Cooper-Standard Holdings Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Good morning, ladies and gentlemen and welcome to the Cooper-Standard Fourth Quarter and Full Year 2020 Earnings Conference Call. During the presentation, all participants will be in listen-only mode. Following company prepared comments, we will conduct a question-and-answer session. 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.

[Roger Hendriksen:]

Thank you, Kevin. And good morning, everyone. We appreciate your continued interest in Cooper-Standard and we thank you for taking your time to participate in our call 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.

[Jeff Edwards:]

Thanks, Roger. And good morning, everyone. We appreciate this opportunity to review our fourth quarter and full year 2020 results and provide an update on our outlook for 2020 and beyond. To begin, on Slide 5, I'd like to highlight some of the key data points that we believe are reflective of our continued strong commitment to driving sustained value for all of our stakeholders. First, we're very pleased that our continuing focus and discipline around environmental, social and governance excellence is driving action and improved results. In 2020, we meaningfully improved 5 of 6 priority ratings and began tracking a new rating from IHS. We believe that the same focus and discipline is directly related to our operating performance, which was again strong during the fourth quarter. We continue to deliver world-class results in product quality, customer service and employee safety. At the end of the quarter, 97% of our customer scorecards for product quality were green, and 98% were green for program launches. Even more importantly, we had a record year for safety performance. For the full year 2020, our safety incident rate was our best ever at just 0.32 per 200,000 hours worked, well below our world-class benchmark of 0.60. We're certainly proud of this outstanding result and we're particularly pleased that 29 of our plants completed the year with a perfect safety record of zero reported incidents. From a financial perspective, our initiatives to improve margins, and return on invested capital continue to drive the expected improvements in our results. During the fourth quarter, our manufacturing teams delivered $18 million in cost savings through lean initiatives, and improved operating efficiencies. For the full year, manufacturing cost savings totaled $65 million, which is an outstanding result when you consider all the unusual challenges presented by increased health and safety protocols, lower production volumes and customer shutdowns.

[Jon Banas:]

Thanks, Jeff. And good morning, everyone. In the next few slides, I will 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 and run rate. On Slide 9, we show a summary of our results for the fourth quarter and full year 2020 with comparisons to the prior year. Fourth quarter 2020 sales were $696.9 million, down 4% versus the fourth quarter of 2019. Excluding the impact of the recent divestiture of our business in India and certain operations in Europe, sales were up approximately 3% year-over-year.

[Jeff Edwards:]

Thanks, Jon. Before concluding our discussion this morning, I want to share a few thoughts regarding our near-term and longer-term outlook for the global light vehicle market and for Cooper-Standard specifically. Moving to Slide 14. Our strong cadence for new program launches continues in 2021. The vehicle programs you see on the slide represent some of the most important launches of the year, but are still a small portion of the total 157 launches planned for the year. We're very pleased to have more of our innovations move into production. In 2021, 30 of our planned launches include our recent innovations. And importantly, 25 of the planned launches are on electric vehicles. Turning to Slide 15. On Slide 15, we provide a list of our planned top 10 vehicle programs for 2021. The vehicle images and names reflect the lead vehicle on each key platform. We're proud of the continued strong mix of our top programs, which maintains a heavy weighting on trucks and SUVs. The strong mix provides us with maximum opportunity to increase product content per vehicle and sales over time. Combined, these top platforms represent approximately 45% to 50% of our planned 2021 revenue. Our top platform is once again the Ford F-Series pickup truck, given its strong plan production volume, as well as our high average content per vehicle. On an unweighted basis, our CPV across these top 10 platforms is expected to be approximately $150 this year.

[Operator:]

Thank you, ladies and gentlemen. Our first question comes from Michael Ward with Benchmark. Please proceed.

[Michael Ward:]

Good morning, everyone. Jon, I wanted to get a bit on Page 11, when you do the adjusted EBITDA walk from 2019 to 2020. If we look out to '21 and assuming COVID doesn't have a similar impact and the volume and mix at best is, you know or worst is neutral. I'm coming up with EBITDA of like at $280 million. And I'm wondering if you can provide some of the blocks that are getting you down to that per your guidance of $180 million to $200 million as far as a headwind. And then maybe we can talk about some of the things that are the offsets that you mentioned and maybe their back-end weighted with the restructuring benefits and some of the other things.

