Cooper-Standard Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 5 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Cooper Standard Third Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in listen only mode. Following company prepared comments, we will conduct a question and answer session. As a reminder, this conference call is being recorded and the webcast will be available on the Cooper Standard website for replay later today. I I'd now like to turn the conference over to Roger Hendriksen, Director of Investor Relations.

Speaker 1

Thanks, Keith, and good morning, everyone. Thank you for spending some time with us this morning. The members of our leadership team who will be speaking with you on the call this morning are Jeff Edwards, Chairman and Chief Executive Officer and John Banas, Executive Vice President and Chief Financial Officer. Also joining us this morning is Chris Couch, Senior Vice President and Chief Technology Officer. Chris will be available to address relevant topics during the Q and A session.

Speaker 1

Before we begin, I need to remind you that this presentation contains forward looking statements. While they are made based on current factual information and and assumptions and plans that management currently believes to be reasonable, these statements do involve risks and uncertainties. For more information on forward looking statements, we ask that you refer to Slide 3 of this presentation and the and statements included in periodic filings with the Securities and Exchange Commission. This presentation also contains non GAAP financial measures. Reconciliations of the non GAAP financial measures to their most closely and directly comparable GAAP measures are included in the appendix to the presentation.

Speaker 1

With those formalities out of the way, I'll turn the

Speaker 2

call over to Jeff Edwards. Thanks, Roger. Good morning, everyone. We appreciate the opportunity to review our Q3 results and provide an update on our business and outlook going forward. To begin, on Slide 5, we provide some highlights or key indicators we have a strong balance sheet of our operations performed in the Q3.

Speaker 2

We certainly have maintained our focus and dedication to delivering quality products and we will

Speaker 1

continue to deliver exceptional

Speaker 2

service to our customers and keeping our employees safe in our workplaces around the world. In terms of product quality, you can see that 97% of our customer scorecards were green in the quarter. We also had 97% green scorecards for new product launches. So we continue to achieve outstanding operational performance, allowing us to deliver exceptional value to our customers. In addition, safety performance of our plants continues to be excellent.

Speaker 2

During the Q3, we had a total incident rate of just 0.27 reportable incidents per 200000 hours worked, And that's well below the world class benchmark of 0.57. Leading this outstanding safety performance were the 31 plants that have maintained a perfect record of 0 incidents through the 1st 9 months of the year. I certainly want to recognize the teams at these plants for their ongoing commitment and leadership as we continue to strive for our we will continue to execute on our strategic priorities. I'm extremely proud of our global team for their continued commitment to workplace safety and certainly a big shout out to our plant managers. Thank you all very much.

Speaker 2

As global light vehicle production volumes continued to improve in the 3rd quarter, our sales increased by a solid 12% year over year, significantly outpacing the market. In addition, we continued our focus and commitment to maximize operational efficiency and become as lean as possible. During the Q3, our manufacturing and purchasing teams delivered $14,000,000 in savings Through lean initiatives and other cost saving programs. Finally, we're continuing to leverage our award winning innovations to win new business, especially on new vehicle on new electric vehicle programs, hybrids and also to upgrade our total content and margin on existing vehicle programs. During the Q3, we were awarded contracts for $91,000,000 in annualized future sales on programs that include our most recent technology innovations.

Speaker 2

This includes both new programs as well as upgrades on existing programs. Importantly, we continue to partner with our customers to design and develop new technologies for their most important electric vehicle platforms. New business awards for EV platforms were $34,000,000 in the quarter, bringing the year to date total to $89,000,000 We are pleased to see our hard work over the past couple of years begin to drive meaningful improvement in our financial results. The combination of leaner cost structure in our enhanced commercial agreements, leveraged across increasing production volumes is certainly powerful. Turning to Slide 6.

Speaker 2

Our company culture is based on providing value, frankly, to all of our shareholders, all of our stakeholders and being good stewards of the environment and the communities in which we work and live. Within this culture, a focus on sustainability is kind of a natural extension. So it comes as no surprise that our performance in the areas of sustainability continues to garner recognition from within the industry as well as from sustainability experts. We recently learned that we have again achieved silver metal rating with EcoVadis, which places us in the 87th we have a number of people who are in the range of $1,000,000,000 in

Operator

the range of $1,000,000,000 in the range of $1,000,000,000

Speaker 2

in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 we continue to work on aligning our priorities with the values of our customers and we believe this ultimately will provide opportunities for sustained growth and long term value creation. And certainly not to fail to mention the type of company that the world's best and brightest want to be a part of. I'll now turn the call over to John to give you the financial details for the quarter.

