Cooper-Standard Holdings Inc. (CPS) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. And welcome to the Cooper-Standard First Quarter 2016 Earnings Conference Call. During the presentation, all participants will be in listen-only mode. Following company's prepared comments, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded and the webcast will be available for replay later today. I would now like to turn the call over to Roger Hendriksen, Director of Investor Relations.

Thank you, Madison. And good morning everyone. Thanks for taking the time to participate in our call this morning. We appreciate your continued interest in Cooper-Standard. The members of our leadership team who will be speaking with you on the call this morning are Jeff Edwards, Chairman and Chief Executive Officer and Matt Hardt, Executive Vice President and Chief Financial Officer. Before we begin, I need to remind you that this presentation contains forward-looking statements. While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable, these statements do involve risks and uncertainties. For more information on forward-looking statements, we ask that you refer to the slide three of this presentation and the Company statements included in other periodic filings with the Securities and Exchange Commission. With that said, I will turn the call over to Jeff Edwards.

Okay. Thanks, Roger, and good morning everyone. We are certainly pleased to again report record quarterly performance. The first quarter of 2016 marks the sixth consecutive reporting period in which we've delivered year-over-year improvement in adjusted EBITDA and adjusted EBITDA margin. We reached a record high $862 million in sales for the quarter, up nearly 8% compared to the first quarter of last year. Excluding the impact of foreign exchange rates, sales were up more than 11% year-over-year. We continue to see strength in the North American markets as well as in China and Europe. Production increases of light trucks and SUV's combined with the launches of our new business continue to drive a favorable mix. Adjusted EBITDA for the quarter was $104 million which was also a record high for our company, up more than 28% compared to the first quarter of last year. The increase was driven by improved volume and mix as well as our continued success in implementing our Cooper-Standard operating system in best business practice tool in our facilities around the world. As a percentage of sales adjusted EBITDA for the first quarter of 2016 was 12%, that's up 190 basis points when compared to the first quarter of last year. We also had an excellent quarter in terms of free cash flow with a $34 million improvement versus the first quarter of last year. And Matt will have more details on that in a few minutes. Our operating teams continue to do an outstanding job of executing our plans and strategy. Launching new products efficiently and providing outstanding service to our customers. We certainly want to thank our 30,000 employees around the world for their engagement and driving our record results this quarter. Slide 6 breaks out the key drivers of our revenue growth in the first quarter. Market share growth and improved industry volume and mix contributed $75 million in incremental sales in the quarter. M&A related items including the Shenya acquisition offset by the sale of our hard coat plastic trim business added approximately $22 million. The total FX impact was a negative $28 million. On slide 7, we compared our adjusted EBITDA results in the quarter to the same period a year ago and then we breakout some of the key drivers of our record performance. Again volume and mix were favorable in the quarter driving $21 million in adjusted EBITDA improvement year-over-year. Our improved operating efficiencies resulting from the roll out of our world-class operating initiatives added $80 million in EBITDA compared to the first quarter of 2015. This is on track with our plans to deliver a $100 million in operating savings in the full year. These incremental operating efficiencies will be achieved as we roll out our best business practice tool in our fuel and brake delivery and our fluid handling system facilities during the course of this year. And we'll continue applying the tool within our sealing plants that we began rolling out over a year ago. Overall we generated nearly $104 million of adjusted EBITDA for the quarter or 12% of sales and that's up 190 basis points over the last year. Moving on to slide 8, we've established a culture of innovation and operations excellence within Cooper-Standard that really is a driving force behind our improving results. And slide 8 here shows some of the highlights in the major operating measures and accomplishments in the first quarter. We are very proud of also received 11 major customer awards in the quarter for product quality, service excellence and new product launches. During the quarter our global workforce was busy launching 70 new programs. The launches have gone very well and should add further to our favorable volume and mix in the future quarters. As I mentioned before we are able to deliver $18 million in improved operating efficiency during the quarter. This is a significant accomplishment in any quarter, but it is even greater achievement given the high number of program launches that we had here in the first quarter. Our product quality continues to improve as well and does our performance in total safety culture. During the first quarter our PPM rate improved 81% compared to the full year 2015 rate. In terms of safety our total incident rate improved by 17%. Finally, during the first quarter we were awarded a $167 million in new business. Nearly all of which is on global platforms. Our advantage to global footprint, world-class operations, innovation in technology all played key roles in the new business wins. Each of our key regions made measurable contributions to achieving the record results in new business wins in the quarter. It was certainly an outstanding effort by our global team. Moving to slide 9. We are very pleased with the progress that we are making in bringing our newest innovative products to market, to-date we've booked nearly $108 million in annual sales of these new value added products. Started production dates in this business range from late 2016 to the first quarter 2019. We've also entered into four development contracts for Ford trucks sealing products. Two of those contracts are with North American OEMs and two are with European OEMs. In each case they are focused on high end platforms that require some of the most stringent standards in terms of technology, quality and performance. In addition to the contracts that we have in hand, we have a significant number of pending open quotes and additional targeted quotes that we expect to submit throughout this year. We are optimistic that is pending and targeted quotes will drive new business awards in the relatively near future. We are also exciting about the pipeline of additional innovations that we have in development which continue to add value for our customers and drive a competitive advantage for Cooper-Standard in the coming years. As we move to slide 10. Over the past 1.5 years we've began to see the positive impact of our operating plans and strategy that we have put in place. We are successfully differentiating Cooper-Standard from a competition with our advantage global footprint, the new technology and innovation, our improved product quality, our launch performance and certainly our customer service. All of these differentiatiors made possible by creating a culture that attracts and retain some of the top talent in our industry and establish as a truly engaged workforce that's committed to excellence. The results are increasingly evident as we win more business on high volume global programs, increase content per vehicle, expand our margins and grow our top line at a rate that significantly out paces total industry like vehicle production. So that point the chart and table on slide 11 reflect the acceleration of our revenue growth as we continue to execute our strategy. In 2013 our revenue growth rate adjusted for exchange rates and acquisitions or divestitures was 1.2 times the global industry growth rate. In 2015, our growth rate was 3.3 times the global industry and in the first quarter of 2016 our adjusted growth rate was 6.5 times the industry. So we are growing the top line or expanding margins, driving significantly improved cash flow. The markets we serve are large and very fragmented and we believe the opportunity for us to continue to grow and gain market share will be significant for many years to come. Now, let me turn the call over to Matt for some more details on our financial's.