[Jon Banas:]

Yeah, sure, Mike. Good morning and thanks for the question. To do that analysis, you really got to look at the, what I'll call, the normalized run rate in Q4, first, and then we can look ahead to what we think is going to transpire in '21. So in Q4, we continue to benefit from certain governmental benefits as well as COVID reimbursements from government programs that were tailwinds for us. We know that -

[Michael Ward:]

Is that like $10 million? Is that like you know about $10 million that of a rate?

[Jon Banas:]

That's around $5 million. So I'll get to the other pieces here. But obviously those aren't going to continue next year when you think about the run rate. Then with a normalized bonus level, you would have to add in some cost into '21 and therefore, bring down the Q4 run rate, because we didn't accrue at a full 100% payout for the 2020 year. Okay. So getting back to a normalized level. And then we had some smaller commercial recoveries on bad debts we had written off in the past in Q4, that also won't expect to continue. So those three main buckets combined, Mike are about 200 basis points of non-recurring good news that should come out of the normal run rate. And then when you look at towards '21, as you well know, pricing is always going to be a headwind for us, so called out about 100 basis points. But we're able to offset that, and then some by combining the 200 basis points of good news from our supply chain optimization efforts, continued net manufacturing improvements, and then another 100 basis points from overall cost savings SGA&E and restructuring initiatives. So all that with a dose of conservatism based on the current Q1 industry challenges, gets back to our implied guidance.

[Michael Ward:]

Okay. All right. Thank you. Jeff, on Page 17. You have - about the - could you talk about some of the things that drive the higher content on the electric vehicles versus internal combustion and where you benefit?

[Jeff Edwards:]

Sure, Mike. Certainly on the - when you think about the cooling and heating the battery packs, that's driving significant content up for us in our fluids business. So obviously, you delete the fuel line. But the other fluid product along with the connections and the routing and the significant engineering that goes into those products we're seeing probably double the content as a result. We do plan on - sorry, go ahead.

[Michael Ward:]

No, no go ahead.

[Jeff Edwards:]

So we do plan on continuing to lead in the space, our customers have really taken to our approach and our engineering teams are doing a great job. They're really embedded into the customer process, well upfront. We're learning a lot. We're able to increase we believe increase value for our customers. And so we'll be providing more detail on that as the summer months come upon us. But with the vehicles that we've been booking so far, we have a high level of confidence we'll will continue to significantly increase content per vehicle simply on the fluid business.

[Michael Ward:]

And then in that business, are the same manufacturing and plants and equipment that you're currently using? Just I guess a different line or different equipment? Is it materially different?

[Jeff Edwards:]

Well, as far as you know, the - yeah, we have today several different types of hosts, product, but the host product for the EV is significantly different than it is for ICE. The good news as they go from ICE to hybrid, you're talking about both of those systems being applied. So we really see even a higher content per vehicle on hybrid as you go to electric and compare it to ICE. It's a significant increase over ICE. So we plan on providing you additional detail on those breakdowns as I said, as we go through the summer months. As it relates to investing in this business, it's pretty much there for us. I would see engineering talent being something that as we expand across the world, we'll continue to increase our talent in this space, because the demand that our customers have, for us to have the knowhow is clearly changing. As it relates to manufacturing product, as you know, we've gotten out of the extrusion hose business in Europe, but we maintained the PVC footprint for electric vehicles. And we continue to add footprint here in North America and we'll continue to add it in China as we need. The good news is the investment is not very significant when you think about capital that's pretty low. The investment for us is really in the connectors in that innovation as well as the technology that we and the knowhow that we have to route the different fluid lines that our customers view is value add for them.

[Michael Ward:]

Okay. Lastly on Page 18, you have a bullet there that says three current customers in Footwear. Is that an additional customer? I thought you had 2. Did you add 1 or is it that I missed something along the way?

[Jeff Edwards:]

Yeah, we've added 1 I think since the last time you and I talked.

[Michael Ward:]

Okay. And it's still looking at commercialization somewhere 12 months out. Is that in China as well?

[Jeff Edwards:]

Yeah, we haven't disclosed that where, but I guess embedded in my prepared remarks when you think about the travel restrictions and how that's impeded a little bit, you can assume that we're not just traveling to Tennessee.

[Michael Ward:]

Okay. Wonderful. Thank you. Really appreciate it.

[Jeff Edwards:]

Okay.

[Operator:]

Our next question comes from Joseph Farricielli with Cantor Fitzgerald.

