Cooper-Standard Holdings Inc. (CPS) Q1 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard First Quarter 2013 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 for Cooper-Standard. Please go ahead.

Thank you, and good morning. Please note that certain information in this call may be forward-looking and contain 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 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. The 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 May 8, 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 Chairman and Chief Executive Officer.

Okay. Thanks, Glenn, and good morning, everyone. First thing we'll do is go through some Q1 highlights. We have completed the 120-day plan that I've shared the last couple of quarters. We'll look at that in a little bit more detail in the next page. We rolled out our profitable growth strategy to all of our employees on April 9. Our global leadership team is in place and we've kicked that off as well here beginning of April. I'll share with you the organization structure in a little bit more detail later in the presentation. Next, regarding the centers of excellence or our functional organizations. We've really been focusing a lot of time and energy around those, specifically the purchasing organization where we are going through a very important process of determining which of our suppliers are going to be strategic for us going forward. Obviously, reducing that base is imperative as well. And so that process over the next 12 to 18 months will really be critical in managing our global commodity strategies, as well as leveraging the scale of our business. And there's also going to be some significant focus around leveraging that scale related to our tooling and equipment buy. The second organization that's getting a lot of attention right now is our operations. We have launched a central group focusing on best business practices and continuous improvement across our plants. This is really about transferring best business practices within the facilities and standardizing equipment and processes to ensure that we maximize the lowest-cost and the highest quality that we can. Next, part of the organization that we're looking at is innovation. That is a stand-alone organization, within the company. It has a separate budget. Their focus, obviously, is bringing new products, processes and materials to market so that we can continue to provide new technologies to our customer base. And then finally, the product group strategies are being developed across, today, 3 core products. We'll talk a little bit about those later. That focus is really on standardization of product designs, standardizing our manufacturing processes and then footprint optimization around the world. The next point is in Europe. We're pleased to say that our performance has stabilized there. We have a lot of confidence in that team going forward. We've brought some additional talent in there as well to help reinforce the great team that was in place so we're excited about what the European team will be delivering over the course of the next several quarters. And then I can also confirm for you that our European restructuring plan that we talked about in previous quarters is on time and on budget. The next page is really the -- is reiterating the orientation plan that we put together. As Jim and I transitioned with the company, we've completed that 120-day plan. If you go to the final box there on the right, can tell you that the management dashboard is done. The decisions on running the business versus changing the business are completed. We've rolled out a very clear strategy to our organization that we believe really gets them focused, empowers them and will hold people accountable for executing the profitable growth strategy that we've documented. So I can tell you also the last bullet, exploring in organic opportunities within the marketplace, really in North America, as well as in Asia and Europe. There are plenty of good opportunities there that we're really excited about as well. And look forward to talking about those in more detail in the coming months. The next page, just for your benefit, is really the poster that we've translated into 15 languages, and have displayed it across our facilities around the world. Really is, the purpose of it, obviously, is to align the 22,000 folks that we have around the strategy of driving for profitable growth. It focuses the teams and the organizations in that manner. It has very clear financial objectives related to top 5 Performances Matter ROIC measurement, as well as top 30 in sales. These are aggressive targets that between now and 2020, we have intention of hitting. Then the final piece here is really, reinforcing the strong values that are across our company. We're very proud of that fact and the values are displayed there in the center of the wheel for all of our employees. Next page talks about the platforms for growth that we've been focusing on, specifically the sealing and trim systems. This is not where we're #1 supplier around the world, it really is about trim appliques, door opening seals, glass encapsulation. The fuel and brake systems, where we're #2 in the world. Direct injection fuel rails, as well as fuel and brake bundles. And then finally, our fluid transfer systems, which are about heater hoses and tube assemblies, as well as a lower radiator hose assemblies. We have 2 or 3 other product groups within the company that we're still evaluating and confirming our direction in the future, and we'll have more on that as well in the coming quarters. And then finally, the global leadership team on the last slide. You can see that we have a very clear P&L responsibility across our regions. We have a North American President, President for Europe and a President for Asia Pacific. The corporate staff that you see in the blue, his responsibility obviously is to drive and develop the strategies, as well as supporting the Presidents on an ongoing basis so that we ensure a high level of execution as it relates to our financial performance and the growth objectives that we've established. Just one final note on this GLT, we're really proud of the fact we have more than 150 years of combined automotive experience with this team. They're in place and they have certainly, a high expectation of their teams and of hitting our aggressive objectives that I talked about. So with that, I'll turn it over to Allen Campbell to walk you through on some of the numbers.

