Cooper-Standard Holdings Inc.
Q4 2013 Earnings Call Transcript

Published: 25 Feb 2014

[Operator:]

Good morning ladies and gentlemen. And welcome to the Cooper-Standard’s Fourth Quarter and Full Year 2013 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session (Operator Instructions) As a reminder, this conference call is being recorded this morning and the webcast will be available for replay later today. I would now like to turn the call over to Sharon Wenzl, VP Corporate Communications. Please go ahead.

[Sharon S. Wenzl:]

Thank you and good morning. Please note, that certain information in this call may be forward-looking and contains statements based on current plans, expectations, events, and market trends that may affect the company’s future operating results and financial positions. Such statements involve risks and uncertainties that cannot be predicted or quantified and that may cause future activities in results of operations to differ materially from those discussed. For additional information, we ask that you refer to the company’s filings with the Securities and Exchange Commission. This call is intended to be in compliance with Regulation FD and is open to institutional investors, security analysts, media representatives, and other interested parties. A reconciliation of certain non-GAAP financial measures used during the call can be found in the appendix of this presentation. At this time, I would like to turn the call over to Jeff Edwards, Cooper-Standard’s Chairman and Chief Executive Officer.

[Jeffrey S. Edwards:]

Thank you Sharon and good morning everyone. Turning to Slide number 4, talking about the industry landscape, our global light vehicle production continues to have a steady growth in 2014 we expect that growth rate to be around 3.1%. Our North America vehicle production remained strong. Europe, as we all know continues to be challenging, still bouncing along the bottom a little bit. We do expect sales to grow in the modest 1.6% in Europe in 2014, however. Emerging markets are mixed with strong growth continuing for China and a slight softening in India and in Russia. Material pricing and availability is stable for 2014. The North America supply base certainly had capacity constraints in 2013, but many of us have now addressed this and are keeping pace with the projected run rates for 2014 and I’ll talk a little bit more about that in the coming slides. Moving to Slide number 5 a little bit more around the 2013 update if you will, our global sales grew by 7.3% year-over-year, outpacing the industry which grew at 3.4%. And for Cooper-Standard, the 7.3% represented growth in all of our regions. Our full year adjusted EBITDA was 9.3% of sales, that reflects additional costs that we incurred to meet in North America production demands. At the same time, we had a series of significant challenges with our new Sealing and Trim technology in three of our plants in North America we’re addressing these issues with investments and people or technical talent as well as process improvements that will begin to turn those facilities around in the first quarter of 2014 and we’re committed to that, and we will be normalized by the end of our second quarter in 2014. So, these were one-time events that impacted our 2013 performance, but we believe we have issues well in-hand and you’ll see the data reflect that as we move through our first quarter and then conclude our second quarter in 2014. Our capital comes in at about 5.9%; I think it’s important that we recognized the details around this number because it’s towards the high end of where we have been historically and where the competition has been historically. We have certainly funded our Asia growth; you can see it’s reflected here in the slide at 9.2% of our sales. South America as well as is expanding and you can see that reflected in the 7.4%. Europe is about restructuring specifically moving from West to East, we’ll launch our Serbia facility at the end of 2014, and Europe is ending at a rate of 6.8%. The key point is, in our mature market in North America we’re spending at 4.8%. You would expect that number to be anywhere from 4.4% to 4.8% given our historical performance, so this isn’t out of line and isn’t this is the reason, the CapEx figure for the company is trending higher. The issue is really simply funding Asia growth, funding South America growth and funding the restructuring in Europe. The last point of the Slide is the company returned $217.5 million to shareholders through share repurchases. Moving to Slide 6, talking about the transition of the company to the profitable growth targets that we’ve established. We have reinvested in our technical staff to address many of the execution issues, we’ve addressed it through product development and we’ve increased our innovation and investment three times, you can see reflected in the slide to the right or the graph to the right, the increase in the staff level from 2012 to 2013. This will go a long way in helping us to correct previous launch issues as well as operating issues that referred as both in 2012 and 2013. Frankly, we were slow to react coming out of the downturn in 2008 and 2009 and we’re playing some catch-up here in 2013, but again we believe that with these additional resources we’ll put the one-time issues behind us and we’ll be operating back in a double-digit EBITDA level as we head through 2014 and we’re confident of that. Additionally, we’ll continue to invest in capital in 2014 to optimize our manufacturing footprint as I mentioned earlier, also investing in product development certainly that’s key ingredient to our growth such as supporting the advanced designs for Sealing and Trim, transitioning from EPDM to plastics which is happening in our industry as well as our global technology process that will support and coordinate the efforts across our company as our customers begin to run more and more of their launches of a global programs, the need for us to have a global engineering process is critical to be competitive. Lastly, we’ve seen our Tooling need to grow over the years which is reflective of the future program launches as well as the increasing complexity of our products as I mentioned a few of them earlier in the Sealing area. We believe that that trend will continue and if something we’ll have to manage going forward. The next slide number 7 provides an update on two areas of our strategic priorities. We’re focusing on the product lines that we feel provide the greatest profitable growth opportunities for Cooper-Standard. Specifically, moving our company from a 7% to 8% ROIC performer to the lower teens. Sealing and Trim, Fuel and Brake Delivery and Fluid Transfer Systems are the three product roots that we’ll invest heavily and going forward and we believe our product groups that we can become number one or number two in the world. And this is confirmed by the relationships with our customer and the fact that we continue to outpace – significantly outpace the industry growth 7.4% versus 3.4% in 2013 to be specific. So, we’re also delivering innovation in these product areas to ensure that we remain number one. We’ll become number one or number two in these markets I mentioned before, in the Sealing and Trim systems, plastic replacing rubber and trim fully integrated with the vehicle Sealing systems are two examples of that in our Sealing and Trim Group. Our Fluid Transfer Systems we have new innovations were high performance hose application and what we think will be revolutionary in material and construction as we move in to the new part of 2014, we believe these innovations will be ready for sale that will help differentiate us in the market. And then finally, Fuel and Brake Delivery, this also is about non-traditional materials that will provide ultra-low mass as well as high strength and long life for our customers in the fuel and brake delivery area. We’ve organized our global core teams to further develop, detail strategies for each of these product groups and make sure that we leverage the scale of Cooper-Standard globally, and manage our investments, managing our plant capacity so that we are driving the ROIC improvements that I spoke about earlier. Also as part of this strategy, we’re pursuing the sale of our thermal and emissions business and we believe we will execute that by the end of the first quarter or early in the second quarter of 2014. So we’re pleased with the progress we’re making to optimize our footprint which is an important element of our growth strategy. We’re on schedule with our Serbia project this year keep that mind, that will drive an improvement of about $25 million in labor savings each year, basically moving from the west at $30 an hour to Serbia at $5 an hour is the simple math. Construction is 95% complete with more than a 155 of the 500 employees already in training are Italy and Poland facilities. Once fully operational as I mentioned, this will resolve in a much more competitive footprint for Cooper-Standard in Europe. Our 90,000 square foot expansion in Aguascalientes is near completion and this with Serbia as one of our major programs with forward. We’re also establishing a technical center Shanghai, China that we’ll open this spring this will provide us local engineering support to continue to grow our China business and to support our ongoing China strategy. And with that I’d like to turn it over to Allen, who will cover our financials for the quarter.