Thanks Jeff and good morning everyone. In the next few slides, I will provide some additional color on our financial results for the quarter and I also want to comment briefly on the evolution of our ownership structure in our trading volume. If you turn to slide 13, you see a summary of our results for the first quarter of 2016 compared to the first quarter of 2015. First quarter of 2016 sales doubled $862.5 million which is a record high for any quarter in our history and represented an increase of 7.8% compared to the first quarter of 2015. Excluding the impact of foreign exchange the sales increase was 11.3%, gross profit was 18.5% of sales and that's up 210 basis points year-over-year. Our adjusted EBITDA, as Jeff mentioned, was $103.6 million for the quarter which was also an all time record high and 12% of sales this was an improvement of 190 basis points over last year. Our net income of $30.6 million included restructuring as well as underwriting fees and some other expenses associated with our secondary offering and share repurchase in March. When you exclude those items our adjusted net income for the first quarter was $47.4 million or $2.54 per diluted share compared to $29.7 million or $1.63 per diluted share in the first quarter of 2015. This represents an EPS increase of 56%. Our CapEx for the quarter was $55.1 million. This is in lined with our plan for the full year which was somewhat front end loaded, due to the high level of new program launch activity we have in the first half of this year. If you turn to slide 14, we show how we are continuing the positive trend and adjusted EBITDA on a trailing 12 months basis going back to the third quarter of 2014 which is essentially when we began the implementation phase of our current operating strategy. We believe this is a clear indication that we are headed in the right direction, moreover we believe that there is more up side opportunity for us going forward. Free cash flow for the quarter improved $34 million compared to the first quarter of 2015. The improvement was driven primarily by improved operating income as well as our continued focus on working capital improvements. Now because of the seasonality of our business and the timing of our required capital expenditures for our customer ongoing. This is typical to have a negative cash flow in the first quarter. But we are pleased with the improvement. As we continue to aggressively execute on our plans to improve our margins and capital utilization we expect our ROIC to continue to improve. We exited 2015 with 9.7% ROIC, up 290 basis points from 2014 and close to 400 basis points over the past 2 years. For 2016 we expect to achieve an ROIC North of 10% and using the Bloomberg methodology our Q1 ROIC was around 10.5%. So it's a nice positive trajectory here as we - in the first quarter and going to the second. If you turn to slide 15, the combination of our strong operating performance and our continued focus for executing on our cash strategies has improved our overall credit profile. We ended the first quarter with total liquidity of $450 million that's what cash increasing by 61% compared to the first quarter of 2015 to $330 million. In addition to $137 million available on a revolver. We believe that with this liquidity and the future cash we expect to generate from ongoing operations. We have significant financial flexibility to fund our profitable growth strategies going forward. We have a moderate amount of debt outstanding with $778 million at relatively low interest rates and there are no significant maturities until 2021 and when considering our cash balance we ended the first quarter with net debt of $465 million, as our operations have become more efficient and drive increased EBITDA performance our interest in our debt coverage ratios has improved as well to 9.9 and to 1.2 times respectively. If you turn to slide 16, as we've transitioned into the execution phase of our strategy our results have improved and we've actively focused on increasing our visibility within the investment community. During that time we've seen a significant transformation of our shareholder base. The total number of Cooper-Standard shareholders has increased nearly 7 times and our average daily trading volume is increased nearly 10 times. Over the past 6 months Jeff and I have conducted nearly 100 meetings or calls with shareholders, potential shareholders and analyst. With Matt, I spoken with shareholders and aggregate own over 70% of Cooper-Standard shares. We are also pleased that our research coverage has increased to 4 analyst from zero three years ago and we look forward to expand it coverage as we move forward. With the added coverage and our proactive investor outreach efforts, we anticipate that the overall investor awareness of Cooper-Standard story will continue to improve. Now let me turn it back over to Jeff.

