Cooper-Standard Holdings Inc (CPS) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference 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.

Thanks, Christie, and good morning, everyone.

Thanks for joining 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 Jon Banas, 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 uncertainties.

For more information on forward-looking statements, we ask that you refer to Slide 3 of this presentation and also the company's statements included in 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.

I'd like to begin on Slide 5 with some highlights and key data points from the second quarter.

Our sales in the quarter were $928 million.

That's up 2.1% over the same period last year.

This was the highest sales total for any second quarter in our history, despite continuing customer price pressure and the unexpected lost production on a key vehicle platform for 2 weeks in the quarter.

Volume and mix were also weaker than we expected across all regions and foreign exchange rates were a positive impact on the sales year-over-year, especially in Europe and Asia.

Adjusted EBITDA for the quarter was $108 million.

This was lower than last year and below our plan as unfavorable volume and mix, price reductions and higher material costs more than offset the $22 million in cost savings that we generated through our lean initiatives and improved operating efficiency.

Despite the challenging market conditions, we did have a very strong quarter in terms of cash flow and new business wins.

Free cash flow was $70 million in the quarter, significantly higher than the second quarter of last year.

And our net new business awards were $144 million.

That's up nearly 50% compared to last year.

With our total net new business awards of $284 million in the first half, we are on pace for a record year in new business wins.

Finally, we received contract awards for our innovation products totaling $49 million in annualized sales during the second quarter and a premium German OEM customer approves Fortrex for bidding on future business.

It's also worth noting, at the end of the quarter, we received our first production contract for Fortrex in China.

Our product innovations are continuing to drive increased demands throughout our automotive business and expanding our opportunities beyond the automotive industry.

Turning to Slide 6. We continue to execute our strategy to profitably grow our business and accelerate opportunities for our material science innovations.

During the quarter, we reached agreements on 2 acquisitions that align with this strategy.

The first is the acquisition of 80.1% of the LS Mtron automotive components business.

When closed, this deal will provide us with synergistic new technology to expand our product offerings in fuel and brake delivery systems, strengthening our global #2 market position in that segment.

Specifically, it will add jounce brake lines, the flexible high-pressure hoses that connect the steel brake line tubing to the brake calipers, and charged air cooling hoses that are critical components in the cooling systems for turbocharged engines.

So combined, these new product lines represent more than $1 billion in additional addressable market for Cooper-Standard.

This acquisition will also expand our business and opportunities with key customers and provide improved market penetration in China, Korea and Brazil.

We look forward to building our relationship with LS Mtron and even potentially exploring new business opportunities with them through licensing our material science technologies in nonautomotive applications.

Next, the acquisition of Lauren Manufacturing, which we actually closed on this morning, immediately expands our nonautomotive business.

It adds 5 new product categories and over 500 new customers for our Industrial and Specialty Group, creating multiple opportunities for cross-selling of products and technology, including new opportunities for the application of Fortrex technology.

This acquisition also adds a dedicated manufacturing footprint supporting our Industrial and Specialty Group.

Finally, we're also very pleased with the cultural synergy between the 2 businesses.

The Lauren team shares our passion for innovation, customer service and community responsibility.

We welcome the Lauren team to the Cooper-Standard family and look forward to their contributions in growing the nonautomotive and specialty sector of our business.

Moving to Slide 7. We've already begun the process of integrating the Lauren team and operations into our existing Industrial and Specialty Group.

The combination will expand our nonautomotive business to approximately $250 million in annualized sales.

This is a significant advancement towards our strategic goal of $1 billion.

With a diverse customer base and wide range of industries served, we're certainly very excited about the potential for continued growth as we execute our strategy to diversify our total business portfolio.

Moving to Slide 8. Also within our Advanced Technology Group, we are continuing to make progress with our applied materials science business, which is focused on licensing our Fortrex technology to other businesses in diverse industries.

We've made considerable advances on a number of fronts.

Our first licensee is set to begin production of Fortrex-based products this quarter.

In addition, they've already come back to us with proposals to add more product applications and material variations to their existing agreement.

We believe this is a strong statement regarding Fortrex technology and the potential for incremental demands once engineers, designers and manufacturers become even more familiar with its capabilities.

We significantly expanded the number of nondisclosure agreements that we've entered into as well and broadened the number of industries in material applications being considered.

