Cooper-Standard Holdings Inc. (CPS) Q1 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cooper Standard Holdings, Inc. First Quarter 2012 Earnings Conference Call. [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 like to turn the call over to Glenn Dong, Treasurer of Cooper Standard. Please go ahead, sir.

Thank you, Sally. Good morning and welcome. Hi, I'm Glenn Dong, and I will be acting as the moderator for today's call. Speaking on behalf of the company are Jim McElya, our Chairman and Chief Executive Officer; Keith Stephenson, Chief Operating Officer; and Allen Campbell, Chief Financial Officer. As usual, we will conduct a question-and-answer session after providing an update on our business, reviewing our first quarter performance and discussing our outlook for 2012. The presentation we will be using for this morning's call will be available after the call under the presentation section of our Investor Relations website on www.cooperstandard.com. Please note that certain information in this call may be forward-looking and contains statements based upon current plans, expectations, events and market trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties that cannot be predicted or quantified, and may cause future activities and results from 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 also intended to be in compliance with Reg 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 this call can be found later in this presentation and in our press release dated May 9, 2012, which has been posted on our website and furnished on the Form 8-K with the SEC. At this time, I'd like to turn the call over to Jim McElya, Cooper Standard's Chairman and Chief Executive Officer.

Thank you, Glenn, and good morning, everyone. I am pleased to provide an overview of the first quarter of 2012. Turning to Slide 5. Cooper Standard posted sales of $765.3 million, up 11% from the first quarter of 2011. Major drivers for our increase were strong vehicle production in North America and sales from businesses acquired during last year. As a point of reference, global auto production was up 4.6% over the previous year quarter and regional volume fluctuations and foreign currency translation also factored into the year-over-year comparison. We also generated $83.2 million of adjusted EBITDA in the quarter, and again, posted double-digit EBITDA margins. Even with the global economic volatility, light vehicle sales continued to be strong, globally, with some pockets had regional softness. The North American market continues to make a strong recovery, with South American production down slightly as customers manage inventories. Asia-Pacific production is slightly up and Europe continues to be soft. Over the next 3 years, the industry is expected to grow at a compounded annual growth rate of 5.4% and we're happy to say we're poised to exceed this rate. Moving on to the highly publicized topic of the Evonik PA12 resin situation. As many of you are were aware, this tragic explosion in the chemical plant in Germany operated by Evonik Industries resulted in the shutdown of the facility for an indefinite period. To fully understand the implications, it is important to understand that this Evonik facility not only made 1/3 of the global output for PA12 used in automotive fuel and brake components, and other general industry products, but it also made 1/2 of the world's CDT, which is a key ingredient in the production of PA12 resin. Prior to this incident, we had already been researching and developing alternative materials to PA12 resin and we believe we are ahead of the curve in terms of finding solutions. We have also assembled a global Cooper Standard team comprised of sales, engineering, purchasing, quality, logistics and operations that have been engaged nonstop since the incident occurred, working closely with customers, suppliers and industry peers to identify and implement solutions in an effort to avoid interruptions in vehicle production. Overall, the situation is very complex, however, we are cautiously optimistic that there will be no or little impact on vehicle production. Moving to Slide 6. I'd like to provide an overview of some strategic investments we are making to support our future growth. We consider 2012 to be a productive yet transitional year as we invest and create the appropriate infrastructure to support higher sales. In the area of thermal management, we are developing technologies that help our customers increase fuel economy and decrease emissions. In our sealing business, our investments provide customers with integrated sealing systems through efficient installation and improved fit and finish. We also continued to advance our Safe Seal technology for improved occupant safety. In our Anti-vibration business, we are working on advanced materials for both weight reduction and enhanced performance. To further support demand for our innovative product solutions, we have added talent and enhanced our engineering capabilities around the world, acquired technologies to augment our current production offerings and continue investing in our global footprint with new operations in Romania and further expansion in South America. We fully anticipate that these strategic investments will support the company's growth in the coming years. Turning to Slide 7. Thermal management is a key area for Cooper Standard as demand for fuel economy and reduced emissions increases. Our recent acquisition of EDC Automotive's thermal management technology is an example of this type of investment that we are making to strengthen our product offering and our talent base. The addition of EDC's technology portfolio, multiple patents, as well as product development and testing capabilities, will enable us to provide our customers with higher valued thermal management solutions. Key members of EDC's thermal management team have joined Cooper Standard and are already integrating EDC's technologies into Cooper Standard's product offering. As we look forward, our expanded thermal management capabilities will enable the company to participate more effectively in this market segment, which is expected to grow to more than $20 billion by 2016. I'd now like to turn the presentation over to Keith Stephenson who will provide an operational overview. Keith?

