Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Second Quarter 2024 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Following company 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 would now like to turn the call over to Roger Hendriksen, Director of Investor Relations. Please go ahead.

Thanks, Julie, and good morning, everyone. Thanks for joining 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 presentations. With those formalities out of the way, I'll turn the call over to Jeff Edwards.

Okay. Thanks, Roger, and Happy August, everyone. We appreciate the opportunity to review our second quarter results and provide an update on our business and outlook going forward. So, to begin on Slide 5, I'd like to highlight some key second quarter data points that we certainly believe are reflective of our continued strong commitment to operational excellence and our company core values. In terms of product quality, 97% of our customer scorecards were green in the quarter. For new program launches, our customer scorecards were 96%. We continue to achieve outstanding operational performance, allowing us to deliver exceptional value to our customers. In addition, the safety performance of our plants continues to be excellent. During the second quarter, we had a total incident rate of 0.29 reportable incidents per 200,000 hours worked, well below the world-class benchmark of 0.47. Leading this outstanding safety performance were the 31 plants that had a perfect safety record of zero incidents through the first six months of the year. I certainly want to recognize the teams at these plants for their ongoing commitment and leadership as we continue to strive for our ultimate safety goal of zero incidents for the entire company. In terms of cost optimization, we had another solid quarter with our manufacturing and purchasing teams delivering $16 million of savings through lean initiatives and other cost-saving programs. This improved efficiency, combined with our enhanced commercial agreements enabled us to improve our gross profit margin by a solid 100 basis points compared to the second quarter of last year. While we certainly have more work to do, we continue to make progress toward our profitability targets. Finally, we're continuing to leverage world-class service, technical capabilities, and our award-winning innovations to win new business. In fact, during the second quarter of 2024, we were awarded $61 million in net new business awards. Importantly, we continue to partner with our customers to design and develop new technologies for some of their most important new vehicle platforms, including ICE, hybrid, and battery electric vehicles. Let's go to Slide 6. While providing our customers with world-class products, technology, and service, certainly is and always will be critical to our success, we also place a high priority on being a good corporate citizen and a steward of the environment. We continue to garner outside recognition for our leadership in sustainability. In the most recent quarter, we were pleased to be included in USA today's list of America's climate leaders in recognition of our efforts to reduce energy consumption and develop products that reduce overall carbon footprint. Consistent with our company values and purpose, we remain committed to creating sustainable products and solutions that will create value for all stakeholders. Now, let me turn the call over to Jon to review the financial details of the quarter.

Thanks, Jeff, and good morning, everyone. In the next few slides, I will provide some details on our financial results for the quarter and discuss our cash flows, liquidity, and aspects of our balance sheet. On Slide 8, we show a summary of our results for the second quarter and first six months of 2024 with comparisons to the same period last year. Second quarter 2024 sales were $708.4 million, a slight decrease of 2.1% compared to the second quarter of 2023. The decrease was driven primarily by the divestiture of our Technical Rubber business in Europe during the third quarter of last year and unfavorable foreign exchange. Excluding the impact of the divestitures and FX, net sales would have been up $7 million or approximately 1% compared to the second quarter of 2023, outpacing global automotive production, which declined by 0.5%. Gross profit for the second quarter was $82.9 million or 11.7% of sales. This compares to a gross profit of $77.7 million or 10.7% of sales in the second quarter of 2023. Adjusted EBITDA in the quarter was $50.9 million compared to $47.9 million in the second quarter of last year. The year-over-year improvement was driven primarily by lean savings achieved in manufacturing and supply chain, favorable volume and mix, including sustainable price increases, and savings related to restructuring actions. These positive drivers were partially offset by the impact of unfavorable foreign exchange and ongoing inflation headwinds in areas such as energy and labor costs. On a US GAAP basis, we reported a net loss of $76.2 million in the second quarter compared to a net loss of $27.8 million in the second quarter of 2023. The result in the second quarter of 2024 included a non-cash charge of $46.8 million related to the termination and settlement of…

Thanks, John. For the few minutes we have remaining on our call this morning, I'd like to focus on the progress we're making with our key strategic imperatives as well as provide you with an update on our full year guidance. So, please turn to Slide 13. Last year, our global leadership team outlined and refined four key strategic imperatives to accelerate growth and maximize the long-term value of our company and you can see these outlined on Slide 13. My earlier comments already spoke to the world-class execution and corporate responsibility. So, I'd now like to share a few comments on some key actions we've taken to improve our financial strength. Turning to Slide 14. As we announced last quarter, our new product line-based organization structure helped us to quickly identify significant opportunities to further optimize costs by eliminating redundancies, automating processes and leveraging technology. As a result, during the second quarter, we successfully implemented a plan to reduce our salary costs globally. These actions are already having a positive impact, as Jon pointed out in his slides, but the impact will be much more significant in the second half of the year and beyond. In total, the reductions are expected to save between $20 million and $25 million in 2024 and between $40 million and $45 million on a full year annualized basis beginning in 2025. The anticipated savings are expected to provide a payback on related restructuring costs in approximately six months. Further, we expect the savings will enable both operating segments to approach, if not achieve double-digit EBITDA margins and return on invested capital as we exit 2025 despite this projected slow growth in global light vehicle production. Of course, we recognize there's still work to do in order to drive the level of financial returns…

Thank you. [Operator Instructions] Your first question comes from Mike Ward from Freedom Capital. Please go ahead.

