Cooper-Standard Holdings Inc (CPS) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Fourth Quarter and Full Year 2018 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.

Thanks, Chelsea, and good morning, everyone.

We appreciate your continued interest in Cooper-Standard, and we thank you for 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 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 the company's statements included in periodic filings with the Securities and Exchange Commission.

This presentation also contains non-GAAP financial measures.

Reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures are included in the appendix to this presentation.

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

Thanks, Roger, and good morning, everyone.

I'd like to begin on Slide 5 with a high-level overview of 2018.

Following these initial comments, Jon will review the financial data of the fourth quarter and full year in more detail.

Then I'll come back and share our progress on the company's strategic priorities.

In 2018, based on the geopolitical and vehicle volume and mix dynamics around the world, our results fell short of expectations.

The global team worked to offset these factors as much as possible, with increases in operating efficiency and lean initiatives that yielded $80 million in operating cost reductions as well as significantly lower SGA&E expense.

In addition, our continued focus on workplace safety resulted in 28 of our facilities achieving perfect safety performance with 0 reported incidents for the year.

These metrics are even more meaningful given that we launched a record 196 new programs in the year, and that was an increase of 16% over 2017.

Our superior products, innovative technologies and high level of customer satisfaction continue to drive new orders.

For the full year 2018, we booked over $440 million in net new business awards, which is a strong indicator of our future growth.

Notably, sales awards related to our new innovative product offerings totaled $287 million for the year, and that's up 30% compared to 2017.

So this shows that our customers are valuing the technology we're bringing to the market, which is creating substantial competitive advantage and margin expansion opportunities going forward.

Overall, even though our results in the second half of the year were weighed down by challenging economic and market conditions, we continued to perform well in 2018 in the areas of our business that we can directly control, and we made considerable progress in the execution of our long-term strategy for profitable growth.

Now let me 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 quarterly and full year financial results and put some context around some of the key items that impacted our earnings.

On Slide 7, we show a summary of our results for the fourth quarter and full year 2018 with comparison to the prior year.

The year-over-year comparisons were challenging given the record quarter we had for both sales and EBITDA achievement in the fourth quarter of 2017.

Fourth quarter 2018 sales were $872 million, down 7% versus the fourth quarter of last year.

The year-over-year change was driven by unfavorable volume and mix, foreign exchange and customer price adjustments, partially offset by acquisitions.

Adjusted EBITDA for the fourth quarter was $76.4 million or 8.8% of sales compared to $131 million or 14% of sales in the fourth quarter of 2017.

The change was a result of unfavorable volume and mix in all regions, customer price adjustments, higher raw material costs and general inflation, partially offset by improved operating efficiency and restructuring and other cost saving initiatives implemented during the year.

On a U.S.-GAAP basis, we incurred a net loss of $23 million in the quarter.

This included the net impact of $39.8 million in noncash goodwill impairment charges in our Europe and Asia segments, $43.7 million in noncash impairment charges related to certain intangible and fixed assets in Asia and Europe as well as a net tax benefit related to deferred tax assets in France and in the U.S. amongst other special items.

On an adjusted basis, net income for the quarter was $27.5 million or $1.53 per diluted share.

For the full year, sales of $3.63 billion were up 0.3% over last year.

We had positive contributions to sales from acquisitions, improved volume and mix in North America and the net impact of foreign exchange.

These positive drivers were partially offset by customer price adjustments of approximately 2% of sales and unfavorable volume and mix in Europe and Asia.

Adjusted EBITDA at $376.5 million was down 16.7% year-over-year.

The key drivers of the decline were customer price adjustments, unfavorable volume and mix and higher raw material costs, partially offset by lower SGA&E and our cost saving and lean initiatives.

Full year net income was $107.8 million or $5.89 per diluted share.

Adjusted for the net impact of impairments, tax adjustments and other special items, net income for the year was $160.7 million or $8.79 per diluted share.

This compares to $208 million or $11.08 per diluted share in 2017.