Thank you, Jim, and good morning. Slide 9 is an overview of what I will discuss with you over the next few minutes. A clear strength of Copper Standard is our global footprint, and during the first quarter, we completed or initiated several important actions that will further enhance our ability to support our customers while responsibly managing our overhead structure. The company continues to make significant investments in product innovation at all product lines. In addition to thermal management, via the EDC transaction, we are also expanding our sealing capabilities, as well as developing alternative materials which creates a number of important opportunities. Finally, we had a busy quarter with product launches while expanding our position on global platforms. Turning to Slide 10. I'd like to provide you an update on the evolution of our footprint. In the first quarter, we fully integrated the recently acquired Sigit Sealing business into our existing Italian and Poland facilities, which strengthened our relationship with Fiat-Chrysler. Our auto buyout [ph] plant in Brazil, near São Paulo, is now operational and supplying sealing systems to both Honda and Toyota. This facility will play an important role in supporting the growth of our business in South America. We completed the consolidation of our hose business in North America as we closed our Bowling Green, Ohio hose plant and transferred assets to existing North American facilities to rationalize our capacity and create long-term cost savings. As we work to manage our cost structure in Europe and serve our customers needs, we continue to transfer capacity into Eastern Europe. In the first quarter, we made solid progress in our Romania facility, which will supply sealing as well as fuel and brake product to Ford when fully operational in the second quarter of this year. As one of our operating disciplines, we are committed to proactively managing our footprint and capacity in both mature and developing markets. Turning to Slide 11. Earlier, Jim provided an overview of our recent acquisition of EDC Automotive's thermal management technology portfolio, which expanded our capabilities to provide customers with thermal management solutions. In addition, we have expanded our sealing capabilities with hard-coating, bright trim and glass encapsulation, which has added value to our sealing systems and increased content per vehicle opportunities. As a global leader in automotive seating, Cooper Standard has the largest sealing product portfolio including our Safe Seal technology which automatically reverses windows and doors to prevent pinching. Recent Safe Seal wins at Daimler, Ford and Land Rover will impact sales beginning in 2013. Finally, an important effort inside Cooper Standard is the progress we are making on identifying, developing and commercializing alternative materials. Transitioning to new materials is important as the industry strives for lower cost options, that are lighter weight and environmentally friendly. Cooper Standard has a robust alternative material development program, which will provide further product differentiation while reducing dependency on certain raw material suppliers. On Slide 12, you see 5 of the 35 programs we launched in the first quarter. As Jim mentioned, we have expanded and upgraded our engineering talent, globally, to support the increase in sales and launch activity. As a reminder, our industry runs on a 3-year launch cycle, with business wins in 2012 actually launching in 2015. The vehicles we have highlighted here include the GM Malibu in North America, which we launched fuel and brake products on, as well as hard-coat trim products from our recently acquired Rockford, Tennessee facility. In Europe, we launched fuel and break product on the Ford Fusion and a complete sealing system on the PSA 208 platform. We launched sealing products on the Fiat Siena in South America. And in China, on the Roewe, which is a full-size luxury sedan being produced by SAIC. Slide 13 illustrates our top 20 platforms. This graphic is an excellent representation of how our strategic initiatives have translated to our global sales mix as we support our customers with an expanded global footprint and product offering. According to IHS, it is estimated that 87% of vehicles from the top 7 manufacturers will be produced on global platforms by 2016. We will continue our strategic focus on expanding our global operations and technical support in order to fully participate in this growing trend. Additionally, the company has realized strong growth in smaller car platforms, particularly outside of North America, which is only partially shown in this chart. It's been a productive quarter across our global operations as we work to create the appropriate infrastructure and engineering capabilities to support our future growth. I will now turn the call over to Allen. Allen?