Thank you, Jeff. On to Slide 10. For the quarter, Cooper-Standard generated sales of $747.6 million, down 2.3% from $765.3 million in the first quarter of last year. Those were impacted by unfavorable foreign exchange of $4.8 million, and weak automotive demand in Europe. Our North American operation reported sales of $382.8 million, a small decline from same quarter previous year. This is reflective of slight decline in North America vehicle production as reported by IHS and effects of negotiated and contractual price concessions. Cooper-Standard's European sales in the quarter of $264.5 million, down $24.5 million, or 8.5%, from the same period prior year. Vehicle production in Europe continues to be weak declining 8.7% when compared to the same quarter a year ago. The joint venture continues to struggle to a larger extent, given our customer concentration and compared to the rest of the operations in this region. The company's Asia Pacific operation reported sales of $54.9 million in the quarter, up 1.3% from the same period previous year. Operations in Brazil generated $45.4 million of sales, up 33.9% from the previous year is owing from increase in production volumes and favorable product mix. Adjusting for $5.8 million unfavorable foreign exchange in the quarter, sales volumes were up approximately 50%. Lastly, our nonconsolidated joint ventures continue to perform nicely, generating sales of approximately $113 million in the quarter, a 13% increase from the prior-year period. Consolidated gross profit for the quarter was $120.3 million or 16% of sales compared to 15.9% in the same quarter last year. Higher gross profit margin can be attributed to our lean and restructuring savings, partially offset by vehicle launch cost, higher staffing costs and effects of our customer price concessions. In SG&A. In this quarter, we saw SG&A expense of $75.1 million or 10% of sales, modest increase from the previous quarter and as compared to $72 million or 9.4% of sales in the same period prior year. Increased staffing compensation expense to support our growth initiatives around the world were the major drivers. Operating profit in the quarter was $36.6 million, net income of $20.7 million, and fully diluted earnings per share of $0.86. Additionally, the company generated $76.7 million of adjusted EBITDA or 10.3% of sales. On the next slide, you see our primary adjustments to EBITDA, that's including restructuring of $4.1 million, [indiscernible] previously announced initiatives in North America and Europe, and our merchant stock related to compensation of $2.7 million, that brings you down to our $76.7 million of adjusted EBITDA. Moving on to Page 12, cash flow for the quarter. We generated $53.9 million in cash prior to changes in operating assets and liabilities. We utilized approximately $67.2 million to finance changes in operating assets and liabilities, which include our working capital requirements and investments in tooling. As of March 31, we carry approximately $139 million in tooling in our balance sheet, a 35% increase when compared to a year ago. Other cash items in the quarter include capital expenditures of $34.3 million, as we continue our investments around the world, excess dividends over earnings from our joint ventures of $2.1 million, purchased remaining interest of one of our Chinese joint ventures for $1.9 million, increased our short-term borrowings of approximately $3 million on our European JV and $11.1 million repurchase of our common share and our scheduled cash dividend payment in our 7% convertible deferred -- Preferred Securities. Overall, we ended the quarter with $216.7 million of cash in the balance sheet. We continue to maintain adequate liquidity to run our business with $314.7 million available, which is comprised of the cash on our balance sheet and undrawn credit facility of $125 million. In April, we successfully extended maturity of our ABL credit facility, increased our borrowing capacity by an additional $25 million. The company's Other financial metrics continue to remain strong with net leverage of $269 million, net leverage to adjusted the EBITDA of 0.9x and interest coverage ratio is 6.5. Slide 13. As previously announced on our April 26 press release, we have updated our full year guidance for 2013 with annual sales growth projected to be 4% over 2012. This assumes a North American vehicle production of 15.9 million units, European production of 18.7 million units and an average exchange rate of $1.30 per euro. Capital expenditures for the year will be within $160 million to $170 million range, as we expand our footprint in parts of Asia, Eastern Europe and Brazil. We additionally expect to incur between $30 million to $40 million to cash restructuring, predominantly in Europe. And we anticipate our cash taxes to be in the range of $25 million to $35 million. Moving on, I'd like to update you on our tender offer we recently went through, and you see that on Slide 14 as a summary. We completed the purchase of approximately 4.65 million shares of the company's common stock at an offer price of $43 per share on April 8. The offer was such a success, the proration factor of 77% of shares tendered was applied in order to meet our target. Adjusting for the tender as of April 30, the company would have had approximately 13.15 million shares -- common shares outstanding. The company utilized $20 million of cash along with net proceeds from our recent 7.375% senior PIK toggle notes issuance and warrants exercised. We are pleased to have provided a sufficient mechanism for shareholders to obtain liquidity. And now I'd 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 this call. Such calls should be directed to our corporate communication group whose contact information is available on our website and on our earnings press release. We would now open the call for questions. Operator?

