Now that the auto industry is back in gear, aluminum wheel maker Superior Industries International Inc.’s factories are booming. The problem is it doesn’t have enough of them.
Superior, which shut down facilities and cut staff to control costs when the recession hit and the U.S. auto industry stalled, failed to add manufacturing facilities to meet demand from reviving Big Three automakers and as a result has been missing out on sales.
The Van Nuys company announced last week that it had finally decided to build a plant in Mexico, which won’t open for two years, to meet demand from its biggest customers. The announcement of the new plant coincided with a disappointing fourth quarter earnings report and Superior was punished by investors, who sent the stock tumbling 13 percent to close at $18.94 for the week ended March 6, making it one of the biggest losers on the LABJ stock index. (See page 38.)
Superior reported fourth quarter net income of $2.7 million (10 cents a share), down from $40.2 million ($1.48) for the year-earlier quarter. Revenue for the quarter was $210 million, a decline of 3 percent from the year-earlier period. The earnings fell well short of the consensus analyst expectation of 25 cents a share.
The facility announcement did little to dull the pain from the earnings report.
“Investors are disagreeable to the fact that it took so long,” said Brian Sponheimer, an analyst who covers auto industry suppliers at Gabelli & Co. in Rye, N.Y. “By the time it’s up and running, the growth in the auto market might be over and Superior won’t be able to see the benefits from this investment.”
The company makes wheels for passenger vehicles, and about 75 percent of its sales come from U.S. automakers Ford Motor Co., General Motors Co. and Chrysler Group LLC. The new plant will cost the company $125 million to $135 million to build and will increase its production capacity by 2 million to 2.5 million units, a 16 percent to 20 percent increase from its current annual output of 12.5 million units.
Superior, with headquarters in a low-slung building near Van Nuys Airport, has five plants: three in Mexico, which account for more than 60 percent of its sales, and two in Arkansas.
Superior executives said the new factory will boost earnings once it’s open.
“This increased capacity will certainly in the long run improve our overall profitability,” said Steven Borick, Superior’s chief executive, on a conference call with analysts. “We’re up against the wall when it comes to capacity.”
Since 2007, the company has closed plants in Van Nuys and Kansas, reducing its workforce to 3,900 from 5,300, as it tried to stem massive losses. Superior’s net loss of $26 million in 2008 ballooned to $94 million the following year.
Real recovery?
Michelle Krebs, senior analyst at Santa Monica automotive website Edmunds.com, said many parts suppliers chose not to expand during the early part of the recovery, opting instead to increase production in existing locations, which is what Superior did.
“They were nervous that the recovery wasn’t for real,” Krebs said.
However, automotive sales momentum has increased and is expected to continue to gain for the next couple of years, she said. The U.S. auto industry reported sales of 14.5 million vehicles in 2012, the strongest in five years and up about 40 percent from 2009, according to Autodata, a Woodcliff Lake, N.J., company that provides industry statistics and analysis.
Krebs said overall sales are on track to exceed 15 million vehicles this year in the United States, and the industry is revving up as drivers begin to replace the old cars they held on to during the recession and take advantage of low interest rates.
Kerry Shiba, Superior’s chief financial officer, said uncertainty about the strength of the recovery and the need to improve operations at existing plants held the company back from expanding. He conceded that the company will lose some market share while waiting for the plant’s construction, but said it would reap the benefits once the facility’s operational.
“We’ll miss out on participating in some of the growth in the market,” he acknowledged. “Currently, we’re at full tilt.”
While the auto industry is not likely to return to its prerecession levels of annual sales of 17 million vehicles or more, it’s not going to return to the doldrums of 2009 either, said Kevin Tynan, senior automotive analyst for Bloomberg Industries in Princeton, N.J.
“If you look out two years from now, we look much more sustainable,” he said.
In the short term, however, suppliers continue to suffer from pricing deals made during the recession, when the cratering of the auto industry led Superior and others to negotiate low prices for their biggest customers.
Tynan said the pricing deals will improve for suppliers as the industry gains traction.
“That’s going to take time to work through,” he said. “The manufacturers can’t constantly put the screws on the suppliers.”
Despite the struggles, Superior has enough cash to pay for the new plant without borrowing. The company ended last year with about $207 million in cash and short-term investments.
Shiba said the company considered many uses for cash, including buybacks and dividends. Ultimately, the need for growth outweighed other considerations.
“We believe, first and foremost, the best thing we can do for our investors is to grow this company,” he said.
On the conference call, Borick said the company was moving aggressively to find a location for the plant and start building so that it will open on schedule. The two-year target is difficult, but not impossible. In any case, it moves the company in the right direction.
“It’s easy to look at the marketplace and whether we decided to wait too long,” he said. “We’ve made the decision to move forward.”
