Cooper-Standard Holdings Inc. (CPS) Q3 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Third Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Following the 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 on the Cooper-Standard website for replay later today. I will now turn the call over to Roger Hendriksen, Director of Investor Relations.

Thanks, Olivia and good morning, everyone. We appreciate you spending some time on the call with us 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. With those formalities out of the way, I'll turn the call over to Jeff.

Thanks, Roger. Good morning, everyone. We appreciate the opportunity to review our third quarter and year-to-date results and provide an update on our business and the outlook going forward. To begin on slide 5, we provide some highlights or key indicators of how our operations performed in the third quarter. We continue to execute at world-class levels by delivering quality products and services to our customers, and keeping our employees safe. At the end of the quarter, 98% of our customer scorecards for product quality were green. Our launch performance scorecards were at 96% green for the quarter. More importantly, the safety performance of our plants continues to be outstanding. Through the first nine months of the year, we have 28 plants that still have a perfect safety record of zero incidents. I want to recognize the teams at these plants for their continued commitment and leadership as they once again confirm that achieving our ultimate goal of zero incidents is possible. I could not be more proud of the global team for their continued commitment in world-class achievements in maintaining a safe workplace for all. While conditions in the global automotive industry, obviously, remain challenging with continuing supply chain uncertainty, reduced production levels and high inflationary pressures. We've maintained our focus on reducing costs across the company. Our manufacturing operations were to deliver -- were able to deliver $22 million in savings through lean initiatives and improving efficiencies in the quarter. Our SGA&E expense was down $7 million year-over-year as we continue to right-size our fixed costs. In past restructuring actions delivered $2 million in benefits in the quarter. We also saw incremental benefits from our enhanced commercial agreements on pricing and cost recoveries in the quarter as more negotiations were concluded and additional adjustments were implemented and realized. Moving to slide 6. Our new product innovations continue to garner recognition from trade groups as well as our customers. This morning, I'm pleased to announce that our advanced thermoplastic thermal management solution for electric vehicles has been named a finalist in the Society of Plastics Engineers Annual automotive innovation competition. Our new PlastiCool 2000 tubing technology was developed specifically for the operating temperature and pressure environments required for glycol, thermal management systems in battery electric vehicles. It also aids in optimizing flow and provides a weight reduction of 60% compared to more traditional EPDM tubing technologies, helping to improve overall vehicle efficiency. Combined with our latest ERGO locks plus QuickConnect technology the system also improves the flexibility and efficiency of the OEM assembly process, a significant value add for our customers. While we're pleased to be recognized by the Society of Plastic Engineers, we're even more pleased with the new business awards that our customers are giving us largely driven by our continued focus on value-add innovation. Turning to slide 7. Continuing on the topic of product innovation. During our last conference call in early August I spoke about the progress we're making in expanding the scope and opportunities within our fluid handling business. Internally, we call it our 4C strategy which refers to our four critical functions of fluid systems in a vehicle; connect, convey, control and communicate. Our traditional suite of products has focused primarily on the connect and convey functions. We have established a track record of providing world-class technology in many different types of tubing and related connectors and they have garnered recognition and driven new business as I just discussed. Through our comprehensive product strategy in the joint development agreement with [indiscernible], we announced in August we're rapidly progressing the development of new sixth-generation technology that integrates the functionality of pumps with advanced fluid control, routing and connection technologies into a single device. These new systems are expected to further optimize the cost, efficiency and complexity of thermal management in technically advanced electric vehicles. For our OEM customer, it will add value through system simplification, enhanced performance, light weighting and improved fluid management efficiencies. For Cooper-Standard the new technology will significantly expand the scope of our product offering and increase our revenue and margin opportunities. Our fluid systems engineers are already collaborating with OEM design teams under multiple non-disclosure agreements to explore how our new capabilities and patented technologies can help them solve some of their biggest system design challenges. The early response has been very favorable and we're excited about the potential new growth opportunities our expanded capabilities we'll provide. Moving to slide 8. Our sealing product team is also delivering exciting new innovations for the electric vehicle market. Among these are flush seal and frameless sealing systems. These technologies are rapidly becoming favored design choices for the premium and electric vehicle markets as automakers work to differentiate their vehicles through a range of styling options. Of our most recent sealing business awards 30% have been for frameless technology, and we expect this trend will continue. And this represents additional growth opportunity as the frameless technology drives a significantly higher content per vehicle in some cases more than 100% higher than traditional sealing systems. We continue to believe our investments in product and technology innovation are the key to driving future profitable growth. We expect this will benefit us even further in the months and years ahead, as we optimize our cost structure, and as production volumes and inflationary pressures normalize. Now, let me turn the call over to Jon to discuss the financial details of the quarter.

