Superior Industries International Inc. (NYSE:SUP) Q2 2016 Earnings Conference Call July 27, 2016 8:30 AM ET
Don Stebbins - President & CEO
Kerry Shiba - EVP & CFO
Jimmy Baker - B. Riley & Company
Tristan Thomas - Sidoti & Company
Hamed Khorsand - BWS Financial
Brian Sponheimer - Gabelli & Co
Good day, everyone. And welcome today's Superior Industries Second Quarter 2016 Earnings Call. For opening remarks, I would like to turn the conference over to Kerry Shiba, Executive Vice President and Chief Financial Officer. Please go ahead.
Thanks, Carolina. And good morning everyone, and thanks for joining us. During our discussion today, I will be referring to our earnings presentation, which is available on the Investors section of our website at www.supind.com.
Joining me on the call today is Don Stebbins, our President and Chief Executive Officer.
I’m going to start as usual with the second slide of the presentation, where 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. 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. Specific conditions, issues and uncertainties that may represent forward-looking statements are noted in detail on the slide. I would like to point you to the Company's SEC filings, including our annual reports on Form 10-K for a more complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.
We also will be discussing or providing certain non-GAAP financial measures today, including value-added sales, adjusted EBITDA and adjusted EBITDA margin. Reconciliations of these measures to the most directly comparable data presented in accordance with GAAP may be found in the financial tables included with our second quarter 2016 earnings press release and in the appendix of this presentation.
With that, I now would like to turn the call over to Don Stebbins, our President and CEO. Don?
Thanks, Kerry. Good morning, everyone. And thank you for joining us today. Please turn to Slide 3 of the earnings presentation. I am very encouraged as the second quarter marked another period of significant progress in our company's evolution. Earnings per share more than doubled to $0.52, driven by combination of better than expected unit volume, favorable product mix and ongoing cost performance improvement. We continue to wining the market with a 13% year-over-year increase in unit shipments to 3.1 million wheels, outpacing production growth of 2.4% in the North American light vehicle market. This was driven by higher demand on our passenger car programs, as well as sustained growth in many of our largest light truck programs.
Second quarter value added sales increased 15% to over $101 million reflecting higher unit volume and favorable product mix, and importantly we continue to make progress and balance in our business with some larger, more value added wheels with the 32% increase in wheels, 19 inches or greater. And we expect this trend to continue over the longer term. Despite our strong growth in units and value added sales, lower aluminum value which we passed through to our customers drove 1% net sales decline in the quarter. Kerry will provide additional details about this in a moment.
Moving on to Slide 4. Second quarter net income more than doubled to $13.2 million compared to $6.5 million for the same period last year. As I mentioned EPS for the quarter was well over double that of the prior year. Second quarter adjusted EBITDA increased 38% to $27.9 million, and as a percentage of value added sales adjusted EBITDA margin was 27.6% expanding by 445 basis points year-over-year. The strong unit volume increased, product mix and cost performance improvement drove the increase and adjusted EBITDA. Cost performance continue to benefit from our new facility in Mexico, which operated a higher utilization rates as compared to the ramp up which occurred in the second quarter of last year.
Please turn to Slide 5. As part of our long-term strategic plan, we continue to focus on driving higher capacity across our manufacturing platform. In a second quarter we benefited from the ramp up of our 500,000 wheel expansion in Mexico. We also continue to make progress toward our goal of operational excellence. We have significant opportunities remaining to improve how we run our business which will unlock additional capacity in our current footprint. Two years ago we thought our annual wheel capacity was approximately 12 million units. And we've surpassed that today despite having closed the facility at the end of 2014. Now we are targeting future capacity closer to 14 million units with a goal to get there by the end of 2018. In the near term, we are capitalizing on opportunities to maximize the number of wheels we can provide to our customers. We are in the very early stages of a new relationship with a Chinese wheel manufacture with a purpose of providing additional flexibility when sourcing after programs as well as supporting our customers in other global locations.
