Ladies and gentlemen, good day and welcome to the Superior Industries Third 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.
SUP Superior Industries International
Thank you. Good morning, everyone and welcome to our third quarter 2020 earnings call.
During our discussion today, we will be referring to our earnings presentation, which along with the earnings release, is available on the Investors section of Superior’s website. I am joined on the call by Majdi Abulaban, our President and Chief Executive Officer and Tim Trenary, our newly appointed 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 more complete discussion of forward-looking statements and risk factors.
We will also 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 will turn the call over to Majdi.
Thanks, Troy and good morning everyone. Thank you for joining us today to review our third quarter results.
Before we begin, I would like to welcome our new Chief Financial Officer, Tim Trenary to Superior. Tim is an accomplished executive with a strong track record of financial leadership and significant experience in automotive industry.
We are thrilled to have him on the team. With that, I will now provide an overview of our third quarter. Beginning on Slide 3, we are pleased with the results, as Superior team delivered a strong quarter in the face of a challenging environment. Recall when the pandemic began, we laid out our priorities in four key focus areas: people, cost, liquidity and efficiency. I am proud of how our team has executed on these priorities. Ensuring the health and safety of our employees has been and continues to be our top priority.
Our Safe Work Playbook is in place, which includes clear protocols for every aspects of our operations, from business, from busing to cafeteria to production. These measures have proven highly effective to-date and will continue to be our focus. Also in response to COVID, we implemented several temporary and permanent cost saving measures. These cost saving initiatives in addition to the structural cost reductions we executed throughout 2019 have enabled us to significantly expand earnings and improve margins. Further, through these decisive cost saving measures, coupled with diligent management of working capital and capital expenditures, we were able to maximize cash flow enabling rapid liquidity.
Finally, I am pleased that to-date we have successfully restarted production with no disruption.
Our team has been able to positively respond to scheduled volatility and reliably deliver to our customer needs. Having said that, COVID uncertainties and the potential impact on our production, supply, customers and the broader markets, remain.
We will continue to be vigilant in managing our business and given the success we have had to-date, we are confident that we have a robust business plan for these challenges. Slide 4, growing EBITDA and cash, has been and continues to be the main priority for us.
During the quarter, EBITDA grew by 20% and EBITDA margin improved by 440 basis points compared to the third quarter of last year. This was driven by structural cost improvements as well as the ongoing portfolio shift towards higher contracted wheels. Actually, 19-inch and larger wheels comprised of an unprecedented 40% of our volume for the quarter.
In addition, we were able to deliver a net debt reduction of $77 million, resulting in the lowest level of net debt since the acquisition of our European business in 2017.
We also improved our liquidity position to a record level of $336 million.
As a result, we are now well ahead of our prior guidance to be cash flow neutral for fiscal year 2020.
As I mentioned, the health and safety of our employees has remained a top priority and we have continued to self evaluate to ensure we are doing everything we can to provide a safe work environment.
In addition to delivering to our customers with no disruption, I am pleased that our manufacturing metrics are tracking ahead of pre-COVID levels due to the alignment we have created around safety, quality and delivery. Further, our focus on improving our operating performance in North America is bearing fruit with significant improvement in profitability and margin.
We have now fully closed the GAAP margin between the two regions.
Now, with respect to our outlook, during the first quarter of 2020, we suspended our full year outlook due to the uncertain production environment.
With the recent stabilization in industry production and the successful restart of our operations, we are now able to provide guidance for the fourth quarter. Tim will provide additional detail on our outlook. We remain optimistic and anticipate a robust quarter in terms of sales and EBITDA and adjusted for the roll-off of temporary cost reductions and shutdowns.
We also expect free cash flow to be ahead of our prior guidance of cash flow neutral for the year 2020. This outlook assumes no COVID-related production shutdowns at Superior or our customers.
As I mentioned, we are closely monitoring the COVID resurgence and the potential impact of any mandated shutdowns in our regions, including Mexico, Germany, and Poland.
Moving on to Slide 5, as the graph highlights the improvement in industry production since the second quarter of 2020, which was down more than 60% in both North America and Europe. North America has rebounded with production in the third quarter, essentially flat to the third quarter of 2019.
While European volumes also improved sequentially, the recovery has been slower, with production down 9%.
As we look to the fourth quarter, IHS is forecasting both regions to be relatively flat compared to the fourth quarter of 2019. Slide 6 highlights how these secular trends of light-weighting and premium wheels continue to propel our growth above markets.