Good morning, everyone. Just a couple of things. On the restructuring actions, those actions have been completed, correct?

We are in the final stages of that, Mike. Most of them have been completed. Certainly, it's going to be the pickup I described between $20 million and $25 million in the third and fourth quarter. We have a high level of confidence. So moving right along with it.

Okay. The second thing on the, I mean, your margin performance, excluding FX was above 9%. And is that like kind of the go-to trend that we're at right now, we're getting towards that double-digit rate of margin?

Yes, this is Jeff again, Mike. Certainly is. We continue to march towards the double-digit EBITDA and return on invested capital, we expect to be there next year.

Okay. Jon, I wonder if you can go over some of your cash flow comments and I just want to make sure I understood it. I think you said that you expect it to be cash flow neutral for the year. Is that correct?

If I gave a range, Mike, that would be the top end of the range. We're looking now at our point estimate is slightly negative. Based on my earlier comments this year, we would have expected to be cash flow positive for the year at the free cash flow line item. But, however, given the confidence we've had from the operational performance and the improvements that we're making in the business, we chose to do a straight cash interest pay in the December coupons for both our first and third lien notes. And that's worth about $25 million incremental cash that will go out the door. However, that's in the best interest over the long-term for our capital structure. So that took us from the slightly positive to slightly negative range on free cash flow.

And then there are other items. I think you see their net cash taxes $25 million, $30 million, and then you have the restructuring cash. I assume all that's in the second half. I didn't see anything in the second quarter. Is that cash restructuring $25 million, $30 million all in the second half?

No. We had some original programs that were carryover from prior years that were still running out. So we did spend some restructuring dollars in the first six months as well as the recently implemented actions. So I think the number was about $12.5 million of restructuring cash that's already been spent.

Okay. In the first half. Okay. So, if I'm looking at the data that we see and you have that in the income statement that's been released thus far, does net cash used provided by our change in assets, operating assets and liabilities, and it was a negative $36 million in the first half. Normally, you would see some of that working capital turn positive in the second half. Some of these other items that are in there are going to keep that. You won't get the normal recovery. Is that right?

Well, just by definition, we do expect the second half to be positive as the first half was about $54 million negative. Q3 and Q4 tend to always be favorable in terms of working capital as we reduce inventories by the end of the year. We collect our receivables in the back half of December. So, there's typically an info that you see with normal seasonality. And so I think that trend continues. It's just mitigated a bit.

Okay. All right. Well, thank you very much. Appreciate that.

Thanks, Mike.

Your next question comes from Kirk Ludtke from Imperial Capital. Please go ahead.

Hello, Jeff, Jon, Roger. Thank you for the call.

Hey, Kirk.

Hi, Kirk.

Well, I wanted to follow up on Mike's question on the margins. I guess at least a 10% EBITDA margin without volume growth doing the math, that would imply $270 million of EBITDA exiting 2025. Am I doing the math right?

Yes, you're doing the math right.

So, you've got another, so that's an $80 million increase from the fiscal '24 guidance. So I think you've mentioned at least $20 million of cost saves. What's the other 60%? Is that the new products you mentioned, mix?

It was a couple of things. Keep in mind that, Kirk, that the $20 million to $25 million is this year's portion. Next year's portion is $40 million to $45 million of cost out with this latest salary cost reduction as a result of the new organization that we put in place. And, as we've said for the last couple of years, as we launch new programs and they replace the existing ones because in many cases, the innovation that I talked about is helping our customers save money. At the same time, we're able to make better margins because the product is technology that they're willing to pay for. In addition to that, the fluid business is returning to a significant level of contribution to the company, while it's been on hiatus for a couple of years here. And so that's a big part of it. And then finally, we're profitable in all regions as well. So, the ability for the team to manage the cost side of the business, which we have done extremely well. We've also been managing the price side extremely well. And that's not supported because people just like us. It's done because of the technology and the way we execute and the way we support our customers and their strategies, whether we're talking about ICE, hybrid, or EV and our ability to change quickly. We were able to engineer new products for their new vehicles and get it into the market and help them especially on the fluid side, help them save money in terms of what it costs them to manage the overall fluid dynamics. And at the same time, that adds significant content for Cooper. So, it's really inside of both of those. We're managing the cost side, we're managing price and we're managing content per vehicle with innovation. So those are the three things that are driving the overall improvement. And whenever we get volume, it will even be better.

