Cooper-Standard Holdings Inc (CPS) 2019 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded and the webcast will be available on the Cooper-Standard website for replay later today.

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

Thanks, Howard, and good morning, everyone.

We appreciate you spending some time with us this morning.

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 these statements 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 to 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 the presentation.

So with that out of the way, I will turn the call over to Jeff Edwards.

Okay.

Thanks, Roger, and good morning, everyone.

As outlined in our press release, our financial results fell short of expectations for the quarter.

We continue to be negatively impacted by weak vehicle production volumes and unfavorable mix in all of our markets.

We expected market weakness in Europe and Asia, but China, once again, was weaker than we had planned.

And we could not have anticipated the delayed ramp of production on our important new vehicle launch with a key customer here in North America.

The delayed production volume had a significant impact on the quarterly results compared to the second quarter of last year and compared to our plan for this year.

But rest assured, we're explaining this, not complaining about it.

To that point, our global team, which we recently reorganized under an improved organization structure, is focused on mitigating as much of these anticipated and unanticipated market impacts as possible.

By many measures, we're achieving record performance.

On Slide 5, we provide some of the highlights of these achievements.

We've been very successful at cutting costs through improved operating efficiency.

In fact, through the first 6 months of the year, we've taken out $52 million of costs in our plants, and combined with restructuring savings and lean purchasing initiatives, we are on pace to achieve our target of $130 million in total cost savings for the full year.

Our product quality continues to be outstanding.

Through the first 6 months of the year, our customer scorecards for quality are 94% green.

Similarly, our safety performance continues at a world-class pace and our total incident rate year-to-date is down 21% versus last year.

We're especially proud of our 34 locations that have a perfect safety record so far this year with 0 reportable incidents.

During the second quarter, we successfully executed a company record 84 program launches, bringing the total to 121 launches for the year so far.

This is consistent with our plans of more than 270 launches for the full year.

Despite this tremendous challenge, our product and program launch teams continue to deliver excellent performance, and we are on track to deliver 90% relaunches for the year.

We continue to deliver innovations to the market that are driving value for our customers in a competitive advantage for Cooper-Standard.

Our customers are recognizing the value of our innovations with their new orders.

So far this year, our commercial team has booked new sales awards related to innovation products, totaling $252 million in annualized sales, including both new and replacement business.

This is up 122% when compared to the first half of 2018.

And they have accomplished this while staying on track with our target to keep customer price givebacks at or below 1% for the year.

And finally, our continuous improvement in world-class operations are being recognized by our customers and the industry.

We were recently honored to receive the Ford World Excellence Awards and the General Motors Supplier of the Year award, in addition to 20 customer awards for quality and service at the plant and regional level, all received since the beginning of the year.

So in summary, our team of dedicated employees are doing an outstanding job of managing the aspects of our business that we can control in the near term.

Beyond this, we are in the process of making significant structural decisions within our business, ensuring we adapt to changing market dynamics and lower global light vehicle production over the longer term.

I will provide more detail on these initiatives, our strategy associated with the initiatives and our outlook following Jon's review of the second quarter financial results.

Jon?

Thanks, Jeff, and good morning, everyone.

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

On Slide 7, we show a summary of our results for the second quarter with comparisons to the prior year.

Second quarter 2019 sales were $764.8 million, down 17.6% versus the second quarter of 2018.

The year-over-year change was driven by the unfavorable volume and mix in all regions, as Jeff just described; the sale of our AVS business; unfavorable foreign exchange; and customer price reductions.

These were partially offset by increased sales from recent acquisitions.

Gross profit for the second quarter was $98 million compared to $151.4 million in the same period a year ago.

Adjusted EBITDA was $58.1 million or 7.6% of sales compared to $107.9 million in the second quarter of 2018.

The most significant driver of the decline in adjusted EBITDA was weaker volume and mix, including the impact of delayed ramp-up of production and key launches.

Also contributing to the decline were general inflation, customer price reductions, raw materials and the net impact of acquisitions and divestitures.

These were only partially offset by the success of our continuing cost-reduction initiatives.

The sale of our AVS business resulted in a gain of $189.9 million recorded in the quarter.

The effective tax rate on the gain was 22% or about $42 million, accounting for the majority of our total tax expense of $44.2 million in the quarter.

However, the cash tax rate on the gain on sale was only 7.9% due to tax laws and tax credit carryforwards in the U.S. and Europe.

With the U.S. GAAP effective tax rate of 23.4% for the quarter and 24.8% year-to-date, we now anticipate an ETR in the range of 21% to 25% for the full year.

On a GAAP basis, net income for the quarter was $145.3 million versus net income of $41.9 million in the second quarter of 2018.

Excluding the gain on sale, related taxes and other special items, adjusted net income for the second quarter was $5.4 million or $0.31 per diluted share.

