Cooper-Standard Holdings Inc. (CPS) Q4 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cooper Standard Fourth Quarter and Full Year 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. Good morning and welcome. I will be acting as the moderator for today's call. Speaking on behalf of the company are Jeff Edwards, our President and Chief Executive Officer; and Allen Campbell, our Chief Financial Officer. As usual, we will conduct a question-and-answer session after providing an update on our business, review our fourth quarter and full year performance and discussing our outlook for 2013. The presentation we'll be using for this morning call is available 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 on 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 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 filing 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 the call can be found in the appendix of this presentation and in our press release dated February 25, 2013, which has been posted on our website and furnished on our Form 8-K with the SEC. At this time, I'd like to turn the call over to Jeff Edwards, Cooper-Standard's President and Chief Executive Officer.

Okay, thank you, Glenn. Good morning, everyone. The executive overview that I'll go through with you this morning is going to start with an update on our Strategic Plan construction that I began to introduce during last quarter's call. I'll also give you some updated information on the European restructuring and the timing there. And then finally some details, about emerging market expansions as well as key leadership appointments to facilitate the growth. The first 120-day plan that we've put in place in middle of October is here for your update. Really, the first 0 to 145 days was evaluating the as is of -- at Cooper Standard. During that time, we had an opportunity to meet with a number of our top leadership around the world. In addition, visited 9 countries as well as a dozen customers and a number of our business partners to help gain an understanding of what was working and what was not working, what needed to be invested and what needed to not be part of the strategy going forward. So it was really an opportunity for me to listen and learn to people that -- from people that had been part of our history for quite some time. During the next 45 to 120 days, this is really about defining the vision and the path forward, so the BB at Cooper Standard. So we've been evaluating with the management team, our capabilities, what our strengths are, what the opportunities are for improvement. We've spent a lot of time analyzing the current product portfolio and the overall performance. Really, everywhere in the world across all 5 of our product groups. We've also spent considerable amount of time looking at the organization model that was in place, and we have redesigned that, and we'll be rolling that out to the organization here in the next couple of weeks. We're also going through a process where as we look at our '13, '14 and '15 business plan, we're looking to ensure that we have the appropriate resources in the organization to ensure that we resolve a number of the execution issues that we've had this past year, specifically, and in our business in North America, as well as South America, to name two. The next 120 days, which is really what we've begun, as we speak is about documenting the specific plan, communicating that to all the key stakeholders, ensuring alignment within our organization and then finally, laying forth the groundwork that describes clearly to everyone how we're going to execute and how we're going to measure it so we can hold ourselves accountable to accomplishing the objectives. So during the end of March, we will roll this out to the entire organization around the world, and then that will be available for external discussion shortly after that. Next page really describes the key elements to a successful company. We've communicated these elements to our employees in a global call here just this past month. Simply, we want to make sure that that shareholder value creation is the overarching objective in the company, and we need to ensure that we come to work every day to deliver on our commitments. Also, our relentless focus on our customers, I think it requires deep insight into their needs everywhere in the world across all the regions in order for us to consistently win in the competitive market. This is an absolute requirement. Next is to achieve profitable growth. This, obviously is about growing the top line and expanding our margins as we go forward. We certainly plan to invest in the most key resource we have, which is our people, and identify which essential capabilities are required to win and make sure we have those in place. And then finally, build an operating model that really enables and sustains success. So this is going to have to be a model that allows us to deliver our product portfolio in really all regions for all customers, and that's what we're in the process of constructing and rolling out. The next page, a little bit more detail into the strategic priorities that we've discussed internally. We rolled these out as well a couple of weeks ago, and these are the priorities we've established for 2013. Again ensuring that all regions, all product groups have a focus on our customers and ensure that we're serving them and really understanding their needs. There's a lot of different needs from North America to Europe to Asia to South America. Each of those may be the same customers, may be the same products but each of those regions has very unique needs, and it's our responsibility to understand what those are and deliver for our customers. And then finalizing the product growth strategy. As I mentioned, we have 5 major product groups today. We're evaluating which of those are world-class, which can become world-class and then what we're going to focus on and invest in going forward. Accelerating our profitable growth in Brazil, India, China, and Southeast Asia, our priorities will be to continue to invest there and grow and certainly, address the capacity required to win and support our customers in those key markets. North America is really about investing in the infrastructure to support not only the growth there but the growth of the global platforms and ensure that what we're talking about our purchasing organization, engineering, IT, HR that we have the necessary infrastructure to not only run Cooper Standard today but also be a whole lot better at integrating our companies into Cooper Standard moving forward. Restructuring Europe. I mentioned that we would talk about that. We're pleased to say that we have accelerated the initial plan for the restructuring. We will spend money in 2013 to do that, and we will finish it up by the end of 2014. That's basically pulling the restructuring for Europe ahead 1 year from what the original plan was. And you can see that we've announced Serbia, we'll have groundbreaking there in the next few weeks. Romania we've completed that startup, that's gone extremely well. And we're in the process of looking at opportunities in Turkey, and we'll continue with our footprint in Poland and make sure that we fully utilize the assets that we have in Poland today. The next to the last bullet is really focusing on building the center of excellence within our global functional organization. Again as I mentioned, we intend to identify which product groups we're going to go around the world and support our customers with. In addition to those global businesses, we have to have the critical support functions like purchasing, like the innovation team, engineering, best business practices across our manufacturing operations. And we're in the process of establishing those global leaders within our new organization model, setting their global objectives and then certainly, investing in those businesses to ensure that they'll support the growth that we require around the world. And certainly spreading the best practices of all of those functions is part of the process. And then finally, invest in Russia and in Indonesia footprint. These are 2 markets that our global customers are requiring that we enter to support them across our product lines, and so we'll be doing that in the coming year. Okay. That's really the strategic priorities summary. I will come back at the end of the presentation after Allen finishes and summarized 3 or 4 other key points. But in the meantime, I'll turn it over to Allen to walk you through the financials.