Our material science scientists have been successful at creating variations of Fortrex that meet a wide variety of performance characteristics and standards.

In a major development, we've passed the test required to certify Fortrex for industrial roofing applications.

We've also developed varieties of Fortrex foam that have achieved breakthrough performance levels with a unique combination of low density, high resilience and rebound, and just the right level of stiffness that shoe manufacturers are looking for.

To our knowledge, no other material has been able to meet all 3 of these specs at the same time.

So we believe it's just a matter of time before we see Fortrex being licensed for use in the manufacture of athletic shoes.

In fact, a major shoe manufacturer that you would all recognize recently reached out to us proactively to learn more about Fortrex.

Their initial reaction to the performance qualities and characteristics was extremely positive and further meetings and discussions are being arranged as we speak.

With the broad proliferation of Fortrex applications, recent testing by an international institute confirms our outgoing material performance and processability in foam applications, including for footwear, seating, insulation and many others.

Finally, we're implementing an aggressive IP strategy to protect Fortrex know-how, including composition and application patents in many fields across broad global markets.

So the momentum for our applied materials science business is building and the excitement about Fortrex technology continues to increase both within Cooper-Standard and with potential licensees.

And now, I'll turn the call over to Jon.

Thanks, Jeff, and good morning, everyone.

In the next few slides, I'll provide some additional detail on our second quarter and first half financial results and also comment on our liquidity, balance sheet profile and capital structure.

On Slide 10, we show a summary of our results for the second quarter and first half of 2018 with comparisons to the prior year.

Second quarter 2018 sales were $928.3 million, up 2.1% over the second quarter of last year.

The improvement was driven by a favorable foreign exchange of $29 million, primarily in Europe and Asia, and modest gains in volume in Europe and North America.

While overall volume was positive in the quarter, it was weaker than we had planned in our major regions and was more than offset by the impact of customer price reductions.

Gross profit for the second quarter was $151.4 million compared to $172.2 million in the same period a year ago.

The change was primarily driven by customer price reductions, weaker volume and mix, and general inflation which, combined, more than offset the $22 million of cost reductions we achieved through lean initiatives and improved operating efficiency.

We continue to see commodity cost inflation on certain raw materials in the quarter.

Through our ongoing supply chain optimization efforts, we were able to mitigate most but not all of the impact.

On a net basis, materials had a negative impact of approximately $4 million in the second quarter.

Adjusted EBITDA was $107.9 million or 11.6% of sales compared to $113.8 million or 12.5% of sales in the second quarter of 2017.

The impact of lower gross profit was partially offset by reductions in SGA&E expense, which was 8.2% of sales in the second quarter versus 9.4% of sales in the same period last year.

Our effective tax rate for the second quarter was 17% compared to 33% in the second quarter of '17.

The lower effective rate is driven primarily by the new U.S. tax law's reduced statutory rate of 21% and changes in the mix of earnings.

We are continuing to analyze and interpret the impacts of tax reform on our business and, as a result, have lowered our full year ETR expectation.

Net income for the second quarter was $41.9 million.

On an adjusted basis, net income was $50.3 million or $2.74 per diluted share, up 3% and 5%, respectively, compared to the second quarter of 2017.

Despite continuing headwinds from material costs and anticipated weaker volume and mix in Europe and Asia, we expect to achieve stronger results in the second half of the year compared to the second quarter.

The improvement is expected to be driven primarily by stronger volume and mix in North America and the increased positive impact from our cost reduction initiatives.

While gross commodity pressures have nearly doubled from our original plan, by working with our customers, suppliers and through internal efforts, we expect to mitigate most of these rising commodity costs.

Since we spoke with you last, we now expect an incremental $3.7 million in net commodity pressure for the rest of the year, mostly related to tariffs on Canadian steel tubes and Chinese imports.

Looking now at the first half of the year.

Sales were $1.9 billion, up 4.7% over the first half of last year.

The increase was driven by improved volume in all regions and favorable foreign exchange, partially offset by customer price reductions.

Gross profit for the first half was $322.2 million compared to $342.2 million in the first quarter of 2017.

The change was driven primarily by customer price reductions and weaker volume and mix, partially offset by improvements in operating efficiency.

