Superior Industries International - Q2 2024

Executive Summary

• Net sales were $319.0M, Adjusted EBITDA $40.0M (22% of Value-Added Sales), and diluted EPS was a loss of $0.75; sequential margins expanded ~400–430 bps (18% in Q1 to 22% in Q2) despite lower YoY sales due to aluminum pass-through and the SPG deconsolidation.
• Guidance was lowered on Net Sales ($1.35–$1.41B), Value-Added Sales ($695–$725M), and Adjusted EBITDA ($150–$165M); Unlevered FCF was maintained ($110–$130M) and Capex cut to ~$40M from ~$50M previously.
• A major capital structure catalyst arrived post-quarter: on Aug 15 the company refinanced all existing debt, extended maturities to Dec 2028, and reduced total debt from $627M to $521M, supporting long-term flexibility.
• Strategic highlights included completion of production exit from Germany and ramp in Poland, plus a record Volvo program award (~$100M, launches Q4’25) and Audi “A” R&D rating, reinforcing technology and footprint advantages.

What Went Well and What Went Wrong

What Went Well

• European transformation executed: exited German manufacturing (SPG) and ramping Poland, expected to deliver $23–$25M annual EBITDA uplift and close margin gap with North America; management emphasized “flawless execution” and strong OEM feedback.
• Structural pricing pivot: management moved from one-time recoveries to more permanent price increases to offset inflation, supporting margin resilience in a lower-volume backdrop.
• Strategic/customer momentum: record Volvo wheel program (~$100M) with premium aero/lightweight technology and an “A” R&D rating from Audi, strengthening European OEM positioning.

What Went Wrong

• YoY top-line pressure: net sales fell to $319.0M from $372.6M on lower aluminum pass-through and deconsolidation; gross profit declined to $31.6M from $41.0M; Adjusted EBITDA fell to $40.0M from $52.0M.
• Higher costs and restructuring: SG&A rose to $21.4M (vs $17.0M), and income from operations fell to $10.2M (vs $24.0M), reflecting restructuring tied to the European transformation.
• Market headwinds: softer production at key OEMs (industry down ~3%, key customers down ~5%) led management to reduce full-year sales and EBITDA guidance, citing lower volumes in the back half.

Transcript

Operator (participant)

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.

Tom McGill (VP of Investor Relations)

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 two of this presentation for the full Safe Harbor statement and to the company's SEC filings, including the company's current annual report on Form 10-K for 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.

Majdi Abulaban (President and CEO)

Thank you. Thank you, Tom, and thank you all for joining our call today to review our second quarter 2024 results. I will begin on slide four. 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 a 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 margins 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 all our global manufacturing capacity into low-cost locations, advancing our local-for-local footprint, and creating additional value for our OEM customers seeking shorter de-risked 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 Poland. 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's value-added sales, adjusted for foreign exchange and deconsolidation in the quarter, increased by 1%. Encouragingly, we delivered solid adjusted EBITDA with 400 basis point sequential margin expansion. This performance was supported by the successful negotiations with our customers for wheel price increases for cost inflation. On this point, I would like to highlight that we have successfully pivoted pricing dialogues with OEMs from one-time 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 output. Tim will provide more color on this later. Moving on to slide five.

We have some very, very exciting news to make, which underscore the momentum we are gaining in Europe with our customers as they recognize our unique competitive position as a technology leader with a competitively advantaged manufacturing footprint. Starting on the left of the slide, we were awarded a record 1.7 million wheel program with our long-standing premium customer, Volvo, on a mid-size crossover platform. This program includes our premium aerodynamic and lightweighting technologies. It's 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 a winning relationship with them. Now, on the right, 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-ranked 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 six provides further detail on our European transformation. As we ramp up production in Poland, we will be closing the margin 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 rationalizing 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 to slide seven. 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 levels 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 tailwind.

The case in point here is that the U.S. fleet age remains at an all-time high. Turning to slide eight, 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 American and European operations grew ahead of their respective markets 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 nine, which highlights the continued positioning of our portfolio of premium 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 winning products, transformed our manufacturing footprint to the best-in-class, competitively advantaged local footprint, and we are strengthening our balance sheet as we retire our notes. 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?

