Q4 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Cooper standard fourth quarter and full year 2019 earnings conference call.

During the presentation, all participants will be in listen only mode. Following company prepared comments, we will conduct a question answer session.

Time, if you have a question do you want me to press the star followed by the one key.

As a reminder, this conference call is being recorded and the webcast will be available for replay later today.

Now I'd like to turn the call over to Roger Hendriksen director of Investor Relations.

Thanks, Letif and good morning, everyone.

We appreciate your continued interest in Cooper standard and we thank you for taking the time to participate in our call today.

The members of our leadership team, who will be speaking with you on the call. This morning, or Jeff Edwards, Chairman and Chief Executive Officer, and John Banas, Executive Vice President and Chief Financial Officer.

Before we begin I need to remind you that this presentation contains forward looking statements.

Well, they're 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 referred to slide three of this presentation and also to the company's statements included in periodic filings with the Securities and Exchange Commission.

This presentation also contains non-GAAP financial measures.

Reconciliation to the non-GAAP financial measures to their most directly comparable GAAP measures are included in the appendix to the presentation.

With those formalities out of the way I'll turn the call over to Jeff Edwards.

Thanks, Roger and good morning, everyone.

I'll be getting this morning by putting some context around our fourth quarter and full year results.

Conditions in the worlds top auto markets remain challenging production of light vehicles globally declined by approximately 6% in 2019.

Negatively impacting every major region.

In our top market North America.

Light vehicle production was down by nearly 4% for the year.

And more than 8% in the fourth quarter.

The decline was not in part due.

Decline was in part due to the way W work stoppage at General Motors.

Production was also down for most of all other Oems.

In China light vehicle production was down by more than 8%.

For the year as estimated by age outs.

Production levels.

For customers and some of our top platforms were down disproportionately versus the overall Chinese market.

In industry production was down in Europe by more than 4% for the year.

In context of the weaker production environment demands for increased price concession continue in commercial negotiations remain challenging.

In addition, despite lower production in the automotive market and other industries.

Commodity cost remain high throughout the year, creating a 29 million dollar headwind.

Finally, adding to the new.

Adding to the normal market impacts the discontinued customer relationship in China that we spoke about last quarter.

In the protracted you ADW strike had a combined 22 million dollar one time negative impact on our results in the year.

We believe the challenging market conditions that have persisted for the past 18 to 24 months.

The new normal for the auto industry.

Environment of slow to negative growth, we have to be more focused than ever before on improving efficiency.

Providing world class quality.

Service and innovation to our customers and driving the business to improve cash flow and returns on invested capital.

And we are.

Despite the volume headwinds through our innovation continuous improvement in best business practices.

We were able to drive $81 million, an operating efficiency for the year.

Further well executing a company record 271, New program launches we ended the year with a record 96% Green watch results on our customers scorecard.

Which is a tremendous achievement for the entire group.

Our World Class quality service and innovation continue to drive customer demand in significant business Awards.

In the fourth quarter alone, we received an estimated $191 million an annualized net new business Awards.

Bringing the total for the year to $451 million.

Contracts awarded for innovation products, including new and replacement business totaled $104 million in the fourth quarter and $380 million for the year.

We expect these new awards combined with our continuing effort to reduce cost and overhead will help position us for future profitable growth.

Turning to page six.

We highlight some of the most significant cost reduction initiatives in 2019, we completed the closure of 10 facilities streamlined our global management structure and reduced head count from senior level executive down to plant level to address SGN any expense.

We also completed two vertical integration initiatives.

One for materials mixing in Mexico, and one for the steel.

Two fabrication in China that will drive significant savings in 2020 and beyond.

And we launched a huge supply chain initiative that will help transform or supply chain and has targeted significant direct spend on materials and commodities by as much as 5% over the next few years.

So we continue to successfully manage those aspects of our business that we can control.

And we're continuing that focus into 2020 <unk>.

Now, let me turn the call over to John to discuss the financial details of the quarter in the year.

Thanks, Jeff and good morning, everyone.

