Cooper-Standard Holdings Inc (CPS) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Third Quarter 2021 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, Vic, 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 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 the presentation.

So with those formalities out of the way, I'll turn the call over to Jeff Edwards.

Thanks, Roger. Good morning, everyone. We appreciate this opportunity to review our third quarter results and provide an update on our ongoing strategic initiatives and the outlook.

To begin, on Slide 5, we provide some highlights or key indicators of how our operations performed in the quarter. We continue to perform at world-class levels in delivering quality products and services to our customers, and keeping our employees safe. At the end of the quarter, 98% of our customer scorecards for product quality were green and 96% were green for launch. Most importantly, the safety performance of our plants continues to be outstanding.

In the third quarter, our total safety incident rate was just 0.46 per 200,000 hours worked, well below the world-class rate of 0.57. I would like to specifically recognize and thank our teams at the 28 Cooper-Standard plants, that have maintained a perfect safety record of 0 reported incidents for the first 9 months of the year.

We are continually striving for 0 safety incidents at all of our plants and facilities, and the dedicated, focused employees at those 28 locations, are leading the way, and continue to demonstrate that achieving our goal of 0 incidents is possible.

Despite lower-than-expected production volumes, our manufacturing operations and purchasing team were able to deliver $8 million in savings through lean initiatives and improving efficiency in the quarter. Our SGA&E expense was down $4 million year-over-year. And the combination of past restructuring actions and strategic divestitures, delivered $5 million in benefits in the quarter.

Unfortunately, we continued to face significant ongoing challenges from volatile customer schedules, reduced production volumes, and tight labor availability in certain markets. In this low production volume environment, we've not been able to offset the widespread inflationary impacts we're seeing in materials, energy, transportation and labor. This, despite our improved operating efficiency. We're taking aggressive actions to mitigate or recover the incremental costs imposed on our business. I will provide more color on this initiative in a few minutes.

Moving to Slide 6. We're proud of the culture we've established within our company, and the progress we're making toward world-class status, with respect to sustainability. We continue to garner recognition from outside organizations for our progress thus far. In the recent quarter, we were recognized by Corp! Magazine for our culture of diversity and inclusion.

We believe this type of recognition is an indication that we are headed in the right direction. We will continue to work hard to further align our priorities with those of our 5 stakeholder groups, because, we believe, this will play a critical role in driving our long term growth and success.

Now let me turn it over to John to discuss the financial results of the quarter.

Thanks, Jeff, and Good morning, everyone. In the next few slides, I'll provide some detail on our financial results for the quarter and comment on our balance sheet, cash flow, liquidity and capital allocation priorities, and then update our expectations for the remainder of 2021.

On Slide 8, we show a summary of our results for the third quarter and year-to-date period, with comparisons to the prior year. Third quarter 2021 sales were $526.7 million, down 22.9% versus the third quarter of 2020. The year-over-year decline was roughly in line with lower global light vehicle production, which continue to be impacted by insufficient supply of semiconductors.

Gross loss for the third quarter was $8.1 million and adjusted EBITDA was negative $33.9 million, compared to adjusted EBITDA of positive $64.1 million in the third quarter of 2020. As with sales, profitability was hurt by lower production volumes and volatile customer schedules. In addition, increasing commodity and material headwinds, higher labor costs, and general inflation, weighed on our results.

Tax expense of $32 million recorded in the third quarter includes a $31.7 million charge, $18.5 million of which relates to the reversal of tax benefits we have recorded in the first 6 months of the year, plus $13.2 million of tax expense for the initial recognition of valuation allowances on our December 31, 2020, net deferred tax assets in the United States. These tax adjustments were driven by increasing historical 3-year cumulative losses, which led to a change in judgment on the realizability of our net deferred tax assets.

Including this tax item, we incurred a net loss for the quarter of $123.2 million on a U.S. GAAP basis, compared to net income of $4.4 million in the third quarter of 2020. Excluding restructuring expense and other items, as well as their associated income tax impact, adjusted net loss for the third quarter of 2021 was $106.4 million or $6.23 per diluted share compared to an adjusted net income of $3.6 million or $0.21 per diluted share in the third quarter of last year.

Capital expenditures in the third quarter totaled $20.4 million compared to $10.5 million in the same period a year ago. Year-to-date, we have invested $76 million in our business, largely to support new program launches, which we expect, will be up approximately 18% for the full year of '21 and should remain solid in 2022. Despite this significant launch activity, we remain committed to keeping CapEx below 5% of sales for the full year.

Moving to Slide 9. The charts on Slide 9 provide some additional clarity and quantification of the key factors impacting our results. On the top line, unfavorable volume and mix, net of customer price adjustments, reduced sales by $165 million versus the third quarter of 2020. Again, the biggest driver was the customer schedule reductions related to ongoing semiconductor shortages.

Foreign exchange, mainly related to the Chinese RMB, the Canadian dollar, the Brazilian real and the euro, contributed $9 million to sales in the quarter.

For adjusted EBITDA, unfavorable volume and mix, net of price, had a negative impact of $64 million year-over-year, driven mainly by the semiconductor-related customer schedule reductions as well as customer price adjustments.

