Good day, and welcome to the Superior Industries Second Quarter 2020 Earnings Conference 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..
Thank you. Good morning, everyone and welcome to our second 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.
This morning, I am 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, and most recent quarterly filing on 10-Q for a more complete discussion of forward-looking statements and risk factors.
We will also discuss 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..
Thanks, Troy, and good morning, everyone, and thank you for joining us today to review our second quarter results. I will begin by providing an overview of the highlights for the quarter, including the impacts of the COVID pandemic on our business.
I will then provide an update on the priorities we discussed during our first quarter earnings call, as we navigate through the current economic environment. We also think it's important to share with you, what we are experiencing as it relates to sales progression and visibility in the quarter – in the future.
Finally, I will discuss where we are at with our long term value creation roadmap. Beginning on Slide 3. During the second quarter, despite the widespread adverse impacts of the COVID pandemic, we continued to benefit from the ongoing secular tailwinds in the wheel industry.
Our portfolio of large diameter wheels grew, delivering content per wheel growth of 4%. 19-inch and greater wheels accounted for 35% of our wheel portfolio, further underscoring our position as a premium wheel solutions provider.
These trends, along with robust share on pickup truck platforms in North America, enabled substantial growth over market in value-added sales during the quarter. Matti will provide more details on our sales performance in the quarter.
As a result of all the actions and initiatives we have taken in response to the COVID pandemic, we were near EBITDA breakeven for the quarter and ended with total available liquidity of $245 million, all of this, despite a 58% decline in unit shipments year-over-year.
After a complete shutdown of our facilities in April, our employees worked relentlessly to bring Superior production back online safely and efficiently. As of June 1st, all of our manufacturing facilities are open and operating.
While, the health and safety of our employees remains our top priority, we are continuing to drive structural cost improvements to manage our financial position and conserve liquidity. For the full year, we anticipate a $40 million cost benefit driven by both temporary and permanent cost actions.
I'll speak more about the actions we took to achieve these results in a moment. With respect to our view for the full year 2020, we previously suspended our outlook due to the current uncertainty.
As we stand today, while production has resumed, many questions remain around the ultimate impact of the COVID pandemic on the automotive industry, on consumer demand, and more specifically, on our unit shipments. This aligns with the public comments from many of our significant customers that visibility is limited.
That said, we are providing some additional information as it relates to our expectations for the full year. As of today, the latest IHS forecast indicates a 24% decline in industry production for the full year of 2020 in our key regions with 23% decline in North America and a 25% decline in Western and Central Europe.
Over the near-term, overall production schedules indicate stronger demand in the third quarter due to OEMs restocking inventory on specific – for volumes in North America. However, there is a high level of uncertainty on industry production volume for the remainder of 2020.
Having said that, based on IHS outlook for volume, we are targeting breakeven cash flow for the full year. For additional context, Slide 4 shows the progression of year-over-year industry vehicle production decline through June. This data highlights the challenging operating environment we face throughout the second quarter.
While the direction in June was positive, it still represents a significant decline year-over-year. As you know, these global shifts are unprecedented. Moving on to Slide 5.
As we discussed last quarter, in response to the challenging macro environment, we implemented several strategic actions to minimize the impacts of the pandemic, including ensuring the health and safety of our employees, reducing costs, sustaining liquidity and efficiently utilizing production capacity.
Our ability to move quickly in late March and early April, in addition to the actions we executed in 2019, were critical to mitigating the impact on our business of the COVID pandemic as it took hold in North America and Europe.
I am incredibly proud of our team for their commitment and strong execution during the quarter, which supported a successful restart of our production facilities and allowed us to capture improving demand trends as OEMs started to rebuild inventories. Let me provide a brief update on each of these initiatives on Slide 5.
Today, we have implemented a multitude of broad based measures to ensure the health and safety of our employees, including the successful implementation of our safe work playbook across all of our facilities.
While, we continue to have employees working remotely where needed, we have been focused on providing a safe environment for our employees, including social distancing, regular temperature checks, along with heightened cleaning processes in all our facilities.
Since reopening our production, there has been minimal direct impact on Superior's production output related to these additional safety measures.
While, we are experiencing renewed demand with an improving order book, we continue to identify additional cost reduction opportunities to further align our business with the current production environment, which may include selective and temporary facility shutdowns.
We are operating under the assumption of a slow and steady return to production volumes worldwide. Total temporary and permanent savings benefiting 2020 are $40 million. This includes temporary savings of approximately $25 million and permanent savings of approximately $15 million.
Through decisive cost actions and cash initiatives, as of June 30, 2020, we have total available liquidity of $245 million. Our cash actions and initiatives included a reduction in non-essential capital expenditures, the use of government subsidies where available, and closely managing working capital.
Our efforts allowed us to maintain net debt below $600 million to repay $101 million of our U.S. revolving credit facility and to remain in full compliance with the lending - with all lending covenants.