[Allen J. Campbell:]

Thank you, Jeff. I’d like to start off by talking about Cooper-Standard’s track record of growing sales. As you can see from this chart, our revenue has grown a compounded growth rate of around 14.6% over the last five years, exceeding global light vehicle production levels over the same period at 9.1% increase. 2013, our sales grew by 7.3% from previous year, as compared to industry growth rate at 3.4%. We also expect to beat the industry growth rate in 2014 and I’ll talk about that later. On the next slide we show our fourth quarter and full year 2013 revenue by regions as compared to the previous year. For the quarter, Cooper-Standard generated sales was $794.2 million, up 13.9% when compared to the same quarter previous year. This was driven by a strong year in North America and market share gains in Europe. Our Jyco acquisition which we completed in July, contributed approximately $20.8 million of incremental sales in the quarter and $32.7 million year-to-date. In addition, sales in the quarter favorably impacted by $5.4 million in foreign exchange movement. For the full year, sales increased by $209.6 million to $3.09 billion, compared to $2.88 billion in the previous year, with approximately $7.6 million of positive foreign exchange. Sales of North America of $426.5 million for the quarter, increased to $62 million, or 17% from the previous year. Our European operations generate sales of $269.9 million, which include a $12.6 million of favorable foreign exchange. Excluding FX, sales were up 8.9% in a very soft market. Sales of Asia-Pacific operations were $60 million, up 5.8% from the same period prior year. In Brazil, we generated sales of $37.8 million for the quarter, despite $4 million of unfavorable foreign exchange movement and a 13.6% volume decline in vehicle production levels. Turning to the next Slide. Joint venture is a major part of our growth strategy, especially for Asia-Pacific regions. We have four non-consolidated joint ventures which serve the Asia-Pacific region and also Asian OEMs, North America. In 2013, these joint ventures generated sales of $445 million, an increase of 8.5% from the previous year. The non-consolidated JVs contributed to our equity earnings in the amount of $11.1 million in the year, up $2.3 million from the previous. On Slide 12, you can see the diversification of consolidated revenue. We are well represented by all major North American and European OEMs. Note that, a significant amount of our sales Asian OEMs are through our JVs, as I mentioned earlier. If you note the others category that predominantly sales to our Tier 1s and Tiers 2s and also commercial vehicle customers. On the right-hand side, it’s our revenue by product. Approximately half of our sales are Sealing and Trim products, where we are number one globally. And we’re too globally in Fuel and Brake Delivery systems and a leader in North American Fluid Transfer Systems. These product lines provides significant opportunities to express further grow our market share to leveraging our existing customers and technology, supported by global manufacturing and engineering equipment. Turning to Slide 13, gross profit on the quarter was a $105.1 million, or 13.2% of sales, down from the previous year quarter and relatively flat on a full-year basis. The year was driven by increased volumes in all regions and favorable lean savings. However, they’re partially offset by customer price concessions, higher staffing costs and other operating expenses. Our gross profit was also affected by operating challenges related to our subset of our Sealing and Trim business in North America and Europe, which contribute the higher than expected costs mostly in the fourth quarter. In selling, admin, the number for the quarter $72.6 million, or 9.1% current 10.7% sales in previous year quarter. On a full year basis, selling, admin and engineering was 9.5% of sales as compared to prior year of 9.8%. In other items, the quarter included a $14 million restructuring charge predominantly for the activity in Europe, we saw that in the operate profit of $14.6 million. For the full year our operating profit was $142.1 million or 4.6% of sales, compared to 3.6% of sales from prior year period. Net loss for the quarter was $20.8 million which include the higher tax expenses related to valuation allowances charge, against deferred tax assets in certain foreign jurisdictions. Fully diluted earnings per share was a loss of $1.44, and a full year basis, the company generated a net income of $47.9 million our fully diluted earnings per share of $2.24. By comparing these numbers please bear in mind, our full year 2012 net income included a one-time $48.3 million benefit related to a reversal of valuation allowances on the company’s deferred income tax assets in the U.S. Adjusted EBITDA for quarter $38.7 million or 7.4% of sales and $287.4 million or 9.3% of full year basis. Turning ahead to Slide 14, I want to highlight some of our challenge – operating challenges and product challenges that we talked about earlier. With a rapid ramp-up in North America production volume, as you can see it from the