Cooper-Standard Holdings Inc (CPS) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cooper Standard fourth quarter and full year 2013 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded this morning and the web cast will be available for replay later today. I would now like to turn the call over to Sharon Wenzl, Vice President Corporate Communications. Please go ahead.

Thank you and good morning. Please note that certain information in this call may be forward-looking and contain statements based upon current plans, expectations, events and market trends that may affect the company's future operating results and financial position. Such statements involve risk and uncertainties, it cannot be predicted or quantified and that may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to the company's filings with the securities and exchange commission.

This call is intended to be in compliance with regulation FD and is open to institutional investors, security analysts, media representatives and other interested parties. A reconciliation of certain non-GAAP financial measures used during this call can be found in the appendix of this presentation.

At this time, I would like to turn the call over to Jeff Edwards, Cooper Standard 's Chairman and Chief Executive Officer.

Thank you Sharon. Good morning everyone.

Turning to slide number 4, talking about the industry landscape, our global light vehicle production continues to have steady growth in 2014. We expect that growth rate to be around the 3.1%. On North America, vehicle production remains strong. Europe, as we all know, continues to be challenging. Still bouncing along the bottom a little bit.

We do expect sales to grow a modest 1.6% in Europe in 2014, however. Emerging markets are mixed with strong growth continuing for China and a slight softening in India and in Russia.

Material pricing and availability is stable for 2014. The North America supply base certainly had capacity constraints in 2013, but many of us have now addressed this and are keeping pace with the projected run rates for 2014, and I will talk a little bit more about that in the coming slides.

Moving to slide number 5, a little bit more around the 2013 update if you will, our global sales grew by 7.3% year over year, outpacing the industry, which grew at 3.4%, and for Cooper Standard the 7.3% represented growth in all of our regions. Our full-year adjusted EBITDA was 9.3% of sales, that reflects additional cost that we incurred to meet North American production demands.

At the same time, we had a series of significant challenges with our new Sealing and Trim technology in three of our plants in North America. We are addressing these issues with investments in people or technical talent, as well as process, improvements, that will begin to turn those facilities around in the first quarter of 2014, and we're committed to that and we will be normalized by the end of our second-quarter in 2014.

So these were one-time events that impacted our 2013 performance, but we believe we have the issues well in hand and you will see the data reflect that as we move through our first quarter and then conclude our second-quarter in 2014. Our capital comes in at about 5.9%, I think it is important that we recognize the details around this number because it is towards the high end of where we had been historically and where the competition has been historically.

We have certainly funded our Asia growth, you can see it is reflected here in the slide at 9.2% of our sales. South America as well, is expanding and you can see that reflected in the 7.4%. Europe is about restructuring, specifically moving from west to east.

We will launch our Serbia facility at the end of 2014 and Europe is spending at a rate of 6.8%. The key point is in our mature market in North America, we are spending at 4.8%.

You would expect that number to be anywhere from 4.4% to 4.8% given our historical performance so, this isn't out of line and isn't the reason the CapEx figure for the company is trending higher. The issue is really, simply, funding Asia growth, funding South America growth and funding the restructuring in Europe. The last point of this slide is that the company returned $217.5 million to shareholders through share repurchases.

Moving to slide 6, talking about the transition of the company to the profitable growth targets we have established. We have reinvested in our technical staff to address many of the execution issues. We have addressed it through product development and we have increased our innovation investment three times.

You can see reflected in the slide to the right or the graph to the right, the increase in the staff level from 2012 to 2013. This will go a long way in helping us to correct previous launch issues, as well as operating issues that have hurt us both in 2012 and 2013. Frankly, we were slow to react coming out of the downturn in 2008 and 2009 and we are playing some catch-up here in 2013.

Again, we believe that with these additional resources, we will put the one-time issues behind us and we will be operating back at a double-digit EBITDA level as we head through 2014 and we're confident of that. Additionally, we will continue to invest in capital in 2014 to optimize our manufacturing footprint, as I mentioned earlier.

Also, investing in product development, certainly that is the key ingredient to our growth. Such as supporting the advanced designs for Sealing and Trim, transitioning from EPDM to plastics, which is happening in our industry, as well as global technology process that will support and coordinate the efforts across our company as our customers begin to run more and more of their launches off of global programs of the need for us to have a global engineering process is critical to be competitive.