While we are flat with market in the third quarter, our year-to-date value-added sales, remains ahead of market. This is driven by the ongoing shift to premium wheels, enabled by our portfolio of differentiated technology, which has long been a competitive advantage for Superior and is core to our strategy.
We expect this trend to continue as we seek opportunities to serve our customers’ desire for increased wheel content.
Turning on to Slide 7, we continue to stay focused on our shareholder value creation roadmap.
Our immediate focus has been on improving operating performance through cost management, efficiency and manufacturing excellence. These efforts are bearing fruit in our year-on-year results, but we recognize that there is more opportunity ahead for us to improve. At the same time, we continue to stay focused on growth above market by executing our portfolio and leveraging the secular trends for premium wheels. Slide 8 actually highlights two recent positive examples of the successful execution of this strategy.
As we have previously discussed, earlier this year, we launched our physical vapor deposition production line, PVD on the Ford F-150.
We are pleased that this past week at Ford’s 22nd Annual World Excellence Award, we received an award from Ford recognizing the flawless launch, the exceptional performance of this product and the production continuity in these challenging times.
We are proud of this recognition of our differentiated portfolio of products and we are continuing to grow here with wins on other programs. Further, we continue to grow our robust portfolio of electric vehicle programs. We were recently actually awarded a key program with a North America OEM, who announced major advancements and investments in this segment. In closing, our progress in executing our near-term priorities during the quarter has enabled us to move along our shareholder value creation roadmap and to emerge as a stronger company from this pandemic. This performance is a testament to our team. I would like to thank everyone at Superior for their unwavering commitment and strong performance as we continue to navigate these challenging times. With that, I will turn it over to Tim.
Thank you, Majdi.
Turning to Slide 10, we delivered $192 million in value-added sales during the third quarter. This represents a 4% decline excluding FX compared to the prior year period and is equal to the industry production decline of 4%.
As Majdi mentioned, the trend toward larger diameter wheels has continued in the global marketplace.
During the quarter, 19-inch wheels and greater accounted for approximately 40% of our portfolio compared to just over 30% in the prior year period.
Our third quarter value-added sales in North America were flat year-over-year, reflecting the strong industry recovery following the downturn experienced in the second quarter of 2020. Europe’s third quarter value-added sales strongly improved sequentially from the second quarter, but the impact of COVID-19 continues to be seen in Europe.
Our value-added sales decreased 8%, excluding the impact of FX compared to the prior year period. On Slide 11, we outlined the regional breakdown of unit shipments, net sales and value-added sales for the third quarter of 2020 as compared to the prior year period. In the third quarter, our wheel unit shipments decreased to $4.4 million compared to $4.9 million in the prior year period. The change in units was primarily driven by lower production levels at our key customers in Europe. Coupled with a decrease in aluminum prices, net sales decreased to $317 million for the quarter compared to $352 million in the prior year, which was partially offset by the shift toward larger wheels with more premium content and a stronger year. We reported net income of $11 million or earnings of $0.12 per diluted share compared to a net loss of $7 million or a loss of $0.57 per diluted share in the prior year period. Please see the table on the appendix for the impact of acquisition, restructuring and other items on diluted EPS and the reconciliation from net income to diluted EPS.
Turning now to Slide 12, as Majdi mentioned, the company took decisive actions to mitigate the impact of COVID-19 that enabled us to better align costs to our customers’ production levels. These temporary and permanent initiatives resulted in higher margins as compared to the prior year.
In addition to these cost initiatives, we enhanced cash flow by improving supplier payment terms, efficiently managing inventory, expanding accounts receivable factoring arrangements to offset higher accounts receivable balances, and reducing capital expenditures versus the prior year period to align to the current production environment. On Slide 13, value-added sales decreased $292 million compared to $195 million in the prior year period. The decrease was primarily driven by lower production volume at our key customers in Europe offset partially by the continued portfolio shift of larger diameter wheels with more premium content and a stronger year. On Slide 14, adjusted EBITDA increased to $47 million for the third quarter of 2020 compared to $39 million in the prior year period. The increase in adjusted EBITDA was primarily driven by our stronger product mix, favorable foreign exchange rates, margin enhancement initiatives, including permanent and temporary cost reductions, rationalizing our manufacturing footprint, lower energy prices and temporary government incentives.
