Welcome to Superior Industries Second Quarter 2024 Earnings Conference Call. This call is recorded. We are joined this morning by Majdi Abulaban, President and CEO; Tim Trenary, Executive Vice President and CFO; and Tom McGill, Vice President, Investor Relations. I will now hand you over to your host, Tom McGill, to begin today's conference. Thank you..

Good morning, and welcome to our second quarter 2024 earnings call. During our call this morning, we will be referring to our earnings presentation, which, along with our earnings release, is available on the Investor Relations section of Superior's website.

I'm joined today on the call by Majdi Abulaban, our President and Chief Executive Officer; and Tim Trenary, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Majdi, I 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.

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. I now will turn the call over to Majdi to provide a business and portfolio update..

Thank you, Tom, and thank you all for joining our call today to review our second quarter 2024 results. I will begin with Slide 4. This quarter highlights the culmination of our efforts in recent years to position the Company for sustainable growth and profitability.

We have refocused our portfolio on winning products and have transformed our manufacturing operations into a best-in-class competitively advantaged local footprint. Combined, these actions have put Superior in its strong sustainable position and earned our place as the premier wheels solutions provider to lead the industry.

In the second quarter, our team delivered a solid performance. Adjusted value-added sales outpaced the broader industry despite softer production and adjusted EBITDA margin significantly expanded on a sequential basis.

As we previously highlighted, we have executed on our strategic actions to transform and elevate our footprint by transitioning off our global manufacturing capacity into low-cost locations, advancing our local-for-local footprint and creating additional value for our OEM customers seeking shorter derisked supply chains.

In this regard, execution of our European transformation remains on track. We have now completely exited our German manufacturing operations and are well on our way, ramping up in both. This will position us for a significant profitability uplift by the end of this year. I am proud of our team's flawless execution on this transform so far.

Our customers actually have been very, very pleased with these results and have recently recognized Superior with business wins and expansion of our technology partnerships. I'll give you more color on this in a bit. In terms of the operating environment this quarter, industry production declined 3% with key customer production declining 5%.

In contrast, Superior value-added sales adjusted for foreign exchange and deconsolidation in the quarter increased by 1%. And currently, we delivered solid adjusted EBITDA with 400 basis points sequential margin expansion. This performance was supported by the successful negotiations with our customers for real price increases for cost inflation.

On this point, I would like to highlight that we have successfully pivoted pricing dialogues with OEMs from onetime price recoveries to permanent price increases. Now with regard to our plans to address our capital structure. We are in advanced discussions with lenders to retire our senior unsecured notes in the very near future.

This action will strengthen our balance sheet and position the Company for long-term growth. We expect to announce more information on this in a couple of weeks. As we look at the remainder of 2024, we are updating our full year outlook.

We are reducing outlook for net sales and value-added sales due to lower aluminum pricing and declines in industry production volumes.

While our teams have done an excellent job flexing costs and recovering price from customers for inefficiencies and inflation, we are reducing disproportionately, that is our adjusted EBITDA guide, while maintaining margins. We are laser focused on cash flow in a lower volume environment.

Unlevered free cash flow remains unchanged as we reduce our capital expenditure outlook. Tim will provide more color on this side. Moving on to Slide 5.

We have some very, very exciting news to make, which underscore the momentum we are getting in Europe with our customers as they recognize our unique competitive position as a technology leader with a competitively advantaged manufacturing footprint.

Turning on the left of the slide, we even awarded a record 1.7 billion wheel program with our long-standing premium customer Volvo on a midsized crossover platform. This program includes our premium aerodynamic and lightweighting technologies and is valued at about $100 million and is expected to launch in the fourth quarter of 2025.

Our team is very proud of this achievement with Volvo. We look forward to our winning relationship with them. Now on the right side of the slide, we have received an A rating in research and development from Audi, a technology leader in the automotive space.

