Cooper-Standard Holdings Inc. (CPS) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. And welcome to the Cooper-Standard Fourth Quarter and Full Year 2014 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. [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, Vice President and Treasurer. Please go ahead.

Thank you and good morning. 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 to refer to the company’s filings with the Securities and Exchange Commission. This call is intended to be compliant 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. At this time, I would like to turn the call over to Jeff Edwards, Cooper-Standard’s Chairman and Chief Executive Officer.

Okay. Thank you, Glenn, and good morning, everyone. Turning to page four, I would like to start with a summary of our 2014 performance. Cooper-Standard’s sales continued to grow year-over-year in 2014 with a 5% increase more than one and a half times the market. We aggressively addressed operational challenges which resulted in improved adjusted EBIT DA margins by 200 basis points in the fourth quarter 2014. We also made good progress on improving margins in our sealing business with the objective of better aligning margins in this product line to our overall global standard. A major strategic event in 2014 was our agreement to purchase an additional 47.5% of Huayu-Cooper Standard Sealing Systems Company. This transaction is expected to close at the end of this month and upon completion, we will become the 95% equity owner of the largest Chinese automotive sealing manufacturer. Early in the year we successfully entered into a $750 million term loan to refinance our senior notes. The term loan was entered into with longer maturity, added flexibility and at favorable interest rates. Page five provides business and operational highlights from 2014, we introduced four innovations including Ultra Galfan, coating for fuel and brake lines, which opens up the Japanese OEM market in our Fuel and Brake business. We've already sold this product in our in-production. Our new Quick Connect technology with improved connections and added sensor capability resulted in book orders during 2014 as well. The company's ArmorHose compound is a breakthrough innovation that eliminates the need for protective sleeves on hoses, which reduces weight and enhances performance. We've also booked orders on ArmorHose. And finally, our New Fourtrax material revolutionizes sealing and hose products. This material reduces weight and in the case of sealing provides greater fit and finish is demanded by today's customers. As previously discussed we announced two important transactions that enhance our presence in Asia-Pacific, growing in the region, especially China is essential to our profitable growth strategy, given the growth of the auto sector there. In Europe, we acquired our partner share in our France JV, which will provide flexibility to manage the business more comprehensively. We also reentered Spain to participate in the automotive industry’s rebound in this part of Europe. Additionally, we completed the sale of our thermal and emissions business as part of our decision to focus on four core product lines across our company. Moving to operational highlights, total safety culture process was implemented and led to a 22% improved performance for the year. We also launched 102 new programs. We introduced our best business practice initiative to drive ROIC improvements across the business and rollout our Cooper standard operating system to standardize manufacturing processes, holding our global operations accountable to achieve a 30% year-over-year target GAAP closure in our best-in-class plans. Moving to slide six, we’ll look at our five-year revenue growth. Our profitable growth strategy and the investments in infrastructure that we've made in years 2012 through 2014 is yielding results as illustrated by our topline growth, which is outpacing the industry CAGR 1.5 times from 2012 to 2017. The key drivers of our sales growth include our ability to outpace our competition in winning global platform business; increase market share in North America and China; in North America, continue to increase our share and our core product lines with Detroit 3 and have made share gains with Asian and European transplants. As referenced earlier, we have developed new strategic partnerships especially in China and India to support our customers and capitalize on growth opportunities there. We’re commercializing breakthrough technologies and we have clearly declared our product line business strategies. The next slide provides a breakdown of our product line revenue in 2014 and customer growth over the next three years. As illustrated in the product line chart, we continue to experience significant growth of our largest segment sealing systems. However, our other three product lines continue to provide significant revenue growth opportunities will all customers in all regions. As we enter 2015, we remain committed to supporting our global customers, strengthening our operations, expanding our margins and enhancing shareholder value. I would like to now turn the presentation over to Allen Campbell, our Chief Financial Officer.