Speaker 3

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some details on our financial results for the quarter and discuss our cash flows, liquidity and aspects of our balance sheet. We are pleased that once again all 4 of our operating regions delivered positive adjusted EBITDA in the 3rd quarter and importantly, total company performance was positive at the U. S. GAAP net income level.

Speaker 3

On Slide 8, we show a summary of our results for the Q3 of 2023 with comparisons to the same period last year. 3rd quarter sales were $736,000,000 an increase of 12% compared to the Q3 of 2022. The increase was driven by favorable volume and mix, primarily in North America and Europe, and our enhanced commercial agreements globally. We also saw a small benefit from favorable foreign exchange. Gross profit for the Q3 was $106,500,000 or 14.5 percent of sales.

Speaker 3

This compares to a gross profit of $38,600,000 or just 5.9 percent of sales in the Q3 of 2022. Adjusted EBITDA in the quarter was $79,100,000 compared to $20,500,000 in the Q3 of last year. The year over year improvement was driven primarily by favorable volume and mix, enhanced commercial agreements and lean savings achieved in net manufacturing and supply chain, all partially offset by ongoing inflation headwinds we will be conducting a few key factors in the future. On a U. S.

Speaker 3

GAAP basis, net income for the quarter was $11,400,000 compared to a net loss of $32,700,000 in the Q3 of 2022. The current quarter included $2,000,000 in net restructuring costs. Excluding special items and the related tax impact from both periods, adjusted net income for the Q3 of 2023 was $15,000,000 or $0.85 per diluted share compared to adjusted net loss of $29,500,000 were $1.71 per share in the Q3 of 2022. The year over year improvement resulted primarily from higher sales and improved gross profit, partially offset by higher interest expense. Our capital expenditures in the 3rd quarter totaled $16,400,000 or 2.2 percent of sales, compared to $14,200,000 in the Q3 of last year.

Speaker 3

We continue to have discipline around capital investments, which remain primarily focused on customer launch readiness. For the 1st 9 months of 2023, sales totaled $2,100,000,000 an increase of $266,200,000 or 14.2 percent versus the 1st 9 months of 2022. Adjusted EBITDA was $139,500,000 in the 1st 3 quarters compared to $10,300,000 in the same period of 2022, a year over year increase of $129,200,000 adjusted net loss in the 1st 9 months of the year was $51,200,000 or $2.95 we expect to be in the range of $1,000,000 or $8.11 per share in the 1st 9 months of 2022. CapEx in the 1st 9 months of 2023 was $63,200,000 or 3% of sales, in line with our full year target. Moving to Slide 9.

Speaker 3

The charts on Slide 9 provide additional insights into some of the key factors impacting our results for the Q3. For revenue, favorable volume and mix, including net customer price adjustments, increased sales by $82,000,000 we expect to see a significant increase in the Q3 of 2022. This increase includes a portion of price negotiation settlements that were retroactive to the start of the year and a smaller amount pulled forward into Q3 that we had originally anticipated settling and recording in Q4. Combined these represented approximately $25,000,000 to $30,000,000 in sales above the normalized Q3 run rate. Foreign exchange mainly related to positive euro movements, partially offset by negative Chinese RMB fluctuations, increased sales by a net $6,000,000 versus the same period last year.

