Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Fourth Quarter and Full Year 2019 Earnings Conference Call. [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.

Thanks, Latif, and good morning, everyone. We appreciate your continued interest in Cooper-Standard and we thank you for taking the time to participate in our call today. 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 Jon Banas, 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 Slide 3 of this presentation and also to the company's statements included in periodic filings with the Securities and Exchange Commission. This presentation also contains non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures are included in the appendix to the presentation. With those formalities out of the way, I'll turn the call over to Jeff Edwards.

Thanks, Roger, and good morning, everyone. I'll begin this morning by putting some context around our fourth quarter and full year results. Conditions in the world's top auto markets remain challenging. Production of light vehicles globally declined by approximately 6% in 2019, negatively impacting every major region. In our top market, North America, light vehicle production was down by nearly 4% for the year and more than 8% in the fourth quarter. The decline was not in part due – the decline was in part due to the UAW work stoppage at General Motors. The production was also down for most of all other OEMs. In China, light vehicle production was down by more than 8% for the year, as estimated by IHS. Production levels for our customers and some of our top platforms were down disproportionately versus the overall Chinese market and industry production was down in Europe by more than 4% for the year. In the context of the weaker production environment, demands for increased price concession continue and commercial negotiations remain challenging. In addition, despite lower production in the automotive market and other industries, commodity costs remain high throughout the year, creating a $29 million headwind. Finally, adding to the new – adding to the normal market impacts, the discontinued customer relationship in China that we spoke about last quarter in the protracted UAW strike had a combined $22 million one-time negative impact on our results in the year. We believe that the challenging market conditions that have persisted for the past 18 to 24 months are the new normal for the auto industry. In an environment of slow to negative growth, we have to be more focused than ever before on improving efficiency, providing world-class quality, service and innovation to our customers and driving the business…

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some additional detail on our quarterly and full year financial results, and put some context around some of the key items that impacted our earnings. Then, I'll provide an overview of our outlook for 2020. On slide 8, we show a summary of our results for the fourth quarter and full year 2019 with comparisons to the prior year. Before getting into the details, a quick note that the financial results has provided in the press release and this presentation include adjustments to previously reported periods. As we disclosed in our Q3 results and Form 10-Q, we identified errors related to the timing of recording of certain pricing matters with customers in the Asia Pacific region. During Q4, we concluded that these amounts would be material to 2019 results, and therefore, determined that it was necessary to adjust previously reported periods. Further information on the impact of this revision will be included in our Form 10-K, which will be filed in the next day or so. Fourth quarter 2019 sales were $726 million, down 16.6% versus the fourth quarter of 2018. The year-over-year change was driven by the sale of our AVS business unfavorable volume and mix in North America and Europe, the UAW work stoppage, foreign exchange and customer price reductions. These were partially offset by improved volume and mix in Asia, and increased sales from recent acquisitions. Gross profit for the fourth quarter was $65.5 million compared to $110 million in the same period a year ago. Adjusted EBITDA was $25.7 million or 3.5% of sales compared to $75 million in the fourth quarter of 2018. The most significant drivers of the decline in adjusted EBITDA were unfavorable volume and mix in all of our…

Okay. Thanks Jon. Before concluding our discussion this morning, I want to share a few thoughts regarding the key strategic imperatives that we believe are critical for delivering sustained value for our stakeholders. I will also share some updates relating to our innovation, diversification, and cost reduction initiatives. So, let's move to slide 14. Our Board of Directors and global leadership team recognize and embrace the responsibilities we have in relation to a diverse set of stakeholders; including our customers, our investors, our employees, suppliers, and the communities, in an environment where we live and work. It's not simple to balance them all, especially when our key markets are impacted with significant volatility. As we entered this New Year, we've aligned our entire global organization around six strategic imperatives that we believe will help us drive improved results and increase value for all stakeholders in both the near and longer term. These imperatives include world-class culture, diversification and innovation, maximization of cash to maintain a strong and stable balance sheet, improving returns on invested capital, profitable growth, and in the longer term, prudent industry consolidation. We don't have time to go into each of these areas this morning, but I will try to relate at least some of the imperatives to our 2020 outlook in the next few slides. So turning to slide 15, the imperative that serves as the foundation for all others is world-class culture which naturally includes impeccable ethics. It's impossible to run an organization successfully without talented people and integrity as its foundation. It's also impossible to attract and retain the right talented people without a corporate culture that they want to be part of. We're proud of the way our corporate culture has evolved and progressed over the past several years and we are proud…