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some details on our financial results for the quarter, and discuss our cash flows, liquidity and aspects of our balance sheet. On slide 10, we show a summary of our results for the third quarter of 2022, with comparisons to the same period last year. Third quarter 2022 sales were $657 million, an increase of nearly 25% versus the third quarter of 2021. Gross profit for the third quarter was $38.6 million, or 5.9% of sales. This compares to a gross loss of $8 million in the second quarter of 2021. Adjusted EBITDA in the quarter was $20.5 million, compared to negative $33.9 million in the third quarter of 2021. The year-over-year improvement was driven primarily by favorable volume and mix, cost recoveries, and manufacturing efficiencies, partially offset by continuing commodity, and material cost headwinds, higher labor and energy costs, as well as other inflationary pressures. On a US GAAP basis, net loss for the quarter was $32.7 million, compared to a net loss of $123 million in the third quarter of 2021. Excluding restructuring expense, and other special items, adjusted net loss for the third quarter of 2022, was $29.5 million, or $1.71 per diluted share compared to adjusted net loss of $106.4 million, or $6.23 per diluted share in the third quarter of 2021. The year-over-year improvement resulted, primarily from improved gross profit, reductions in selling, general administrative and engineering expenses, and lower income tax expense versus Q3 of 2021, when we recorded a significant charge related to valuation allowances on deferred tax assets in the United States. Our capital expenditures in the third quarter totaled $14.2 million, compared to $20.4 million in the same period a year ago. We continue to have a disciplined focus on capital investments, and we're on track to keep CapEx below 4% of sales for the full year as we committed last quarter. Moving to slide 11. The charts on slide 11 provides some additional insights into the key factors impacting our results for the third quarter. On the top line, favorable volume and mix, net of customer price adjustments, increased sales by $168 million versus the second quarter of 2021. Improving customer production volume year-over-year was the biggest driver, and customer cost recoveries in the quarter, also included in the volume and mix category. Foreign exchange mainly the Euro reduced sales by $32 million, versus the same period last year, and the deconsolidation of a joint venture in Asia, which was completed in the first quarter of this year further impacted sales by $6 million. For adjusted EBITDA, volume, mix and net price adjustments, including recoveries drove a combined $69 million of improvement for the quarter. Lean initiatives in purchasing and manufacturing efficiency contributed $22 million, reductions in SGA&E added $7 million, and savings from past restructuring actions added another $2 million. As for the headwinds in the quarter, higher material costs amounted to $35 million, and higher wages, compensation-related costs, general inflationary pressures, and other items reduced adjusted EBITDA by a combined $10 million in the quarter. Moving to slide 12. Looking at these same key operating measures and drivers for the first nine months of the year sales increased 8.5% compared to the same period in 2021. The increase was driven primarily by improvements in volume mix and net price adjustments, with partial offsets from the deconsolidation of the Asian joint venture in the first quarter, and unfavorable foreign exchange. For adjusted EBITDA, significant improvements from positive volume and mix, net price adjustments, manufacturing and purchasing efficiencies, lower SGA&E, and restructuring savings were more than offset by increased material costs, which have now reached $117 million in the first nine months of this year, as well as higher wages and general inflation. Turning to slide 13. In terms of cash flows, cash used by operations during the three months ended September 30, was approximately $10 million driven primarily by increases in inventory and tooling receivables. With CapEx of approximately $14 million as mentioned earlier, we had a modest net free cash outflow of approximately $24 million in the quarter. As a result, we ended September, with a still solid cash balance of $231 million. Availability, on our revolving credit facility, which still remains undrawn, was $156 million at quarter end, resulting in total liquidity of $387 million as of September 30, 2022. From a liquidity perspective, based on current expectations for light vehicle production and customer demand for our products, we expect our current solid cash balance and access to flexible credit facilities will provide sufficient resources to support our ongoing operations, and the execution of planned strategic initiatives for the foreseeable future. Separately, the company's ability to meet its debt service requirements for the next 12 months is contingent upon our ability to refinance our term loan facility. We're continuing discussions with certain investors, with respect to potential refinancing alternatives. And while these discussions are ongoing and have been constructive, the company has not yet reached an agreement for refinancing its capital structure and there can be no assurances that such an agreement will be reached. Beyond that, we won't be providing any further details at this time. That concludes my prepared remarks. So, let me hand it back over to Jeff.

