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Superior Industries International (NYSE:SUP)

Q2 2013 Earnings Call

August 02, 2013 1:00 pm ET

Executives

Kerry A. Shiba - Chief Financial Officer, Executive Vice President and Director

Analysts

Marcelo Choi

Operator

Good day, and welcome to the Superior Industries Second Quarter 2013 Earnings Teleconference. For opening remarks, I would like to turn the call over to Mr. Kerry Shiba. Please go ahead, sir.

Kerry A. Shiba

Thank you, DeVona, and welcome everyone to our second quarter 2013 earnings call. During our discussion today, I will be referring to a PowerPoint presentation, which as usual, we've posted on our website at www.supind.com. Joining me on the call today are Stephen Borick, our Chairman, Chief Executive Officer and President; and Michael O'Rourke, our Executive Vice President in charge of Sales, Marketing and Operations.

I'm going to start, as usual, with Slide #2 with the presentation, where I would like to remind everyone that any forward-looking statements made in this webcast, or contained in this presentation, are subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially because of issues and uncertainties that need to be considered in evaluating our financial outlook. We assume no obligation to update publicly any forward-looking statements. Conditions, issues and uncertainties that may be discussed from time to time include, but are not limited to, global competition; product pricing and mix; domestic and foreign demand; commodity prices, including metal; energy and foreign currency; manufacturing capacity, including plans to construct a new manufacturing facility; productivity; capital investment; operating and manufacturing challenges; as well as our strategic and operating plans. Please refer to the company's SEC filings, including our annual report on Form 10-K for a complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

I'm going to jump right into the presentation this morning, and we're going to generally follow the same format that we used in the last call. So as usual, you may want to begin by taking a look at Slide #13, and I'll provide you just a very brief overview.

Slide #13 should be the condensed comparative income statement for the second quarter. Revenues for 2013 declined 7% from the same period last year, and that was on an 11% decrease in unit sales volume. Despite the volume and revenue decline, however, gross profit was improved by $521,000, and net income was down only slightly at $90,000 short of last year. It kind of got lost in the rounding as EPS was flat at $0.23 per share.

With this brief overview in mind, let's go back to the beginning of the slide deck and turn to Slide #3 please, where I will begin the detailed discussion. Slide #3, which is titled North American Vehicle Production versus Superior shipments, is where we frame the market environment in which we operated. We changed the look of the slide a little bit to hopefully make it a bit easier to digest, but the information provided, basically, is unchanged.

As most of you know, North American Vehicle Production is a good overall indicator of the demand driver for our products. I will provide some information on customer and product mix in just a few minutes, which are important to help you understand distinctions between the overall market and Superior's specific performance.

But first, let's start with the broad market view. So if you'll take a look at the red line on the graph, you will see the market reach, roughly 4.2 million units in the second quarter of this year, which represents a 6.5% increase over what was a strong Q2 of last year. Although it is not shown in the graph, this was the strongest production rate since the second quarter of 2002.

Second quarter of this year also was up on a sequential basis, increasing just under 6% over the prior Q1. The trailing 12-month build rate also was improved and reached 15.7 million vehicles. Superior shipments are shown in the blue line. Second quarter unit sales volume was down 11% year-over-year and was off 4% sequentially. The data quickly points to a market share decline, which was about 4.4 percentage points compared to last year and 2.3 percentage points sequentially. I'll talk more about this in just a few minutes.

If you would now please move to Slide #4, this is where we will peel back the production analysis by major customer. Let's review the format briefly. The chart on the left shows our top 5 customers individually, with the remainder of the OEMs grouped together in the last set of bars. For each customer, we provide year-over-year production volume comparisons for the quarter, including a product category breakdown between light trucks, which is shown in blue; and passenger cars, which is shown in red. Just to confirm, recall that the light truck category includes SUVs, vans and crossover vehicles in addition to light- and heavy-duty pickup trucks.

We also show the aggregate industry comparison by vehicle category in the chart on the right, where you can quickly see the growth rate for both passenger cars and light trucks was relatively even.