Commodity and material input costs were $21 million higher, which brings the year-to-date impact to $34 million. Commodity inflation has continued to ramp up much faster than we had anticipated in each successive quarter of the year. We now expect a full year increase of approximately $60 million compared to our initial expectations of $15 million when the year began, and $20 million higher for the year than we expected just 3 months ago.

Other negative drivers were $11 million in write-downs of certain accounts receivable deemed to be unrecoverable, and $14 million from wage increases, general inflation and other items. The write-down of receivables are recorded as a credit loss, and SGA&E expense was largely related to the bankruptcy proceedings of a divested JV partner in China. On the positive side, lean initiatives in manufacturing and purchasing drove a combined $8 million in cost savings for the quarter and run rate SGA&E expense was $4 million lower.

Moving to Slide 10. Cash used in operations during the 3 months ended September 30, 2021, was an outflow of approximately $51 million, driven by the cash net loss incurred and increases in working capital, namely inventories, resulting from volatile customer production schedules. Combined with CapEx of approximately $20 million, we had a total third quarter free cash outflow of approximately $71 million. Despite the outflow, we ended the third quarter with a solid cash balance of $253 million.

In addition, availability on our revolving credit facility, which still remains undrawn, was $127 million, resulting in total liquidity of $380 million as of September 30, 2021.

With our cash conservation efforts and ongoing negotiations with our customers to recover incremental costs from commodity inflation and volatile production schedules, we expect to sustain a level of liquidity that will support ongoing operations and the execution of planned strategic initiatives.

Regarding capital allocation priorities, our top priority continues to be to sustain and grow our business profitably. We will continue to make modest investments in capital equipment and technologies to launch important new programs for our customers. With a disciplined focus, we anticipate CapEx of approximately $100 million for the full year 2021, and within the range of 4% to 5% of sales on average over time, with nearly all of that dedicated to new program launches.

As we look ahead, another priority will be to reduce the interest burden on the company, by addressing the senior secured notes that we issued in 2020. That said, we are continually evaluating our liquidity needs and overall capital structure, in relation to market conditions and opportunities. We may adjust our priorities from time to time in light of market fluctuations.

Turning to Slide 11. We have updated our full year guidance to reflect our year-to-date results, rising commodity and other cost pressures, and lower expectations for fourth quarter light vehicle production volumes, as compared to our outlook heading into the third quarter.

We now see sales for the year in the range of $2.30 billion to $2.34 billion, and adjusted EBITDA loss in the range of $25 million to $10 million. Our outlook for cash restructuring remains unchanged as we expect to continue our planned fixed cost reduction initiatives throughout the fourth quarter. And cash taxes should be approximately $10 million for the full year.

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

Okay. Thanks, John. And to wrap up our discussion this morning, I'd like to provide an update and some additional detail on our strategies to diversify our business, leverage growth in the electric vehicle market, and our outlook related to our longer-term return on invested capital improvement goals.

Please turn to Slide 13. Innovation and diversification remain key parts of our long term strategy, and we're making good progress in both areas.

Moving to the category of good news this morning. We're very pleased to announce that subsequent to the end of the third quarter, we finalized our first commercial agreement with a global footwear manufacturer. The agreement grants the customer license to use Fortrex technology in the manufacture of their footwear products. Cooper-Standard will receive licensing fees and ongoing volume-based royalties with an established minimum value. The agreement is for a 10-year term and is non-exclusive.

In accordance with the terms of the agreement, we can't disclose the identity of the footwear manufacturer or the specific financial terms. I will say, though, that the minimum fees and royalties will be sufficient to offset all of the investments we've made in our Applied Material Science business to date.

Our discussions in technology development work with other footwear manufacturers is continuing, and we hope that this first agreement will be a catalyst to future opportunities in the footwear industry.

Beyond footwear, we're exploring a number of exciting opportunities to leverage the performance and sustainability aspects of Fortrex technology, including reducing rolling resistance of tires. We're in the early stages, but the initial development work shows good potential.

We continue to believe that superior physical performance characteristics and the lower carbon footprint, Fortrex chemistry platform represents a clear competitive advantage for us in our automotive business, our Materials Science business, and in our industrial and specialty products business as well. We remain optimistic about opportunities to grow in diverse markets over the longer term, as some of these development projects are completed.

Turning to Slide 14. The momentum of the electric vehicle market is continuing. IHS estimates that battery electric vehicle production will increase at an average rate of 39% over the next 4 years, reaching approximately 18% of the total market by 2025. We see this market transition as a clear opportunity, and we're leveraging our innovation, reputation for world-class customer service, and engineering expertise to win significant business in this hyper growth segment.

In the third quarter, we were awarded $30 million in annualized net new business on electric vehicle platforms. For the first 9 months, new EV business awards totaled $88 million. Key innovations driving our success in this market include our PlastiCool family of products, which offers highly engineered thermoplastic tubing solutions for glycol applications over a wide range of temperatures, up to 150 degrees centigrade.

PlastiCool also offers reduced emissions and carbon footprint, improved recyclability and reduced weight compared to more traditional products, making it a highly desirable option for the EV market. This type of innovation is enabling us to grow our EV business faster than the overall market.

Based on existing book business and anticipated future awards, we expect to grow our sales on EV platforms at an average rate of approximately 50% annually over the next 4 years compared to the expected market growth of 39%.