Finally, we have taken and continue to take action to efficiently utilize our production capacity, specifically by utilizing temporary facility closures and staggered restarts. We are extremely pleased with the successful and efficient restart of our facilities. We have seen strong operating metrics through the restart, which is positive.
Turning on to Slide 6. Let me provide some background as to what we are seeing at Superior related to value-added sales trends. Similar to the overall industry production, we experienced a dramatic drop in sales in April and in May with some improvements in June.
For the third quarter, we expect our value-added sales to be down in the low-teen percentage range, based on present customer releases. However, I would like to reiterate, the demand environment continues to be highly uncertain and going forward, will depend upon government incentives, consumer confidence and the development of the COVID-19 recovery.
Turning on to Slide 7. I would like to provide an update on our long-term value creation roadmap, which we have not – despite what we are facing day-to-day. As we previously laid out, we have made significant strides in delivering improvements in our North American operations, including optimizing our footprint, reducing structural costs.
These actions allow us to align – allowed us to align the margin profile of our North America business with our more profitable European business.
We are continuing to emphasize operational excellence by focusing on ongoing operational improvement, commercial discipline and strengthening our premium capabilities through training and knowledge transfer from Europe.
Further, we are prepared to take additional actions under a more negative volume scenario, including further reductions in direct and indirect headcount, SG&A and external spending. Even under the current scenario, we are continuing our relentless pursuit of cost efficiency.
Finally, I would like to address – I would like to address our New York Stock Exchange listing. On June 5th, Superior received notice that it was not in compliance with the listing standards due to a decrease in the company's market capitalization and shareholders' equity.
We submitted a remediation plan on July 20th, and the Exchange has 45 days from the submission to respond. 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 summary, I remain confident that the actions we have taken so far and the opportunities identified, along with our team's flexibility will allow us to achieve both our near-term risk mitigation objectives, while executing our long-term goals. Additionally, these actions position Superior to emerge stronger from the crisis.
Again, I would like to thank the entire Superior team for their hard work this quarter and rising to the challenge to manage through the current operating environments.
Before I turn the call over to Matti, I would like to thank him for his leadership and positive impacts he has had on Superior during his tenure, specifically his focus on operate, while improving the operational capabilities of the organization and cash generation initiatives.
We have undergone an extensive review of internal and external succession candidates and expect to announce a replacement shortly. In the meantime, I am pleased to announce that Troy Ford, our VP of Corporate Finance will take on the role as the Interim Chief Financial Officer upon Matti's departure.
Troy has strong background in finance, having held positions as an investment banker, various corporate finance roles and most recently with Superior since 2016, as Treasurer and VP of Investor Relations and Corporate Finance. I look forward to working with Troy as we execute on our key priorities. With that, I'll turn it over to Matti..
Thanks, Majdi. As Majdi mentioned, the COVID-19 pandemic severely impacted OEM automotive production worldwide, which resulted in a substantial adverse impact on our financial results for the second quarter of 2020. Turning to Slide 9.
Our second quarter 2020 value-added sales results continue to outperform the broader market due to continued consumer trend towards larger, higher content wheels. We delivered 11% growth over market for value-added sales, as well as value-added sales per wheel growth of 4%, excluding the impact of foreign exchange.
The tailwinds we have discussed in the past regarding the shift of larger wheels with additional content continues to play out.
Despite the macroeconomic headwinds, we are seeing the continued trend towards larger diameter wheels pick up globally, as Majdi mentioned and with 19-inch wheels and greater, accounting for approximately 35% of our portfolio in the second quarter. This compares to 28% in the prior year period.
That said, in both North America and Europe, value-added sales were negatively impacted by the overall decline in the auto industry as a result of COVID-19-related production shutdowns. North America and Europe, value-added sales declined 64% and 50%, respectively.
On Slide 10, we outlined the regional breakdown of unit shipments, net sales and value-added sales for the second quarter of 2020, as compared to the prior year period. In the second quarter, our wheel shipment units decreased to $2.1 million, compared to $4.9 million in the prior year period.
The change in units was driven by COVID-19 related production declines at our key customers. The decrease in production led to net sales of $145 million for the quarter, compared to $353 million in the prior year period, which was partially offset by the shift towards larger wheels with more premium content.
We reported a net loss of $43 million or a loss of $2 per diluted share, compared to net income of $7 million or a loss of $0.04 per diluted share in the prior year period. Please see the table in the appendix for the impact of acquisition, restructuring and other items on diluted EPS and the reconciliation from net income to diluted EPS.
Moving to Slide 11. As a direct result of the COVID-19 pandemic and despite the decisive cost reduction actions we took in the quarter, COVID-19 negatively impacted net sales by approximately $200 million, value-added sales by approximately $110 million and adjusted EBITDA by approximately $55 million.
Operating cash flow was negatively impacted by lower profit during the quarter, because of the impact of COVID-19. Inventory and accounts receivable were both reduced favorably during the quarter. However, ongoing efforts – ongoing outflows related to accounts payable management and payments more than offset this reduction.
