Cooper-Standard Holdings Inc. (CPS) Q4 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Fourth Quarter and Full Year 2021 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.

Thank you, Liz, and good morning, everyone. We appreciate your continued interest in Cooper-Standard and we thank you for takin the time to participate in our call this morning. 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 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. So, with those formalities out of the way, I’ll turn the call now over to Jeff Edwards.

Thanks, Roger, and good morning, everyone. We appreciate the opportunity to review our fourth quarter and full year 2021 results, and provide an update on our outlook for 2022 and beyond. To begin on Slide 5, I'd like to discuss some key data points that we believe are reflective of our continued strong commitment to driving sustained value for all of our stakeholders. For our customers, we continue to deliver world class results in terms of product quality, launches, and customer service. At year end, 98% of our customer scorecards for product quality were green. Our scorecards for program launches were 97% green for the year, even as we executed on 12% higher launch volume versus 2020. Even more importantly, we had another outstanding year for employee safety, which is always our top priority every day. For the full year 2021, our safety incident rate was 0.40 per 200,000 hours worked, well below the world class benchmark of 0.57. We're especially proud of our 23 plants that completed the year with a perfect safety record of zero reported incidents. When the automotive market gets tough, suppliers often have to deliver the same or more with less resources. This was certainly the case for us in 2021. In view of industry headwinds, we focused on further right-sizing every aspect of our business. As a result, we ended the year with nearly 10% reduction in headcount when compared to the end of 2020. While this reduction will drive necessary cost improvements for our current business environment, we also want to acknowledge and recognize the contributions of all of our hardworking, dedicated employees. We know that our employees are the heart and soul of the company, and are definitely a competitive advantage for Cooper-Standard. And that's true now more than ever during this unpredictable business environment as a result of the pandemic. Our continuous improvement and lean manufacturing initiatives, are the definition of doing more with less. During 2021, our manufacturing teams delivered $33 million in cost savings through these programs, which is an outstanding result when you consider all of the unusual challenges presented by volatile product schedules and lower production volumes. We also successfully reduced our SGA&E expense by $32 million compared to 2020, and realized $16 million in savings from our aggressive restructuring actions. So, in total, we delivered over $80 million in sustainable cost reductions for the year. By many measures, we had a very successful year, but unfortunately, strong industry headwinds of lower production volumes, volatile schedules, and unprecedented inflation, combined to offset our operational cost savings. Turning to Page 6, complementing our focus on manufacturing excellence, is our commitment to sustainability. We are consistently advancing our efforts and resource allocation on environmental, social, and governance initiatives. And we are seeing positive momentum throughout the company. From the plant floor to our product development labs and the boardroom, the progress we are seeing is encouraging and rewarding. Our progress in 2021 resulted in improving scores by multiple ESG rating institutions. In addition, our focus on transparency and reporting sustainability topics, placed us ahead of our aspirational comparative peer group in 10 out of 11 high priority categories. Led by our recently established Global Sustainability Council, we are quickly driving our ESG efforts beyond basic compliance requirements, to true strategic alignment within our business and with our stakeholders. We expect this improving alignment to be the key to enhancing long-term value and sustainability of our company. Now, I'll turn the call over to Jon to walk you through the financial details of the quarter and the year.

