Cooper-Standard Holdings Inc (CPS) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded and the 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, Scott, and cooking everyone. We again appreciate your taking time to participate in our call today and we appreciate your continued interest in Cooper-Standard. 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 this presentation contains forward-looking statements. While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable, these statements do involve risks and certainties. For more information on forward-looking statements we ask that you refer to slide 3 of this presentation and the Company's statements included in periodic filings with the Securities and Exchange Commission.

With that said I will turn the call over to Jeff Edwards.

Okay, thanks, Roger, and good morning everyone. We are certainly pleased to again report record quarterly performance. The third quarter of 2016 marks the eighth consecutive reporting period in which we've delivered year-over-year improvement in adjusted EBITDA and adjusted EBITDA margin.

We reached a third-quarter high of $856 million in sales. Excluding the impact of foreign exchange rates acquisitions and divestitures, sales were actually up more than 4% year over year.

Our Asia-Pacific region was particularly strong during the quarter and demand for light trucks and SUVs in North America continue to drive a favorable mix. Adjusted EBITDA for the quarter was $101 million which was also a third-quarter record. That's up nearly 8% compared to the third quarter of last year. The increase was driven by improved volume and mix as well as our continued success in implementing our Cooper-Standard operating system and best business practice tools in our facilities around the world.

As a percent of sales adjusted EBITDA for the third-quarter 2016 was 11.8% and that's up 50 basis points compared to the third quarter of last year. We also had an excellent quarter in terms of free cash flow with a 60% versus the third quarter last year. Matt will provide more detail on this in a few minutes. We certainly want to thank our team of more than 30,000 employees around the world who continue to collaborate and innovate to improve our business and deliver results for us every day.

The table on slide 6 reflects our track record of outpacing industry growth. As mentioned on the prior page we had a 4.3% growth in the third quarter excluding the impact of FX acquisitions and divestitures. On a year-to-date basis with similar FX and M&A adjustments, we have grown the top line by 5.9% compared to the same period last year or 1.4 times greater than global light vehicle production growth.

We expect this trend to continue for the next several years as we take advantage of opportunities created by our product innovation and advantaged global footprint. We'd like to thank our customers around the world for their continued support and trust in Cooper-Standard.

On slide 7 we compare adjusted EBITDA results in the third quarter to the same period and break out some of the key drivers for our record performance. Volume and mix were favorable in the quarter, adding $7 million in adjusted EBITDA improvement year over year. Our manufacturing teams continue to drive improved operating efficiencies, adding $20 million in EBITDA compared to the third quarter of 2015.

We expect to achieve additional operating efficiencies in the fourth quarter as we continue the implementation of our best business practice tool in our fuel and break delivery and fluid transfer systems facilities. We also completed the acquisition of AMI Industries' fuel and brake business in North America during this quarter. This is a tuck-under acquisition for us that we expect to integrate very quickly within our own operations utilizing the CSOS playbook.

It gives us improved customer and geographic penetration and also provides some nice incremental technology. Even though it's small it will provide some good synergies that we can leverage going forward.

The acquisition added around $5 million in revenue for the quarter but it was not yet accretive on an EBITDA basis. We expect it to be accretive in 2017 and we expect to close on the Asian portion of this acquisition in the relatively near future.

Turning to slide 8, here we highlight some of the major operating measures and accomplishments of the third quarter. We are pleased to have added $78 million of annual net new business, bringing the total for the year to $292 million. This is a significant accomplishment that is only made possible by our continued excellence in customer service combined with the exciting value-added innovations that we're providing.

We successfully launched 18 new programs in the quarter while at the same time achieving $20 million in operating cost reductions. We improved quality by 80% and improved employee safety by 30% versus 2015 levels.

Finally, we are very proud to have been named a finalist for a major award from the Society of Plastics Engineers recognizing our innovation in the development and application of materials. The recognition is for a high-performance vacuum brake tube which provides more than a 50% weight savings versus the current rubber hoses and clamps, more than a 35% space savings due to lower profile and the compact design, quick connects that enable improved routing and assembly and finally the product is recyclable. Award winners will be announced on November 9 at the Society of Plastics Engineers Annual Awards Gala, so stay tuned.