Capital expenditures were also reduced significantly as a result of production shutdowns. Based on our liquidity position and outlook, at the end of the second quarter, as Majdi noted, we repaid $101 million on our U.S. revolving credit facility.
On Slide 12, I will walk through our change in net assets – sorry, net sales and value-added sales year-over-year for the second quarter of 2020. Value-added sales decreased to $84 million, compared to $194 million in the prior year period.
The decrease was driven by lower production volume due to the COVID-19 production shutdowns and delayed shipments, offset partially by the continued portfolio shift to larger diameter wheels with more premium content.
On Slide 13, adjusted EBITDA was a loss of $4 million for the second quarter of 2020, compared to $49 million in the prior year period.
The decrease in adjusted EBITDA was primarily driven by lower volumes in North America and Europe, including production shutdowns related to COVID-19, partially offset by temporary closing manufacturing facilities, reducing personnel and operating expenses and the rationalization of the company's manufacturing footprint.
Overall, the adjusted EBITDA decremental margin on net sales for the quarter was 25%. Our second quarter cash flow is presented on Slide 14. The aggressive actions we took during the quarter, which Majdi laid out in his comments, served to minimize our cash burn.
Operating cash flow was a $38 million use of cash, compared to a $41 million source of cash in the prior year. This decrease was primarily driven by lower profit from the impact of COVID-19 under operations and the working capital use of cash.
In the second quarter, we saw net cash used for investing activities increased to $9 million, compared to $7 million in the prior year period.
This decrease was driven by a one-time $8 million benefit from the sale of other assets in the second quarter of 2019, partially offset by a higher reduction of capital expenditures from $15 million in the prior year period to $9 million in the second quarter of 2020, which we have continued to target as a cost reduction measure.
Net cash used for financing activities primarily increased due to payments on our revolving credit facility. I will provide more detail in the following slide.
Preferred dividends paid during the quarter totaled $3 million and purchases of minority holders of Superior Industries Europe totaled $1 million, leaving approximately $2 million worth of shares outstanding. Turning to Slide 15 for an overview of our capital structure.
In this period of uncertainty, we are focused on maintaining our financial flexibility and enhancing liquidity. As of June 30, 2020, total liquidity, including cash and available amounts under our revolving credit facilities was $245 million and our total cash on hand was $131 million.
Total funded debt as of June 30, 2020, was $727 million, compared to $658 million in the prior year period. Net debt increased by $44 million when compared to year-end 2019, bringing net debt to a total of $596 million, compared to $601 million in the prior year period.
At the end of the second quarter, as I noted before, we repaid $101 million on our U.S. revolving credit facility. We remain in full compliance with all lending covenants, including leverage ratio limits on its lines of credits.
Based on various conservative financial forecasts, we do not currently anticipate any issues meeting the covenants under these facilities. After repaying our U.S. revolving credit facility in the second quarter, we were less than 35% drawn on the facility and, therefore, not required to test the net leverage covenant of 4.5 times.
Even if we had been more than 35% drawn on the facility and we were required to test the covenant at the end of the second quarter, we would have been in compliance with that covenant. Further, after the second quarter of 2020, the company has made net repayments on its U.S. and European revolving credit facilities, totaling an additional $69 million.
Recall, we originally drew down our revolvers in the abundance of caution. As of today, based on various conservative scenarios, we do not anticipate needing the funds and have substantially repaid the revolvers. As seen on Slide 16, we have no significant near-term debt maturities.
Our revolving credit facilities matured in 2022 and we will look to extend the maturities on these facilities in early 2021. Our most significant funded debt maturities will occur in 2024 and 2025. Slide 17 illustrates our cash breakeven target, based on approximately 25% volume decline across our footprint for full year 2020.
Assuming well-managed working capital, acquisition of our remaining minority shares, continued payment of preferred dividends and cash and significantly slowing capital expenditures during the period of no production and reducing non-essential capital expenditures, we still expect to maintain neutral free cash flow for the full year.
Our historical progression of free cash flow and liquidity is depicted on Slide 18. The strong liquidity position generated by 2019's free cash flow is projected to be maintained in 2020, despite the impact of COVID-19 on the first half. We are projecting to end 2020 with approximately $285 million of total available liquidity.
Turning now to our full year 2020 outlook on Slide 19. As the pandemic continues to develop, the full impact of our industry is still unknown. That said, IHS's current production forecast indicates the full year 2020 decline in North America and Europe of 23% and 25%, respectively, resulting in a 24% decline across our footprint.
Again, we anticipate free cash flow neutral for the full year 2020. For the third quarter, we expect value-added sales to decline by a low-teen percentage range year-over-year.
As Majdi noted, we remain focused on executing our key priorities to ensure the health and safety of our employees and customers as well as to maintain Superior's financial position. With that, I'll turn the call back to the operator and open up the call for any questions..
Thank you. Thank you, everyone for joining the call. Have a great day. Thank you..
Thank you. And thank you all for your attention. This concludes today's conference. You may now disconnect..