In the next few slides I'll provide some additional detail on our quarterly and full year financial results and put some context around some of the key items that impacted earnings.

Then I'll provide an overview of our outlook for 2020.

On slide eight we show a summary of our results for the fourth quarter and full year 2019 with comparisons to the prior year.

Before getting into the details a quick note that the financial results has provided in the press release and this presentation include adjustments to previous reported periods.

As we disclosed in our Q3 results and form 10-Q.

We identified errors related to the timing of recording of certain pricing matters with customers in the Asia Pacific region.

During Q4, we concluded that these amounts would be material to 2019 results and therefore determined that it was necessary to adjust previously reported periods.

Further information on the impact of this revision will be included in our form 10-K, which we filed in the next day or so.

Fourth quarter, 2019 sales were $726 million down 16.6% versus the fourth quarter of 2018.

The year over year change was driven by the sale over ABS business.

Unfavorable volume and mix in North American Europe.

The way W. work stoppage foreign exchange and customer price reductions.

These were partially offset by improved volume and mix in Asia.

And increased sales from recent acquisitions.

Gross profit for the fourth quarter was $65.5 million compared to $110 million in the same period a year ago.

Adjusted EBITDA was 25.7 million were 3.5% of sales compared to $75 million in the fourth quarter 2018.

The most significant drivers of the decline in adjusted EBITDA run favorable volume and mix and all of our key regions.

Customer price adjustments high raw material costs general inflation, and the net impact of acquisitions and divestitures.

These were only partially offset by improved operating efficiency and other cost savings initiatives implemented during the year.

In addition, the extended you weigh w. work stoppage in the U.S. and some receivable write offs related to the discontinued customer relationship in China that we spoke about last quarter.

Negative factors in our fourth quarter and full year results.

On a U.S. GAAP basis, we incurred a net loss of $67 million in the quarter.

This included restructuring expense.

Noncash and parents and pension settlement charges related to the purchase of the bulk annuity insurance policy to de risk our U.S. pension plan.

Excluding these and other items adjusted net loss for the fourth quarter was $22 million were a dollar and 32 cents per diluted share.

For the full year sales of 3.1 billion were down 14% versus 2018.

The main drivers the decline where the sale over ABS business.

Weaker volume and mix in our three largest regions and unfavorable foreign exchange.

Adjusted EBITDA for the year came in at 201.6 million compared to 372.7 million in 2018.

The key drivers the decline run favorable volume and mix customer price adjustments.

General inflation in higher raw material costs.

Partially offset by improved operating efficiencies and other cost savings and lean initiatives.

Full year net income was 67 and a half million dollars were $3.92 per diluted share.

Which included the gain on the sale of our SBS business asset impairments in the pension settlement charges.

Adjusted for the net impact of these and other special items, we incurred a net loss of the year for a $3.3 million or 19 cents per diluted share.

From a capex perspective, we ended the year at a $164.5 million were 5.3% of sale.

This compared favorably to capex of 218.1 million or 7% of sales in 2018.

Moving to slide nine.

The charts on slide nine quantify the significant drivers of the year over year changes in our sales and adjusted EBITDA for the fourth quarter.

For sales normal volume and mix net of typical customer price reductions reduced sales by $25 million year over year.

The volume and mix impact with largest in North America, due largely to the cancellation or run out of certain programs previously announced.

And slower than expected ramp up of key replacement programs.

The way W. strike, which we break out as a one off items accounted for approximately $24 million of the revenue decline.

The combined impact of acquisitions and divestitures was a negative $85 million a foreign currency fluctuations reduced sales by 11 million.

For adjusted EBITDA are ongoing efforts and lean manufacturing and operational efficiency drove $16 million and cost savings for the quarter.

These savings were more than offset by $29 million of unfavorable volume mix and typical price reductions.

As well as $11 million, a one off items from the impact of the way W. work stoppage.

And the write off of receivables related to the former customer in China.

We also faced.

Negative $9 million of commodity headwinds and in that $8 million from acquisitions and divestitures, primarily the sale of the ABS business.

Moving to slide 10.

For the full year sales were impacted by $278 million of unfavorable volume mix and customer price.