Slide 9 provides an update on the sales of our new game-changing technology. To date, we've booked over $170 million in annual sales of our new automotive products, $30 million of which was booked in the third quarter. We are especially excited to announce the first sealing production contract for Fortrex on a premium North American passenger car.

Since it's is a running change it will begin production later this month. It's a small component on a luxury vehicle, so the volume and related revenue won't be significant, but it's very significant in terms of validating our Fortrex technology as a value-add solution for weight reduction in acoustics performance. We are confident that this will be the first of many orders to come.

In addition to the contracts we've been awarded thus far, we have a larger number of pending open quotes and additional targeted business that we expect to submit by the end of the year. We are also excited about the pipeline of additional innovations we have in development which we expect to drive incremental profitable growth and a competitive advantage for Cooper-Standard going forward.

Now let me turn the call over to Matt.

Thanks, Jeff, and good morning everyone. In the next few slides I will provide some additional color on our financial results for the quarter and comment briefly on a refinancing initiative to reposition our capital structure that's due to close this week.

On page 11 we show a summary of our results for both the third quarter and the first nine months of 2016 compared to the same periods in 2015. Our third-quarter 2016 sales of $855.7 million was a third-quarter record. Gross profit for the quarter was at 19.2% of sales, up 130 basis points year over year and up 170 basis points year to date.

Our adjusted EBITDA of $100.8 million for the quarter was also a record high for any third quarter and at of 11.8% of sales this reflects an improvement of 50 basis points over last year and was in line with our third-quarter expectations. Our year-to-date adjusted EBITDA of 12% is up 110 basis points over the first nine months of 2015 and is aligned with our revised total year guidance.

Net income in the third quarter was $36.4 million or $1.94 per diluted share and excluding restructuring charges, the adjusted net income was $46.5 million or $2.48 per diluted share, up more than 11% when compared to the third quarter of 2015. Our year-to-date adjusted EPS of $7.85 is up 29% compared to the first nine months of 2015 and CapEx for the quarter at $35.4 million or 4.1% of sales. For the first nine months of the year CapEx was at 4.5% of sales, which is in line with both our full-year and longer-term plans.

On slide 12, the chart on the left highlights how we are continuing a positive trend in adjusted EBITDA margins. On a trailing 12-month basis we've shown margin improved every quarter since the third quarter of 2014, which is essentially when we began the implementation phase of our current operating strategy. We are pleased with this improvement so far and we believe that there is still more upside opportunity for us going forward.

Free cash flow for the quarter improved by $11 million compared to the third quarter of 2015 and year-to-date free cash flow generation is up $85 million compared to the same period last year. These improvements were driven primarily by improved operating income, timing of CapEx spend and our continued focus on working capital improvements.

Moving to slide 13, this combination of strong operating performance and focus on executing our cash generation strategies has continued to strengthen our balance sheet. We ended the third quarter with $360 million of cash, up $128 million versus the same period last year.

Now when you adjust for stock repurchases related to the secondary offering in Q1 and the AMI acquisition that Jeff talked about in Q3 this represents a cash increase of more than $183 million or close to 80% compared to the end of Q3 2015. Through continued improvement in EBITDA and cash generation we've increased our interest coverage ratio to 10.1 times and maintained our net debt at 1 time trailing 12-month EBITDA.

Now moving to slide 14, subsequent to the end of the quarter we announced an initiative to refinance our debt and improve our capital structure. Last week we announced the intent to issue $400 million in new senior unsecured notes.

We plan to use the net proceeds of the notes to repay a portion of our existing term. This would give us a fixed rate on a portion of our debt and extend the maturity until 2026.

Additionally, we intend to amend the terms of the existing term loan on the remaining $340 million and upsize our ABL facility from $180 million to $210 million while extending the maturities on both. All transactions are scheduled to be finalized later this week.

