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Edited Transcript of SUP.N earnings conference call or presentation 8-May-20 12:30pm GMT

Q1 2020 Superior Industries International Inc Earnings Call

SOUTHFIELD Jun 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Superior Industries International Inc earnings conference call or presentation Friday, May 8, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Majdi B. Abulaban

Superior Industries International, Inc. - CEO, President & Director

* Matti M. Masanovich

Superior Industries International, Inc. - CFO & Executive VP

* Troy Ford

Superior Industries International, Inc. - VP of Treasury & Corporate Development

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Conference Call Participants

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* Stephanie Ann Vincent

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Superior Industries First Quarter 2020 Earnings Teleconference Call. Today's conference is being recorded.

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

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Troy Ford, Superior Industries International, Inc. - VP of Treasury & Corporate Development [2]

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Thank you. Good morning, everyone, and welcome to our first quarter 2020 earnings call. During our discussion today, we will be referring to our earnings presentation, which, along with the earnings release, are available on the Investors section of Superior's website. I'm joined on the call by Majdi Abulaban, our President and CEO; and Matti Masanovich, our Executive Vice President and CFO.

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 more complete discussion of forward-looking statements and risk factors.

We also will be discussing non-GAAP measures today, including value-added sales and adjusted EBITDA. 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 directly comparable U.S. GAAP measures can be found in the appendix of this presentation.

With that, I'll turn the call over to Majdi.

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Majdi B. Abulaban, Superior Industries International, Inc. - CEO, President & Director [3]

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Thanks, Troy, and good morning, everyone. And thank you for joining us today to review our first quarter 2020 results. Before I begin my remarks, I would like to first thank our global team who has shown tremendous resiliency throughout these challenging times. There have been many shared sacrifices across the organization. On the bottom of the page, you see one of our employees back to work after we restarted production in Germany. My hat goes off to the men and women that have kept this company moving forward during these challenging times.

Now moving on to Slide 4. I will discuss the highlights for the quarter as well as the impact that we have seen from the COVID pandemic. I'll then provide you an update on our operating strategy in the current economic environment.

In line with the larger automotive industry, our first quarter results were significantly impacted by COVID as nearly all of our customers were shut down. However, prior to the escalation of these global prices, we delivered significant progress on various key metrics of our value-creation road map, and we were actually on track to deliver on the targets we shared with you earlier.

First, we continued to execute on our portfolio of differentiated and premium technologies. This resulted in growth above market on value-added sales of about 5% with 32% of our portfolio consisting of 19-inch wheels or greater, substantially higher than where we were last year. Our efforts to enhance our margins in North America by reducing structural costs, rationalizing our footprint, expanding our product portfolio and fixing troubled product lines delivered an 80 basis point margin improvement across the entire business despite a 15% year-on-year decline in volume.

Finally, we ended the quarter with $296 million of available liquidity and an $11 million reduction in net debt. Our current liquidity position is very strong, and we believe it allows us to weather the storm ahead.

Now regarding COVID-19. In the first quarter, the impact of the pandemic was actually significant. In response, we immediately implemented measures to ensure the health and safety of our employees, including the temporary suspension of production at our facilities. Our unit shipments were actually negatively impacted by 11% and EBITDA by about $7 million. As the environment changed drastically late in the quarter, we moved quickly, taking actions to align our costs and preserve our financial flexibility. To augment our liquidity position, we drew down on our revolvers shoring up our cash balances. We remain in compliance with all debt covenants, and we do not see -- we do not foresee a scenario where we are not in compliance with these. I will elaborate on the details of these actions in a moment.

As it is difficult to predict the full impact of COVID-19 will have on the industry and our business, we suspended full year 2020 outlook near the end of March. That said, IHS is currently estimating a 25% decline in production for 2020, however, that could change materially as we move through the second quarter and OEMs and suppliers begin to restart production. Without clear visibility into the timing of the recovery in production, we are planning -- we're planning for and all rightsizing costs, assuming production remains depressed compared to pre-COVID level. Ultimately, we are focused on controlling what we can, the health and safety of our workforce, superior financial flexibility, aligning cost and restarting production in the most safe and efficient manner.

Turning on to Slide 5. Before diving deeper into our COVID-19 response and restart plans, I would like to provide an update on our continued progress in North America. Our efforts, which we started discussing with you mid last year, are focused in 3 primary areas: our technology and portfolio, cost rationalization and customers. These actions are yielding positive results, creating a $20 million run rate improvement and closing the margin gap between the 2 regions.

