Cooper-Standard Holdings Inc. (CPS) Q3 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cooper Standard Holdings Incorporated Third 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 now like to turn the call over to Glenn Dong, Treasurer of Cooper Standard. Please go ahead.

Thank you. 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 position. Such statements involve risk and uncertainties that cannot be predicted or quantified, and that may cause future activities and 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 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 in the appendix of this presentation and in our press release dated November 7, 2012, which has been posted on our website and furnished on Form 8-K with the SEC. At this time, I would like to turn the call over to Jeffrey Edwards, Cooper Standard's President and Chief Executive Officer.

Thanks, Glenn, and good morning, everyone. Before we get started, we just wanted to let everyone know that our thoughts have been with the folks on the East Coast that were impacted by the super storm Sandy the past week or so. We hope certainly that the coming weeks bring relief to everyone who's been affected by the storm on the East Coast. As we head into the next couple of slides, I wanted to, first of all, thank everyone at Cooper. I started with the organization on October 15. I'm very pleased to be the new President and CEO of Cooper Standard. Certainly, during my first 4 weeks, I've had an opportunity to meet with a lot of key stakeholders, employees, company leadership, the Board, customers, partners from around the world. It's been 4 weeks, but it's very easy to see that this is a very good company, strong values, innovative technology, very talented people, certainly a global footprint that gives us an opportunity to deliver great products to our customers all over the world. Before I get into any more detail, I just wanted to also spend a little bit of time giving you some background on my career. I've spent the first 28 years of it with Johnson Controls in the automotive industry. I started in the 1980s in the manufacturing plants. During the '90s, I had an opportunity to gain my first experience with Asian transplants. I was in Middle Tennessee for 4 years or so, running a joint venture there with service to Nissan. Then I came back to Michigan and had an opportunity to manage some global relationships businesses, specifically related to our Ford business and the General Motors business. Then for the decade of the 2000s, I had an opportunity to run the North America business before I moved to Asia, where I was a lead executive for the Asia business from 2004 until most recently, prior to me joining Cooper Standard. So that last decade, certainly, has given me an opportunity to learn the business in Asia, develop relationships that, obviously, are important for the future of Cooper Standard as well, specifically related to China and India. There's outstanding opportunities for our products and services to support our customers in those regions. So we're looking forward to the opportunities that growing in that region will provide. Also I wanted to take a few minutes today to just give you some idea of the first 100-day plan that we've started to execute here at Cooper. If we can go to the next slide, it will show some details there. First of all, the opportunity to be introduced to the employees around the world, we did that on the 17th of October. That went extremely well. Now, the global tours really have started. We've spent a week in Europe. We head to Asia tomorrow actually. The intent is to begin gathering more information on what our opportunities are, meet with the key stakeholders of the company and begin laying out our future roadmap to take advantage of those profitable growth opportunities and understand, really, how we can support our customers effectively. Certainly, reviewing the technologies, the product scope, the processes that we have within each of our product groups is critical. I need to understand a lot more about that, certainly, to understand the innovation that we've been developing over the last several years and how we can turn that into real business opportunities. The next step is -- after that, is begin evaluating the organization structure to insure that we have the alignment necessary to support the global customers and really a solid foundation to allow for the future growth of our business. I already mentioned the focus on growing our Asia business. We have an opportunity to continue aggressively pursuing our European turnaround plan. We want to accelerate those plans as well, and we'll talk more about that after the first of the year. And then finally, just to understand the initiatives that we've been investing in, the products that we have available, the new innovation that's ready for sale, and then determine which of those we're going to focus our priorities on, which provide the greatest potential for profitable growth around the world, and then make a clear designation to everyone, especially the customers and the employees around the world on where we're going to focus and what we're going to do. And then obviously, part of that includes what we're not going to do. So we need to set some priorities. Regarding the go-forward plan with the leadership team, we will be spending considerable time together here in the coming weeks so that we can clearly decide on the new strategies. Certainly, everything's not going to be new, so we have to commit to what is and then commit to still executing on those things that are critical to us. We want to make sure we articulate those plans clearly so we get all 22,000 employees around the world focused on the same thing. We want to make sure that we empower our workforce. It's certainly an outstanding one that we trust, our customers trust and it has a long history of good execution. Obviously, after that, measuring the plans and holding people accountable and providing ongoing feedback is critical to any business. And certainly, as change occurs within the industry and now within Cooper Standard, that makes it even more important to provide that ongoing feedback so that we can all stay aligned and focused on what's most important. So as I close here, I'd just like to thank, certainly, our global workforce for their continued dedication to serving our customers throughout the world with innovative, high-quality products. I certainly look forward to reporting back to you on the progress during our year-end earnings call, which will happen early next year. And we really appreciate the patience and understanding as we take our time over the next 60 days or so to really ensure that we have a clear understanding of what's important to our customers and our other key stakeholders. And we'll come back to you with a very clear and precise plan of what we're going to do during the calls early next year. So thank you again. I'd like to turn the presentation now back over to Allen Campbell for a look at the third quarter financial results. Allen?