As reflected in our quarterly results and outlook, as John described, we and other automotive suppliers continue to face significant cost headwinds due to ongoing erratic production schedules, lower overall production volumes, supply chain delays and disruptions, and persistent widespread inflation. Virtually, everything we buy to support our operations, has increased in price over the past 9 months. We are taking further aggressive actions to offset these headwinds, including commercial, supply chain, and internal cost reduction initiatives.

With our customers, we're taking a multifaceted approach that includes negotiating price increases, reduced or delayed price concessions, and expanded commodity indexing programs. We're targeting a recovery of more than $100 million overall. We've made good progress in our negotiations to date, but have more work ahead to achieve the target. We believe our status as a preferred supplier and technology partner, puts us in a solid position to have these difficult discussions.

We are also working with suppliers to implement indexed-based contracts, extended payment terms, and we are pushing back against unjustified price increases and surcharges. We're doing everything we can to ensure consistency of supply, while trying to limit the impact of this daunting wave of inflation.

Internally, we're focused on conserving cash by limiting discretionary spending, carefully managing capital investments and accelerating collections of tooling and other receivables. These actions enable us to continue funding new program launches and the future growth of our business, while near-term sales remain suppressed by ongoing weak production levels.

In terms of the outlook, you could say, we're planning for the worst with headwinds continuing, but remaining optimistic that strong end consumer demand will drive a rapid rebound in light vehicle production, when widespread supply chain challenges begin to be resolved.

Turning to Slide 16. To conclude our presentation this morning, I want to provide an update on our driving value initiative and our progress toward achieving sustainable double-digit return on invested capital. While, we've made substantial improvements in many areas of our business, current market headwinds have more than offset those operational gains in recent quarters.

On the graphic on Slide 16, we've highlighted 2 work streams that focus on managing the impacts of increasing commodity and material costs as just discussed. These work streams are clearly more critical and more challenging now than when we first laid out the driving value plans. Given the current challenging market conditions, it may take us a little longer than we had anticipated, to reach these areas -- these targets, but we are making progress. And I assure you that we will maintain and remain committed to achieving the long term goals of double digit return on invested capital and adjusted EBITDA margins. If we achieve our $100 million cost recovery target, we could still be largely on track.

Next, I'd like to thank our global team of employees for their continued hard work and commitment. I also want to thank our customers for their continued trust and support, as we work through these turbulent times together.

This concludes our prepared remarks. We would now like to open the call to questions.

(Operator Instructions) Our first question comes from Mike Ward with Benchmark.

Jeff, first off, on the sneaker agreement. Is this the company that you started doing, I guess, the development -- technology development agreement with, back in 2019?

That's probably about right, Mike. I think it's been a couple of years now that we've…

Couple of years.

Been working with this particular and we've had several, but this particular one has been a couple of years. Yes.

What is the -- what do you think the timing is of when you would do revenues stove up in your financial statements?

Yes, without disclosing product plans that they have, Mike, it's difficult to get into that conversation. But probably in the neighborhood of 12 to 18 months from now, is the production outlook.

And the nature of the agreement with the -- it's 100% margin, right? It's just straight cash. There's no cost to it?

Yes. We'll get into more of those details in the fourth quarter, but that's directionally correct.

And on the material cost front. Now, what were the lessons you've learned? Just a couple of years ago, you went through, where you took a hit from some of the commodity inflation with some of the vehicle manufacturers. And I think you were largely successful getting some of that back in your commercial negotiations. Is it easier this time? Or are there any lessons learned? Or how does that work through?

Yes. I think, given the sophisticated audience we have this morning in the automotive industry, I would tell you, it's no different than what you've experienced in the past. For certain customers where we don't have a business that's ready to be sourced to us over the course of the next several months, they tend to have conversations probably in a way that you and I would hope for.

For customers that we have new business coming at us over the next several months, those conversations aren't quite as joyful. But somewhere in between, we'll work it out. And I would anticipate that over the next month or 2, for the most part anyway, we'll know exactly where we'll end up. So by the end of the year, I think, we'll give you some real, concrete direction in those regards. But it's a tough time we're in. Obviously, our customers are, too, and we're all trying to work through it together.

Now with new contracts that come on, are they going to be more the traditional supplier pass-through type agreements you're kind of stuck with these legacy type agreements?

Well, for new programs, obviously, we're able to price at the current commodity rate and indexing is part of what we do. Your question really is, in the rears it's -- whatever we had is what we have, and we're trying to negotiate the best we can. And if they agree to put indexing in, as the train has already left the station, sometimes those are good deals, sometimes those aren't good deals, and you just have to take it sort of one at a time by customer.

Now John, you mentioned that these senior notes, the no-call provision expires, I think it's mid-'22, correct?

Yes, Mike, it's -- June 1, is the first opportunity for the non-call date. Yes.

Do you have to -- is it -- do you have to call all the notes? Or can you call part of them? And is there a minimum cash balance do you think you need to -- with cash or credit facilities to go forward? Just the cash on the balance sheet…

Yes, Mike, I think I got the gist of that question. You broke up a little bit at the end. But let me start with the minimum cash. What I've said in the past, and what we're still kind of thinking is a good level, is that we're comfortable in something in the range of $150 million to $180 million of cash on hand. And then we still have the access to our revolving credit facility, which we have not tapped into at this point. So we think that's the minimum cash required to run the business going forward.