Thanks Jeff. On slide nine, we show our fourth quarter and full-year 2014 revenue by region as compared to previous year. For the quarter, Cooper Standard generated sales of $767.9 million, down 3.3% when compared to same quarter in the previous year, significantly affected by unfavorable foreign exchange of approximately $31.5 million. For the full year, sales increased by $153.4 million or 5% to $3.244 billion compared to $3.091 billion in the previous year, driven by 3% increase in global production volume, share gains in Europe and Asia Pacific and sales from our Jyco acquisition. These were partially offset by approximately $31.3 million, a negative foreign exchange, customer price concessions and the sale of our thermal and emissions product line. Our North America operations reported sales of $400.5 million for the quarter, down 6.1% from the prior year quarter, impacted significantly by vehicle mix, especially in the Ford F-150, the sale of our thermal and emissions product line, and unfavorable foreign exchange of $6.1 million. This was predominantly driven by a stronger U.S. dollar versus Canadian dollar. I will discuss the impact of the F-150 in the next slide. For the quarter, our European operations generated sales of $259.3 million. On adjusting for $22.7 million of unfavorable foreign exchange, our sales increased 4.5% from the prior year quarter as we gained market share in a relative soft market. In Asia Pacific, we continued to perform nicely, with sales up 19.2% in the quarter. In Brazil, we generated $36.4 million of sales, down 3.6% from the previous year quarter. With $1.7 million unfavorable foreign exchange, our sales were relatively flat, despite a 7.4% decline in vehicle production in the region. Sales from our non-consolidated joint ventures generated sales in the quarter of $128 million, up 17.3% from the prior year. On slide 10, we showed the content per vehicle on our top five platforms. As you can see, the Ford F-150 is our largest content vehicle. Production units were down 65,000 from 2013 significantly impacting our fourth quarter. As we entered 2015, the customers are projecting that their units will return to normal by the end of first quarter. Current projection for first quarter 2015 is for production to be slightly below fourth quarter units as the new bottle ramps up. Turning to slide 11, gross profit in the quarter was $117.8 million, or 15.3% of sales. This increased from $105.1 million or 13.2% of sales in the prior year quarter, primarily driven by favorable impact of our continuous improvement efforts, material cost savings, and increased production volumes. SGA&E for the quarter was $73.1 million or 9.5% of sales, compared to 9.1% of sales in the previous year quarter. On a full year basis, SGA&E was 9.3% of sales, as compared to prior year of 9.5%. As noted, operating profit for the quarter of $7.7 million was down from $14.6 million over the prior year, primarily due to non-cash impairment charges of $26.3 million and $3.6 million related to lump sum buyouts of certain terminated vested participants of our U.S. pension plans. These items were offset by favorable operational improvements and lower restructuring charges for the full year. For the full year operating profit was $164.5 million or 5.1% of sales, up from 4.6% from the prior year. On positive side revenue growth, gross profit expansion, lower restructuring cost, and gain on sale of our thermal and emissions product line contributed to the increase. These positive items more than offset the non-cash items mentioned earlier. We posted net loss for the quarter of $12.8 million. On a full year basis, we generated net income of $42.8 million or fully diluted earnings per share of $2.39. Net income for the year included $18.9 million after-tax cost in connection with our debt extinguishment in quarter two 2014. Adjusted EBITDA was $72.1 million in the quarter or 9.4% of sales, a significant improvement from our prior year quarter of $58.7 million or 7.4% of sales. Full year adjusted EBITDA was $311.5 million or 9.6%. In our last earnings call, we mentioned that we are still looking to achieve double-digit adjusted EBITDA in 2014 subject to certain headwinds. The magnitude of the impact of foreign exchange for the fourth quarter was unexpected. Additionally, Brazil and vehicle mix, which were issues at the time did impact us negatively for the quarter. On slide 12, we show a reconciliation of the $42.8 million net income to a $311.5 million adjusted EBITDA. Key adjustments for the year include one-time loss in connection with our debt extinguishment of $30.5 million, non-cash impairment charges of $26.3 million and adjustment for the gain on the sale of our thermal and emissions product line of $14.6 and $3.6 million related to voluntary lump sum payment to vested participants U.S. pension liabilities in addition to couple other normal adjustments. Slide 13 shows our full year cash flow. Our business generated $214 million in cash prior to changes in operating assets and liabilities. We utilized approximately $43 million to finance changes in operating assets and liabilities, which include our working capital requirements and investments in tooling. As of December 31st, we carried approximately $124 million in tooling our balance sheet, down from $156.2 million in the prior year. Our capital expenditures for the year were $192 million, as we continue to divest to support product launches in our strategic activities and growing markets. Overall, we ended the year with $267 million of cash on the balance sheet. The company’s other financial metrics continued to remain strong, with net leverage of $519 million, net leverage to adjusted EBITDA of 1.7 times and net interest coverage ratio of 6.8 times. Before I go into 2015 guidance, I’d like to point out few headwinds that are impacting our business. Foreign exchange movement may impact our business significantly, given that 73% of our revenues are generated outside the United States. We experienced high foreign exchange volatility throughout 2014, especially evidenced by the significant strengthening of the U.S. dollar versus the euro and Canadian dollar in the fourth quarter that continues into the first part of this year. North America sales were impacted by vehicle mix and some of our key platforms. The F-150 production volume, one of our key platforms was down 21.7% in the second half of 2014, compared to the prior year as Ford transition to their new vehicle. Normalized production level is anticipated to resume in the second quarter of 2015. We continue to face the challenging economic environment in Europe. Vehicle production level in Europe grew 3% in 2014 and is expected to range relatively flat in 2015. We continue to address our operational issues as we embark on a major restructuring effort and execute our footprint optimization strategy. South America, the combination saw economic growth, foreign exchange volatility and low vehicle production volume impacted our results in 2014. These trends like to continue for 2015 with vehicle production remain relatively flat. The team in Brazil is flexing to manage the overall impact and while continuing to gain market share. In the positive side, material costs have been favorable alike. Our next slide is our guidance for 2015. Our guidance assumes North American vehicle production of $17.4 million units and European production of 20.3 units. We also assumed an average exchange rate of $1.19 for the U.S. dollar to euro and $0.84 for CAD to U.S. dollar. Cooper-Standard expects revenue for 2015 to be in the range of $3.3 billion to $3.4 billion. We are seeing slightly lower revenue growth in 2015 due to the timing of some of our new launches, foreign currency headwinds and the absence of sale from our thermal and emissions product line. Regionally, Asia will show significant growth during the year, well, Europe and Latin America will still continue to struggle. Investments will continue into 2015. The capital expenditures expected to be between $185 million and $210 million. But the main capital expenditures driver is being 2016 launches, production relocation at Serbia and our strategic activities in China and rest of Asia. As previously announced we will be continuing our restructuring efforts in Europe as we move production from west to east, which will account for the majority of our cash restructuring cost in the range of $35 million to $45 million in 2015. Cash taxes is project to be between $45 million and $55 million, as we are now tax payers in North America and in some European countries, and as Asia becomes increasingly profitable. Our continuous operating improvement in Sealing production and the application of Cooper-Standard operating system and best business practices will expand our adjusted EBITDA margin by 50 to 75 basis points in 2015. Now, I’d like to turn the call over to Melissa to open the line for questions. Melissa?