As we look at the data on the slide, keep in mind that total industry production was up 6.5%. So here are a few key observations. Ford is the #1 customer on our portfolio. Assembly rates for Ford, at plus 11%, increased at a substantially higher pace than for the industry overall. It drove about a 1 percentage point gain in market share. The light truck category drove the improvement at plus 14%, a healthy growth rate which matched the previous quarter.

Commentary on the slide provides some detail about the major programs driving the change. The Lincoln MKZ is a new program for us, when compared to the same time last year. And we also sell into the other programs noted, except for the C-Max.

GM is our second largest customer. Their Q2 production rate was about flat with last year, resulting in a loss of 1 share point. Their vehicle category mix shifted a bit with modest light truck growth driven by the GMT900 production. As you may recall, the GMT900 has been a highly important program for us. The modest decline in passenger cars reflects the decrease in the Chevy Malibu, a program on which we no longer participate.

Chrysler's rate of production was up about 5% overall. While the rate of the increase was greater for passenger cars at plus 8%, growth in units produced, actually, was higher in light trucks. Light trucks comprised almost 3/4 of Chrysler's total vehicle production for the quarter, which is also where our business with Chrysler is concentrated.

Production for the international brands is, in aggregate, was up 8%. For the OEMs affecting Superior, Toyota increased almost 7%, while Nissan was up about 14%. BMW and Volkswagen were at plus 11% and 6%, respectively.

Turning to Slide #5, which is titled Superior Shipments Year-over-Year Comparison. Let's take a look at what drove the company's volume changes for the second quarter. We are using the same format as just shown, except now the focus is on Superior shipments to our customers.

I mentioned previously that our 11% volume decline resulted in a 4.4 percentage point decline in market share. Underneath the surface, there were some unusually large changes in the mix this quarter. Before discussing individual customers, let's start with an overall comparison by vehicle category, which is shown in the chart on the right. With second quarter shipments that were about flat in the light truck category, our overall decline was driven entirely by a 33% decline in volume for passenger cars.

The next change in mix was difficult to discern from the chart. Our sales shifted about 3 percentage points away from the international brands and into the domestics.

Now let's look at our major customers. With our largest customer, Ford, our aggregate volume was flat, as nice growth in the light truck category offset a decrease in passenger cars. The light truck growth primarily reflects increases on the Explorer, Expedition, Flex and the F-Series. The principal declines in the passenger car category were for the Fusion and Mustang. We did see nice growth on the Lincoln MKZ.

At GM, our #2 customer, we were down 21% overall. The decline clearly reflects the loss of the Malibu program, which we have commented on in prior calls. We did see some gains on other GM passenger car programs, including the Chevy Volt and the Cadillac ATS.

In the light truck category, we were flat on the GMT900 as this platform moves closer to a complete changeover to the new K2XX. We also saw a nice increase in the Buick Enclave.

At Chrysler, our business largely is focused on light trucks. A 5% overall decline reflects our exit from the Jeep Grand Cherokee program and other decreases for other parts of the Jeep brand. What can't be seen in the surface are nice increases for the Dodge Ram truck and the Chrysler Town & Country van.

We have a large year-over-year pickup at Toyota, where we were up almost 26%. The growth reflects big gains on the redesigned Avalon. For Q2 of this year, our shipments to Toyota surpassed volume with Chrysler by 7%. The rate of decline at Nissan was significant at minus 48%. We've talked in previous calls about the ramp down on the Sentra.

The decline on the Maxima program largely reflects the change in vehicle production rates. We also were down on the Versa, the Xterra Frontier program and the Altima.

Finally, we also experienced declines at BMW and VW, although the latter was relatively small in number of units. So as you can see, there were many shifts in the sales mix when looking on a program-to-program basis. While we believe some of these changes were timing-related or related to vehicle demand, we also have been increasingly more selective when bidding for new business due to our ongoing capacity constraints. While we know we have lost program bids to highly-aggressive competition, our proven product mix is having a positive impact on average selling price and margins. We also continue to run at high capacity utilization rates overall, albeit, at levels that better accommodate good factory maintenance practices and improved efficiency.