chat above, the additional staffing costs operating expenses incurred to meet these demands. Introductions to some of our new technologies and more complex product offerings our Sealing and Trim product line, created several operating challenges which effected [indiscernible] launches at three of our North American plants. These new products evolve the street learning curve and are better challenged to our manufacturing and cost processes. As a result premium freight, increased scrap, additional labor and other costs were incurred. In total, these unanticipated costs amounted to approximately $17 million incremental operating expenses in the quarter. Substantial amount of resources has been brought to spare to resolving the issues and ensure they will not be repeated. We expect this situation to improve in the first quarter of 2014, and be normal by the end of the second quarter. European market continues to be a challenge, the economic environment appears to stabilize with vehicle production and forecast to be modestly improving in 2014. One of our strategies is to migrate most of our manufacturing footprint towards a relatively lower cost areas such as Eastern and Central Europe. The recent example of this is our new facility in Serbia that Jeff mentioned, and also our operating Romanian plant that we opened in 2012. As from mix [ph] is also an any issue by the way of strong market share of PSA and Fiat, their units are struggling more or so in Europe and others. From operational perspective, we also have experienced some isolated challenges with some of our European plants in the fourth quarter, then issued our two of our launches one in Germany and most notably while in the introduction the most complex Sealing part and Electrical Vehicle in Italy. The situation is improved and we expect these challenges behind this by the end of the second quarter. On Slide 15, as reconciliation adjusted EBITDA for the year to our net income of $37.9 million. We show the customary adjustments as you see in this page, restructuring charges at $21.2, previous stock compensation was $5.2 million and $1.5 million in connection primarily with acquisition costs. On Slide 16, as our cash flow for the full year. The business generated $192.5 million last year we required $41.4 million for working capital expansion included funding of customer reimbursed tooling to support future program awards. As a note, tooling balances on our – at the end 2013 was approximately $117 million on our balance sheet. Capital expenditures for the year were $183.3 million, of which 7% related to Thermal and Emission business which Jeff had talked about. Roughly 58% of CapEx has been on supporting new and our replacement business, 15% for maintenance and the rest for expansion and restructuring and other activities. We spent $13.5 million of cash to acquire the Jyco business which is immediate accretive to earnings. We made $7.9 million of contributions to U.S. pension plans during the year. Additionally, we paid down $4.7 million in dividends related to convertible preferred securities these were converted into 3.5 million shares of common stock in November. There was cash used to reach at $715.9 million and other primarily related to notes offering and common stock tender. If you look to page 17, it shows significant special liquidities for the business which is $300 million available at year end. We have a very long-term debt maturity table 2018 most of our bonds were due. Our pension plans for the most part are frozen around the world, and we’ve made some excess contributions the last couple of years and those are coming more into better funded positions. Our financial metrics continue to remain strong, our net leverage ratio of EBITDA is just 1.7 and we have over five times interest coverage. In terms of our guidance page, our projections for this assumes that North American vehicle production of $16.8 million units, Europe production $19.6 million which includes Russia. Also assumes that U.S. dollar at euro exchange rate of $1.28. With those assumptions, we’re expecting sales to be $3.25 billion to $3.35 billion. We expect capital expenditures to be in the $195 million to $205 million to further invest in the growing regions and the products we talked about the technology that Jeff mentioned. We expect to return to double-digit adjusted EBITDA for the full year. We expect cash taxes to be in the range of $25 million to $35 million, and we expect cash restructuring to be in the $20 million to $30 million range. In summary, we’re focused on stabilizing our North American business in Europe also we’re addressing the launch of product complexity in our Sealing and Trim. we’re continuing to make necessary infrastructure and capacity investments to support our growth strategy in Asia and in our Serbia expansion, and we’re going to continue evaluate partnership and acquisition opportunities that advance our plan. The layers [ph] are focused on these new launches in achieving double-digit adjusted EBITDA margins that I referred to earlier. This concludes the formal portion of our conference call Lisa, please open the call for the Q&A.