Thanks, Jon. And to wrap up our discussion this morning, I'd like to touch on our ongoing efforts to further improve our cost structure and then update you on the outlook for the full year. So if you'd please turn to slide 15. We're continuing our focus on reducing costs and rightsizing our operations where necessary. These efforts have delivered more than $100 million in savings per year over the past three years and already $86 million in the first nine months of this year. As conditions in our markets around the world remain challenging, we're continuing evaluating our business and seeking ways to improve and further optimizing our operational footprint. To be clear, all options are on the table. We have made good progress and completed a number of cost reduction and rightsizing initiatives this year, as outlined on the slide and we expect to complete the remaining projects in 2023. In the remaining months of 2022 and into next year, we expect the rate of inflation to slow and our cost reductions, manufacturing efficiencies and enhanced commercial agreements, should allow us to further expand margins and improve cash flow. Turning to slide 16. In terms of our 2022 guidance, we're trimming our full year estimate for sales and adjusted EBITDA, factoring in the results for the first nine months of the year, which fell short of our original expectations, primarily due to continued variability in our customers' schedules and weak production volumes. We now expect full year sales in the range of $2.5 billion to $2.6 billion and adjusted EBITDA in the range of $45 million to $50 million. So the revised range remains very near the low end of our original guidance range for adjusted EBITDA, despite the disappointing production volume. In addition, the midpoint of these ranges suggest a significant sequential improvement in adjusted EBITDA margin for the fourth quarter, an improvement we expect to carry forward and build upon into 2023. While there is still a lot of uncertainty in the global economy and in our industry, we continue to successfully manage the aspects of our business that we can control. Our cost structure has improved significantly and is still improving. Our manufacturing operations are running as efficiently as they ever have and we continue to fulfill our end of the bargain with our customers, delivering quality products on time and supporting their strategic initiatives and objectives with our technology and innovation. I want to thank our global team of employees for their continued dedication and their commitment to delivering for our customers and other stakeholders in this challenging environment. I also want to thank our customers for their continued trust, confidence and their support in managing through commodity inflation. However, as the weakness and volatility of customer production volumes continue, we'll aggressively pursue further commercial enhancements to offset volume shortfalls and related stranded costs, as well as ongoing inflationary pressures. Despite all the noise and uncertainty in our industry, I'm confident that the innovative products, sustainable solutions and value that we're providing to our customers will ultimately be fairly compensated. This will enable us to drive increasing long-term value, not only for our customers, but for all of our stakeholder groups, including our employees', communities, suppliers and our investors. This concludes our prepared comments. So let's open up the call for Q&A.

[Operator Instructions] Now, first question coming from the line of Michael Ward with Benchmark. Your line is open.

Thank you, very much. Good morning everyone. Jeff, on the fourth earnings call, the company cited $1 billion lump sum payments to suppliers or for supplier settlements. In addition, it said it was not just for commodities, but for other things like disruption and production schedules. I think Cooper has the highest or among the highest exposure to Ford on a relative basis. Can you walk us through that process? I think you mentioned in your comments that, part of those settlements were implemented and realized. I mean, is the type of thing where the material costs are kind of straightforward. And then, with the production disruption and some of the other stuff the freight, it sounds like there are several buckets. Am I reading that correctly?