Thanks, Jeff, and good morning, everyone. In the next few slides, I will cover the details of our quarterly and full year financial results, put some context around some of the key items that impacted our earnings, and then provide some color on our balance sheet and liquidity, before talking about expectations for 2022. On Slide 8, we show a summary of our results for the fourth quarter and full year 2021, with comparisons to the prior year. Fourth quarter 2021 sales totaled $601.3 million, down 14% versus the fourth quarter of 2020. The decline was the result of lower volume and mix in all our automotive segments, as the semiconductor shortage and other supply chain issues continued to weigh on vehicle production. The volume and mix impact was partially offset by some positive customer price adjustments, in part related to our material recovery initiatives. From a more positive perspective, fourth quarter sales were an improvement of 14% when compared sequentially to the third quarter of this year. We were encouraged by the increasing production volume and improved stability in schedules that we saw in the latter part of the fourth quarter, and we are cautiously optimistic that these positive trends will continue. Adjusted EBITDA for the fourth quarter 2021 was $2 million or 0.3% of sales, compared to $57 million or 8.2% of sales in the fourth quarter of 2020. The year-over-year decline was driven primarily by increased material costs, the previously mentioned unfavorable volume and mix, higher wages, and general inflationary pressure across the board. Positive customer price adjustments were only a small offset to the inflation and volume pressures. On a sequential basis, we saw strong improvement of E36 million in adjusted EBITDA versus the third quarter of this year, an indication of how we are leveraging both the increased sales, as well as our ongoing cost improvements. on a US GAAP basis, we incurred a net loss of $102 million in the fourth quarter. This included certain non-cash asset impairments, non-cash valuation allowances established on net deferred tax assets. Excluding these and other smaller special items, we incurred an adjusted net loss of $50.3 million or $2.94 per diluted share for the fourth quarter of 2021. This compared to adjusted net income of $3.3 million, or $0.19 per diluted share in the fourth quarter of 2020. And sequentially, adjusted debt loss improved by 53%. For the full year 2021, our sales totaled $2.33 billion, a decrease of 1.9% versus 2020. The main driver of the decline was a divestiture of certain European operations in our India business on July 1st of 2020, as well as unfavorable volume and mix. These negative factors were partially offset by favorable foreign exchange benefiting the topline. Adjusted EBITDA for the year came in at negative $8 million compared to positive $35.7 million in 2020. Again, the key driver was significantly higher material costs, higher wages, and general inflation. Unfavorable volume and mix and the non-recurrence of certain COVID-related government assistance, also contributed to the decline. These negative factors were only partially offset by improved operating efficiency, lower SGA&E expenses, and the other cost saving and lean initiatives we have been executing. Full year net loss was $322.8 million, which included non-cash asset impairments, deferred tax asset valuation allowances, restructuring charges, and other special items. Adjusted for the net impact of these items, we incurred a net loss for the year of $222 million or $13.04 per diluted share. From a CapEx perspective, we ended the year at $96 million, or 4.1% of sales. This compared to CapEx of $91.8 million or 3.9% of sales in 2020, with the increase primarily related to higher program launches. Moving to Slide 9. The charts on Slide 9 quantify the significant drivers of the year-over-year changes in our sales and adjusted EBITDA for the fourth quarter. For sales, unfavorable volume and mix, net of customer price adjustments, reduced sales by $93 million. FX was a further negative impact of $3 million during the quarter. For adjusted EBITDA, lower SGA&E expense was a positive variance of $12 million compared to the prior year, and savings from restructuring initiatives added $5 million. These improvements were more than offset by $15 million of unfavorable volume and mix net of price adjustments, $30 million in increased material costs, and $26 million from wage increases, general inflation, and other items. Moving to Slide 10, for the full year, unfavorable volume and mix net of customer price adjustments, reduced our sales by $31 million. Divestitures further reduced sales by $65 million. Favorable foreign exchange was a positive partial offset of $50 million. For full year adjusted EBITDA, a number of positive factors benefited results, including $33 million from improved operating efficiencies, $32 million from lower SGA&E expense, and $16 million in savings from earlier restructuring initiatives. But these improvements were more than offset by $64 million in higher material costs, $41 million in higher wages and general inflation, $15 million related to the discontinuation of COVID-related benefits, and $7 million of unfavorable volume and mix. Moving to Slide 11. In terms of free cash flow, we experienced a modest outflow of $24 million in a quarter, essentially in line with our expectations. Our teams did an outstanding job of reducing inventory in our plans as production schedules began to stabilize, and of collecting and tooling receivables from our customers. This helped to keep net cash used in operations at just $4 million in the quarter, despite rising sequential sales. In addition, our continued focus on conserving cash, resulted in CapEx coming in at just $20 million, which was lower than what we had expected heading into the quarter. With cash on hand of $248 million, and an additional $148 million of availability on our revolver, we ended the year with total liquidity of $396 million. Given our outlook for improving industry trends and our successful execution of ongoing cost reduction initiatives, we believe this certainly provides adequate capital for the funding needs of the company. Turning to Slide 12. On this slide, we provide our initial guidance for 2022, along with our expectations for regional light vehicle production that forms the basis of our annual plan. For this year, we expect sales in the range of $2.6 billion to $2.8 billion, and adjusted EBITDA in the range of $50 million to $60 million. We believe these estimates are appropriately conservative, given the continuing uncertainties within our industry, and the macroeconomic trends in each of our key operating regions. We will continue to invest in our business conservatively in 2022, with CapEx expected to be in the range of $90 million to 100 million, which is similar to 2021. As a percentage of sales, this would put us at less than 4%, so continuing modest investment in the business, primarily to fund growth on our new customer programs. Cash restructuring in 2022 is estimated at $20 million to 30 million. The majority of this investment will be focused on further right-sizing of our operations and overhead in Europe, consistent with our driving value initiatives. The restructuring investment is expected to have a payback period ranging between one and two years. Finally, as reflected on our balance sheet at December 31, we anticipate receiving a tax refund of more than $50 million in 2022 related to prior year US income tax returns, Net of ongoing cash tax payment requirements, we expect a net cash tax refund of $30 million to 40 million for the year, which will further strengthen our already solid liquidity position. Moving to Slide 13. The chart on Slide 13 provides some additional detail around the main positive and negative factors impacting our 2022 adjusted EBITDA outlook. These are broad estimates based on current market conditions and our own assumptions for the remainder of the year, and reflect the midpoint of the adjusted EBITDA range we provided. We expect volume and mix, including customer price adjustments, to drive $130 million of improvement in 2022. The positive impacts of our cost recovery initiatives are also included here. With improving volume, we also expect to drive significant improvements in manufacturing efficiencies, adding approximately $70 million in adjusted EBITDA for the year. These anticipated gains in efficiency should be more than enough to offset expected increase in general and wage inflation, and even the planned normalization of incentive compensation in 2022. However, we still face an expected $70 million in incremental headwinds from material cost inflation this year that won't be covered through improved operational efficiencies. As mentioned earlier, we believe our initial guidance is appropriately conservative, given the uncertainties in the marketplace. Further, with recent announcements from some of our customers delaying production and continuing supply chain challenges, we believe such conservatism is warranted. We are factoring in the recovery of a fair or share of the higher material costs, but there are no guarantees on the level of recovery we will ultimately achieve. On the other hand, there is potentially some upside opportunity if production volumes come back stronger than expected in the back half of the year, or if material costs unexpectedly begin to moderate. Finally, let me emphasize that we believe we are in very good shape from a liquidity perspective. We have a solid cash balance, along with an undrawn revolving credit facility, and we anticipate sizable cash inflows from not only the tax refund, but also a sale lease-back of a non-core property to further bolster our cash balance during the year. As a result, we expect to have more than sufficient resources to continue our focus on growing our topline, expanding margins, and working with our customers to ensure that we're being fairly compensated for the cost and value of the products we supply. Based on the November 2023 maturity of our term loan B, we will likely be in the market later this year to refinance that tranche of debt. With a maturity date in 2024, the paydown of our senior secured notes is less of a priority at this point. That concludes my prepared comments, so let me turn the call back to Jeff.

