes, if you see on the chart on the premium finishes, where if you paint a wheel and you ship it versus you paint it, you take it back, you machine that surface, you seal it and perform many other applications to that and add more content. So these 2 macro trends are the underpinning of our portfolio. This is where we have invested. This is where we believe we are differentiated. This is where customers see Superior. And this is why you see the growth numbers ahead of market that we have shown in recent quarters that we believe will continue to accelerate. And as you look at chart 9, we continue to bring to market technologies that are going to accelerate this growth. On this chart, you see PVD, which is short for physical vapor deposition. If you want to know what it is, look at the back of your iPhone, that's the kind of finish. It's actually a chrome replacement, more environmentally friendly, lower cost application. It's found on the Ford F-150 and will be on the Ford F-250, really a great product that has been well recognized and received actually a global excellence award from our customer, Ford. That product adds a significant amount of content to a base-level wheel. You see on the chart some of the lightweighting technologies. We continue to advance that Porsche GT3 you see, it has got a flow formed wheel, which I talked about. And it's also got a thin rim technology that takes out more weight out of the wheel. And on the bottom of the chart, you see a patented product. We refer to it as Deco Tech, which is again an imprinting on a wheel. And you got to remember, these wheels have to withstand hundreds of thousands of miles and acid application and such. So these products have been developed with our market-leading technologies and engineers that have been in the business for a long time. These are all applications and technologies that we recently launched that have been very well received by the marketplace. Slide 10, again, just taking the opportunity to highlight who we are as a company, highlighting our technology leadership. Here, we're absolutely excited for being named as the finalist for this PVD technology I just mentioned, for the prestigious Automotive News PACE Award. You're all familiar with the PACE Awards and what it takes to be considered. But it's really a testament to the technology and market leadership of Superior Industries. Next, I'd like to jump to Slide 12. While we feel very, very good about our growth position and how it's accelerating our position, we feel equally good about the remarkable progress we have been making in driving performance and building a performance culture. You see that in improved margins. For those of you who have been following us closely, we have said our North America business was lagging in many ways from a profitability standpoint. We set our sights on that back in 2019. We closed -- we have said we want to close the gap between Europe and North America, it was about 400 basis points, and we did more than that. In fact, if you look at our results now compared to 2019, you'll see a margin expansion north of 700 basis points. And if you look at the entire company as we think of performance, and Tim will talk about it, we've expanded margins globally in Q1 on lower volume, more than 300 basis points. And you see this performance in the deleveraging of the company. In 2019, we were mid-600s. We're now south of $470 million on a net debt basis. So fundamentally, we have been driving performance across the entire business. We have been working the portfolio, fixing troubled product lines, specifically in North America, bringing new technologies to market, as I just shared with you. We have been working on our footprint. We're now 100% low cost in North America, 90% low cost in Europe. We have done -- we really feel good about this teamwork that's going on between Europe and North America, and it's managing itself in our ability to book business and grow with premium carmakers in the U.S. It's a very nice victory for the team. And Chart 13 -- really, Chart 13 brings it all together. We see -- I'll bring you back to the 2 points I've tried to bring together. We see this momentum of Superior as a growth above-market company, differentiated on portfolio and Superior as a company with enhanced performance, continuing to deliver strong EBITDA and cash flow numbers, ultimately enabling us to continue to invest in the business. I'll tell you that what's driving all of this is an outstanding leadership team that is driving execution, and performance and has a proven track record to speak of. So I will stop there, and I'll turn it over to Tim for further remarks on our results.