You're correct, Mike. The first bucket that we've been talking about specifically this year is obviously the raw material component of the cost buckets if you will and we're pleased that we've completed those negotiations really with all of our customers. Many we have now indexing contracts in place. Others, we have quarterly surcharges in place that address the material cost inflation that we've been bearing quite frankly for a number of months. So, I would say, consider the negotiation related to material, closed and going forward, we expect that we'll be at the -- above the high end of our recovery that we've had historically. So think about 70% recovery of all raw material inflation going forward. Of course, when it goes the other way, then we share that back with the customer. So very pleased with how that's all transpired. And as I mentioned, I thank our customers for working with us and allowing us to get to a point where we think it's sustainable. Your other question is the bucket related to smart stop labor freight energy costs and the like. Those negotiations continue. Those are typically handled more in terms of surcharges with customers and I would expect us to continue to recover more and more of that into '23. That was in my prepared remarks. So, I think that we're confident that they're going to work with us to help recover those shortfalls. But -- it's still a very challenging environment. We would really like if we had our magic wand out there, we would waive it. And just if the volumes would have hit per the releases in the third and fourth quarter, we'd have a much different conversation right now. But unfortunately, the volumes as I said in my prepared remarks continue to be short of the releases that are out there and that's causing even more headwind and hence more challenging conversations with our customers going forward.

So when I look at the bridge analysis Jon on your Chart 12 and it had $117 million in material economics through the first nine months. Is that money that will be recovered, or is -- because I think you mentioned that the recoveries are included in the volume mix correct? So is that $117 million...

Yeah, Mike. The $117 million on the bridge page there is the gross commodity costs. The recoveries, you're right, we include those in the volume and mix bucket as we've historically included price in those rows of those charts. So as Jeff mentioned, you can think it in terms of being around that 70-plus percent of recovery on that $117 million both from a current period perspective as well as some catch-up on 2021 commodity inflation that we're able to call back this year.

Okay. So you recovered part of the $117 million, but not all of it. So part of that will come over the next couple of quarters?

Yeah. There's kind of a quarter delay perhaps a two-quarter delay as those index contracts reset and then you're doing a look back period on the previous quarter or two to do recovery mechanism.

Okay. And on the general inflation and other that $69 million would that include any of the impact from the start-stop?

That would be not necessarily in that bucket. What it would include is your general economics, your labor inflation, transportation costs, utility bills going up. The start stops those are really inherent in the cost of goods sold manufacturing bucket. They degrade the lean activities and the efficiencies we're able to gather. So they kind of go against that area as opposed to the other bucket.

Okay. So that could be over and above the material recoveries for the next two quarters as we cover in 2023. So we're up north of $100 million of potential recoveries?

That's the goal, yeah.

Okay. Jon, just one last question. On the term loan, is there any significance that it is now current as it relates to your -- the refinancing activities?

Today is technically the date the term loan goes current. But I'll emphasize that that's -- as of right now it's a date on the calendar. We're still engaged in those constructive conversations with investors to look at the capital structure and arrive at a potential refinancing alternative. But Mike there's no impact on our debt agreements right now because that is current or anything like that. There's no default situation. It's just the -- that it's now within 12 months of coming due.

Okay. Thanks, Jon.

Thanks, Jon.

Thank you. And our next question coming from the line of Steve Ferazani with Sidoti. Your line is open.

Good morning guys. Appreciate all the color on the call. I do want to follow up a little bit of the previous questions because I'm looking at the EBITDA margin in North America where you did see some growth and I would have expected a little bit more improvement. I'm trying to get a sense is that the continued inflationary pressures? Is that the starting and stopping that you've added labor and you're just not getting the volume that you were expecting? Trying to get a sense of what we're seeing in that margin line?

Yes, Steve, this is Jon. I'll take that. North America was certainly pressured along with the entire company on the commodity side as well as those other inflationary pressures that aide into the -- what you would have otherwise expected from the benefit of the uplift in volume and mix activity during the quarter year-over-year. So if I look across that $35 million of commodity inflation for the quarter, nearly $15 million of that was hit in North America. Similarly, within that -- the general economics that are really higher than the $10 million because there's pluses and minuses in that other row on the bridge there's over $6 million of what I'll call the normal wage/utilities/transportation inflationary pressures hitting the North American market. So they're doing well when the volumes are coming back as Jeff indicated. But those other inflationary pressures are certainly eating into the performance there.