[Operator:]

Thank you (Operator Instructions) One moment please, as we assemble the queue for questions (Operator Instructions) Our first question comes from [indiscernible] from CORE Partners. Your line is open.

[Unidentified Analyst:]

Hi Jeff and Allen, thanks for – thanks the call today. Quick question Allen, you had mentioned I think $17 million in incremental cost related to the North American challenges, when you were going over to Page 14 on there so it’s net $30 million of excess non-recurring. So I’m just trying to figure out the difference between the two numbers?

[Allen J. Campbell:]

Sure. The net of $30 million is what we expect to see in the first quarter. And then we expect more than that as we roll through the rest of the year.

[Unidentified Analyst:]

Got you, okay. So.

[Allen J. Campbell:]

We’re going to get some of that will roll into the first quarter, but most of them will go away.

[Unidentified Analyst:]

Okay. So the bulk of these excess charges will be – just the $30 million will be gone by the end of the first quarter.

[Allen J. Campbell:]

That’s correct.

[Unidentified Analyst:]

Okay. Thanks.

[Allen J. Campbell:]

Sure.

[Operator:]

(Operator Instructions) We have no further questions. We do have a question from John Novac [ph] Mizua Securities. Your line is open.

[Unidentified Analyst:]

Yeah, hi guys. Thanks for the call today. Just had a question, in the press release you mentioned market share gains in Europe, and I was just wondering if you could talk about that, is this something that you expect to continue, why are you gaining share, how are you are gaining share and any other just general comments you have on your ability to continue to take share in Europe? Thanks.

[Jeffrey S. Edwards:]

So I think it’s a couple of things. I mentioned the move from west to east, we traditionally have not been as competitive as we would have liked in Europe, but we are becoming much more. So, we’re starting to reflect that in some of the decisions that we’re using to go after new business. The second, clearly is around our technology that we have coming in into the market. Third is, frankly we’ve re-established a very strong European management team who is aggressively pursuing our growth opportunities as well. So, it’s a combination of those three things. And yes, we’d expect it to continue.

[Unidentified Analyst:]

Okay. Thank you.

[Jeffrey S. Edwards:]

Sure.

[Operator:]

And our next question comes from [indiscernible] from UBS. Your line is open.

[Unidentified Analyst:]

Good morning, guys. Could you give us a sense of our CapEx levels, when you would expect them to decline from the pace they’re at, if in fact that’s the case? And then just on restructuring charges, should we anticipate that this $20 million level will – $20 million to $30 million will continue for a number of years, or are we close to the end of that?

[Allen J. Campbell:]

Okay, yes I think as we’ve mentioned in previous discussions, we’ll be at a high end of it in 2014, we’ll probably towards the high end of it in 2015 and then after that we would expect it to be back down to a more normal level.

[Unidentified Analyst:]

And that’s CapEx?

[Allen J. Campbell:]

That’s CapEx.

[Jeffrey S. Edwards:]

And then restructuring, at the level we talked about should go for about two or three years in similar. By then, we should have the right western European structure and for the most part where we need to be in North America today.

[Unidentified Analyst:]

Thank you.

[Operator:]

And we have no further questions in queue. Thank you for joining. This concludes our conference call. You may now disconnect.