Right. Absolutely. So it's really we're talking about $60 million of sales, at least $20 million in fiscal '24, another $40 million in fiscal '25.

Kirk, let me clarify that. This is Jon. It's $40 million annualized. So, we've $20 million this year and an incremental $20 million next year. So the total run-rate savings is $40 million to $45 million.

Okay. Got it. And that's helpful. Thank you. And more net new business wins this quarter, how would you describe your organic growth rate? Is it low single-digits, mid-single-digits better than that?

Yes, I think, Jon tried to give you a little sense of how we're continuing to outpace the market even in these crazy times in terms of the way the volumes continue to come down. I mean here in North America, the latest projection is 15.8 million units. And in his prepared remarks, he walked you through the math associated with it. So, we continue to outpace the market. So, we're growing the business pretty significantly. And when you look at that percentage over our history, I think, it's probably about the same. We do expect with the hybrid introduction that's coming, Kirk, that hasn't been clearly defined yet by our customers in all cases is going to significantly improve that number versus historical comparisons just because hybrid volumes are going to go up at least that's what we're being told. And that represents a content per vehicle increase for us in our fluid business by about 80%. So I think that's going to be really good news that we really haven't quantified for you yet in the macro sense beyond what I just did. The reason is because we don't know exactly what the product plans are yet over the next two or three years for our customers, but we've been told we're going to hear that here very soon.

Got it. Thank you. That's helpful. And I think I heard you'll make cash payments on both bonds in December?

Kirk, that's right. This is Jon again. Yes, we've not elected the pick option, so we're going to do a straight cash pay in December on both the first lien and the third lien notes.

Great. Wonderful. I appreciate it. Thank you very much.

Thanks, Kirk.

Your next question comes from Brian DiRubbio from Baird. Please go ahead.

Good morning, gentlemen. Just a few questions for me. Just on the CapEx spend, going back to my model. The last time I think you guys had CapEx that low was back in 2009. It had $46 million, obviously, your $50 million to $60 million. But can you explain sort of what the thought process is in terms of how you're deploying capital differently today or maybe for 2024 versus prior years? And why it can be that low? And how long can it be at that low level?

Yes, this is Jeff. There is a couple of different components of that. The first one is we're definitely getting better at designing the products that are going into our plants. So, they require less capital than they probably historically did. So I think that's first and foremost, hats off to our product engineers working closer with our manufacturing engineers to try to do everything they can to reduce the capital required to manufacture the parts. So, that's number one. Number two is the fact that we're operating at such low volumes in many cases where we're booking a lot of new business like China, we're just kind of filling up what we have there. And so that's been an advantage for us here in the short and medium term. I think that will continue through next year as well. And then finally, we've just, in many cases, as it relates to cost reduction and that historically, we would have probably accepted 1.5 years or 2 year payback on things and then invested accordingly. We've pushed that to less than a year. So that's had a positive impact because it forces the teams to have more of a laser focus on what they're doing from a cost reduction point of view if they're going to spend capital to achieve it and that behavior, I think, has been good for our company. And, I think, that's a sustainable thing going forward because there are still quite a few things in the pipeline that we're pretty excited about. So, those are kind of the reasons we certainly continue to grow the business. We continue to book a lot of business with our customers. So I don't want you to think that we're starving it for capital, but we've figured out ways to do it better. And then finally, to answer your question, where do we see that going forward? I mean, we would like to see that number closer to 3% than 4% going forward. So, let's see how we do.

Great. That detail was awesome. I appreciate all of that. Just as we think about next year, I know you said you still don't have plans on sort of the capital structure, but the notes do go full cash pay next year. I guess the immediate question here is, what is the current balance of the first lien and third lien notes so we can start figuring that out ahead of time what the cash interest will be?

Hi, Brian, you'll see the full details in our 10-Q we'll file later today. But the first liens balance as of June 30th was around $609 million. The third liens were at $387 million. The stub on the old senior notes is $42 million.

Got it. Appreciate that. And then just a final question for me. Jeff, given some of the comments that you made, as I looked at the guidance and the estimates for US auto production, that obviously didn't change in your press release. Just trying to understand sort of where the risks are with your current guidance that you provided. Do you see US manufacturers cutting production between now and the end of the year? Or are they sort of reticent to do that just because of the impact that has on their business? I'd love to get your thoughts there.