So on a pro forma basis upon closing our senior secured leverage will decrease to one-time while still maintaining our gross leverage at two times. We believe this new capital structure provides us with the right balance and flexibility as we continue to execute our profitable growth strategy over the longer term.

Now let me turn it back to Jeff.

Okay, thanks Matt. To wrap up our discussion this morning I will just take a minute to review our outlook and guidance for the full-year 2016, so let's move to slide 16.

In view of our year-to-date record results and our positive outlook for the remainder of the year, we are maintaining our full-year guidance as provided back in July. We continue to expect full-year sales to be in the range of $3.4 billion to $3.43 billion and adjusted EBITDA margin to be in the range of 12% to 12.5% of sales.

So this concludes our prepared remarks. Now we will open the line for questions.

(Operator Instructions) John Murphy, Bank of America Merrill Lynch.

Good morning, guys. Just a first question on North America. It looks like the revenue as you are disclosing it by region was down about 1.2% there.

I'm just curious what you are seeing in North America that drove that as far as maybe mix and how you are seeing schedules here in the near-term? Because there's a little bit of a disparity in the way some companies are going about this in cutting production and some are building into the market, so there's some ebbs and flows depending on the manufacturer you are looking at there. So just curious on schedules and releases if they are getting a little bit more volatile or if you are not seeing that?

Hey, John, it's Matt. Thanks for the question and thanks for dialing it.

You know, in North America our volume and mix were actually positive in the quarter but they were more than offset by the price reductions that we typically see in that 150 to 180 basis point range as well as the net impact of M&A. If you recall this includes the divestiture of Rockford that we talked about at the end of the year offset slightly by some of the incremental sales from AMI. So when you exclude the M&A impact sales were up slightly quarter on quarter.

Additionally, when you talk about one of our largest customers did announce a reduction in production volumes on the F-Series Escape, Fusion and the Fiesta a couple of weeks back. Compared to our initial forecast for the beginning of the year the F-Series is down quite a bit really with all that coming in the second half.

It did have an impact somewhat on the third quarter. However, year to date F-Series sales are up quite significantly.

Got it. That's incredibly helpful. And then, Matt, just on schedules in the near-term, are you hearing any, seeing any volatility or 30- and 60-day releases are holding fairly steady?

We are seeing them hold relatively steady on our largest customer and production volume hasn't slowed at all on our next two largest customers in D3.

Okay, that's helpful. Then a second question, you are talking about opportunity on margin and, obviously, a lot of it looks like it will come in in Europe and Asia-Pac. I'm just curious in both of those regions if you'd give an update on efforts there to get those margins turned around?

That's a good question. As you know, John, we report at the segment profit level and we continue to work through from an operating efficiency perspective completing our restructuring in Europe which we are well on track. As we had mentioned back early in 2015 we announced a restructuring program and we are about two-thirds through that and we are on track for that to deliver $55 million or so in savings as we get into 2018 and beyond.

In Asia the integration in Shenya is going nicely. Total light vehicle production was up more than 20% in Asia, specifically in China in the third quarter. And we are taking advantage of that and it's helping us to increase our margins by leveraging some of the fixed space that we've got with the operating facilities that came with the Shenya acquisition.

Okay, that's incredibly helpful. Then as we look at the Fortrex announcement on our North American premium vehicle, obviously you can't disclose, or maybe you can disclose, the exact nameplate there. But if you can that would be helpful.

But also if you can't is this a product that could be global? Meaning, is it a global vehicle or is it a very North America-specific product?

Yes, John, this is Jeff. So for the product I can tell you it's a Ford luxury vehicle. I won't get into nameplates.

And as I mentioned in my remarks the good news here is that as you know once you are approved for a particular material technology, in other words it's on the drawing, the ability to move it faster is really positive. As you also know, we've got six development contracts still going. So we are working with other OEMs upfront in their engineering departments to prove out this product and to get it on their vehicles and that's three Europeans as well as the three here in North America.

So as I mentioned in the prepared remarks we are really excited about this. I think it always takes one, the first order, in the first production order, then you tend to see it go from there.

