Q1 2024 Cooper-Standard Holdings Inc Earnings Call

Participants

Roger Hendriksen; Director, Investor Relations; Cooper-Standard Holdings Inc

Jeffrey Edwards; Chairman of the Board, Chief Executive Officer; Cooper-Standard Holdings Inc

Jonathan Banas; Chief Financial Officer, Executive Vice President; Cooper-Standard Holdings Inc

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard First Quarter 2024 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. Please go ahead.

Roger Hendriksen

Thanks, Chloe, and good morning, everyone. We appreciate you taking the time to join our call today. 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. And 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. With those formalities out of the way, I'll turn the call over to Jeff Edwards.

Jeffrey Edwards

Thanks, Roger, and good morning, everyone. How you do, and we appreciate the opportunity to review our first quarter results and provide an update on our business and the outlook going forward.
So to begin on Slide 5, I'd like to highlight some key first quarter data points that we believe are reflective of our continued strong commitment to operational excellence and our core company values.
In terms of product quality, 97% of our customer scorecards were green in the quarter. For new program launches, our customer scorecards were 96%. So we continue to achieve outstanding operational performance and this is allowing us to deliver exceptional value to our customers. In addition, the safety performance of our plants continues to be excellent as well. During the first quarter, we had a total incident rate of 0.38 reportable incidents per 200,000 hours worked. That's well below the world-class benchmark of 0.47 leading this outstanding safety performance for the 39 plants that had a perfect safety record of zero incidents through the first three months of the year. I want to recognize the teams at these plants for their ongoing commitment and leadership as we continue to strive for our ultimate safety goal of zero incidents for the entire company.
In terms of cost ops and optimization, we had another solid quarter with our manufacturing and purchasing teams, delivering 19 million of savings through lean initiatives and other cost saving programs. This improved efficiency combined with our enhanced commercial agreements enabled us to improve our gross profit margin by a solid 300 basis points compared to the first quarter of last year. While we have more work to do, we continue to make progress for our profitability targets.
Finally, we're continuing to leverage world-class service, technical capabilities and our award-winning innovations to win new business during the first three months of 2024 we were awarded 66 million in net new business awards. Importantly, we continue to partner with our customers to design and develop new technologies for some of their most important new vehicle platforms, including ICE, hybrid and battery electric vehicles.
Turning to slide 6. Another indication of our customer relationships, valued technology and world-class service are the product and service awards. We frequently frequently receive. We're very pleased once again to be named as a supplier of the year for General Motors, one of our top global customers. And I think probably one of the most coveted awards in our industry. While the award was announced and presented during the first quarter, it's an annual award that is reflective of our performance throughout the past year. This is the seventh consecutive year that we have received this prestigious GM award, and we look forward to continuing and expanding our relationship with them going forward.
Slide 7, while providing our customers with world-class products, technology and service. That's certainly what we do, our commitment to doing business the right way with uncompromised honesty, transparency, integrity and maintaining a continual focus on being a good corporate citizen says even more about who we are. We're pleased to announce that in just a few weeks, we will once again be publishing our annual corporate responsibility report it covers a wide range of topics, including products financial performance, corporate governance in environmental stewardship, among others. We hope that you will take the opportunity to read through the report and provide any feedback you might have or you might like to share your input will be helpful to us as we strive toward our company purpose of creating sustainable solutions together.
Now let me turn the call over to John to review the financial details of the quarter.

