Good day and welcome to the Superior Industries' Third Quarter 2021 Earnings Teleconference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Clemens Denks. Please go ahead, Sir..

Thank you. Good morning everyone and welcome to our third quarter 2021 earnings call. During our discussion today, we will be referring to our earnings presentation, which, along with the earnings release, is available on the Investor Relations section of Superior's website.

I'm joined on the call by Majdi Abulaban, our President and Chief Executive Officer; and Tim Trenary, our 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 various non-GAAP measures today.

These non-GAAP measures exclude the impact of certain items and are therefore 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 to provide a portfolio and business update..

North America and Europe. As such we are narrowing the range for adjusted EBITDA to the range of $160 million to $165 million for the year and expect cash flow from operations to be $25 million to $55 million at the end of 2021.

As I mentioned earlier, our narrow adjusted EBITDA guidance represents an EBITDA margin in line with our guidance issued earlier this year, despite a 9% decline in unit shipment, underscoring the strength of our team and their execution in an incredibly challenging environment.

While we anticipate supply chain headwinds and rising raw material costs to persist through the remainder of the year, we believe these challenges are temporary. As conditions improve we expect overwhelming demand across the industry to fulfill backlog and support pent-up demand.

In conclusion, I am pleased that the continued response of our team to this very, very challenging environment we're facing. I am confident that once economic conditions return to normalcy, Superior will capitalize on the pent-up demand for our portfolio and the continuous secular trends for premium content.

I would like to thank the entire Superior team for their hard work this quarter, and I look forward to finishing the year off strong. I will now turn the call over to Tim to walk through the financial results.

Tim?.

Well, thank you, Majdi and good morning, everyone. This quarter's financial results include another consecutive quarter of growth over market for Superior despite supply chain disruption within the auto industry.

The global semiconductor shortage has increasingly impacted our customer's vehicle production, especially the number of vehicles manufactured and the stability of production schedules. This in turn has affected automotive supplier’s top lines and manufacturing costs. Furthermore, certain commodity costs and utility and freight costs are up.

Superior is not immune to these challenges. However, manufacturing and administrative cost structure actions have permitted the company to protect margins to the extent practicable. Our example temporary layoffs, a short-time labor program in Germany and a hiring freeze are contributing significantly in minimizing labor costs.

Other step changes to the cost structure have been implemented and more are being considered, but we intend to strike a balance here. We do not want to unduly compromise the ability of the company to respond should light vehicle production surge post to semiconductor shortage.

Our ECI program or enterprise cost improvement and our lean Six Sigma program what we call continuous improvement, both launched late last year and are gaming momentum and driving waste out of our company. Absent these programs Superior's financial results would be more adversely impacted by the current business environment.

Perhaps more importantly, these programs when coupled with the company's sales growth over market trajectory should bring value accretion to our stakeholders in the future. Our financial results on Slide 15 reflect the difficult business environment, which Superior operates today.

Unit shipments increased year-over-year by 20% and net sales down 2% resulting in a 16% decline in value added sales. The company delivered $29.8 million of adjusted EBITDA and $162.2 million of value added sales, a margin of 18.4%.

We reported net loss of $7.2 million or a diluted loss per share of $0.61 compared to net income of $11.1 million or earnings of $0.12 per deliberate share in the prior year period. Slide 16 is a year-over-year sales per bridge. The associated adjusted EBITDA bridge is on Slide 17. Both bridges reflect the lower vehicle production.

On the sales bridge, note to the far right the magnitude of the cost of aluminum in the Q3 2021 sales bar, compare it to the same metric in the leftmost bar, the Q3 2020 sales almost 20% higher in 2021. This is finding its way onto the balance sheet in the form of higher investment in working capital.

On the EBITDA bridge, the company benefited year-over-year from high cost aluminum and inventory year coming out of the COVID-19 shutdowns and the inability at that time to pass those inflated aluminum costs through to the OEM.

Also on EBITDA bridge year-over-year results were adversely impacted by COVID related temporary cost structure actions coming out of the shutdown that remained last year into third quarter, and also manufacturing in-efficiencies arising through the difficult business environment today, more specifically, lower vehicle production and unstable OEM production schedules.