Thanks, Jon. And before concluding our discussion morning, I want to share a few thoughts regarding our near term and longer-term outlook for the global light vehicle market and for Cooper-Standard specifically. Moving to Slide 15, our ability to cover the rapidly increasing costs we face from unprecedented widespread inflation, will certainly be a key factor in our success this year. We've significantly leaned out our cost structure to offset what we can, but we have little room for further cuts without adversely impacting our ability to deliver the quality products and world class service that our customers demand deserve. We have no choice but to insist that our customers pay for a fair portion of these cost increases. Last quarter, we announced that we would aggressively pursue recovery of $100 million in costs from our customers. We've made good progress in this effort through a combination of price increases, delayed price concessions, increased indexed-based contracts, and other means. To date, we're tracking toward the high end of our historical recovery range of 40% to 60%. Most of our customers have been willing to engage with us in these cost recovery discussions, but others, frankly, have not. As material costs continue to rise, we will again be asking our customers to pay a fair share of the increases. If customers remain unwilling to come to the table, it can only lead to a more difficult conversation later this quarter. In terms of our index-based contracts with customers, we have historically had good coverage on rubber components. In the current environment, we're pushing to expand coverage to our metal components as well. Most customers recognize the challenge higher metal costs are creating for their suppliers, and have been willing to engage with us in meaningful discussions. We expect to firm up our recovery and indexing actions on metals by the end of this first quarter. Our purchasing team has also been working diligently with our suppliers to increase indexed-based purchase contracts. They have more than doubled the percentage of our annual direct material purchases that are covered by indexed-based pricing, and this should help us avoid massive price swings and unfair or predatory pricing going forward. As long as we face these unprecedented inflationary headwinds, our cost recovery initiatives with customers will certainly continue. Given their demonstrated ability to pass costs onto their end customers through higher prices, we expect them to fairly consider the needs of the supplier community. Of course, we can never lose focus on our own efficiencies, lean initiatives, and operational excellence. This year, we will continue to optimize our European operations and rationalize our overhead and fixed costs globally. Some of these actions will have an upfront cost, but all will provide short term cash payback. Ultimately, we are confident that our leaner cost structure and strong relationships with our customers and suppliers, will allow us to get back to the levels of profitability and returns that our investors expect and deserve. Turning to Slide 17. Because of our strong customer relationships, world class service, and innovative technology, we continue to win new business and supply critical components on some of the industry's most desirable and popular vehicle platforms. On Slide 17, we provide a list of our anticipated top 10 vehicle programs for 2022. The vehicle images and names reflect the lead vehicle on each key platform. We are proud of the continued strong mix of our top programs, which maintains a heavy weighting on trucks, SUVs, and global platforms. This strong mix provides us with maximum opportunity to increase product content per vehicle and sales over time. Combined, these top platforms represent approximately 40% of our planned 2022 revenue. On an unweighted basis, our content per vehicle across these top 10 platforms, is expected to be approximately $155 this year. Turning to Slide 18. Our strategic focus on light trucks and SUVs, puts us in a great position to benefit from the current light vehicle market trends. As shown in the chart on the left, the light vehicle market is poised for significant growth over the next five years, with passenger car growth estimated at nearly 4% annually, and trucks and SUVs growing at over 7%. The one-year growth rates for 2022 are expected to be even higher at 6% and 11%, respectively. For Cooper-Standard, over 70% of our 2022 global revenue is expected to come from trucks and SUVs. In North America, the proportion is approaching 90%. And importantly, our content - our average content per vehicle on trucks and SUVs, is 2.1 times our content on cars globally, and 2.7 times the average car content in North America. As a result of our strategic focus on the trucks and SUV segment, we expect our revenue to grow at an average rate of 9% annually over the next five years, significantly outpacing the broader light vehicle market. Turning to Slide 19. We're also in a solid position to outpace market growth in the most important electric vehicle segment. We're currently a supplier on four of the top five, and 14 of the top 25 EV platforms globally. Over the past two years, we were awarded more than $200 million in annualized new business on future electric vehicle platforms. In fact, in 2021, net new business awards on electric vehicles exceeded our awards on traditional drivetrain vehicles. Based on these contract awards and future target business, our current outlook is for revenue growth in the EV sector of approximately 50% annually over the next five years, compared to industry growth of approximately 38%. Our portfolio on commercialized innovation products, technical expertise, and manufacturing capabilities, have been the key to our success in this high growth segment. Now, turning to Slide 20, we're continuing to invest strategically in innovation across all aspects of our business. This includes the development of the new materials and products that are driving the new business awards that I just mentioned, as well as advancements in efficiencies and sustainability in our plant operations and manufacturing processes. For manufacturing process, we have developed Liveline, which is an artificial intelligence-based machine-controlled technology that uses real-time add feedback to automatically optimize extrusion lines. This technology has already been installed in nine locations, and has proven to improve product quality, reduce scrap, and contributions to landfills, and improve operator efficiency. We plan to roll out the technology to nine more locations where the complexity of products and process warrant it. The investment is small for each location, and the payback can be measured in just a few months. We're also utilizing our AI modeling capabilities within the industry 4.0 framework to help drive improved asset utilization across the company and accelerate the development of new alternative material compounds. For asset utilization, our AI capabilities help us in several ways, including predictive maintenance modeling, and equipment deployment and allocation. On the material side, we've had an extremely agile response to increasing costs and supply chain constraints. And our AI modeling has allowed us to quickly determine alternative compounds without negatively impacting product quality or performance. In addition, we continue to invest in a wide range of promising projects to improve performance, costs, and sustainability of our materials. We've recently developed capabilities to reduce the cost of Fortrex by conducting critical chemical processes in line, rather than pre-processed feedstocks. In addition, we're continuing our collaboration with MIT to explore the use of post-consumer waste, such as shopping bags and water bottles, as a source of chemical inputs. Both Liveline and the advances in Fortrex, represent clear achievements in efficiency, quality, sustainability, and competitive advantage, benefits that will extend to our customers and all stakeholders. Moving to Slide 21. To wrap up our discussion this morning, I want to briefly highlight our revised purpose, mission, and value statement that we introduced internally last week, and announced publicly a couple of days ago. We remain focused on creating value for all stakeholders, and our revised purpose statement places a stronger emphasis on collaborating together with all stakeholder groups to drive sustainable solutions to the value-creation equation. The new language really only codifies the changes we have been driving within our culture of our company over the past couple years. Our culture has clearly evolved over this time and has become even more aligned, we believe, with the diverse interests of our customers, our employees, our investors, and the communities where we both live and work every day. At the same time, we're continuing our focus and drive towards our strategic financial targets of double-digit adjusted EBITDA margin and double-digit return on invested capital. These targets have not changed, and we believe the further realignment of our priorities and values, will help us achieve those strategic goals. Clearly, we have had a setback on the timing of when we expected to achieve those goals due to the hyperinflationary environment of 2021, and what lies ahead this year. The good news is that we have significantly improved our internal cost structure and operating efficiency, and we can leverage these accomplishments when production volumes normalize. Assuming that we can successfully offset the inflationary pressures through commercial negotiations and contract indexing, which we fully expect to do, we believe we can be back on track to reach our stretch strategic goals for adjusted EBITDA margins and return on invested capital by 2024. And finally, I want to thank our global team of employees for their continued commitment and dedication in these challenging times. I also want to thank our customers for their continued trust, confidence, and support. Together, we have a bright future and many opportunities ahead. This concludes our prepared comments. So, let's open it up for Q&A. Thank you.