Okay. Thanks, Matt. In a few minutes that we have left I want to review our outlook and the guidance for the full year 2016. So as we move to slide 18, actually show the slide wanted to report of our fourth quarter results a couple of months ago. And I think it make sense to show it again because it provides a nice summary of our plans and objectives for this year. And we will continue the optimization of our global footprint with the integration of our Shenya operations in China. Also the continued migration form West to East in Europe. We'll also be adding one more production facility in China this year and that will support the expansion and the vertical integration of our fuel and brake delivery business in that region. We are also focused on successfully launching all of our 161 new programs in 2016 and that's about a 34% increase over 2015. And as we continue to roll out our best business practice tool in both our fuel and brake and fluid transfer system business we expect to drive an additional $100 million in cost savings. We also expect our top line growth to continue to outpace global light vehicle production. We will continue to aggressively manage our capital resources in 2016 by further optimizing working capital, maintaining capital expenditures closer to 4.5% of sales and minimizing the restructuring spend and continuing to implement our tax planning strategies. On slide 19, we provide you with our guidance and expectations for the year. We’re maintaining the same range as for guidance is provided with our fourth quarter results and we believe we are on track to meet these targets. However, in view of the positive first quarter performance we are leaning more toward the upper end of the ranges, more sales and EBITDA margin. So this concludes our prepared remarks this morning. Now, we would like to take the time to answer any questions that you may have.

Thank you. [Operator Instructions]. And your first question comes from the line of John Murphy with Bank of America Merrill Lynch.

Good morning, guys, this is Aileen Smith [ph] actually on for John.

Hi, Aileen.

Good morning, Aileen.

So just first question, based on your first quarter performance it still looks like your outlook for the remainder of 2016, may actually be pretty conservative especially as you guys posted a 12% EBITDA margin in the first quarter in your outlook. Only really costs for 11.3 to 11.8 and I know you guys said that you are leaning toward the upper end of the range. Is there something in the latter half of the year that would explain the sequentially margin compression, it does not really appear the 1Q the weakest in terms of seasonality for margins. So I just want to know if there are any particular launches or other headwinds that will be rolling in the second quarter and beyond.

No, we don’t. This is Jeffrey. We don’t anticipate that, but as I mentioned we've got a lot of going on obviously with the launches certainly with Brazil still being a challenge. As we sit here today, we just didn’t feel at the stage and so we just put the guidance out there that we were going to update it for this quarter. Last year we took a look at the end of the second quarter and made the adjustments for the year I would anticipated a similar approach this year.

Okay, great, that is helpful. And within North America you guys called out volume mix and raw MATS as some of the main drivers of the improved operating performance in the quarter. Can you break out explicitly how much each of those items accounted for? We are just kind of thinking about raw MATS and how big that how big of a tailwind of that was in the quarter and how we should think about that going forward?

I think balance for the year, Aileen. This is Matt. I mean raw MATS was favorable. Now, as we have discussed we do pass some of that from an index perspective back to the customers. So raw MATS did help us a bit in the quarter and a lot of that was offset as you know by price and in the U.S. we did have some headwinds due to FX as well based on the changing grades in Canadian dollar.

Okay. And then, just a final quick one. How should we think about your share repurchase program? You guys repurchased $23 million of shares in the quarter which is pretty solid. Is your strategy on share repurchases more opportunistic with the share price and M&A opportunities or is it in ongoing part of your capital allocation strategy?

