Cooper-Standard Holdings Inc (CPS) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cooper Standard third-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded and a webcast will be available for replay later today.

I would now like to turn the call over to Roger Hendriksen, Director of Investor Relations.

Thank you, Johnna, and good morning, everyone. We appreciate your taking the time to participate in our call today. 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 Matt Hardt, Executive Vice President and Chief Financial Officer.

Before we begin, I need to remind you that the statements made in this presentation which are not historical in nature are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. They are made based on current factual information and certain assumptions, plans, expectations, and market trends that management currently believes to be reasonable. Such statements involve risks and uncertainties.

Financial and operational results for future periods may differ materially from current management projections as a result of factors outside the Company's control. For additional information on forward-looking statements and related risk factors, we ask that you refer to the Company statements included in our Form 10-K and other periodic filings with the Securities and Exchange Commission.

With that said, I'll turn the call over to Jeff Edwards.

Okay. Thanks, Roger, and good morning, everyone. We appreciate you joining us this morning. As we move on to slide 4, we're certainly pleased with the Company's results in the third quarter, as we were able to combine our continued operating improvements with strong sales growth to once again drive our margins higher year over year.

Sales for the quarter increased by 6% compared to last year and an adjusted EBITDA increase by 40%. Our adjusted EBITDA margin was 11.3% and that's up 280 basis points when compared to our third quarter last year.

In North America, we are able to leverage higher volume and better mix while improving operating efficiency to expand margins, and having certain key platforms back at full production was a plus as well. In Europe, we are progressing with our transition from West to East. We continue to ramp up production in Serbia, where we launched two new platforms during the third quarter.

The rollout of our world-class operations actions are helping to stabilize a number of our facilities that we've struggled with consistency in the past. In Asia, the integration of our Shenya operation is continuing as planned. We also started production of our new sealing plant in Sanand, India, during the third quarter.

In Brazil, we're working to right-size our operations in anticipation of lower overall light vehicle production levels moving forward. Flexing our operations enabled us to reduce the magnitude of our loss there compared to last year, but we have more work to do to return this region to profitability.

Through the successful implementation of our Cooper Standard operating system and the rollout of our best business practice tool, we're on pace to achieve over $100 million in net operating savings in 2015. This is a significant result in a relative short period of time and is a tribute to how fully our team has embraced the improvement process. As we continue to roll out, we believe we can achieve similar operating improvement again in 2016.

And as you see as indicated on slide 5, all of our manufacturing facilities have the same scorecard to measure improvement and ensure accountability as we strive to become world-class in manufacturing. This is creating additional value for our customers, our employees, suppliers, and shareholders. In terms of safety in the workplace, which is certainly our highest priority, we've lowered our total incident rate by 35% in the first 9 months of the year compared to full-year 2014.

In another key operating measure, our overall equipment effectiveness has improved 260 basis points since last year. To put that in perspective, each 100 basis points represents the equivalent of 1.7 extrusion lines or approximately $6 million in capital avoidance. Credit really goes out to our outstanding plant managers for fully embracing our best business practice tools and driving this excellent year-over-year operating improvement.

Moving to slide 6, our third-quarter sales were $828 million, an increase of 6%, as I mentioned earlier. Unfavorable foreign exchange rates were again a headwind for us in the quarter. Excluding the impact from exchange, sales in the third quarter 2015 would've been $902 million, an increase of 15.4% over the third quarter of 2014. So in spite of the FX headwind, our top-line growth continues at a pace significantly higher than the growth of the overall light vehicle production.

Moving on to slide 7, it really breaks out the revenue by region. As you can see, North America and Asia were clear leaders in the quarter, with revenue gains of 10.4% and 63.8%, respectively. In Asia, our underlying organic growth rate was 8.2% and this is despite lower-than-expected light vehicle production in China.

Moving to Europe, although the sales were down 6.8% compared to last year, on an FX neutral basis, they were up 11% year over year. We continue to see strong underlying growth rates in all of our regions.

Slide 8 shows our revenue bridge in a low bit more detail. Overall, our improved volume and mix contributed $87 million in incremental sales in the quarter, and the Shenya acquisition added approximately $40 million. The total FX impact was a negative $74 million.

In summary, our sales growth was strong in the third quarter and our operating efficiency continues to improve as we execute our profitable growth strategy.

Now I'd like to turn the call over to Matt.

Thanks, Jeff, and good morning, everyone. Beginning on slide 10, I'd like to provide an overview of the financial results for the quarter. In the third quarter of 2015, we generated total sales of $827.5 million compared to $781 million in the third quarter of 2014. So gross profit was at $148.4 million or 17.9% of sales. This is a 370 basis point improvement to gross margin year over year.