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

I -- Jeff, on Slide 7, I think you mentioned that there are 2 or 3 product groups that, I think, you mentioned under review, or used the phrase under review. Can you elaborate that and maybe give us some color as to how big those product groups are?

Yes, I can, Kirk. So the comment really was referring to the 3 that I showed you and the fact that we have made our way through those 3 in a very deep way and have confirmed what products within those groups we're going to be in and which ones we're not. And then we still have a couple of other groups namely the AVS group, which is a significant part of our business today. Again, we're deep diving the products that are -- that make up that, that particular organization and trying to determine from a technology perspective which ones we should be in and then which ones our customers value the most. And the complexity within that group sort of lends itself to a little bit longer time to deep dive it. So that's the largest one that we're still sorting our way through. And then, thermal and emissions, which is a smaller product group within the company but has probably our newest technology, again, we're trying to work close with 1 or 2 of our largest customers to determine their level of interest in several of those products where we spent some pretty good money the last couple of years developing some new technologies. So in both of those cases, there is -- in one case, there's some customer issues that we're working through and then in the other case, it's just really about the complexity of the product and the global footprint in determining what we want to do. So hopefully that answers it.

Yes, that's very helpful. I appreciate it. And you may have mentioned this, but how big are those -- the 2 of those businesses that are -- that you just mentioned?

We don't put it out there exactly what our sales are in those ranges. I think as you see us publish some information over the next little while, you'll see it, identify it a little closer.

Okay. And now that you're through your 120-day review, can you talk a little bit about any gaps you see in the product line or the footprint? Or you've still got some liquidity here and I'm just curious, if there's any holes to fill?

Well the good news is we do have a lot of wait space. We have, in the case of the sealing business, even though we're the #1 supplier in that particular product group around the world, we have certain geographies and certain customers where we have almost no business. So I think that's an opportunity for us, as we grow our global team, especially in Asia. Kirk, I would say that, that provides us an opportunity to grow that business in a big way. The other thing to keep in mind within that part of the company, as it relates to the competitive base, there's still some small players out there that our customers are -- have been utilizing, that may or may not, from a technology point of view, be able to keep up so I think that also provides us some opportunity as we move forward. So on the fuel and brake side, again, there's one strong global competitor there. But underneath, we're #2, but we're a distant #2. There's opportunity there as well as we've talked to our customers in Europe, as well as in North America to do some things to help them improve the level of performance within that particular product segment. So that's how I would answer both of those. We're excited about the growth opportunity in both of them, even though you see today, we're #1 and #2, there's still a huge upside there.

Excellent. I appreciate it. And then with respect to the guidance. Now that you've had a good look at the business, I know you've provided CapEx and cash restructuring cost guidance for 2013. I'm just curious if you could give us directionally, where you see those 2 line items going beyond 2013?