And I think that speaks to the work that's gone on for the last two to three years in the development process both internally with Cooper-Standard and with our customers. We are all gaining a real good understanding of what this product is all about and very excited about it.

That's helpful. And then just lastly on AMI, what's the revenue base on an annualized basis for North America? And when we think about the incremental acquisition that you are making in Asia on that, if you can run through the basics there, the mechanism of what's going on and then also the revenue and profit potential in Asia.

Yes, I think, John, on AMI we will have more on that as we come out with our 2017 number. So at this time we haven't disclosed it.

Okay. Thank you very much.

Mike Ward, Seaport Global.

Thank you, good morning everyone.

Two things. Just following up on the AMI, is that acquisition cash out in the third quarter, the $34.5 million is that for AMI?

Yes.

And does that include China?

That does not. So the bulk of the acquisition was US-based, a smaller portion will be in China and that will go when we clear regulatory.

Okay. Second thing on the term loan and redoing the term loan, does that lift some of the restrictions as far as giving the Board the flexibility to pay a dividend or buy back stock?

The term loan is covenant light and we would still go through with the Board anything we were going to do regarding any distributions, Mike.

Okay, but did the old term loan, when the full term loan was there didn't it have restrictions as far as paying dividends and those sorts of things?

It did not. However, there was a restricted payment basket that we continue to accrue and that's included in the terms of the term loan. We are intending to maintain the size of the restricted payment basket that we've built up over the life of the existing term.

Okay. So under the new, with this new extended-out debt portion you do have a bit more flexibility for what the Board can do if they want to in that regard?

Yes.

Okay, and just lastly, typically you have a pretty strong seasonal cash flow in the fourth quarter. Do you expect that again this year?

Yes.

Super. Thank you very much.

(Operator Instructions) Matt Koranda, ROTH Capital.

Good morning, guys, and thanks. I just wanted to cover EBITDA margin, the implied guide for Q4 seems to suggest that you guys could improve sequentially from this quarter. I just wanted to get your take on what are the sensitivities to expanding EBITDA margin relative to Q3 and Q4.

Sure. Thanks for calling in, Matt.

As you know, we typically see a lift in Q4 from an EBITDA margin rate. Q3 is typically our lower rate based on seasonality with shutdowns and vacations in Europe and the states over the summer.

We will expect to see that at or north of third-quarter rates in the fourth quarter. And we are maintaining, as Jeff had mentioned, our total-year guidance of north of 12% EBITDA.

Got it. Very helpful.

Then on North America I just wanted to touch on essentially if we look out into 2017 and think about production flattish year over year, and your EBITDA margins this year are running relatively nicely in North America, I'm backing into something in the high teens. Any sense for if you guys can continue to expand beyond where you are currently in North America in terms of EBITDA margins or operating margins in general?

Okay Matt, this is Jeff. I think Matt mentioned that we still believe there is opportunity to take cost out and we continue to drive the best business practices across the other two product groups both in FTS as well as our fuel and brake delivery. So we have expectations that we will continue to lower the cost level within the business really around the world and to your question still here in North America.

Okay, got it. On Asia, obviously, 40% growth in the quarter, really strong and running well ahead of the general market, especially as it pertains to China. Could you just talk about the program launches or what enabled that strength and how sustainable is it into 2017?

For Asia?

Yes, for Asia specifically.

Yes, Matt, this is Jeff. So we've talked a lot about Asia and we continue to expect a march towards $1 billion in revenue as we go past 2020 and we are on that trajectory. So we have high expectations.

We are very busy. There is a lot of launches going on, a lot of terrific work being done by our teams throughout the region and specifically there in China. So we will continue to ramp that up over the next several years and you will see a steady increase each year 2016, 2017 right out through 2020.

Okay and last one for me just on Fortrex, I know you guys have highlighted the strategy of trying to go after some of the running changes that are out there. It looks like you are starting to chip away at that, but just wondering does the Fortrex product increase those opportunities for you in any way relative to your legacy product?