From a CapEx perspective, we ended the year at $218 million or 6% of sales.

This was in line with our guidance and plans for the year as increased launch activity; continued investment and innovation; expansion of our Spartanburg plant; and advance of new Fortrex launches; and investment in our nonautomotive businesses drove higher capital demand.

CapEx for our core business was approximately 5% of sales, while investments related to innovation and diversification added the other 1%.

Moving to Slide 8. These charts quantify the significant drivers of the year-over-year change in our adjusted EBITDA for the fourth quarter and full year.

In the quarter, we achieved $23 million in cost savings through improved operating efficiency, and we also reduced SGA&E expense by $5 million compared to the fourth quarter of last year.

These savings were more than offset by the negative impacts of $52 million from weaker volume and mix, net of price, $16 million in higher material costs and $15 million in higher expense related to wages and general inflation.

For the full year, we achieved $80 million in cost savings through improved operating efficiency and $38 million of cost reductions in SGA&E.

These savings were, again, more than offset by the negative impacts of $126 million in unfavorable volume and mix, net of price, higher material costs of $44 million and wage increases, general inflation and other items totaling $23 million.

In terms of adjusted EBITDA margin, company-driven cost savings and improvements in our underlying performance resulted in positive contribution to margins of 70 basis points for the year.

However, market factors negatively impacted margins by 280 basis points.

Moving to Slide 9. Our balance sheet and credit profile remained strong despite lower earnings and cash flow during the year.

We ended 2018 with $265 million of cash on hand.

This was after investing nearly $172 million in strategic acquisitions and returning more than $60 million to shareholders in the way of share repurchases during the year.

Our total debt at year-end was $831 million and net debt was $566 million.

This compares to total debt of $758 million and net debt of $242 million last year.

Our gross debt was 2.2x adjusted EBITDA at year-end.

On a net basis, our leverage ratio was just 1.5x.

With cash on hand and availability on our revolver, we had total liquidity of $409 million at year-end.

And as a reminder, we expect the sale of our AVS business to provide approximately $200 million in cash at closing early in the second quarter of this year.

When combined with our current cash position and credit profile, we expect to have more than adequate liquidity to support our near-term operating requirements as well as our longer-term strategic plans and priorities.

Moving to Slide 10.

We issued our initial full year guidance for 2019 a few weeks ago, and those same numbers and assumptions are provided again this morning.

We expect sales in the range of $3.4 billion to $3.6 billion in 2019.

The net impact of divestitures and acquisitions is expected to reduce sales by approximately $160 million or around 4% versus 2018.

Other assumptions affecting the top line are continued weakness in Asia and Europe for the year and ongoing customer price adjustment, albeit at a rate substantially lower than we experienced in 2018.

CapEx is expected to be between $180 million and $190 million, down from $218 million in 2018.

We expect our effective tax rate to be in the range of 16% to 18% for the year given the lower statutory rate in the U.S. and planned geographic mix of earnings.

We expect our operations will again be successful in improving operating efficiency and lean savings.

We also anticipate incremental savings from recent restructuring activity.

Combined, these represent 360 basis points of margin improvement over 2018.

However, we also anticipate continuing headwinds from market-driven factors.

Given our outlook on commodity prices and assuming currently announced tariffs remain in effect for the year, we would expect to see an adverse 180 basis points in raw material cost pressure.

This assumes no further tariff actions are implemented.

General inflation on wages, energy, rent and utilities is expected to drive 150 basis points of margin headwind, and all other items are expected to add another 160 basis points of pressure.

Our margin guidance assumes volume and mix essentially in line with 2018 levels.

Moving to Slide 11.

Free cash flow for the quarter and full year 2018 was weaker than in 2017 and short of our expectations.

This was primarily due to lower cash earnings, the nonrecurring positive benefit at the start of our pan-European factoring program in Q4 of 2017 and higher CapEx loans.

We also made a discretionary pension contribution to our U.S. plan in 2018 to benefit from the then current tax rate.