[Operator Instructions] Our first question comes from Kirk Ludtke with Imperial Capital. Please go ahead.

Good morning. Can you hear me? Thank you for the call and the presentation. Very helpful. I have a couple of follow-ups with respect to the guidance. You mentioned that you feel like you're in good shape with respect to liquidity, and I think that math makes sense, $400 million of liquidity at year-end. And I'm just curious, what do you expect to happen with respect to working capital? You've got a pretty significant increase in revenues in this forecast. So, I’m curious, what kind of a use will working capital be?

Actually, Kirk, with respect to working capital, we still have some further opportunities that we continue to drive. One of those is what we do look at every single year, and that's the inventory balances within the manufacturing footprint. So, we think there's still opportunity to drive some working capital improvements for the whole year. Then the next biggest piece would probably be on the tooling balances, whereby we've always historically had over $100 million of tooling tied up on our own balance sheet as we build tools on behalf of our customers. So, we see a significant level of opportunity within the tooling element of working capital as well. So, if you put those two significant pieces together, despite a rising sales level throughout the year, each sequential quarter, as we see it, we think working capital is expected to be slightly positive for the year.

Thank you. That's very helpful. With respect to this bridge for the guidance, it’s very helpful and it includes, I guess, another $70 million of commodity headwinds in fiscal ‘22. Do you help us - how do you forecast commodity prices? That's very difficult generally. How did you go about arriving at the $70 million?

Well, we use a variety of sources. The main one which we look at commodity index projections based on the IHS market data. So, we actually look at those very discreetly and plug them into our systems and try to get it granular all the way down to the product and platform level, to understand the impact on what we're projected to make during the year, and then where those cost curves are actually heading. So, very robust process as we use that data down to the program and part level detail, Kirk. So, we know that, for example, for 2022, the curves are showing that rubber prices will be up another almost 60% year-on-year. And we saw that in Q4, the exit rate where EPM rubber components continue to rise throughout 2021. So, we're seeing that continue on into ‘22 from a carry-forward effect. Same phenomenon on steel. They'll be up another 26% of that $70 million incremental component. And then plastics, resins, and other specialty things will make up the difference to get to that overall $70 million incremental inflation. Hope that helps.