[Operator Instructions] Our first question comes from Justin Clare of ROTH Capital Partners. Your line is open.

Hey guys, thanks for taking my questions.

Good morning, Justin.

So first off, I was wondering if you could speak about how you see profitability trending as you move through 2020. It looks like launches are likely to be more heavily weighted toward the back half. And you're continuing to work through some additional cost initiatives here. So should we anticipate revenues and margins moving higher through the year here?

Yes Justin, this is Jeff. I think as we've talked about a couple of important lane ways here to improve the overall profitability of the business, I think clearly the supply chain initiative that we talked about, over the next few years is going to continue to allow us to claw back some of the material economic inflation if you will that have suppressed the margins over the last 18 months or so. So that's the first thing. The second thing is around pricing. And when you think about all of the net new business that we continue to talk about quarter-after-quarter including the amount of innovation that's being booked by the company, we're very confident that the price points of that business certainly allow us to exceed the cost of capital for the company or we wouldn't be booking those orders. And then finally, if you think about all of the restructuring that we've done and the Cooper-Standard operating system that continues to improve the overall efficiency and effectiveness of our plants and of our organization in total those things will continue to contribute as we go forward. What we expect is to continue to deliver world-class execution for our customers and create a demand for Cooper-Standard to be their supplier of choice. We mentioned earlier that we have to address the industry consolidation issue. That's not going away anytime soon. It will continue to provide some type of weight if you will on pricing. However, I'm sure that our customers would agree the long-term health of the suppliers in this segment need to be addressed, they need to be addressed soon. So that's the way I'd answer the question.

And Justin, it's Jon, if I could add just a few more points here. When you talk about the quarterly cadence, clearly Q1 will be the most depressed in terms of profitability, just given the coronavirus situation for us that I mentioned on the call earlier. And you are right, the launches kind of build throughout the year, so you should see a sequential improvement going forward each quarter in profitability.

Okay. Thank you. And then you indicated that general inflation is expected to be a key factor here affecting your EBITDA margins in 2020. Can you talk about where you are seeing this inflation more specifically? Is this across all regions? Or is it affecting either Europe or China or North America, more than other places?

Justin, it's John again. It really is across all regions. When you think about normal step-ups in rent, in utility bills, a lot of these in regions around the world are pretty significant year-over-year for us. And then like I mentioned in my prepared remarks, the compensation-related factors is a significant portion of the inflation as well. So when you think about a global average of -- I don't know about the exact magnitude about 3% to 5% of wage inflation coupled with the incentive compensation related matters then that makes up a significant portion of the 270 basis points of inflation that we'll see on the margin pressure. In round numbers around $80 million in total across all those buckets I described.

Okay, got it. And then in China, obviously, the situation is still evolving here. But can you share what the current status of your plants are? Are you fully ramped up with production? And then are you seeing any disruption right now to your supply chain that is affecting your manufacturing outside of China?

Yeah, Justin, this is Jeff. From a big picture point of view, I think certainly we're nowhere near back to normal as it relates to our plants and our customers' plants. In fact, I just saw an announcement this morning of a couple of customers that delayed start-up until March 10th. So this is a very fluid situation. We're very fortunate to have an incredible local Chinese management team in place in that region who is doing just a great job for us to address some of the things that you just mentioned in terms of supply chain being cut off from certain parts in certain regions of the country is affecting everyone. And so our team is doing a marvelous job working 24/7 to get our businesses to a point where we can support whatever our customers are requiring us to do. And so far so good. The issue frankly is going to be over a period of the next couple of months, how soon do we return to at least the new normal in China. Frankly, I think delta probably got it right. So towards the end of April would be my guess at this stage if you ask me to give you a date.