Thank you, Jeff. Turning to the next slide, we show our third quarter year-to-date sales as compared to the prior year. Third quarter is traditionally our trough period for sales due to customer plant shutdowns. However, this year, we've also had effects of continued softness in Europe, as well as foreign currency volatility, in our numbers. For third quarter, Cooper Standard reported sales of $684 million, down 3.5% from $708.5 million in the same quarter of the previous year. Adjusting for $42.5 million of unfavorable foreign currency movement in the quarter, Cooper Standard sales were up 2.5% from the previous year. In North America, we reported sales of $363.9 million, up 4.4% from $348.5 million in the previous year. Sales were up 5.4% on an adjusted for unfavorable foreign currency movement. Vehicle production in North America continues to be strong across-the-board, with overall production up 12.2% from the same quarter last year as reported by IHS with notable increases in the Asian OEMs. Europe continues to soften, with vehicle production down 16% from the second quarter and down 7.8% as compared to the third quarter of last year. This is reflected in our European sales of $227.6 million, down approximately $40 million from the same quarter last year. Adjusting for $29 million of unfavorable foreign currency movement in the quarter, sales were down 4.1% from the previous year. Our Asia-Pacific sales for the quarter were $53.4 million, down from the previous year of $56.5 million. Sales were up slightly when adjusted for $3.9 million of unfavorable foreign currency movement, but were negatively impacted by customer and vehicle mix. Brazilian market is showing signs of improvement as a response to government stimulus measures, yet remains a very challenging environment. Our Brazilian operations generated sales of $39.2 million in the quarter compared to $34.2 million from the prior quarter of this year, and $36.5 million a year ago. Foreign currency is unfavorable to the amount of $6.1 million. Sales are improving as we execute our launches with customers such as Toyota, Honda and GM. Gross profit for the second quarter was $103.1 million or 15.1% of sales compared to $108.6 million or 15.3% in the same quarter of the previous year. Raw material recovery, savings from lean initiatives and volume and vehicle mix, particularly in North America and Brazil, positively impacted gross profit. These were offset by costs related to vehicle launch activities, adjustments to our operating footprint, and increases in raw material prices. We are, however, starting to see some raw material price stabilization, which should benefit us in the coming quarters. For the quarter, SG&A expense increased to $65.4 million or 9.6% of sales from $64.4 million in the previous year. Our increase in engineering resources, to support new program launch and research and development activities, were partially offset by a reduction in the company's estimated annual incentive compensation and timing of some of our infrastructure investments. We generated $23.6 million in operating profit and $11.6 million net income for the quarter, with a fully diluted earnings per share of $0.44. The company's adjusted EBITDA was $69.8 million or 10.2% of sales for the quarter. As the third quarter is normally our trough period in terms of financial performance, we're pleased with this quarter as we maintain margin levels consistent with that of the prior quarter. Year-to-date, adjusted EBITDA was $227.1 million or 10.4% of sales. A reconciliation of these figures are in the Appendix section of this presentation. Turning to the next slide, joint ventures are very important to us as they help us grow with key customers. Our 4 non-consolidated joint ventures provide products to Japanese OEMs, such as Honda and Toyota; in India, OEMs such as Maruti Suzuki, Tata, and Mahindra & Mahindra and SAIC and Chery in China. These joint ventures generate $118 million in total revenue for the quarter, a 34% increase compared to the same quarter last year. Their sales were in excess of $319 million year-to-date. Additionally, the profitability contributed to our equity earnings an amount of $2.3 million in the quarter compared to $0.8 million in the third quarter of last year. These results reflect especially stronger North American market as Asian OEMs recover from the depressed levels a year ago. Included in this year's third quarter and not in the prior year quarter, are results from our Thailand joint venture, which we formed last year with Nishikawa Rubber Co. For the quarter, the business generated $39.1 million in cash before changes in our operating assets and liabilities. We used $26.3 million to finance changes in operating assets and liabilities, which includes our working capital requirements and investments in tooling. This funding activity in the quarter is in line with the traditional seasonality of our cash flows. Additionally, we continue to fund tooling to support future program awards. We're currently carrying approximately $119 million in tooling in our balance sheet as of September 30, which ultimately will be reimbursed from our customers as the programs are launched. This level of fluctuate is to continue to incur additional tooling to support new program awards going forward. For the quarter, we invested approximately $33 million in capital projects, with noble increases in North America and Brazil to support current program launches and the newly-awarded business. In the quarter, we repurchased $7 million of our common stock. Year-to-date, we have repurchased $25.5 million in common and convertible preferred securities. Today, we announced that our Board of Directors has authorized a $25 million share repurchase program of our common stock, convertible preferred stock or warrants to purchase common stock. This repurchase program will commence in the fourth quarter of this year and is expected to be funded from our cash-on-hand and future cash flows. Subject to market and business conditions, shares will be repurchased in the open market or privately negotiated transactions. Other cash items in the quarter included the quarterly cash dividend paid on our 7% preferred securities and debt repayment of approximately $4.6 million outside of the U.S. Turning to next page. We continue to maintain strong liquidity as of September 30, with cash in our balance sheet of approximately $218 million and an undrawn revolver with approximately $315 million in unrestricted liquidity. The company's balance sheet and financial metrics continues to being strong with net leverage of $264.5 million, net leverage to adjusted EBITDA of 0.9x and an interest coverage ratio of 6.8x. Guidance for 2012 sales remains unchanged. We are projecting our sales to be between $2.85 billion and $2.95 billion. However, we have revised our guidance in other areas. Capital expenditures are estimated to be between $120 million and $130 million. Cash restructuring between $40 million and $45 million, and cash taxes between $20 million and $25 million. I'd now like to turn the call back to Glenn.