$263 million from the sale of the ABS business.

87 million from unfavorable foreign exchange, primarily the euro in RMB.

And $32 million from the way W. strike.

On the positive side acquisitions added $144 million in sales for the year.

Full year, adjusted EBITDA benefited from $81 million and cost savings through improved operating efficiencies.

These savings were more than offset by $170 million, a weaker volume and mix.

$22 million from the one off items previously mentioned.

$29 million in higher material costs, and the net $9 million negative impact from acquisitions and divestitures.

Moving to slide nine.

Hello, sorry 11.

Our balance sheet and credit profile remains strong despite lower earnings during the year.

We ended 2019 with $360 million of cash on hand.

Up from $323 million at the end of the third quarter this year.

$95 million higher than a year ago.

And actually our free cash flow increased more than 32 more than $34 million in the fourth quarter and improvement of more than 100% over Q4 last year.

We accomplished this positive outcome there an intense laser focus on capital spending and working capital management, which we fully intend to continue in 2020 and going forward.

Our total debt at year end was $808 million and net debt was 448 million.

This equates to a net leverage ratio of just 2.2 times trailing 12 months adjusted EBITDA.

With cash on hand, and availability under revolving credit facility, we had total liquidity of $533 million at year end.

We believe this provides ample capital for the funding needs of the company given the current industry environment.

And finally on the long term liability side of the balance sheet, we're able to take advantage of favorable market conditions and proactively de risk nearly 20% of our U.S. pension plan during the quarter.

Using pension plan assets, we purchased a bulk annuity policy and reduced our projected benefit obligation by $58 million.

We were able to execute this with no incremental cash contributions and relatively no impact on the overall funded ratio of the U.S. plan, which remains nearly 96% funded.

This was a great result that significantly reduces the long term risk of our pension liabilities going forward.

Moving to slide 12.

We provide our initial guidance for 2020 as well as some key assumptions for light vehicle production that form the basis of our forecasts.

We currently expect sales in the range of $2.85 billion to $3.05 billion in 2020.

This range is impacted by one quarter of remaining overhang from the sale of our ABS business.

And a $50 million reduction in sales in the first quarter due to plant closures in quarantine actions related to the Corona virus outbreak.

Other assumptions affecting the topline or the continued weakness in light vehicle production in Asia, and Europe for the full year and ongoing customer price adjustment.

Adjusted EBITDA for the year is expected to be in the range of $150 million to $185 million.

Including an estimated impact of $15 million in the first quarter due to weaker sales and production in China as a result of the Corona buyers.

This would imply an adjusted EBITDA margin approximately 80 basis points lower than 2019 at the midpoint of our ranges.

We expect our teams will again be successful and improving operating efficiency and lean savings.

And we also anticipate incremental savings from recent restructuring activities.

Combined these represent 290 basis points of expected margin improvement over 2019.

However, we also expect continuing headwinds from market driven factors.

Given our outlook on commodity prices.

We would expect to see an adverse 50 basis points in raw material cost pressure.

And for planning purposes. This does not anticipate any further tariff actions.

General inflation on salaries wages and comp as well as energy rent and utilities.

It is expected to present 270 basis points of margin headwind.

Much of this is driven by the need to provide competitive compensation in order to retain and reward our talented team members and tightening labor markets.

The impact of all other items net of customer price for adjustments is expected to approximate a positive 10 basis points.

And finally for adjusted EBITDA, We currently estimate the impact of the krona virus outbreak in China will have a negative impact of Approx, approximately 60 basis points on our EBITDA margin year over year.

Note that this is factoring in only what are we are seeing for the first quarter of the year.

We believe these forecasts are conservative relative to normal market drivers.

Well, we've incorporated our current best estimates of the impact to the Corona virus into these guidance ranges.

Outbreak is creating unusual amount of volatility and uncertainty.

We believe that the direct impacts in China have the potential to create a spillover effect that could further disrupt the global automotive market and the global economy in general.

However, it is impossible to estimate those potential impacts at this time. So we continue to monitor the situation carefully.