Adjusted EBITDA was $93.3 million or 11.3% of sales compared to $66.6 million or 8.5% of sales in the same period a year ago. As Jeff mentioned, that's a 40% increase year over year. And on an FX neutral basis, the adjusted EBITDA was $101.7 million or nearly 53% higher than in the third quarter of 2014.

Net income for the quarter was $32.7 million or $1.78 per fully diluted share. That's up 45% from 2014 on strong operating earnings and a 28% effective tax rate. Excluding restructuring, adjusted net income for the third quarter of 2015 was at $40.8 million or $2.21 per diluted share and that's an increase of more than 230% compared to the third quarter of 2014.

On slide 11, we compare our adjusted EBITDA results in the third quarter to the same period a year ago and then break out some of the key drivers of our year-over-year improvement. Improved operating efficiencies resulting from the rollout of our best business practices tools added $27.6 million in EBITDA compared to the third quarter of 2014.

Volume and mix were also strong in the quarter, driving an additional $24.2 million in adjusted EBITDA improvement year over year. Labor inflation and the impact of foreign exchange had a slightly negative impact in the quarter, so this all told resulted in a $93.3 million adjusted EBITDA figure for the quarter.

As I move on to slide 12, I'll cover a few of the balance sheet highlights and touch on our overall liquidity. We ended the third quarter of 2015 with $232 million in cash on the balance sheet as compared to $205 million at the end of the second quarter.

We did generate $53 million in cash from operations during the quarter and then spent $34 million on CapEx. So total liquidity at the quarter was $368.9 million, giving us sufficient flexibility to manage our business and pursue profitable growth opportunities.

Our financial metrics are strong and improving. With net debt at $567 million, our net leverage ratio is down to 1.7 times trailing 12-months adjusted EBITDA and our interest coverage ratio is at 9 times. Net leverage to total capitalization was just 40.4% at the end of the third quarter of 2015.

As I turn to slide 14, I want to review the cash flow improvement initiatives we've been implementing over the past couple of quarters. We've said that we want to reduce our CapEx from more than 6% of sales in the past years to be more in line with industry averages at around 4.5%. CapEx in the third quarter was 4.1% of sales and we continue to make progress through purchasing efficiencies and our OEE work to improve our existing equipment capacity.

We're also making solid progress as it relates to work capital. At quarter end, our days on hand inventory was down by 3 days versus last year, and our accounts payable outstanding was up by almost 6 days.

In terms of restructuring, we have plans and actions in place to offset the cost of our European initiative of transitioning our manufacturing from Western to Eastern Europe by approximately $50 million while maintaining our related annual cost savings estimate of $55 million. This results in an estimated simple payback of just over one year.

Our rigorous capital management efforts combined with the increasing efficiency of our operations led to positive free cash flow in the third quarter. And we believe we'll be able to generate further cash flow improvements for the remainder of the year. We remain committed to significantly improving our cash returns on our shareholders' investment going forward.

Now let me turn to call back over to Jeff.

Okay. Thanks, Matt. And I'll conclude the presentation this morning just with a few final comments here. As we look ahead, we intend to finish the year strong and leverage the momentum we've created in the first 9 months of the year.

We've already seen considerable margin improvement and we're certainly enthusiastic about the potential for increased sales related to advanced technology that we're introducing as well into the market.

As we look at our key markets, we are encouraged by current trends and dynamics. In North America, continuing strength in the light truck and SUV segment supported by lower fuel prices is a positive. We expect this to drive further improvement to our volume and mix in the quarters ahead.

In China, while light vehicle production forecasts have moderated, our outlook remains positive. Recent reductions in the purchase tax rates on smaller engines should support industry demand in the fourth quarter and into 2016. In addition, we expect to launch several new programs in the coming months, which will continue to drive our top-line growth at rates that exceed the industry.

At the same time, we continue to optimize our production footprint throughout Asia with the integration of our Shenya operations and the startup of our INOAC joint venture in China as well as our Polyrub joint venture in India.

In Europe, we expect fourth-quarter light vehicle production levels to be in line or slightly up versus last year. And overall, the market remains fairly stable and we see this as a key opportunity as we continue the rollout of our European cost improvement initiatives.

Light vehicle production in South America certainly remains depressed as we see no sign of significant improvement in the near term. We expect a new normal production level of around 3 million units annually and we're working to flex our operations to be profitable at that level. We recognize that we operate very dynamic markets and change can happen really at any time.

Because of our operating improvements, experienced leadership team, and our improving cash flow, we are better positioned today to manage market headwinds than at any point in the past several years.

Based on our results for the first nine months and our outlook for the rest of the year, we are adjusting our full-year guidance as shown in the table on slide 16. We've lowered our projections for CapEx and we've raised the lower end of the range for expected margin improvement.

