Cooper-Standard Holdings Inc (CPS) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder this conference is being recorded this morning and the webcast will be available for replay later today. I would 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 contain statements based on current plans, expectations, 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 you to refer to the Company's filings with the Securities and Exchange Commission. This call is intended to be compliant with Reg FD and is open to institution 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, Glen, and good morning, everyone. On slide 4 I will begin with an overview of the industry.

Overall the global economy is struggling to gain momentum, which is mostly attributed to downturns in Brazil and Europe. For the year IHS has reduced its forecast in Brazil by 4.3% and has also reduced its 2015 to 2021 Brazil forecast by 347,000 vehicles annually.

Our customers in Brazil have significantly reduced their production volume. While sales in North America were solid, vehicle mix impacted production levels as some key platforms saw a decline in sales year-over-year.

Turning to slide 5, as we look at the quarter the volume decline in Brazil together with an unfavorable exchange impacted results. Additionally, we had five weeks of downtime on a significant platform from one of our largest customers which also impacted the quarter.

From a long-term perspective we had an active and productive quarter executing our profitable growth strategy. We had notable additions in Asia, which I will provide in more detail in a moment and we completed the sale of our thermal and emissions business as a part of our decision to focus on four core product lines. During the quarterly sold three breakthrough technologies that have been brought to the market through our renewed focus and investment in innovation.

Slide 6 provides an overview of activities across our regional operations. In Europe we made good progress on improving margins bringing them more in line with our global standard.

Our Serbia facility, which began equipment move-in during the second quarter of 2014, is on schedule to begin production. We also added fluid transfer systems capacity in Spain to service growing vehicle production there.

In North America, we continue to manage a very active launch schedule with 11 major launches across 17 facilities. Our customer scorecards are our gauge on launch performance and we are tracking green on customer metrics for all major launches. As I indicated previously, our customers mix in North America negatively impacted our third-quarter results.

In South America the challenges associated with the Brazilian economy have been well-publicized and are impacting the entire automotive sector. The combination of reduced vehicle production and FX volatility also negatively impacted our third-quarter results. Our team in Brazil is flexing to lower volumes and managing the overall impact.

In Asia we celebrated the grand opening of our Shanghai Technical Center providing additional engineering support for our customers in the region. We also continue to expand our presence in the region and announced two important transactions in the quarter accelerating our growth in the region. I will elaborate more on these on the next slide.

Slide 7 provides a summary of the two important transactions that enhance our presence in the Asia-Pacific market. Growing our presence especially in China is essential to our profitable growth strategy given that China alone will produce one-third of the world's vehicles by 2020.

In early September we announced an agreement to purchase an additional 47.5% of Huayu-Cooper Standard Sealing Systems Company. Upon completion Cooper-Standard will become the 95% equity owner of the largest Chinese automotive sealing manufacturer. This transaction positions us as the clear leader in sealing systems in the Chinese automotive market, which enables us to better support our customers on global platforms while at the same time capitalizing on growth opportunity with domestic Chinese automakers.

In addition, early in the quarter we also announced the formation of a joint venture with INOAC. The INOAC joint venture accelerates our FTS strategy and leverages each companies' technology strengths, customer relationships, rubber and plastics knowledge plus our established footprints. It provides Cooper-Standard with better access to the Japanese customers and adds further support to global platforms.

The map on slide 7 illustrates our updated footprint in China in the additions of the locations associated with both of these transactions. We anticipate both of these transactions to be completed in the first-quarter 2014.

On slide 8 is a recap of the quarter. We are very pleased with our progress on strategic initiatives in the quarter which have accelerated our growth plans in Asia and China specifically.

We are reaffirming our full guidance as previously stated. As we look to the full year of 2014 we continue to anticipate achieving double-digit adjusted EBITDA but are closely monitoring Brazil volumes and vehicle mix based on the impact they had on our third-quarter results.

I would now like to turn the call over to Allen Campbell to discuss our financial results. Allen.

Thank you, Jeff. Before I get into the numbers I would like to give you some key takeaways for the quarter.