Okay. Thanks guys.

Thanks, Justin.

Thanks, Justin.

Thank you. Our next question comes from Michael Ward of Benchmark. Please go ahead.

Just following up on the last question about China. So I think, Jon you mentioned that $50 million of revenue in the first quarter is your current assumption being lost?

Yeah, Mike that's the ballpark figure we're seeing right now. But again just frames Q1. We haven't looked beyond that.

Right. No that's fine. And then on top of that, you said that for the year it was roughly 60 basis points impact on EBITDA, so about $20 million in that ballpark. Can you talk about just some of the things and Jeff maybe from your perspective from being there for so long? What is causing that big of an impact on the profitability side?

Mike, I'll go first and then Jeff can add his expert insights. When you looked at the impact overall, even though we're not fully producing, we're still paying the workers their full-time wages. So that's going to be a drag even though, we don't have the top line revenue to support the ongoing cost base overall. And that's really the big picture. For us certainly, health and safety of the workers comes first. So, we're spending any money we need to keep workers healthy and safe, as they come into work every day. So between those two things that's why you see an outsized profit impact on that $50 million of revenue.

Okay.

And Mike from my side of it, what I see is continued incredible work ethic as you would expect focused on doing everything that is possible given the constraints of this situation. So there's a resolve that certainly exists within the entire workforce there that we continue to be extremely proud of. But like many things some things you can control and some things you can't. So as Jon just said, the primary focus for us is the health and safety of our employees. And then second, how do we support our customers as quickly as they need us to do it. And the first quarter is going to be really, really tough. As I mentioned before, probably will extend into the early part of the second quarter is my best guess at this stage, but we aren't really in a situation that's trying to put any numbers around that. So that's sort of a personal opinion based on what you asked me.

Right. Appreciate that. When it relates to this $450 million of new business and then another $380 million from recent innovations, is there anything – when you look at the new business from these recent innovations. Some of that has already started to kick-in in 2019 and 2020 correct?

Yeah, Mike. That's correct. These can be running changes, where we're able to replace existing or legacy technology with new innovative.

On Fortrex sealing. Now are the margins on those new programs below historical levels? Is there a learning curve? Is there something that we need economies of scale just like taking with Fortrex sealing I think you had one or two start-ups in 2019. Now, it sounds like you have two more programs starting up in 2020. Is there a learning curve so to speak on the margin side of it? Is that something that's pressuring margins as well? Or is it all – a lot of these kind of one-off circumstances beyond your control like with the Board?

Mike, this is Jeff. So you asked a lot of questions in there. And so let me try to divide those up. So first of all, there is a learning curve associated with launching Fortrex like, there would be in any factory. That's why we chose to go forward with sort of one at a time rather than selling it to all customers at once. We are learning and we are improving and as we learn and improve, I do expect margins for that business will continue to expand. I think it's also important to note that, we did receive for the Fortrex chemistry in the raw material, if you will the type of pricing improvement over the outgoing product that we had always expected. So it's our responsibility to continue to reduce the cost from a manufacturing point of view, so that that margin expansion is as good as it can be and so far so good. We are really pleased the teams are working extremely hard. As you know, it has been well publicized the first launch with Ford given all the challenges with Explorer, it didn't help anyone it didn't help us certainly not last year. But hopefully, most of that's behind us. And as we head into 2020 we can reap the benefit of much smoother waters to sale.

Okay. And just lastly on this – some of the advanced technology. It looks like those appliances are new to the game. I assume that chart on page 18 those are industries or different programs where you have license agreements. Is that a fair statement?