I want to once again thank all of our employees around the world for their effort and their personal commitment to achieving our 2015 priorities. I would also like to thank our customers as well as our suppliers for their continued support.

And we'll now be happy to answer any questions that you may have.

(Operator Instructions) Trevor Young, Jefferies.

Good morning. Thank you for taking my questions. On slide 4, you mentioned $100 million plus in net operating savings. Could you walk through some of the moving pieces there? I'm presuming like $25 million comes from the potential savings in Serbia, which should have a greater impact in the near-term. Plus $50 million to $55 million in some of the longer-term EU restructuring. Is the balance from some of the CS/OS operating initiatives?

Trevor, this is Matt. Thanks for the question. You're right with respect to Serbia and the restructuring savings that come in Europe. However, those savings will not start hitting us until starting in 2017 and really hitting us in 2018.

The $100 million that Jeff referenced with respect to net operating savings this year is really result of the implementation of a lot of the world-class operations and best business practices tools, where we are going through on a plant-by-plant basis and working productivity actions. It really has nothing to do yet with restructuring or Serbia.

Okay. Great. That's really helpful. And how much of those savings do you really see flow through to the EBITDA line? So if you achieve $100 million this year, does that mean EBITDA, all else being equal, could be $50 million higher next year?

I think when you take a look at it, we're planning on seeing $100 million this year and we've got plans in place of doing similar to that next year as well. When you think about the flowthrough in 2015 to the bottom line, that does help us out in offsetting some of the pressures that you see from a pricing standpoint and on economics, effect on payroll and some of the other inflationary pressures that you see here.

But when you take the net operations' favorability and add that to some of the purchasing favorability that you see, that's really been the basis of a lot of the margin expansion that you've seen on a year-to-date basis and we plan on seeing for the balance of the year.

Trevor, the other thing -- this is Jeff -- the other thing that you're seeing in this year-over-year number certainly are launches last year. I think our teams struggled a little bit more this year with the effort from our plant managers as well as the program management teams, our engineering group. Our launches this year are much better and I think that's also resulting in this year-over-year improvement that you see from quarter to quarter.

Okay. Great. That's really helpful. And now switching gears to your China business. As that grows in the next few years to maybe $400 million, $600 million in revenue, at what point will it come a meaningful contributor to EBITDA? Could it achieve Company-level EBITDA margins by like 2017 or 2018, implying an incremental $40 million or $60 million in EBITDA?

And also, too, how does the outlook for China change, given the recent slowdown that I think you noted has weighed on 3Q growth somewhat? Thank you.

I don't think we've really gotten into projecting the future performance there in China as we look forward to 2016 and 2017. Certainly we've talked pretty openly about what that growth is going to look like on the top line. I would tell you that we have full expectations that our business will operate probably somewhere between where we are in Europe and where we are in North America, so there's no reason we can't be double-digit performance in China as we go into 2016 and 2017. That's about all we've said externally at this stage.

Okay. Great. Thank you. That's very helpful. Congrats on a great quarter.

John Rolfe, Argand Capital.

It looked like the tax rate was below 30% for the quarter. I think you are at about 33% for the year. I understand going forward, the rates that you guys expect will be a function of profitability in the various regions. But can you give any sort of broad guidance in terms of for modeling purposes what you think would be sort of reasonable moving forward in terms of a consolidated tax rate?

Yes, John, this is Matt. Thanks for the question. I think we ended up at 28%, as I had mentioned, here in the third quarter. Our outlook for the year is right around 32%, 32.5% is what we contemplate for the year. I think on a go-forward basis with some of the actions that we're taking, we should be at or below that level over the next period of time.

Okay. That's great. Thanks very much and congrats on the progress that you guys have made.

Jim Marrone, Singular Research.

Yes, congratulations on a great quarter, gentlemen. My question comes in regards to the North American sales and how much of that was impacted by setting up the Mexican plant? And can you maybe shed some light as far as the status of that operation?

I think the short answer on North America is obviously the units continue to be strong: in the 17.5 million unit range here. So that's very good for us. We mentioned the trucks and the SUVs; that certainly is a favorable mix for us.

And then the real issue is -- and we've talked about this in the past -- the Ford F-series launch over the last year or so. We are now up to full volume there, so that also played a pretty good role for us in North America.

The Mexico footprint that you referenced continues to be very good for us and is supporting our customers' continued growth there. So the North America team, I would say, is certainly operating on all cylinders and doing a great job with running their business.

Okay. Great. And I just wanted to speak in terms of the headwinds from the FX exposure. Has there been any discussion as far as mitigating those losses on foreign exchange?

Sure. There has. And we actively pursue a hedging strategy on our major currencies as we take a look out over the next series of quarters and try to mitigate the impact of exchange in the near term as much as practical.

