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

Hello, and welcome to the Superior Industries International Special Investor Call. We are joined this morning by Majdi Abulaban, President and CEO; Tim Trenary, Executive Vice President and CFO. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to Tim Trenary. Thank you.

Good morning, and welcome to our investor conference call. During our call this morning, we will be referring to a supplemental investor presentation, which is available on the Investor Relations section of Superior's website. I am joined on the call today by Majdi Abulaban, our President and Chief Executive Officer. Before I turn the call over to Majdi, I would like to 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 2 of this presentation for the full safe harbor statement and for the company's SEC filings, including the company's current annual report on Form 10-K for a more complete and forward-looking statements and risk factors. We will also be discussing select non-GAAP measures today. These non-GAAP measures exclude the impact of certain items and, therefore, are not calculated in accordance with U.S. GAAP. The reconciliation of value-added sales to the most directly comparable U.S. GAAP measure to be found in the appendix of the presentation. With that, I'll turn the call over to Majdi.

Thank you, Tim, and hello, everyone. Thank you for joining our conference call today on such short notice. A few words before I turn to our slides. Since 2019, we have made substantial progress in aligning our business to a rapidly evolving operating environment, thus elevating our footprint to a competitively advantaged position. Today, the vast majority of Superior's capacity is high performing and is strategically placed in two low-cost locations, Mexico and Poland, creating an attractive local for local solution for our customers as they seek shorter supply chains to mitigate production risks. Let me turn to Slide 3. The action we are announcing today represents a continuation of our plan and the transformation of the remaining 6% of our footprint. It is a critical step in improving the performance of our production facility in Werdohl, Germany, otherwise known as Superior Industries Production Germany or SPG. This strategic action incorporates Protective Shield Proceedings, a German court-administered reorganization for SPG. During these proceedings, operations at the production site in Werdohl will continue. Importantly, our operations and facilities in the U.S., Poland and Mexico are not impacted by these proceedings. Further, our other German operations and aftermarket business are not part of these proceedings. More than ever, supporting our customers is an overriding priority, we will continue to deliver for our customers in North America and Europe with the same level of quality and reliability while ensuring on-time delivery. Our strong financial position and ample liquidity enabled us to maintain the highest level of service throughout these proceedings. In recent years, SPG has faced both operational and financial challenges, recently exasperated by higher cost and lower vehicle production by European OEMs. Elevated vehicle prices, vehicle financing costs, consumer inflation and recession concerns continue to be a drag on the industry, which has seen a drop in production levels, particularly in Europe. As I mentioned, while we have already taken action to improve performance at SPG, including the streamlining of manufacturing processes, reducing backlog and drifting of overhead costs. These actions have not been sufficient to adequately reduce our manufacturing and administrative cost structure at SPG, requiring us to explore additional options. We believe that these proceedings are a necessary step to further enable us to better serve our customers while elevating our long-term competitive position in Europe. They are fast and cost-effective instruments of German insolvency law to improve SPG's competitiveness. A key action we're taking is the implementation of a revived operating plan to reduce costs, enhance revenues and to better -- critical customer needs. Slide 4 speaks to our competitive local for local footprint strategy. As I have mentioned previously, our global manufacturing footprint has been a key differentiators to OEMs as they seek to derisk long supply chains by sourcing components locally. The vast majority of our capacity is strategically located in the low-cost areas of Mexico and Poland, which are high-performing sites due to the transformation we have made to align our business to rapidly evolving operating environment. These actions were taken today represent a continuation of that plan, giving us the opportunity, as I said, to transform the remaining 6% of our footprint. Slide 5 outlines how these proceedings fit into our larger plan to bridge the performance gap between our European and North American operations. I spoke to this during our Q2 earnings call. Solid execution here will keep us on path to achieving the targeted 400 basis points in margin improvement in Europe, thereby addressing the performance gap between the 2 regions. As a reminder, the North American operations benefited significantly from the operational improvements we have made over the last several years, and we are now looking to do it again. As a technology leader in Europe with a diversified customer base of leading premium customers, we remain confident in the long-term strength of our European operations. Our competitive differentiators including industry preference for our localized footprint and our ability to capture customer demand for larger premium wheels will continue to support our business well into the future. As we make our the way through these proceedings, which again impacts only 6% of our global manufacturing capacity, we remain focused on supporting our customers while optimizing costs and improving cash generation. We look forward to successfully emerging from these strategic actions as a stronger company, positioned to better serve our customers while supporting long-term value creation for our shareholders. I will now pass the call over to Tim. Tim?

