Superior Industries International, Inc. (SUP) CEO Majdi Abulaban on Q2 2021 Results - Earnings Call Transcript

Superior Industries International, Inc. (NYSE:SUP) Q2 2021 Earnings Conference Call August 4, 2021 8:30 AM ET

Company Participants

Clemens Denks - VP, Treasury

Majdi Abulaban - CEO and President

Tim Trenary - EVP and CFO

Conference Call Participants

Gary Prestopino - Barrington Research

Mike Ward - Benchmark

Operator

Good day, and welcome to the Superior Industries Second Quarter 2021 Earnings Teleconference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Clemens Denks. Please go ahead, sir.

Clemens Denks

Thank you. Good morning, everyone, and welcome to our second quarter 2021 earnings conference call. During our discussion today, we will be referring to our earnings presentation, which along with the earnings release, is available on the Investor Relations section of Superior's website. I'm joined today on the call by Majdi Abulaban, our President and Chief Executive Officer; and Tim Trenary, our Executive Vice President and Chief Financial 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 to the company's SEC filings, including the company's current annual report on Form 10-K for a complete discussion -- for a more complete discussion of the forward-looking statements and risk factors.

We will also be discussing various 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. Reconciliations of these measures to the most direct comparable U.S. GAAP measures can be found in the appendix of this presentation.

With that, I'll turn the call over to Majdi to provide a portfolio and business update.

Majdi Abulaban

Thanks, Clemens, and good morning, everyone. Thank you for joining our call to review our second quarter results. I will begin on Slide 5 with the highlights. We are pleased with our results for the quarter. Our team responded to industry-wide instability and continue to deliver solid operating performance and substantial growth over market. Our focus on executing against our value creation road map has enabled us to deliver growth across the board with value-added sales increasing 121% versus prior year, well ahead of market.

Adjusted EBITDA increased by $48 million for the quarter, driven by volume and cost performance. Our top line growth has consistently been supported by our differentiated portfolio of product technologies, enabling us to capitalize on the secular trends driving our industry, including electrification, CO2 reduction and vehicle differentiation, each increasingly demanded by OEMs and consumers alike.

During the quarter, semiconductor shortages significantly impacted OEM production schedules, presenting operating challenges for us, especially in North America, where sequential volumes declined 14%. Here, our teams responded very well.

Furthermore, these shortages also drove OEMs to shift focus to premium vehicles, which partially, by the way, supported a favorable mix for us. This combined with our disciplined portfolio strategy has resulted in continued growth in our larger wheel segment. Here, 19-inch and larger wheels actually represented almost 50% of our shipments to OEMs, growing both sequentially and year-over-year. The same growth trend is reflected in the adoption of lightweighting and premium finishes.

Collectively, our portfolio delivered 12% top line growth over markets. As we continue to cultivate our portfolio of premium technologies and execute on our portfolio strategy, we expect to further solidify our leadership position and capture long-term sustainable growth.

Turning to Slide 6. A few words on our current operating environment to just add more context to our strong results for the quarter. The right side of this slide highlights that the overall industry recovery in 2021 has fallen well short of initial expectations. Q2 production levels initially forecasted in January this year have dropped actually double-digits in both North America and in Europe, as semiconductor and other supply chain shortages continued to impact OEM production schedules.

We foresee these challenges as well as others, including rising commodity costs and increasing concerns about disruptions due to the delta variant persisting throughout the remainder of the year.

Further, we expect some impact from the partial shutdown of our German manufacturing site in the third quarter as it was affected by severe flooring event in July. I will say that our team there responded admirably. Despite this challenging environment, marked by slower production rates and unstable demand, we have been able to maintain strong operating performance, while delivering profitable growth.

Slide 7 shows more detail on how our premium portfolio has driven growth over market during the quarter. Across both of our manufacturing regions, value-added sales adjusted for FX increased 121% compared to the period in the prior year, representing 12% growth over market. This trend has been further pronounced with the favorable mix shift I mentioned earlier as OEMs shifted focus to premium vehicles. Now, having said that, our growth above market trend, as you see on the bottom left of the chart, is a continuation of the same we have seen since early 2019.

I will now move to Slide 8, which highlights our global product launches in the second quarter and really underpins my prior comments about the secular tailwind of electrification and consumer preference driving our growth. In North America, we launched content on the Mustang Mach EGT, Lucid and Jeep Compass. The wheel for the Mach-E -- for the Mustang Mach-E are made from low carbon footprint aluminum and advance both forward and superior sustainability efforts. We're very proud of that.