Yes, that's very helpful. And then lastly, and I'll step aside. Can you give us some sense for the cadence of the full year guidance, at least maybe directionally how you expect the year to progress?

Yes. We don't want to give the quarterly breakdown there, Kirk, but I think generally you think the first half will look very similar to what Q4 did as the OEMs continue to work out supply chain issues and chips to some extent still. And then as the year progresses, that sequentially continues to improve. that's at least what IHS forecasting would have us believe in terms of the overall production environment, that it continues to build sequentially throughout the rest of the year. So, the second half, in other words, looks a little bit better than the first half does.

Great. Thank you very much.

Our next question comes from Mike Ward with Benchmark.

Thanks very much. Good morning, everyone. Jon, maybe just to follow on what Kirk was talking about there on the walk and the bridge you have for 2022 and the $70 million, does that include any recovery?

No, Mike. In my prepared remarks, I indicated that the recovery will be in that - the volume mix price column, which is the $130 million. So, you see the net impact of both on price …

But no impact? Is that the recovery from last year, the $100 million, or is there - that's what I'm trying to bridge. So, last year you talked about - Jeff mentioned $100 million in cost recovery, and you should get - you're on target to get the high end of your historical recovery rate. So, say $60 million. I assume that $60 million was in that $130 million. Then you have the additional $70 million. Are you expecting any recovery on the additional material economics this year from that $70 million?

Yes, Mike. I would characterize that as, it’s pretty fluid as far as the cadence of when you start seeing that recovery. Much more timely, usually just a quarter lag when you think in terms of indexes. And - but that recovery is an ongoing process. for example, we realized a small portion in the fourth quarter of 2021, around 10 million bucks or so. Most of that was primarily on indexed contracts that were already in place. So, as our teams continue to negotiate, there's going to be a lag effect to the recovery and a gradual catch-up on a percentage basis.

Okay. So, if we look at some of the outside metrics for different steel and aluminum prices, is it fair to say that the impact is greater in the first half? And as we get to the second half, there's a chance we start to see better recovery in the second half of the year from the impact of the higher prices in the first quarter, fourth quarter, that sort of thing. Is that what we're looking at?

Yes. We do see the projections indicate that a lot of the commodity prices will come down later on in the year, Mike. So, yes, your triangulation of course.

Okay. And then - and Jeff, you've heard some of the suppliers talk about getting recovery for - I mean, the stop-starts and the sudden changes in schedules, particularly like with some of your key components or your key programs, it's causing a headache. Now, there are some suppliers that are getting recovery for some of those costs. is that included in your $100 million bucket? And is that something that you're getting - having success with?

Yes. In my prepared remarks, Mike, I referred to the other bucket if you will. And that's where some of that would reside. So, it’s on the table. It's being discussed, being negotiated. In some cases, we've got it. In some cases, it's still being negotiated.

Okay. But it sounds like the vehicle manufacturers are a little more accepting of some of these negotiations than they have been in the past, whether that's because they're getting new pricing.

We're still waiting. Yes.

Check is in the mail.

I'm still waiting for that meeting. Yes. I'm still waiting for that.

Jon, just to clarify, you went through your remarks about the capital priorities and refinancing and the debt. and I just - I wanted to make sure I was on par with what you were talking about.

Sure, Mike. I'll just reiterate. Based on the current thinking, current balance sheet structure and what's ahead of us in terms of maturities, we think the first priority will be addressing the term loan B. that comes due in November of 2023. So, technically is - would be current later here in Q4 of 2022. So, we want to get ahead of that obviously maturity and that incoming current. Then on the …

That's about $325 million?

Yes, that's exactly right.

Okay. I'm sorry. Then the next thing was the senior notes.

Yes. Then the - we had been optimistic on being able to exercise the call option on the senior secured notes. But this time, we're going to focus on the term loan B and then tackle the senior secured at a later date,

If you're able to. Awesome. Thank you very much, guys.

Our next question comes from Brian DiRubbio with Baird.

Good morning. A couple of questions for you. First off, can you help explain what the source of the $13 million EBITDA gain you had in corporate and other for the fourth quarter?

Yes, Brian. A portion of that is ongoing overall recoveries in our ISG business because remember, corporate and other includes what we referred to as our advanced technology group. So, it has our technical rubber and industrial and specialty products business located in there. So, as they were able to be profitable in the quarter, including some recovery efforts, that's what you're seeing in that category.

Okay. Is that sustainable or is that $13 million just sort of a one off?

I wouldn't call it necessary completely a one-off, but some of it is nonrecurring in that $13 million. So, I wouldn't extrapolate that for the whole year.

Okay, understood. Then I’ve got a question, a lot of confusion around the increased total liquidity, a few questions there. I think you said you didn't draw on your revolver, but gross debt was up, by my calculation, $15.6 million. And I'm looking at your accounts. Receivables were up by $8.6 million, tooling receivables were down by $8.6 million, and inventory was down by $40 million. So, with your borrowing base ostensibly lower, how is the availability higher quarter-over-quarter on your revolver?

The revolver availability is based entirely on US and Canadian inventory balances and accounts receivable. So, as production continued to sequentially increase in the North American market Q3 to Q4, despite us bringing down inventory levels, you saw availability increase. There is a hold-back of 10% on overall availability because of the fixed charge coverage ratio element in there, Brian. So, that 148 reflects that 10%. And then there are some minor letters of credit that work against the contractual availability as well. That's how you get to the 148.