Third quarter cash flow was addressed on Slide 15. Net cash from operating activities was $100 million compared to $33 million in the prior year. This increase was primarily driven by working capital improvements, including supplier term extensions and its expand factory or receivables to offset higher accounts receivable balances, thereby enhancing our free cash flow and placing us ahead of our 2020 target. In the third quarter, net cash used for investing activities decreased to $10 million compared to $19 million in the prior year period. The decrease was primarily driven by an $8 million reduction in capital expenditures versus the prior year period.
We have carefully managed capital spending throughout 2020. Net cash used for financing activities increased primarily due to payments on our revolving credit facilities, which all carry to zero balance at the end of the third quarter.
We also paid preferred dividends of $3 million during the quarter. In total, we generated $86 million in free cash flow in the third quarter.
Turning now to Slide 16 for an overview of our capital structure, we made significant strides toward our goal of generating cash flow to reduce debt. The strong cash flow in the third quarter also boosted our liquidity to a record level.
As of September 30, 2020, total liquidity, including cash and available amounts under our committed revolving credit facilities, was $336 million. Total funded debt as of September 30, 2020 was $630 million compared to $635 million in the prior year period. Net debt decreased by $77 million compared to the second quarter, bringing net debt down to $519 million, a record low since the acquisition of our European operations in 2017. Slide 17 summarizes our debt maturity profile.
We have no significant near-term maturities of funded debt.
With the next significant financing event being the extension of our U.S. and European revolving credit facilities, which mature in May 2022.
Our revolving credit facility is currently having zero balance.
Our term loan does not mature until 2024 and our senior notes mature in 2025. We remain in full compliance with all loan covenants.
Our historical progression of free cash flow and liquidity is depicted on Slide 18. We achieved free cash flow of $86 million in the third quarter driven by the cost and cash flow actions previously described.
We are on track to beat our payer free cash flow outlook issued on August 5 of this year of being free cash flow neutral in 2020.
In addition, our current liquidity is a record standing at $336 million. We believe Superior is well-positioned to continue to manage in this challenging economic environment resulting from the pandemic.
Our outlook for the fourth quarter of 2020 is on Slide 19 and reflects the latest IHS industry production forecast for the fourth quarter, which assumes no production shutdowns arising from the virus. IHS’s current production forecast is for the fourth quarter in North America to be relatively flat and an increase in Europe of 1% resulting in a flat quarter across our footprint.
As a result, we expect shipments to be in the range of 4.15 million to 4.45 million units, net sales to be in the range of $305 million to $325 million and value-added sales to be in the range of $175 million to $195 million, resulting in adjusted EBITDA of $40 million to $46 million. Based on these estimates, we anticipate free cash flow be positive for the full year 2020, an improvement to our prior outlook of free cash flow neutral for the full year. We anticipate maintaining most of the free cash flow achieved to-date in 2020 through year end. I would like to address our New York Stock Exchange listing. On June 5, Superior received notice that it was not in compliance with the listing standards due to the decrease in the company’s market capitalization and shareholders’ equity.
We have submitted a remediation plan on July 20 and announced that the New York Stock Exchange, have accepted that plan on September 8. The plan lays out our strategy to increase the market capitalization within the required timeframe.
We are confident that by executing our plan we will deliver market capitalization greater than $50 million. In closing, we continue to execute our Safe Work Playbook to ensure the health and safety of our employees and other key priorities to continue to improve Superior’s financial position and to drive shareholder value. That concludes our prepared remarks. I will turn the call back to David to open the call for questions. David?
Thank you. [Operator Instructions] Our first question comes from Gary Prestopino with Barrington Research.
Hey, good morning all. Great results.
Good morning, Gary.
Hey, the couple of questions here. And I couldn’t keep up with the how fast you were going in terms of some of the slides, but you repaid $114 million of debt in the quarter right and how much of that was the revolver and how much of that was actually your part of your other debt structure?
Hi, Gary, it’s Tim.
That we call repayment or repayment of the revolvers.
Okay, well, repayment of the revolvers, okay. That’s great.
Yes, you guys basically have those revolvers just as a source of liquidity going into the pandemic, right?
Yes, I mean, it’s that and our cash on the balance sheet is a source of our liquidity, the company did draw-down on the revolvers in the midst of the pandemic just to assure liquidity, but as production came back up, we are comfortable now that we can pay them down and they are paid down zero balances and we have little north of $100 million of cash on the balance sheet.