Capex for 2020 is expected to be between 140 and $150 million down from the $165 million last year and lower than our plan depreciation and amortization.

Cash restructuring is expected to be in the range of 30 to 40 million as we continue our significant efforts to streamline and right size the business.

We expect our cash taxes for the year to be in the range of $10 million to $15 million given the prevailing tax rates in various jurisdictions.

Plan geographic mix of earnings overall.

And the varying opportunities to utilize tax credits in certain countries.

Lastly, free cash flow will be an intense focus area for us in 2020 as it always is.

With continued discipline on optimizing capex and emphasis on improving working capital.

While meeting the guidance targets we provided.

We expect to be cash flow positive in 2020, despite the new normal of challenging industry condition.

Now, let me turn the call back over to Jeff.

Okay. Thanks, John before concluding our discussion this morning, I want to share a few thoughts.

Regarding the key strategic imperatives that we believe are critical.

For delivering sustained value for our stakeholders.

I will also share some updates relating to our innovation diversification and cost reduction initiatives. So let's move to slide 14.

Our board of directors and global leadership team.

Recognize and embrace the responsibilities we have in relation to diverse set of stakeholders.

Including our customers are investors our employees suppliers in the communities in an environment, where we live and work.

It's not simple to balance the mall, especially when our key markets are impacted with significant volatility.

As we entered this new year.

We've aligned our entire global organization around six strategic imperatives that we believe will help us drive improved results in increases value for all stakeholders in both the near and longer term.

These imperatives include World class culture.

Diversification in innovation.

Maximization of cash to maintain a strong and stable balance sheet.

Improving returns on invested capital.

Profitable growth.

In in the longer term prudent industry consolidation.

We don't have time to go into each of these areas. This morning.

But I will try to relate at least some of the imperatives to our 2020 outlook in the next few slides.

So turning to slide 15.

The imperative that serves as the foundation for all others is world class culture.

Which naturally includes an packable ethics.

It's impossible to run an organization successfully without talented people.

In integrity as its foundation.

It's also impossible to attract and retain the right talented people without a corporate culture that they want to be part of.

We're proud of the way our corporate culture is evolved in progressed over the past several years and we're proud of the recognition.

That we're receiving as a result.

This morning, we're very pleased to be recognized by Ethisphere Institute as one of the world's most ethical companies.

Based on their extensive review process analysis in comparison of many public companies.

This in addition to having been included in Newsweek magazine's list of world's most responsible companies a few weeks ago.

While we have worked to do in terms of achieving our long term SG goals. We believe this recognition is an indication that were on the right track.

You can learn more about our activities in progress.

For our SG initiatives by checking out our 2018 CSR report as published on our website.

And we'll be publishing our 2019 report later this spring.

Turning to slide 16.

The next few slides relate to the strategic imperatives of innovation.

Versus vacation and profitable growth.

Our continued focus on innovation and products that enhance customer value.

Has led to many new business awards.

That are now beginning to roll into production.

As you know in 2019, we had a record year.

For new program launches.

We continue with huge launch activity in 2020.

Importantly of 190 planned program launches 24 are related to our innovation products. This includes the next two major launches for our Fortrex static sealing products.

Our innovation products are driving improved margins versus our traditional products. We believe this will become more evident as our innovation sales ramp up.

Some of the exciting new vehicle platforms were launching products on this year are shown on this slide.

Turning to slide 17.

We provide a list of our planned top 10 vehicle programs for 2020.

The vehicle images in names reflect the lead vehicle on each platform.

We're proud of the continued strong mix of our top programs.

Which maintains a heavy weighting on trucks and as you vs.

The strong mix provides us with maximum opportunity to increase product content per vehicle and sales overtime.

Combined these top programs represent approximately 40% of our planned 2020 revenue.

Our top platform. Once again is the Ford F series pickup truck.

And given its strong planned production volumes as well as high average content per vehicle.

Even after the sale of our avionics business ours CPV on the F series averages nearly $340.

This year, the all new 2020 explore as even a slightly higher content per vehicle than the F series.

On a weighted basis.