Okay. That's helpful. And then, how big is the lease-back expected to be?

I can't give you the exact magnitude because the deal's not yet closed. So, we can't contractually disclose the sale proceeds at this time. However, they will be sizeable. And if I think about it in terms of our free cash outflow for the year that's kind of projected in the math, they won't entirely make up that free cash outflow, but they'll certainly fill in a lot of that usage hole, okay? We'll be able to talk more about that when the deal closes in Q1.

Got it. And then just two minor ones. Your payables did extend a little bit. I noticed that it was also mentioned on the slide deck. How much do you think you can press that?

Yes. Brian, what we're working towards is a global average of around 60 days. that's our aspirational target here. we’re approaching 57 days as we close the year end. And just as a frame of reference, every day we take out, it's worth about $6 million in working capital for us. So, there's probably a day or so of further opportunity we’re marching towards in 2022, but it's a hard go-get, especially in a tough supply environment like we're dealing with today, but we haven't given up.

Okay. And then just finally, technically on the refi, I’m a little confused why you wouldn't address both the first lien notes and the term loan B simultaneously, seeing that it would be easier to get both done at the same time, because there's less uncertainty from the term loan B’s holders’ perspective, how you're going to address the first lien notes shortly thereafter. So, I'm a little confused. And even though your costs of borrowing of the term loan B more than likely are going to be up pretty substantially, I'm guessing there would have been a little bit of opportunity to reduce that 13% coupon. I'm just trying to get a sense of how you're thinking about this and why you're not addressing both at the same time.

A little bit goes by too. there's still continued uncertainty in the market and us maintaining that total liquidity that we've talked about in the past of about $150 million or so to run the business day in and day out. So, the preference would be to bring down that $250 million overall, because we took that out as a “insurance policy” two years ago at the start of the pandemic, thinking that we wouldn't need to tap into it, but at the time, didn't know how long the pandemic would last, if there was going to be further production complete stop and shuts throughout the industry. So, that was always the goal, right? So, as we sit here today and we’re still dealing with a little bit of market uncertainty, how the year progresses, we think there'll be more of an opportunity to do this two-step, but certainly as market conditions allow, we’re modeling and working with our partners to say, is there a path to do both at the same time, or do the term loan B first because of the maturity element to it?

Understood. Appreciate the color. Thank you.

Our next question comes from Steve Ferazani with Sidoti.

Morning, everyone. Thanks for taking my questions. I do want to ask again about those - the material costs you're expecting in 2022. I'm trying to get a sense with your guidance, is that based on where you already have succeeded in negotiations in terms of cost recovery, or your hopes? Is there a more upside to that number or downside?

Yes, this is Jeff. I think we have included what you would call in our pocket, right? So, and now as we just talk, there's still further conversation going on, which wouldn't be included in the outlook.

And so then, can you give us some update on your successful or lack of success in terms of moving towards indexing and how the automakers respond to it, given the current environment?

Yes, I think the response has been very, very positive. Obviously, the detail of the negotiation around what number you start with, determines whether we say yes or whether we say no.

Fair enough. Any updates in terms of other divestments in terms of nonprofitable markets or businesses and where you would be, or is that kind of on hold, given market conditions?

Yes, so far on hold. I assume you're talking about South America there, and we continue to improve that business and work with our suppliers, as well as our customers to get above breakeven. And we think we have a pathway to do that. But I would say that that's still part of options that are on the table, but the market timing associated with divesting it, wouldn't be very good right now. So, if it happens, it would be in the future, but we're still hopeful that we can make it a positive cashflow business and stay in it and support our customers, but TBD.

Okay, fair enough. And then just last one for me, in terms of talking about that double-digit EBITDA margin type target, which is now maybe 2024. I'm trying to get a sense - clearly when you put that out there, a lot changed fast. I'm trying to get a sense of what kind of market conditions you need to get there beyond material cost stabilization, right? If we have a huge rebound in automotive production in ’22, ‘23, we don't really know where we're going to be in 2024. What types of levels are you thinking about market conditions are you thinking about to get there in 2024?

Yes. We provided that earlier, but it I would just recommend you take a look at the IHS forecast for ‘22 ‘23, ‘24 and ‘25. And we've used that primarily to make the statements that we've made to you this morning.

Okay. Fair enough. Thank you.

Our next question comes from Josh Taykowski with Credit Suisse.

Hey, thanks for taking the questions. I guess, first wanted to start just on the sale lease-back. I heard that question a few minutes ago. I think I missed the update there. Is there any info you can provide on what that is?

Yes. Josh, it’s Jon. This is what we view as a non-core property over in Europe, where we just really looked at the long-term need for certain of the buildings on the space. The property had a legacy plant that we had closed years ago, as well as some lab space and headquarters type space there, in addition to a manufacturing plant that's currently still running. So, the sale lease-back gives us some flexibility over time to remain in that property, but it does unlock some capital for us to be used throughout the system. So, like I mentioned a few minutes ago, deal is not yet closed. It’s expected to close in Q2. So, we'll be able to give you a little bit more color on the size of the proceeds, but again, it will be a sizeable inflow of cash for us.