While we don't provide specific guidance, our global team is committed and aligned to improving free cash flow in 2019.

We have already taken proactive steps beginning in 2018 to reduce SGA&E and fixed overheads.

Last year, targeted actions reduced SGA&E expense and headcount, saving $27 million, with expected carryover benefit in 2019.

We also expect to see the benefit of a recent voluntary separation program that is expected to drive further savings with less than a 1-year payback.

On the capital side, our global team will centrally manage equipment specs and sourcing decisions, better enabling us to evaluate and facilitate equipment redeployment opportunities.

Similarly, we now have centralized global leaders who are driving working capital optimization and are focused on reducing days inventory on hand.

In summary, while we expect continued margin pressure in the near term, we are committed to making 2019 one of our better years for free cash flow improvement.

And the good news is that this process of driving improved free cash flow has already begun.

Now let me turn the call back over to Jeff.

Okay.

Thanks, Jon.

So before wrapping up our discussion this morning, I just want to take a few minutes to review our longer-term strategic outlet and some of the reasons why we believe the next 5 years will provide greater opportunity for our company than the last 5 did.

So let's move to Slide 13.

We have many reasons to be positive about the future of our company, and product innovation is just one.

This is an important year for Fortrex in the automotive industry.

It's the year we launch our first major Fortrex production program, which will be on the 2020 Ford Explorer.

It is also the first year we expect to see a significant revenue impact from this important material science innovation.

Our customers will soon be able to experience the difference Fortrex makes and the overall advantages it provides on their vehicles as well as in the assembly process.

We'll be launching the new explorer sealing program in our plant in Spartanburg South Carolina, where we recently completed a major expansion project focused specifically on Fortrex production.

So following 2 years of planning, execution, significant capital investment, the construction is now complete, the equipment is in place, and the training of production personnel is underway.

Turning to Slide 14.

This chart shows our projected growth and innovation-related revenue.

As you can see, we have significant growth planned in each of our product categories.

So our innovations include much more than just the Fortrex technology applied to our sealing products.

As our innovations goes into production and ramp up, we anticipate margin expansion opportunities as we set prices in accordance with the incremental value they provide our customers.

Moving onto Slide 15.

Another key reason to be positive about our outlook is the progress we've made in our strategy to diversify the business.

Building on the formalized structure we put in place in 2018, our Advanced Technology Group is poised to deliver strong growth and margin enhancement going forward.

The Industrial and Specialty Group will aggressively pursue share in a fragmented, nonautomotive market, estimated at approximately $3.2 billion globally.

This business will leverage our traditional technologies as well as our core product innovations to drive value in near-adjacent industrial markets, such as recreational vehicles, power sport vehicles, commercial trucks, agriculture and off-road equipment and appliances, among others.

The Applied Material Science business will employ a license-based business model to expand penetration of our Fortrex Chemistry platform into a broad range of high volume industrial and consumer applications, with limited additional capital requirements for our company.

Existing licensees, INOAC and PolyOne, are progressing towards initial production and commercialization, and we've advanced our discussions and negotiations with several additional, potential licensees in various market segments.

Moving onto Slide 16.

The chart on Slide 16 shows our plans for the growth of the Advanced Technology Group.

The cumulative average growth rate of 21% takes into account book business as well as planned replacement and targeted new business within the Industrial and Specialty Group.

It also assumes a number of new licensees within the Applied Material Science business.

It does not assume any further M&A activity, although this will continue to be part of our strategic growth plan for this business.

While we're not providing definitive guidance on the potential margins for this combined nonautomotive group, we are confident that this business can eventually deliver EBITDA margins similar to our North American core automotive business and significantly higher ROIC, so it certainly makes for a very exciting part of our growth strategy going forward.

Turning to Slide 17.

This chart provides a look at our overall growth expectations for the next 5 years.

With a significant portion of our future sales already booked over this period and the competitive advantages provided by our innovation, we believe that our sales growth will significantly outpace the forecasted growth in light vehicle production.

