Cooper-Standard Holdings Inc (CPS) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Cooper-Standard's second-quarter 2014 earnings conference call.

(Operator Instructions).

As a reminder this conference call is being recorded this morning and the webcast will be available for replay later today. I would now like to turn the call over to Glenn Dong, Vice President and Treasurer. Please go ahead.

Thank you and good morning. Please note that certain information in this call may be forward-looking and contains statements based on current plans, expectation, events and market trends that may affect the Company's future operating results and financial position. Such statements involve risks and uncertainties that 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 filing with the Securities and Exchange Commission. This call is intended to be in compliance with Reg 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.

Okay. Thank you, Glenn. Good morning, everyone.

Starting with page 4, revenue for the quarter was strong. It was up 9.3% from the prior-year quarter.

That exceeded the industry's growth of 2.2%. Overall, our sales grew organically by 5.9%.

As indicated in our first-quarter call we have successfully returned the business to double-digit adjusted EBITDA financial performance delivering 10.7% adjusted EBITDA margins, which is up from the prior-year quarter and the first quarter of 2014. Consistent with our strategy to establish full product line capabilities in Asia-Pacific we have announced the formation of a new joint venture relationship with INOAC. This will greatly accelerate our fluid transfer systems growth in that region.

INOAC has an extensive Asia-Pacific footprint. They have strong relationships with the Japanese OEMs and a long history of delivering superior rubber and plastics components to the automotive industry. Combining INOAC's experience with Japanese customers and their Asia manufacturing footprint with Cooper Standard's global expertise in the fluid transfer systems business as well as our broad customer base, really creates an unmatched potential to gain share of the $2.5 billion fluid transfer automotive market.

In addition, we are pleased to announce that we have also closed the sale of our thermal and emissions product line. And then on the operations side for the quarter I'd like to report that we are actively launching new business across multiple platforms for many customers across really all regions. I'm pleased to report that as a result of the launch process installed during 2013 all of these launches are tracking green and this is based on our customer metrics, so we are very pleased about that.

Moving on to page 5, it is our overview of the regions -- we will start with Asia. We are very pleased with our strategic progress here with the opening of our new tech center and Asia-Pacific headquarters in Shanghai, China as well as the JV agreement that I just spoke about regarding INOAC.

And that is to accelerate our growth of our fluid transfer business in the Asia Region. We also continue to actively evaluate other growth opportunities and anticipate to announce additional details about that during the third quarter.

We are equally proud of our Europe team. They've made great progress with improving the margins through addressing isolated operational issues, renegotiated contracts and a lot of focus around optimizing our footprint.

The grand opening of our Serbia facility is an excellent example of moving from high to low cost production with expected savings of $25 million annually. We expect that facility on schedule to ramp up during 2015.

We are also gaining market share despite a flat market. The Europe market is showing signs of improvement, which we anticipate will further strengthen the gains that we are making.

In North America it is important to point out that a key factor in achieving our normalized adjusted EBITDA margin was based on our ability to address operational issues. We accomplished this while also launching a significant amount of new business across multiple platforms and plants.

Just to give you an example of the magnitude of the North American launch load, we are currently launching 24 vehicles that are impacting 20 of our plants in North America. Volumes are also forecasted to remain strong throughout 2014 and our team here is certainly well-positioned to successfully support our customers on this robust volume.

Despite significant headwinds in South America we have continued to gain market share and are actively launching new business there, as well. Production volumes are forecasted to remain down for the remainder of 2014. And as you would expect our team is flexing as needed to adjust to that changing environment.

Moving on to page 6, our profitable growth strategy is clear. We are focusing on our core product lines to improve our return on invested capital.

With the announcement of divesting our thermal and emissions product line we have now solidified our core product lines. Those four are the sealing and trim systems, fuel and brake delivery systems, fluid transfer systems and anti-vibration systems.

We have appointed product line leaders who are charged with supporting our regional organization as well as driving improved ROIC across those four product groups. Those particular leaders will also work closely with our innovation team to bring the latest innovations to our customers, utilizing our common engineering and manufacturing standards across Cooper Standard.

Finally, moving on to page 7 in addition to driving return on invested capital improvements through our product line focus, we also have tremendous upside potential by delivering best business practices really throughout our global organization. We are developing the best-in-class business practices by product line and have already gone live in our sealing and trim systems business, which will be followed by our fluid transfer system and fuel and break delivery systems, all completed and live by yearend.

So I would now like to turn the presentation over to Allen Campbell. Allen?

Thank you, Jeff. Turning to slide 9, as Jeff mentioned for the quarter Cooper Standard's sales were up 9.3% when compared to the same quarter the previous year. Higher North American vehicle production levels, share gains in Europe and North America, sales from our Jyco acquisition and $7.9 million of favorable foreign exchange all contributed to this increase.

Our North America operations reported sales of $452 million. We were up 15% in a period when production units were up 4.3%. This is a result of share and mix gains in our Jyco acquisition.

In Europe we continue to gain market share with sales up 7.8%, or 2.7% before foreign exchange movements in a relatively flat market. Sales in Asia-Pacific were up 14.9% versus the market at 5.1%. Primarily the incremental sales came from our Jyco acquisition and also the increased volume.