Lastly, we have seen our tooling needs grow over the years, which is reflective of the future program launches, as well as increase in complexity of our products, I mentioned a few of them earlier in the Sealing area. We believe that, that trend will continue and is something we will have to manage going forward.

The next slide, number 7, provides an update on two areas of our strategic priorities. We are focusing on product lines that we feel provide the greatest profitable growth opportunities for Cooper Standard. Specifically moving our company from a 7% to 8% ROIC performer to the lower teens.

Sealing and trim, fuel and brake delivery, and fluid transfer systems are the three product groups that we will invest heavily in going forward and we believe our product groups that we can become number one or number two in the world. This is confirmed by the relationships with our customer and the fact that we continue to outpace significantly outpace the industry growth 7.4% versus 3.4% in 2013, to be specific.

We are also delivering innovation in these product areas to ensure that we remain number one or become number one or number two in these markets. I mentioned before in the Sealing and trim systems, plastic replacing rubber in trim fully integrated with the vehicle sealing systems, are two examples of that in our Sealing and trim group. In our fluid transfer systems, we have new innovations or high-performance hose application in what we think will be revolutionary material and construction, as we move into the middle part of 2014. We believe these innovations will be ready for sale and will help differentiate us in the market.

And then finally, fuel and brake delivery, this also is about nontraditional materials that will provide ultra-low mass, as well as high strength and long life for our customers in the fuel and brake delivery area. We have organized our global core teams to further develop detailed strategies for each of these product groups and make sure that we leverage the scale of Cooper Standard globally and manage our investments, managing our plant capacity, so that we are driving the ROIC improvements that I spoke about earlier. Also, as part of the strategy, we are pursuing the sale of our thermal and emissions business and we believe we will execute that by the end of the first quarter or early in the second quarter of 2014.

So, we are pleased with the progress we are making to optimize our footprint, which is an important element of our growth strategy. We are on schedule with our Serbia project this year. Keep in mind, that will drive an improvement of about $25 million in labor savings each year, basically moving from the West at $30 an hour to Serbia at $5 an hour is the simple math.

Constructions 95% complete with more than 155 of the 500 employees already in training in our Italy and Poland facilities. Once fully operational, as I mentioned, this will result in a much more competitive footprint for Cooper Standard in Europe.

Our 90,000 square-foot expansion in Aguascalientes is near completion and this will service one of our major programs with Ford. We are also establishing a technical center in Shanghai, China that will open this spring. This will provide us local engineering support to continue to grow our China business and to support our ongoing China strategy.

And with that, I would like to turn it over to Allen who will cover our financials for the quarter.

Thank you, Jeff. I would like to start off by talking about Cooper Standards track record of growing sales. As you can see from this chart, our revenue has grown at compound annual growth rate of around 14.6%, over the last five years. Exceeding global light vehicle production levels over the same period of 9.1% increase.

In 2013 our sales grew by 7.3% from the previous year, as compared to industry growth rate of 3.4%. We also expect to beat the industry growth rate in 2014, I will talk about that later.

On the next slide, we show our fourth-quarter, in full year, 2013 revenue by region, as compared to the previous year. For the quarter, Cooper-Standard generated sales of $794.2 million, up 13.9% in compared to the same quarter, previous year. This was driven by a strong year in North America and market share gains in Europe.

Our Jyco acquisition, which we completed in July, contributed approximately $20.8 million of incremental sales in the quarter and $32.7 million, year-to-date. In addition, sales in the quarter favorably impacted by $5.4 million in foreign exchange movement. For the full year, sales increased by $209.6 million to $3.09 billion, compared to $2.88 billion in the previous year with approximately $7.6 million of positive foreign exchange.

Sales in North America were $426.5 million for the quarter, increase of $62 million or 17% from the previous year. Our European operations generated sales of $269.9 million, which included $12.6 million favorable foreign-exchange. Excluding FX, sales were up 8.9% in a very soft market.

Sales in our Asia-Pacific operations were $60 million, up 5.8% from the same period prior year. In Brazil, we generated sales of $37.8 million for the quarter, despite $4 million of unfavorable foreign-exchange movement and a 13.6% volume decline, in vehicle production.

Turning to the next slide, joint ventures are major part of our growth strategy, especially for the Asia-Pacific region. We have four non-consolidated joint ventures, which serve Asia-Pacific region and also Asian OEM's North America.