[Joseph Farricielli:]

Good morning, thank you. A question on your CapEx guidance and if you could give some color on your tooling balance? The CapEx number that's your CapEx that doesn't include anything for tooling. Is that correct?

[Jon Banas:]

Yeah, Joe, this is Jon, that is correct. So CapEx is just Cooper-Standard owned equipment that we would capitalize and use over, not only our special purpose for individual customer programs, but general purpose equipment that we can use for any programs. Tooling, that's specific to a customer and that they owned is categorized separately on our balance sheet. So it's not in that CapEx number, you see, because we're typically getting reimbursed for that either upfront or in some cases, in piece price over the life of the program.

[Joseph Farricielli:]

Okay, great. Thanks. I know there were some confusion in the past. And then I'm missing it. I know last quarter the tooling balance sheet item was about $88 million. Where does that stand today? And also given the amount of launches, where does that go going forward?

[Jon Banas:]

Yeah. Joe, just give me a minute to look up your question on the tooling receivable. Right now at year-end it is about $82 million still so.

[Jeff Edwards:]

Okay, comparable to the Q3 number.

[Joseph Farricielli:]

Right, right, right. And what is that the cadence of receiving those funds? What does that look like compared to the launches that you have this year?

[Jon Banas:]

You know, typically the lump sum reimbursements are going to be right around the launch timing, you know, we get the tools approved as far as our test parts by the customer. And then, then we can invoice them for those tools. So I would say of our 157 planned launches throughout 2021, you're going to see a ratable collection on that tooling receivable, some of it could be longer-term, as I mentioned, in piece price, and therefore, there's a portion that is of long-term nature that we will get reimbursed over time. But I will just have you keep in mind that, we're continuing to execute and launch those programs on our behalf for our customers. So we'll invest in more tooling as we continue to collect. So you'll see that balance, you know, fluctuate a bit quarter-to-quarter.

[Joseph Farricielli:]

Okay. Okay, that's good color. Thank you very much.

[Jon Banas:]

You're welcome.

[Jeff Edwards:]

Thanks.

[Operator:]

Our next question comes from Brian DiRubbio with Baird.

[Brian DiRubbio:]

Good morning. Can we just focus on inflation for a minute? Can you sort of give me a sense of, you know, how much your cost of goods sold is impacted by some of the inflation we're seeing in steel, rubber and resins? And, you know, and how that's going to, you know, any compensation you can get from the OEs on that rapid inflation?

[Jon Banas:]

Yeah, Brian, let me take the first part of that. When I look at Q4, just given the overall economic conditions, Q4 is actually a tailwind for us, in that, we saw some commodity deflation in most of our main commodities. When you think about our inputs like carbon black, EPDM rubber or purchase rubber compound, plastic resins and the like, across the Board, those were down and then we're able to recoup about $3.4 million year-over-year in commodities. The second part of your question is, we continue to work with our customers on recovering in rapid inflationary times and approach them and more of a negotiation basis. We do have some initiatives that we're attempting to get on indexes with a variety of customers to, you know, insulate against those kind of fluctuations into the future. But that's kind of a work-in-process that we're currently marching towards, as far as some of our other supply chain optimization initiatives.

[Brian DiRubbio:]

Understood. And as we think about working capital this year, I guess between the ramp up to a more “normalized sales” and then the inflation, I mean should we expect working capital to be use of cash in 2021?

[Jon Banas:]

Yeah, this is Jon, again. I would expect it to be a moderate use of cash, just given like you've mentioned, in a typical rising sales environment, you'll see more of an outflow on the working capital side. If I look at the cadence of that, a lot of that comes in, in Q1 as we ramp back up and it's a typically a seasonal outflow for cash flow. And then as the year progresses, Q2 through q4, will return to having working capital being an inflow for us.

[Brian DiRubbio:]

Great. And how are you thinking about those, firstly, notes that are outstanding currently?

[Jon Banas:]

Yeah, if I look at the two senior notes and the unsecured notes that we've got, you know, currently, you know, they're both trading very well in terms of price, you know, and it might be attractive to some, if you look at just the unsecureds trading in 89 to 92 range, depending on the day. But you know, that is a low-cost instrument for us at the coupon is only 5 and 5/8. So we're in no hurry to refinance that at this point in time. And then as I've said in the past on calls, in terms of the senior secured notes, you know, that it's a non-call two-year instrument, which would put that to 2022, next year, middle of next year. And so our focus is just maintaining liquidity here in the next 12 months to make sure not only protecting the ongoing operations, but we could be in a position should the conditions in the capital markets be amenable to pay those back really if we.