Speaker 3

These positive factors were partially offset by $9,000,000 in reduced sales related to the divestiture of our technical rubber business in Europe during the quarter. For adjusted EBITDA, volume, mix and net price adjustments, including the retroactive portion of the price settlements mentioned earlier drove a combined $68,000,000 of improvement for the quarter. Lean initiatives in purchasing and net manufacturing efficiencies contributed $14,000,000 year over year and material cost improvements were a benefit of $14,000,000 in the quarter. These positive contributors were partially offset by the non recurrence of a favorable compensation related adjustment last year and certain ongoing headwinds this year. General inflation, including energy, salaries, wages and transportation and other costs, reduced adjusted EBITDA

Speaker 1

we will continue to

Speaker 3

expect the strengthening of the Mexican peso. Moving to Slide 10 to look at the analysis for the 1st 9 months of the year. For sales, favorable volume, mix and net price adjustments added $291,000,000 versus the same period last year. Foreign exchange was an offset of $16,000,000 and divestitures were a reduction of 9,000,000 for adjusted EBITDA, favorable volume, mix and net price adjustments added $163,000,000 compared to last year. Net manufacturing and purchasing efficiencies added $38,000,000 and material economics were a favorable $19,000,000 these factors were partially offset by $49,000,000 of significant general inflationary headwinds for items such as labor, utilities and transportation, negative $23,000,000 of foreign exchange and negative $12,000,000 of various other impacts.

Speaker 3

Moving to Slide 11. Looking at cash flows and liquidity, our cash provided by operations was approximately $20,000,000 in the Q3 of 2023, reflecting not only improved cash operating income, partially offset by net changes in working capital associated with increased sales volumes. As mentioned earlier, CapEx was approximately $16,000,000 in the quarter, primarily reflecting the timing of program launch activity. We were pleased to generate positive free cash flow of approximately $4,000,000 during the quarter. We ended September with a cash balance of approximately $205,000,000 This included a draw on our ABL facility of $120,000,000 which we opted to take prior to quarter end as a precautionary measure due to the uncertainty and anticipation of potential production disruptions related to the OEM labor negotiations.

Speaker 3

Because we had this cash on hand from the ABL draw, we did not factor our receivables in Europe as we typically would, and this had the effect of reducing free cash flow in the quarter by approximately $15,000,000 with $55,000,000 of remaining availability on our ABL and cash on the balance sheet, we had solid total liquidity of of approximately $259,000,000 as of September 30. With the OEMs and the UAW having recently reached tentative labor agreements, which has significantly reduced the risk of further production disruptions. We no longer felt carrying the incremental cash from the ABL borrowings was necessary and we repaid the $120,000,000 this morning. Based on our current outlook and expectations for light vehicle production, improving operating efficiencies and the further benefit from enhanced commercial agreements with our customers, we believe we will be cash flow positive in the 4th quarter. We are still assessing the impact of the strike and now production ramp up will have on our working capital and how that will affect cash flow for the full year.

Speaker 3

That being said, we believe our current cash on hand, expected future cash generation and access to flexible credit facilities, we'll provide ample resources to support our ongoing operations. That concludes my prepared comments. So let me turn it back over to Jeff.

Speaker 2

Thanks, John. And over the next we're executing to drive increasing value in the near term and in the years ahead. Then I'll conclude with a few comments on our outlook for the remainder of the year, including our full year guidance. So please turn to Slide 13. During the Q3, we continued to work with all of our customers to recover incremental costs related to inflationary pressures and establish sustainable pricing that will enhance quality of earnings and value creation over the longer term.

Speaker 2

Through these negotiations, our customers continue to demonstrate support of our strategic and recognize the value of our innovation, engineering, manufacturing and quality. The majority of these customer negotiations are now complete, resulting in significantly enhanced commercial agreements that will provide for inflation recovery as well as sustainable pricing going forward. Approximately 75% of the recoveries and price adjustments achieved will carry forward into 2024 and beyond. We anticipate concluding the few remaining customer negotiations before the end of the year. Turning to Slide 14.

Speaker 2

Our industry leading innovations are a key reason why our customers consider us a strategic partner. We continue to design, develop and deliver new technologies that help solve our customers' problems, reduce complexity in their systems and enhance vehicle performance and aesthetics. In addition, our innovations our customers to advance their own sustainability goals and objectives by reducing carbon footprint these innovations are providing growth opportunities for Cooper Standard through increased content per vehicle and margin enhancement. While we've already launched and sold many unique product innovations, our pipeline of new technologies soon to be in the market holds great promise. Let me remind you of just a few.