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

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

And I just wanted to welcome Jeff on board and appreciate the call. Jeff, you were mentioning that you wanted to accelerate the company's growth, and I just was curious if maybe you could elaborate on that, and particularly with respect to your acquisition strategy.

Thanks for the welcome as well. I think my comment regarding growth, certainly, as we continue to execute our product plan and our innovation plan, I'm confident that the growth opportunities, especially that I referred to in China and India will give us an opportunity to expand that footprint that we have today. So that, I'm certainly confident and look forward to meeting with those customers and spending time talking to them about, certainly, what we do to support them today but even more importantly, what opportunities we have to provide them products that we historically have not yet. So that's what I was referring to.

So it's more expanding the business in the JVs that you already have, as opposed to entering new ones or acquiring companies over there?

No. I certainly wouldn't rule out any of the above, so I think it's -- all of it is on the table.

Okay. And could you give us an update on new business wins. Where -- or maybe talk about the organic growth rate you see over the next 1 to 3 years?

Sure, Kirk. We did not publish that this quarter. We intend to publish it after the end of the fourth quarter for our net new business and for 2013. And we're contemplating that. We believe we're winning competitively at what we should be winning and above. You won't see that for another year or 2, obviously, with the timing that's going on. But there's a lot of programs -- a lot of global programs are being put out for quote over the next 6 to 9 months, and we expect to win our fair share of those.

So maybe the organic growth rate, you think, will pick up?

We intend to pick up the organic growth rate in the future, yes.

Okay. And then, more -- I guess, more on the detail side. Do have a strategy for buying back the preferred and the common? I mean, do you have a target price in mind?

We do not have a target price in mind. We have a basket obviously that we've announced that we're going to utilize. We have opportunities that present themselves, either direct -- directly to us or in the market. As you can see, our share has been -- price has been down of late, and we think it is a good opportunity to buy some of that out.

Okay. And I was curious if you could -- now that we're getting pretty close to 2013, if you could give us some color as restructuring costs, pension funding, some of those larger cash items for next year.

Okay. As we talked about, Jeff's joining us just recently, and part of his effort is going to be reviewing our strategy and getting out and looking to sites and looking opportunities. So I think it's best for us to allow his 90-day plan to play out, and then we'll be in a much better position to publicize what our thoughts are in that area.

Okay. Do you think -- you think you're, I mean, directionally -- I mean, the company's guidance, I think at least the impression I've gotten is that both pension funding and restructuring costs are going to be trending lower. Is that still the case? Can you even talk directionally?

Well, directionally, I think, if you look at pension payments -- the excess payments we've made the last year or 2, that will not be inconsistent for the next year or 2. And then that would put us much closer to fully funding after a couple of more years like we've seen in the last 2. Restructuring, you've seen our history there. We have spent $15 million to $35 million each year for the last several years. We are looking at the European market where, obviously, excess capacity in the OE and supply base. That may cause it to swing higher over the next year or so, but again, we're not going to position it and put any numbers to that.

[Operator Instructions] Our next question comes from the line of Jeff Forlizzi with Silver Point Capital.

Just a couple of cash questions. Can you just -- 2 things, can you give us a sense what's caused the revision to CapEx higher? Just directionally where that's going? And then the second question is just, can you also give us a sense -- the $119 million of tooling that you're carrying, just from a contact's perspective, where does that -- the highest it's ever been? Is that close to the highest it's ever been? Just so that we can get a sense for how much that might come back.

Sure. Jeff, I'll start with the second one, tooling. $119 million is the highest that we've tracked since I've been with the company. It's up in the high-20s-some million over the prior year end. I would expect that number to trend down over the next few quarters. So we'll ebb and flow. We like seeing tooling because it's a forbearer of newer sales going forward. So in a high-growth period, it may trend higher than that. But it isn't one that you'll see that we've invested in and it will come down and some of the cash will come back to us over the next couple of quarters. As far as CapEx, our CapEx has trended higher. A couple of reasons. Again, like tooling, the positive reason is, it's related to new business. It's related to some new products that we are introducing, and then -- shortly, especially in North America. And it's also related to our Brazilian business, where we've had -- we basically held back some spending because of the uncertainty in the market. And now, with the -- a little more certainty coming back, we feel more positive about the market. We've added another facility, we've put in significant more extrusion line and finishing equipments. So it's spending in Brazil and other emerging markets, plus new technology in North America that's driving the CapEx. That new technology, the forecast we had was for late next year and some of that, we moved into this year because of the timing of the programs.

With that being the last question, we will now conclude the call. Thank you. You may now disconnect.

Thank you.