Our CPV across these top 10 platforms is expected to be approximately $140. This year.

The chart indicates that we have content in all three of our product categories on most of these top 10 programs, but there's still opportunity to increase content in most cases.

We believe our focus on innovation.

Value and World class customer service will help us increase our content per vehicle in total sales volume as we move forward.

Turning to slide 18.

We continue to make progress within our advanced technology group to build a complementary business that leverages, our materials science and manufacturing expertise and expands our market opportunities beyond the automotive industry.

In terms of material licensing in sales.

We are currently shipping customized materials to our earliest licensee.

These volumes are still small, but there's potential to expand our business with this team overtime.

We remain on track and the material and technology development phase.

With our other customers and licensees.

As the materials science surrounding the four tracks chemistry platform continues to evolve it is generating new interest and creating additional opportunities.

As a result, we will be investing in additional tooling and equipment this year.

To speed up the prototyping and development process.

In terms of new business development, we signed six new joint development agreements in 2019.

And we continue to see interest from a number of potential customers.

We will continue to sign additional agreements in 2020.

Primarily by expanding on existing technology in applications.

On the converted product side of the advanced Technology group.

We will look to introduce for tracks base material.

Into our converted materials product line up in 2020.

We expect this to further differentiate the business with our customers expand target markets in applications and create additional competitive advantage.

As we look ahead, we continue to believe that the advanced technology group business model has the potential to drive high volume material sales licensing fees in royalty income with a relatively light asset base.

As we diversify the company through growth in AG.

We expect to deliver improving returns on invested capital overall.

Moving to slide 19.

To conclude our prepared remarks. This morning, I want to return the focus to our action plans and opportunities to deliver improved value in the near term as we discussed in our last conference call.

We've completed the transition to our global organization and leadership structure.

And the team is settling into an effective operating rhythm.

We clearly with clearly defined goals and objectives. Our team is in a strong position to execute our near term operating plans with improved efficiency.

Those plans include streamlining our operations, where it makes sense.

Including the closure of the 10 facilities, we announced previously which are largely complete and now to more significant manufacturing facilities that were recently identified for closure in 2020.

The two facility closures this year will require approximately $15 million and restructure restructuring expense.

But the expected annualized cost savings related to the projects represent a payback and approximately two years.

Another key component of our profit improvement plan is to fix or exit unprofitable operations.

So this end we initiated a strategic review process last quarter.

And it is continuing.

We are exploring alternatives for a number of operations and will provide further details is updates are appropriate.

Of course, while these mega initiatives are underway, we will continue our laser focus on driving operating efficiencies.

With our new global structure, we expect to achieve cost reductions related to supply chain optimization in economies of scale.

And further reductions in SJ SG in any expense.

This is in addition to our usual lean manufacturing and cost reduction initiatives.

Finally, we're continuing our focus on improving free cash flow by further reducing capital investments in optimizing working capital metrics.

Based on the guidance John gave you earlier, we now expect capex to be less than a one to one ratio to depreciation and amortization this year.

While total spending will be down we continue to invest in innovative products and projects.

It can help improve efficiency.

And reduced scrap of going forward.

In terms of working capital we made good progress in 2019, and we're ramping up our efforts to reduce inventory and extend payables, even further in 2020 to maximize Keith.

Free cash flow.

So in closing we want to thank our employees for their continuing commitment to our core values into the strategic imperatives that we've discussed this morning.

We remain committed to delivering value to all of our stakeholders, despite the challenging market conditions.

And we certainly want to thank our customers around the world for their continued trust.

Confidence and support.

This concludes our prepared comments, so we can move into the QNX session.

Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by the one on your telephone.

If your question has been answered all your wish withdraw your registration you may do so by pressing the pound.

And if you are using a speakerphone please pick up the handset before entering your request.

One moment, please as we assemble the queue for questions.

Our first question comes from Justin Clare.

Of Roth Capital Partners. Your line is open.

Hi, guys. Thanks for taking my questions Hey, good morning, Justin.