In addition to capacity we are also focused on further enhancing our competitive offering by expanding our inhouse finishing capabilities. As we discussed on our last call, this quarter we initiated investments on two new capital projects which will expand our finishing capabilities in Mexico. This new equipment will allow us to provide a wider range of products to support our customers. These facilities are expected to launch in mid to late 2018.
We continue to expect the total cost of these projects to be in the neighborhood of $25 million, split relatively evenly between 2016 and 2017 with the 2016 portion reflected in our outlook. We believe combined with our other investments, these projects will allow us to further enhance our global competitiveness and drive long-term market share gains by bringing more complex, higher value added wheels to our customers as they look to further differentiate their product offerings.
Superior's continued operational improvements and commitment to quality and customer service are also being recognized by our customers. I am very pleased that in the second quarter we received Toyota 2015 Quality Certificate of Achievement Award as well as Mazda 2015 Supplier of Excellence Award, a first for Superior. Both of these achievements are selected based upon outstanding performance, quality and customer centric innovation. Additionally, in the second quarter we were awarded our first program ever by a global OEM establishing a new and important customer partnership for our company. This is an indication of the progress we are making as we strive to be a best-in-class manufacture in our market. And we thank all of our employees for making this possible.
I'd now like to hand the call back to Kerry who'll provide additional details on the quarter.
Thank you, Don. I'd now like to provide a more detailed overview of our financial performance for the second quarter of 2016. So if you could go now please to slide 6. As Don mentioned, Superior shipments increased 13% to 3.1 million units in the second quarter compared to 2.7 million units in the same period last year. Our rate of the volume growth once again significantly outpaced North American light vehicle production, which was up about 2.4%. This marks the fourth consecutive quarter Superior has outperformed the market. Similar to what we saw last quarter, the year-over-year improvement was mainly driven by significant growth in passenger cars, and in particular the Chevrolet Malibu which increased by 207,000 units over last year when the program was just beginning.
We also achieved overall growth in the light truck category which include pick up SUV and crossover with the most significant gains on the GM K2XX platform which increased by 97,000. The K2XX is now our largest program overall and will be supplemented further by the launch of additional real program later this year. Overall shipments across the GM continuous to be strong with year-over-year growth of 35% in the quarter, partially offsetting this increase was a volume down of our participation on the Cadillac SRX.
Our second largest volume increase by customer was for Nissan which was up by more than 75% primarily driven by the continued ramp up of our new Sentra and Kicks programs. We also held solid growth for Toyota which was up 11%, as we continue to benefit from the ramp up of our new counter program and strong volume for the Sienna and the Highlandar.
At Ford, our largest customer, our unit shipments declined by 2% overall. We were up in the light truck category with strength in the Explorer and in increase for the Expedition for the modest decline in the F-Series reflect the planned roll up in certain program which we discussed last quarter. A decline in volume for passenger cars offset the improvement in light truck, primarily driven by the Fiesta and Focus which were anticipated as we near the end of this model year programs.
I also want to comment briefly on the sequential comparison. Unit shipments were down roughly 3% in the second quarter compared to a very strong first quarter. We saw sequential increases on several programs including the K2XX, the Ford Explorer and the Toyota Highlandar. While new launches from the Nissan Kicks and the Ford MKZ also contributed significantly to second quarter volume. By far the most significant declines is for the Chrysler Town & Country, a roll off we have discussed with you previously.
Moving to Slide 7, let's take a look at the year-over-year change in net sales and value added sales. The graph at the top also reconciles these two sales figures. Net sales were $182.7 million this quarter, a decline of $1.2 million or 1% when compared to the prior year period. The significant increase in volume contributed $22.4 million. The overall decline was caused by $25.4 million in lower upcharges and aluminum value which are passed through to our customers. The remaining items affecting the comparison were minor. Value added sales in the second quarter of this year were $101.2 million, an increase of $13.6 million or 15.5% compared to the second quarter of 2015. Similar to the previous quarters, higher unit volume was the main driver of value added sales growth contributing $11.8 million. This was followed by favorable price/mix which contributed $4.2 million over double the benefit we experienced in the first quarter. From the remaining items again are relatively small.