Slide 18, free cash flow for the quarter was negative.

Most noteworthy as depicted on Slide 19 we size the impact of the higher cost of aluminum on working capital and to a lesser extent higher finished goods and working process inventory from the unstable production schedule at approximately $50 million, where not to this, et debt would have been flat. This should be temporary.

That is the high cost of aluminum and supply chain disruption impact on production schedules should normalize in time. Moreover, this will result in a release of working capital in the future with an attendance boost in cash flow. The company's capital structure is outlined on Slide 20.

Funded debt with $624 million at quarter end, cash on hand $76 million, net debt was $548 million. Deleveraging the balance sheet remains the key objective as of September 30, 2021 liquidity including cash and available amounts under our committed, revolving credit facilities was $273 million. The debt maturity profile is depicted on Slide 21.

The company is compliant with all loan covenants and has no near term maturities. Moving on to the full year 2021 outlook on Slide 22.

We are adjusting 2021 guidance due to the significant decline in light vehicle production expected this year, the impact on manufacturing operations of unstable production schedule, and the about 50% increase in the cost of aluminum.

This refresh guidance assumes somewhat lower light vehicle production in the fourth quarter than what IHS has advertised. It also reflects the elevated cost of aluminum today.

Finally, we now expect 1 million unit shipments in the range of 15.6 million to 16 million, net sales in the range of $1.33 billion to $1.36 billion, value added sales in the range of $725 million to $740 million, and adjusted EBITDA of $160 million to $165 million, the lower end of EBITDA guidance at the beginning of the year.

Using the midpoints of the ranges, the refresh guidance reflects the same EBITDA margin is at the beginning of the year. That is 22% on a 4% decline in value added sales, and a 9% decline in unit shipments. I'm pleased with this margin protection.

Cash flow from operations is expected to be in the $25 million to $55 million range significantly below our prior guidance, primarily because of investment in working capital due to the elevated cost of aluminum. We expect approximately $75 million in capital spending through the year, some of which is carry over from 2020.

This investment is largely for extending our premium wheel finishing capabilities and expanding premium wheel manufacturing capacity. Law portion is for repairs to our German facility, a victim of the floods in Europe earlier in the year. We model a 35% to 45% effective tax rate for the year and $10 million to $13 million in cash taxes.

In closing, I'm pleased with the manner in which our facility management and operators, the men and women who make our wheels in these challenging times have risen to the occasion.

And although we expect the semiconductor shortage and other supply chain disruption to persist heading in 2022, we believe lower dealer stocks and pent-up vehicle demand will support industry recovery in the not too distant future in which we intend to be prepared to capitalize. With that I'll turn the call back to you, Majdi..

Thanks. Thanks Tim. I'd like to turn it over to the operator for Q&A now..

Thank you. Our first question comes from Gary Prestopino with Barrington Research..

Good morning, everyone..

Good morning Gary..

Could you guys possibly explain a little bit more of this whole issue with metal timing, price increases on aluminum? My understanding was that that this was just a pass through, but it seems to me in some of your narrative that at least on a working capital basis, it's certainly a bigger use of working capital than it had been in the past.

So could you just explain how that all works?.

Sure. Hi. Gary it's Tim. I'm happy to do so. We have what I would characterize as very effective mechanisms agreed with our OEMs in both North America and Europe for the past rising or declining costs of aluminum through to them as they occur. That, so therefore the effect of changing aluminum prices on the P&L is not very great at any point in time.

However to the extent aluminum costs go up, they – those increased costs are resident in our working capital more specifically they will reside in inventory and receivables and to some extent are offset and payable to the extent we owe to smoke those money.

So while there's very little impact on the P&L, there can be an impact favorable or unfavorable on the balance sheet in working capital, and that's the environment that we're in today. Just to give you an idea, aluminum was about round numbers now $2,100 per metric ton at the beginning of the year.

It rose to as high as $3,150 a couple weeks ago, and it's pulled back a little bit to $2,900. So it was up as much as 60%, a couple weeks ago, and today's about 40%. So on average about 50%, very little impact on our income statement and an impact on working capital..