If you would now turn to Slide #6, we can look at the sequential sales volume comparison. From the surface, Q1 to Q2 changes for the market tell a somewhat similar story as reflected in the year-to-year change. As I mentioned earlier, Q2 assembly rates were up 6% on a sequential basis. The growth rate for light trucks was 8% versus 4% for passenger cars. The overall mix between domestic and international brands was unchanged.

Now let's look at some of the details. Ford's increase was at 4%, driven by the Fusion and Econoline. GM also was up 4%, with growth on several programs. Chrysler had the largest increase of the domestic brands at plus 15%, with substantially all the growth occurring in the light truck category.

The international brand, in aggregate, grew by 5% sequentially, although Toyota was up almost 10%. When looking at Superior, our shipments declined sequentially, but at a lower rate than in the year-over-year comparison. The sequential comparison shows a 4% decline, less than 1/2 the 11% decrease from 2012. Once again, there were substantial differences when you look at the underlying mix.

Our volume shifted roughly 2 percentage points back towards the international brands. This degree of change from 1 quarter to the next demonstrates how dramatically specific program activity can affect our overall position in the market. This type of short-term change also reflects how challenging it can be to run this business.

Our volume was down at all domestic brands. The largest decline was at GM and reflects timing impacts related to the changeover of the GMT900 to the K2XX. On the plus side, we continue to see growth for Toyota in passenger car programs. Although our volume with Nissan remains well below last year, we did experience rather significant sequential recovery, primarily on the Altima and due to the Note, a new vehicle which was going into production launch.

And next, we'd like to turn to Slide #7, which focuses on net sales dollars and a year-over-year comparison for the second quarter. This slide is in the familiar format used in the past, so I will move right to the data. My focus will be on the quarterly comparison. At the top, you can see the unit volume decrease at 11% was larger than the 7% net sales decline. The remainder of the data will show components of the sales dollar comparison. You can see on line #3 that lower volume was a dominant factor in the sales comparison, which is of course, no surprise. However, I also would like to address a couple of additional items. First, in the bottom section of the table, you can see the changes in aluminum had a minor net impact overall. However, while the price of aluminum was down compared to last year, this impact, partially, was offset by an increase in aluminum content in the wheels sold.

Next, I would like to point out the last line of the schedule, which is labeled Price/Mix. This comparison, again, was positive, which is the fourth quarter in a row when looking at year-over-year changes. Also, the magnitude of improvement has continued to grow. As I noted a few minutes ago, improvement in our overall product mix reflects an improved balance between opportunities in the market and our manufacturing capacity. And while our mix is better balanced, I do want to note again that some very aggressive prices continue to be bid into the market by our competition. This activity will limit the extent to which we can continue to enrich our mix.

If you now would please turn to Slide #8, let's review what happened with gross margin. The volume impact is, of course, negative, however, this impact was mitigated somewhat by actions taken to reallocate volume to our lower cost Mexico capacity. We will continue to focus on optimizing our capacity loading to the extent possible.

The next item is Mix/Rate which, again, addresses product mix improvement as discussed on the last slide. The only difference here is the product mix is also picking up -- I'm sorry, the product cost has also picked up in the gross margin analysis.

The next 3 items are now material, so let's go to the last item, which is labeled Plant Performance. This item fundamentally measures the change of manufacturing cost performance from period to period. The impact of the change in depreciation is shown separately.

In aggregate, we estimate the change in plant cost performance at roughly $1 million negative. However, while still negative, this variance did improve sequentially. Cost management was made more challenging this quarter by the volume decline, so we are pleased that the year-over-year variance continues to improve overall. The manufacturing efficiency being achieved at our Mexico operations continue to be a bright spot. However, it is very important that we continue to increase flexibility to optimize capacity loading. This will allow us to leverage the lower cost improvement operating efficiencies in Mexico to the greatest extent possible.