Yeah, I think probably the ladder certainly as market dips occur we are prepared buy back shares that was part of the announcement that we put out here a couple of months of so I think that's how we would answer that Aileen.

Okay. So is there like a specific amount you’re planning to repurchase for quarter or losing rally model and then it does plan that does?

We haven’t specifically guided that way all. We are prepared as the fluctuations occur to buy back shares if that opportunity makes sense.

Okay, great, that is very helpful. I’ll pass it on.

Okay. Thanks, Aileen.

And our next question comes from the line of Glenn Chin with Buckingham Research Group.

Good morning, gentlemen and congratulations on a terrific quarter.

Thanks, Glenn. Good morning.

Can I ask you stripping out - I am just looking at organic revenue growth. So stripping out the Shenya acquisition, the hard coat plastic divestiture and then FX impact. I guess to about an 8% organic revenue growth number is that about right, can you explain that?

Yeah.

Great. And then…

That’s how we try to lain that out on page 11, we try to clarify that given some of the noise that is in the numbers today, Glenn.

Yeah, okay. Very good thanks. And then in the press release you mentioned [it's] $167 million in annual net new business awards. Can you talk about over which or many years that business rolls over?

Well typically, Glenn as we book new business for our timelines. We see it launch usually 2 to 2.5 hours out from when we book it.

Okay.

And at last over the program life, typically the program lives are 5 years or so. 5 to 6.

Very good. And then in Asia-Pacific, so the segment profit results implies the degradation in margin right because revenue increased almost 50% yet segment profit was relatively unchanged. Is that a function of lack of critical revenues MATS in the region or at one point do we expect to realize some operating leverage there?

Yeah you can Glenn. I mean when you take a look at the Asia-Pacific margins in particular. As we report the segment profits it's at earnings before tax basis. what comes into that figure in order to adjust that to sort of come up with an EBITDA look is there an interest charge that goes there that's essentially the equivalent cost to the fund the Shenya operations. There is depreciation in that figure. There isn't any restructuring. But that be the other bucket to get from segment profit to an EBITDA figure. Those numbers are in the queue in the K and when you take a look at that for Asia, and you strip out depreciation and the interest charge, you get to a low double-digit type of an EBITDA figure. And that number will continue to grow as we continue to drive top-line and fill up the factories that came with the Shenya acquisition in early 2015.

Okay very good. That's it from me and congrats again.

Thank you.

Thanks.

Thanks, Glenn.

[Operator Instructions]. And you do have a question from the line of Bret Jordan with Jefferies.

Hey, good morning.

Hi, Bret.

Good morning Bret.

On the fourth quarter I think you'd used a SAR guide or SAR estimate of 18.2 for your projections for '16 and I didn't see SAR estimate in this - Are you sticking about 18.2 or have you revised those numbers after Q1?

No. Bret we're still at 18.2 for SAR.

Okay and again what the sensitivity? Obviously you've got some platforms that are outperforming the industry average but SAR we're 17.5 and how much the delta in your projection?

That's a tough question. I think at the SAR with the 17.5 and the SAR in North America dropped with smaller automotives. It probably wouldn't have that demonstrable of an impact on us. If gas price they shut up in the SUV and the pickup truck market we're to go sideways that probably have a bigger impact on us given the level of penetration that we've got in pickup trucks and SUVs F-150 and the GM products.

This is Jeff. I would tell you that with the volume and mix that we've been talking about. We certainly are predicting that to shift substantially in anyway. In fact I think that the trucks and SUVs continue to forecast very, very strong mix and that obviously helps us and that's what we reviewed here with you this morning. I don't see that changing.

Great and question on the slide number 9. I guess in the last conference call you've talked about a couple of pending contracts in Ford trucks. Is that $108 million of booked business, is there any Ford trucks in that or is Ford truck is still sort of pending development contracts.

Yeah as I mentioned the four orders that we spoke of this morning on Ford Trucks. Those are development contracts .And the reason their development contracts is because we're working way upstream with the engineering folks the advanced engineering teams that get those Ford customers. And as the work is done and as the RFQs come on that business later then we'll be in a very good position. Having done all of the preliminary work necessary to prove out the product. So when the ready to source we're standing there for the order.

Okay great thank you.

Okay.

And it appears there are no more questions at this time. I would now like to turn the call back over to Roger Hendriksen.

Okay. Thanks, Madison, and thank you all for your participation this morning. We look forward to catching up with you in the coming days and weeks. If further questions come up please feel free to give me a call. Again thank you very much for joining.

And this does conclude today's conference call. You may now disconnect.