Turning to Slide 8. Our second quarter adjusted EBITDA increased 38% year-over-year to $27.9 million or 27.6% of value added sales, an increase of 445 basis points when compared to the same period last year. As noted at the bottom of the slide, adjustments to EBITDA are related to carrying cost for plant close at the end of 2014 and were approximately $143,000 in the second quarter of 2016 which compares to $1.1 million in the prior year period.
As you can see on the chart, unit shipments growth and product mix were by far the largest factors in driving the year-over-year increase in adjusted EBITDA, contributing $6.5 million of the $7.6 million increase. The impact of the lower Peso versus the dollar contributed $1.7 million and favorable timing of the pass through of aluminum cost to customers along with lower metal alloy costs contributed an additional $2.1 million.
Overall cost performance also had a positive impact similar to what we observed last quarter; we manufactured a higher proportion of our overall volume in Mexico this year, where our costs are lower than in the US. We also benefited from additional operational efficiencies for our newest plant in Mexico which operated at higher utilization rate in the second quarter of this year as compared to the ramp up the plant underwent during the same period last year. Cost performance also was affected by operating inefficiencies during certain product ramp up this quarter.
Slightly offsetting the significant volume and product mix improvement in the second quarter was $1.8 million increase in SG&A expenses which reflect increase accruals for incentive compensation. And lastly, the other category includes several items including a higher project development costs when compared to last year.
I'd also like to comment briefly on the sequential quarterly change in adjusted EBITDA which is available on the appendix of slide deck on page 15. Although volume was down slightly in the second quarter, improved product mix more than offset the volume impact. The 1% sequential decline was driven by a few items including higher incentive compensation accruals and SG&A, and increased project development cost which is captured in the other column along with the variety of smaller items. Timing of aluminum pass through was slightly positive as was cost performance where the comparison again was affected by previously mentioned operating inefficiencies.
Turning to Slide 9. I'd like to conclude my comments for the brief looking at our cash flow and capital allocation. Operating cash flow was $24.5 million in the first half of 2016, compared to $25.2 million in the first half of 2015. The change is primarily resulted from higher working capital, partially offset by higher net income year-over-year. Capital expenditures were approximately $11.6 million in the second quarter compared to $8.4 million in the second quarter of 2015. The increase reflects investments related to two new capital projects which Don mentioned will expand our inhouse finishing capabilities.
We also continue to return cash to our shareholders. During the quarter, we paid a cash dividend of $0.18 per share and repurchased 51,186 for a total cost of $5.7 million. Year-to-date through July 26, we have returned approximately $27.3 million to shareholders for dividend and share repurchases, a 60% increase compared to $17.1 million returned to shareholders in the first half of 2015 and a reflection of our confidence in our long-term growth plans. We have approximately $46.7 million still available under the $50 million share repurchase program which is approved in the first quarter of this year.
With that I'd now like to turn the call back over to Don who will walk you through our expectations for 2016.
Thanks, Kerry. Moving to Slide 10 of the earnings presentation. Let me walk you through our updated outlook for 2016. In my remarks I'll be comparing today's updated guidance to our prior guidance provided on April 19th. As we discussed, we are seeing increasing demand from many of our customer programs and as a result we are increasing our top line guidance to reflect this demand along with the new program launches expected in the back half of the year. We now expect 2016 unit growth of 6% to 8% driven by better than expected second quarter volume and higher than originally forecasted demand in the second half of the year. As a result, value added sales are expected to be in the range of $395 million to $403 million, an increase of 9.5% to 11.5%. This compares to our previous full year 2016 outlook of 3% to 6% unit growth and value added sales of $380 million to $395 million.