We also are pleased to see continued signs of stability and improvement being achieved in our smaller U.S. facility. These benefits are continuing to accrue from making key capital upgrades in 2012, some of which did not become operational until the fourth quarter of last year. Our challenge has remained to achieve similar improvements in the larger of our 2 U.S. facilities. These challenges not only relate to facilities' age and equipment reliability, but also to process capability in the face of an increasingly challenging product mix.

We have discussed in past conference calls that we are committing capital to address these issues and make continual improvements on all of our manufacturing facilities. Our capital spending for Q2 for 2013 was over $9 million, and we now have invested about $17 million for the first 6 months. This compares to $23 million spent in all of 2012.

As a final note on this slide, capacity utilization in the second quarter remained high, but for the first time in literally years, the rate dropped to below 100%. While conventional wisdom may conclude that cost absorption is hurt by the decline in volume, there are also offsetting benefits such as improved factory maintenance, equipment reliability, reduced labor and over -- and overtime and less overall disruption in the operations flow. We do believe that some of these benefits were reflected in the continued improvement in factory cost performance for the second quarter.

Turning next to Slide #9, there really is not a lot more to highlight regarding second quarter 2013 income performance, but I will briefly address a few items. At this point, you may also want to, again, refer to Slide #13, which is the comparative income statement for Q2. SG&A expense is $400,000 lower for the quarter when compared to last year, primarily reflective of lower outside professional fees. Interest income was up modestly, and we had a slightly higher foreign exchange gain for the quarter. And finally, the effective income tax rate for the current year was 36%, which compares to 24% for Q2 of 2012.

The current year tax rate was high due to certain nondeductible expenses recognized during the second quarter. Last year's relatively low tax rate benefited from the release of FIN 48 accruals due to the expiration of an audit statute.

The next slide, Slide #10, addresses the balance sheet and cash flow. These statements are shown on Slide #15 and #16, respectively. Cash and short-term investments ended the quarter at almost $207 million, which is about flat with the balance at year end of 2012. Accounts receivable increased roughly $8 million compared to unusually low balances at the end of 2012. Lower values at the last year end largely reflect the impact of taking maintenance shutdowns at the end of 2012, during which very little shipping occurred.

The inventory investment is down slightly from the prior year end, with some shift between finished goods versus raw material and work in process. We will continue to use finished goods inventory to buffer the impact of short-term fluctuations and customer demand.

I discussed capital spending previously. And I'd also like to comment on the operating cash flow comparison shown on Slide #16, which does look a little bit odd on the surface. While there were a variety of factors relating to the year-over-year difference, most of the change is timing in nature and related to payments for value-added tax in Mexico and for purchases of aluminum. And working capital on the current ratio continued to remain very strong.

On Slide #11, we're going to provide you a brief update on our new manufacturing facility. Since the last conference call, we have made important progress on our new plant in Mexico. We have assigned a full-time team to manage the project from construction through startup and finally, into operation. The building construction is well underway. The site preparation was delayed about 1 week due to heavy rain, which is unusual for the area. But we now have foundation work beginning and have key facility-related equipment on order. Machinery and equipment decisions are proceeding with urgency. We've done a lot of assessment regarding equipment in order to balance needed capability and available improvements with startup and operational risk. Our cost estimates remain in the $125 million to $135 million range.

So finally, in summary and conclusion, if you could turn to Slide #12, please. North American vehicle production remained strong. Our share declined in the growing market for a variety of factors we discussed, and as we balanced manufacturing capacity with market opportunities that best dovetail our circumstances with our customer needs. While factory utilization rates have declined, they still remain at relatively high rates. Operations in Mexico continue to run smoothly, with a focus on optimizing capacity loading to keep our low-cost facilities fully utilized. And while operating challenges continue in the U.S. overall, our smaller U.S. plant continues to achieve improvement. As just discussed, we continue to push ahead with our new wheel plant. And finally, our liquidity remains strong to continue to support our major investments.