In 2013, these joint ventures generated sales of $445 million, increase of 8.5% from the previous year. The non-consolidated JV's contribute to our equity earnings, in the amount of $11.1 million in the year, up $2.3 million from the previous.

On slide 12, you can see the diversification for consolidation revenue. We were well represented by all major North American and European OEM's. Note that (inaudible) amount of our sales to Asian OE's are through our JVs that I mentioned earlier.

If you note the others category, they are predominantly sales to our tier 1 and 2's and also commercial vehicle customers. On the right-hand side is our revenue by product. Approximately half our sales were sealing and trim products, where we are number one globally.

We number two globally in fuel and brake delivery systems and a leader in North America fluid transfer systems. These product lines provide significant opportunities for us to further our market share through leveraging our existing customers and technology, supported by global manufacturing and engineering footprint.

Turning to slide 13, gross profit in the quarter is $105.1 million or 13.2% of sales, down from the previous year quarter and relatively flat on a full year basis. The year was driven by increased volumes in all regions and favor lean savings; however, they are partially offset by customer price concessions, higher staffing costs and other operating expenses. Our gross profit was also affected by operating challenges related to a subset of our Sealing and trim business in North America and Europe, which contributed to higher-than-expected costs mostly in the fourth quarter.

In selling and administrative, the number for the quarter $72.6 million or 9.1% compared to 10.7% of sales in the previous year quarter. A full-year-basis selling and administrative, and engineering was 9.5% of sales, as compared to prior to year 9.8%. In other items that the quarter included $14 million restructuring charge, predominately for activity in Europe, resulting in operating profit of $14.6 million.

For the full-year operating profit was $142.1 million or 4.6% of sales, compared to 3.6% of the prior year period. Net loss for the quarter was $20.8 million, which included a higher tax expenses, related to evaluation allowance charge against deferred tax assets in certain foreign jurisdictions.

Fully diluted earnings per share, was a loss of $1.44. On a full-year basis, the company generated an income of $47.9 million for fully diluted earnings per share $2.24. When comparing these numbers, please bare in mind, they are full year 2012 net income, included a one time $48.3 million benefit, related to reversal evaluation allowances on the company's deferred income tax assets in the US. The adjusted EBITDA for the quarter is $58.7 million or 7.4% of sales and $287.4 million or 9.3% on a full year basis.

Turning ahead to slide 14, want to highlight some of our challenge, operating challenges and product challenges, we talked about earlier. With rapid ramp-up in North America production volume, as you can see from the chart above, additional staffing costs and operating expense recur to meet these demands. The introduction of some of our new technologies and more complex product offerings and our Sealing and trim product line, created several operating challenges, which affected vehicle launches of three of our North American plants.

These new products involve a steep learning curve and a better challenge to our manufacturing and cost process. As a result, premium per rate, increased scrap, additional labor and other costs were incurred. In total, these unanticipated cost amounted to approximately $17 million in incremental operating expenses in the quarter.

Substantial amount of resources are being brought to bare, to resolve these issues and ensure they will not be repeated. We expect the situation to improve in the first quarter of 2014 and to be normal by the end of the second quarter.

European market continues to be a challenge. Economic (inaudible) appears to stabilize with vehicle production forecasted to be modestly improving in 2014.

One of our strategies is to migrate most of our manufacturing footprint towards relatively lower-cost areas, such as eastern and central Europe. Recent example of this is our new facility in Serbia, that Jeff mentioned, and also our operating Romanian plant that we opened in 2012.

Customer mix is also an issue. Why we have strong market share of PSA in Fiat, their units are struggling more so in Europe than others. From operational perspective, we also experienced some isolated challenge in some of our European plants in the fourth quarter with issues with two of our launches, one in Germany and most notably involving the introduction of most complex sealing part in luxury vehicle in Italy. The situation is improved and we expect these challenges to be behind us by the end of the second quarter.

Slide 15 is reconciliation adjusted EBITDA for the year. Starting net income (inaudible ) with $37.9 million. We show the customary adjustments, as you see on this page, restructuring charges of $21.2 million. Previous stock compensation awards $5.2 million and $1.5 million connection primarily with acquisition costs.

Slide16 is our cash flow for the full year. The business generated $192.5 million last year. We required $41.4 million for working capital expansion, which included funding of customer reimbursed tooling to support future program awards. As a note, [tooling ] balances on our, at the end of 2013, was approximately $170 million on our balance sheet.

