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Superior Industries International, Inc. (NYSE: SUP) Third Quarter 2023 Earnings Call Transcript, November 1, 2023
Its consistently with Industries International, Inc. ne meets earnings expectations. Reported EPS is -$1. 1 consistent with the action, expectations were -$0. 28.
Operator: Welcome to Superior Industries’ third quarter 2023 earnings call. [Operator’s Instructions] We’re joined this morning by Majdi Abulaban, President and CEO; Tim Trenary, Executive Vice President and Chief Financial Officer. I now turn the floor over to your host, Tim Trenary, to begin today’s conference. Thank you.
Tim Trenary: Hello everyone and welcome to our Q3 2023 earnings call. On our call this morning, we will refer to our earnings presentation, which, along with our earnings release, will be found in the Investor Relations segment of Superior’s website. I’m joined on the call by Majdi Abulaban, our President and CEO. Also with me today is Michael Dorah, senior vice president and president of North America. Before I turn the floor over to Majdi, I’d like to remind everyone that everyone forward- The statements of appearance contained in this presentation or discussed today are subject to the port provisions of the Private Securities Litigation Reform Act of 1995. See slide 2 of this presentation for the full Safe Harbor statement.
And the Company’s filings with the SEC, adding the Company’s existing Annual Report on Form 10-K for a fuller discussion of forward-looking statements and threat factors. Today we will also discuss various non-GAAP measures. These non-GAAP measures exclude affect certain parts and are therefore not calculated in accordance with US GAAP. Reconciliations of these measures to the most directly comparable US GAAP measures are found in the appendix to the presentation. With that, I will convert him to Majdi to provide him with an update on the business and portfolio.
Majdi Abulaban: Thank you, Tim, and hello everyone. Thank you for joining our call today to review our third-quarter effects. I’ll start with slide 5. Our team achieved strong effects in the quarter despite a challenging and consistent environment. Higher EBITDA and margins and content consistent with higher rolling for the eighteenth consecutive quarter. This is a testament to the consistent national strength of our groups and the competitive positioning of our portfolio. Although we are seeing a general recovery in advertising vehicle production, our core markets remain under pressure from continued resilience. headwinds, resulting in our currency-adjusted value-added sales remaining strong compared to last year. The UAW strike had a marginal impact on our third-quarter effects.
However, we believe the strike will have a significant effect on the fourth quarter. In North America, fleet sales, which are usually limited in content, continue to grow. And one of our top consumers, GM, experienced a 4% drop. in production, basically due to the common closure of its operations in Mexico. In Europe, production at primary consumers fell by 1% during the quarter, especially in DW. That said, it turns out that our European aftermarket is showing some recovery as wholesalers and suppliers restock for the winter season. We remain focused on what we can control, leveraging our business discipline, operational excellence, and demand for our differentiated portfolio. In line with our long-term purpose to reshape our footprint and improve our competitive position. , in the third quarter we announced the strategic fashion of our production facility in Werdohl, Germany.
As a reminder, when we announced this action, we stated that it would result in a €20 million functional improvement in regional profitability. We are on track to make this a reality in 2024. I will communicate this later in the presentation. Finally, we were able to align our costs with emerging input costs while taking steps to eliminate inconsistent forming portions and generate long-term profitability. We continue to meet customer demand for larger, lighter wheels with premium finishes. 6% year-over-year and premium wheels now account for more than 52% of our shipments to OEM customers. Additionally, in the quarter, net debt decreased to $453 million despite a desire to build a protective inventory similar to our action in Germany.
Overall, we maintain a strong liquidity position of $194 million and enhance it further through capital prudence with year-to-date capital expenditures of $30 million. We are updating our full-year outlook to reflect the effect of the deconsolidation of our German operations and the UAW strike affecting our fourth-quarter results. We are using our full-year price and volume guidance and trimming our adjusted EBITDA range. In addition, we are cutting our operating cash flow guidance to reflect transitory current capital accumulation. adding $25 million in safety inventory to protect consumers and facilitate the move of production to Poland. We expect this to impact the flow of operating money to the other side once the task is completed in early 2024.
We are also trimming our capital expenditure outlook as we focus on reducing the capital intensity of our business. Tim will provide more main points on the updated ones consistent with the outlook later in our presentation. Let’s move on to slide 6, which highlights the solid functionality. We’ve noticed it since 2019. Here, I showed the comparison of the KPIs of 2019 and the last 12 months. While commercial production declined, we saw a physically powerful expansion in value-added sales and profitability, higher margins, particularly reduced net debt, and higher content consistent with Wheel. As we continue to face ongoing national challenges, I’m confident we’ll continue to make progress on those metrics, thanks to the innovations our teams have made in the business over the past few years.
Let’s move on to slide 7. Our position on high-end platforms has remained stable; Several of our technologies have been used in recent releases on the left side of this graphic. Above all, as you can see on the right-hand side in this regard, we have been successful with our consumers by aligning the value of products with the cost of our company’s inputs. This value enhancement, combined with the expansion of premium content, has resulted in a really extensive and sustained expansion of content consistent with Wheel. Content expansion and value advanced in our content consistently at 29% compared to 2020. Let’s move on to slide 8, which shows a snapshot of the existing content environment. However, we have noticed a continued moderation in source chain constraints and a smaller inflation effect. In fact, global commercial output is slowing compared to recent quarters.