You see here -- I mean based on the bridge you're not seeing much easing at this point some of that might be what's coming out of inventory not quite clear. But are you getting any sense beyond energy that there's some easing to your inflationary pressures where you can start really catching up beyond just the contracts you have in place now?

Steve let me just clarify. Are you speaking in terms of commodities or all the other inflationary buckets?

Throwing them all in. I'll leave it open for you.

Okay. Well, certainly the rate of increase of inflation is subsiding somewhat, but it's certainly not going down and you're not experiencing any deflationary benefits or tailwinds for us in the quarter. Looking ahead, perhaps there's some longer-term commodity prices that are projected to come down. But as of right now, the inflation is still running high certainly relative to year-over-year as we see it. And as you know well energy costs in terms of natural gas and electricity and labor inflation those are sticky and those don't tend to revert back and deflate. So and we'll be facing those for a long time here now.

In previous quarters, you talked about cash on the balance sheet going to remain relatively stable this year despite the challenging environment. We did see it come down a bit this quarter. It looks almost entirely related to higher inventory. How are you thinking about both cash management over the next couple of quarters assuming we're maintaining a sort of challenging environment?

I'd characterize it this way Steve that cash is top of mind for everybody in the company. We're continuing to monitor all discretionary spending and preserve Cooper-Standard cash and protect the balance sheet if you will. And while we don't typically provide guidance on free cash flow, we do obviously expect an increase in EBITDA in Q4 here. And the typical seasonality where we can draw down inventories as production levels drop towards the end of the year, we'll definitely be a positive benefit to cash flow in the quarter. But keep in mind Q4 we do have interest payments to the tune of about $30 million on both our unsecured notes and our senior secured notes that hit in November and December. So, we'll have to manage through the working capital side offset by those interest coupons in Q4.

Great. And then if I could just get one more in in terms of any updates in terms of Fortrex marketing outside of your typical customer base?

Steve this is Jeff. We continue to march towards the launch of the first shoe deal. I think that's been pushed into the early second quarter, but still basically on target what we've talked about. And then we are having continuing discussions with that particular customer about expanding the opportunities but we don't have anything to share specifically related to that other than to tell you that those conversations continue to happen at a pretty good pace.

Appreciate the time.

Okay.

Thank you. And our next question coming from the line of Joe Farricielli from Cantor. Your line is open.

Good morning. Could you tell us or give an update on Brazil? I recall Ford was closing a plant there and you had some restructuring expenses in South America. Any update specific to that and restructuring in general?

Yes, this is Jeff. On Brazil our teams have done a very good job of reducing costs and also managing the price recoveries from our customers there. We do expect as we look forward to 2023 that they will be in a pretty healthy position assuming they can continue to close the deals with the customers that they have to close here in the quarter, but we are encouraged by the potential upswing in profitability in Brazil.

And that was a co-located. You're on a customer -- in a customer plan correct?

We have a variety of manufacturing footprints there. The one you're speaking of with Ford is history. So, what I'm talking about is what's left and the fact that we'll be profitable in 2023 based on all the work that's been done there this year. I think what you're referring to is my comments in previous quarters about all options are on the table as it relates to that business footprint. I'm encouraged that as I sit here today I think there is a way forward for us in Brazil and it's directly related to the effort of that management team there and the leadership to get the business turned around. So, we're pleased about that.

Okay. That's great. And then last question. Is Goldman still engaged as your adviser for the refinancing?

Yes.

Perfect. Thank you guys.

Thanks Joe.

Thank you. And our next question coming from the line of Brian DiRubbio with Baird. Your line is open.

Good morning Jeff and Jon. Just a couple of questions for me. Can you, Jeff, maybe help us get a sense what operating cadence or the operating rate of the plants have been over the last quarter versus maybe at the worst point of the production issues?