Our outlook for 2016 net sales is now $710 million to $725 million, compared to our previous guidance range of $690 million to $710 million. As you know, the lower growth rate of net sales in comparison to the growth rate of value added sales reflects a decline in the value of aluminum year-over-year which is passed through to our customers and is excluded from value added sales. We've also raised our expectations for adjusted EBITDA to a range of between $102 million and $108 million. At the midpoint this represents an increase of 38% compared to the prior year, an increase of 11% compared to our previous 2016 outlook. Our updated guidance corresponds to adjusted EBITDA as a percentage of value added sales of 25.8% to 26.8%, an increase of 475 to 570 basis points year-over-year compared to our previous guidance for an increase of 300 to 370 basis points.
That being said, I'd like to note that we do expect lower adjusted EBITDA in the third quarter compared to the fourth quarter due to the normal industry downtime and model changeovers combined with the operating efficiencies related to certain program ramp ups which began in the second quarter and will continue through the third quarter of the year. More specifically, we expect our quarterly EBITDA run rate to be relatively consistent throughout 2016 with the exception of the third quarter due to the factors I just discussed.
Looking ahead, we see significant opportunities to drive greater levels of operating efficiency, capacity and favorable program mix as we continue to make progress toward our strategic goals and drive long-term value for our shareholders.
Now with that, we turn it back over to operator for questions.
We will go ahead and take our first question from Jimmy Baker with B. Riley & Company. Your line is open.
Hi, good morning, Don. Good morning, Kerry. Could you just help us understand the 200 basis point delta between the unit growth rate and the growth in value added sales in the quarter? Is that a function of more favorable mix?
Yes. Jimmy, that's exactly what it is.
Okay, helpful. And so then you mentioned the 14 million capacity target in 2018. I guess what would you view as kind of an optimal utilization rate of that capacity? And how much work do you have to do it to fill in your backlog to get to that utilization rate?
Yes. I think it's comfortable level for us if that would be kind of in the 95% range allow us to flex relatively easily. In terms of work to get to that capacity level I think there is fair amount of work to be done to get there. In terms of filling that, in terms of orders I think that's part of the trick so to speak managing, we are bidding on programs in 2018 and 2019 and trying to look at the macro environment and what that will generate program by program versus what will have ready for capacity I think that's exactly what we work on everyday.
Okay. And any update on the M&A hunt or potential JV opportunities that would further increase that capacity or present you with a more global footprint?
Yes. In the remarks we mentioned a little bit of a new manufacturing arrangement that we have with a Chinese wheel supplier. I'd say in its infancy stage. We are just starting to receive some wheels literally last night in Mexico; I think we received about 300 wheels that we will finish and then move on to the customers. So I mean it is beginning, starting but again it will be a slow, lengthy ramp up I guess. What I would expect and we'll see how that relationship grows over the next few months.
Okay, great. Just last one for me. Any specific programs to call out in terms of the upside from your prior expectation and then just interested, Don, in your high level view of the auto cycle here. Are you looking for beyond 2016, are you looking for much improvement in production volume over the next couple of years? Do you see a plateauing from here or any reason to be concerned that a meaningful could be on the horizon?
Yes. So if you remember back to kind of how we've talked about this for the past year probably we always felt it would be a more plateau type environment as we look at the back half of this year and early into 2017, there really isn't anything that changes that view. There may have been I think ISS brought their numbers down a little bit but again more to the plateau level rather than substantial growth that they had in 2017 and 2018. We continue to look at it that way that somewhere around the high 17s is where production will be in North America for the next couple of years.
Thanks. And just any specific programs to highlight in terms of this year's upside versus your prior expectation?
Well, certainly the Malibu has been a great program for us that we launched, sales have been quite good. The K2XX has been strong. There are numbers as Kerry mentioned Explorer have been good this past couple quarters, so there are number of programs that have been -working, I don't think from all perspective one over the other is -- I wouldn't call it how it is a driver.
We do have a couple of new programs in the fourth quarter starting which will be large diameter wheels with some -- it finishes items so those are been planned on, Jimmy. So they are not new addition but they are -- they are not new additions for our expectations but they are kind of re-supplies additions to our portfolio overall. I think in general it has been again Malibu has been a big driver. But I think in general as time is progress over first and the second quarter our overall outlook in the second quarter or on the second half is become more bullish.