From a CapEx perspective, our spending in the second quarter was $35.9 million or 4.7% of sales, down from $38.8 million in the same period a year ago.

This was in line with our expectations for the quarter and consistent with our plan to reduce CapEx by more than 15% for the full year.

Moving to Slide 8. The charts on Slide 8 quantify the significant drivers of the year-over-year change in our sales and adjusted EBITDA.

For sales, volume and mix, net of customer price reductions reduced sales by $100 million year-over-year, and the impact of FX was another $26 million negative.

The net impact of acquisitions and divestitures was a negative $38 million combined.

For adjusted EBITDA, our ongoing efforts in lean manufacturing and operational efficiency drove $27 million in cost savings for the quarter.

These savings were more than offset by $53 million of unfavorable volume and mix, net of price reductions.

North America had the biggest volume and mix impact due to customer delays on the ramp of production and an important new program launch and the discontinuation or run out of certain passenger car programs.

In addition to the unfavorable volume and mix, we also had $8 million in higher commodity cost and a net negative impact of $4 million from acquisitions and divestitures.

General inflation, such as wages, rents and utilities and other expenses accounted for $12 million in other incremental costs.

Moving to Slide 9. We continue to maintain a strong balance sheet and credit profile.

We ended the second quarter with $311 million of cash on hand.

With cash on hand and availability on our revolving credit facility, we had solid liquidity of $470 million as of June 30, 2019.

Our total debt at the end of June was $792 million, down from $907 million at the end of the first quarter this year.

Net debt was $481 million.

This is down from $645 million at the end of the first quarter and compares to net debt of $317 million at the end of the second quarter last year.

Our net debt to trailing 12-month adjusted EBITDA at the end of June was 1.8x compared to 0.7x at the end of June 2018.

Turning to Slide 10, a few more thoughts on the balance sheet and cash flow.

We closed on the sale of our AVS business on April 1, 2019, with a total sales price of $265.5 million.

Following the adjustment for certain liabilities assumed by the buyer, we received $243.4 million in proceeds during the second quarter.

We estimate that the net proceeds, following post-closing adjustments, fees and cash taxes yet to be paid, will be in the range of $215 million to $220 million.

For purposes of this discussion and slide, we'll use the upper end of that range, but the final amount may vary.

Shortly after closing the transaction, we used $115 million of the proceeds to completely pay down the balance of our U.S. revolving credit facility as well as some local debt balances in China.

We also used $30 million of cash to repurchase shares in the second quarter.

The rest of the proceeds remain on our balance sheet, giving us improved flexibility to manage the business.

Given the prevailing conditions in global automotive markets, we believe this to be a prudent allocation of the proceeds.

As it relates to cash flow, free cash flow was down in the first half of the year as compared to the same period last year due largely to lower earnings.

We continue to expect to generate positive free cash flow in the second half.

And for the full year, we expect to be essentially free cash flow neutral, which would deliver a solid improvement over full year 2018.

To summarize, while pleased with the strengthening of our balance sheet and the overall financial condition of our company, we remain focused on increasing free cash flow and improving our credit profile.

We believe we are well positioned to manage through the current challenges in the market, while pursuing our long-term strategy for profitable growth.

Now let me turn the call back to Jeff.

Okay.

Thanks, Jon.

With the next few slides, I want to provide some perspective on our longer-term strategy and more importantly, the actions we're taking to improve our financial results going forward.

So moving to Slide 12.

A core component of our long-term profitable growth strategy is the continued focus on innovation.

Our success in this area is an increasing competitive advantage for us.

As I discussed earlier, it is driving significant new sales awards.

Our Fortrex material has dominated the innovation conversation for some time.

It is just one of the many innovations we offer.

We continue to advance a full pipeline of innovative products and technology.

Our new FlushSeal technology was just introduced to the market during the second quarter, and we've already sold it for production on an exciting new premium electric vehicle.

It is gaining attention with all of our customers, and we are in the midst of a global roadshow, featuring this product on site at customer locations.

With the premium sleek appearance and improved aeroacoustics this technology provides, we believe this first contract award is just the first of many.

Moving to Slide 13.

Looking ahead, we have a number of additional innovations that we expect to introduce to the market before the end of the year.

LightHose III, ArmorHose III and ArmorTube have all garnered significant attention from our customers due to the high performance and wage savings they provide.

In some cases, they can drive cost savings for our customer while still providing an enhanced margin for us.

Importantly, we are leveraging our expertise in material science to deliver innovation across all of our product lines.

Moving to Slide 14.

We continue to make solid progress on our strategy to diversify our business.

The current state of the global manufacturing industry is a perfect example why this strategy is so important in the long run.

We're very pleased to have signed another agreement to develop Fortrex technology for applications beyond the automotive industry.

The latest agreement is with a large, multinational industrial company based in Asia, who will be focusing initially on 3 or 4 potentially high-volume product applications.