So you said you think this – this whole issue with the aluminum prices or aluminum will begin to normalize as we go forward.

Is that just a function of flows in and out will equal liberalize? Or are you anticipating that aluminum prices they're going to come down?.

I anticipate that aluminum will be, as it has in the past and that is when there's some shock to the global economy.

Generally aluminum will go up or down dramatically, but it will over time, I think as the supply chain disruption is behind us and other disruptions, I believe it'll normalize back towards the number, I think more closer to $2,000 per metric ton. So I think what we're experiencing today is an aberration, it's temporary..

Okay. And then Majdi on Slide 12, you went through all of your new product launches, but I couldn't write it down fast enough. You said seven of the nine were larger wheels, which I assume are 19-inch or greater.

And then you had eight up – eight of the nine were what, six of the nine were what; eight of the nine it was just some things there that I couldn't capture?.

Yes. Sure. So we said seven of the nine have larger wheel sizes. Gary, eight are premium finishes, six are electric vehicles and eight of the nine have lightweighting technologies..

Okay. So you're still seeing a good proliferation there. And then the PVD you've got, I'm sorry, go ahead, Majdi..

Yes. No, because the adoption continues to exceed our expectations. It's a very exciting space..

That's great to hear. And then lastly, you said you got PVD approval from a second major OEM.

Are you actually producing wheels now with PVD or are you waiting for business on new front?.

We absolutely are Gary. We, this product has been on the F150 since January 2020. And actually won an award from Ford as global excellent award subsequent to that award from Ford it qualified as a finalist in the pace award, which is the highest innovation recognition in our automotive industry in the fourth quarter.

So we were a finalist, which is really a great recognition of Superior as a technology company. And now the most – really a very exciting step is this is a major OEM that is excited about the product. Ford will tell you it is the best PVD technology in the industry.

And now, I was talking to our guys that were speaking to the customer where we got the second approval. They were just astonished at in many aspects of the technology and we're excited and we're going to have another OEM here soon – very soon and more to come, more to come on that front..

Great. That's good news. All right. Thank you very much..

You're welcome..

Our next question comes from Michael Ward with Benchmark..

Thanks. Good morning, everyone. Majdi, just a follow-up....

Good morning, Michael..

Good morning.

To follow-up on online or on Page 12, what is kind of the average content? If you're looking at those wheels compared to where you are today, if you're looking at the overall business, are we going – I think if you look at the global average, you're somewhere in that, if you take the total units of the revenue – the value added revenue, you're somewhere around the $46, $47 range.

What is the average of these vehicles compared to which you are historically?.

Mike, it really, really depends. So now it tends to be significantly higher than the base level wheel. So orders of magnitudes, our PVD technology is a Chrome replacement. Chrome, Chrome is extremely an expensive application. With PVD you get 60% increase in the value of the wheel.

When you lightweight a wheel, so we said eight of the nine have lightweighting, actually we said, yes, eight of the nine have lightweighting. That process essentially what it is, is stretching a wheel taking mass out, but it adds, it's an added cost because it does require a special process.

So light waiting on average adds close to 20% to the value of the wheel. So it really depends across the board, but an average – the company that's 45, the premium wheels could go anywhere between 60 to 100..

And on the EV side, I mean, the F150 lightning, one of the things that stands out to you is the wheels are much larger. They need to be, I guess to carry the weight.

Is a similar type increase in the cost for those types of vehicles as well?.

No. Yes, it is – it is significant. And listen, I mean, you talk about sizing. We have just; we won the 24-inch believe it or not 24-inch wheels. We never thought that day would come on the navigator. So sizing is moving fast in 2019, 208% of our wheels were 19-inches or larger. We used to use 19-inches a line of demarcation mic.

Now I think you will have to change that. Now it's close to 50% and most of the time we're talking 21-inch, 22-inch, and now we're talking 24-inch wheels substantially more added content..

As we look next....

We fee, Mike, wheels are selling fast. You got it..