Good morning, I. So first off I was wondering if you could speak about how you see profitability trending as you move through 2020, it looks like launches are likely to be more heavily weighted towards the back half and you're continuing to work through some additional cost initiatives here. So.

Should we anticipate revenues and margins moving higher through the year here.

Hi, Justin This is Jeff I think as we've we've talked about a couple important.

Lane ways here to improve the overall profitability of the business I think clearly.

The.

The supply chain initiative that we talked about over the next few years is going to continue to allow us to claw back.

Some of the the material economic.

Inflation, if you will.

That is have a suppressed the margins over the last 18 months or so so that's that's the first thing the second thing is around.

Pricing and when you think about all of the net new business that we continue to talk about quarter after quarter, including the amount of innovation, that's being booked by the company. We're very confident that the price points of that business certainly allow us to exceed.

The cost of capital for the company or we wouldn't be booking those orders.

And then finally, if you think about all of the restructuring that we've done.

And the Cooper standard operating system that continues to.

Improve the overall efficiency and effectiveness of our of our plants and of our organization in total.

Those things will continue to contribute as we go forward.

What we expect is to continue to deliver world class execution for our customers and create a demand for Cooper standard to be their supplier of choice.

We mentioned earlier that we have to address the industry consolidation issue, that's not going away anytime soon it will continue to to provide some type of.

I'll wait if you will on on pricing, however, I'm sure that our customers would agree the long term health of the suppliers in this segment I need to be addressed the need to be addressed soon.

So thats the way to answer the question.

And just as John if I could end just a few more.

Points here when you talk about the the quarterly cadence clearly Q1 will be the most depressed in terms of profitability just given the the corona virus situation for us that I mentioned on the call earlier and.

Youre right. The launch is going to build throughout the year. So you should see.

A sequential improvement going forward each quarter and profitability.

Okay. Thank you.

And then you indicated that a general inflation is expected to be a key factor here affecting your EBITDA margins in 2020.

Can you talk about where you are seeing this inflation more specifically is this across all regions or is it affecting Europe for China, or or North America or more than more than other places.

Hi, Justin as John again, it really is across all regions. When you think about.

Normal.

Step ups in rent and utility bills a lot of these in regions around the world are a pretty significant year over year for us.

And then like like I mentioned in my prepared remarks, the compensation related factors is is a significant portion of the inflation as well.

So when you think about a global average of.

I don't remember the exact magnitude, but 3% to 5% of wage inflation, coupled with the incentive compensation related matters than than that makes up.

A significant portion of the 270 basis points of inflation that we'll see on the margin pressure and were in round numbers around $80 million in total across all those buckets I described.

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

Your manufacturing outside of China.

Yeah. Justin this is Jeff from a big picture point of view I think.

Certainly we're nowhere near back to two normal.

As it relates to our plants and our customers plants. In fact I just saw the announcement. This morning of a couple of customers that delayed start up until March 10th. So this is a very fluid situation. We were very fortunate to have an incredible local Chinese management team in place in that role.

Region, Who's doing just a great job for us to address some of the things that you just mentioned in terms of supply chain.

Our being cut off from certain parts in certain regions of the country is affecting everyone and so our team is doing a marvelous job working 24 seven to to get our our businesses to a point, where we can support whatever our customers are requiring us to do and so far so good the issue.

Frankly is going to be over a period of the next couple of months. How soon do we returned to at least the new normal in in China.

Frankly, I think delta probably got it right.

So towards the end of April would be my would be my guess at this stage. If you asked me to give you a date.

Okay. Thanks, guys.

Thanks, Jeff Thanks, Justin.

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

Just following up on the last question about China.

So I think John you mentioned that $50 million revenue in the first quarters your current assumption being lost.

Yeah, Mike that's that's the ballpark figure were seeing right now, but again just just frame to Q1, we haven't looked beyond that right now that's fine and then.

You said that for the year was roughly 60 basis points impact on EBITDA, so about $20 million in that ballpark.

Can you talked about just some of the things.

Jeff came from your perspective from being there for so long.

What is causing that you have an impact on the profitability side.