Yes, I think the volume over the course of 2022 continues to be up versus what we saw in 2021 as Jon talked to you about. My biggest concern is that especially related to the third quarter and the fourth quarter there was a lot of conversation from our customers about the strength of the third quarter and the strength of the fourth quarter and it was frankly reflected in the releases. And I'm really talking about here in North America with these comments. And then in both instances the actual volumes fell considerably short. So when you look at an inventory number, that's up considerably from what we would have expected it to be on these particular revenue points it's directly related to the fact that the releases were there and then the volumes were pulled out and didn't happen. So, that's part of the challenge. And look we know that our customers are doing the best they can, I'm just stating the facts. And so that's -- that volatility if you will continues to impact us and I'm sure other suppliers as it relates to the efficiencies that we really need the stability that we really need out of the releases. And if we get that stability and then most importantly if it's up then that results in a much healthier environment. Unfortunately, that's not where we are. So let's see how 2023 takes off. We expect that many of the supply chain issues that that have hit us the last few years are going to be subsiding based on most reports. So, I'm hoping that will add a level of stability to the release process. And then that helps us get the right amount of labor get the right amount of inventory and be as efficient as we can on the manufacturing side. So, hopefully that answers your question.

No, that helps. Jon last earnings call you had mentioned that there was other potential opportunities for sale leasebacks. Just want to see if there's any updated thoughts on that front?

Yes, Brian. Thanks for the question. Nothing new to report on that front. We continue to look at those opportunities to unlock some capital. We haven't entered into any sale-leaseback transactions in -- since we did the large one in Europe in Q1. But those options are still on the table for us. And if it makes sense economically and the cap rates are such that they plug into our cost of capital nicely and don't burn in ongoing operations with significant lease expense to unlock that capital then we'll go ahead and enter into those. But for now we're just continuing to investigate opportunities across the entire real estate footprint.

Okay. And switching gears just focusing on Europe for a second. Is the biggest headwind that you're experiencing there? Is it just the operating cadence, or is it the energy cost? Just trying to get a sense of what you need to occur to get Europe from turning EBITDA positive?

Yes, this is Jeff. So, as we've said before, we recognize we have some fixed cost issues that we ultimately, need to address in Europe and we have plans to do that. So, that's, kind of, under the bucket of what we can control. We also have a significant challenge there with many of our prices frankly, as we've absorbed a lot of the -- and I'm talking about the non-raw material inflation at this point has really eaten away what margins we did have in Europe. And so we're having those conversations with customers. And I expect here over the next 30 to 60 days that those will become extremely pointed and extremely important as it relates to at least getting us to a point where we can see an improvement in our European business. The final point that's been a big challenge there obviously is the volumes, right? They have dropped off a cliff starting in the third quarter. And when you look at the macroeconomic challenges the geopolitical challenges in Europe it continues to create a significant headwind for everybody. Hence as what I said before for us all options are on the table for Europe much like we've talked about Brazil. Ultimately, these businesses have to begin generating a return for us or the options are pretty clear. And so while we are hopeful that our customers will continue to agree with what we need in order to maintain a fair relationship there. We'll see how that goes over the course of the next several months. And we'll keep you posted.

Got it. Final question from me, as pertinent inflation metal prices and other commodities have started to decline off their February peaks. If I'm hearing you correctly is it now more of the just energy and labor that sort of replace the commodity inflation that's impacting the business?

It's Jeff. Well, obviously when you talk about energy costs going up, I mean that impacts a lot of buckets. But we are hopeful that when we talk about labor, when we talk about freight, when we talk about utilities that we're able to get to a deal in Europe with those customers that will allow us to at least get hole and hopefully start to make our way towards a positive business environment there. We can't continue to give away parts. It's just not feasible. And believe me, those conversations are happening. They're pointed. It's not personal. We just -- we got to get to a point where we're able to make money there and sustain it. And we're either going to do that or we're going to do something else.

Understood. Appreciate all the points. Thank you.

You bet.

Thank you. And one moment please for our next question. Our next question coming from the line of Kirk Ludtke with Imperial Capital. Your line is open.

Hello everyone. Thank you for the call. Just a couple of follow-ups, with respect to the customer relationships are these -- are you negotiating -- would you describe what you're negotiating as one-time price adjustments, or is the nature of the relationship changing such that these material costs are becoming more of an automatic pass-through?