Jonathan Banas

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some details on our financial results for the quarter and discuss our cash flows, liquidity and aspects of our balance sheet.
Before I get into the financials, as you may have seen in our press release effective from the beginning of this year. We changed our operating management structure and reporting segments to a product line basis rather than the former geographic basis. We believe the new structure will be more efficient and we expect it to help us increase value creation going forward. Jeff will talk more about this in a few minutes.
Now looking at the first quarter's results. On Slide 9, we show a summary of our results for the first quarter of 2024 with comparisons to the same period last year. First Quarter 2024 sales were $676.4 million, a slight decrease of 0.9% compared to the first quarter of 2023. The decrease was driven by primarily by the divestiture of our technical rubber business in Europe during the third quarter of last year and a smaller divestiture of our stake in a joint venture in Asia. Excluding the impact of these divestitures, which represented 13 million of sales in the first quarter of 2023, net sales for the first quarter of last year would have been 669 million on that basis, our sales for the first quarter of 2024 would have been up around 1% year over year, outpacing global automotive production.
Gross profit for the first quarter was $61.6 million or 9.1% of sales. This compares to a gross profit of 41.8 million or 6.1% of sales in the first quarter of 2023. Adjusted EBITDA in the quarter was 29.3 million compared to $12.5 million in the first quarter of last year. Year-over-year improvement was driven primarily by favorable volume and mix, enhanced commercial agreements and lean savings achieved in manufacturing and supply chain all partially offset by ongoing inflation headwinds in areas such as energy and labor costs, as well as the impact of unfavorable foreign exchange.
On a US GAAP basis, the net loss for the quarter was $31.7 million compared to a net loss of 130.4 million in the first quarter of 2023. As you will recall our results for the first quarter of 2023 included a significant loss on refinancing and extinguishment of debt. Excluding this and other special items and the related tax impact from both periods.
Adjusted net loss for the first quarter of 2024 was 30.6 million or $1.75 per diluted share compared to adjusted net loss of 46.2 million or $2.68 per diluted share in the first quarter of 2023. Our capital expenditures in the first quarter totaled $16.8 million or 2.5% of sales compared to $29.3 million or 4.3% of sales for the first quarter of last year. We continue to have discipline around capital investments, which remain primarily focused on customer launch readiness and maximizing returns on invested capital.
Moving to Slide 10. The charts on slide 10 provide additional insights and quantification of the key factors impacting our results for the quarter. For revenue, favorable volume and mix, including net customer price adjustments, increased sales by 8 million versus the first quarter of 2023. The impact from the technical rubber divestiture was 13 million in the quarter and foreign exchange mainly related to the Chinese RMB and the euro further reduced sales by a net $1 million versus the same period last year. For adjusted EBITDA, lean initiatives and purchasing and manufacturing contributed 19 million year over year. Favorable volume mix and net price adjustments as well as other cost recoveries drove a combined 15 million of profit improvement for the quarter and material cost improvements were a further benefit of 1 million. These positive contributors were partially offset by general inflation, including energy, salaries and wages, transportation and other costs amounting to 9 million in the quarter and another 9 million of unfavorable foreign exchange, primarily related to the strengthening of the Mexican peso and the Polish zloty against the US dollar.
Moving to slide 11, in terms of cash flow and liquidity. Cash used in operating activities was approximately 14 million in the first quarter of 2024, as seasonal changes in working capital and the timing of compensation related payments offset improved cash earnings. As mentioned earlier, CapEx was around $17 million in the first quarter of 2024, resulting in a net free cash outflow of approximately $31 million. We ended the first quarter with a cash balance of approximately 114 million combined with 167 million of availability on our ABL, which remained undrawn. We had solid total liquidity of approximately $282 million as of March 31st, 2024.
Regarding our credit facilities, we are pleased to announce that we just signed an extension on our ABL through May of 2029. The agreement and extended term ensures that we have the flexibility we need to continue executing our plans and initiatives to improve the financial strength of the company and drive profitable growth and enhance value over the long term.
Based on our current outlook and expectations for light vehicle production, our improving operating efficiencies, further cost reduction initiatives and the continuing benefit from enhanced commercial agreements with our customers, we expect to generate positive free cash flow for the full year and based on that outlook, our current total liquidity position, we believe we have sufficient resources to execute the business and pursue our growth objectives for the foreseeable future.
Let me turn it back over to Jeff.