Thank you, Majdi. I'll provide some detail now on the financial impact of the strategic action before addressing our updated financial outlook. On Slide 6, the financial details of the section. We expect to recognize a noncash charge of approximately $82 million in the third quarter of 2023, representing the excess of the carrying value of the net assets over the estimated preliminary fair value of our interest in SPG. We expect to incur cash charges associated with these proceedings up from EUR 15 million to EUR 18 million and to realize a benefit to adjusted EBITDA, which is expected to be fully realized in 2024 on a run rate basis, that reflects a payback of approximately one year. In the event, this restructuring is unsuccessful, the SPG facility may be closed, in which case we would expect a result that is similar from the standpoint of cost and financial benefits. There will be some full ahead of capital spending associated with the proceedings, and there may be some contraction of supplier terms in Europe, which is expected to be temporary. We also are reaffirming today our full year guidance, which may be found on Slide 7. Our guidance ranges for 2023 include 15 million to 15.8 million wheels, net sales of $1.55 billion to $1.63 billion, value-added sales of $755 million to $795 million and adjusted EBITDA of $170 million to $190 million. We continue to expect cash flow from operations of $110 million to $130 million. Capital expenditures are expected to be approximately $65 million. This concludes our prepared remarks today. Majdi and I are happy to take any questions you may have. Francois?

[Operator Instructions] Our first question comes from Michael Ward from Benchmark.

Majdi, so this is technically a reorganization. Is the plant going to be closed?

So this is -- okay, so this is really a 2-step process. It's a legal process under court administration to execute on a plant, might to improve performance. So we have set targets on scrap and other operating performance, targets on growth, and we are commencing to execute on that plan. So should that plan not materialize in the results we expect, we move to the next step and possible action in the next step would be the [indiscernible] of this facility and moving the business from Germany into Poland, but we're not there yet.

Okay. And so this is totally signed off by any German unions, anything else like that?

That is correct. There is a -- German court this morning, appointed an administrator that is responsible for executing on these proceedings and he's actually at our facility.

Okay. And then Tim, on the cost side, does the $82 million include the cash costs?

Yes. The cost that I quoted, might be approx EUR 15 million to EUR 18 million, that is the cash cost.

That's okay. And that's included within the $82 million third quarter charge?

Yes. Well, there are two different charges. One is a noncash charge, the $82 million is really totally noncash, has no effect on the company's cash position, separate and apart from the EUR 15 million to EUR 18 million which are the actual cash cost to close the facility, which, as I think we said in the press release, basically [ possibly the benefit ] that we would expect to get in '24. So a one-year pay there.

Okay. So that cash will come out in the second half here in the fourth quarter, I assume?

Well, not all of that. You're very familiar with our company and you follow us and you're on all the earnings calls. You might remember that during the first half of this year, we've taken various actions to address certain elements of our business, [ especially with our ] overhead and our manufacturing operations. Most of those activities have -- frankly have been centered in Europe and we're specifically associated with this facility. So the strong total of the restructuring charges in the first half of the year, which my recollection, is approximate EUR 6 million and not all of those in the first 6 months represent cash, but a large portion of them do. So some portion of this EUR 15 million to EUR 18 million and cash charges has already been spent beginning earlier in this year. So I'd say rationally, I don't know, 25% or 30% just to be rough.

Okay. Okay. And so some of those cash charges will continue into the first half of 2024, but again, the savings aspect should be about a 1-year payback on the cash component.

Actually, our planning is such that we would expect substantially all of the EUR 15 million to EUR 18 million cost to be incurred before the end of the year as possible, a little bit in the next year, but that certainly is not our plan. So -- look, I mean, there's execution risk in everything, there's some execution risk in this. We think we have very solid plans so we expect to spend substantially all [indiscernible]

The next question comes from the line of Gary Prestopino from Barrington Research.

Majdi, I would assume that you have to go through this in Germany because it's very difficult to restructure a company as an entity as deep as you want to, unless you have a court approval. Is that kind of -- am I looking at it the right way?

Yes, kind of, Gary. I mean, we went through a process. We have been trying. We work with the works council. We have implemented initiatives. And frankly, it's a natural next step. You -- the German law provides these options to allow us to engage with the works council and to allow us to see if we can make it work. Your assessment is correct, Gary.

Okay. So if this is 6% of your footprint, all right, what percentage of your output comes out of this plant and in the European market? Is it about an even mix between...

Gary, you can just back into it, you know how many wheels we made globally and you'll get a number between 800,000 wheels to 100 -- to 1 million wheels. And they tend to be a little complex -- more complex wheels in terms of extent but nothing highly different than what we do in Poland today.

