Superior Industries International, Inc.
Q1 2019 Earnings Call Transcript

Published: 8 May 2020

[Operator:]

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.

[Troy Ford:]

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 two 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.

[Majdi Abulaban:]

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 short 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 four. 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 this global crisis, we delivered significant progress on various key metrics of our value-creation roadmap. And we were actually on track to deliver on the targets we shared with you earlier. First, we continue 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 are 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 five. 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 three primary areas

[Matti Masanovich:]

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 well 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 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 31st 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 shipped 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 work 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 are 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 4.5 times 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 4.5 times, 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 31st 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 30th 2020, we maintained liquidity in excess of $260 million with no near-term debt maturities. Going forward, in a non-production 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 our 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 to the questions and answers. I'll turn the call back to the operator.

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Stephanie Vincent with JPMorgan.

[Stephanie Vincent:]

Hi. Thank you very much for taking my questions. 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.

[Matti Masanovich:]

So, Stephanie. 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 week 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 a 1.5 week 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 a 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.

[Stephanie Vincent:]

That's great. And if I can slip another one in there. Some suppliers have talked about not even having a week or two 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?

[Matti Masanovich:]

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 verbatim. And so I think we have very good visibility on what they're going to order.Now over the mid-term 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 weeks to 16 weeks from the customers. They give us those schedules and we actually confirm back because 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.

[Majdi Abulaban:]

And Stephanie, this is Majdi. I just -- actually I just got off the phone this morning with my President in Europe. And 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. Mid-term, 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 PBIs, we're calling and we're making revisions to the forecast. So being -- we can just start back up the entire plants operations. We're being very cautious with that.

[Stephanie Vincent:]

That's great. I’ll get back in queue. Thank you so much.

[Majdi Abulaban:]

Thanks, Stephanie.

[Operator:]

Thank you. [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.

[Majdi Abulaban:]

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 in safe in these challenging times. Thank you.

[Operator:]

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