This is a significant achievement and positions us as a top brand supplier with this major OEM for innovation, reflecting the strength of our portfolio as well as our industry-leading R&D capabilities. We're very grateful for this recognition from Audi.

Again, this underscores our momentum with European customers as they recognize the strength of our recently transformed footprint, our leadership in technology and our long-standing customer relationships. Slide 6 provides further detail on our European transformation.

As we ramp up production in Poland, we will be closing the launching gap between North America and Europe in the second half of this year. We will benefit from higher cost absorption and improvement in our Polish operations as production ramps up.

In addition, we are continuing to improve our overall cost structure in Europe by consolidating aftermarket warehouses and fractionalizing overhead. Further, we are pleased with the progress our teams have made in recent times negotiating with all European OEMs to implement wheel price increases to recover inflationary costs.

These conversations reflect the collaboration with our customers and our long-term nature of the relationship. Turning on to Slide 7.

To further highlight our current operating environment, the industry continues to face a complex landscape shaped by ongoing volume volatility and key customer shutdowns, higher dealer inventories, unfavorable production mix and increased inflation in Europe. While industry recovery versus pre-COVID level continues, we are seeing a slowdown.

Industry production in our two regions declined 3%, while production on our key customers declined 5%. That said, production remains below COVID levels. We expect in the long term continued industry recovery supported by pent-up demand tailwinds. A case in point here is that the U.S. fleet age remains at an all-time high.

Turning on to Slide 8, which highlights Superior's growth compared to the broader industry in the second quarter. Global industry production as well as production among key customers both declined, while we delivered 1% increase in value-added sales, adjusted for foreign exchange and deconsolidation.

Regionally, North American OEM production increased but was offset by softer production among European OEMs. Now that said, both our North America and European operations grew ahead of the respective market in the quarter. Further, we have strategically pruned parts of our portfolio and exited underperforming programs.

We are seeing the benefit of these actions in our results. Overall, we are performing well in a challenging environment. Moving on to Slide 9, which highlights the continued positioning of our portfolio of premier technologies and how the accelerated adoption of these products is driving growth.

The left side of the slide highlights some exciting launches in the second quarter. The right side of the slide highlights the historical trend with long-term content growth per wheel of 34% since 2019. We expect these macro trends driving the wheel space to continue well into the future.

In closing, I am grateful to the Superior team for the position we have created for our company. We have refocused our portfolio on many products, transform our manufacturing footprint to the best-in-class, competitively advantaged local footprint, and we are strengthening our balance sheet as we retire our [indiscernible].

Through outstanding execution of our team, Superior now more than ever is positioned for sustainable, profitable growth. Now I will turn the call over to Tim to provide more detail on our financial results.

Tim?.

Thank you, Majdi. On Page 11, a Europe transformation update. I recall that on August 31 last year, we announced an important strategic action, the continuation of our local-for-local manufacturing footprint optimization and the transformation of the remaining 6% of our manufacturing footprint to a more competitive cost structure.

More specifically, our production facility in Werdohl, Germany, otherwise known as Superior Industries production in Germany or SPG, entered protective shield proceedings, a German court administered reorganization process.

Generally accepted accounting principles required an SPG's statement of operations and balance sheet beginning with the commencement of the proceedings to be consolidated for Superior Industries' financial statements.

Accordingly, the income statement of SPG is excluded from the second quarter 2024 financial results as is the balance sheet of SPG at quarter end. The deconsolidation affects the year-over-year comps. More specifically, in the second quarter 2023, 245,000 wheels were sold by SPG.

The associated net sales and value-added sales were $31 million and $20 million, respectively. Year-over-year, second quarter 2024 financial results and, therefore, adjusted EBITDA, capital expenditures and working capital benefited from the closure of the facility.

Adjusted EBITDA was $1 million more, capital expenditures and working capital over $1 million and $22 million less, respectively. We sized the step change benefit of the transfer of wheels from Germany to Poland at $23 million to $25 million annually. Capital expenditures should be approximately $10 million less per year.