As Jeff mentioned, Brazil we saw was a challenging environment for us with slowing economic growth, declining vehicle production and weak currency. For the quarter our Brazilian operation accounted for a shortfall in excess of $9 million to our adjusted EBITDA when compared to the prior-year quarter. Despite these challenges we still managed to continue to gain share as we position ourselves for the longer term.

In North America, our sales increased from prior-year quarter; however, vehicle mix was unfavorable and given that a material amount of North American sales are in Canadian dollars, we saw the effects of the stronger US dollar impacting our result. Our European operation continues to deliver margin improvement despite vehicle production decline in the quarter. Lastly it is worth noting we continue to invest in engineering and other resources in Asia to support our growing presence in the region.

Turning to slide 11, Cooper-Standard sales were up 2.2% when compared to the same quarter in the previous year. Sales were favorably impacted by higher vehicle production levels in North America and Asia-Pacific, share gains in Europe and sales from our Jyco acquisition. Sales in the quarter were unfavorably by $3.1 million in foreign exchange movement predominately as a result of stronger US dollar against Canadian dollar.

In North America, operations reported sales of $413.5 million, up 1.2% from prior-year quarter driven by higher vehicle production levels and incremental sales from out Jyco acquisition. This was partially offset by product mix, the sale of our thermal and emission product line and unfavorable foreign exchange of $3.4 million.

In Europe we continue to gain market share with sales up $7.2 million, or 2.8% in a relatively flat market. Sales in Asia-Pacific business were up 14.7% versus a market of 4.7% as a result of increased volume in the region and incremental sales from our Jyco acquisition.

Turning to the South America region, Brazilian market continues to struggle with production dropping more than 20% during the period, which has resulted in lower sales for us. Sales from our non-consolidated joint ventures generated revenue of $110 million, up 2% from the prior year.

Moving to slide 12, gross profit in the quarter was $111.3 million, or 14.2% of sales compared to $115 million, or 15.1% of sales from the prior-year quarter. Lower gross profit margin in the quarter was primarily driven by unfavorable foreign exchange, customer price concessions, higher staffing costs and other operating expenses, partially offset by our cost saving efforts.

SG&A expense for the quarter was $67.4 million, or 8.6% of sales compared to $73 million, or 9.6% of sales in the prior-year quarter. Operating profit of $53.5 million, or 6.9% of sales which included a gain on sale from our thermal and emissions business.

Our net income for the quarter was $22.7 million. Fully diluted earnings per share for the quarter was $1.23.

On a year-to-date basis we generated $55.6 million in net income and a fully diluted earnings per share of $3.07. Our net income on a year-to-date basis was affected by $18.9 million of a one-time loss in connection with our debt extinguishment in the second quarter of 2014.

On slide 13 we show a reconciliation of our $239.4 million of adjusted EBITDA that we generated for the first nine months of the year. This walks from a starting net income of $55.6 million. We made customary adjustments to these and a large one to note is our gain on our sale of thermal and emissions business that we've adjusted out of these numbers.

Slide 14 shows our year-to-date cash flow. The business generated $172.2 million in cash prior to changes in operating assets and liabilities. We utilized approximately $83.5 million to finance changes in operating assets and liabilities which included our working capital requirements and investments in tooling.

As of September 30, we carried approximately $158 million in tooling on our balance sheet. We anticipate our tooling balance to decline with the connection of the recent F-150 launch. Our capital expenditures for the quarter $154.3, which is in line with our guidance of $195 million to $205 million for the year.

Overall we ended the quarter with $244.9 million of cash on the balance sheet. The Company's other financial metrics continue to remain strong with net leverage of $541.2 million, our net leverage to adjusted EBITDA of 1.8 times and interest rate coverage of 5.9 times.

In conclusion, we are reaffirming our initial guidance for 2014 as indicated on slide 15. And at this point I would like to open the call up for Q&A. Operator?

Thank you. (Operator Instructions) John Rolfe, Argand Capital.

Hi, it is John at Argand Capital. A few question for you guys. Wondering if you could give any rough guidance in terms of what the revenue impact was A, from the three-week downtime of the large customer and secondly from the sale of the thermal and emissions business?

Okay. We have noted in the past that our F-150 volumes in excess of $400 a vehicle. So you can use that number and figure out the amount, the impact from just that particular volume.

