Background 

Superior Industries (SUP) manufactures aluminum wheels for General Motors, Ford, Volkswagen, Toyota, and others. Superior was profiled back in February, but I believe recent developments merit further examination. Production is in Mexico and Poland, having recently consolidated their German manufacturing into their Polish facility. The company currently manufactures about 15m wheels per year, versus more than 20m pre-Covid. The portfolio has been pruned to improve margins, and light vehicle production in both the US and Europe remains well below pre-Covid levels. 

Superior’s 2024 guidance is as follows: 

Source: Superior Investor Presentation - https://www.supind.com/cm/dpl/downloads/content/7003/2Q.2024_SUP_Earnings_Presentation.pdf 

Reported results appear depressed due to the deconsolidation of their German operations in August 2023, which will finish being reflected in their Polish production this year. The company should exit the year with around a $180m EBITDA profile. Superior expected to exit at $190m after Q1 but has guided down after Q2 due to lower customer production and has not formally updated year-end guidance. 

The primary overhangs for SUP were their capital structurei, higher-cost German operations, and the slow post-Covid recovery for light vehicle productionii.  The Company has addressed two of these three overhangs, and I believe SUP is poised to capitalize on a normalization of auto production going forward.  

Capital Solution: Creditor Violence 

Superior announced on 8/15 they had paid off their June 2025 unsecured notes by expanding their Senior Term Loan with Oaktree to $520m, paying off the remaining notes balance in cash from their balance sheet. SUP now has their debt termed to December 2028, with the TPG Preferred stock due next September. The terms of the new credit documents provide some insight into the planned strategy with regards to the preferred (link: https://www.sec.gov/ix?doc=/Archives/edgar/data/0000095552/000119312524201017/d819822d8k.htm): 

• Previously, the term loan had a springing maturity 90 days prior to the due date of the preferred. That provision has been removed. Though the preferred is due in September 2025, Superior can defer repayment if they can't pay it off. The revised TL with Oaktree allows this by adding a junior debt condition that requires the term loan be paid below $350m before additional junior debt may be incurred.   

• The new term loan docs prioritize the pay down of the term loan over the preferred, given 7.05(b)(9) mandates that cash payment to the preferred stock can only be made when the net leverage ratio is no greater than 2 to 1. So, with current leverage a bit over 3 to 1, preferred dividends will be PIK’d. 

• While the preferred carries a 9% interest rate, this amount is calculated against the face value, currently $153m, effectively 4.5% on the current redemption value of $306m. So not having to refinance the payoff amount next year prevents Superior from paying significantly more interest on their debt. 

• PIK’ing the preferred dividends will add them to the face amount until after the maturity date. The docs are a bit confusing, but I’ve confirmed the following with IR: After Sept 2025, the redemption value of the preferred will only increase by 9% * the face value if the dividend is PIK'd. Until Sep-25, the redemption value increases by 2x 9% the face value if the preferred is PIK'd. In summary, for the next year, dividends will PIK at a 9% effective rate, dropping to 4.5% after the redemption date. 

The TPG preferred is sitting in their TPG Growth III sidewall, raised in 2013/launched in 2015, which had returned 1.7x as of April 2024 (https://pitchbook.com/profiles/fund/14824-36F#overview). My expectation is they will mark the shares down below par given that Superior has begun to PIK the dividend. This strategy appears aimed at denying repayment of the preferred in September 2025 when it comes due; forcing TPG to either take a discounted payoff to exit the position or wait to see if/when SUP can comply with debt covenants sufficiently to offer a full payoff. If they PIK 5-6 preferred payments, that would suggest a notional payoff value of $330m or so, but I expect a ~10-20% haircut or combination of cash and equity could be used to make whole. Equity solutions will be more appealing as SUP delevers, regains index inclusion, and has a more material market cap from which to make a deal.  

Valuation Approach 

Here’s how I expect this to play out: 

• SUP has generated $9.3m in unlevered FCF YTD and is guiding to $120m by the end of 2024.  

  • 1H: (4.5) Cash from Operations - 14.8 CapEx + 28.6 interest Expense = 9.3 YTD.  

  • Midpoint of guide is $120m unlevered FCF for FY24, which implies 2H is (X) - 25.2 + 30 = 110.7m unlevered FCF, so X equals $105.9m 2H cash from operations, less the $25.2m remaining capEx, leaves $80.7m for debt paydown. 