As far as the non-call date, you can do partial, but our intent is to look at that 13% really expensive debt and see what we can do to take out of all of it. So we'll keep you up-to-date on developments here over the next 6 months, as we look at the opportunities within the capital markets.

Our next question comes from Brian DiRubbio with Baird.

I guess my first question is, can you help us get a sense of the timing of the $100 million plus of raw material recoveries that you're in discussions with your customers?

Yes. We've asked -- this is Jeff. We've asked for recoveries is starting October 1, to be clear. Obviously, we can ask whatever we want to. And we're in the stage of negotiation where, in some cases, we've achieved that, in other cases, the negotiations are still ongoing, Brian. So that's why I mentioned, I do believe that by the end of the calendar year, so by the end of the fourth quarter for us, we will have a very good idea for where each of these negotiations will take us. So there's -- the -- probably the gist of the question was, do you have any of this in your guidance for the rest of this year? The answer is we do not.

And how should we be thinking about these recoveries? Is it sort of just a flat amount? Or are you changing some of the structure of the contracts where you're now more indexed-based rather than fixed price base?

It's a combination. Each customer is different. In some cases, we already have indexing with certain customers on certain commodities. It's our objective going forward that for the new business that we're quoting, and the new business that will come into our company in the future years, indexing is what we want to do. For a lot of the business that we have in the rears, it doesn't include that. Historically, we have said, 40% to 60% of raw material inflation is what we have recovered. That was prior to this hyperinflation moment that we're in right now. But to give you some idea of the historical recovery rate.

And just thinking about the growth in EVs, and the numbers you said sound great. But what is your feeling -- or maybe what is your exposure right now to fuel lines? I think you in your results, you've combined that with brakes as well. But could we see some of that gains in EVs be offset by declines in fuel lines?

Yes, to a large extent, Brian. We've given some color on this in past quarters. But, basically, the EV fluid systems can be anywhere from 30% to 50% more content than the ICE, engine fluids. So for us, we definitely want more EVs, because the content -- even if you take the fuel line out, our content is up significantly. And, of course, that varies as you go from the passenger car market up to the small SUVs, mid SUVs, large SUVs. The bigger the vehicle, the much larger the content for us. And so we actually are going to enjoy the transition from ICE to hybrid to battery electric vehicle in the segment.

Hybrid actually is doubling, because, obviously, you've got a -- you've got 2 powertrains that you're managing from a fluid point of view. But the good news when you move into EVs, that number goes up substantially as well. Obviously, we're working with customers to improve the efficiency of those systems. So as we go forward, we'll have a lot more insight for you on the specifics of the content per vehicle on some of these, as we get closer to launch.

Just 2 more. You didn't provide any update on free cash flow. How much cash, if any, do you expect to burn in the fourth quarter?

Yes, Brian, I'll take that one. This is Jon. We do expect a modest free cash outflow in Q4, just given the nature of production levels. With reduced losses that we would anticipate in Q4 on higher volumes, that will be mitigated somewhat. But keep in mind, we do have significant interest cash coupon due effectively December 1 coming up, so that's $30 million of cash going out the door. We should see some favorable working capital benefits to offset that. And with the guidance, you can squeeze the math on capital expenditures -- are worth about another $25 million for the year.

But, as Jeff described earlier, we're looking at all discretionary spending. We're managing the capital expenditure area. And part of these customer negotiations are looking at tooling and other outstanding receivables to see if we can get accelerated payment terms on those. And then on the supply side also, looking to extend days payable outstanding as we renegotiate some of these contracts. So all that told, in the short-term here in Q4, should result in a modest free cash outflow.

And then just finally, as we think about next year and the refinancing of the 13% notes. You're going to probably have to address the Term Loan B at the same time. So how are you thinking about timing? Because obviously, you could be in a situation where you may save on coupon, on the first lien notes. But your Term Loan B right now is priced close to $100. I'm not sure if you're going to be able to reprice that term loan there. So just -- how are you thinking if that -- are you going to probably approach this attacking both at the same time? Just love to get a sense of your thought process.

Sure. That's a good question. The Term Loan B comes due in 2023, and you never want to have that come current on your balance sheet. So, clearly, it's top of mind for us to look at the total cap structure here over the next 6 months and figure out the best alternative for us going forward. As I said in my prepared remarks, subject to market conditions, as always. So we'll see how the production environment is in -- starting the year. Q1, if it is optimistic as the pundits say and our customers believe, then we should be in a good situation overall as far as looking at the total cap structure. But for now, we're looking at all alternatives, Brian.

And you're still rolling out an equity raise, correct?

Yes. At this point, with the stock price where it's at, the dilution impact on current shareholders, doesn't really make a lot of sense for us to go out with an equity raise and use that to refinance any of the debt. But we'll keep that as an alternative, and we're always watching that.

Our next question comes from Joseph Farricielli with Cantor Fitzgerald.

First question bit of housekeeping. Slide 10 shows free cash flow of negative $71.1 million. But on a quarter-over-quarter basis, cash was down by -- I believe, it's $82.2 million. So what's the $11-odd million difference?