Yeah. Kirk, for the material side of it, as we've talked before we probably have 65% or so of our total company revenue is now indexed related to the raw material cost portion. So that's a significant improvement over where we were. The other ones are quarterly surcharges that really act in a similar way. So we're confident that those deals that we've cut are also sustainable which is why we said earlier that we feel going forward that we're at a 70% recovery rate. I'll use the words that you just used that's, automatic going forward, whereas in the past they've been ongoing price negotiations. So that's the substantial improvement or substantial change we've made really in the foundation of this business and I feel very good about that. Related to those other costs of product, that's in production labor, freight, utilities those things that everyone is dealing with going up, while you get to quote those costs on your new business going forward and the business that we've yet to launch, would reflect those additional costs. The business that you have in production today requires you to go back and negotiate those recoveries separately and that's what we're doing. And we expect that we'll have similar results as we look at our 2023 book of business in recovering at least our fair share of those other buckets.

Thank you. That's helpful. So it sounds like you've de-risked the business. And would you say that the margins would be similar?

Yeah. I think we believe that we have reduced the volatility we've reduced the risk if you will of raw material ups and downs. And that's good. We believe it's good for the customer. We believe it's good for us and that's positive. Related to those other buckets you historically wouldn't have seen such large increases in labor and freight and so forth energy costs certainly coming this winter especially in Europe although probably not as terrible as originally thought still up. We believe that that it's fair to have those items on the table when we're discussing cost sharing and lean initiatives and VAVE and long-term contracts that you accepted LTAs in different environments. Those are all the things that are in the center of the table when you're having this conversation. And all we want is to keep something that's fair. And we are going to continue to reduce prices when costs are going up at the level they are and pretty straightforward.

Got it. Thank you. That's helpful.

Great.

And then just one other, with respect to the production specifically in the next couple of quarters in Europe, understands that inflation is still there, I'm just curious have you -- are there any real risks to production like energy rationing that type of thing. I know it's hard to -- you don't have a crystal ball, but how do you think about that type of risk?

Yeah. I don't have a crystal ball, but I can tell you that I can read my current financial statements. And clearly the revenue is suppressed. And I don't see anything in the near future that's going to change that. And so hence these conversations about cost recovery and getting to a point where Europe can generate positive cash flow is more than we can do by ourselves. We need help from our customers to get a footprint and a sustainable foundation there that will allow us to continue to make positive gains related to cash flow in Europe until things return to normal. I have no idea when that is. So we're just treating it as if it's going to be bad for a while.

Got it. But in terms of your customers' production levels, are you hearing about schedules being altered by actual rationing of energy?

No.

Okay. I appreciate it. Thank you very much.

Thank you. One moment for our next question. And our next question coming from the line of [indiscernible]. Your line is open.

Yeah. Hi, guys. Thank you for taking the questions. Most of mine surrounding inflation were answered already. So thank you. As it relates to labor though, are you able to hire the number of employees that you need at wages that are attractive to the company just given the labor and inflationary environments?

This is Jeff. I think in most markets we have, but clearly we have certain plants in certain states and in certain regions around the world that we think those headwinds are something that's going to need to be addressed on a long-term basis. So I think that whether you're working in retail or whether you're working in fast food or whether you're working in manufacturing, I think you have a similar feeling right now that labor is tight. Costs are going up. What we do is try to make sure that we provide the type of environment that's competitive for our employees and that they believe they have a long-term future that will help support their families. And that's what we try to make sure that we do. We aren't trying to pay the most, but we recognize that we have to pay a competitive wage, and so all of those wages for us virtually in every region have increased. I would say that we have at least gotten to a point where we have enough people lined up outside that we can feel like we can run the facilities the way we need to run them as long as we're willing to pay the wages that the market is demanding right now. So hopefully that answers your question.

Yeah, that does. That does. Thank you. And then as a second question I had. So SG&A this quarter came in at about $45 million, which is really well-below where it's been historically and it shows a lot of your cost-cutting initiatives are bearing fruit. Should we think of this call it roughly $45 million level as a new run rate, or do you think that's going to go back up or change materially going forward?