The breadth of their overall business provides potential for more applications in the future as well.

Our Advanced Materials Science business remains on track with the goals and objectives that we laid out for you at the 1st of the year.

Having signed 3 new Fortrex agreements so far, we still expect to sign 1 to 3 more for a total of 4 to 6 by the end of the year.

These agreements continue to demonstrate the versatility of the Fortrex chemistry platform and the wide range of potential applications for the technology.

We continue to be excited and optimistic about the long-term potential of this side of our business.

Turning to Slide 15.

As we consider the trends and the near-term outlook for light vehicle production and customer demand around the world, we must position our company to deliver value in the new normal environment in Asia and in Europe.

Our current view of these markets is that light vehicle production will remain at or below current levels at least through 2021 and possibly longer.

As a result, we are taking significant steps to align our production capacity with the anticipated lower vehicle demand.

We now expect to initiate the closure of 8 plants by the end of the year, including 5 in Asia and 3 in North America.

In Europe, we believe we can become more profitable by becoming smaller.

In all the regions around the world, if we cannot fix the underperforming businesses to at least cover our cost of capital, we will exit them.

In North America, the plant closures will help us achieve the planned synergies related to recent acquisitions.

We believe this market remains fundamentally strong, with underlying support from a growing economy and continuing consumer preference for light trucks, SUVs and crossovers.

Our new North America program launches ramp up as planned for this year.

We believe our North American operations can exit the year at a run rate EBITDA margin once again in the high teens.

We are accelerating our transition to a pure global organization structure, and we believe this will help us drive significant synergies and cost savings.

We expect to further flatten the organization structure, leverage global scale and better align the priorities between manufacturing, engineering, supply chain and commercial teams in a uniform way across the globe.

Details will be provided during our fourth quarter.

Related to this, we've begun an important supply chain initiative that will dramatically reduce complexity and better leverage global scale on more than $2 billion in annual direct commodity and equipment spend.

This is a joint project with collaboration among all of our major global functions.

We expect this to drive significant reductions in the cost of materials in the 2020 to 2023 time period.

Continuing our focus on improved cash flow, we plan to reduce our capital spending to a reinvestment ratio of 1 or lower in 2020.

We also plan to reduce our inventory days on hand to 21 in the near term, with a longer-term goal to get to 14 and further optimize receivables and payables.

Our entire global organization is aligned to execute this near-term transition in connection with our long-term strategy and objectives.

Turning to Slide 16.

The initiatives we've laid out for you are already beginning to reduce costs in the second half of the year but not sufficiently to offset the first half volume impacts.

Most of the benefits will not be realized until 2020 and beyond.

Given our first half results and the expectation of continued weak volumes in Asia and Europe, we've revised our full year outlook as shown on Slide 16.

While we expect the positive impact to second half sales as new launches ramp to full production, we are not assuming volume lost to production delays in the second quarter will be made up this year.

Using the midpoints of the sales and EBITDA ranges, you can see we do expect improvement in EBITDA margin in the second half.

We want to again thank our global team for their commitment to driving change and value creation in a very challenging environment.

We would also like to thank our customers for their continued trust and confidence.

This concludes our prepared comments, so we'll now open the phone lines for Q&A.

(Operator Instructions) Our first question or comment comes from the line of Mike Ward from Seaport Global.

Jeff, I want to make sure I got this right.

Did you say you do not -- your assumptions for your guidance do not expect the lost volume from the new program ramp to be made up in the second half?

Yes.

We took a conservative view there for the second half, Mike, and it's conservatively behind the original plan.

So we just felt that it was prudent to take that bit of a conservative approach for the second half.

That's correct.

Okay.

That's despite the fact that the company -- your customer, is adding another line, right, and hiring employees, so you're just being ultra conservative?

Yes.

Again, I haven't -- and again, you know us, we don't really like to talk to or for our customers in these situations, so I won't indicate which one was or that aspect.

But based on the information we have available, we just felt that was for this period.

I mean, again, we're talking about 6 months here to make up a considerable number of vehicles, and we just thought, for our business, it was prudent to take this approach.

For next year, I'm sure things are going to be on track and everything is going to be going extremely well.

Okay.

Is the FlushSeal product different than the Fortrex-based window seal like in the Explorer?

Yes.

It is, Mike.

There's actually a potential for incorporating the Fortrex technology within the FlushSeal product.

But FlushSeal is really the way that the glass is aligned with the sheet metal or with the structure of the vehicle itself to give it much smoother and sleeker appearance and a quieter feel.

We call it aeroacoustics.

So yes, it's a new program, but it can actually incorporate the material science of Fortrex.

Okay.

And the vehicles launched in 2Q?

No.

That one hasn't launched, it's been sold for future production.

Oh, I got you.

Okay.

The award was given, okay.