Jeffrey Edwards

Thanks, John. In over the next few minutes, I'd like to provide you with some insights into our change in operational management structure from a regional basis to a product line basis, how this change fits in the overall strategy and how it will drive some significant cost improvements in our business.
So please turn to Slide 13. Last year. Our global leadership team outlined and refined four key strategic imperatives to accelerate growth and maximize the long-term value of our company through relentless focus on these imperatives and a lot of hard work. We are definitely making progress, but we know we have to be more aggressive, more agile, certainly more responsive to our markets and our customers. If we're going to get to the next level and achieve our long-term objectives. The change to product based management is intended to do just that.
So please turn to Slide 14. The new structure, which was put in place effective January one is already providing key benefits, including establishing complete P&L ownership and accountability for each product line, optimizing allocation of human and capital resources, streamlining operations and engineering execution and enabling us to more quickly deliver value, add innovations to our customers. In addition, the new structure will allow each product group to more fully develop and execute separate customized strategies suited to the needs of their specific markets.
Turning to slide 15, in our sealing business, we're certainly working from a position of strength as the global leader in the market, we will look to expand our market share and competitive advantage through technology and customer service, enhancing customer relationships as well as pursuing opportunistic market opportunities in support of our customers. We expect to improve profitability and return on asset by rightsizing costs within our operations while aligning capital investments with high growth opportunities.
Turning to Slide 16. In our fluid business we see greater opportunity for accelerated profitable growth given the highly technical requirements for thermal management in hybrid and electric vehicles.
As we bring some of our recently announced innovations to market we expect to significantly increase our average content per vehicle as well as expand our total addressable market. Patented innovations will also improve our competitive advantage and enable market share gains. We believe we can be competitive and build a solid Fluid Handling business in China based on the proprietary technology enhancements we provide to electric vehicles.
Turning to Slide 17. Finally, with a new organization structure in place. Our operations are already becoming more streamlined and more efficient as automotive production levels have not rebounded as quickly as many had expected, but certainly an imperative that we do. So we've identified opportunities to further optimize cost by eliminating redundancies, automating processes and leveraging technology. Beginning later this quarter, we'll be implementing a plan to reduce our salaried workforce globally. The actions are expected to save between 20 and 25 million in 2024 and between 40 and $45 million on a full year annualized basis next year. The anticipated savings are expected to provide a payback on related restructuring costs in six months. Further, we expect the savings will enable both operating segments to approach if not achieve double digit EBITDA margins as we exit 2025. As these initiatives were not contemplated when we developed our initial plan for the year, successful implementation and the related cost savings could represent an upside to our 2024 full year guidance. Certainly assuming industry production volumes hold at planned levels as we typically do, we expect to provide a formal update on guidance in conjunction with our second quarter results. So I want to thank our customers and all of our stakeholders for your continued confidence as we support and support as we work through these turbulent times in our industry, and we thank you all for joining the call today.
This concludes our prepared remarks, so let's move into Q&A.

Question and Answer Session

Operator

(Operator Instructions) Michael Ward, Freedom Capital.

Thank you very much. Good morning, everyone. I'm just when you look at this the actions you're taking, it sounds like more details will come in the second quarter, but there's a very quick payback? Is that because the nature of it is just salary headcount reduction?

Jeffrey Edwards

Good morning, Mike, I appreciate the question. Yes, that's that's the fact. Obviously a lot of changes within our company, but continued challenges within the industry, right? And we've done a lot of things to realign with today's reality.
And the new organization structure really has put the costs of running these businesses directly in the hands of those that are running it. So that the support infrastructure, say down the left-hand side of the chart, it certainly isn't as required as it once was as we were building the organization.
And so we're taking these measures to dramatically reduce our costs, make ourselves a lot more agile, make our decision making what it needs to be to support our customers and frankly, move us a lot closer to the double digit EBITDA and double digit ROIC objectives that we have to a point that will be there and next year with those up with those particular objectives as certainly we exit 2025. That's what we believe.

And what percentage is of your global salaried headcount?

Jeffrey Edwards

We haven't announced that that detail, Mike, but it's not substantial. It's a substantial component of the total cost. I would tell you that I just as soon not get into the percentages for the client. That's now what we're talking about the whole folks here. So I just keep it not like cancer.