Turning to Page 15. For the first quarter of the year, Cooper Standard posted sales of $765.3 million, up 11% from the first quarter of last year. This increase in sales is reflective of strong North American vehicle production, sales from businesses acquired in 2011, a varying volume and vehicle mix in some regions, along with unfavorable foreign currency movement. In North America, we reported sales of $388.1 million or an increase of 8.2% as compared to IHS's reported 15.2% increase in vehicle production in the same quarter last year. We are seeing a balancing out of discontinued programs where we had significant content, including Ford's Crown Victoria and Ranger, and GM's HHR program. We're also seeing the results of opportunities missed while the company is going through its restructuring efforts a few years ago. Our European operations generated sales of $289 million, up $49.3 million as compared to $239.7 million from the first quarter of 2011. Acquisitions contribute approximately $57 million in sales for the quarter. While Europe, on a macro basis continues to be a challenging environment, with vehicle production down 7.5% for the quarter, our base business is basically flat with the exclusion of $10.4 million in unfavorable foreign currency movement. Vehicle production in the Asia-Pacific region was up 8% for the quarter, but we saw our sales decline by 2.2% to $54.2 million. This sales decline is attributed to our specific vehicle mix and unfavorable foreign currency movement. Delayed customer launches were also a factor in the quarter. However, we will see sales increase as these specific platforms ramp up during the course of the year. We generated $34 million of sales in South America, down 2.9% from the previous year quarter versus a market decline of 5.7%. Our positive volume and vehicle mix offset unfavorable foreign currency movement. Our consolidated gross profit was $121.7 million, up $900,000 from the prior quarter. Our sales and lean initiatives, in most of our areas of our operations, were able to offset increases in raw material prices, operating cost and expenses associated with launch and expansion activities. Gross profit as a percentage of sales declined 1.6% in the quarter from our previous year's quarter, which can be attributed to higher raw material prices, lower gross margin at our acquired businesses and unfavorable foreign currency movement. As we mentioned last quarter, our Cooper Standard France joint venture margins continued to trail our base business. This joint venture, as with our other joint ventures, provides important strategic advantages. We continue to be very focused on bringing this business up to our operating financial standards. For the quarter, we saw our SG&A costs increased from $60.9 million in the first quarter 2011 to $72 million this year. This was driven by planned increases in salary headcount, as we increased our R&D and the engineering resources to support our growth around the world, as well as the SG&A in connection with our recent acquisitions. For the quarter, we generated $39.7 million in operating profit and $23.8 million in net income, with the fully diluted earnings per share of $0.90. The company generated $83.2 million of adjusted EBITDA or 10.9% of sales. On Page 16 is our walk from our net income of $23.2 million quarter to our adjusted EBITDA of $83.2 million after making the customary adjustments. We have an add-back for restructuring of $5.8 million for the period, predominantly related to the closure of a North American facility, which we announced earlier this year and some restructuring related to our European operations, which included our French joint venture. Lastly, we have a $2.7 million add-back related to the devaluation of our merchant's related stock compensation. Here's a view of our consolidated and nonconsolidated joint ventures and their performance in the quarter. Our 6 consolidated joint ventures generated sales for the quarter of $138 million, with inclusion of approximately $98 million in sales from our CS France joint venture. These joint ventures provide sealing, fluid handling and ABS products, not only to our base customers but to Chinese and Indian OEs as well. They expand our geographic footprint, operating for many different countries such as China, India, France, Poland and Mexico. Our 4 strategic nonconsolidated joint ventures generated sales of $100 million in the quarter, a 36% increase from the same quarter last year. This sales increase is primarily attributed to our joint ventures with the Nishikawa Rubber Co. The 4 joint ventures serve mostly the North American and Asian markets, providing products to Honda, Toyota, Indian OEs, key Chinese OEs and SAC and their joint venture companies. Joint ventures are very important to Cooper Standard, they enhance our global footprint and capabilities, particularly in developing regions. Lower cost of entry provide us valuable local knowledge and help to enhance existing and develop new customer relationships. Upside opportunities for margin improvement our JV exist as we share technologies and best practices. Turning to Page 18. For the quarter, the business generated $61.2 million in cash, prior to pension funding and changes in operating assets and liabilities. Similar to the first quarter of last year, we made another discretionary pension contribution to our U.S. plan. This time an amount of $17 million in addition to our minimum quarterly contribution. Typical of the industry's cash utilization in the first quarter, we used approximately $76 million to finance changes in operating assets and liability, which include working capital requirements and investments in tooling to support future growth. Our capital expenditures for the quarter is in line with our historical levels and 2012 guidance. Other cash items in the quarter include: cash outflows relating to acquisition activities of $1.7 million, the sale of an idle facility in North America for $4.2 million, our normal cash dividend paid on our 7% convertible preferred securities, and the use of $4.9 million on a buyback and retirement of some of our preferred securities. Overall, we ended the quarter with $296 million of cash in the balance sheet. We continue to have more than adequate liquidity to support our business operations, finance our planned expansions, restructurings and weather any softness in regions. For the quarter, we had over $390 million in liquidity with an undrawn ABL revolver, which supports approximately $30 million of letters of credit. Approximately $20 million of this cash resides in our Cooper Standard France joint venture, most of which will be required to finance the final phase of its restructuring in the second quarter. With our excess cash, we also have the ability to take advantage of opportunistic acquisitions, as we are able to, with USi, Sigit and EDC technologies. Our financial metrics remain strong, with a net leverage of only $195 million, net leverage to adjust EBITDA of 0.6 and an interest coverage ratio of 7.5x. Our debt structure remains pretty much unchanged from previous quarter, with no material maturity until 2018. Our current guidance for 2012 remains unchanged, with sales projected to be between $2.85 billion and $2.95 billion. Capital expenditures between $120 million, $110 million and $120 million, which is in line with the historical run rate. Cash restructuring between $45 million and $55 million. And cash taxes between $25 million and $30 million. I would now like to turn the call back to Glenn.