Yes. Joseph, you'll see, when we issue our full 10-Q later today. We have some local borrowing lines around the world, and we just had -- we simply had a paydown in some bank debts over in China. This makes up most of that difference.

And then, thinking of cash and what you said for minimum liquidity, what kind of working capital drain, or investment rather, are we going to see when things start to turn back on? And have you thought about where your liquidity position will be at that time?

Yes. Except, when is that time, right? We're monitoring the production levels as we go forward. I guess, the good news in that working capital story is, we have maintained higher inventory levels just because of the volatile production schedules. So you won't -- when production levels do rise, you won't see a significant outflow for inventory buildup back, that you would typically see in the seasonal production environment.

Now, we're still working to bring those inventory levels down by the end of the year, to more right-sized level of inventory. I think we ended above $190 million on the balance sheet here in September. So we'll bring that number down. And then, as I've said before, we're also looking at tooling and other receivables, to bring those collections in earlier, rather than have those extend out.

So when the industry production levels do ramp up, you're absolutely right, you do typically see a working capital usage. But I think in this case, it will be a little bit more moderated than typical.

And then last question. Looking at auto production, just top line isn't always a good guide, and looking at what some of your customers have idled. Could you give a breakout per platform generally, sedans, SUVs, trucks, what your exposure is?

Yes, Joseph. I think, we've been through this a few times, but clearly, trucks and SUVs, crossovers, those type of vehicles represent 80-plus percent of our revenue. So it's a very important number. And here in North America, it's virtually the whole business. I mean, we've just have a lot of content in trucks and SUVs and crossovers. So as those vehicles pick back up here in the North American market, so goes Cooper Standard.

Yes, that's what I thought. And honestly, I thought your top line this quarter was down more than I would have expected, given SUV and truck sales, chips, going towards the more profitable vehicles. So, thank you for confirming that.

(Operator Instructions) Our next question comes from Derrick Wenger with Concise Capital.

Vic, I think you need to move Derrick into the question queue, please -- or out of the queue and into the current?

Let's move first to the -- to our next question. And that will come from the line of Bob Amenta with JPMorgan.

A couple of clarification. The $11 million JV, is that a non-cash, even though you're putting it in EBITDA?

It's non-cash for now, Bob. The -- as we understand it, the bankruptcy process in China could take a couple of years, before we see that issue settle out. So for now, we've taken a conservative position to put up a reserve for that $11 million.

But it's money that you thought you would collect, and you're not going to collect it? Or is it money you have to pay out?

It's the money we thought we were going to collect, that is now subject -- or raising question, whether we're going to get that recovery or not.

And then on the bridge, I guess, with the -- obviously, the volume mix thing is -- it seems almost like 40% decremental. I don't know if that's there's a lot of stuff in there -- the $165 million lost sales, $65 million lost to EBITDA.

But the other 2 items, the general inflation and the material economics, we'll see what they are year-to-date in quarter. But is there a general historical percentage? I know we're in maybe a little unusual times, how extreme some of these increases are. But do you usually recover 50% of that, 75% over time? I mean, is there -- I mean, clearly, you're not going to get all of it? How does that work, between the pass-throughs and other mechanisms you have? What percent could we assume you should normally recover?

Yes. Bob, let me comment real quick on your volume and mix observation. Keep in mind, when we present those numbers, it does include customer price. So it's not just the straight flow through effect of production volume changes, okay? So keep that in mind. Jeff already addressed it by saying our historical recovery has been anywhere from 40% to 60% on the commodity side on materials.

Typically, what we would do in normal inflationary times would be, offset those, call it, wage inflation or rent utility inflations, with our cost-saving initiatives. Here, with the significant levels that we're seeing in all those categories, the rise in all the input costs, et cetera, is far outpacing any ability in the short term to whittle away at the -- through our own cost reduction initiatives. So the big number, I think, you're looking for the 40% to 60% level. And as we've indicated, we're still in conversations with our customers about how to call that back.

And a couple of quick ones then. On the minimum liquidity -- or I guess, you called it minimum cash. I guess, I just wanted to -- I don't know if it's parsing words here. But the $150 million to $175 million minimum number. Would you be comparing that to the cash plus your unused availability? Or would you just be comparing that to your current cash? Or do you view those 2 as kind of the same thing, cash and revolver availability?

Yes. Call that overall liquidity.

And so Q4, I know you mentioned the interest payment and some of the other stuff. Your guide obviously implies 0 to modestly negative EBITDA, working capital, all that -- I mean, I -- that's -- I mean, to me, that's more than modest outflow, and that's $50 million, give or take. But either way -- and then next year, we don't know all your guidance yet for CapEx and everything. But all in with interest, it seems to be a couple of hundred million, give or take. So it just seems like you're going to burn cash fourth quarter and next year. And I know you're doing some things to kind of cut costs. So, I guess, time will tell.

But how -- I mean, it seems like you're going to get close to that number. I guess, maybe not, that's why I was asking about the -- you're at $380 million now. I mean, it could be down to low 200s. I mean, I just wonder if you have any thoughts on how close you're cutting it? Or -- I know you're not going to issue equity, but I just didn't know what other things you have at your disposal. I mean, asset sales, clearly -- maybe now is not the best time for that. But what other things, if anything is out there, besides just trying to cut some costs here and there?