[Brian DiRubbio:]

Understood. Great, thank you.

[Operator:]

Our next question comes from with Barclays.

[Unidentified Call Participant:]

Hey, thanks for taking the call. Just saw on the revenue guidance. You know, I saw your assumptions. It was IHS obviously in the US SARs, you know, more than 20% you know, Europe is up 10%. It looks like you're at the midpoint, you're up less than 10%. Just can you kind of walk us through in the puts and takes there?

[Jon Banas:]

Yeah, sure. This is Jon, I'll take you through. You know, as we pulled our plan together and looking at the IHS inputs, you know, we clearly reacted to those fluctuations in how we saw the global market playing out, specific to our platform. So it's always important to look at not just the global market, which is going to be up around 12% from '20 to '21, you have to look at the key markets that we operate in, as well as the platforms that we're on. And so when we peel that back, Cooper-Standard volume specifically, is going to be up closer to the 20% market. So we anticipate growing in excess of the market. You know, Jeff alluded to this in his prepared remarks on the call as far as our overall CAGR. So when you think about 20% compared to the 12%, we're about 1.4 times the market growth.

[Unidentified Call Participant:]

Got it. But the overall sales is only up 10 - a little bit less than 10% so versus the 20% assumption, what is the delta there?

[Jon Banas:]

Yeah, as I mentioned on the call, you've got an element of divestitures going away. So if you look at our 2020 sales of $2.38 billion, if you will, and consider the COVID impact, that should have been in our revenue, but deduct over $100 million of lost sales either due to COVID or due to the divestitures, then you're down to more of a $2.7 billion mark. And pricing is always a headwind, which comes off dollar for dollar on the top line. And then certain of our customers have exited various markets that we're in. And that also has a decline in overall revenue base. So that that's essentially the high-level walk to get to revenue for next year.

[Unidentified Call Participant:]

Understood. And then $180 million to $200 million of EBITDA range, how much the cost that included on a run rate basis? And maybe on an absolute basis, like what are you assuming that number?

[Jon Banas:]

Yeah, and I mentioned a few minutes ago, the overall strategic actions and restructuring, as well as SG&A savings are about 100 basis points within that range. So if you look at the midpoint on revenue and do that math, you can get back into a ballpark dollar amount. What's also considered there is the lean initiatives, we have both on the purchasing front as well as manufacturing front. And again, that's around 200 basis points. So doing that same math will get you in the ballpark.

[Unidentified Call Participant:]

So it's a 100 basis points plus 200 basis points, right. Just to be clear?

[Jon Banas:]

That's correct. Yeah, but again, offset by normalizing our Q4 here and commercial headwinds of another 100 basis points.

[Unidentified Call Participant:]

Got it. And, you know, in terms of, you know, working capital, you know, on the previous question, you mentioned that moderate impact you know is in that $50 million or in order of magnitude, or shall we think of about a number that is going to be higher?

[Jon Banas:]

Sorry, I didn't quite hear the magnitude you referenced.

[Unidentified Call Participant:]

Yeah, I was referencing somewhere around $50 million, is that the right ballpark we should be thinking about?

[Jon Banas:]

Yeah, I mean, given the Q1 outflow that I mentioned earlier and just calling back, that's probably in the ballpark. But we continue to work on various components of that working capital. I mentioned our activities around commercial payments and collecting those on time. We also have optimization efforts on our global supply base to extend payment terms where we can do that around the world. So there's opportunity there that we're still driving towards. So I'll frame that your $50 million with that reference.

[Unidentified Call Participant:]

Fantastic. Thank you. And the just last one, would you consider share equity at this price? Or how you're thinking about, you know, using stock as a way to enhance liquidity or just expanding your optionality at this point?

[Jon Banas:]

Well, we always look at all capital allocation opportunities, both inflows and outflows. And at this point, we're not considering issuing any new shares.

[Unidentified Call Participant:]

Fantastic. Thank you.

[Jon Banas:]

Thanks, Chris.

[Operator:]

Our next question comes from Bob Amenta with JP Morgan. One moment. Okay, you should be now, Bob.

[Bob Amenta:]

Okay. Hi. I just had a couple follow-ups on cash flow items. Just so I understood working capital, Chris was just asking about this. Did you - were you talking about 2021 when you mentioned that give or take $50 million number?