So, as the cash flow improves then, you will obviously start paying down some term loan B, right?
Well, that certainly is an option.
We will want to manage here through the fourth quarter, make sure this virus is behind us, make sure our cash flow continues to stay strong, continue to execute and we will address that in due course.
Okay. Did your senior secured notes trade on the market?
Did the senior secured notes trade, what are they trading at now toward you know?
I think the latest I saw was around the mid-80s, 84, 85.
Okay, I got a couple of more questions here and then I got to jump. I don’t want to hog the call, but I got a 9 o’clock call.
So hey, Majdi, the IHS projections or predictions, those were obviously put in or maybe they weren’t before the new shutdowns on the pandemic in terms of what’s going on in Europe. What’s your view on – first of all, I would assume that no auto manufacturing has been shutdown and what’s your view on what this could cause in Q4 with European operations?
No, yes, Gary.
So, listen, clearly, this last couple of weeks, there has been a lot of action by governments both in Mexico, frankly and in Europe.
So far, our manufacturing both in Germany and in Poland has not been impacted. I would tell you that during COVID post those operations as we replant up, we are able to manage very effectively. Right now, we don’t see a big disruption to manufacturing in either one of those operations.
Okay, that’s good to hear. And then I am – just I am writing this down here and like I said, I don’t want to hog the call, but I got to jump here soon.
You talked about the margin gap closing between North America and Europe, which is really a testament to what you guys have done and it’s great. Is that they are both on about the same margin levels right now on an – that’s on an adjusted EBITDA basis, Majdi?
Yes, I would say that and we expect the same for the balance of the year. Gary, North America has performed extremely well.
In the face of the challenging environment, I mean, you are very familiar with all the initiatives we put in place. That story is not really during the pandemic only, we took some cost actions, but the plan that was executed prior to the pandemic is panning out as we discussed.
Okay. I guess what I am getting at is that obviously maybe Europe came down, because it was sluggish, U.S. came up, is that one way to look at it and plus the fact you have such great sell-through and pickups in SUVs and stuff, is that one way to look at it? And I am not belittling what you guys have done I am just trying to get an idea of how these things moved either way?
Gary, I will tell you that for the third quarter, North America is substantially better than Europe. We did see an impact on Europe from a volume standpoint, but Europe has done a very good job of reducing cost and holding margins. Again, the story in North America is structural in nature, really along all dimensions of the business.
Okay. And then just in terms of the large diameter wheels at 40%, where can that go to? I mean that I think, initially, you were talking about somewhere in the low 30s, mid-30s as a percentage of the portfolio and now it’s at 40%. I mean, is there still room to grow that?
Gary, I mean, this whole trend towards larger wheels, more premium wheels, actually overall, still represents a small percentage of the fleet. That content story we expect to continue.
For us, North America was off the charts, because the mix moved in our favor on the platforms we are at, we are on. But overall, as you average out the year, last year, we are at 26%, this year, we are at about on average 34%.
We expect that trend to continue.
Great. That’s good news. And then lastly, can you give us any clue who was the EB manufacturer that you got the new program on?
I would only go as far as saying it’s one of the big three.
Okay, that’s great. That’s all you know. Thanks a lot, guys. I got to jump.
We will speak to you soon.
Our next question comes from Stephanie Vincent with JPMorgan.
Hi, thank you very much for taking my questions.
First off, very good quarter on the margins, just wanting to make sure when we model you guys going forward, especially into 2021, are there any kind of one-time items either through government support or just keeping a very tight rein on costs that maybe you can’t do next year that we should be plugging back into our numbers either on COGS or in SG&A? That would be my first question.
The second question is similar on CapEx, I mean, in your view, what can we look forward to in terms of a medium-term CapEx outlook per annum for Superior? And then finally, very, very happy that you paid down the revolver, from a bondholders’ perspective, I guess you have taken excess cash and have put that into bond buyback. But I am just wanting to know maybe from your perspective, what you would feel comfortable in this type of environment holding in cash on your balance sheet realizing that it’s going to be higher than in previous years? These are my initial questions.
Okay, thank you for your questions, Stephanie, it’s Tim. I will try and take them here in order. Yes, I think we indicated during the call, the third quarter did continue to benefit somewhat from some temporary cost saving actions they were rolling off during the quarter and for the most part, for example, the compensation and benefits actions I think were gone by the end of the quarter, but there was some benefit in the third quarter, there will be a small benefit, certain other temporary cost actions, for example, travel obviously will be lower than it normally would in the fourth quarter. But going into 2021, absent some resurgence, some large resurgence of this virus and an impact on our company and/or our customers, I would expect for the most part that the temporary reductions will be gone and we will be back to a normal cost structure beginning in 2021.