Tim Trenary (EVP and CFO)

Thank you, Majdi. On page 11, Europe transformation update. 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 Germany, or SPG, entered protective shield proceedings, a German court-administered reorganization process. Generally Accepted Accounting Principles require that SPG's statement of operations and balance sheet, beginning with the commencement of the proceedings, be deconsolidated from Superior Industries' financial statements. Accordingly, the income statement of SPG is excluded from the second quarter of 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 of 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 were $1 million and $22 million less, respectively. We size the step change benefit of the transfer of wheels from Germany to Poland at $23 million-$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-$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, 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 to $180 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, aluminum cost passed 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 bridge. 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 non-recurring recovery and cost inflation, are the primary reasons adjusted EBITDA declined. Importantly, the company has substantially completed the pivot to incorporating 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 and metal timing on the quarter compared to the prior year period was immaterial. An overview of the company's second quarter 2024 unlevered free cash flow is on page 15. Cash use 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 on the preferred shares were paid in kind. The company opted to PIK the dividends to maximize cash. Unlevered 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.

An overview of the company's capital structure as of June 30, 2024, may be found on page 16. The 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 unlevered free cash flow remains a top priority. The company's debt maturity profile, as at the end of the quarter, is on page 17. As you know, we are in advanced discussions with lenders to retire the senior unsecured notes in the coming weeks. The revolving credit facility was undrawn at quarter end, and we are in compliance with all loan covenants. The full year 2024 financial outlook is on page 18.

For the full year 2024, we now expect net sales in the range of $1.35 billion-$1.41 billion, and value-added sales in the range of $695 million-$725 million. The reduction in expected sales reflects lower aluminum costs and lower expected OEM light vehicle production. We are lowering the Adjusted EBITDA to $150 million-$165 million due to lower sales output. We still expect to deliver unlevered free cash flow in a range of $110 million-$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 model 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?

Operator (participant)

Thank you. If you'd like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. You'll be advised when to ask your questions. We will take our first question from Michael Ward, Freedom Capital. Your line is open. Please go ahead.

Michael Ward (Analyst)

Good morning, everyone. Majdi, I think you mentioned something, and I didn't quite catch it. Is there a change in the pricing with the vehicle manufacturers?

Majdi Abulaban (President and CEO)

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 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.

Michael Ward (Analyst)

In the deal with Volvo, is that the 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?

Majdi Abulaban (President and CEO)

Absolutely. And I think the one, you know, Volvo with German customers and with Volvo and JLR, we've always been in a strong position. This is an excellent sign, a combination of the 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. You know, 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 Italy. So it's really all ultrahigh costs from a manufacturing standpoint, at least for, for wheels, and we're now 100% in Poland. Customers know it, and, you know, I would tell you the, the transformation we executed on in a very short time, you know, closing a plant, a major operation, moving it to Poland without any disruption. You know, 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've not seen one that has been executed flawlessly as this one. So this actually elevates. So our competitive position has elevated our position, Mike, with customers, and the way this team has executed has been better.

Michael Ward (Analyst)

That's what it sounds like. Tim, do you have the unit shipment data separated between North America and Europe?

Tim Trenary (EVP and CFO)

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

Michael Ward (Analyst)

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

Tim Trenary (EVP and CFO)

Yeah. Yeah, I don't have it by region, Mike.

Michael Ward (Analyst)

Okay. Will it be in the queue, or?

Tim Trenary (EVP and CFO)

I believe it is, yes.

Michael Ward (Analyst)

Okay. And when you talk about-

Tim Trenary (EVP and CFO)

We don't have it.

Michael Ward (Analyst)

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. You know, what did it look like in the first half. We're getting the annual rate of the $23 million-$25 million in savings. Is that what we're gonna see in the second half? We're gonna start to see that pretty quickly?

Tim Trenary (EVP and CFO)

Yeah. The launches are ongoing right now, very heavy right now.