We also expect China will continue to be a growth driver for us in our core automotive business, and that's despite the current projections for slower growth in the near term.

As the largest automotive market in the world, China remains a tremendous opportunity for us to grow our top line and improve margins as we launch record numbers of new programs in the country and ultimately fill up our existing manufacturing plants.

The planned strong revenue growth within our Advanced Technology group, as I just discussed, will also be key to our ability to outpace the growth of the global light vehicle market.

Turning to Slide 18.

So to conclude our prepared comments this morning, I really want to return our focus to the action plans and the opportunities to deliver improved value here in the short term.

On Slide 18, we highlight a number of these opportunities, including the further leveraging of our innovations to help offset price pressure and material cost increases, optimizing cash flow, as Jon described and successfully concluding the sale of our AVS business.

Underlying all of this, we're committed to continued improvements in operating efficiency and further cost savings estimated at a combined $130 million in 2019 to offset as much of the market headwinds as possible.

So in spite of our lower sales and earnings projections, we expect to deliver significantly higher free cash flow in 2019.

And as we do, we will continue to be prudent, yet opportunistic, as it relates to the deployment of capital for strategic acquisitions as well as further share repurchases.

Importantly, we want to thank our global team of employees for their commitment to continuous improvement and dedication to delivering value to our customers and stakeholders in challenging market conditions.

We also want to thank our customers around the world for their continued trust and confidence in the Cooper-Standard team.

This concludes our prepared comments, so we can move on to the Q&A.

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

So a first question on the outlook on Slide 10, and I appreciate the walk on the margins, but if we were to look back at Page 8, which is a, sort of, an absolute walk year-over-year in 2018, I haven't seen -- one's margin, one is absolute dollars, so I understand it's a little bit mixed up here, but if we look back at Slide 8, the volume and the mix was a negative $126 million.

I don't see any bar like that in Slide 10 for that margin walk and once again I know, one's absolute, one's margins, so it's not perfect comp, but when you think about volume and mix in 2019, how are you kind of thinking about that headwind or maybe not such a big headwind as what we saw in 2018?

And if we think about that bar in 2018, I mean, how much of that was just pure volume as opposed to mix?

Because mix doesn't seem like it should have been too negative in 2018.

John, thanks for the question, this is Jon.

As far as the 2019 walk in my prepared remarks, I kind of alluded to the fact that we expect the same mix profile throughout 2019 that we do in 2018, so that's why you don't see an incremental bar on that margin walk for the guidance levels.

So the same kind of profile for volume and mix that we saw in Q3 and Q4, that continues all the way throughout 2019 in our planning process.

So with respect to the 2018 impact, it really was the story of the European footprint for us with some platforms that drove a true mix profile.

And then the China volumes being down.

And there, we're concentrated.

90% of our sales go to global OEMs and Detroit 3 OEMs.

So what -- they were significantly challenged in 2018, that impacted our volumes and mix profile during the year.

So again, those 2 stories continue on into the 2019 that we foresee in the near future.

John, this is Jeff.

Let me continue that.

So back in mid-January, when we issued our guidance, we talked about the uncertainty in the market in Asia, primarily China, and also in Europe.

Obviously, some of that is a result of the conversations going on right now around trade, and we happen to believe that, that'll probably resolve itself here by early summer, at least that's our optimistic view.

We didn't put that into our guidance.

We felt that there was too much uncertainty to do that, so we took the back half of '18, which was obviously significantly down from what anybody thought, and that's what we put into the entire 2019 year.

So obviously, that's a conservative approach, but it's the one that we decided to go with.

And so for Section 301, you guys are assuming that the 10% stays in place, we don't go up to 25%, and then there's an assumption that 232 in the U.S. doesn't get put into place, is that a -- or gets enacted as sort of a net 0, is that a fair statement?

Yes, John, that's exactly right.

We're not assuming any additional tariffs come on board.

Got you, okay.

And then just real quickly on Europe the RDE.

