Cooper-Standard Holdings' (CPS) CEO Jeff Edwards on Q2 2014 Results - Earnings Call Transcript

| About: Cooper-Standard Holdings (CPS)

Cooper-Standard Holdings Inc. (NYSE:CPS)

Q2 2014 Earnings Conference Call

August 1, 2014 09:00 ET


Glenn Dong - Vice President and Treasurer

Jeff Edwards - Chairman and Chief Executive Officer

Allen Campbell - Executive Vice President and Chief Financial Officer


Dan Kilmurray - UBS


Good morning, ladies and gentlemen and welcome to the Cooper-Standard’s Second Quarter 2014 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded this morning and the webcast will be available for replay later today.

I would now like to turn the call over to Glenn Dong, Vice President and Treasurer. Please go ahead.

Glenn Dong - Vice President and Treasurer

Thank you and good morning. Please note, that certain information in this call may be forward-looking and contains statements based on current plans, expectations, events, and market trends that may affect the company’s future operating results and financial position. Such statements involve risks and uncertainties that cannot be predicted or quantified and that may cause future activities and results of operations to differ materially from those discussed.

For additional information, we ask that you refer to the company’s filings with the Securities and Exchange Commission. This call is intended to be in compliance with Reg FD and is open to institutional investors, security analysts, media representatives and other interested parties. A reconciliation of certain non-GAAP financial measures used during this call can be found in the appendix of this presentation.

At this time, I would like to turn the call over to Jeff Edwards, Cooper-Standard’s Chairman and Chief Executive Officer.

Jeff Edwards - Chairman and Chief Executive Officer

Okay, thank you Glenn. Good morning, everyone. Starting with Page 4, revenue for the quarter was strong. It was up 9.3% from the prior year quarter that exceeded the industry’s growth of 2.2%. Overall, our sales grew organically by 5.9%. As indicated in our first quarter call, we have successfully returned the business to double-digit adjusted EBITDA financial performance delivering 10.7% adjusted EBITDA margins, which is up from the prior year quarter and the first quarter of 2014.

Consistent with our strategy to establish full product line capabilities in Asia-Pacific, we have announced the formation of a new joint venture relationship with INOAC. This will greatly accelerate our Fluid Transfer Systems growth in that region. INOAC has an extensive Asia-Pacific footprint, have strong relationships with the Japanese OEMs and a long history of delivering superior rubber and plastics components to the automotive industry. Combining INOAC’s experience with Japanese customers and their Asia manufacturing footprint with Cooper-Standard’s global expertise in the Fluid Transfer Systems business as well as our broad customer base really creates an unmatched potential to gain share of the $2.5 billion fluid transfer automotive market. In addition, we are pleased to announce that we have also closed the sale of our thermal and emissions product line.

And then on the operation side for the quarter, I would like to report that we are actively launching new business across multiple platforms for many customers across really all regions. I am pleased to report that as a result of the launch process installed during 2013, all of these launches are tracking green and this is based on our customer metrics. So, we are very pleased about that.

Moving on to Page 5, it is our overview of the regions. We will start with Asia. We are very pleased with our strategic progress here with the opening of our new tech center and Asia-Pacific headquarters in Shanghai, China, as well as the JV agreement that I just spoke about regarding INOAC and that’s to accelerate our growth of our fluid transfer business in the Asia region. We also continue to actively evaluate other growth opportunities and anticipate to announce additional details about that during the third quarter. We are very proud of our Europe team. They have made great progress with improving the margins through addressing isolated operational issues, renegotiated contracts and a lot of focus around optimizing our footprint. The grand opening of our Serbia facility is excellent example of moving from high to low cost production with expected savings of $25 million annually. We expect that facility on schedule to ramp up during 2015. We are also gaining market share despite a flat market. The Europe market is showing signs of improvement, which we anticipate will further strengthen the gains that we are making.

In North America, it’s important to point out that a key factor in achieving our normalized adjusted EBITDA margin was based on our ability to address operational issues. We accomplished this while also launching a significant amount of new business across multiple platforms and plans.

Just to give you an example of the magnitude of the North American launch load, we are currently launching 24 vehicles that are impacting 20 of our plants in North America. Volumes are also forecasted to remain strong throughout 2014 and our team here is certainly well positioned to successfully support our customers on this robust volume. Despite significant headwinds in South America we have continued to gain market share and are actively launching new business there as well. Production volumes are forecasted to remain down for the remainder of 2014 and as you would expect our team is (indiscernible) as needed to adjust to that changing environment.

Moving on to Page 6, our profitable growth strategy is clear we are focusing on our core product lines to improve our return on invested capital. With the announcement of divesting our thermal and emissions product line we have now solidified our core product lines. Those four are the sealing and trim systems, fuel and brake delivery systems, fluid transfer systems and anti-vibration systems. We have appointed product line leaders who are charged with supporting our regional organization as well as driving improved ROIC across those four product groups. Those particular leaders will also work closely with our innovation team to bring the latest innovations to our customers, utilizing our common engineering and manufacturing standards across Cooper-Standard.

Finally, moving on to Page 7, in addition to driving return on invested capital improvements to our product line focus, we also have tremendous upside potential by delivering best business practices really throughout our global organization. We are developing the best in class business practices by product line and have already gone live in our sealing and trim systems business, which will be followed by our fluid transfer system and fuel and brake delivery systems are all completed in live by year end.

So I would now like to turn the presentation over to Allen Campbell. Allen?