Ben, this is Jon. I'd say it's in the ballpark. The efforts that you described that we're continuing to look at all costs not just SGA&E and make sure it's rightsized and rationalized for our current size and footprint will be ongoing. So we were continuing to look for further opportunities, not only at that SG&A row but across the full P&L. We'll continue to drive that down and make sure it is rightsized as I mentioned. The only one thing I would call out in the quarter. When you're looking at the run rate, you also have to look at all of the compensation-related structures that we've got in place. And with the unfortunate continued pressure on production volumes overall in our lowering of our guidance that we talked to you about a few minutes ago. The bonus plan for the year won't be at 100% payout. So you do see a slight decline in SGA&E related to taking that bonus level down to call it the 75% range. That would be not in your go-forward run rate.

Got it. Thanks. That’s very helpful. I appreciate that. That’s it from me.

Thank you. And our last question in queue coming from the line of Sohail Ameer [ph] with Beach Point Capital. Your line is open.

Hi. Thanks for taking my call. Most of my questions have been addressed. But I just wanted to talk about, what initial thought you guys can share, about how 2023 might look. You mention during the call, that Q4 might be a better indication of run rate and wondering if you might provide guidance, on how we could extrapolate forward.

Yes, this is Jeff. I think I said during the prepared remarks, that if you look at the margin improvement in the fourth quarter, we expect to continue to build on that in 2023. That's kind of where we're leaving it today, as it relates to 2023. Clearly, we've talked a lot of about volume, we've talked a lot about release versus actual production. We need stability in 2023. We need numbers that we can take to the bank and run our plans off of I'm hopeful, that that's what we're going to get. So allow us to you know get a little closer here to the end of the year, when our customer starts to put out numbers that are hopefully, accurate for the quarter. Clearly, when you look at some of the folks out there that do forecasting for a living, they continue to talk about some softening versus what they originally thought 2023 was going to be. So that's really what we're seeing right now. And it would be too early for us, to assume what each of our customers are going to do. And so we usually, wait until the call to talk about the year-end and February, March time period and then we'll have a better understanding, of what 2023 top line is going to going to look like.

And with regards to the incremental costs that come as releases and actual production don't match. Can you give us a sense of, how much of a headwind that's been this year?

Well, you saw the inventory for the quarter, right? And so that's one large bit of cash that we spent because the releases were up. So it doesn't just make itself. So we have labor and plants running and people building this stuff that ultimately didn't sell so. That's one way for me, to describe it for you.

Are there like other incremental costs that are in this inventory timing related, that are also impacted by this, or should we just think of this as more of like a cash working capital impact?

Now clearly, when our volumes are suppressed like they are now and we have the fixed cost base that we have in each of our regions. I mean, volume is important. I mean we need like everybody the volume to return and to get back to a normal way of operating, rather than the stop start and overbuilding inventories and then depleting those the next quarter and those are just inefficiencies that, when you're in manufacturing you don't like. Again, I don't want to harp on it from a customer point of view, they're doing the best they can with what they have as well. We're just highlighting the facts.

I guess, if I were to rephrase it in another way. If you guys, have been given like the actual production levels in the releases, that you guys were like some actual realized reduction levels. Obviously, volumes would still be low, but I'm wondering how much lower would cost be if you knew like what to produce ignoring sort of the inventory buildup? I'm wondering are there other operating costs that are higher, because you guys had expected you needed to produce more and then you guys didn't, or like how should I sort of model like cost decreases potentially because with better production schedules in future years?

Yes, I'm not going to get into that breakdown. I think we take that offline, if you want to get into that with Roger. But clearly, in our case, I can assure you that the actual production level in the third quarter each of the months. And so far in the fourth quarter, are down substantially from what we saw. And I think it's clear that the expectation from the customer was that they were going to be up too. So, this isn't a surprise just from the supplier side of it, it's happened across the board. But if you want more detail in terms of modeling, which is what you just asked for, I suggest you get a hold of Roger, after the call and he can walk you through more details.

All right. Thanks a lot.

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

Okay. Thanks, everybody. We appreciate you joining the call and appreciate all the good insightful questions. As Jeff mentioned, if you do have further questions or would like to engage further, please feel free to reach out to me and we'll make arrangements to do that. Again, thanks for joining the call. You can disconnect and have a great day.

Ladies and gentlemen, that does concur our conference for today. Thank you for your participation. You may now disconnect.