Yeah, Mike. The appliance side of the business which you're familiar with – with our ISG business and the acquisition that we made with Lauren combining that with the Cooper ISG business historically that's what that is intended to represent. So that's the business that today is generating just under $300 million of revenue for the business, when you combine the Cooper ISG with the Lauren Manufacturing business, that we acquired last year.

Okay. And you feel -- still feel confident that in 2021? Or at some point, leading into it, we can start to see meaningful revenue starting to come in for some of these non-automotive type programs on the advanced technology group. That's all.

With -- I guess, let's separate the two.

Yeah.

So within the advanced technology group you have ISG that continues to perform well. The compounded annual growth rate of that business going forward is, just under 10%. The AMS business which you're I think referring to as well. That's a little bit longer-term view. What Jon and I have said, as it relates to external reporting of any details around ATG, that's going to have to be, still a few years out. If not, we'd be disclosing pricing of each client, as we launched our business. So, we'll be able to talk to you more as we go forward about, what we think the profitability of that business has a chance to be. But in terms of reporting it, Mike, you're going to be out into the probably the 2023 timeframe before -- towards the end of 2023, I said publicly, before you were going to think about disclosing, the type of detail that you talked about. But, we do expect to over the time between, let's say, the end of 2021 through 2023, we will be launching, more and more of that type of business, on the heels of these license agreements that we've signed, in 2019. And we expect to sign more in 2020. So if you think about, a 24-month period of time, as you get into the labs and develop the product that they need. And then, settle on the pricing. And then, develop it and get it into production. I mean that's going to be probably a, 24-month on average time period to get it, where you're actually generating revenue and earnings. So hopefully that will...

Right, but some of those license agreements are almost 12 months old? So we should -- we're getting closer to some of those starting to turn into...

Yeah. Yeah, starting to -- we haven't -- and let me just be real clear. In every one of those that are in that 2019 bucket. I mean we still haven't established pricing, on any of them yet. So that hopefully helps you understand where we are in the process. So it's impossible for me to even give you an indication of the revenue and earnings, when we're still in price negotiations.

All right. But, there hasn't been anything that, suggests that it would be a step back, you're still -- they're still pressing forward with the development side of it?

Yeah. I mentioned in my prepared remarks that we're actually investing in additional tooling and equipment to help, speed up the development process, because there's just such a demand there that we need to address. And so, you can imagine if we're spending capital, I can assure you, it's real.

Sounds good. Thank you. Okay. Thanks very much.

Thanks, Michael.

Thank you. [Operator Instructions] Our next question comes from the line of Glenn Chin of Buckingham Research. Your line is open.

Great. Good morning, gentlemen. Thanks for taking my question. So there are several factors that impacted your results, in the back half of 2019. We have the strike slow Explorer launch, pricing dynamics within the industry, et cetera. But I don't see them reflected in your 2020 guidance walk. Should one expect the non-recurrence of those factors to be a tailwind, in 2020?

Hey, Glenn, it's Jon. Yeah. It's a good question. But the -- there will be a tailwind to some extent when you think about the GM strike. However, as Jeff just talked to you a little bit about, Explorer, where we're still seeing that below the planned levels where we had anticipated. And it's certainly below the levels of the prior model that was still being built in Q1, of last year. So, it won't be as significant of a tailwind as you would imagine if they're still figuring out all three shifts there on the Explorer and working through efficiencies there. We're just dealing with what we've got in the plan levels for right now, on Explorer. And then what you don't see on the guidance walk, if you will, is pricing and other kind of normal headwinds for us that are kind of eat into the good news on the GM strike going away.

Okay. And then, free cash flow, so it's expected to be positive this year. But on, presumably, lower implied net income. So, I mean, first on CapEx, it's going -- the guidance you offered implies slightly -- that slightly less than 5% sales. So my question is, is that sustainable? And is that maintenance level?