If you want to have some indication of what that would look like, I would encourage you to look at the fourth quarter guidance that we provided and use whichever part of those ranges you would like to, but that will give you some indication as to what we expect the margins to be post the suspension of the temporary cost reductions. With respect to capital expenditures, you are absolutely right, we watched very carefully during the year when this virus was heavily present of the capital spending and where we could, we pushed discretionary spending off a little bit.
For the most part, I would say, it’s a bit of a snowplow. I mean, eventually we will undertake that capital spending, but we thought it prudent here in the near-term to watch our cash and therefore our capital spending as closely as we could until we got our arms around. The company’s ability to deal with this virus, which as you can see in the financial results, we did very well. With respect to the prospective capital spending, I would just say that we for the time being we expect the annual spending to return to sort of historical levels.
As regards, the company’s liquidity position, more specifically, our cash, again, all the revolvers, both the revolvers have zero balances and there is a fair amount of cash on the balance sheet. At the end of September, we have given you where we thought the cash flow will come out here at the end of the year.
So, again, absent some resurgence of the virus, we expect that liquidity position to stay strong. It gives us a lot of flexibility, Stephanie, going into next year, a fair amount of opportunity to manage our balance sheet as we might see fit and optimize it depending on a lot number of factors.
So, I can’t be specific at this point, because I don’t know exactly, yet whether this virus is behind this, but more to come on that suffice to say, tremendous cash flow, remarkable cash flow and results here in the third quarter and pretty good outlook for the remainder of the year and good liquidity position gives us a lot of flexibility.
Thanks. And can I slip in just a couple more. I mean, we were on a conference call with a supplier late last week and they did say that actually Q1 is shaping up to be really strong. They have slightly different sort of end-markets than you guys from a geographic basis, but would you agree with that assessment? And then finally, obviously said through your supplier negotiations, we saw quarter-over-quarter a decent uptick in payables. I am just wondering if that’s going to be reversed for the most part in Q4, is this something we can also expect going into Q1 and Q2 of next year? And that’s it from me.
Thanks. Stephanie. It’s Tim again. I am not familiar with the tire business and we don’t have any with respect to production volumes next year, absent any better information for the moment, we are for the most part, agreeable with what IHS is projecting.
So I would point you towards those projections in terms of Q1.
As regards, the company’s working capital position at the end of the third quarter, we increased the factoring as you know to offset the increase in the receivables, good management on the inventory, the guys, the operators actually did a nice job of managing that in light of the uptick in production. And finally, with respect to payables, we have over the last few quarters, our procurement function has managed the payables terms up quite a bit.
So, if you do the calculations, you will see that DPOs are up.
So, again, ask me something some exogenous event from the virus or otherwise, we would expect those terms to remain in place. There may have been a little bit of at the quarter a little timing with respect to the shared services function in the payment of bills.
So, there might be a little pullback perhaps in the fourth quarter, but I don’t expect anything dramatic.
Thank you very much.
Stephanie, just a point on IHS, relative to outlook, IHS is fundamentally forecasting a significant recovery next year. They have continued to improve the outlook. And just the data point for your reference and now forecasting a 20% recovery in our markets in North America and Europe now consider that we are down 22% this year, if you go back 3 months ago, they were forecasting, we won’t see a recovery for 3 to 4 years.
So, the outlook appears to be very positive, but it’s all hinges on the resurgence and how it impacts our business.
Yes, and I think there are numbers in Q1 globally, I was just looking at now are kind of up 17% for the first quarter. I don’t have the geographic breakdown in front of me, but it was one supplier in particular that actually Q1 looks very strong relative to their expectations a few months ago, but thank you for that guidance.
Thank you. At this time, we have no other questions.
So, I will turn it back to Mr. Majdi Abulaban for closing comments.
Well, thank you everyone for joining. I want to reiterate how pleased I am with the response of the entire Superior team to the pandemic. We remain focused on executing our value creation roadmap and we are confident that we are taking the right steps to deliver shareholder value. Thank you.
Thank you. Ladies and gentlemen, that concludes this morning’s presentation.
You may disconnect your phone lines and thank you for joining us today.