We advanced our technology with the commercialization of PVD, improved our polishing product line profitability and launched new premium platforms. We also reduced expenses and optimized our North America footprint, which is now 100% in low cost. Further, our facilities have been certified per European requirements, enabling new business with these customers in North America.

As I stated last quarter, from a margin standpoint, we expect many of these initiatives to narrow the gap between our North American operations and European operations. While these initiatives represent significant progress, we still have more room for manufacturing improvement.

Moving on to Slide 6. As mentioned earlier in my remarks, in response to the ongoing COVID pandemic, we decisively moved to ensure the health and safety of our employees. Additionally, we took action to enhance financial flexibility by shoring up our liquidity, reducing costs and efficiently managing our production capacity. Now these 4 areas you see on the chart will continue to be our primary focus.

Turning on to Slide 7. As I mentioned, we suspended production in late March to ensure the safety of our employees and put in place our health and safety playbook. As the pandemic escalated, our leadership team began meeting daily. I was on the phone with my team every day to ensure that we are implementing the necessary precautions at our facilities. As we slowly restart production in our facilities, we will continue to put heightened health and safety measures into action.

We have modified our practices in all of our facilities, such as in common areas, cafeterias and conference rooms, to mitigate risk of COVID-19. We do not believe these initiatives will have a significant impact on our cost structure, capacity or ability to meet production demand. To drive consistent health and safety protocols at all of our sites across our global footprint, we created an Employee Health and Safety Steering Committee responsible for overseeing these actions. This committee will also continue to drive consistent health and safety measures as production ramps back up.

Moving on to Slide 8. We are confident in our current liquidity position and have taken decisive steps to ensure that. We have eliminated all nonessential capital expenditures and continue to focus on any actions we can generate -- we can take to generate further cash flow through working capital management and other cost-reduction initiatives. As noted previously, in an abundance of caution, we drew down on our revolving credit facilities to shore up our cash balances and liquidity. We ended the first quarter with $296 million of available liquidity, and as of April 30, we maintained liquidity of $260 million. These figures were bolstered in part by the upsizing of our European revolving credit facility we completed in January.

Turning on to Slide 9. From a cost management standpoint, we have taken the necessary steps to reduce our operating costs based on the current environment. We took broad-based cost reduction measures by aligning our headcount across the footprint to better fit current and anticipated industry production, along with reducing salaries and executive compensation and temporarily furloughing workers. For example, in North America, we reduced our SG&A headcount by approximately 15%. Additionally, in Germany, we have taken advantage of short-time work programs where employees receive the majority of their salary from the government. This is for all production associates in Germany and much of our salaries -- workforce in -- across the organization there.

In Mexico, we reduced the workforce through a combination of releasing contract workers, workforce reductions and temporary layoffs. Finally, in our U.S. locations, all associates received a reduction in pay and are taking temporary furlough.

Turning on to Slide 10. We have responsive -- we have responded decisively to each of our manufacturing sites by ensuring the health and safety of our employees and to maximize efficiency of our facilities. In Mexico, our facilities stopped production in early April, and in Europe, our facilities stopped production in mid-March. We have already reopened 3 of our facilities in Europe and anticipate opening the fourth this summer in line with inventory levels and demand. We anticipate reopening our facilities in Mexico in the coming weeks. We're actively watching and monitoring the government decree in Mexico, which, by the way, we heard this morning that we have the green light for restart of our operations in Chihuahua on May 18, so we're happy to hear this news.

Moving on to Slide 11. As we open our facilities in North America and Europe in accordance with federal, state and local guidelines, we're currently seeing the ongoing positive trends and product mix continue. You see an article there on the right side of that chart relative to mix.

Now that our facilities in Europe have been through the reopening, we will use this as a blueprint for North America. We have seen -- we have been in close contact with our customers and suppliers to understand the requirements, and we will be working closely to ensure our supply chain is ready to ensure -- to proceed according to demand. We're anticipating restarting production in North America in the coming weeks, and we'll be closely managing inventory, production inefficiencies through the restart.

Again, while we cannot predict the full impact of COVID-19, we're operating under the assumption of reduced production volumes worldwide. Our ramp-up will be measured, and we will utilize all strategies to mitigate the negative impacts of restarts.