[Jon Banas:]

Yeah, that was a 2021 forward-looking number.

[Bob Amenta:]

Okay. And then just with regard to cash reorg, I'm sure as we get to the end of this year, you're probably going to look at things and maybe something new is out there, but just with $40 million last year and with $50 million or so this year, is that elevated? Or is that something that you would could expect like if we went out for the next year without finding anything else, should that come down? Or are you kind of sort of perpetually, you know, spending that kind of amount of money that to try to enhance the business, I guess?

[Jon Banas:]

Hey, Bob, this is Jon again. I would expect that number to come down significantly in the out years. We think with the plan we've got in place here in 2021 and the actions that are on the list, we should be in good state in '22, '23 and beyond. That's in the assumptions and those driving value commitments that Jeff talked about earlier. You know, but there's what I'll call, minor fine-tuning in those out years that we'll continue to look at as far as looking at the footprint or rationalizing the cost base and other ways at that point. So it's not going to go to zero, but it's not going to be anywhere near the $50 million that we expect this year.

[Bob Amenta:]

Right, okay. And then just lastly on the kind of that slide with the three-year target. I mean, if we look, obviously 2020 from a margin perspective was not really relevant. Hopefully going to say that again, but you had - if I go back to '19, I know some of the business has changed since then. But it was like a 6.5% EBITDA margin, '21 you're kind of guiding to low 7s, I guess, if we just look at the guidance, but yet, by three-years, you want to be closer to 10%. I'm presuming three years is 2023. So if we're at low 7s in '21, and let's just say 10% in '23, is there that only leaves one year in between those two? I mean, is it more backend loaded? Or if you, in fact, think you can get there or I mean, because that would put you know, you're in the upper 8 so it's a mid to upper 8s in '22. Is that kind of how we should think about it or should we really be thinking about this is something that's I don't want to say, overly optimistic, I assume these are achievable in your mind. But is it backend loaded, I guess is the ultimate question?

[Jeff Edwards:]

Hi, Bob, this is Jeff. Let me take that. So first of all, for this year, I think we were pretty clear that for the first two quarters, given everything that's going on in the industry, we are where we are. And then we said that we will exit fourth quarter this year, we believe, above 10%. I said that the driving value, roadmap items would put us back to double-digit ROIC and double-digit EBITDA in the next two to three years, we believe that we will exit '22 at those levels. So '22 won't be a run rate there, but we'll exit '22 achieving that status and then '23 is probably the year that we believe that we're at a level of sustainability. And that was reflected in my remarks. It may not have been as clear, but hopefully that answer was clear.

[Bob Amenta:]

No, it is and I'm sorry, I missed - that Q4 exit of 10%, I must have missed you saying that. So that helps. So okay that's all I have. Thank you.

[Jon Banas:]

All right.

[Operator:]

Our next question comes from .

[Q - Unidentified Call Participant:]

Hey, guys, thanks for taking my question. I just wanted to follow-up quickly on the questions about the equity offerings or secured notes. By my math here, if you guys wait until the June 22 call on those 13% notes, you'll be paying almost 20% or 20 points in coupon and then you had to call them at $106.5 million. So $126 million all-in cost. However, if you utilize your equity call right now, you could actually call 35% of those bonds at $113 million, not only would you not have to use any cash and you significantly you could enhance your liquidity by saving on interest expense. So I'm curious why that doesn't make sense to you guys right now?

[A - Jon Banas:]

Jeremy, good question. You know, like I said before, we consider all those options and then we talked to our banking colleagues to run the numbers on those various scenarios. And so like I said before, you know at this point we continue to look ahead and maintain liquidity as best we can. But at this point exercising that equity call just isn't in the cards for us.

[Q - Unidentified Call Participant:]

All right, thank you.

[End of Q&A:]

[Operator:]

It appears that there are no further questions. I'd like to turn the call back over to Roger Hendriksen.

[Roger Hendriksen:]

Okay. Thanks, everybody for the questions and the engagement on the call. As I said earlier, we appreciate your continuing interest in Cooper-Standard. And should additional calls come up or additional questions come up, please feel free to reach out to me directly, and we will address those as promptly as we can. We look forward to speaking with you again and again, thank you for joining the call.

[Operator:]

So, ladies and gentlemen that conclude today's presentation. You may now disconnect and have a wonderful day.