And we'll go ahead and take our next question from Tristan Thomas with Sidoti. Your line is open.
Good morning. Just actually I had one quick question. Could you maybe give us an update from the other internal initiatives you have going on like just the ERP and the shared service center, is that on track?
Our shared service center is open and operating, has been for a couple of months now. So that's gone well. ERP is still being implemented, I think the first site will go in October; we will follow with the other sites in early January. So we are on plan to go ahead and get that up running as soon as we can.
And we will go ahead take our next question from Hamed Khorsand with BWS Financial. Your line is open.
Hi. Could you talk a little bit about the product mix and is the beneficial product mix you have been seeing the new norm?
Well, certainly what we have been trying to do is balance the portfolio. I think historically we played it at front level that we did not have, let's call, I'd call our representative share of the larger diameter wheels the more complex wheels and so we have made concerted effort to try to play in that space. And we've been very fortunate the customers have supported us in that move. I think we brought some great ideas to the customers and that's played well as well. And so, yes, I mean that's certainly part of the strategic plan here is to have more balanced portfolio of product to go to our customers with.
But they are still will be balanced too, I mean there won't be some high volume smaller diameter wheels with basic finishes, using as many wheels as we do overall, but you have to expect it's always going to be some drastic mix from high to low.
Okay. And then what could happen in customer design changes in the next four months to change the product mix dynamics?
Well, I think there is a demand, an increasing demand for different styles of products to further differentiate the vehicles. And so what we see from the customer development centers are -- let's call it cutting edge designs that we are working with to see to ensure that they make the cuts so to speak in terms of the characteristics that a wheel needs to have. And so it's really kind of marrying those two factors together with the design studio and a customer would like versus being able to produce it on a mass scale.
Okay. And final question did you use any 24x7 scheduling in the quarter?
Yes. Yes. There are number of operations throughout the facilities that are in 24x7 now.
We will take a next question from Brian Sponheimer from Gabelli. Your line is open.
Hi. Good morning, Don. Good morning, Kerry. How are you? I guess my question isn't Superior specific, it’s more industry related and given the makeshift and maybe some excess inventory that's out there, have you seen any of your customers on the small car side started adjust their own production downward or some of the smaller car platform you are seeing?
I wouldn’t say Brian that we have noticed any impacts at our level. I am not sure if again our mix is necessarily matching up to the inventory points that you are pointing tom but nothing on our side.
Yes. We haven't seen any.
Okay. I guess the opposite of that is other than maybe K2XX, any specific crossover ramps that or SUV and truck ramps that you maybe would have anticipated heading in the year?
Well, we do have some new programs coming up in the light truck category I alluded to just a few minutes ago in the fourth quarter. So that and we mentioned Expedition and Explorer were very strong in the second quarter.
Yes. We haven't had any huge changes from our expectations when we started the year. Again probably Malibu is a little bit higher than expected. And MKZ maybe a little bit better than expected but not over -- not stunningly significant.
Okay. And then going to the Chinese arrangement, can you maybe talk about how that really came about and with the understanding it's in infancy just ideally what sort of arrangement this would be by year or so down the road assuming everything goes well?
Yes. I think for us I mean we've talked about it strategically for a while trying to increase our capacity in a low cost way and make sure that we can play up and down the product line to all of our customers all of the time or as much as we can. And so we've had a number of discussions, a couple guys inside Superior have known this company for more than a few years so it's a little bit natural in terms of those discussions to start there. And it turned out that there was an opportunity on a program here where we could get them up to speed relatively quickly as kind of let's see how it works situation and so 300 wheels arrived last night. And we would hope to get them to 2000 wheels a week on this program and we'll see how it goes. So far it has been great and I think it can blossom into something bigger as we go forward.
And did you say the name of the company? Are you at liberty to say?
No. We are not at this point.
And we have no further questions at this time.
Great. Thank you very much for your attention and participation. And have a good day.
And this concludes today's program. Thank you for your participation. You may now disconnect.
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