Turning on to Slide 12. In the coming months, our main priority, as we manage through the crisis and return to full production, will be to focus and execute on each of these four areas: healthy and safety, maintaining liquidity, controlling costs and efficiently managing production. In Q1, industry volumes declined 10% in North America and 21% in Europe, totaling 16% in our market. During the second quarter, we are anticipating a 70% drop in OEM vehicle production in North America and 60% in Europe, with the full year down in both regions by about 25% based on the latest IHS forecast. Given the decline and the potential for a protracted recovery, we are assuming volume will not return to pre-COVID levels in the near term.

Before I turn it over to Matti, I would like to make a few final comments. First, I would like to welcome Ray Benvenuti, who we plan to appoint to the Board of Directors immediately following our annual meeting. Ray brings significant operational, industrial and financial experience to the table. We are pleased with Ray's addition to the Board.

Next, I want, again, to thank our associates globally for their dedication in managing through these challenging times.

And finally, moving forward, based on the steps I've outlined, I am confident in our ability to emerge from this crisis ready to compete and drive growth.

Matti?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [4]

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Thanks, Majdi. As Majdi mentioned, the continued spread of COVID-19 has had a widespread and adverse effect on the auto industry on both consumer demand and OEM automotive production. The pandemic negatively impacted our financial results for the first quarter of 2020.

Turning to Slide 14. Our first quarter 2020 value-added sales results further outperformed the broader market due to our shifting mix towards larger, higher content wheels. We delivered 5% growth over market and value-added sales per wheel growth of 5%, excluding FX. This growth was largely due to outperformance of our European operations, despite the COVID-19 impact of production headwinds we saw late in the quarter.

In both North America and Europe, value-added sales was negatively impacted by the overall decline in the auto industry as a result of production shutdowns related to COVID 19. North America and Europe value-added sales declined 11% and 10%, respectively.

Despite the macroeconomic headwinds, we are continuing to see large diameter wheels penetrate globally, with value-added sales per wheel increasing compared to the prior year period. As Majdi noted, 19-inch wheels in greater accounted for approximately 32% of our portfolio, which compares to just over 25% in the prior year period. We expect the penetration of larger diameter wheels to continue in 2020. The present OEM release schedules, while subject to change based on demand and market conditions, currently support this ongoing trend. We expect 19-inch and larger wheels to represent approximately 36% of our portfolio for full year 2020.

On Slide 15, we outlined the global -- the regional breakdown of unit shipments, net sales and value-added sales for the first quarter of 2020 as compared to the prior year period. In the first quarter, our wheel shipment units decreased to $4.3 million compared to $5 million in the prior period. The change in units was driven by a decline in our key customers, primarily related to COVID-19.

In the first quarter, we reported a net loss of $190 million or a loss of $7.84 per diluted share compared to net income of $2 million or a loss of $0.24 per diluted share in the prior year period.

Due to the ongoing spread of COVID-19, in the first quarter, we were required to test the valuation of our goodwill and indefinite-lived intangible assets, which you can see on Slide 16.

Based on lower 2020 forecasted European automotive production volumes, higher discount rates and lower market valuation multiples, the valuation analysis indicated that these assets were impaired, requiring an additional noncash charge to earnings of $194 million during the first quarter. While we still have a strong business in Europe, the impact of COVID-19 and the resulting change in volume expectations as well as the respective valuation inputs ultimately resulted in the full write-down of these assets.

Staying on Slide 16. The impact of COVID-19 to our first quarter results was impactful. Our analysis indicates that unit shipments were negatively impacted by approximately 530,000 units or 11% with a corresponding unfavorable impact on value-added sales of $22 million and an unfavorable impact to net adjusted EBITDA of $7 million.

In addition to our net loss for the quarter, driven by the noncash goodwill impairment, increased volatility in the foreign exchange rates lowered the fair value of our hedging portfolio and our Mexican subsidiaries financial statements when translated into U.S. dollars. The combination of the net loss and foreign exchange impacts reduced shareholders' equity to negative $28 million as of March 31, 2020. Please see the table in the appendix for the impact of impairments, acquisition, restructuring and other items on diluted EPS and the reconciliation from net income to diluted EPS.

On Slide 17, I'll walk through our change in net sales and value-added sales year-over-year for the first quarter 2020. Value-added sales decreased to $170 million compared to $193 million in the prior year period. The decrease was driven by lower production volume due to COVID-19 production shutdowns and delayed shipments, offset partially by the continued portfolio shift to larger-diameter wheels with more premium content.