Yes. Clearly, asset sales could come into play. But you're right. You don't sell in the bottom of a market. So you wouldn't get any meaningful proceeds from that. But there are other legacy assets that we're taking a look at. There are other alternatives and options that we're looking at. We've already talked about our cost-cutting and reduction initiatives around the world, that should start bearing some cash savings here as we go forward.

But, clearly, that's coupled in the short term with some restructuring cash outflow that -- it's already in our guidance, right? So, clearly, it's top of mind for us, and that's why we're looking at every single area of not only spend, but other opportunities that we could have on there, to manage through that and stay above that minimum liquidity level, as we've been talking about. So I'm not going to get into 2022 at this point in time. So too early for us in our planning process to give you any color there, but just say it's top on mind for us.

And then just lastly, and generically on Europe. Obviously, the last couple of years, I mean, negative EBITDA. But even before that, if I go back in time, margin-wise, 3%, 4%, where the U.S. was kind of 15%, 16%. Structurally or just generically, can you -- I mean clearly, the simple answer is why are you in Europe? I'm sure there's reasons, you can't just leave there tomorrow. But generally speaking, Europe versus the U.S. or North America, what -- it just doesn't seem like it was ever really that good. Clearly, positive $30 million of EBITDA is better than negative $20 million. But, generally speaking, what is it about there that -- are you just not big enough there? Or what's kind of the issue over there?

Yes, Bob, this is Jeff. I think the -- for Cooper-Standard, it isn't about whether we're big or small in Europe. The issue for us is really on the fluid side of our business. On the sealing side, we actually do fairly well, and the outlook going forward for sealing in Europe is positive. The challenge for us is fluid, always has been, and we're working through that. That's about a lot of the conversations we've had this year, in relationship to restructuring has been about. There's been some cost savings taken out in Europe, but there's a lot more to go.

We also sold the rubber business for hoses over there -- the rubber hose business in Europe, not too far back. So there's some stranded costs that we need to get out of that business, as we head into '22, and we're committed to doing that. So we will be smaller, but we'll be more profitable in Europe going forward. We'll talk a little bit more about that when we get into the guidance for '22 early in the calendar year.

Our next question comes from [Zohair Azmi] with Beach Point Capital.

I was wondering if you would be able to provide an update on your plan for the Latin America business?

Yes. This is Jeff. I think, the conversation that we just had in terms of assets, and what we plan to do with certain parts of our business that continues to fall short. Our Brazil business has been part of the conversation here, and we said that by the end of this year, we would get to that conclusion. I didn't necessarily think that we're going to have the challenges from a supply chain and hyperinflation that we're dealing with right now.

So it might not be the best of time, as Jon just said, to make those decisions. But I will say this, our teams in Brazil have done a terrific job of taking costs out and managing the price as well as inflation in that market. So I think, at least, as it relates to self-help, that we have driven ourselves, they've done a very good job. Whether that's going to be enough to push us into a category of fair return on investment, we will probably need a little bit more time than the end of this year, given all of the variables that I just spoke of. But that is one that we still owe a decision on.

And if we could just look at the results between second quarter and third quarter, revenue was down around $6.5 million, while EBITDA was down around $19 million sequentially. And so would you mind providing a quick bridge on those results?

Sure. [Zohair] it’s Jon here. I can walk you through, but the significant driver overall is going to be the commodity inflation -- acceleration that we're facing. But with revenue down about $9 million or so, as you said, globally, that has just a few million dollars of EBITDA pull-through in the current business run rate, on just the pure volume and mix calculation.

But then, when you throw it layer on commodity inflation and other inflationary pressures, that's almost $12 million or higher compared to the second quarter and all in experience, right? Then, on top of that, the biggest other driver that -- the bad debt that we reserve that we put up for the $11 million. So those big variance drivers are what's causing that outsized degradation. But let me break down some details for you by region, okay?

So contrary to the North American market actually being down almost 6%, the market production was down 5.7%. Cooper-Standard volumes were up 9.6%. So it's actually an outsized performance when you think about an earlier question on what platforms we're on, and the heavy weighting towards trucks, SUVs and the prioritization our customers have there. That kind of indicates why we're able to outpace the overall market here in North America.

Europe and Asia, we were right in line with the market declines. Our volumes have fluctuated right accordingly with both of those areas. And we were favorable in the Brazilian market, actually being up 3% or so in terms of volumes, while the market was down 5%. So hopefully, that kind of helps you paint the bridge picture, but it's really all about commodity and other inflationary pressures and net bad debt expense.

Our next question comes from Josh Taykowski with Credit Suisse.

If you look at the 8% to 9% EBITDA margins you were doing in the second half of last year, even versus the negative 6% this quarter, how do you bucket that 15% margin swing? I know material inflation is a big piece of that. But if you had to split that 15% in between volumes and production volatility versus material costs versus anything else, what would be the estimate?