Again, it's, yes, Jeff's been through his 120 day. There's a lot of areas to be worked out a little more specifically. In general, we may have a period where those items they be a little bit higher in the short term. In the long term, they oughta to be more in range of what we've had historically.

Okay. And I guess, sales up 4% over 2012. How much new business is in that? I'm just trying to get a sense for how much of that is build and mix and how much of that is organic?

It's a mix in 2013, but it's more a reflection of the market than new business. As you recall, we went through restructuring in '10, so our run rate on new business was slow because of that. You won't see the impact of net new business that's of any significance until you get into next year and the year after.

Next year? And the year after? Okay. And longer term, do you have a view now or -- is it kind of a view forming, as to what the organic growth rate is when you get all your strategies in play?

We'll hold that out until we're ready to hit the road with the roadshow.

Okay, I'm sorry. And the last question. I appreciate the cash flow items here. Is working capital -- you may think that's use source neutral this year?

It should behave over the quarters, like it's done historically. The one item we did call out was tooling. That's an indicator of future business, new business. We've been spending a significantly more -- a significant amount of money in tooling and that's been driving our working capital usage. It's a little bit out of the ordinary. The receivables inventory payables, they're going to behave like they have historically. You'll build in the first 2 quarters, you'd wash in the third and you'd make money in the fourth. They counterbalance that a little bit would be your tooling. We're at a very high level now. I don't expect it to stay at that level, but it is -- it's one of those good things, bad things.

Have we already seen the worst of the increase in tooling receivables?

Part of me says yes, and there a part of me says, we might -- if we get some new business, that might continue to grow.

Then that's a good problem, right?

That is. It's better than the alternative.

Okay. And then lastly on the pension. Is there any other legacy liabilities, funding requirements and excesses of expense this year?

This year, we should put in somewhere between $10 million and $20 million, in excess of the P&L.

[Operator Instructions] Your next question comes from the line of Matt Kaplan from Imperial Capital.

On the new business front, have you been involved in new GM K2 platform? And then, will the GMT 900 rolloff affect you at all?

We are heavily involved in that project. Obviously, it's a target business. If you're a supplier in this industry, you'll want that. And we believe in our major product lines that Jeff talked about, we -- the customer is right there with us. It's one that we have a significant amount of business on today. And we expect to have a significant amount of business on tomorrow.

And is that also the same for the 13th generation of the Ford F-150 pickups that are coming online in 2013?

Right. There's some things going on with the F-150. What products you're on, what products you're not on. It will continue to be a large component and a high content per vehicle item for us.

We have no further questions in the queue at this time. I would now like to turn the call back over to the presenters.

Okay, thank you. This is Jeff. Just to summarize, I guess the presentations that we've gone through. First of all, we're pleased with the quarter, it's a good quarter. We're excited about the rest of the year as well. We're also proud that we were able to roll out the strategy, the new strategy across the company to ensure the alignment of all 22,000 employees within Cooper-Standard, that's complete. Strengthening our teams in the capabilities related to the leadership team, as well as probably the next 1 or 2 levels down in the organization, related to program execution. Those are also complete and we're happy about that. We did launch the Cooper-Standard Foundation, which we're extremely proud of. The company has a long legacy of community service. This really provides our employees an opportunity for further engagement opportunities in support of the charitable opportunities within their particular communities. We also have a scholarship component within the foundation that I know our employees are excited about, as we move forward. And finally, the last point there is that we'll continue to adjust our footprint. We'll continue to expand it on a global basis and make no mistake. Our focus is on execution, listening to our customers and growing the business profitably, that's what we come to work everyday and we're really proud of the fact that we have a very enthusiastic group of employees. I would certainly like to thank them for their support of me and the leadership team, the past 6 months as we've taken our time to understand what's very much part of the future, and what needs to change as well and their patience and support is very appreciated. So thanks to all 22,000 Cooper-Standard employees. So thank you for joining us, we appreciate it.

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