And we are, of course, exceptionally excited about welcoming Lucid as a new customer of Superior. In Europe, we launched content on the Porsche Macan and Cayenne, the VW Touareg and the Daimler all-electric EQE, just to name a few.

Now, here are a few interesting statistics from this slide. 3 out of our 8 launches support electric vehicles; 5 are wheels 19-inches or greater, another 5 apply premium finishes and 7 out of 8 use our lightweighting technologies. You can see the proliferation of our portfolio fundamentally is accelerating.

Moving on to Slide 9. We remain committed to executing our strategy to deliver shareholder value. Our focus now is on driving operational excellence across all of our business units and on executing our strategies to deliver profitable growth. In this regard, we are making progress on all the strategies highlighted on this slide. In terms of operational excellence, our teams have done an exceptional job driving efficiencies, leveraging global procurement, improving quality and instilling commercial discipline before and after launch. This is reflected in our gross margins globally, but especially in North America.

We have also invested in improving our manufacturing capabilities to support premium finishes and larger size wheels. And most recently, we initiated a cultural transformation to continuous improvement. This started with the deployment of a fully staffed organization of lean experts in both regions, driving Lean Six Sigma and problem-solving across the business. We see much opportunity in this journey and are well underway with many Green Belt and Black belt certifications in both regions, driving process improvements and eliminating waste.

We are also focused on executing our strategies to deliver long-term profitable growth. Here, we are well positioned to respond to the macro trends driving our industry, electrification, CO2 reduction and consumer preference for premium finishes and larger wheels.

In this regard, we now believe that we have the most comprehensive portfolio of technologies in the industry. This has manifested itself in consistent growth above market that is now accelerating, a solid book of business for the coming years, continued growth in the electrification segment through our lightweighting and aerodynamic portfolio of products, and finally, most recently, our advancements on the front of offering green products with low carbon footprint.

To this point, Slide 10 highlights the progress we have made towards our environmental, social and governance initiatives, which are critical in driving sustainable growth and furthering our long-term value creation. Our efforts, sorry, through these initiatives, we are focused on reducing our environmental footprint, increasing safety standards and protecting the health of our employees. Our efforts are now in full swing with our progress to date captured in our UN Global Compact Sustainability Report published in June. We look forward to reporting on the advancement of our sustainability efforts as we further realize our commitments and enhance our corporate stewardship practices well into the future.

I'll now address our full year outlook on Slide 11. While we expect the industry recovery to continue, albeit at a slower pace than originally anticipated, we are maintaining our guidance for the year. Our focus remains on driving enhanced profitability and cash flow. For the full year, we expect to deliver adjusted EBITDA in the range of $160 million to $180 million and cash flow from operations in the range of $110 million to $130 million. In closing, despite the current industry headwinds, I am very pleased with our results for the second quarter and remain confident that we will continue our momentum of growth above market, margin expansion and cash flow generation as the year continues.

With that said, I would like to thank the entire superior team for their unwavering commitment to hard work during the quarter as we continue to deliver value for our shareholders. With that, I will turn the call over to Tim. Tim?

Tim Trenary

Thank you, Majdi, and good morning, everyone. The second quarter of 2021 was another quarter of growth above market for Superior. Premium mix and enterprise cost structure improvements supported financial performance in an unstable vehicle production environment and in the face of a 14% sequential decline in North America shipments.

Slide 13 is the second quarter 2021 year-over-year financial results. These results reflect the pandemic induced collapse of vehicle production in the second quarter of last year. Unit shipments increased year-over-year by 102% and value-added sales increased by 132%, a reflection of the continuing shift to premium contented wheels. Net sales are up 140% on the 132% increase in value-added sales, reflecting the run-up in the cost of aluminum. Superior delivered $44.6 million of adjusted EBITDA and $195.5 million of value-added sales, a margin of 22.8%. We reported net income of $1.7 million, but a diluted loss per share of $0.26, because of dividends on and accretion of the preferred stock. This compares to a net loss of $43.2 million or a loss of $2 per diluted share in the prior year period.

As regards to the 14% sequential decline in North America shipments in the quarter, this significant decline in such a short period gave rise to stranded manufacturing costs. Further impacting the quarter is the instability in the OEM production schedules, which results in more frequent mold and equipment changeovers, which in turn results in elevated labor, scrap and other manufacturing inefficiencies. More specifically, the OEMs continue to shift production to their premium vehicles, capitalizing to the extent practicable on the limited availability of semiconductors. Our product mix shifts in concert with the OEMs and has put some constraints on certain manufacturing process capacity, which the operators have managed well.