Superior's European variable contribution margin should approach that of Superior North America. We expect the cost to complete the wheel transfer to be $20 million to $35 million. Bottom line, regarding the closure of SPG and transfer of the wheels to Poland.

The Company successfully executed on a cost-effective facility closure in a high-cost country, that results in a significant increase in unlevered free cash flow because of the reduction in capital employed and higher earnings. Let's look at the quarter on Page 12. And second quarter 2024 financial summary.

Net sales decreased to $319 million for the quarter compared to $373 million in the prior year period. The normalization of the cost of aluminum and deconsolidation of SPG accounts for slightly more than all of this $54 million decline or $55 million.

Value-added sales decreased $280 million for the quarter compared to $200 million for the prior year period. The deconsolidation of SPG and foreign exchange accounts for $19 million of this $20 million decline. Adjusted EBITDA was $40 million. The associated margin expressed as a percent of value-added sales, 22%.

For the quarter, net loss was $11 million. The second quarter of 2024 year-over-year sales bridge is on Page 13. As just mentioned, value-added sales declined to $20 million compared to the prior year quarter, reflecting deconsolidation of SPG and impact of foreign exchange.

To the far right, [indiscernible] cost pass through to customers was down $34 million because of the lower cost of aluminum and deconsolidation of SPG. On Page 14, second quarter 2024 year-over-year adjusted EBITDA [indiscernible]. Adjusted EBITDA for the quarter decreased to $40 million compared to $52 million in the prior year period.

The adjusted EBITDA margin for the quarter was 22% compared to 26% last year. Lower unit sales, partially offset by favorable price and product mix. And to the far right, lower performance primarily because the second quarter of last year benefited from nonrecurring recovery cost inflation are the primary reasons adjusted EBITDA declined.

Importantly, the Company has substantially completed a pivot to incorporate into wheel pricing amounts necessary to offset in large part, the impact on the cost structure of extraordinary cost inflation and other factors. The impact of foreign exchange embedded timing in the quarter compared to the final period was immaterial.

An overview of the Company's second quarter 2024 unleveraged free cash flow is on Page 15. Cash used by operating activities was $8 million for the quarter compared to $28 million in the prior year period.

Lower investment in working capital in the second quarter of this year, partially offset by lower earnings in the quarter, are the primary reasons for the decrease in cash used by operating activities.

Cash used by investing activities for the quarter was $8 million, $2 million more than the prior year period because of the somewhat higher capital expenditures this quarter. There were no cash payments for non-debt financing activities in the second quarter of this year because the dividends payable and preferred shares were paid in kind.

The Company opted to PIK the dividends to maximize cash. Unleveraged free cash flow for the second quarter of 2024 was $2 million, an increase of $19 million compared to the prior year period, primarily because of the improvement in cash used by operating activities.

A review of the Company's capital structure as of June 30, 2024, may be found on Page 16. Cash on the balance sheet at quarter end was $172 million, funded debt $627 million at quarter end, and net debt was $455 million. Deleveraging the balance sheet and, therefore, unleveraged free cash flow, remains a top priority.

The Company's debt maturity profile after the end of the quarter is on Page 17. As Majdi noted, we are in advanced discussions with lenders to retire the senior unsecured notes in the coming weeks. The [indiscernible] facility was undrawn at quarter end, and we are in compliance with all loan companies.

The full year 2024 financial outlook is on Page 18. For the full year of 2024, we now expect net sales in the range of $1.35 billion to $1.41 billion and value-added sales in the range of $695 million to $725 million. Reduction in expected sales reflects lower aluminum costs and lower expected OEM light vehicle production.

We are lowering adjusted EBITDA to $150 million to $165 million due to lower sales [indiscernible]. We still expect to deliver on leveraged free cash flow in the range of $110 million to $130 million, primarily because capital expenditures are expected to be lower, offsetting the lower adjusted EBITDA.