Thank you, Jeff. Turning to Page 9, we show our fourth quarter and full year 2012 revenue as compared to the prior year. In the fourth quarter, Cooper Standard generated sales of $697 million, relatively flat when compared to the same quarter previous year. For the quarter, sales were up in all regions except Europe, which is impacted by the effects of weak automotive demand and negative foreign exchange. For the full year, sales were $2,880,900,000, an increase of $27.4 million from 2011. Excluding $129 million of unfavorable foreign exchange during the year, sales were up 5.5% from a year ago. North American operations generated sales of $364.5 million for the quarter, up 6.1%, a little below the industry which was up 8%. Cooper Standard's European sales in the quarter were $235.8 million, down $35.6 million or 13.1% from the previous year, including $9 million of unfavorable foreign currency movement. Typical [ph] demand continues to be weak in Europe, affecting almost all the OEMs. Production levels in the quarter falling over 11% when compared to the same quarter a year ago and 5.8% on a full year basis. Europe is the major focus within the company as we address the region's overcapacity issues and fixed cost as weak demand is expected to continue. Our Asian operations are improving as reported sales of $56.7 million in the quarter, up 10.1% from the previous year as production volumes improve. In Brazil, we generated sales for the quarter of $40.1 million, up from $29 million or up 38% in the same period a year ago. Even with unfavorable foreign currency movement -- this was in spite of unfavorable foreign currency movement as production improves significantly related to customer confidence and government incentives. Turning to Page 10. Gross profit in the quarter was $99.7 million or 14.3% of sales compared to $97.6 million or 14% in the same quarter of the previous year. Our lean initiatives contributed favorably to gross profit, offset by customer pricing and vehicle launching expenses along with costs associated with improving our manufacturing footprint. For the full year, gross profit was $438.9 million or 15.2% of sales as compared to $450.6 million or 15.8% a year ago. Key drivers affecting gross profit in the year was the same as the quarter. SG&A. In the quarter, Cooper Standard's SG&A, which includes research and development expense increased to $74.8 million or 10.7% of sales and $66.7 million or 9.6% from a year ago. We'll continue to add engineering resources to support our customers and to further evaluate and expand our technology. The company increased investment in engineering customer support as noted in the full year numbers, also. Operating profit was a negative $2.1 million for the quarter. Net income was a loss of $9.9 million for the quarter. Net income was affected by after-tax charges of $12.5 million in connection with the company's European restructuring initiatives, and $9.1 million from impairment charges relating to the company's South American business and one of our European facilities. On a full year basis, the company generated net income of $102.8 million, a fully diluted earnings per share of $4.14, which includes a $48.3 million benefit relating to reversal of valuation allowance on the company's deferred income tax assets in the United States. Earnings per share would have been $2.03 without tax valuation adjustments. We delivered double-digit adjusted EBITDA margin at fourth quarter of 10.2% and $70.9 million of adjusted EBITDA, up from $66.6 million or 9.6% of sales in the same quarter previous year. Full year 2012 adjusted EBITDA was $298 million or 10.3% of sales. The next slide, which show a reconciliation of adjusted EBITDA for the year from our net income of $102.8 million. In addition to customary adjustments to net income, we have add-backs for restructuring $25.8 million, primarily related to the closure of North American facility and restructuring in our European operations. Asset impairment charges of $10.1 million, onetime retirement obligation and recruiting cost of $11.5 million, emergency related stock compensation of $9.8 million and $2 million deferred tax valuation reversal at our FMEA joint venture. Turning to next slide. Joint ventures are a major part of our growth strategy especially for the Asia-Pacific region. We have 4 nonconsolidated joint ventures which serves the Asia-Pacific region and/or Asian OEMs. Our Chinese [indiscernible] Cooper Sealing JV with SAIC Hasco; Nishikawa Cooper with Nishikawa Rubber in Thailand, Sujan; Cooper Standard France India with Magnum Elastomers; Nishikawa Cooper JV, which was established in North America along with Nishikawa Rubber in 1989 provides key Japanese OEMs such as Honda and Toyota. In 2012, these joint ventures generated sales of $407 million, an increase of 27% from the prior year. The profitability contributed to our equity earnings in the amount of $8.8 million in the year, up from $5.4 million the previous year. Slide 13, for the quarter, the business generated $66.8 million in cash from operations, net of CapEx. In that quarter, we generated $65.8 million from changes in operating assets and liabilities, which is in line with the traditional seasonality of our cash flows. Changes in operating assets and liabilities predominantly include our changes to working capital. We continue to fund tooling to support future program awards. As of yearend, we carry approximately $121 million in tooling in our balance sheet. This balance will fluctuate as we reimburse from our customers, these programs are launched as we continue to incur additional tooling cost to support future programs. For the quarter, we've invested approximately $39.6 million in capital projects, $131.1 million for the full year, supporting current and future program launches and our expansion activities. Other material cash items in the quarter and during the year were proceeds from sale of assets, cash dividends paid on our 7% preferred securities, debt repayments of approximately $5.5 million outside the U.S. during the year, an outlay of $18.2 million in the quarter in connection with the repurchase of our common and preferred securities and $43.7 million for the full year. We continue to maintain adequate liquidity to operate our business with $368 million availability as shown in the table above. Other financial metrics continue to remain strong with net leverage of $22.8 million, leverage to adjusted EBITDA of only 0.7x, and interest coverage ratio at 6.7. On page 14, we highlight key areas of 2013 guidance. North America production volume is assumed as 15.6 million units, and Europe production volume of 18.7 million units as compared to 2012's 15.3 million in North America and 19 million units in those actual units in Europe. We assume average full year exchange rate of $1.25 to EUR 1. With these assumptions, Cooper Standard expects sales growth of 1% to 2% in 2013 and have capital expenditures of between $150 million and $170 million as we continue to invest in support of our customers, invest in technology, expand our presence into emerging markets across the region. We expect to spend more than $25 million in China and India in 2013. We expect to incur between $40 million and $50 million of cash restructuring expense predominantly in Europe and we anticipate our cash taxes to be in the range of $35 million to $45 million. With that, I would now like to turn the call back to Glenn.