While commercial production in our two regions increased by 6%, automotive production and our primary consumers in both regions remain almost stable year-over-year. Remember that 2022 was a slightly limited year for the industry. Now, 2023 faces more constraint demands, as evidenced by declining production in the third quarter and throughout the rest of the year. IHS expects production in either region to decline in the fourth quarter compared to a year earlier. In particular, GM and Ford are expected to experience really significant declines. in the next quarter, reflecting the effect of the strike. That said, despite those challenges, we are well-placed to generate successful long-term growth, driven by the industry’s preference for our localized presence, the so-called secular premium wheel market, and the advantages of the innovations we are making to our overall footprint to strengthen our competitive position.
Let’s move on to slide 9. Another view of how we are doing compared to the industry as a whole. Our adjusted value-added sales remain strong compared to the expansion of production from our primary consumers, as well as the industry as a whole. As reported in the past, an unfavorable allocation in North America and the continued closure of General Motors’ Silao plant continued to weigh on our revenues. In addition, production at our main consumers in Europe decreased by 1%. Finally, the deconsolidation of our operations in Germany during the quarter, while ultimately supporting our long-term expansion, resulted in a transitory loss of revenue, which will eventually return. Let’s move on to slide 10 for a quick summary of the strategic action we announced in August at our German production. and how it fits into our broader plans to improve our footprint.
Our global production presence has been a key differentiator for OEMs looking to reduce the risk of long supply chains and source parts locally. Most of our features are strategically located on low-quality sites in Mexico and Poland, which are high-performing sites due to the action we have experienced in recent years. The steps we have taken at our German plant constitute a continuation of this plan, giving us the opportunity for the rest of our footprint while also enabling us to better serve our consumers across Europe. These plans continue in fact, this proceeding is better known in the United States as insolvency proceedings (Chapter 11). It is now increasingly likely that this task will result in the closure of the Werdohl plant in Germany and the transfer of some 800,000 wheels to facilities in Poland.
This is a key aspect in the incremental profitability improvement I mentioned earlier. I would now like to move on to slide 11. To address the broader steps we have taken to improve margin across our European presence. As shown in the past, our movements in Germany are developing as planned. We are now focusing on moving production to Poland, which will require significant protective storage to ensure that the service does not have an effect on our consumers as we improve our capabilities and features. In addition, we are networking to streamline administrative charges and at the same time consolidate aftermarket warehouses to improve our overall charge structure. We also continue to work with our European consumers to adjust charges in line with consequential charges.
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Our efforts have been successful, as evidenced by the 13% increase in value and content since the beginning of the year. In addition, we have strived to reduce the hazards associated with wheel launching, moving the production of systems originally scheduled to be introduced at our German facility in Poland. Finally, as part of our 80/20 approach, we have divested ourselves of underperforming systems in our portfolio to achieve higher margins and product mix. This means transporting approximately 750,000 wheels from our business portfolio. While this is a significant number, it is critical to note that these were marginally successful systems that did not advance our long-term expansion strategy. Overall, while there is still a lot of work to be done, I am pleased with the progress we have made. We’ve finally made the margin hole between Europe and North America, and I’m pleased to continue this momentum to move our business forward.
In conclusion, our teams have continued to do an excellent job of overcoming demanding situations and generating solid results. Our content story continues to spread and we are making wonderful strides in our global footprint to ensure successful long-term growth. For the remainder of 2024, we remain focused on advancing our portfolio, optimizing pricing, and generating money to drive sustainable pricing for our shareholders. I will now turn it over to Tim to give us more details on our financial results. Tim?
Tim Trenary: Thank you, Majdi. On August 31 of this year, we announced a strategic action. Continue our local footprint to optimize the local production footprint and reshape the remaining 6% of our production footprint to a more competitive charge structure. Our production facility in Werdohl, Germany, which is not just Superior Industries Production Germany or SPG, has been subject to a protective coverage proceeding, a reorganization proceeding administered through a German court. Generally accepted accounting principles require that the source of income and the balance sheet of SPG, as of the graduation procedure, be deconsolidated from the monetary statements of Superior Industries. As a result, SPG’s revenue source for the month of September is excluded from the third quarter monetary results, as is SPG’s balance sheet at the end of the 3rd quarter.
SPG’s deconsolidation resulted in a rate of $80 million in the quarter. In addition, approximately 80,000 wheels produced at SPG in September are excluded from wheel shipments and approximately $9 million and $6 million, respectively, of net sales and value-added sales are excluded from third-quarter sales. The deconsolidation of SPG had an effect of less than $1 million on adjusted EBITDA in the third quarter. Let’s take a look at the quarter on page 13, monetary summary for the third quarter of 2023. Net sales decreased to $323 million for the quarter from $406 million in the prior-year period, however, value-added sales of $176 million remained particularly unchanged from the prior-year quarter. The decrease in the price of aluminum is the main explanation for the decrease in net sales.