So given your current your initial guidance of adjusted EBITDA of one eight to 10. Now if all things being equal, we could be looking at somewhere in the 200 to 2 35 range is what you're saying when you get this thing done this year?

Jeffrey Edwards

Yes, we'll describe that to you like we always do as we as we exit Q2. But yes, your your range would be would be accurate as we sit here today. I guess the biggest issue that everybody has, we're not the Lone Ranger here obviously is what are the volumes going to be. I mean if we knew that, then I can answer your question of note in the cash cost for that restructuring are in line with it sounds like you're looking at a $25 million charge, and that will be the cash costs as well.

But a pretty quick payback actually from a cash point of view, cash flow, it will be a cash flow plot positive, is that even for 24? Okay. John, on the FX, you mentioned Mexico and Poland, that seems like a pretty big hit on a relative basis. As far as the impact, I mean, it took off almost a point-and-a-half of margin from what were some of the circumstances there and has that continued in 2Q?

Jonathan Banas

And thanks for the question, Mike. The dynamic here is that we operate in the various countries where the local cost base isn't tied with the of the revenue stream. So for example, in Poland, we manufacture our products there locally. So the cost base is in zloty.
However, the the regional trading currency is the euro. So we sell in euro base, right? So as the zloty would appreciate against the euro and or the USD, our costs go up in relative terms. And that's really what's driving it similar to the peso where as we manufacture in Mexico for certain of our shipments back into the US, we the revenue is tied to the U.S. dollar as opposed to the peso. So when you when you think about coming into from last year. The peso was average in the quarter about $18.66, 18 pesos to the dollar.
It's now down the average 1697. So as that as the peso continues to strengthen, again, our cost base rises relative to the selling currency and similar on the zloty, Czech corona to a minor extent in the RMB.
I mentioned on the top line as well. So that's that's really what's going on. We do some we do place hedges against our fixed costs, but you don't hedge against 100% of that. So it takes a little bit bite out of it, but not completely is or is that something you can recover? Or do you just adjust with price on powered trial with certain of certain of our commercial arrangements have had FX components to them as far as a disease and recovery, but not not all of them. So we'll never be able to recover 100% of that data.

And we're going back to our customers as these things exacerbate or continue to stay elevated to reengage in conversations and just one last thing, Jeff, you kind of alluded to it, but it sounds like there's a with the industry trying to push and accelerate production of hybrids. I think you used to provide some sort of a content walk between ICE vehicles, hybrids and all electric. What type of content are we looking at with as a push on these hybrids, particularly, I guess for the fluid side of it relative to ICE and what you're seeing over the next, say, 12 to 18 months?

Jeffrey Edwards

It's a good question, Mike. So if we use ICE as the baseline for your question. And if we would go from an ICE vehicle to a hybrid vehicle, meaning our customers would and that we would be supplying the fluid handling for that particular hybrid, it would almost double our content per vehicle on hybrids to X.
And then BEV.'s is even higher than that. We actually know the EV would be about 20% at 20% to 30% higher is the number we've used with you in the in the past, higher higher relative to ICE waiver by US GAAP. So hybrid US Hybrid. The hybrid is definitely the the higher content per vehicle solution for Cooper-Standard. And so the fact that that we're talking about more hybrids out there, that's good news for us.

Operator

Our next question comes from the line of Kirk with Keith from Imperial Capital. Your line is open.

Good morning, Jeff. John, Roger, appreciate the call. And just with respect to the outage, the March quarter, were there any commercial settlements from prior periods in there now?

Jonathan Banas

Kurt, I think or yes, as we talked on the last call, we detailed all that for you and look as we get into that 24 and beyond. There's always commercial conversations going on. So we'll have we'll have settlements each quarter. And there always is, but nothing to the magnitude of what we what we've talked to you about last year. So I would say, let's just call it business as usual and 24 is as it relates to pricing.

Got it. Perfect. I appreciate it. And then with respect to the you mentioned you there's you see some some upside to the earlier 24 guidance, are you still using the same production estimates that you gave us last quarter?