Hey, Josh, this is Jon. Yes, I'd say, you're on the right track as far as the commodity inputs being the biggest driver in the variability and production schedules. But also keep in mind, last year, Q3 and Q4, we were benefiting from various governmental programs around the world due to the COVID pandemic. So that had favorable good news. And in the back half of last year, as the governments were offering various types of support, that's essentially gone away, and you don't see that coming through again. And if memory serves, Q4 of last year, that was about 200 basis points of favorability in our Q4 results. So the overall environment, the stop-starts, and the inefficiencies that has caused us, coupled with commodity inflations, are your very biggest drivers.

And then just a clarification on the last question. The bigger EBITDA swing overseas was in Asia, you touched on it a minute ago. 5% sequential increase in revenue, yet EBITDA declined negative to -- negative 14% quarter-over-quarter. That's primarily that $11 million charge bad debt?

Yes, exactly. It's $11 million bad debt plus some material economics.

And then just looking at the guide, if you do the math, it implies close to a $60 million burn pre-working capital. I know you said that it should be a modest cash outflow for 4Q. Maybe you've got some inventory, but you're still working to unwind with some tooling. But how should we think about working capital in the context of that $60 million burn? Is it -- just looking for a bit of a range, or I guess, is it $30 million to $40 million? Is it a little bit less than that, or little bit more? How should we think about that?

Yes. I've given all the color I want to give at this point, Josh, just given all the moving pieces. So I'll give -- given you the qualitative aspects of how it comes together. But because of the various initiatives we've got going on around the world, there's a lot of puts and takes there.

And then next question. Just wanted to cover, I guess, in a little bit more detail, the goal for these commercial settlements. It's the $100 million that you got out there now. How would you frame that for -- compared to the actual headwinds that you faced year-to-date, I guess, in the context of that 40% to 60% historical success rate, is that kind of in line?

Yes. This is Jeff. I think the target that we put out there, and the letters that we sent out to our customers, reflected the reality of our business. So our commercial teams are in negotiation as we speak, and the targets are clear for our customers, and the targets are clear for our folks that are negotiating to those targets.

And does the $100 million -- that's got asked previously, but is -- if you got all that you set out for if not $100 million, how much of the goal is retroactive versus you get the recovery later down the road once this inflationary period starts to subside?

Yes. Again, the October 1 request that went out with the $100 million of help required, was based on the reality of the commodity inflation and as it was occurring within our company. So, again, we didn't just make up the October 1 date. And so each customer is talking to us about how they can help us recover those costs. There's a bunch of moving parts and a bunch of different levers that can be pulled. I talked about those in my in my prepared remarks.

And so each one of them are different. I think that, as I mentioned earlier, by the end of the calendar year, we will have a very good idea of the result of those negotiations. So we'll just stick to that, and I don't want to provide any more detail, any more color. I don't use earnings calls to give my customers' performance review. So we've probably given enough of that today.

I mean, does the $100 million include anything else besides material costs? I know there's been other suppliers out there talking about trying to recoup whatever estimate they have for costs incurred for the volatility in production schedules or other inflationary labor, things like that? Or is it just for materials?

All in, everything you just described.

Our next question comes from Patrick Sheffield with Beach Point Capital.

Not to belabor the point. One last try here on the $100 million. You guys gave different categories of where you expect to get those savings from. Is there any like directional guidance you can give as far as how much of that is from price increases versus other initiatives? Is it mostly price increases that would drive the $100 million? And then I just wanted to confirm the $100 million is like an annual cost number, like an EBITDA improvement, theoretically. Is that right?

Yes. So first of all, the answer to the question is, yes, there's price increases. We also are very focused on cash. And so any -- as I mentioned in my prepared remarks, there's discussions going on about tooling payments and other costs associated with our business that we typically would absorb, that we're asking them to absorb.

So each customer is different. Each status in how they would like us to address the recovery is probably different. And I also -- try to give you some color in terms of the leverage of these negotiations. They're based on business that we have today, but it's also a business that we want to keep tomorrow and new business that we want to win tomorrow.

And depending on where you are in those different slots of life, they're more apt to help when you don't have a lot of new business that's coming your way. And when you do have a lot of new business coming your way, then those negotiations are more difficult. So you also know who our largest customers are. So it's pretty simple. We've given that breakdown many times. And so you know that we've got 3 or 4 people that need to pay their fair share here. And that's what we're focused on. So we'll -- we feel really good about the engagement. We feel good about the atmosphere of the negotiations. And I appreciate everything our customers are doing to try to help us, and I'm sure everybody else that's sitting in our lobby these days.

And quickly on restructuring for '21. We see the guide from 45% to 50% or 60%. Any preliminary thoughts if that number is going to be higher or lower in '22?

Yes. On our last call, I mentioned that we expect it to be significantly lower than the current spend rate, and nothing would change how we're viewing that right now.

And then finally, on the bad debt write-down. Are there any others? Or is this sort of a one-off? Is there anything else that -- like that, that might be going on in the region? Or is that fully captured?

This was with just one particular former joint venture. So we are, obviously, still in the region, and managing through the challenging industry environment there. So I can't say whether anything else is coming our way, but not that we know at this time.

Our next question comes from Chris Wang with Barclays.

Most of my question is answered. Just wondering if that $100 million recovery that you're requesting from October to year-end, is that included in any shape or form in your guidance?

Chris, this is Jeff. As I said before, no, it's not.