• I will use $180m run-rate EBITDA as my FY25 estimate. I assume another $40m CapEx, $60m of cash interest on the debt, and PIK’d interest on the preferred, to arrive at another ~$80m of debt paydown. Taxes should be de minimus through FY25 given NOL balance & high interest exepense, pref accretion, etc, and likely become material again in FY26. This allows SUP to exit 2025 with <$400m of senior debt once again. Illustrative path: 

  • TL balance as of August: $520m 

  • Less $80m 2H24 paydown 

  • Less $80m FY25 paydown 

  • ~$360m FYE25 balance

• At this point SUP would have 2:1 coverage on their TL, 4:1 coverage on their debt plus preferred, and should trade at a 5x multiple of EBITDA. After the 2:1 milestone, preferred dividends can be resumed in cash. 

• Their $240m 2027 EBITDA guide plus an additional year of debt reduction would imply 5*240m - $300m TL -$300m preferred = $600m equity value, over $20/share. Even if we conservatively back out the $94.5m AR factoring facility from the EV, we arrive at about $18/share. 

• Note – I am ignoring the cash balance here, as I assume any cash left on the balance sheet will be needed to operate the business. To the extent you want to back out cash (likely around $25-35m after the refinancing) you will arrive at a higher target price. 

Manufacturing Transition (Germany to Poland) 

Superior deconsolidated their German subsidiary last year in connection with their operations moving to Poland. The continued overhang in Q2-24 is as follows: 

• 245K Fewer Wheels 

• $31M Fewer Net Sales 

• $20M Fewer Value-Added Sales 

• $1M More Adjusted EBITDA 

• $1M Less Capital Expenditures 

• $22M Less Working Capital 

The company has maintained the following impact from the decision to make this move: 

• $23M - $25M approximate step change in Adjusted EBITDA 

• ~$10M approximate annual reduction in Capital Expenditures 

• Superior Europe variable contribution margin approaches that of Superior North America, 35% to 40% of incremental Value-Added Sales 

• $20M - $35M approximate total cost of SPG closure and wheel transfer 

In summary, Superior seems to have found a way to significantly increase margins while lowering ongoing CapEx, at about 100% annual ROI. I have confirmed with Management that no contracts have been lost because of this transition, and their recent 100m EUR platform win with Volvo seems to underscore the competitiveness of their operations. The costs have been incurred and the benefits yet to be realized in Superior’s operating results.

EV Exposure 

Superior is mostly agnostic in the EV transition, as they will only be at risk when cars stop needing wheels. In terms of Superior’s portfolio, I would direct you to prior investor decks that summarize their product’s positioning: 

https://www.supind.com/cm/dpl/downloads/content/7003/4Q.2023_SUP_Earnings_Presentation_Master_vFF.pdf 

https://www.supind.com/cm/dpl/downloads/content/7003/1Q.2024_SUP_Earnings_Presentation_v12_Final.pdf 

As you can see, 7% of their entire portfolio, and 25% of their product launches in 2023 were on EV platforms, which trend towards the premium vehicle market. With these trends in mind, I think Superior is sufficiently positioned for the EV shift and appears more likely to benefit from a long-term shift than be harmed. (Superior’s portfolio is pacing ahead of US EV sales: https://www.edmunds.com/electric-car/articles/percentage-of-electric-cars-in-us.html). Fortunately, key customer Ford has the largest share of the current US electric fleet behind Tesla. 

i) Superior capital structure prior to refinancing: 

• $60m Revolver (undrawn) 

• $394m Term Loan (SOFR + 8.0 with Oaktree leading syndicate) 

• 217m EUR Senior Unsecured Notes (6% fixed) 

• $153m face Preferred Stock with TPG, redeemable in September 2025 for $306m, with 9% annual dividend on face amount, convertible at $57/share 

• $172m cash 

• $94.5m receivables factoring facility 

Post-refinancing: 

• $60m Revolver (undrawn) 

• $520m Term Loan (SOFR + 7.5) 

• $153m face Preferred Stock with TPG 

• ~$35m cash 

• $94.5m receivables factoring facility 

iii) 5x EV/EBITDA multiple is well supported among OEM suppliers: 

• GTX trades at 5x forward EV/EBITDA, with some overhang from ICE exposure. SUP is fortunate that EVs index more towards premium wheels, making the industry transition a tailwind for the business. 

• CPS trades about 7x forward EV/EBITDA, having also restructured their debt to extend the business liquidity runway. 

• STRT trades about 5x EV/EBITDA while sitting in a net cash position, suggesting the above multiple aren’t just a product of excess leverage. 

• PHIN was spun out by Borg Warner to contain some of their ICE exposure and trades at a 5x EV/EBITDA forward multiple.