No, it's not -- that's not just strictly maintenance level. In fact, most of that is program-specific related. You always have maintenance included in that bucket, but I would call it over 70% program related and the rest is regulatory health and safety, or ongoing maintenance-type activities. So we think that's a sustainable level. With a lot of the restructuring activities that we've taken around the world, there's a certain focus to repurpose and reutilize/refurbish equipment and move it around the world as best we can. So that is helping us be a little bit more disciplined on the capital spending side of things as well, Glenn.

Okay, very good. And then, so more broadly on, going back to free cash flow, how it will be positive this year, presumably working capital will be a source of cash. Can you just talk about the levers that you have left there at pole, Jon?

Sure. The team is continuing to take days out of inventory and march towards a world-class level. The world-class bogey is about 14 days on hand and we ended 2019 with a touch above 21 days. So there's significant opportunity for the team to continue to sequentially draw down those inventory levels and put cash on the balance sheet. Similarly, with the supply chain optimization initiatives that Glenn -- I'm sorry, that Jeff talked about earlier, we're looking to commonize days payable around the world as well. And for us, every day payable is about $7 million of cash for us. So I think we racked up to about 55 days of payables right now, globally. And, in fact, it increases like we think it will, that can be a nice source of funds for us overall. So those are the two big levers we have there. There is, of course, the other piece of the equation is the accounts receivable side, not much leverage we have as far as collecting the normal receivables, but we are optimistic on the tooling side, to not leave that money on the balance sheet for too long.

Okay. So on payables, Jon, you said you guys are at 55 days globally?

Yes, that's an approximation of 55 days globally. Yes.

Okay. And what could that get down to, potentially?

Well, the longer-term goal is to actually get it up to about 60 days, would be the longer term goal for us. But that won't happen all this year. But every day, like I said, is $7 million. So the team is working very hard to standardize those terms with suppliers around the world and really drive that number up.

Okay. Very good. That’s it for me. Thanks.

Thanks, Glenn.

Thank you. Our next question comes from Josh Taykowski of Credit Suisse. Please go ahead.

Hey. Thanks, Guys. Just a couple for me. Just a follow-up on working capital. Just trying to get a little bit more granular on what you think ballpark inflow for 2020 could be?

Josh, I'll just defer the answer to that question. We don't give that level of detail. This is kind of actually the first time we've come out with guidance on free cash flow, even directionally. So I'll just leave it at that, that we'll be free cash flow positive for the year.

Okay. That's fair. Next question, just more broadly, obviously, a lot of cash on the balance sheet. Any near-term plans for that cash?

Now, what we always talk about, Josh, is continue to invest in innovation. We've been very successful with that. Certainly, restructuring, we've talked about some of that this morning as well. As we think about the industry consolidation that has to take place within our segment. And we don't have anything planned but that's one of the other buckets that we want to maintain a very strong cash position as the market continues to take a break here and we see downward pressure in all major regions. We want to be in an offensive position this time when that occurs so that we can help our customers figure out how to clean up this mess. So those are some of the things that we're doing.

Got it.

And Josh just a concluding thought for me. It's Jon again. Just given the industry dynamic and volatility, no other plans on the capital side of the balance sheet that we would contemplate this year with the cash we've got on the balance sheet.

Sure. Okay. And then I guess the final one for me. The two additional facilities you've got targeted now for closure by 2021, it looks like those are two seemingly larger facilities versus the other 10 that you've kind of targeted throughout 2019. Any additional color on kind of what the volumes look like in those two facilities?

Yes just generally certainly customer-driven is one reason. And then the second one as we continue to streamline and consolidate and get more efficient, we don't need as much space. So the combination of both of those things.

Okay. That’s it for me. Thanks, guys.

Thanks, Josh.

It appears there are no more questions. I would now like to turn the call back over to Roger Hendriksen.

Okay. Thanks, everybody. Again we appreciate your continuing interest in the company and we appreciate you joining our call today. If you should have other questions, please feel free to reach out to me in the coming days. Thanks again for joining. This will conclude our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.