Thank you, Allen. The purpose of this conference call is to also answer questions from our stakeholders. We would ask that media inquiries be handled separately from this call. Such calls should be directed to our corporate communications group whose contact information is available on the website and on the earnings press release. This concludes the formal portion of our conference call. We will now open the call for questions.

[Operator Instructions] Your first question comes from the line of Kirk Ludtke with CRT Capital.

I wanted to follow-up on the supply shortages. You mentioned that you didn't think it would have an impact on industry production and I was curious, was that -- do you think it'll have an impact on Cooper Standard's profitability?

No, we don't think so. We have insurance to cover some of the disruptions, so I think that's pretty much going to be covered, Kirk. We are working almost 24/7 with this wonderful team we have assembled here and there's going to be some expenses, and I think some of it, we'll work with our customers to handle it correctly. I don't see anything that's going to be out of the ordinary, certainly material.

And with respect to the margins, typically, looking back now for several years, your EBITDA margins were strongest in the first quarter and then they trailed off sequentially. And I know you're not providing guidance, but directionally, should we expect the same thing this year?

We aren't providing guidance. There were a few things that you'll see impact in the first quarter versus prior year, which is the inclusion of the new business. That will be there through the rest of the quarters. We had a significant impact of FX, in the quarter, that may or may not continue as we look to the next 3 quarters. And a lot of it, then, also is going to be driven by the volume in South America and Europe, question marks around that.

Is the acquired business EBITDA negative?

Not negative, no.

Okay. I was hoping that we could fill out the cash requirements a little bit. Do you have working capital guidance for the full year?

No, we've not provided that. I think if you look back, historically, in our working capital movement to sales, you could use that as a guideline.

Okay. And pension funding, I guess, it was $20 million in the first quarter. How much do you expect to fund for the full year?

It'll match our EBITDA through the rest of the year. You can look at a number that's, well, $17 million less, the next 3 quarters.

Okay. So it's just $3 million a quarter?

Roughly, yes.

Okay, got it. And what do you have? Do you have plans to repurchase more preferred?

No plans at this point.

And how do you go about deciding when to buy preferred and when to be in the market, when not to be in the market?

It's something we look at opportunistically.

Okay. And pension expense, what do you expect that to be for the year?

We haven't published that. But I think if you look at the K, we published expense last year. Expense this year is going to be close to that number.

[Operator Instructions]

Well, that could be the last question. I'd like to take a moment to summarize today's call. One of the greatest strengths of our business is our people and their dedication to the highest levels of customer service is an important factor contributing to our growth. Our strategic initiatives, along with our investments in key technologies and engineering capabilities around the world, further position us for strong growth over the next several years. We look forward to updating you on our progress throughout 2012, and thank you for your attention today.

This concludes today's conference call. You may now disconnect.