Thank you very much, Majdi, and good afternoon to all. It's a pleasure to be with you today. I have some opening comments with respect to the company's financial performance which, frankly, I characterize as a rather remarkable financial performance. And you can find them on Page 15 of your materials. It's entitled Accelerating Growth and Improving Performance. Over on the left-hand side of the page, just for very high-level metrics that really are good descriptors of the company's performance in the first quarter, starting with the fact that the company generated $55 million of EBITDA in the quarter on $198 million of value-added sales. For those of you who may not be that familiar with our company, we report 2 metrics for sales: one, a traditional sales figure, net sales, on this page is $358 million; and then a metric, which we refer to as value-added sales. The difference between 2 sales metrics is simply the value of aluminum that is in our product. And the reason we tend to separate that out when we talk about value-added sales is because of the rather striking movements in cost that can influence the aluminum markets, and it tends to destroy our metrics. So you'll find that most of my comments today will be in the context of value-added sales. Back to the EBITDA performance, that $55 million was 39% more EBITDA in the first quarter of '21 in the year ago period, in the first quarter of '20, and yielded an EBITDA margin of 26%. It's not surprising, I guess, that, that 26% EBITDA margin is about 300 basis points higher than the prior year period because the value-added sales growth during this period of 17% is very good. But when one has the cost discipline that we've exhibited here recently, we can convert that 17% increase in value-added sales into very handsome EBITDA margins and improvements of EBITDA, in this case, of 39%. With respect to the value-added sales growth year-over-year of 17%, that was accomplished on unit shipments of 4.5 million, which were up for our company 5% year-over-year. Notably, that real unit shipment improvement for our company, improvement of 5%, was on industry growth of minus 2%. So we, in the first quarter, achieved shipments in excess of the market and value-added sales in excess of the market, which yielded the metric that Majdi mentioned a moment ago, a 19% year-over-year growth over market in value-added sales. A couple of further comments with respect to the value-added sales growth in this period. It is, of course, a reflection, in large part, of the shift in the aluminum wheel market to aluminum wheels and, more specifically, to the premium wheels that Majdi described in our capabilities in that arena: lightweighting, flow forming technology, aerodynamics, finishes, et cetera. So it is in part, certainly, a reflection of our capabilities here and the shift in the wheel market to premium wheels. And also, though, in the first quarter, in all candor, and this is counterintuitive, is a reflection of the shortage in semiconductors. Many of our customers shifted their mix, their vehicle mix, to the more premium vehicles, which tend to have the premium wheels on it in the first quarter in the face of the conductor shortage and we, of course, benefited from that. So if you will, our performance at the value-added sales line was, in a way, supercharged, if you will, because of the shift to the premium wheels that the assemblers executed in the face of the semiconductor shortage. I would say, finally, with respect to the first quarter, this performance was achieved notwithstanding some really very difficult operating conditions in some respect. And it's a testament to the men and women that make our wheels that they were able to deliver these sorts of results. More specifically, we continue to operate under our Safe Work Playbook, which is very important for the safety of our workplace. But the COVID protocols do introduce some inefficiencies into our operations. Certainly, the assemblers' production schedules have been affected by the virus and then, most recently, by the semiconductor shortage. And that has resulted in instability of the production schedules, some short production runs, and that's complicated the life of the operators in our facilities. The supply chain, in some respects, has been challenging. There have been some not shortages but concerns with respect to the availability of aluminum. Because of the profile of our aluminum suppliers globally and relationships that we have with them, we have been able to move our aluminum purchases around to avoid any complications in getting that raw material. Also, some supply chain constraints with respect to shipping containers and MRO out of China, we've been able to manage really quite effectively through our centrally led procurement function. And then finally, as you might imagine, when production shifts as dramatically as it did in the first quarter to these premium wheels, the operators in all of our facilities, all 8 of our facilities, have been managing very effectively through certain process constraints, more specifically with respect to flow forming and painting. So I just want to call out the fact that these financial results were achieved in the face of, frankly, some difficult operating conditions, which is a reflection of a comment that Majdi made at the outset, which is a performance culture that is developing at our company, Superior. If I could turn your attention now please to Page 19, Page 19 in your materials. It's entitled First Quarter 2021 Free Cash Flow. Let me give you some context here with respect to where we've been in terms of generating free cash flow and where we think we might go in this year 2021. The company over the last 2 years has focused very intensely on free cash flow and, therefore, delevering the business and, more specifically, a very, very serious approach to investment in operating working capital on the balance sheet, receivables, inventory and payables. Over the last 2 years, in each of those 2 years, we have generated -- Superior's generated about $80 million for a total of $160 million in free cash flow. It's largely as a consequence of the accounts receivable factoring program that we put in place to consciously saw off some of the rise in the receivables, especially coming out of the virus but also a focus on our payables terms with our supply base. We have moved the DPOs up by about 6 days. And with respect to the inventory, a focus on both our OEM and aftermarket inventories has resulted in the reduction in days on hand of about 7 days. So when you marry nice financial performance, EBITDA up, with a focus of the operating working capital on the balance sheet, the result is obviously free cash flow and, as a consequence, a reduction in the company's net debt position over the last 2 years of about $150 million down to a number that's approximately $475 million. We intend to continue to delever the company and, therefore, intend to continue to generate free cash flow. In a moment, we'll take a look at the guidance for 2021. What you'll see, when we get there, is that the free cash flow, assuming the capital expenditures and the midpoint for the operating cash flow and then factoring in the dividends on the preferred, should, according to our guidance, be about $30 million. So a continued generation of free cash flow but not of the magnitude that we have driven over the last 2 years because, frankly, the opportunity to get more of the working capital out is pretty much exhausted. So we've sort of squeezed that, and we're done there. And from here, it's going to be more sort of steady in terms of free cash flow generation. If I can turn your attention now, please, to Page 21 in our materials. This is a maturity profile of the company's debt structure. Three primary elements, the first being the term loan. Directionally, $350 million, terms out in 2024, so about 3 years from now, and then the bonds in 2025. And then while the preferred equity is not debt obviously because it does have an optional redemption trigger in 2025, we've seen fit to put it on this schedule. Suffice to say, no near-term maturities here. And you should know if you don't already, that we have extended the revolving credit facilities in both North America and Europe with respect to North America out to October of '23 and, with respect to Europe, out to May of '23. Finally, just some levers here that are coming together allowing the company to facilitate, when the time comes, the recapitalization of the company. Our industry continues to improve. The premium wheel market is growing. Our EBITDA is performing. Free cash flow generation has been good, and we expect to continue to generate free cash flow. Net debt has come down. And then finally, the capital markets are open for business. And so as we continue to drive these sort of levers and benefit from the industry, we believe we will put ourselves in a position to address the capital structure in the not-too-distant future. We'll do so when the time is right. Finally, on Page 22, a guidance with respect to 2021 that we provided in conjunction with the fourth quarter earnings release, which we affirmed in the first quarter. You can see here for yourself the various metrics. Using the midpoint, it's $170 million of EBITDA on value-added sales of $750 million and operating cash flow of $120 million. This guidance reflects industry recovery in the mid-teens, a continuing shift to premium wheels, some increase in aluminum prices. And in fact, we have incorporated in here some assumptions with respect to the semiconductor shortages. If I could just sum it up here quickly, and following on with Majdi's comments with respect to a growth over market company and our wheel technology portfolio and participation in the premium wheels segment of it, when one takes that sort of growth over market profile on the top line and combines it with the investment that we have made in our Lean Six Sigma program, which we refer to as continuous improvement, the enhancement of our centrally-led procurement organization, a benefit of which I suggested a moment ago, which was the managing of the supply chain and the DPOs managing them up, the cost discipline that we've exhibited over the last 3 quarters and especially with respect to the first quarter of this year, taken together with the structural cost improvements, you yield the kind of financial performance that we've seen over the last 3 quarters, which is EBITDA of $47 million in Q3 and Q4 and $55 million in the first quarter of this year. And that, taken together with the deleveraging of the business over the last couple of years, yields, as you would expect, an improvement in the value of the enterprise, which I think the financial markets have recognized. I would tell you, as evidence, the movement in our stock price here over the last 2 or 3 quarters, so a company with a growth over market profile on the top line and very disciplined cost structure. That concludes our prepared remarks. And [ Hershey ] or Brian, we'll turn it over to you.