Michael Ward (Analyst)

Okay.

Tim Trenary (EVP and CFO)

We started a little bit in 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 wheels. We've built them before, but we built them in Germany, and so it's something new for the guys in Poland. So it's not quite as difficult as a brand new launch, but there is some. It does require their attention. So we expect to have all of those launches done by the end of the third quarter.

Michael Ward (Analyst)

Okay.

Tim Trenary (EVP and CFO)

In fairness, it'll take them a little while probably to get their arms around some of the processes. So, you know, all the wheels will be manufactured in Poland by the fourth quarter, and this step change, the $23 million-$25 million annually, will present itself through the full year of 2025. We won't have the full benefit of it into the fourth quarter.

Michael Ward (Analyst)

Right. Okay. And just, 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?

Tim Trenary (EVP and CFO)

Yeah, the notes being current on the balance sheet have not affected the discussions.

Michael Ward (Analyst)

Great. Thank you very much, everyone.

Tim Trenary (EVP and CFO)

Thanks, Mike.

Operator (participant)

We will take our next question from Gary Prestopino, Barrington Research. Your line is open. Please go ahead.

Gary Prestopino (Analyst)

Good morning, Majdi and Tim.

Majdi Abulaban (President and CEO)

Hey, Gary.

Gary Prestopino (Analyst)

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 gonna 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?

Majdi Abulaban (President and CEO)

So, Gary, when you think of pricing and price transfer to customers, two elements, right? You're very well aware of the aluminum contractual relationship. Aluminum passes on 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, and I think that our ability to get price in the quarter enables us to offset some of these volumes you'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.

Gary Prestopino (Analyst)

They're permanent, but not indexed?

Majdi Abulaban (President and CEO)

Most of them, yes.

Tim Trenary (EVP and CFO)

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

Gary Prestopino (Analyst)

Okay. Let's jump to the win with Volvo. The data you shared with us, that's over the life of the program. And so how long would that program run?

Majdi Abulaban (President and CEO)

You know, these, all of these programs, Gary, are between 3-5 years, right? So this one is a brand-new platform coming, you know, through the localization out of China. It's a midsize SUV. It's actually gonna be manufactured not too far from our plants, in Poland.

Gary Prestopino (Analyst)

Okay. I think Volvo said they're going entirely EV eventually. Is this an EV?

Majdi Abulaban (President and CEO)

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

Gary Prestopino (Analyst)

Okay. 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 gonna be? I mean, you're gonna replace the notes with something, I guess. I'm trying to get a feel for how this is gonna work and, you know, is there gonna be a step change? If you have to replace them with another debt structure or whatever, what's gonna be the step change up in interest rate on the new debt?

Tim Trenary (EVP and CFO)

Gary, we're not done with this transaction yet. As we 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 capital structure.

Gary Prestopino (Analyst)

Okay. Thank you.

Operator (participant)

We will take our next question from Mehmet Dere, Deutsche Bank. Your line is open, please go ahead.

Mehmet Dere (Analyst)

Hey, guys, can you hear me well?

Majdi Abulaban (President and CEO)

Yes.

Mehmet Dere (Analyst)

Hello? Hey.

Majdi Abulaban (President and CEO)

Yes, great to hear you.

Mehmet Dere (Analyst)

Yeah, 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 new debt structure, are there going to be new bonds involved, or are you going to refinance this with a loan? Or can you give us a broad guidance for this? Thank you.

Majdi Abulaban (President and CEO)

Yeah. Mehmet, 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 and the refinancing.

Mehmet Dere (Analyst)

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 of, you know, more guidance here, more color? Is this going to be more in September, October, like?

Majdi Abulaban (President and CEO)

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

Mehmet Dere (Analyst)

Okay, all right. Thank you very much.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad now. We'll pause for just a quick moment to allow everyone an opportunity to signal for questions. There are no further questions on the line. I will now hand you back to Majdi Abulaban for closing remarks.

Majdi Abulaban (President and CEO)

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.

Operator (participant)

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