Adjusted EBITDA for the first half was $230.5 million, increasing 2.6% over the first half of 2017 as reductions in SGA&E expense helped offset lower gross profit.

Adjusted net income in the first half was $114.1 million, up nearly 9% compared to the same period last year.

And coupled with our share repurchase activity over the last 12 months, adjusted earnings per share increased nearly 12%.

From a CapEx perspective, our spending in the second quarter was essentially in line with the same period last year.

For the first half, CapEx was slightly higher than last year and is consistent with our expectations based on continued investments in innovation and growth.

Full year spending will likely follow our typical historical cadence, which tends to be more heavily weighted in the second half.

Moving to Slide 11.

The chart on Slide 11 quantifies the significant drivers of the year-over-year change in our adjusted EBITDA for the second quarter.

As mentioned before, we achieved $22 million in cost savings through improved lean initiatives and operating efficiency.

This brings our cost reduction efforts to $47 million in the first half of the year.

We also achieved savings in our SGA&E expense for the quarter as we continued to implement cost saving initiatives in all areas of the business.

The lower expense was driven by our investments in improved systems and automation, reduced headcount and lower net compensation-related costs and was a positive impact of $13 million in the quarter.

These cost savings were offset primarily by the negative impacts of $27 million from weaker volume and mix and price reductions, higher net material costs and general inflation and other items.

Moving to Slide 12.

Our balance sheet and credit profile remain strong.

We ended the second quarter with $440 million of cash on hand, even after using $43.5 million to repurchase shares of our stock in the period.

Our total debt at the end of June was $757 million and net debt was $317 million.

This compares to net debt of $353 million at the same time last year.

With cash on hand and an undrawn revolver, we maintain solid liquidity of $641 million as of June 2018.

Our gross debt to trailing 12 months adjusted EBITDA is 1.7x, improved from 1.8x at the end of June 2017.

On a net basis, our leverage ratio is currently just 0.7x while our interest coverage ratio improved to 11.3x.

Finally, a few thoughts on cash flow and capital structure.

Free cash flow for the second quarter was $70 million compared to $21.1 million in the second quarter of 2017, a very good result driven mainly by timing of certain customer payment collections and other working capital improvements.

We expect continued strength in cash generation in the future.

When combined with our strong balance sheet and credit profile, we expect that our liquidity will adequately support our strategic plans and priorities.

Our approach to capital allocation remains consistent with investment in profitable growth, whether organic or through strategic acquisition, being the top priority.

We will continue to opportunistically repurchase shares as our cash balance and anticipated cash requirements permit as we believe our shares still represent a compelling investment opportunity.

Now, let me turn the call back over to Jeff.

Okay.

Thanks, Jon.

To wrap up our discussion this morning, I'll just take a minute to review our outlook and guidance for 2018.

So if we can just move to Slide 14.

Following our results in the first half, we're still on pace to have another record year in terms of sales and adjusted EBITDA.

There are some continuing headwinds, however, which have led us to tighten and refine our full year guidance ranges.

Our full year outlook for sales has increased based partially on the impact of foreign exchange.

So we've raised our top line guidance range to $3.6 billion to $3.7 billion.

We're continuing our cost reduction initiatives in all aspects of our business.

We are on pace to deliver more than $100 million in savings within our manufacturing operations for the year.

We also expect [SG&A and E] expense to remain lower as we continue to benefit from investments in upgraded IT systems and streamlined administrative functions and services.

However, continued pricing pressure from our customers, commodity cost inflation and weaker volume and mix in the second half of the year in Europe and Asia will likely keep us on lower end of our original guidance range for adjusted EBITDA margin.

So we've narrowed our guidance range to between 12.7% and 13% for the full year.

Our core automotive business remains strong and opportunities for future growth and margin expansion are certainly exciting and compelling.

In addition, we remain very positive about the rapid evolution of our nonautomotive business, which has the potential to create significant incremental value.

So in closing, we want to thank our Cooper-Standard team for their continued engagement in executing our strategies and innovating across the business to support our customers and grow our business.

We also want to thank our customers for their continuing support and trust.

This concludes our prepared comments.

So we'll now open the phone lines for Q&A.

(Operator Instructions) Our first question comes from John Murphy with Bank of America.

Just a first question on volume and mix.