Yes, I think as we work with the different customers, Matt, on their new platforms, they are gaining a lot better understanding of what the product can do. And so I don't have any more that I can talk to you about, but I assume that we will see running change opportunities.

I don't want to suggest that that's going to be the significant growth driver here because I don't think it will be. But if you can do running changes and get the material approved at a variety of OEMs that just helps facilitate when the RFQs come. On conquest business or replacement business we're that much further ahead and it makes that ability to get in the end zone much easier.

Okay, that's it for me, guys. I will jump back in queue. Thank you.

David Tamberrino, Goldman Sachs.

Thanks. Good morning, thanks for taking my questions. That new business looks like it's tracking at about $292 million for the year-to-date period if I add up the last couple of quarters.

I'm wondering where those winds are coming from geographically? I think you've given out how much are on new products, but just maybe help us frame that with the better pricing. And then lastly how is this comparing to how you were tracking last year?

This is Jeff. David, good morning. With the innovation awards I would say that's really spread fairly even around our business when you talk about the customers not necessarily where it's going to be produced all the time. But we are very pleased.

I think we mentioned before that our new MAGALLOY technology on the fuel and brake has given us the opportunity to begin selling that product to our Japanese customers. That door was closed to us prior to this innovative technology and now that door is open. So we are really pleased about that.

And when you think about 35% or so of the total automotive market from a fuel and brake point of view we weren't able to pursue prior to this new technology. Now we are. So we have high expectations that that will continue.

Related to Europe, they continue to do a great job. They have been very involved with the development of Fortrex as I mentioned before. Three of the companies or the customers that we are working with on advanced Fortrex are Europeans, and we've been very successful on our ArmorHose product really across all customers.

So we are excited about that. It doesn't seem that anybody out there is stiff arming the product.

We actually decided that we were going to focus on those six customers first, just not to dilute our resources and to make sure that we got this material approved before we started trying to go everywhere with it. So part of that was our strategy in capturing the value and making sure that we got it into the market very successfully and that we didn't have any hiccups doing that.

And then, again, about I think $292 million this year, did you mention how that's tracking against last year?

I didn't mention how it was tracking against last year. Do we have that number, Matt?

$292 million, we are on track slightly ahead of where we were last year.

That's helpful, thank you. And then just a last one, as we think about the North America marketing and we get into this plateaued environment that we've been in for the last, call it, year or so and maybe it extends into next year, just wondering how your conversations are going with your OEM partners, if there is more aggressiveness on the side of pricedowns or looking for quick savings upfront in your negotiations for business, new business wins, if you are seeing any of that?

I think it's more of the same, David. I don't see any change in expectations. It's a competitive market, as you well know, and we continue to win more than our share fair share, so we expect that to continue

Understood. Thank you for taking my questions.

John Rolfe, Argand Capital.

Hey guys, just a quick one on modeling and maybe you mentioned this, if you do I apologize. It looked like the tax rate came in a few hundred basis points lower than what you have been run rating in recent quarters. Just wondering I assume that's a function of mix geographically what we should be using to model going forward?

Sure. So John, thanks for the call. Our ETR actually for the three and nine months for 2016 was 25% and 29%.

One of the big drivers was the adoption of ASU 2016-09 which is the improvements to employee share-based payment accounting or the stock compensation. This actually had about a 7 point impact in Q3 and year to date 4.4 as we implemented this in the second quarter.

In our Q you will see footnotes 1 and 8 that identify this. You will see our tax rate on balance for the year we are going to be in the high 20s for the balance of the year, is what I would contemplate modeling.

Okay, and I'm sorry I'm not familiar with that new rule, but is that something that's like a one-time catch-up or is that going to be ongoing? Looking at a high 20s rate is that something that we can use going forward into next year you think as well?

I'd use high 20s on a go-forward rate, yes.

Okay great. Thanks. I appreciate it. Nice quarter.

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

Okay, thanks everybody. We appreciate your engagement in the call and the good questions. If you have further questions or want to reach out to us please feel free to reach me via email or call my office.

I look forward to further conversations down the road. Thanks very much.

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