But when you take a look year on year, with the euro -- year on year, euro being down 16%, the Canadian dollar being down 13%, the Brazilian real being down 29%, there is a demonstrable impact on our financials this year versus last regardless of any hedging that you do.

Okay. Thank you, gentlemen.

(Operator Instructions)

Scott Segal, MSD Capital.

Congratulations on a great quarter. Just following up on Trevor's question, you mentioned that you think you can achieve similar savings in 2016 to the $100 million that you generated in 2015. My question is if sales were flat in 2016, should we think of that as translating into an incremental sort of $50-ish million dollars of EBITDA, given price downs and other offsetting costs?

You could probably get close to that, Scott. I think when you contemplate the incremental amount of price erosion that you see year over year that we anticipate -- industry average of 1.5 to 1.7 points -- as well as, as I mentioned, some of the inflationary pressures you see, I think this year some of the favorability that you saw on the commodities probably won't repeat next year, but the op should fall through.

The only type of thing I'd contemplate from a modeling perspective is the mix of the earnings that you see. North America we anticipate continuing at a 17.5% to 17.7% rate over the next period of time. And our growth in China will be a big incremental favorable for us, but the growth there does not come at the same margin level that we achieve in North America. So I'd temper that maybe a little bit.

Great. Thanks. And just one quick follow-up. Your effective guidance for the fourth quarter would imply that fourth-quarter margins would be materially lower than where they've been recently. Is there something about the fourth quarter specifically that we should be thinking about?

Really what we've done there is obviously we've got a bit of a train wreck going on from an economic point of view in Brazil. So we've been a little bit conservative as a result of that. Obviously China in the third quarter was down, so there is probably a little bit of conservatism, although we continue to be pretty pleased with the most recent shift up in production in China.

So I don't think anything material there at all, Scott. I think we're just being a little bit conservative, given a couple of markets that -- they are a little bit hard to predict at this stage.

Great. And then just last question from me. On China, just given the shift in the tax regime there, have you seen a material improvement relative to what you were seeing towards the end of the third quarter?

That's what I was just alluding to. As we head through October and based on some releases that we're seeing for November, it looks like it's working.

Terrific. Thanks again, guys, and congratulations on a great quarter.

Glenn Chin, Buckingham Research.

Good morning, gentlemen, and congrats from here as well. So can I ask you -- I would expect the fourth quarter to be stronger for you guys, particularly in North America. We are beyond the summer shutdowns; F-150 production should remain strong. Are there any margin drags that we should foresee in the fourth quarter?

No, not at all. As I mentioned, North America certainly continues to do very well. We don't see any change in mix or volumes at this stage as we sit here. Our bigger concern would be south of here, as I mentioned. The Brazil market continues to be challenging in a number of ways and we were little bit -- coming out of the third quarter in China, we wanted to make sure that we weren't overshooting that.

As Scott just mentioned earlier, the tax rate change there on the smaller-engined vehicles, which we were hoping would have a positive impact, but we really didn't -- we weren't sure, at least at this stage after a month looks like that might be helpful in the quarter. So nothing beyond what I've said.

Okay. Very good. And then given how inexpensive your stock is, Jeff -- or Matt as well -- what are your thoughts around repurchasing shares? Or maybe relative to how you think about it versus acquisitions or capital allocation just in general?

You know, Glenn, that's a good question and it's a good problem for us to have as we start generating incremental cash. We prioritize the use of our cash really based on the highest return opportunities that we have, starting with winning new programs and launching the ones that we've already won.

Next, we've identified opportunities to improve profitability of both our current and future business through the restructuring initiatives that we've discussed moving from north to south in the States as well as moving from west to east in Europe and other high-cost to lower-cost regions.

You know, the other thing that we've talked about in the past as well is we are continuing to focus on investing in innovative technology to improve our performance on our products to better serve our customers. And then to your point, we are constantly reviewing bolt-on acquisitions. They are going to provide us that strategic growth either for certain customers, certain regions, or within certain technologies.

And then lastly, after we go through that, we are continually reviewing the capital markets' opportunities that could return cash to our shareholders, either in the form of stock purchases or potential dividends. We are winning all of those constantly. We just had a discussion with our Board yesterday and we continue to weigh those as we contemplate the incremental funds flow that we are generating.

Okay. Very good. Thanks and congrats again.

It appears there are no further questions. So I would now like to turn the call back over to Roger Hendriksen.

Okay. Thanks, everybody, for participating in the call. We appreciate your questions. If further questions come up, don't hesitate to call. Look forward to chatting with you over the coming weeks and again next quarter. Thanks very much.

This concludes today's conference call. You may now disconnect.