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…

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…

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…

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.