The outlook for capital expenditures is now $40 million, $10 million lower, as the Company continues to reduce the capital intensity while strategically investing in the business. We modeled tax expense of approximately $30 million for the year.

In closing, our teams have done a great job executing our European transformation and keeping us on track to achieve our operational and financial priorities. This concludes our prepared remarks. Majdi and I are happy to take questions.

Alan?.

Thank you. [Operator Instructions] We will take our first question from Michael Ward, Freedom Capital..

Majdi, I think you mentioned something, and I didn't quite catch it.

Is there a change in the pricing with the vehicle manufacturers?.

I was really referring to the negotiations, Mike, for price increases. We have -- you recall, we talked about it last year, and we shared with you our success. And this year, we've pivoted to permanent price increases on our wheels with customers to recover inflation. So the answer is yes, I'm referring to negotiations for price increases.

And I will tell you that our discussions with customers have been very productive, and we have been successful in reflecting now, I would say, 90% of the way we are reflecting inflation in our price through agreements with our customers..

And the deal with Volvo, is that a sign of more to come with some of these -- the luxury-based manufacturers in Europe, given your new cost structure? Is that what that is?.

Absolutely. And I think the one -- Volvo, with German customers and with global and JLR, we've always been in a strong position. This is an excellent sign, a culmination of a long-standing relationship as well as our competitive position -- by far because of our competitive position.

I also shared with you in the presentation new developments with Audi. The A technology rating is the highest with Audi and really indicative of what's to come. We have been in dialogue with customers -- advanced dialogue, actually -- to continue to grow the business and leverage what we have from a portfolio standpoint and a footprint standpoint.

Mike, you may have heard me refer to this. The majority of the capacity in Europe for wheels resides in either the three countries, right? Germany, Austria, Spain and a little bit of Italy. So it's really all ultra-high cost from a manufacturing standpoint, at least for wheels. And we're now 100% in Poland. Customers know it.

And I would tell you the transformation we executed on in a very short time, closing a plant, a major operation, moving into Poland without any disruption. We just came out of a meeting with Audi a couple of days ago.

They were very, very pleased with the execution and they said "It's the largest insolvency they've seen in recent times and they had not seen one that has been executed flawlessly as this one." So this actually elevated. So our competitive position has elevated our position with customers and the way this team has executed [indiscernible]..

That's what it sounds like.

Tim, do you have the unit shipment data separated between North America and Europe?.

I do have it. I don't have it with me right now. It is in total, Mike, on one of the pages..

I saw the total number. I was just curious by region..

I don't have it by region, right?.

Okay.

Will it be in the queue or…?.

I believe it is, yes..

[indiscernible] have it..

Okay. When you talked about the margins, it sounds like the margins in the second half in Europe will be getting closer to North America, and that's a substantial change. What did it look like in the first half? And what type of -- we're getting the annual rate of the $23 million to $25 million in savings.

Is that what we're going to see in the second half? We're going to start to see that pretty quickly?.

Yes, the wheels are starting to -- the launches are ongoing right now. Very heavy right now. We started a little bit in the [indiscernible] half of the second quarter. So the guys in Poland are extremely busy right now consumed with launching these new wheels. I mean, we know how to build these mills.

We've built them before, but we're going to Germany and so it's something new for the guys in Poland. So it's not [indiscernible] a brand-new, brand-new launch, but there is some -- it does require the retention. So we expect to have all those launches done by the end of the third quarter.

And in fairness, it will take them a little while probably to get their arms around some of the processes. So all the wheels will be manufactured in Poland by the fourth quarter and this step change, the $25 to -- $23 million to $25 million annually, will present itself for a full year of 2025.

We won't have the full benefit of it [indiscernible] quarter..

Right. Okay. And just lastly, is there any implication with the notes coming current on the balance sheet? Or is that just all part of the negotiation, which sounds like it's pretty close to getting resolved..