Jonathan Banas

Yes. The volumes that we that we talked about are unchanged, as you know, the first quarter was a bit challenging as it got started from a volume point of view. But then we saw some recovery in February and March was and I guess what we were hoping March would be is how I would describe it a little bit of a slow start, but a strong March helped the overall number. And then our comments related to the rest of the year. We typically have I'll take a shot at that. After the second quarter, we have a little bit better view of quarter three and four at that point and then we'll adjust anything for you at that at that stage is how we've done it for a decade. So we'll continue to do it that way.

Got it. Thank you. And with respect to the geographic reporting, were you were you EBITDA positive and all the regions again, this quarter?

Jonathan Banas

Yes.

Great. And then and then lastly, on the new business, it appears to be ramping RUM. Ken, can you provide the percentage of your first quarter revenues that were generated from electric hybrid for both vehicles?

Jeffrey Edwards

Yes, I don't have that in front of me occurred at this point. I mean, we certainly can can provide it. I'm sure Roger can get back to you with that.

Okay. Meaningful.

Jeffrey Edwards

I think we continue to progress our well as we as we manage issue of what that future is. I mean, it certainly has been moving around on us, but but we haven't seen a whole lot of our of our core business cannibalized, if I could say it that way. So that's good.
And as we have been told by our customers that certain EVs are being pushed out as much as two years on some new business that we already been awarded.
And that wasn't a significant hit to us just because we hadn't spent a bunch of money yet.
And so we're just on hold there.
And in the meantime, I will continue to run what we already run longer. So that's probably going to be a bit of a benefit, too, from an asset point of view. So I guess there's there's puts and takes. But overall, I'm not I'm not complaining and I appreciate it.

Thank you. Very much.

Operator

Ben Briggs, StoneX Financial.

Good morning, guys. Thanks for taking the questions. So I just wanted to touch on top line revenue growth for a minute. I know that on a GAAP basis, this quarter, the revenue was down, let's call it 1% year over year, but there was a little bit of noise in there. And if you call it on a call like US same customer revenue line, you guys were actually up a little bit and can you give me a little bit more clarity on what the trajectory of call it, that same customer revenue, customer revenue should look like and what the drivers are going to be, is it going to be pricing is going to be more new business wins? Or is it going to be a?

Jeffrey Edwards

Yes, it's a combination of both, yes, as Jeff. So I think what John went through with you was we had a couple of transactions. So we sold a couple of businesses that resulted in a bit of a top line down but when you compare apples to apples and you look at the industry of automotive versus our automotive revenue, we were actually up for the quarter slightly.
And so I think as we look without getting into any more details about second through fourth quarter this year, I think that is what we think is going to continue to to be like. So I would say our business plan is pretty much spot on this at this stage. I wouldn't think the numbers are going to drift much differently as we go through second, third and fourth quarter. I mean, obviously, each month changes a bit. But overall, we still expect to outgrow the markets that we serve. And automotive, I think that's the key point.

Okay.
That's that's helpful.
Thank you.
So since your revenue is outgrowing the markets that you serve, is it fair to say that you're winning market share?

Jeffrey Edwards

Yes, I think that's what we're saying and we with the announcement here around sealing and fluid handling going forward, given the innovation we have and given the customers' excitement about it and what I just talked to the previous caller about in terms of content per vehicle going up, especially our fluid business, we expect to continue to gain share.

Great. That's helpful. On Moving on to gross margins, you guys are obviously up, call it 300 basis points on a year-over-year basis, come down a little bit, but let's call it close to flat sequentially. Do you guys see gross margin hitting double digits, call it, 10 plus percent during the current fiscal year? Or is that something that we should think about more 2025 and beyond?

Jeffrey Edwards

Does as Jeff The answer is yes. And then I was pretty clear about where I think 25 is going to be. So we should be back to double digit EBITDA and ROIC as a company as we exit 25.

All right. Great. That's very helpful. And then last thing for me is I know that you're in June on the third liens, the June interest payment, you guys elected to pay cash there. When do you need to formally elect whether you're December interest payments will be cash or pay?