Okay. So I guess the question that I would have is you've already been through where you're trying. You had to go to a court process here. Why not just close the whole plant down and expand...

Gary, that's another good question, right? I think you'll find -- when you learn about German court proceedings, the German government can be supportive of our process, which is what I mentioned in my remarks, to try to make it work. And if that -- and they support that process. And I don't want to get into details of what -- how the government participate. But at the end of it if it does not work, and if it does not create a competitive business, we go to the next phase that you just described, closing the facility. And we will -- I mean, we will know. This is not a 1-year process. This is a few months where we work together with the works council. We execute a plan and we go back to the court and give them an update on the outcome.

Okay. So if I look at Chart 5, and you see there's a 400 bps margin differential on value-added sales, is that an EBITDA number? Or what is that margin?

That's a value-added EBITDA number, Gary and whenever we set this out, we were conservative. We remember on the right side of the chart which talks about a holistic approach to our business in Europe. We have a clear plan outside of this operation to drive improvement. And again, if you want to back into this 400 basis points, frankly, from my perspective, Gary, it's conservative. You take EUR 18 million savings by the value-added sales, and you'll see that by itself is 500 basis points in improvement.

I'm sorry, go ahead Majdi.

No, no, no. Go ahead. I finished. I was just giving some framing as to the impact of the savings that Tim shared with you on the business. And if you wanted to back into an EBITDA of that margin, you could do it very quickly, and you'll find that it's north of close to 500 basis points just from this action.

So as I read this or listen to what you're saying, this whole EBITDA margin differential is really a function of what goes on in this plant between Europe and North America?

Not totally, but that's a good way to think about it.

Okay. And then just lastly, I just want to make sure I got this right. You're talking about a cash charge of EUR 15 million to EUR 18 million which is probably just back of the envelope USD 18 million to USD 21 million, is that about right? Maybe even higher?

The exchange rate now is about 1.1:1. So the multiplier, Gary -- you've got the multiplier right, multiply by about 110% if you get to U.S. dollars.

Okay. And then -- which is you're expected to fully realize in 2024 on a run rate basis. So I mean, the other question you asked is, I just want to make sure I'm getting this right that from these actions, you can probably assume an uplift to EBITDA of EUR 15 million to EUR 18 million in 2024. Is that correct? Or am I wrong?

That's correct. You're not wrong, that's correct. Our planning is such that we expect to have this resolved by the end of the year or very shortly thereafter. So it's a one-year payback. So yes, you're correct with respect to the expected step change in 2024 to adjusted EBITDA.

And didn't -- why aren't you already talking about some kind of a restructuring or what you were doing that was going to save about $10 million prior to this announcement? Or am I wrong there?

You are right. We embarked very early this year, actually very late last year on an initiative to drive USD 10 million out of our business. Almost all of which is in what we refer to as selling, general and administrative expense and nurturing support services, by and large, administrative expenses. We have said -- I think most recently in our Q2 call that we will not get all the way there this year because I mean these activities [ bleed ] in during the year, but we expect to exit 2023, having driven USD 10 million out of our overhead and manufacturing support functions. So yes, this is in addition to that $10 million.

So as I read this between 2023 and 2024, you're talking about from the actions that you've taken to reduce costs, if you don't redeploy any of these expense savings into growth initiatives, you're talking between $26 million and $28 million on a 2-year basis of -- a benefit to adjusted EBITDA? Is that right?

[Technical Difficulty] one thing. So portion, a significant portion of the $10 million that I just spoke of, the thrifting of the overhead and the manufacturing to support the partners, not all of that $10 million will show up in 2023, but a significant portion of it well, let's say, $6 million or $7 million, okay? So if you're going to sort of think of this is on a year-over-year basis, really probably shouldn't incorporate all of the $10 million into the incremental benefit from '23 to '24. Do you see what I'm saying?

No, no, I understand. I'm just talking about if we fast forward to 2025, if you don't redeploy any of these cost savings into growth initiatives, you should have, like I said, potential on a full year run rate basis to capture between $26 million and $28 million of increased adjusted EBITDA. That's what I'm getting at. I know it's not all going to come in any one year, but just hopping here on what you're telling.

Yes, you had that right.

There are no further questions. So I'll hand you over to Majdi to conclude the conference.

Thank you. Thank you all for joining our call today on such short notice. Listen, we continue to be excited about our business and where we are today. This is another step in creating, frankly, what I believe to be the most competitive, most capable wheel company in the industry, and we're excited about that. Thanks very much, and have a great day.

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