Got it. That's helpful. Thanks, Jeff. I guess, just turning to the sequential EBITDA improvement in 4Q, I know we've talked about commercial settlements a lot, but is it possible to frame up for us going from the negative $34 million in 3Q, to the positive $2 million in 4Q, how much of that was driven purely by commercial settlements that you were able to put in your pocket during the quarter?

Yes. Josh, I said a few minutes ago that the recoveries there were about $10 million of clawing back some of that commodity inflation. And again, a lot of that was on index contracts. But when you put volume and mix, which was positive in all of our major regions together, to the tune of about $75 million in revenue at about that 30% pull-through, that's the majority of clawing that back. But clearly further worsening of commodities quarter-over-quarter. When we went from $21 million in Q3 up to $30 million in Q4, it's continued significant headwinds that we're facing that are spilling over into 2022, obviously. The manufacturing organization continued to take cost out as well as the restructuring initiatives that we had paying dividends there. So, that kind of gives you the main pieces of the sequential walk overall.

Got it. Okay. So, the $10 million, I know you said a lot of that was on index. So, does that net out from the $100 million target, or is that just kind of general indexing that you would expect to get anyways?

No, no, that would be part of that goal there. Like Jeff said, we're approaching that a variety of different ways, straight PO changes, index contracts, absence of contractual give-backs, et cetera.

Got it. So, during the quarter, just to confirm in a little bit different way, there wasn't some material kind of one-time lumpsum payment that you got on a commercial recovery that's kind of helping out the quarter?

No.

Okay. The corporate other bucket, I know someone else asked about this, but the $13 million, I know you said a portion of it was one-off, a portion of it was not. Is there any guidance you can give on what the split of that is?

No, I'll just leave it to my past comment.

Okay. And next one for me, just on SG&, $58.5 million during the quarter, about flat with 3Q, but I know in 3Q you took that bad debt expense charge, call it 10 million, I think it was. So, I guess, comparing to 2Q, you're up call it $9 million or so. So, what what's kind of driving that during 4Q?

Josh, I don't have that in my fingertips, but a little bit is the ongoing, call it, wage inflation probably as there's turnover in the system, which we're experiencing a lot of. you're hiring people back at slightly higher wage rates. I think that contributes to some of it. But within that bucket, it’s not just salaries. it's all of the other costs in the business that are within that SG&A bucket that can be rising along with that overall inflationary pressure. And the good news here is that we see that that percentage coming down in 2022 and further, with increase in sales and further restructuring initiative that Jeff and I have already talked about today. So, we see continued benefit there on the SGA&E role.

Okay. And then just a couple of questions for me on the ‘22 guide. I'm looking at the $20 million to $30 million of cash restructuring costs. Maybe that's the best place to start. Any way you can bucket for us what's that going to, between kind of the three buckets, whether it's manufacturing savings or SGA&E? how should we do about the split of that?

So, it's really a, call it a 60/40 split. 60% of it, I said in my prepared marks, was primarily related to European actions that were already in flight. So, if you recall, in 2021, we addressed direct and indirect labor at some of our high-cost facilities. These weren't plant closures, but they were overall reductions in the labor force there as production levels had come down, revenue levels had come down. So, there's a carryover effect as you're paying over time for those past actions. So, like I said, about 60% of the $30 million. And the remainder is incremental actions as we look across, like I just described a minute ago, SGA&E holistically, but also above-the-plant cost of goods sold. So, it's not in the manufacturing facilities, but it’s the above-the-plant organization that we're looking to address with the remainder of that restructuring money in ‘22.

Okay. I guess the last one for me, just more of a modeling question. I know you're not going to give kind of quarterly splits on your guide for ‘22 as far as cadence, but just thinking about recovery over the course of ‘22, how should we think about what your contribution margin is today, given the environment, plus some of the actions that you've taken on the cost side? So, that's my first question. And then, just along that same line of the cost actions on SGA&E, is there an estimate you can give us on kind of what the run rate magnitude of fixed costs that you've got running through COGS currently?

Yes. Let me tackle the first one, Josh. I think Jeff alluded to that we’re actively continuing to negotiate here. And so, a lot of those efforts will come to fruition as Q1 closes. So, you're not going to see necessarily a big influx of recovery money in Q1 as we see it. But there could be an element where in Q2 or beyond, there could be a retro effect going back to beginning of the year. But as of right now, as the team continues to build that pipeline, it'll increase throughout Q2 and beyond, where you'll see that step change, okay? Then, I guess, a little bit more on your second question. Are you asking what the fixed cost base is for the plant structure? I didn't really quite get that.

Yes. Just like you’ve got your COGS line item, I think 540 in 4Q. what percentage of that would you say is fixed type cost?

Well, let me break it down like this. 48% of that was materials. So, you see the sizeable headwind that we're facing. And then the rest would be your labor and your fixed cost component overall, okay?

Got it. Okay. Fair enough.

Our next question comes from Joseph Farricielli with Cantor Fitzgerald.

Hi. Question on the sale lease-back. I know you don't want to give the proceeds, but it seems like the description of the property is something that wasn't needed. Why are you doing a sale lease-back and not just an outright sale?