I mean, the volume numbers, I guess, probably came in a little bit lighter than people were expecting at the beginning of the quarter, but mix was relatively strong in major regions just looking at sort of an industry-wide level.

So I'm just curious, is there something going on with some of the specific programs you're on?

Are you seeing something different than sort of the industry top line level?

No, John.

This is Jeff.

The issue, and we haven't really spelled it out here, but obviously, the supplier fire that was well-publicized in the quarter certainly had a pretty significant impact on us.

The good news there is that all that volume will be made up in the third quarter.

So it just really shifts it from second to third.

And then the rest of it is sort of the comments that we made in terms of some softening in Europe across a variety of programs and then probably a little softer in China, given some of the obvious challenges going on in that market.

But the primary large one was the supplier fire that hurt really most people in the industry in the quarter.

Got you.

And then maybe just following up on the China angle, I mean, just given everything that's going on with the rhetoric in trade right now, how is your business faring sort of domestically in China?

Is there any real risk or is it kind of still game on?

And then you also mentioned IP protection, intellectual property protection for Fortrex.

And is that something that is -- you're sort of alluding to some concern that you might have in China or other markets as far as being sort of copycatted in the formula?

I'm just trying to understand what's going on there as well.

Okay.

So the first one regarding China, I think it's pretty early in this whole process around rhetoric to have a crystal ball on how that's all going to play out.

Based on my experience and the communication that I have there, I'm hopeful that ultimately it's resolved.

We have not seen any issue related to your comment about headwinds or challenges that have been created for us or our customers as it relates to the issues going on between our 2 governments.

So I'm hopeful that as the next quarter or 2 pass, you'll see that focus on resolution rather than what's been going on so far.

Related to IP protection, it was a general, general statement.

Obviously, we've announced that Fortrex is already sold in China.

It's now approved in Germany.

And certainly, we're in business in Japan as we speak and certainly here in the U.S. So it's really a global push on our part to make sure that we do what we need to do to protect that intellectual property.

And it's not just within -- keep in mind, it's not just within the automotive space.

I mean, we have -- I think it's approaching 30 patents today that were filed, most are pending, some are approved.

And we're doing our diligence to make sure that across these industries that we've talked to you about in the past that we're protecting ourselves in advance of going into production.

So I would just consider it prudent management on our part to make sure we protect the value and capture the value that Fortrex will have across the industries.

But no incremental threat that you were detecting?

This is just as this gets expanded, you just want to make sure you're covered.

Is that a fair characterization?

Absolutely.

Okay.

Then also just on the customer price-downs.

I mean, did something change there in the quarter?

Or is this just sort of a, I mean, standard operating procedure on your standard price-downs?

It just sounds like the way that you're characterizing it, it might be slightly more than usual.

No.

I think it's pretty much what we talked about in the last call.

We have historically been in the 1.5% to 1.7% range, John, on pricing.

This year, we knew things were going to have a little more incremental pressure and we said 2% is what we were targeting for this year.

And that's a little lumpy across quarters, but we're right on target for that for the year.

And then just lastly, real quick on acquisitions.

What is the criteria or sort of characteristics you're really going after?

And as we think about sort of those acquisitions expanding in other end markets, just wondering if you could talk about product cycles in those end -- other end markets because as a dumb auto analyst, I usually think about 5-, 5-year product cycles, but some of this stuff sounds like it's a lot shorter.

So just trying to understand how fast the opportunity could roll on.

Yes.

In the -- in our ISG space, I mean, this isn't a new space to us.

It's obviously expanded now with the -- with the war in manufacturing.

We're very pleased with what I would call the insulation of cyclicality that, that business provides Cooper-Standard.

We just need more zeros after the revenue line to provide a little thicker insulation, if you will.

So that's our idea, is to continue to consolidate opportunities within that space where product that uses the material science that we have at our disposal can be applied.

And we will leverage our scale within the automotive space to drive economies in that space that today, frankly, hasn't happened because those players are much smaller and more focused on what they consider niche opportunities.

So you will hear more and more from us going forward as we consolidate that under the Cooper-Standard umbrella because there are many, many of those, not just here in the U.S., but around the world that we'll be able to take advantage of.

The second point that I would make there in terms of margin with that business, it is significantly stronger than what we would traditionally see within some of our automotive business.