Our Form 10-Q for the second quarter 2013 will be filed later today with the SEC. And once filed, the 10-Q also will be available on our website at www.supind.com.

And with that, I'd like to thank each of you for attending our call today, and thank you for your attention. And we will now open the lines to take your questions. SO I'll turn it back to you, DeVona.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our question from Jimmy Baker with B. Riley & Co.

Marcelo Choi

This is actually Marcelo Choi in for Jimmy. First question that I had, in terms of the volume declines, is there a way that you can sort of quantify in terms of the volume loss. What was it -- was it due to mix, program timing, customer shutdowns and just selective bidding? I guess, just even focusing more on the selective bidding, how much volume did you think you lost because of this more rational bidding process?

Kerry A. Shiba

We have to go back probably 2 to 3 years to really try to keep counting that up, Marcelo, because we've been in a very high capacity utilization since really starting in the second quarter of 2010. So it's been -- the ongoing process of -- and with the lead time involved in bidding for programs, we've been getting careful about matching our availability with the programs that are out there, starting quite some time ago. What -- to some degree, that kind of continual remaining burn-off of some low-priced program that everybody was out grabbing after the recession. But to really put a number on that, would be very, very difficult for us.

Marcelo Choi

Okay. But is it fair to say, I guess, just looking out in the future quarters that -- I guess, was there anything special in terms of this quarter? It was a pretty steep decline versus North America production. Was this sort of just a 1 quarter phenomenon? Or do you sort of expect that trend to continue in the next few quarters or so?

Kerry A. Shiba

At this point in time, we would expect our run rate is -- well, first thing, just to remind you that if you just look at what had happened from Q1 to Q2, we had a lot of shifts between international and domestic. The share comparison was quite a bit different from the sequential look versus the year-over-year look. So I'll just continue to remind you that from quarter-to-quarter, lots of stuff can happen. You just got to really get the detail to understand. They are not, almost by definition, necessarily indicative of long-term trend. I can tell you our run rate right now is running somewhat in line with what we have seen for Q2. So that's kind of a near-term expectation at this stage. But going into next year, it's still really comes down to circumstances around individual programs.

Marcelo Choi

Okay. And just shifting over to the gross margin story. It looked like that performance was still a negative this quarter, but much improved sequentially. How much of this was shifting to more efficient Mexico facilities versus improvements in the U.S. plants? And just looking ahead in the next few quarters, where do you think you'll be -- in terms of Mexico facility utilization rates, how are they going to sort of compare in the next few quarters versus what you did in the back half of last year?

Kerry A. Shiba

First off, I'd say, a little bit less than one half of the improvement that we are seeing is improvement that's occurring in the U.S. at this point in time in our smaller U.S. facility. So we're very pleased about that. Year-over-year changes, I guess, when you look at that from that perspective, with the objective to keep Mexico filled and the objective is to keep them in line with last year, where they were running at high utilization rates. So we'll continue to try to load as much of our demand into those facilities. It's not perfect. We don't have every program qualified at every plant in our system. That's just not a practical possibility. It would be an extremely heavy investment with regard to tooling to try to do that. But the capacity utilization rates for the Mexico facilities in Q2 were down a bit directionally from what have -- from what we achieved in the fourth quarter of last year. With the lower demand levels that we're running based on how the product mix looks at this point in time, our expectation is we can get the utilization rates at Mexico back up to where they have been running, overall, from last year.

Operator

[Operator Instructions] And there are no further questions at this time. I'd like to turn it back over to you to Mr. Shiba, for any additional or closing remarks.

Kerry A. Shiba

Well, again, thanks, everybody for joining the call today and for your attention. It was -- I guess, overall, at this quarter that we were very pleased about the operating performance of the business in the context of what was happening on the sales side. So we look forward to talking to you in about 3 months. Thank you, everyone.

Operator

Thank you. This does conclude today's conference. We appreciate your participation.

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