Turning to South America region, Brazilian market continues to struggle with vehicle production dropping more than 20% during the period, which drove our lower sales. Sales from non-consolidated joint ventures continue to grow nicely generating sales in the quarter of $117 million, up 3.8% from the prior year.

Moving to slide 10, gross profit and the quarter was $146.1 million, or 17% of sales which is favorably impacted by our lean and material cost savings and increased production volumes which were partially offset by customer price concessions, staffing costs and other operating expenses. SG&A expense for the quarter was $81.9 million, or 9.5% of sales compared to $72.7 million, or 9.3% of sales in the prior quarter as we continue to invest and build our technology and support our customers globally. Operating profit of $56.5 million was 6.5% of sales.

Turning our attention to net income for the quarter, we reported $13.2 million. Please bear in mind that this includes a loss of $30.3 million in connection with our debt repurchase that we completed in April. Fully diluted earnings per share for the quarter was $0.72.

Adjusting for a debt refinancing charge our fully diluted earnings per share for the quarter was $1.74 as compared to $1.34 in the previous share quarter. On a year-to-date basis we generated $32.9 million in net income and a fully diluted earnings per share of $1.82, or $2.87 on an adjusted basis.

Turning to the next slide, Cooper Standard generated $172.3 million in adjusted EBITDA in the first six months of the year and $300.5 million for the last 12 months. For the quarter adjusted EBITDA was $91.8 million, or 10.7% of sales. As shown on this chart we have delivered improved operative performance and, as Jeff mentioned, we are on track with key launches making us confident this level of performance will be sustainable for the remainder of the year.

Moving to slide 12, we show our normal reconciliation of net income to adjusted EBITDA and we will move on to slide 13. Slide 13 shows our cash flow for the first half of the year. Business generated $132 million in cash prior to changes in operating assets and liabilities.

We used approximately $76.8 million to finance changes in operating assets and liabilities which include our working capital requirements, investments and tooling. As of June 30 we carried approximately $167 million in tooling on our balance sheet. Our capital expenditures for the quarter were $110.8 million, which is in line with our guidance of $195 million to $205 million for the full-year.

Overall, we ended the quarter with $207.4 million of cash on the balance sheet. We continue to maintain adequate liquidity to run the business with $351.8 million of availability as shown on the table. Other key financial metrics continue to remain strong with net leverage of $585.1 million, net leverage to adjusted EBITDA of 1.95 times and interest coverage ratio of 1.4 times.

Moving to slide 14, we are reaffirming our initial guidance for 2014. However, we have slightly modified our view in North America increasing production units to 17 million and European production units to 19.9 million for the full year. In our view on certain FX rates to reflect current market levels with average exchange rates for US dollar to euro to $1.37 and US dollar to Canadian dollar of $0.92.

On page 15, in summary, we continue to drive ROIC improvements through our core product strategies and global business practices and we are actively investing in partnering in Asia to accelerate our growth. The recent opening of Asia-Pacific Technical Center expands our regional technical presence and the announcement of our INOAC JV accelerate our fluid transfer systems production in the region.

Our team is also building a great place to work by attracting and developing engaging talent to support our growth and our employees are very involved in the communities in which they work and live supported by the Cooper Standard Foundation. Additionally, we are very proud of our Careers for Veterans Program, which recruits veterans who are transitioning from active service to civilian careers. Thus far we have increased our veteran workforce by 16% in 2014 and anticipate this number to climb further as this program continues to gain traction.

Thank you for participating on today's call. Operator, please open the call for the Q&A portion.

Thank you. (Operator Instructions). Gentry Klein, Cetus Capital, LLC.

Thank you. Good quarter, guys. On adjusted EBITDA margins, it looks like it was 10.7% for the quarter. You mentioned that North America was running at a normalized level.

Can you just help us better understand, maybe provide a little more clarity on what the double-digit margins for the year, is that approaching 11%, 12%? And going forward what does the margin profile look like over the next few years? Can we get back to the 12%, 13% margins that we were at historically?

What we have said in continue to say is we are going to have double digit for the year, 2014s and we are continuing to say that. We have not gone any further publicly on any other type margins.

You can look at our historical performance. You can look at what we did last year when we pointed to the operational issues around the third and fourth quarter. And you can see our recovery now and you can probably make some assumptions of where we are headed.

Got it, okay. And there is nothing structural that would prevent us from getting back to where we were historically?

That's correct. There's not.

Got it. Okay. Thank you.

(Operator Instructions) Dan Kilmurray, UBS.

Good morning, guys. Could you give us a sense, or have you formulated your CapEx plans for 2015 and into 2016? And is there an expectation that it will trail down, or stay in this $200 million range?

We have not given guidance yet for 2015/2016. As Jeff mentioned, we are working through a significant amount of our strategy. We are looking at growth in Asia, so that would tend to believe you're going to have some investments but we have not put a number to that.

Okay. Thank you.

(Operator Instructions). Thank you. We have no further questions.

This concludes our conference call. You may now disconnect.