Yes. Thank you, Majdi and Tim. We've gotten some questions over the course of the presentation that I'll lead off with in the remaining 4 minutes that we have here. First is directed towards Tim. Could you comment about free cash flow looking forward, 2022, considering CapEx should be less in 2022 versus 2021 because of this year's catch-up?

Yes. There is some snowplow of capital spending from 2020 into 2021. That's reflected in the $75 million in our guidance, Brian. That number has historically been a little lower than that, let's say, $65 million, $70 million a year, setting aside 2020, which was only $45 million. So I would expect that to probably come down a little bit but not a whole lot starting in 2022. This is a capital-intensive business. We do plow about $4 million a year in each of our facilities in maintenance. We are installing some additional capabilities to address the premium wheel business. So while there may be some moderation in the capital spending down from $75 million in '22 and on, it won't be all that much.

Excellent. Thank you, Tim. Related to that, the next question is, as you think forward to expected timing to refresh on guidance, noting that General Motors raised its guidance this morning.

Yes. Well, we will see. Here's what we're seeing, okay? The first quarter, again, counterintuitively, because of the shortage of the semiconductors, gave rise to a supercharged value-added sales. And we benefited from that, okay? At the time we issued our first quarter results, we stood pat on our guidance for the remainder of the year, not knowing really at all where the semiconductor issue was going and anticipating that it would have a worsening effect in the second quarter. I think everybody knows, you can read it in all the media and the analyst reports, it has gotten worse in the second quarter. And we'll see when it abates. I think generally, the analysts think that there should be some relief in the third quarter. We'll see. So until we can get our arms around a little bit better where that's going, we'll stay with this guidance. And look, I mean, who knows? I mean if the analysts are right and there is some relief in the third quarter, given the low inventories, the assemblers may be going like gangbusters in the fourth quarter. So it may come out all right, and we may be at the very top end of this guidance. We'll see.

And the final question is related to, overall, the cash balance and thinking about that in the context of the dividend potentially being restored in terms of -- if you could comment on that.

Certainly. Yes. Our capital allocation strategy, Brian, is to delever the business, okay, so to provide adequate liquidity, provide capital for growth in the business, which we're doing, but then to delever the company. As important as it is to return capital to shareholders, we think it's prudent, for the time being, to focus on deleveraging the balance sheet and putting us in the best possible position to recapitalize the company when the time is right. This is a long way of saying that I don't, at this juncture, see a return to the common dividend until we have addressed the capital structure.

Excellent. Well, thank you for your time today. We are out of time. We appreciate the participation again of Superior in this year's conference. And we appreciate the investors joining us for this discussion. Thank you, everyone.

Thank you.

Thank you.