I mean, it sounds like WLTP, like for everybody, created some disruption, particularly at Audi, BMW.

Have you heard anything about the RDE testing, sort of, in the second half of this year?

And how far ahead of that your customers may or may not be?

This is Jon -- Jeff.

No, we don't have an opinion there.

I can tell you that our concern in Europe is a little different in terms of some of the uncertainty -- the geopolitical uncertainty.

Obviously, the trade discussion with China is having an impact on Europe.

I think the Paris activity that existed back last year when we pulled out of that, it's just driving some very unique behaviors across some segments in Europe for us that we're being impacted by.

So frankly, that's more of the issue for Cooper-Standard than the issues that you raised.

Okay.

And then just another question on the $440 million of net new business that you booked this year.

Just curious sort of the cadence of the flow -- that flowing on to the books.

And then also as we look at Slide 14, kind of, thinking about that business flowing on plus the innovative revenue flowing on.

I mean, how should we think about sort of the net new business backlog over the next 3 to 5 years?

And what kind of growth above market?

So first really, how fast is the $440 million flow on just so we can gauge how quickly you can win and grow the top line?

And then, also sort of just a thought process around the next 3 to 5 years on net backlog?

Yes, John, this is Jeff.

So regarding how long it takes, typically from the time we book an order till we go into production is somewhere between 2 and 3 years at this rate of change that's going on in the industry.

So it's not sort of 4 to 5 like it was in the old days.

So a lot faster.

And as we go forward, I think we expect that we'll continue to see similar opportunities that we had this year in terms of net new business.

Got it.

And then just lastly, the -- on licensing side.

Should be think about sort of 5% licensing fees on whatever dollar revenue that your partners sell?

Or is that way too simplistic?

I mean, how should we think about that licensing flow?

Yes, I think it's fair to say that as we do more of these, John, going forward, we'll have more transparency around it, so it would be premature for us to talk about specific numbers, but in general terms, the licensee approach that you've described is pretty typical.

Our next question comes from David Tamberrino with Goldman Sachs.

This is Mariel on for David.

So our first question is just kind of on the industry production assumptions in your 2019 guidance.

You guys said that you were expecting weakness in Asia and Europe, but it looks like in the industry kind of assumptions you're pointing to a little bit of growth year-over-year.

Is this in line with what you're seeing from customers?

Or is the weakness just something more particular with your customer base?

Mariel, this is Jon.

Thanks for the question.

Yes, it's more particular to the customer base.

As we've discussed on our last call, the impact in the European story is really a mix discussion around a few significant platforms for our business.

There's some luxury SUVs being produced in the European market that we have a -- some nice business with that was -- it was down in Q3 and Q4 of last year as well as some other premium vehicles and some B-segment vehicles that really drove the mix decline for us.

So it's not so much the overall volume market in 2019 that we're concerned about, it's that mix story continuing for that year.

Okay.

And then more particularly with China, is that sort of the same thing where you could still see it up year-over-year for the region or...

Are you talking about the overall production environment or Cooper-Standard specific?

Overall production and then Cooper-Standard specific.

Okay.

Well, I guess, I'll leave it to more experts in the China market to predict where that's going, but the way IHS looks, China specific looks to be down year-over-year as far as in terms of production.

So we kind of model and follow through that, but again, with our heavy concentration on global OEMs and the Detroit 3 OEMs, our story is going to be a little bit more significant than the market decline.

It's Jeff, I'll just add.

I'll add this for you that this is additional information that we provided a few weeks ago.

If you look at the mix related to Western OEMs in China, as Jon just talked about that, obviously, in the short term, that mix is hitting us pretty significantly, but when you go out over the course of the next several years, you'll see that our China business becomes much more diversified than it is today.

So by 2023 in fact, 30% of the revenue in China will be with the Chinese domestic automakers.

So as we go forward each year, we'll have less and less dependence on the Western companies, and we'll shift a lot more balance over to the local Chinese.