Speaker 2

Turning to Slide 15. Our new EcoFlow technology, which we developed in partnership with Solari, is revolutionary integrated fluid system that eliminates independent valves and pumps by combining functionality we will be conducting a single unit. In addition to reducing components and complexity, the system will reduce system pressure drop cost of fluid management systems for the OEM customer, but will provide increased content and margin for Cooper Standard. We expect this technology to be available for quoting on new programs beginning in the Q1 of 2024. Turning to Slide 16, another exciting new product is our full thermoplastic dynamic seal, which offers enhanced sustainability features such as full recyclability, weight reduction and lower energy consumption.

Speaker 2

A key enabler of this innovation is a proprietary new carrier that replaces the traditional steel or aluminum version, while still providing the necessary mechanical integrity. This new technology also offers a provide a variety of color options that can enhance overall vehicle aesthetics. We anticipated our full thermoplastic dynamic seal will be formally available for new business quotes early next year. Turning to Slide 17. Finally, we're continuing to make enhancements to our overall Fortrex technology portfolio by adding new formulations that meet specific customer requests and needs.

Speaker 2

MicroDense Fortrex ED-sixty five Fortrex is expected to be available in 2024 and will provide lower durometer for an enhanced softer feel and greater design flexibility. It will also provide improved durability and even lower compression set than the original Fortrex formulations. Finally, we're advancing our development of upcycled Fortrex, which will use recycled consumer materials as feedstocks for a lower carbon footprint and overall enhanced sustainability. We expect this technology to become available to the market sometime in 2025. Also relating to our innovation developments and business diversification, we're pleased to announce a significant milestone we are executing our efforts to commercialize LiveLine Technologies, our proprietary AI based advanced process controls system.

Speaker 2

We developed LiveLine as a means of improving efficiency and reducing scrap on our own extrusion lines. Over the past few years, we've developed the technology on 20 lines in 4 countries and the realized savings have been and continue to be are significant. Based on that initial internal success with relatively low cost and efficient scalability, we believe the technology has the potential to benefit many manufacturing companies within a wide range of industries, making advanced process control systems more affordable and accessible. We've begun marketing the technology through a wholly owned the AI technology startup subsidiary, LiveLine Technologies, and we have just received our first commercial order from a large fiber optic manufacturer. We're still in the early stages of marketing this technology, we believe this first commercial contract provides important validation of the business model and the opportunity ahead.

Speaker 2

Turning to Slide 19. Even as we continue to invest in exciting innovation, we recognize the need to reduce our overall costs. While we have made great progress, we're continuing to optimize our operating footprint and business portfolio to accelerate value creation and improve profitability. We expect to direct more of our new business to advantaged production facilities over time, reducing our exposure to high cost labor markets. We will also consider divesting non core businesses that don't meet our strategic minimum rates to either fixing or exiting underperforming businesses remains a central part of our strategy to restore our margins and returns on invested capital the double digit levels.

Speaker 2

Turning to Slide 20. Based on our strong performance in the 3rd quarter, continuing benefits from our enhanced commercial agreements and expected higher production post the recent strikes, we have adjusted our guidance to reflect an improved outlook for the full year. We have tightened the range for sales with a bias towards the high end of our original estimate. And we raised the range for expected full year adjusted EBITDA. We have also lowered our outlook for cash restructuring and cash taxes.

Speaker 2

I'm certainly proud of what our teams have accomplished so far this year, and I'm confident we'll finish the year strong. I'm also very excited to see what we can achieve next year and beyond as production volumes continue to rebound to pre pandemic levels. And we continue to launch new innovative technology and programs that we believe we'll enhance content per vehicle and variable contribution margins going forward. Finally, I want to thank our customers for their continued trust, confidence and support, and we remain committed to supporting them with exciting innovations, world class design and engineering services, flawless program launches and quality products. This concludes our prepared remarks.

Speaker 2

Let's open the call for Q and A.

Operator

Yes. Thank And the first question comes from Michael Ward with Benchmark.

Speaker 4

Thanks very much. Good morning, everyone. John, on your slides 9 and 10, with the bridge for adjusted EBITDA, how much of that $68,000,000 was retroactive? Mike,

Speaker 3

I mentioned in my prepared remarks that the impact on both sales and EBITDA was about $25,000,000 to $30,000,000 That was the retroactive portion. So if you use that and you're walking across, you'll get the magnitude.