Aluminum costs have now normalized after a significant increase that began in early 2022. Adjusted EBITDA $39 million, up $3 million from the prior year quarter. Adjusted EBITDA margin, expressed as a consistent percentage of value-added sales, advanced year-over-year through 160 core issuances to 22%. We incurred a net loss of $86 million in the second quarter, or a loss consistent with a diluted percentage of $3. 42, compared to a net loss of $400,000 in the prior year consistent with a percentage or a loss consistent with a diluted percentage of $0. 35. The third quarter includes $80 million in closing charges similar to SPG’s proceedings and SPG’s assisted deconsolidation of the monetary statements of Suconsistent withior. The year-over-year sales bridge for the third quarter is on page 14. On the far right, aluminum costs passed on to consumers decreased by $81 million, or 35%. Compared to the previous year in the same period, reflecting the normalization of aluminum cargo.
Value-added sales were down to just $2 million, or 1%, compared to a year earlier in the same period, reflecting a reduction in wheel shipments, largely offset through the mix and value. Value-added sales continue to gain advantages by increasing content consistent with the wheel. The coins contributed $8 million to net sales. On page 15, combine year-over-year adjusted EBITDA for the third quarter of 2023. Adjusted EBITDA for the quarter increased to $39 million from $36 million in the prior year. consistent with the period. Adjusted EBITDA margin for the quarter was 22%, an improvement of 160 core issues compared to the prior year consistent with the period thanks to strong year-over-year value-added sales. Volume, value and composition, timing and metals functionality contributed to the accumulation of adjusted EBITDA for the quarter. However, the coin burned the adjusted EBITDA to less than $1 million.
A summary of the company’s loose cash flow in the third quarter of 2023 can be found on page 16. Cash flow from operating activities was $9 million, compared to $17 million at the time. last year. This reduction is mainly due to slight increases in working capital and restructuring rates, as well as an increase in interest rates. Net money used for investment activities was $12 million, compared to $11 million a year earlier. The $3 million reduction in capital expenditures in the quarter compared to the prior year was more than offset by a $4 million currency rate related to the SPG deconsolidation. Cash used in financing activities was $0 million for the third quarter compared to $4 million in the prior year. Preferred dividends of approximately $3 million were reduced due to the payment schedule at the end of the 2023 quarter.
Free coins for the quarter were negative $3 million, compared to positive $2 million in the prior-year period. A review of the company’s capital allocation as of September 30, 2023 can be found on page 17. Cash on the balance sheet at the end of the quarter was $177 million, funded debt was $630 million at end of the quarter and net debt was $453 million. a minimum of $3 million compared to last fiscal year. At the end of the third quarter, liquidity, adding the availability of the revolving credit line, was $194 million. Superior’s debt maturity profile as of September 30, 2023 can be found on page 18. The revolving credit facility was terminated at the end of the quarter. We comply with all loan agreements. The $250 million SOFR-based interest rate swaps we entered into last year in anticipation of turbo refinancing are in currencies due to immediate rate increases.
Annual interest expense is about $5 million less than it would otherwise be. We adjusted the full-year 2023 monetary outlook on page 19. These changes reflect the effect of SPG’s deconsolidation of the company’s currency effects during the last four months of the year and an estimate of the effect of the UAW strike. With respect to the deconsolidation of SPG, we are reducing wheel shipments to 300,000 wheels, net sales to $32 million and value-added sales to $20 million. The effect on adjusted EBITDA is an improvement of $1 million. The operating cash flow effect is expected to be $35 million and reflects a transitory investment in current capital at the end of the year, in addition to the accumulation of protective inventory to shield our clients during SPG proceedings.
This current capital investment will return to the company in 2024. As for the UAW strike, the impact in the third quarter was negligible. Through the end of October, the impact was approximately 85,000 wheels and $8 million and $4 million, respectively, in net sales and value-added sales. The effect on adjusted EBITDA is close to $2 million. Our changes to the monetary outlook for 2023 incorporate the assumption that no further services will be affected and that the strike will be resolved by mid-November. On page 20, the monetary outlook for the year 2023. The adjusted forecast for 2023 is 14. 6 million to 15 million wheels. Net sales of $1. 39 billion to $1. 49 billion and value-added sales of $745 million to $765 million. We are cutting the guidance diversity for Adjusted EBITDA to $170 million to $185 million and adjusting the guidance for operating cash flow to $80 million to $95 million.
Again, the adjustment for cash flows from operations reflects transitory investments in current capital, primarily protective inventory that is expected to be $35 million at the end of the year. This transitory current capital investment is partially offset by a $15 million relief in capital expenditures for the year. Capital investments for 2023 are now expected to be approximately $50 million. This relief of $15 million in capital investments is further evidence of our business capital intensity target. The strategic action involving SPG’s production facility is expected to generate strong price creation. for the company and could lead to an increase of approximately €20 million in adjusted EBITDA from our European operations upon completion.
In conclusion, we had a solid quarter. I am satisfied with our teams, especially the operations, purchasing and sales team. That concludes our comments. Majdi and I will be happy to answer any questions you may have. Laura?
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