Yes. The mills being current on the balance sheet and that affected the discussions..

We will take our next question from Gary Prestopino, Barrington Research..

Several questions here.

First of all, on the pricing that you've negotiated with the OEMs, do these negotiations in terms of how you're structuring, I guess, your contracts or whatever -- are they going to be tied to some kind of inflation metric that if prices change again going forward, in terms of whatever inputs you're putting in there, that you automatically get an escalation? Or do you have to go back and renegotiate the contract?.

So Gary, when you think of pricing and price transfer as customers, two elements, right? You're very well aware of the aluminum contractual relationship -- aluminum [indiscernible] cost. That's an automatic. You know that. Everything else we have negotiated is really for -- mostly for labor costs and other inflationary costs in manufacturing.

So those are permanent. There are some price increases, but I'll say less than 20% of the price increases negotiated are related to energy index. So for the most part, the price increases that are built in our plan and actually, you see them in Q2, Gary.

[indiscernible] our ability to get price in the quarter enables us to offset some of these volumes we've seen in the industry. So the direct answer is, for the most part, these price increases are permanent and not one-offs and not indexed for now..

So they're permanent, but not indexed..

Most of them, yes..

A small element, Gary, primarily in Europe, is indexed to energy and that's because the energy cost -- gas and electricity in Poland -- are more volatile in North America..

Okay. And then let's jump to the win with Volvo. That obviously the data you shared with us, that's over the life of the program.

And so how long would that program run?.

All of these programs, Gary, are between three to five years, right? So this one is a brand-new [indiscernible]. I mean, three localizations out of China. It's a midsize SUV. It's actually going to be manufactured so it's not too far from our plants in Poland..

Okay. And this is EV? Because I think Volvo said they're going entirely EV eventually.

Is this an EV?.

That's correct..

I'm sorry, I didn't hear you..

Yes, that's correct, Gary. It is an EV..

Okay. Okay. And then could you -- in terms of retiring these notes, which is great, you've made the progress in, but could you give us conceptually what the retirement is going to be? I mean, you're going to replace the notes with something, I guess. I'm trying to get a feel for how this is going to work.

And is there going to be a step change -- if you have to replace them with some kind of another debt structure or whatever, what's going to be the step change up in interest rate on the new debt?.

Gary, we're not done with this transaction yet. As we've said, we characterize it as being in advanced discussions, which we are. So I'm not at liberty, frankly, until we conclude these discussions and complete this refinancing, to discuss the construct of the capital structure..

We will take our next question from [indiscernible] Deutsche Bank..

Can you hear me well?.

Yes..

Yes, fantastic. I have a very simple question, actually, again, on the redemption of the bonds. Can you give us the main reason behind the delay for the redemption or the refinancing? That's the first question. And the second question is, you started talking about the redemption of the bond.

And then after that, you said a few seconds ago about refinancing.

The new form of this -- of the new debt structure, are there going to be new bonds involved? Or are you going to refinance this [indiscernible] loan? Or can you give us a broad guidance for this?.

Yes. As I just described, we're just not prepared to make any comments with respect to this new capital structure until we've completed the activities on the refinancing..

Okay. Great. And then in terms of timing, you said you will come out with more details in a couple of weeks or in a few weeks.

Can you give us a bit more guidance here? More color? Is it going to be more in September, October like?.

Again, I'm going to suggest that we wait to complete the discussions, and then we can discuss the capital structure..

[Operator Instructions] There are no further questions on the line. I will now hand you back to Majdi Abulaban for closing remarks..

Thank you, Alan, and thank you, everyone, for joining our call to the Superior team. Thank you. Everything that we have done, everything that you have done, has been extremely difficult and close to impossible. The results are really a product of your unwavering commitment. So thank you, and thanks, everyone, for joining. Have a great day..

Thank you for joining today's call. You may now disconnect..