Yes, absolutely. Yes. And as we look out over the next three to five years, the average is going to go north….

Yes. So we have a study of the IHS data. We believe that between 19 and 25 premium wheels will grow at an average of 6%. And we see ourselves growing at 12%. So the subset of the industry, which is the fastest growing subset premium wheels, is going to grow at 6% and we're going to be at 12%.

And we have the history for the last four years to support that we've even exceeded that..

Mike it's Tim. To Majdi's point when you look at any one platform or collection of platforms, the incremental content for wheel across that vehicle compared to another or one portfolio of vehicles compared to another can very dramatically.

If you're looking for some economic measure of how this premium content in our industry on our wheels is affecting our business, one measure is what we refer to as the VAS or value added sales per unit.

So this, if you just one just simply takes the value added sales over any period of time, divided by the number of units, some of which to premium and some are standard. What you'll find is that over the last three or four or five years, that I've looked at it that VAS per unit is up.

Let me just give you two numbers, the VAS per unit for the third quarter of 2021 was about $46.35, that same number a year ago was $43.75. So what's up in excess of $2, call it $2.5 more than 5%, call it 6%. Again that's the content spread, not only over the premium wheels, but the standard wheels in the portfolio.

But if you look back, what you'll see is a steady progression of this VAS per unit, which reflects that additional content..

And so it sounds like, if I look back, I mean, you basically from five years ago, you've gone from 37. So you're up at 47, and it sounds like over the next five years, the increase is going to be bigger than that.

And it just sounds like there a number of factors that line up and another one at least in North America, moving away from cars in this acceleration towards light trucks and crossovers and EVs, all of them have higher content for you correct?.

I'm inclined to agree with you. And frankly, I mean in terms of internally here we need plan and model. We actually have underestimated the impact of this in our business.

It actually been very pleasantly surprised and having done some study on this that referred to, we find ourselves in a segment of premium wheel segment, that's growing very handsomely and we're growing quite well inside that growing segment. So I don't have any reason to believe that this would – this would decline any time in the next year or two..

It certainly seems like it.

And so Tim, on the working capital and the transitory items you cited to $50 million, is this – I assume just as it unfolds, is it, are you looking at a normal like two to three quarters where that unfolds? Is that what you're looking at?.

Yes. So you're wondering when this $50 million as of the third quarter that has – that we've invested in the balance sheet and aluminum and a little excess inventory, extra inventory that we'd like to have because of the production schedule. And that will be – look, I don’t, and when it is released, it'll be a boost to the cash flow.

I can't tell you what exactly when it's going to we'll get some relief from that. I will tell you that about a third of that 50 is finished good into a lesser extent working process that we are managing down.

And while I can't tell you definitively that it'll be all gone by year end, I believe that one-third will come down a bit, now having said that in fairness, Mike. On the other side of the equation, in this past month as I think I mentioned with respect to aluminum prices, it actually went up a little bit. So by year end, they may be offsetting.

I don't know exactly when it'll be released the balance sheet. It’s a temporary investment..

Yes. It's a nice tailwind for the next two quarters, at least..

It will come back. It will come back to us..

Okay.

And just lastly, have you heard any – have you seen any firming up in production schedules?.

Yes. That's a good question, Mike. I would tell you that maybe the takeaways that we haven't seen the bottom, the bottom yet. So IHS has got you look at the numbers, they got some recovery in Q4 by a bottom 1 million vehicles in our markets. We really don't see that. We're seeing more like a flat market.

If you can extrapolate from our numbers, we're saying market is at, going to be down 30% will continue to be ahead of that in the high teens as we've had done for the last for several quarters. It will normalize probably more in the first half of next year, and I think maybe perhaps the real recovery will be in the second half of 2022..

Yes. That sounds like it. Well, thank you. Thank you very much..

Thank you..

And there are no further questions at this time. I will turn the call back to our speakers for any additional or closing remarks..

Thank you. Thanks everyone for joining our call today. We look forward to updating you on our progress next quarter, as we continue to drive value for Superior and our shareholders have a good rest of the day. Operator..

Thank you. This concludes today's call. You may now disconnect..