Speaker 4

So then Okay. So then if we look at the 9 month number, that's probably the better read on where it is, like from a performance standpoint, is that correct?

Speaker 3

Okay. So the retroactive would have been back to January 1, and therefore the 9 months is more representative of the run rate.

Speaker 4

Okay. And so then when you look at your guidance for the year, now from what I can tell with the numbers in your content on the key vehicles, the strike impact was minimal in the Q3, but it was significant in October and then depending on the pace of ramp up, It's somewhere in that $40,000,000 to $50,000,000 impact on revenue. Is that the right way to think about it?

Speaker 3

Fortunately, it's a touch lower, Mike, but you're right on Q3. The way the strike rolled out, it impacted us, but to a minor extent, less than $5,000,000 in revenue for September. However, with the continued escalations that grew over time obviously. So through October 31st, the impact on us was closer to about $30,000,000 in lost revenue and therefore to $10,000,000 in EBITDA lost. Now we're continuing to monitor the ramp back up, how that comes back online, so that number could grow, the impact on us as we've got full labor in the plants, we're ready to deliver product to our customers as soon as they're ready to take it.

Speaker 4

Okay. So the impact depending on the pace of the ramp up, it could be obviously above $30,000,000 somewhere in that $40,000,000 to $50,000,000 range depending on how fast some of these plants ramp up. And that's included in your guidance, which you're looking at?

Speaker 3

The impact is included in our guidance. We'll have to see how the pace

Speaker 4

And so Jeff, as you've looked historically, you've talked about getting back to double digit type margin performance and it looks like you're getting closer every quarter. And so if we take away some of the strike impact, you're up in that 7% type level for 2023 and then so what are the steps to take you as we exit 2024, maybe we're getting closer to that double digit level? What are some of the key variables. You got the cost in place. You got the new pricing in place.

Speaker 2

Yes, I think as we look at our 3 year plan like we do this time each year, Mike, I mean it's clear that we're we can reach out and touch it, let me say that. And clearly, The pricing and all of the negotiations that went into the enhanced commercial agreements this year helped that. Our focus on the cost side helped even more as we look at launching all the new business that we've been talking about in 'twenty four and in 'twenty five, those products will launch at better margins than those that they will replace. And then finally, volume. I think we all believe that eventually, volume is going to return to We have some work left there that we plan on executing over the next couple of years That will really cement this double digit EBITDA and double digit ROIC that we're approaching upon right now, but a little bit of work left and then the volume will certainly help us as we go forward over the next 2 or 3 years.

Speaker 4

And just lastly, Chris, welcome to the party. I hope you're doing well. On Slide 18, I assume that LiveLine is yours. Is that part of your It's Cooper Stairs, correct.

Speaker 2

Yes, I run it.

Speaker 4

So could Tell me a little bit how it evolved and what it came from? And on the chart, there are these numbers popping up plus 89, plus 78. What do they represent? Are they kind of the scrap reduction? Is that the efficiencies?

Speaker 4

How does it start? What are we looking at with this process?

Speaker 2

We created the technology to solve a problem, which is how to use automation intelligently to improve the operating performance of our lines from a variety of metrics, scrap is certainly 1, unplanned downtime due to line issues is another and those are the types of numbers you saw popping up. So those are real results from different lines we've basically completed the low hanging fruit rollout within Cooper Standard and now are taking this So

Speaker 4

that's the planned uptime. The unplanned uptime, you can reduce In the scrap rates, I got to believe for a lot of those, the materials you're producing, the scrap rates higher than industry average. So whatever it is, 5% to 7%, are you cutting it in half? Is that what the type of thing we can expect?

Speaker 2

We see reductions typically in half uncontrollable scrap. That's correct.

Speaker 4

Thank you very much.

Operator

It appears there are no more questions. I would like to return the floor back over to Arthur Hendrickson.

Speaker 1

Okay. Thanks, everybody. We appreciate you joining the call and your continuing interest in Cooper Standard. If there are further questions that come up later in the day, feel free to reach out. We'll be happy to connect.

Speaker 1

Thanks again for joining the call. You can now disconnect.

Speaker 3

Thank you.

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