Jonathan Banas

Hey, Ben, this is John. We have to elect that six months in advance. So really by June first, essentially, we'll be making that election on both the first lien and the third lien notes.

Operator

(Operator Instructions) Brian DiRubbio, Baird.

Good morning, gentlemen. A couple of questions for you. Just on, John, are you going to put out a recast segment results with the new second structure in place?

Jonathan Banas

Yes, the window we issue our 10 Q later today, Brian, you're going to see the segment results for not only of this first quarter of this year, but also 2023. And then each subsequent quarter will put in the the historical frame of reference for you on those. And we're going to obviously get to once we get to the 10 K will be a full three years. And there will go all the way back to 2022 just because of the comparative rules from SEC standpoint. So you'll see those coming as we as we publish our upcoming financials Scott, excuse me and then yes, sorry, go ahead.

Jeffrey Edwards

No, I was just going to point out that you also see the previous years in the press release that we issued last night as well together. But I'm glad that I got the one of Austria.

Yes, yes. Now that I got it. Yes, just going to rewrite my rewrite. My model now is just fine. So just on that pick versus cash pay, I guess my question for you on that is, you know, if you were if you would have cash paid your coupons this year, would you still be free cash flow positive?

Jeffrey Edwards

Well, I gave you that the general that we expect to be free cash flow positive. We don't get into the details of what the magnitude of that is. We don't give free cash flow guidance. So we'll I'll just leave it at that. And we're continuing to work towards, obviously not having to elect that we want to have it for the rest of this year through the through the Q4 payment and then that rolls off in 25 forward. But clearly, the goal is to not add to the quantum of debt and be able to straight pay all that. So I won't give you the the adjusted pro forma guidance on that, but that will just leave it at that.

Fair enough.

Jeffrey Edwards

This year speculation that you still like to do a global refi next year. That's our current thinking. You know, of course, that all depends on the production environment, the interest rate environment and the like. But certainly with our trajectory, what we're thinking about in terms of continued improvements in the cost base of the business improvements and free cash flow that Jeff and I have been talking about here today. We think that sets us up very well to be in the market next year, but a lot of factors go into that.

And then final question is on just on raw materials, natural rubber and butadiene prices are trending upward. We are those mostly on a lag basis in terms of your pricing resets?

Jonathan Banas

Yes, Brian, it's John again past and typically there on a quarter or perhaps a two quarter lag. Same thing with our steel and aluminum buys as well. You see a quarter or two there. So we are seeing what you described on the rubber side, but also on the steel cold-rolled steel side, we are seeing some headwinds. When we came into 2024, we thought we'd have a slight tailwind, but now that's kind of been mitigated by by recent commodity trends. And we're back to kind of a flat commodity environment overall for the year that that's our current outlook.

And final one for me. Could you remind me what your of the cost recovery payments were last year in aggregate, are you talking about the cost we were able to take out of the business, knowing what the OE sort of compensate you for for the prior year inflation pressures?

Jeffrey Edwards

Yes, this is Jeff. I think we haven't revealed that and we'll keep that to ourselves. I guess from a pricing point of view, if we feel like we have done a really good job. Our customers have certainly stood up and supported Cooper Standard's requests. We've talked about the impact at the end of last year. You can see the impact but that's had during the first quarter. Obviously, are our bullish comments today about what we think 24 could be and certainly 25. And clearly, we've got we've got our own lifting to still do this isn't about just how much money do we negotiate in price increases. Frankly, most of it is reflects the cost increases that the business went through but I think we're in a good position to be successful. We're in a good position to return ourselves to the level of profitability that we need to be in to generate the type of cash we need to be generating in order to provide our customers with the consistent ongoing support. We've always done and certainly continuing to improve for our shareholder base is part of that whole equation as well. So we'll keep the amount to ourselves to stage.

Operator

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

Roger Hendriksen

Okay. Thanks, everybody for joining the call. We appreciate your questions and the engagement, please feel free to reach out to me directly if there are other questions that we didn't cover or we'd like to address in more detail. Thanks again. And this concludes our call.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.