Importantly, premium mix enterprise cost structure improvements offset some of these challenges, thereby supporting financial performance. We believe these challenges are temporary and will subside with the resolution of the semiconductor shortage. When that day comes, pent-up customer demand must be satisfied and vehicle inventories replenished, likely resulting in outsized vehicle production.

There's a second quarter of 2021 year-over-year sales bridge on Slide 14, the associated adjusted EBITDA bridge is on Slide 15. The both bridges reflect the recovery from the Q2 2020 collapse of industry production, the richer product mix from the shift to premium wheels and some benefit from favorable foreign currency exchange year-over-year. Additionally, the sales bridge reflects the rising cost of aluminum.

Free cash flow for the quarter, depicted on Slide 16 was neutral. Burdened somewhat by inventory build resulting from the production environment but benefiting from improved payables and favorable capital expenditure timing in the quarter. The company's capital structure is outlined on Slide 17. Funded debt was $633 million at quarter end, cash on hand $149 million. Net debt was therefore $484 million.

Deleveraging the balance sheet remains a key objective of Superior. As of June 30, 2021, liquidity, including cash and available amounts under our committed revolving credit facilities was $348 million.

The company's debt maturity profile is depicted on Slide 18. We have extended the maturity dates of our U.S. and European revolvers. There are no near-term maturities. The term loan matures in 2024 and the senior notes in 2025. We are compliant with all loan covenants. Our full year 2021 outlook is on Slide 19. Notwithstanding the ongoing adverse impact of the semiconductor shortage on vehicle production, we are reaffirming our prior 2021 guidance.

More specifically, we continue to expect industry production volumes to recover to pre-COVID levels over time and believe our wheel unit shipments will, therefore, be in the range of $16.9 million to $17.7 million, net sales in the range of $1.3 billion to $1.37 billion and value-added sales in the range of $740 million to $780 million, resulting in adjusted EBITDA of $160 million to $180 million.

The sales outlook assumes industry production recovery in the high single-digit percentage range across our global footprint, an increase in aluminum prices and a continuing shift to larger diameter wheels with increasingly premium content. We model a 15% to 20% effective tax rate for the year. This guidance, in addition to including an estimate of the impact of the semiconductor shortage on our business also includes the impact of the previously described temporary shutdown of our German operations because of the recent flooding in Europe.

We expect cash flow from operations to be in the $110 million to $130 million range, capital expenditures should approximate $75 million, some of which is carryover from 2020. A portion of this spend is for investments in our wheel finishing capabilities as we continued to develop our portfolio of premium wheels. Finally, we have now heard back from both of our ratings agencies, Moody's and Standard & Poor's, I'm pleased to report that both agencies have upgraded Superior to a stable outlook.

With that, I'll turn the call back to the operator Sergey for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Gary Prestopino from Barrington Research.

Gary Prestopino

In the German factory, is that up and running now post the flooding or are you still under direst there?

Majdi Abulaban

We are right now in a shutdown period for a couple of weeks in August. Fortunately, it was planned. We expect to have the plant up and running in mid-August. Right now, I would say, 70% of the equipment is running in preparation and will be fully running by mid-August.

Gary Prestopino

So that was a normal summer shutdown, which happens in Europe, right?

Majdi Abulaban

Yes.

Gary Prestopino

And then good statistics on the percentage of 19-inch wheels or greater. But if you look across your portfolio, besides the 19-inch, if you add 19-inch lightweighting premium finishes, what percentage of your units going out have those characteristics? And how has that changed year-over-year?

Majdi Abulaban

We'll be providing more stats on all of those. Recall when we talked Gary last, we talked about lightweighting. It was 6% of our shipments in 2019. It's now 12% of our shipments. You talk about aerodynamics, which is very, fairly new, almost non-existent in 2019. It's now 6% of our shipments. For both those 2 stats, we expect that to grow to about 30% of our shipments in the next couple of years. Premium finishes actually has followed a very similar trend to the larger wheel size. It's been ongoing for a while. But overall as I look at our plan and forward-looking top line, I see all these trends accelerating, and all of them, at average growth rate in the next 4 years between 10% to about 25%.