Allen Campbell - Executive Vice President and Chief Financial Officer

Thank you, Jeff. Turning to Slide 9, as Jeff mentioned for the quarter Cooper-Standard sales were up 9.3% when compared to same quarter previous year. Higher North American vehicle production levels, share gains in Europe and North America, sales from our Jyco acquisition and $7.9 million of favorable foreign exchange all contributed to this increase. Our North America operations reported sales of $452 million. We are up 13% in a period when production units were up 4.3. This is a result of share and mix gains in our Jyco acquisition. In Europe we continue to gain market share with sales up 7.8% or 2.7% before foreign exchange movements in a relatively flat market. Sales in Asia Pacific were up 14.9% versus the market of 5.1%. Primarily the incremental sales came from our Jyco acquisition and also increased volume.

Turning to South American region Brazilian market continues to struggle with vehicle production dropping more than 20% during the period which drove our lower sales. Sales of non-consolidated joint ventures continue to grow nicely generating sales in the quarter of $117 million, up 3.8% from the prior year.

Moving to Slide 10, gross profit in the quarter was $146.1 million or 17% of sales, which is fairly impacted by our lean and material cost savings and increased production volumes, which were partially offset by customer price concessions, staffing costs and other operating expenses.

SG&A expense for the quarter was $81.9 million or 9.5% of sales compared to $72.7 million or 9.3% of sales in the prior quarter as we continue to vest and build our technology and support our customers globally. Operating profit of $56.5 million was 6.5% of sales.

Turning our attention to net income for the quarter, we reported $13.2 million. Please bear in mind that this includes a loss of $30.3 million in connection with our debt repurchase that we completed in April. Fully diluted earnings per share for the quarter, was $0.72. Adjusting for debt refinancing charge, our fully diluted earnings per share for the quarter was $1.74 as compared to $1.34 in the previous year quarter. On a year-to-date basis, we generated $32.9 million in net income and fully diluted earnings per share of $1.82 or $2.87 on an adjusted basis.

Turning to next slide, Cooper-Standard generated $172.3 million in adjusted EBITDA in the first six months of the year and $300.5 million for the last 12 months. For the quarter, adjusted EBITDA was $91.8 million or 10.7% of sales. As shown in this chart, we have delivered improved operating performance. And as Jeff mentioned, we are on track of key launches making us confident that this level performance will be sustainable for the remainder of the year.

Moving to Slide 12, we show our normal reconciliation of net income to adjusted EBITDA. We will move on to Slide 13. Slide 13 shows our cash flow for the first half of the year. Business generated $131 million in cash prior to changes in operating assets and liabilities. We used approximately $76.8 million to finance changes in operating assets and liabilities, which included our working capital requirements, investments and tooling. As of June 30, we carried approximately $167 million in tooling in our balance sheet. Our capital expenditures for the quarter were $110.8 million, which is in line with our guidance of $195 million to $205 million for the full year. Overall, we ended the quarter with $207.4 million of cash and balance sheet. We continue to maintain adequate liquidity to run the business with $351.8 million availability as shown on the table. Other key financial metrics continue to bring strong leverage of $585.1 million, net leverage to adjusted EBITDA of 1.95 times, and the interest coverage ratio of 5.4 times.

Moving to Slide 14, we are reaffirming our initial guidance for 2014. However, we have slightly modified our view in North America increasing production units of $17 million and European production units to $19.9 million for the full year. And our view on certain FX rates to reflect current market levels with average exchange rates for U.S. dollar to euro to a $1.37 in U.S. dollar to Canadian dollar of $0.92.

On Page 15, in summary, we continue to drive ROIC improvements through our core product strategies and goal of best business practices. And we are actively investing and partnering in Asia to accelerate our growth. The recent opening of Asia-Pacific Technical Center expands our regional technical presence and announcement of our INOAC JV accelerates our Fluid Transfer Systems production in the region. Our team is also building a great place to work by attracting and developing gauging talent to support our growth and our employees are very involved in the communities, which they work and live supported by the Cooper-Standard foundation. Additionally, we are very proud of our Careers for Veterans Program, which recruits veterans who are transitioning from active service to civilian careers. Thus far, we have increased our veteran workforce by 16% in 2014 and anticipate this number to climb further as this program continues to gain traction.

Thank you for participating in today’s call. Operator, please open the call for the Q&A portion.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from Gentry Cline with (indiscernible) Capital. Your line is open.

Unidentified Analyst

Thank you. Good quarter guys. On adjusted EBITDA margins, it was 10.7% for the quarter and you mentioned that North America was running at a normalized level. Can you just help us better understand maybe provide a little more clarity on what the double-digit margins for the year is that approaching 11%, 12%? And going forward, what does the margin profile look like over the next three years? Can we get back to 12%, 13% margins, that we are at historically?

Allen Campbell

What we have said and continue to say is we have double-digit for the year 2014 and we are continuing to say that. We have not gone any further publicly on any other tight margins. You can look at our historical performance. You can look at what we did last year and we pointed to the operational issues around the third and fourth quarter and you can see a recovery now and you can probably make some assumptions of where we are headed.

Unidentified Analyst

Got it, okay. And there is something structural that would prevent us from getting back where we were historically?

Jeff Edwards

That’s correct. There is not.

Unidentified Analyst

Got it, okay. Thank you.

Jeff Edwards



(Operator Instructions) Our next question comes from the line of Dan Kilmurray with UBS. Please go ahead.

Dan Kilmurray - UBS

Good morning, guys. Could you give us a sense or have you formulated your CapEx plans for sort of ’15 into ‘16 and is there an expectation that it will drill down or stay in this $200 million range?

Allen Campbell

We have not given guidance yet for 2015/2016. We are, as Jeff mentioned, we are working through significant amount of our strategy. We are looking at growth in Asia. So, that would tend to believe you are going to have some investments, but we have not put a number to that.

Dan Kilmurray - UBS

Okay, thank you.


(Operator Instructions) Thank you. We have no further questions. This concludes our conference call. You may now disconnect.

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