On Slide 18, adjusted EBITDA was $40 million for the first quarter of 2020 compared to $43 million in the prior year period. The decrease in adjusted EBITDA was primarily driven by lower industry production volumes in North America and Europe, including production shutdowns related to COVID-19, partially offset by the shift of higher content wheels as well as lower energy prices, procurement savings, manufacturing footprint rationalization implemented in the fourth quarter of 2019, SG&A savings and other cost savings.

Despite the lower industry production volumes, we worked to execute on our strategic priorities to align costs with production levels. As Majdi noted in his comments, we acted swiftly to protect the health and safety of our employees by temporarily ceasing production at all of our facilities in Europe and North America. For reference, SG&A expense for the first quarter of 2020 was $12.5 million or 5% of net sales, flat as a percentage of sales compared to the prior year period.

Our first quarter cash flow is addressed on Slide 19. Net cash from operating activities was $31 million compared to $29 million in the prior period. This improved result year-over-year was due to improved working capital management despite lower earnings. In the first quarter, we saw an increase in net cash used for investing activities at $14 million compared to $12 million in the prior period. Capital expenditures remaining relatively flat for the quarter at $14 million, as we made cuts to nonessential capital investments is the primary driver.

Preferred dividends paid during the quarter totaled $3.4 million, and purchases from minority holders of Superior Industries Europe totaled $4 million. At the end of the first quarter, we have less than 1% of the remaining minority shares outstanding or approximately $2 million.

Slide 20 provides an overview of our capital structure. Prior to the pandemic and as part of our capital-allocation strategy, we entered into a new low-cost financing solution with European equipment loans for $12 million at an interest rate of 2.3%, maturing through 2027. In line with our strategic priorities, we delivered free cash flow and lowered net debt by $11 million during the first quarter. We utilized new financings and cash generated to pay down our term loan by $23 million in the first quarter.

We remain in full compliance with all lending covenants, including leverage ratio limits on our lines of credit. Based on various negative forecasted scenarios, we do not currently anticipate any issues meeting the covenants under these facilities. So you are aware, the covenant on our U.S. revolver is 4.5x net debt to LTM-adjusted EBITDA as defined in our credit agreement. The covenant is only tested if we're more than 35% drawn on the U.S. revolver on any given quarter end. Therefore, based on my prior comment that we do not foresee a covenant issue. We would expect to reduce borrowings under the U.S. revolver to less than 35% if our leverage is greater than 4.5x in order to maintain compliance with this requirement.

Turning to Slide 21. In this period of heightened uncertainty, our top priority is preserving our financial flexibility. As a precautionary measure against potential impacts of COVID-19, we drew $208 million net on our U.S. and European revolving credit lines. As of March 31, 2020, our total cash on hand was $282 million, with total availability, including cash and availability on our revolving credit facilities, of $296 million. As of April 30, 2020, we maintained liquidity in excess of $260 million with no near-term debt maturities. Going forward, in nonproduction scenario, our cash burn is expected to be less than $25 million per month, which implies significant available liquidity to manage the business through the crisis.

Slide 22 illustrates our cash breakeven case in the event of an approximately 25% volume decline. Assuming flat working capital, acquisition of the remaining minority shares, continued payment of the preferred dividends in cash and further base level maintenance capital expenditures, our cash flow should be roughly neutral for the full year.

And finally, with regard to our full year 2020 outlook on Slide 23, we previously withdrew our 2020 outlook due to the uncertainty around production volumes. IHS is currently forecasting a 25% production decline in both North America and Europe. Based on this volume, we expect to end 2020 with a strong liquidity position with net debt peaking in Q2 or Q3 depending on the ramp-up schedules. We also anticipate returning to or improving the margins we saw in the first quarter 2020 by the fourth quarter of 2020.

With that, I want to open the call for the questions and answers. I'll turn the call back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Stephanie Vincent with JPMorgan.

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Stephanie Ann Vincent, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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My first question is just on the leverage. So obviously, the liquidity position is quite good. However, given multiples through the supplier space, and I realize that Q2, Q3 will probably be trough, what sort of liquidity level are you comfortable with returning back to the proposition that you had made earlier about repayment of debt either through bond buybacks or continued pay downs of term loan. And I know you have done some of that this quarter, but it would just be helpful to know what you consider your minimum liquidity threshold to do that.