And our innovation's driving a lot of that, they're very interested in the new products, new innovation that we have to create a competitive advantage for them.

Okay.

And then just on the $70 million in innovation awards in the quarter, how much of this was replacement versus new business?

Can you break that out?

We don't really have a specific breakout at hand.

It's a little bit of a complicated mix, but we can address that.

Over the past period of time, if you were to look at the last year or so, it's a -- on the innovation sales, it's roughly 50-50.

I just -- I don't have the specific detail on the quarter at hand.

Okay.

And then just the last question from us.

It seemed like pricing, again, was negative in the quarter, and it looked like it stepped up a little bit from 3Q.

How is this, kind of, comparing to your expectations for pricing going forward in like, I think, the 2% range?

Yes, it's a good question.

So just historically, we've been in the 1.5% to 1.7%, just to frame that.

2018 was definitely a year that we anticipated more pricing pressure, and we got it.

We were in the 2% range, as you just mentioned.

For 2019, that number's going to be a lot closer to 1%.

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

In terms of the EU mix issue that you guys were referencing earlier, I guess, without getting too far over your skis in speaking for customers, why are those programs seeing headwinds in particular?

Is that demand related in your view?

Or is that, sort of, trade and production issues around Brexit?

Just a little more color would be helpful.

Sure, Matt, this is Jeff.

I was trying to allude to that with John's question earlier, and it is difficult, as you know, to not talk specifically about our customers' challenges there, I try to avoid that, but clearly, there are 5 vehicles, Matt, that are affecting us.

One of them is a larger SUV, that's really a high-end vehicle produced in the U.K. Another is a large luxury passenger car produced in Germany.

And then we have issues around, what I would call, a small to mid-cycle -- or mid-segment vehicle that's produced in Europe by a North American manufacturer, that's high content per vehicle for us, there's another one in Italy that's an issue for us.

And these -- this comes back to what we think is really driving the issue, more of a geopolitical, more of an environment focus.

Obviously, the diesel scandal had a lot to do with creating an awareness on top of the already existing environmental awareness in Europe.

Certainly, the rhetoric around the Paris discussions and ultimately, the U.S. pulling out of that, I think all has led to some type of the challenge within the market on these larger upscale vehicles that just happen to be ones that we're producing large content per vehicle, large profit per vehicle.

Our customers make a lot of money on those vehicles, therefore, the supply base tends to follow.

So that's what's going on for us in Europe, and we've assumed that, that will continue through 2019.

And that was a back half of '18 issue when this really started for us.

Okay, understandable.

And then just maybe a little help with the quarterly cadence for the year, for 2019.

I mean, you guys did a good job with the bridge and explaining some of the headwinds, but are there any launches that are going to drive some choppiness quarter-to-quarter?

I know you guys mentioned the Explorer Fortrex program in your slides, for an example of a launch, but how should we sort of thinking about the sales and EBITDA progress through the years as the quarters progress?

Yes, I think the good news there is that we've got almost 200 new programs that we'll be launching.

We are very confident in our ability to continue to do that and to do it well.

We, historically, the last couple of years, each year has been a record large year for us.

'19 will also be a record launch year.

Our teams are executing very well.

We don't have concerns, Matt, that we'll have costs above what we've already baked into our plans.

I mean, statistically, we're pretty good at predicting how much it's going to cost us for each launch, and in -- the last 2 years being any indication, we're confident that '19 is covered with what we showed you.

Yes, Matt, and I won't break out the actual revenues for you specifically, but I can give you a flavor of the launch cadence.

As Jeff indicated, there's -- it's a record launch year, and we're going to have over 250 launches in 2019.

Around 50 of those hit in Q1, but then Q2 and Q3 are over 80 new launches.

And then it tails off at the end of the year.

So you can kind of get a feel for that launch cadence compared to how the business results will come in.

Okay, that's helpful.

And then just in terms of licensing and how that impacts the 2019 outlook, I don't think you guys necessarily covered that.