So that's also enticing to us.

So it isn't just about cyclicality.

It's about margin expansion.

And I'm sorry, Jeff, also product cycles.

I mean, how much shorter are they than what we would see in the auto industry?

[They're selling them at] 6 months, 12 months, I mean...

One to 2 years, John, I think is probably the right number.

Your next question comes from Matt Koranda with Roth Capital Partners.

Just wanted to start out with sort of your implied second half EBITDA guide.

It looks like, roughly using the midpoint of what you've given us here, backing into something in the high $230s million, around $240 million.

If I sort of add in the incremental operating efficiencies that you guys referenced in your prepared remarks, obviously get to a number much higher.

Just wondering if you could kind of break out the headwinds by mix, commodity and potentially even tariffs in the back half so we can kind of get a cleaner number.

Yes, Matt.

This is Jon.

We -- like Jeff said earlier, the big headwind will still be price.

We're running about 2.4% for the first 6 months of the year and we'll continue the year and then come in just a little bit north of 2%.

So you'll see a little bit less of an impact, but still significant when you compare it to years past for us.

As I mentioned in my prepared remarks as well, the commodity headwinds for us have doubled for the full year.

So that is not going away for us.

So that adds another incremental pressure of $3.7 million since the last time we updated you guys.

And then, the volume and mix story.

We anticipate North America will have some favorable tailwinds with -- picking back up in Q3 and then into Q4.

However, what we're seeing in China and in broader Asia as well as the European market, just a bit of softening that we also saw here in Q2.

So we see that expected to continue on for the rest of the year.

Got it.

That's helpful.

And then just speaking of Asia and sort of the growth profile there, I know you guys have highlighted a lot of growth and launch activity occurring in 2019.

So any reason to expect that, that outlook changes in any material way for 2019?

And then maybe could you also talk about sort of your mix of launch activity with Chinese domestics versus international OEMs next year?

Yes, Matt.

This is Jeff.

We're not talking about '19 yet obviously, but we have, I think, been very transparent on how we saw the China growth progressing and nothing has changed that as we sit here today.

Obviously, the conversation we just had earlier in terms of what's going on between the 2 governments, I mean -- set that aside for right now.

I don't see anything that would change in a material way what we've already been talking to you about.

Got it.

And then just on the adjacent market items that you mentioned, could you highlight for us just what are the gating items in terms of getting a technology or advanced materials deal done in the near-term here?

I mean, you mentioned some positive developments on the footwear licensing front, but any further updates on sort of the timing or the potential gate items that you need to get through to get a deal done there?

Yes.

We're still bullish on getting something done this year.

We have -- as you know, we are launching -- we talk about it quite often.

We're launching business as we speak in Japan.

So we can't forget that we do have that going on.

So that's one that we have gotten done and gotten it into the market.

And I mentioned that the products that are being brought to us now by our partner there are expanding across the industries that we've discussed with you.

So if we set that aside, we're also talking with a couple folks from a compounding point of view that we're hopeful work out.

And then finally would be -- what we would consider those that are going to be manufacturing products for us.

And I think in the last 2 cases, my expectation is that we will have something to discuss before the end of this year, Matt.

Okay.

And then just lastly on the stock buyback, I know you guys have the authorization out there and it looked like it was starting in November, but are you essentially limited in what you can do between now and then?

Or how should we think about deployment of that potentially over the coming months?

Yes, Matt.

This is Jon.

So we have a small amount left under the old authorization.

So we did announce a new $150 million authorization, but we're winding up the $125 million previous authorization.

And we've got an existing ASR in place now that is expected to run for another couple months.

So before we did anything incremental, we would let that one run its course.

Your next question comes from David Tamberrino with Goldman Sachs.

Just wanted to pick through the updated guide for the top line and just get an understanding of how much of the raise was driven by FX rates and how much of it was more kind of core organic performance that's coming in better.

David, it's Jon.

So in the first 6 months of the year, we did have favorability on the top line of revenue certainly and to the tune of $29 million just in Q2 alone.

So that will provide a bit of a tailwind for the second half compared to the prior year run rate.

If I look at the spot rates today, they're down a bit from the averages in Q2.

So I wouldn't expect it to be as much as taking $29 million and timesing it by 2 to get to the back half of the year, but it should be at a positive run rate for us.