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

[Operator Instructions] Your first question comes from the line of David Hidalgo, private investor.

I'm just trying to understand. You have sales growth for 2013 of 1% to 2%, capital expenditures to $150 million to $170 million, plus restructuring of $40 million to $50 million. It just sounds like we're burning through a lot of cash without a lot of sales growth. Can you help explain the logic behind those numbers?

Sure. What you're seeing is some of the remnant of our restructuring that came through in 2010, which tempered our ability to gain new business, which you're now seeing in our '12 and '13 numbers. But what the company's done is put themselves in the position from here on out for a great growth platform. Including in that is a need to make sure we have the right cost structure to balance the European volume that you see has been down significantly, and to basically move into the areas we should have been in the past like Thailand, like expanding significantly more in India and China, as Jeff mentioned, Turkey and Russia that we're looking at. So the capital that you see for '13 is simply higher than historical. But it's related to 2 things, the footprint improvement and the new business that launches in the future years.

With that being the last question, we will turn the call back to Jeff Edwards for final comments.

Okay, thank you. Just a summary on what we've discussed and what we will be focused on going forward here. The completion of the 120-day plan, this is really our intent to go live with our 5-year strategic plan by the end of March. We'll also roll out a new organization model. At the same time, we'll clearly establish what our new strategic objectives are for Cooper Standard and certainly, we'll be executing on the 2013 business plan that we've introduced. The second point is really aligning our organization to support the global customers. The fourth point below is really something we're excited about, we've identified both our Asia and European presidents, new positions, new people within the company that are really being put in place to execute within those regions, but also to ensure that we have the right level of leadership supporting the customer in Asia and in Europe. Finally, the new organization rollout will have some changes that ensure customer alignment. And then after that, we will go directly to our customers and clearly describe the product strategies that we plan on investing in the future and frankly, some that we will not. The third point is, leveraging the footprint and capabilities to win our global platform. This is really about restructuring Europe by the end of 2014, which is a year pull ahead to the plan in launching Serbia that I spoke of before. We'll also make significant investments in SAP and PLM, again, to ensure that we have a global organization that can execute, communicate and run the business with the best tools available. The other thing that we've done is launched a new global innovation team. We're excited about that. We've invested in that business and we believe, based on the early indications that we will have innovative products ready for market from that group for the 2014 year. And then finally, we're working on a new business model for China that we hope to conclude by the middle of this year, and that will provide a platform for growth in the future in China. I mentioned the point about attracting and retaining key talent. We've recruited the Asian president, the European president, and we've also appointed an executive to oversee the emerging markets. So those are 3 critical functions within the company that we're excited about their contributions moving forward. And then finally, continuing our relentless focus on our customers, really, through global support and innovation. From a leadership perspective at Cooper Standard, this is a key responsibility that we all have, we all understand and look forward to supporting our customers around the world. Thank you very much.

Thank you, ladies and gentlemen. You may now disconnect.