Is -- how does content compare with traditional sealing products?

As we do with all our innovations, we try to get additional content and hopefully, improve value for the customers and value for our shareholders as well.

Okay.

And just one last thing.

You mentioned that you had 8 plants targeted to close by the end of this year and I guess 5 in Asia.

I think it's what you said.

When you look at those closures, are these plants shut, complete gone?

Or are they mothballed that if volume comes back that they can be turned back on in a relatively short period of time?

Yes.

For the Asia footprint, Mike, this is Jeff, it's the mothball approach, as we've talked in the past.

I think, for us, it's more prudent to move our lines and consolidate lines into the number of plants that we actually need for the foreseeable future.

As the volume comes back there, then we have the flexibility to open those back up, yes.

And when does the new business in China start to accelerate?

Well, we're launching a significant amount of new business in China as we speak.

The issue there has more to do with the volume and mix for us than it does a number of new programs.

Just to give you some color around that, the data would suggest that from a customer point of view in China, if you just look at year-over-year volume and mix reductions for all customers in China, that number is a little bit over 13% year-over-year down.

If you look at the Cooper-Standard volume and mix associated with that customer group, ours is down about 30%.

So a significant number of vehicles that we happened to be sourced on are significantly down from the previous year's volumes.

So that really is our issue.

The good news is, I guess, if you try to find some good news in that, is we have a tremendous amount of good information going forward.

So it allows us to really take out costs and to address the fixed cost that were -- that I just spoke about going forward.

So we will get the costs out and the footprint will reflect that particular environment until that particular environment improves.

(Operator Instructions) Our next question or comment comes from the line of [Mik Dae Lee] from [EME Asset Management].

You bought back $30 million in stock in the quarter and you've got room left on the -- your purchase authorization.

Do you expect to continue the cadence of the buyback between now and the end of the year?

And secondly, will you do that, you think, in that accelerated format or open-market repurchases?

Mike, this is Jon.

The $30 million program was an accelerated share repurchase program, as you pointed out.

So we had initial delivery of 80% of those shares, and technically, the program is still open as our banking partner covers the shares.

To date, so far, we've bought them back at about an average of $43 per share.

As I mentioned in my prepared remarks, though, we are going to sit back, I think, a little bit here for the rest of the year as we work through the industry dynamics and we don't have any further plans at this point to spend any of the further $98 million authorization that we still have open.

Okay.

That's probably prudent.

Okay.

Good luck.

Thank you.

Our next question or comment comes from the line of Prateek Gupta from Goldman Sachs.

So my question was specifically around the guidance that you have provided.

And if I'm kind of doing high-level calculations around implications from 1H versus 2H, revenue is obviously softer, but margin profile looks much stronger.

So can you just help us bridge the gap in terms of where exactly this improvement in margin is coming from despite what looks like lower revenue?

Yes, Prateek.

This is Jon again.

Jeff alluded to this in his prepared remarks as the second half profitability looks to improve for us.

The significant driver there year-over-year and sequentially is going to be the significant launch cadence that we've got scheduled this year.

And we've got 272 launches, and 83 of those launch in Q3 and another 68 launch in Q4.

So as the launches we've had year-to-date are at full run rate exiting the year and those other ones come online, we expect to have increased absorption, improved profitability in the back half of the year.

Okay.

And one follow-up question around these launches would be, in terms of visibility, obviously, you mentioned 2Q, some of the launches kind of surprised to the negative in terms of volume.

So what is the visibility level in terms of these launches actually getting done and actually getting the volumes that you are modeling in your guidance?

Yes.

This is Jeff.

So I think we're very confident in what we have just said related to the guidance.

The vehicle that we refer to is a challenge during the quarter.

As I mentioned, we're being somewhat conservative in the back half related to the making of those units that were lost in the second quarter.

That's our decision that we've taken.

So that gives us a high level of confidence that what we do have in there is going to happen.

Okay.

If I may, finally, any commentary around which regions these new launches are kind of spread across?

Is it similar to your revenue mix right now?

Or is it more concentrated in a particular region?

Yes, Prateek.

It's Jon again.

I can give you some further breakdown.

Of the full year 272 programs, 163 of those are actually global platforms and 109 are regional when you look at the actual platforms themselves.

But in Q3 and Q4, the North America region will launch another 45 programs, Europe will launch another 38, Asia will launch 58, and South America will launch another 10.

So you can see it's a very global program and aggressive launch schedule that we have for all of our regions.

It appears there are no more questions in the queue.

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

Okay.

Thanks everybody for your questions.

We appreciate your participation this morning, and we would invite you to reach out to us if you have further follow-up calls in the coming days and weeks.

Again, we thank you for your participation today and look forward to speaking to you again soon.

This concludes our call.

Thanks.

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

This concludes the program.

You may now disconnect.

Everyone, have a wonderful day.