Yes, Brian, I'll pull out my crystal ball here. I wish I had a specific answer to that. But let me just start with this. We think that for the next six months, so for the second half of this year, we are confident in everything that we can control. Our pricing is set. The cost reductions are in or as close to in as they can be. Our plants are operating extremely well. So I don't anticipate any surprises in terms of what we can control. As I mentioned, the projections here in North America are down to 15.8 million units. I think we started the year with 16.1 million units. If you go back to the conversation I had with you all when we were talking about volume projections for '24 when we had this discussion, I think in January, we were saying then that we were worried about the volume we'd actually had gone forward with a fairly conservative guide everybody thought. We're now $100 million top line below that. So, I'm hopeful that we've seen the bottom of it. We anticipate that we have the releases going forward suggest that they're going to live up to the forecasts that are out there and are in our guidance. I'm sure everybody's feeling the same way. We'll see. But I'll tell you, the business is performing extremely well. There isn't any part of the business that hasn't been overachieving to make up for the significant headwind related to revenue that's taken a lot of money off our bottom line. Jon mentioned FX and the challenge that, that's provided. And so, when you think about things like inflationary pressures that Jon discussed, we expected material to be a bit of a tailwind this year. It's actually turned into a headwind. But because we're taking such care from a cost point of view, we've made virtually all of that up. And then, we've done a nice job managing price. Historically, we've given back 1.5% to 1.7%. During the COVID years, we took that below 1% give back last year. And this year, it's actually a positive for us. So, you add all that up, and we have a very bullish second-half outlook. We have a very bullish feeling about '25 and beyond. As soon as we get some volume back, my friend, it's going to be a good thing.

Understood. Just a final question. Fortrex, any updates on any other deployments of that compound and any other wins that you see in the near future to be announced?

We continue to have quite a pool for lower weight and recyclable. And I talked about that quite a bit in our prepared remarks. So it continues to be a driver for our Sealing business. And I think Nike announced the third shoe that's out there. And if you could see Jon's feet this morning, he actually has it on. So we continue to see the results that we thought we would there hopefully over the horizon that becomes more of a contributor to the bottom line. But again, a positive related to Fortrex, which was your question.

Great. Appreciate all the color. Thank you.

Okay.

[Operator Instructions] Your next question comes from Ben Briggs from StoneX Financial, Inc. Please go ahead.

Hey, good morning, guys. Thanks for taking the call and congratulations on the margins this quarter. The vast majority of my questions already got asked and answered. So, thank you. But just to confirm housekeeping. This is the last quarter that you had the pick option on either bonds, correct?

That's correct, Ben. In June, we actually had to make the election for the December coupons. So this was the last opportunity to make that election

Got you. And then just quickly on margins. So, gross margins came in at 11.7% this quarter, which is one of the highest numbers kind of excluding that third quarter of '23 when you had some retroactive payments. I think this 11.7% number is like the highest number since 2020. Should we expect on a gross margin basis, these double-digit, 11-ish, 12-ish kind of numbers going forward when we think about modeling this?

Yes, Ben, this is Jon. I think that's a fair way to look at it. Across the entire P&L, where we continue to look for opportunities to continuously improve margin rates. Significant attributors on the variable contribution margin uplift that we're seeing on new product launches, the cost reductions within the manufacturing area, and the purchasing lean initiatives are all going to manifest themselves up into the cost of goods sold and therefore, gross margin. So you should continue to see those levels even improving as we look to exit in double-digit EBITDA margins towards the end of 2025 as Jeff really talked about a lot already.

Got you. And then last one for me and I know you kind of got asked this just a couple of different ways, but I'll try one more time. On the last call, I think you had talked that a global refi was potentially on the table in 2025. Would you refer to that as still potentially on the table?

There's always potential, Ben, of course, it's going to be heavily dependent on market conditions, what the interest rate environment looks like in the capital markets, acceptance of deals starting in Q1 of 2025. As a reminder, our non-call provision is done at the end of January of 2025. So, in Q1 forward, we do have that opportunity to refinance. So, subject to those market conditions, automotive industry conditions and the overall production environment will enable us to go to market. So all those things combined, we'll see how things look towards next year. But as Jeff has already alluded to, we're 100% focused on the capital structure and making it more manageable in terms of a company of our size and footprint. So as we have these opportunities next year, leveraging the improvements that we're making in the business and the sustainable profitability and sustainable cash flow generation, we'll certainly look to leverage those metrics and KPIs as we go to market.

Understood. Thanks very much for taking the questions, guys

Okay, Ben. Thanks.

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

All right. Thanks, everybody, for your questions, the engagement. We appreciate your participation very much. If there are other questions that come up later in the day or in the following weeks, please feel free to reach out to me directly and we can arrange for a further conversation. Thanks again. This will conclude our call.

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