Capital expenditures for the year were $183.3 million, which 7% related to thermal emission business, which Jeff talked about. Roughly, 58% of our CapEx was spent on supporting new and replacement business. 15% for maintenance and the rest for expansion and restructuring and other activities.

We spent $13.5 million of cash to acquire the Jyco business, which is immediately accretive to earnings. We made $7.9 million to contribution to US pension plans, during the year.

Additionally, we payed out $4.7 million in dividends related to convertible preferred securities. These were converted into $3.5 million shares of common stock in November. There was a cash usage of $17.9 million and other, primarily related to notes offering in common stock tender

If you look at page 17, we show a significant sufficient lack of liquidity's towards the business, which is $300 million available at year-end. We have very long-term debt maturity table, 2018, most of our bonds are due. Our pension plans, for the most are frozen around the world and we have made some excess contributions the last couple of years and those are coming more into better funded position.

Our financial metrics continue to remain strong. Our net leverage ratio of EBITDA is 1.7 and we have over 5 times interest coverage.

We turn to our guidance page. Our projections for this, assumes that North American vehicle production of 16.8 million units, Europe production of 19.6, which includes Russia. Also assumes that US dollar to euro exchange rate of $1.28.

With those assumptions, we are expecting sales to be $3.25 billion, $3.35 billion. We expect capital expenditures to be in the $195 million to $205 million.

To further invest in the growing regions, in the products that we talked about and the technology that Jeff mentioned, we expect to return to double-digit adjusted EBITDA for the full year. We expect cash taxes to be in the range of 25% to 35% and we expect cash restructuring to be in the $20 million to $30 million range.

In summary, we're focused on stabilizing our North American business, in Europe also. We are addressing the launch of product complexity in our sealing and trim.

We continue to make necessary infrastructure and capacity investments to support our growth strategy in Asia and our Serbia expansion. And we're going to continue to evaluate partnership and acquisition opportunities to advance our plan. (Inaudible) is our focused on these new launches and achieving double-digit adjusted EBITDA margin that I referred to earlier.

This concludes the formal portion of our conference call. Lisa, please open the call for the Q&A portion.

Thank you.

(Operator Instructions)

Our first question comes [ Safra Capitia with Core Partners ], your line is open.

Hi Jeff and Allen. Thanks for the call today. Quick question, Allen you mentioned, I think $17 million in incremental costs related to the North American challenges. When you're going over page 14, on there it says net $13 million of non-excess recurring, so I am trying to figure out the difference between the two numbers.

Sure, the net of $13 million, is what we expect to see in the first quarter. And then we expect more than that as we roll through the rest of the year.

Got you. Okay.

(multiple speakers) Some of that will role in the first quarter but most of it will go away.

So the bulk of these excess charges will -- to the tune of $13 million -- will be gone by the end of the first quarter?

That is correct.

Okay. Thanks.

(Operator Instructions)

There are no further questions, we do have a question from [John Novak from Missoula Securities] your line is open.

Hello guys. Thank you for the call today. Just another question, in the press release you mentioned market share gains in Europe, I was wondering if you could talk about that. Is that something that you expect to continue? Why are you getting share and how are you getting share and any other general comments you have on your ability to continue to take share in Europe? Thanks.

I think it is a couple of things. I mentioned the move from west to east. We traditionally have not been as competitive as we would like in Europe. We are becoming much more so. We are starting to reflect that in some of the decisions that we are using to go after new business.

The second, clearly is around our technology that we have coming into the market. Third is, frankly, we've reestablished a very strong European management team, who is aggressively pursuing a growth opportunities as well.

So, it is a combination of those three things. And yes we expect it to continue.

Okay, thank you.

Dan Kilmurray, UBS.

Good morning guys. Could you give us a sense of CapEx levels, when you would expect them to decline from the pace they are at if in fact that is the case? And just on restructuring charges, should we anticipate that this $20 million to $30 million will continue for a number of years or are we close to the end of that?

I think as we mentioned in previous discussions, we will be at the high end of it in 2014. We will probably be towards the high end of it in 2015 and then after that we would expect it to be back down to a more normal level.

And that is CapEx?

That is CapEx.

And the restructuring the level we talked about should go for about two or three years and similar by then, we should have the right Western European structure and for the most part, we're we need to be in North America today.

Thank you.

We have no further questions in queue. Thank you for joining. This concludes our conference call. You may now disconnect.