Okay.

And then what's embedded in the back half of the guide, just what current spots are?

Is it a little bit lower than where we are today?

I'm just a little uncertain what's been embedded in there.

Yes.

I would just point to the spot rates today and that's a good guide for you.

Okay.

And then I believe the lower end of CapEx was increased to 5.7% from 5.5%.

What is that incremental capital going towards?

So -- it's Jon again.

So we have been talking about the investments that we're making in innovation, our IT infrastructure and really just changing the way we do work here in the back office as well.

So if you look at the full year spend, I think about 24% of that is going to be what we would call non-core over and above our traditional capital base.

That would really be under 5% of sales.

So it's another 1.5 points of CapEx spend that we're investing in growth, the new joint ventures over in China as well as the innovation in IT infrastructure.

Okay.

And then just lastly, I mean, you're up WLTP.

I think pretty well known, so some softening there from schedules kind of makes sense.

But within China, the last 2 months, June and July, the way that it's tracking, it will look like a bit of a -- it could be a bit of an air pocket.

Are you seeing any shortening up of production days from your OEM customers?

Or is that not working its way into the market just yet and everyone is kind of waiting to see if the consumer comes back in August, September?

Dave, this is Jeff.

I -- as I mentioned before, I think it's fair to say that, yes, there is some softening in China.

I think that's consistent with everything that you just said.

And we're now seeing a little bit of that creep in to our plants, but it's reflected in what we've talked about this morning, but that it is softer.

Your next question comes from Glenn Chin with Buckingham Research.

You guys identified some restructuring charges during the quarter.

Can you share where those restructuring charges were?

What regions?

Yes, Glenn.

Spread pretty much throughout the globe.

If I look down to the chart, you'll see something in our Q this -- later today, but about $1 million in North America.

Europe had about $7 million as it winds down the broader $125 million program that we put in place about 3 years ago.

Asia had a few tenths.

And then the rest of the company, including the corporate functions, had almost $2 million.

So collectively, that adds to about $10 million for the quarter.

Okay.

Great.

And then just a clarification on your Slide 11, that was actually an EBITDA bridge for the first half, not the second quarter.

Can you share what the buckets were for the second quarter?

I didn't catch all those.

Glenn, I think you might be looking at the appendix page.

The appendix page had the...

The first 6 months.

There was a slide out of order so...

Okay.

So it's in the appendix now, right?

It's 2 of the same chart, I think.

Okay.

We will get you, certainly.

But nevertheless, if you can just give us the -- can you share what the buckets were for the second quarter?

Yes.

I'll paint the bridge for you for just the second quarter.

So the prior year EBITDA was $114 million, operating efficiencies added $22 million while SG&A reductions added $13 million.

And overall, FX on the profit line added about $3 million.

Then on the negative side, volume and mix cost $27 million, whereas net materials were negative $4 million.

And then our general inflation on wages, utilities, et cetera and other minor items was $13 million.

And that gets you to the $108 million rounded for Q2 of this year.

Very good.

And then on the Meridian supplier fire, I don't suppose you guys can quantify the impact from that overall?

This is Jeff.

Glenn, we're not going to talk about the specific customers that make up that volume and mix.

I mentioned that one in a specific context of trying to answer the previous question, but I think that's about all we're going to say about that, other than the good news is it will all be made up in the third quarter.

So it really, for the year, is a nonissue for us.

Your next question comes from John Sykes with Nomura.

I got on this a little bit late, but do you -- I know you're not talking about 2019, but can you talk a little bit about what you expect in terms of price-downs going forward?

Is that pressure going to continue?

Should we think of that as an ongoing challenge you're going to have?

Yes, John.

This is Jeff.

I think the history would tell you 1.5% to 1.7%.

When we talked about 2% for 2018, that was, in our view, justified because of just the number of variables that we were dealing with in terms of business we were pursuing, certain programs that we're ramping down, certain programs that we're ramping up.

And so we didn't feel like this was a statistical shift, if you will, in pricing for the company.

So that's what we said early in the year and that's still how I feel right now.

Okay.

I guess the other question I have is leverage, which, obviously, your balance sheet is pretty strong.

Where are you comfortable with bringing that up?