And then taking a step back in terms of your overall COGS base. Can you give me a sense like what is the overall raws as a percentage of COGS? And then, in terms of raw material, I know you have all kinds of different flavors, the rubber and all kinds of derivatives. Can you kind of maybe give us a little bit more sense of what are -- what are the buckets that are moving the most for you?

Yes. Sure. This is Jon. The main inputs that -- you can kind of categorize them in 3 main buckets. You've got -- rubber is clearly the largest input cost that we've got, followed by metals and then plastics. And then, if you think about the $34 plus million we've already incurred this year and the $60 million we'll face for the full 12 months, about 65% of that inflation is based on the rubber area. Another 25% is on metals. So I think steel and aluminum in that category, and then about 10% coming out of plastics and resins. So I think that's kind of the overall -- the inflationary impact of how that breaks down.

In terms of our direct materials, you'll see in our 10-Q direct materials, as a percent of sales -- is about 47% in the Q3 timeframe. We don't break it down by direct raw materials, but it's more about the overall materials that we're buying, that -- going into that 47%.

And I mean, there is a bit of a lift in terms of sales sequentially. Can you talk about the visibility to that and probably broken down by continents?

Yes. When you look at the continent-by-continent, the IHS forecast has North America up about 7% compared to Q3; and then Europe is supposed to be up about 31%, Q3 to Q4; and the overall Asian market up about another 12.5% or so. So if you kind of factor that in with our weighting of revenue, that's how you get to our overall sales increase. Clearly, there is 2 schools here. One is the IHS forecast. And then we also have the short term customer releases that we manage too. And so we're triangulating both of those data points into the guidance range that you see.

And I missed on a couple of things. One is, you said 4Q, you're going to have modest cash outflow with working capital, is that right?

Yes. I'm rethinking that's the term modest, to be honest with you. But we're going to have enough cash outflow with the current outlook, the interest load, and then the capital expenditures that we got in front of us. And we've got a lot of positive offsets that we're working towards, to bring that cash outflow down.

And I noted you didn't really get a lot of working capital back, even with, obviously, sales a little bit lower in the quarter. What's sort of your expectation now in 4Q and going to '22, hopefully, into that recovery phase, when your sales is going to be higher?

Yes. I answered this a few minutes ago, right? The biggest reason why we didn't see the benefit of lower revenue on the working capital front in Q3 was because of the higher inventory levels. And as those come down, and we don't need to buy as much in a rising sales environment, we should get some of that working capital back.

Our next question comes from Jared Weil with Deutsche Bank.

I think most of the questions has been answered, but talking about like the path to margin improvement in the buckets you've identified, the material inflation coming into this year was -- we didn't think it was going to be like this. So if you were to -- and part of this -- part of the improvement, and maybe part of the $100 million that you'll be able to sort of bucket -- into the into that bucket? I mean, if costs hold here or pull back next year, you'll be able to catch up on your customer negotiations, and that will sort of accrue to margins on its own, right?

But the other part of my question is, if we were to remove that material cost inflation, how do you -- where do you think you are on all these other initiatives, and executing on those to get yourself back to the margins you're shooting for? I understand that material cost inflation set you back. How do you sort of grade yourself on progress on all the other stuff?

Yes. Jared this is Jeff. I said in my remarks, if we get that, then we're largely back on our timing. And what I've said in a number of these conversations is that, 2023 was the first full year we expected to be at double digit return on invested capital and double digit EBITDA. And we said as we exited '22, we would be able to demonstrate that. So that was pre all of the conversation we were just having regarding inflation.

Obviously, that didn't include significant supply chain shortages or shutting down on most profitable vehicles, and causing start and stop from a production standpoint that traps significant inventory costs and labor and all of that. We've talked about all that this morning.

If we talk about the glass is half full here, then what we have is the lowest inventory level in the history of the automotive industry. I think, we have the most new vehicles coming on the market. We have EVs that are going to create incredible brand opportunities and pent-up demand. I believe, Cooper-Standard has never been in a better position from a cost point of view internally, given what we can control.

We still have work to do in Europe, and we still have work to do in China, to get those regions profitable, and we'll take next year to continue to work our way through that. That's been the plan. North America, we need to get these plants up and running. And I'm sure our customers feel the exact same way. And as soon as that happens, the demand is there, and I think you're going to see a tremendous result.

And clearly, the raw material inflation is real. The costs that we're absorbing as a result of the supply chain challenges, are real, and that's why we've asked for more than $100 million of price increases. And so, that's about as simple as I can say it. I remain extremely optimistic about this industry and about the future. I've never been more confident in our company, both in terms of what we have done to this point, to set it up for long-term success and sustainability. I think we have the best talent in the industry, and I think that they want to stay here.

And the culture is a big deal, and the relationships we have with our customer have never been better, I can promise you that. And we're going to do everything we can to continue to deliver for them, as we negotiate some of the toughest contracts that we've ever had to negotiate. And I'm confident that we'll get it done, and we aren't going to whine about it. We're just going to go to work and continue to focus on the things that we can control, and I know our customers will help us the best they can. That's sort of the synopsis.

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

Thanks, everybody. We really appreciate your engagement and insightful questions this morning, and we certainly look forward to future conversations. This will conclude our call. Thank you.