Gary Prestopino

And then lastly, in terms of the guidance, obviously, you can appreciate the environment you guys are working in, given the shutdowns and the shortages and whatever. But it looks like -- based on your guidance, if you hit the top end of the guidance, you're going to have a down 6 months in adjusted EBITDA. And then obviously, at the low-end, it's even down more further. I mean, are you anticipating things getting much worse from here that the company would not be able to hit that high-end of the adjusted EBITDA number?

Majdi Abulaban

So, let me just step back a bit with some stats and Tim can add to this, Gary. So, right now, if you ask IHS, they've backed off significantly their outlook for the business. So, for the second half, they're saying Q3 is down 6%, Q4 is flat. So, collectively, that's a down 3%. Listen, Gary, you can really -- my view on our top line, you can work the numbers. We're a company that grows above market. So, if they make cars, we're going to deliver wheels. And we're going to deliver content ahead of market.

So, right now, I would tell you that we are concerned about the second half. And I would tell you, if you look at our numbers for the year that we flagged, we are more concerned at IHS. Q3, the whole microchip thing has really been underestimated by the entire industry. No one expected Q2 to come in at that level. We were cautious with our 2021 outlook. Back in January, recall IHS was at 25%.

We’ve built a plan around 15% for the entire year. Now, we’re saying more like 8% for the entire year, I is 10%. Overall, I would tell you we are concerned about the second half, but hitting the higher range, even beating it, if the microchip issues are resolved, we’re there.

Operator

[Operator Instructions] Our next question comes from Mike Ward from Benchmark.

Mike Ward

2 things, can you give an update on what's going on with the European aftermarket business?

Majdi Abulaban

Yes, sure. Mark, the European aftermarket business, it's been always a diversification element of our business and it's really a bright spot for us in the quarter. Business grew north of 16% year-on-year. As you recall, we talked about this in Q1. There have been -- our customers have faced container issues, shipment issues out of the far East that have brought business more in our direction. We're very, very pleased with the progress there and the growth. And frankly, we're doing our best and would like to keep a lot of that upside in the coming quarters as well.

Mike Ward

Second thing on that chart on Page 8, when you were talking about some of the new technologies in the 3D or EVs, do -- are the EV wheels higher content or are you just citing that they were EVS? Because I know there's heavier weight and so there's more impact on the higher...

Majdi Abulaban

They are definitely, yes. No, I should explain that, Mike. They are definitely higher content in several ways. They're stronger. They go through our lightweighting flow forming technology. I mentioned earlier, average lightweighting technology adds 15% to 20% to the content of the wheel. Further, a lot of the EVs, Mike, they tend to use larger wheels. Again, consumer preference is driving that, and they also are driving premium finishes. So, across the board, an average EV has a lot of content on the finish side, on the size side as well as in terms of technology to drive lightweighting, take math out and to bring more strength to the wheel.

Mike Ward

So, it checks all 3 boxes across the board.

Majdi Abulaban

Yes.

Mike Ward

So, if we're looking at in North America, so in the second quarter, if you had value-added content of roughly $42 a wheel, the EV wheels are closer to $50, is that about right?

Majdi Abulaban

It depends on the size of the vehicle, right? But, directionally correct.

Operator

And we have a follow-up question from Gary Prestopino from Barrington Research.

Gary Prestopino

Majdi, I just want to ask you, you mentioned -- if you look at Slide 8 with all of the product launches here, you kind of gave us some statistics and maybe I didn't write this down, but 3 of 8 were electrification, 5 of 8 19-inch greater, etcetera, etcetera. So, -- but as I count there, I'm counting 10 vehicles that were launched. So, am I missing something here or are you just going by OEM at that point?

Majdi Abulaban

That's a good catch, Gary. Let me look here.

Gary Prestopino

Mercedes and Skoda have 2 models. That's all I'm wondering is just so we have our statistics correctly -- correct.

Tim Trenary

It's the largest. In this case of the Skoda, it applies, for example, to both.

Gary Prestopino

So, that would count as one launch is what you're saying, right?

Tim Trenary

Yes. Yes, we consider that as one launch.

Gary Prestopino

But the fact of the matter is it's proliferating across various models within the manufacturers.

Tim Trenary

That is correct.

Operator

As there are no further questions in the queue, I'd like to hand the call back over to our speakers for any additional or closing remarks.

Majdi Abulaban

All right. Thank you. Thank you very much for your participation in our Q2 2021 earnings conference call. We look forward to give you our Q3 2021 update in early November. In the meantime, please stay safe, and thanks for your participation.

Operator

Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.