Because we still need to conduct business for a short period of time on that particular location. And I think it's also important to note that this isn't a reaction to the overall liquidity situation in the company. In fact, this particular project has been on our radar now for the last couple of years, and we've been running some processes to determine the best value and the timing associated with when we should do it. And that's - that happened to be right now. So, I want to make sure that we're clear on that. But the positive is that we've found a buyer. they're flexible in terms of allowing us to stay there for a short period of time as we transition some business, and then they will take over that property and transform it, if you will. And there'll be more details around the specifics here as we work our way towards the end of the first quarter, and then it'll be pretty obvious.

Okay, good. The - you were talking about the term loan and the refinancing, and you made a comment that implies that you're working with an advisor. Have you hired a banker or some kind of advisor to assist with your capitals structure?

Yes, Joe, let me be clear. I did not imply that. We have a core team of banking groups who have been our longtime partners in our capital structure. So, it's just conversations with those that I'm referring to. We haven't hired anyone, just to be clear.

Okay, perfect. Thank you. And then finally, the last is on the cash restructuring. And as we know with auto part supply companies, you're always changing productions, and you always have those costs. But when do we start to see this become a - and this is down year-over-year, but when do we see this become a smaller line item? any color there or thoughts?

Yes, Joe, to be frank, if you look back to my comments, in Q3, we thought 2022 would be in the teens. But as we looked throughout the ‘22 business plan, we just realized that a little bit more needed to be done to right-size that cost structure going forward. So, I think as we get through ‘22, there's no other planned actions in our long-term business plans or strategic plans that are being contemplated right now. So, we hope this sets us up very, very well for return to double-digit margins and double-digit ROIC accordingly.

Okay, good. And then final question. Could you give us some context on the commodity recovery conversations, how it relates to the conversation with new wins and new contracts, and how it relates to the old? Is it just the customer saying, guys, this is the black and white of the contract. you signed it. live up to it. But on the new ones, we'll consider others. Or what - just some color there as to how those conversations are going about.

Sure. This is Jeff. Just keep in mind that the programs that we're quoting and that we've been quoting since the fall, reflect all of these additional costs. So, as those launch in the future, those aren't problems. Those are programs that'll reflect today's costs. The programs that we have in our plants today that we're producing and shipping product, fall into the other category that you talked about, which require us to go in and renegotiate, if you will, recoveries, be it inflation, volatility, or other cost increases that we've been dealing with in terms of volume and mix, let's call it. And those require basically renegotiating the deal, to your words, of existing product. And that requires us to explain why we need it and the customers to agree to give it. Some of those are easier than others.

Okay, good enough. Thank you.

Our next question comes from Doug Larson with Bank of America.

Yes. Hi, guys. Thanks so much for all the detail. Just two quick questions. In your bridge, you have lean manufacturing a positive $70 million in 2022. The next step is for us to try to forecast 2023, and 2024. How do we think about that lean improvement kind of in 2023? Could you just give us some view of how much sustainability you have in that lean number?

Yes, I think in my - this is Jeff. In my prepared remarks, I talked about it being sustainable going forward. I mean, that's - I guess you look at, you’ve got to try to find some positive in the insanity that we're dealing with. And I think clearly our plants have continued to find ways to take out costs to help us offset some of the categories that we've talked about today. Those things do carry forward and we’ll be in a much better position when we get back to normal production volumes in what proves to be very strong market demands everywhere are in the world. So, when we talk about double-digit EBITEDA, ROIC in ‘24 versus what we had originally were planning to be ’23, that should tell you what we think. We truly believe that we will be able to recover the costs here in the short term to allow us to improve sequentially as we go through this year. And then the cost base that we head into ‘23 with, we believe is sustainable, and not just the fixed cost and then additional changes we're going to make in our fixed cost structure this year, but what we discussed from an SGA&E point of view. When you start looking at that as a percentage of sale in ‘23 and ‘24 with the additional growth, I mean, we'll be at record low levels. And that includes adding compensation back in for incentive comp, but isn't in our numbers, obviously for ‘21. So, being able to really come out of it much, much stronger than went into it, we believe is sustainable. And that's why we're reflecting the optimism for ‘23, ‘24 and ‘25. We're just pedaling fast to get there. That's all.

That's super helpful. And then my last question. I'm trying to piece together some of the free cashflow thoughts around 2022. So, it looks like working capital is going to be a potential source - potentially meaningful. and the sale lease-back, I think you commented would maybe make up some of the gap on the free cash flow. Are we able to think about free cashflow then, or year-over-year change in cash over 2022 to be reasonably close to breakeven, given the working capital and the sale lease-back? or is that kind of going too far on a limb?

I think you get close to that point, Doug. But keep in mind, the sale lease-back item won't be in traditional “free cashflow.” But clearly, it benefits the liquidity situation and the cash balance at the end of the year, okay?

Right. Okay. So, the cashflow, not breakeven, but the sale lease-back will help below the cashflow line to have liquidity. You're pretty close to where we are today, despite the EBITDA being kind of less than normal.

You got it.

That’s helpful. All right. Thanks so much. That's it for me. I appreciate it.

That concludes our question-and-answer session. I would now like to turn the call back over to Roger Hendriksen.

Okay. Thanks, everybody, for the questions and for your participation today. We really appreciate it. If there are other questions outstanding that we weren't able to get to this morning, please feel free to reach out to me. Give a call and we'll make sure that your questions are addressed. Thanks again for participating. This concludes our call.

This concludes today's conference call. Thank you for participating. You may now disconnect.