And on thermal, I'm not sure we have published sales numbers. No, we haven't published sales numbers at this point but we will take a look at that and see what we can do.

Just to clarify, John, that was five weeks, not three.

Five weeks, okay, great. A couple other things.

Just to confirm I guess, so to get to the double-digit adjusted EBITDA margin for the year it looks like backing into it it would require something close to an 11% EBITDA margin in 4Q. Presumably a fair amount of that is going to depend on stemming some of the losses down in South America.

Can you just talk a bit about you mentioned that you are flexing on an expense basis there. What is your ability to respond in the short term and limit losses down there and sort of what is going to be involved in doing that?

I think from our standpoint given our outlook at least as we sit here today for the next 60 days in Brazil, we believe that we can manage through the outlook as we know it. And in my remarks I commented that there is still obviously some risk there, but as long as they hold to what they have told us at this point we believe that we can flex and manage through it for the quarter.

Okay. Okay, and the turnaround in Europe on a pretax basis was really nice and good to see. Is that sustainable, is that just sort of results finally showing through from the restructuring that you guys have been doing there sort of on a consistent basis?

I would say the short answer is yes, it is sort of all of the above. As you know we have turned over our management team in Europe quite significantly the last 15, 16 months, so I think they've got some good traction.

The answer regarding sustainability going forward is we believe that to be the case. The volumes there continue to bounce along the bottom as we like to say. But assuming that they don't deteriorate going forward, we feel that the margin improvements in Europe will continue.

And as you also know, we have just started into our Serbia launch so we are on schedule for that. That will continue to help us improve margins as we go through 2015.

Okay, great. Thanks very much.

(Operator Instructions) Gentry Klein, Cetus.

Hi, one of my questions was just answered on the confidence on Q4 guidance. Maybe can you help us understand a little bit as far as 2015, can you give us guidance on 2015?

If not when do you plan on giving us guidance for 2015? And also maybe to even answer it a little differently, can you help us understand the impact from the Serbia plant as well as the consolidation of JVs on the earnings side for 2015?

For 2015 we anticipate releasing that in February with our yearend results, so we will be providing more guidance at that point. If you look at Serbia what we have said is when it is all-in it will save $25 million a year on a run rate basis. We are still moving production there and it is early in the ramp-up so we will not see a large amount of that at all in 2015 but it will start -- a substantial portion of that will be in 2016.

Okay. And what about the JVs?

Okay, a couple of things on the JVs. We announced that we are buying out our major JV and I think reached an agreement anyway to purchase the one in China, so we are going to bring that on our books. That's a consolidated business we will bring north of, depending on the time period, somewhere between $160 million and $170 million in sales next year.

And then our -- we have a French JV where we are 51%, you will see the consolidated results in our numbers today. We are obviously working through the downturn in Europe and managing that as we go forward.

So it will be -- today it is not near our average for the Company's margins, it is less than that. But will be working to head back toward the direction over time.

Got it. I recognize you are not giving us 2015 guidance until February. For purposes of thinking about it and framing it, can I look at it from the perspective of this year if you hit your guidance you will be doing at least $330 million of EBITDA and that is assuming you hit the low end, 10% of double-digit margins, not even anything higher than that.

So is it fair to say $330 million? Plus on a pro forma basis for Serbia recognizing it is not going to hit 2015 but on a pro forma basis when it does roll in that is $25 million, I'm guessing another $15 million or so from the Chinese consolidation. So collectively that is $40 million, so you are at $330 million plus $40 million, that should be $370 million. And that is not including any volume increases globally or any other margin improvement.

So am I thinking about it correctly when I say that on a run rate pro forma basis maybe if it is not specifically 2015 given the timing of some of these actions, but we should be running at at least $370 million, $375 million plus. I would imagine it should be well over $400 million given the volume increases on a pro forma basis at some point in the not-too-distant future?

It would be hard to argue with some of your points there. I think, as you mentioned, we are looking at $25 million all-in when Serbia is up and running and complete and the China business will bring us a material amount of EBITDA to us as we consolidate.

Got it. Okay, thanks very much.

(Operator Instructions) And there are no further questions at this time. So this concludes our conference call today. You may now disconnect.