Thank you. [Operator Instructions] Our first question comes from the line of Dan Dolev with Jefferies. Please go ahead.

Hi, thanks for taking my question. On revenue, what you are guiding today versus what you guided in January, is it really just FX that’s the -- causing the difference between two numbers -- between the 3.4 to 3.5 and then 3.3 to 3.4 makes sense, just wanted to confirm?

Yes, that’s exactly, right. That’s the only difference.

Okay. Thank you. So your outlook of the overall production globally has remained unchanged?

That’s correct.

Okay. Great. And then, your EBITDA margin at 9.6 for the year that as said on the call that’s a little bit light of what you expected and you had some explanations for that. What makes you think you can actually accelerate EBITDA growth in so from 30 basis points year-over-year in '14 to 50 to 75? Can you maybe quantify some of the moving parts you think you can get there?

Yeah. I think, Dam, this is Jeff. I think the first thing is from an operations perspective, we’ve really stabilized our business in North America. There are no surprises there. So I think that’s the first thing. Secondly, as Allen mentioned, the F-series is very important to us. We’ve been basically from October through really what will be our -- the end of our first quarter, you can figure that’s about 50% of the volume given how they launched the business from October through the end of March. So from April on, we will have a 100% of the F-series volume, which we expect to be very good by all indications. And we also provide you additional detail, the content per vehicle that we have on F-series which is very strong for us. So that’s’ -- those are two big reasons. The third one I would tell is our launch, the heavy complicated launch is that we went through really the last year and half or so, although we have a number of launches, I wouldn’t put them in that category for 2015. So I think the risk associated with launch like we had last year turned out in Europe, we feel a lot more confident. And then finally, the point Allen made is related to our manufacturing operations. We have launched our best business practice tool, which will allow us very easily to track the performance of our plants in terms of material, labor variable and fixed overhead and really transfer best practices much easier from plant to plant and allow a -- we think a much more aggressive approach to getting the money of our shop floor and into our packet frankly as it relates to those key cost drivers. So those are all I think the reasons why we’re as confident as we are heading into 2015.

Okay. And then maybe just like lastly like a very longer term question in the work that we’ve done in our -- learning about your company. The one thing that kind of stood out is that the significant efficiency versus your peers and I just wanted to -- our view was that this is not something that’s structural, that something that’s flexible. Maybe you can, do you have a view of where you could be in terms of efficiency versus your peers, two, three, four years down the road. Is there -- do you think it’s structural, do you think there is something that can be done there?

Dan, I think we’re poised with the investments that we’ve made. The leadership that we brought into the company in Europe and in Asia strengthened the team in North America. We are in very good shape from the standpoint of leadership and the experience in their ability to manage all aspects of the business. That’s probably not where we were couple of years ago frankly, so that’s an improvement and gives us confidence moving forward. I think some of the operating issues that we’ve spoken very transparently about were a result of launching some new technology within the sealing business that drove some performance issues within the company. We believe we’ve got our arms around those at least technically. There is still certainly some pricing challenges but we’ve been able to overcome some of that. And I think it’s a much more sustainable platform that we have now heading forward. So I think what we’re trying to do here is give guidance on the margin expansion that we see in 2015. Certainly there is a lot of runway there as we keep going. And I’m confident that we’ll continue to meet and exceed expectations in regard to margin expansion.

Okay. Thank you very much.

Sure.

[Operator Instruction] There are no further questions in queue at this time. This concludes our conference call. You may now disconnect.