And then my next question is on Q2, Q3 because it's very difficult for us analysts to really think about the absolute level of working capital swing, can you just talk about when your customers are coming back online early May, mid-May, what sort of working capital swing could you see in these summer months as the production schedules are quite erratic? I think that's quite helpful.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [3]

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So Stephanie, here's how -- Thank you for the question. It's Matti speaking. So the first question, what -- how do we feel about debt -- continued debt pay down, either bond buybacks or term loan B repayment in the current environment? And as I mentioned, I think as we move through the year and then you kind of look at what I framed up from an IHS perspective with 25% down and how we're going to -- how we're going to end this year, I think we'll be cash flow breakeven from a free cash flow perspective. So I don't anticipate further debt pay down this year in 2020 from what we paid down in the first quarter. We're going to preserve our liquidity and build cash to the extent possible. So I don't anticipate going forward with any further debt pay downs, that's number one.

And then the working capital swing in the second and third quarter, obviously, as Majdi mentioned, we're trying to manage that working capital swing. Really where it comes out is our ability to continue to factor receivables, our ability to continue to harvest DPOs from our supply base, and then obviously, with the inventory coming back online. We ended March with a reasonable inventory position, and so we ended up with about 1.5 weeks' worth of finished goods. And so I'd tell you that I think we're in a good spot as we kind of begin to launch with the start-ups here in May. And so we started last week in Europe, getting things up and running 1.5 weeks ago in Europe. And I think as we kind of move forward here, my view is we're trying to hold the inventory levels where they are and not have to kind of rebuild inventory levels. Initially coming out, we're seeing stronger demand in Europe, which is good, just kind of from a customer release perspective versus what we were thinking. So I think that's a good start, but it's got to stick. And as you know, when we build inventory, we have a -- we're a foundry. So we start with melting metal, and we go all the way through finished goods. So we carry a lot of whip and raw as we sit here. So we're looking at all avenues to reduce our inventory positions as we go forward and kind of be as thrifty as we possibly can in our start-up.

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Stephanie Ann Vincent, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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That's great. And if I can slip another one in there. Some suppliers have talked about not even having a week or 2's worth of visibility. As you stand today, how good do you feel about how the schedules are ramping up in May? Do you feel like even over the past week, that's improved or not?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [5]

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We are in constant communication with our OEM customers, with the schedulers of the OEMS. And so I'll tell you that we have very close tracking of what they're ordering. We're reconfirming via phone calls with them. So we're not just taking their broadcast as verbatim. And so I think we have very good visibility on what they're going to order. Now over the midterm here, as consumer sentiment and consumer demand, as I mentioned, I think -- I do think it's going to be choppy kind of moving into the summer months. But we're hopeful, clearly, that we're going to have stronger demand and the economy bounces back. But I'll tell you that from a visibility standpoint, we get really good visibility to 12 to 16 weeks from the customers. They give us those schedules, and we actually confirm back that that's what they're ordering and they're going to take it. So that's where we're going to -- where we're pushing.

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Majdi B. Abulaban, Superior Industries International, Inc. - CEO, President & Director [6]

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And Stephanie, this is Majdi. I just -- actually, I just got off the phone this morning with my president in Europe, and he was just talking about the restart and how well it's going. And so from a visibility standpoint, we're actually pleased. We're seeing more stability than we expected and slightly above where we thought we would be. Three of our facilities in Europe are back up and running. Germany is up, now running 7/24. So yes, the visibility is getting a lot better and more stability. Midterm, I think it remains to be seen, right? So from a manufacturing standpoint, we really, in our business, need to be very flexible. We're staying very, very close to our customers, and we're not just relying on PDIs we're calling and we're making revisions to the forecast. So being -- we can't just start back up the entire plant's operations. We're being very cautious with that.

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Operator [7]

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(Operator Instructions) At this time, there are no further questions in the queue. I would like to turn the call back over to Majdi Abulaban for closing remarks.

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Majdi B. Abulaban, Superior Industries International, Inc. - CEO, President & Director [8]

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Thank you. Since there are no more questions, we will go ahead and close out the call. Thanks, everyone, for joining. We hope you stay well and safe in these challenging times. Thank you.

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Operator [9]

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This concludes today's conference. You may now disconnect.