I guess, if you do a buyback, that type of thing, assuming all other things are the same that, that will creep up.

Where do you kind of get a little less comfortable, I guess?

Yes, John.

This is Jeff again.

I think what we typically say here is if we're a 2, 2.5, that's, for us, the answer to your question.

In our space, in our industry, we don't like to talk about anything that would have a 3 in front of it.

We have discussed at length the consolidation opportunity that exists within our core products.

It still exists.

We're very diligent about how we pursue those opportunities and they certainly need to be accretive and it needs to make sense given our multiple and where we are in the industry cycle.

So those are all things that we consider before we go forward.

I think it is pretty clear that we have a desire to get 25% to 30% of our revenue ultimately in this nonautomotive bucket that we like to talk about.

We mentioned today that we've got about $250 million with this latest acquisition.

And so we'll continue to try to fill that one up.

At the same time, are hopeful that as things move forward, the ask for our core business opportunities, at least as it relates from an M&A point of view, come down into a range where they make more sense to us and make more sense to the customers and then we'll go ahead and do more of those.

But in the meantime, we have plenty of opportunity in this nonautomotive space.

Yes, John.

This is Jon.

Just a little bit more color on that is the team has worked incredibly hard to improve our credit ratings over the last several years.

And whatever leverage we did take on for strategic purposes certainly wouldn't risk -- put that at risk.

So we would maintain current credit ratings and the path forward that we've got there.

Yes, I guess that was kind of my other question because when you look at the level of leverage and the credit stats, it would seem like you guys should be in BB territory on the issue.

And have -- what's the feedback been from the rating agencies on that?

Well, in May of this year, we did get an upgrade from Moody's.

They're still one notch below S&P, but great feedback overall.

I think there's a bit of [sector] overhang when it comes to both of the agencies that we deal with.

So we fight that battle despite our good credit profile.

Okay.

Just one more.

You had mentioned where we are in the cycle, okay?

And I've heard more and more on calls that there's a lot more concern about a downturn and where we might end up from a trough perspective.

Now, I see what you guys are doing for 2018, but what's your thoughts looking out a little bit further?

I mean, 2019, obviously you're starting to think about that.

And it all kind of ties together with the level of leverage that you're willing to accept, right?

So I'm just thinking, do you see the industry globally kind of entering a downturn in 2019?

Or do you think things will be steady for that period?

John, this is Jeff.

I think we've talked about this a number of times.

And while you may think that the North America volumes are flattening out, and I think most people would agree, when you look at the mix within North America, there's still growth within the SUV and CUV segment.

When you go to China, the top line continues to grow there from an industry point of view to probably somewhere around 3% by most projections, but when you look at the SUVs and CUVs within that particular mix, they're growing north of 5%.

So with Cooper-Standard anyway, we're probably a little bit different than some where our target business, our trucks, SUVs, CUVs as the first play, the mix within each of the markets that I just mentioned are actually positive growth projections out over the course of the next couple years.

So it isn't just is it going to be 100 million units or 105 million units or 110 million units around the world, but the mix of those units, pretty important for our company.

Yes.

It's content, right?

No matter what happens, if that mix continues to shift, your content -- maybe it's favorable to you from a content perspective.

That's -- I'm assuming that's -- yes.

Yes.

That's correct.

Your next question comes from Matt Koranda with Roth Capital Partners.

Just had a quick follow-up.

Any update on monetization of non-core automotive products for you guys?

I know you mentioned some activity at your Investor Day, but just wanted to get the update there.

Yes, nothing that we're prepared to talk about this morning, Matt.

But for us, as we go forward in general terms, I mean, we're pretty clear we're going to be #1 or #2 in our core automotive business.

That's still the strategy.

And where we're not, we need to fix that.

And then the real focus for us right now in terms of organic and inorganic is on the nonautomotive side, which is what we've talked about most this morning.

But probably next quarter, we'll have a little more color that we can share related to that question.

It appears there are no more questions.

I would now like to turn the call back over to Roger Hendriksen.

Okay.

Thanks, Christie.

Once again, we'd like to thank you all for your participation today and we appreciate your continuing interest in Cooper-Standard.

And we look forward to connecting with you again in the near future.

This concludes our call today.

Thank you.

This concludes today's conference call.

You may now disconnect.