I mean, I guess -- I'm guessing it's de minimis or whatever you may get is mostly upside to the EBITDA outlook, but if you could clarify that, that'd be helpful.

And then maybe just also levels that us on maybe the number of additional licensing agreements that you'd expect to sign in the year?

Matt, this is Jon.

On the actual financial impact during the year, we'll call that immaterial at this point, and I don't want to give you any specific information just because we only have 2 deals signed right now, so that will kind of giveaway an indication of commercial sensitivity there.

So we are nearing in -- or I should say, we're in discussions and nearing and hope to have about 3 to 4 new license agreements signed here in the coming months.

Our next question comes from Glenn Chin with Buckingham Research.

Just a quick follow-up on the customer pricing dynamic.

So you mentioned it ramped up in 2018, but then it's expected to moderate in 2019.

Is that a function of, I guess, your negotiations for raw material recovery?

Glenn, this is Jeff.

Yes.

Okay, very good.

And then in the presentation, Jeff, you mentioned opportunity to optimize your China manufacturing footprint.

What needs to be done to optimize that other than just filling up the plants?

Yes, the biggest thing, Glenn, is the vertical integration for our fuel and brake business.

So we're in the early stage of launching a brand-new tube plant there with our MagAlloy technology.

So that's, for 2019, that's the biggest factor other than just launching product and putting it into the existing factories.

So this is a significant investment that we made during the 2018 year, and it will come up to production here as we head into 2019.

Okay.

And then in China and Europe, even excluding the noncash impairment charges -- so the way you guys disclosed the results by region, it looks like even excluding those noncash impairment charges, that profitably took a bit of a step down sequentially.

Is -- did anything accelerate or deteriorate in the quarter from third quarter to fourth quarter?

Glenn, it's Jon.

There, it is just the further exacerbation of the mix story that we talked about earlier, is the big impact there in Q4.

Our next question comes from Michael Ward with Seaport Global.

Just following up on that one, when you're referring volume and mix, customer mix is part of that, correct?

Yes.

Okay.

And can you break down, you talked about $50 million of volume and mix hit in the fourth quarter, can you break down how much of that was China and how much of that was Europe?

Is it about 50-50 or is it more tilted towards China?

Actually, for Q4, we had negative volume and mix in all regions as even North America footprint, based on our customer mix profile, took a bit of a hit, but Europe and Asia, kind of, were equally weighted as far as that $40 million or $50 million you mentioned.

Okay.

When -- you talked about, Jeff, you were just mentioning the commercial negotiations and if the math was right, it's roughly $30 million of a help.

And Jon, when you alluded to the $60 million raw material pressures in 2019, is that net of the $30 million savings from commercial negotiations?

Or is the $30 million negotiations a payback from 2018 in the negative impact?

Mike, this is Jon again.

The material economic numbers I gave you were the gross impact before going back up for the price.

Okay.

So then the -- in the help out in the price sales for 2019, is that more of a payback for the pain you took in 2018?

Or is that...

Yes, exactly.

That's exactly right, Mike.

Okay.

So when you're looking at that $60 million number for 2019, there's a chance we could get some positive commercial negotiations at some point?

It's possible.

Typically, those happen on a lag as commodity inflation occurs during the year and the year closes out, and then we, kind of, rack things up and then go back to our customers with the overall scorecard and present it at that time.

A minor amount there is actually indexed.

So you'll get it on that 2 to 3-month lag, but for the most part, it's all based on negotiations.

Okay.

And as a ballpark figure for what you're spending on raw materials, from out of these, it about $1 billion?

Good question.

I don't have that in hand, but I think direct materials are about 50% of our overall cost of goods sold, yes.

Right.

So that's ballpark, okay.

Yes.

It appears that there are no more questions.

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

Okay.

Thanks, everyone.

We appreciate your participation today.

Should you have further questions, please feel free to reach out to me, and we'll stay in touch over the coming days and weeks.

Thanks again.

This concludes our call.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone, have a great day.