Mike I'll go first and then then Jeff can add is expert insights, but when you when you looked at the the impact overall, even though we're not fully producing we're still paying the workers their full time wages, so thats going to be a drag even though we don't have the topline revenue to support.

The ongoing.

Cost base overall, and that's really the big picture for us.

Certainly health and safety of the workers comes first so we're we're spending any money, we need to keep workers healthy and safe as they come into work every day.

So between those two things that's why you see an outsized.

Profit impact on that $50 million or revenue.

And Mike from my my side of it what I see is continued.

Incredible work ethic.

As you would expect focused on doing everything that is possible given the constraints of this situation. So there's a.

Resolve that that certainly exists within the entire workforce there that we continue to be extremely proud of.

But like many things.

Some things you can control and some things you can so as John just said the primary focus for us as the health and safety of our employees.

And then second how do we support our customers as quickly as they need us to do it.

In the first quarter is going to be really really tough I as I mentioned before.

Probably will extend into the early part of the second quarter as my best guess at this stage, but we aren't.

We are really.

In a situation that to try to put any numbers around that so that sort of.

Personal opinion based on what what you asked me.

I appreciate that.

When it relates to this 450 of new billion millions of new business and then another three.

From recent innovations.

Is there anything when you look at the new business from these recent innovations some of that has already started kicking a 19 and 20 correct.

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

Unfortunate ceiling now or the margins on those new programs below historical levels is there a learning curve is there something that we need economies of scale just like taking with four took ceiling. I think you had one or two startups in 19 now it sounds like you have to more program starting up in 2020.

Is there is there a learning curve so to speak on the margin side of it is that something that's pressuring margins as well or is it is at all a lot of these kind of one off.

Circumstances beyond your control like with the board.

Mike This is Jeff So you ask a lot of questions in there. So may try to let me try to divide those up so first of all.

There is a learning curve associated with launching.

Before drugs like there would be in in any any factory now that's why we chose to go forward with sort of one at a time rather than selling it to all customers that did once we are learning and we are improving and as we learn and improve I do expect margins for that business will will continue to expand.

And.

I think it's also important to note that we did receive for the for the four tracks chemistry in the raw material if you will.

The the type of pricing.

Improvement over the outgoing product that we had always expected.

It's our responsibility to continue to reduce the cost from a manufacturing point of view, so that that margin expansion.

Is as good as it can be and so far so good we're really really pleased the teams are working extremely hard I as you know it's been well publicized the first launch.

With four given all the challenges with explore I didnt help anyone and didn't help us.

Certainly last year, but hopefully most of that's behind us and as we head into 2020, we can.

Reap the benefit of of much smoother waters to sale.

Okay, and just lastly on this some of the advanced technology.

Yeah. It looks like those appliances are new to the new to the game.

Are you assume the chart on page 18 those are.

Industries or or different programs, where you have license agreements is that a fair statement.

Yeah, Mike the appliance side of the business, which which you're familiar with with our I SG.

Business and the acquisition that we made with.

Lauren combining that with the Cooper I SG business historically, that's what that is intended to to represent so that's that's the business that that today is generating I'll just under $300 million.

Revenue for the business when you combine the Cooper I SG with Lauren manufacturing a business that we acquired last year.

Okay, and you feel still feel confident that 2021 or at some point leading into it we can start to see.

Meaningful revenue starting to come in for some of these.

Non automotive type.

Programs on the advanced technology group as well within the I guess, let's separate the two so within within the advanced Technology Group you have EISG.

It continues to perform well.

The compounded annual growth rate of that business going forward is just under 10%.

The.

Mass business, which you're I think referring to as well, that's a little bit longer term view.

What John and I have said as it relates to external reporting of any details around 80, Gee, that's going to have to be still a few years out.

If not we'd be disclosing pricing of each client as we as we launched our business. So.

We'll be able to talk to you more as we go forward about what we think the profitability of that business as a chance to be but in terms of reporting it Mike you're going to be out into the.

Probably the 23 timeframe before towards the end of 23, I said publicly.

Before you were going to think about disclosing the type of detail that you talked about but.

We do expect to over the time between let's say.

The end of a 21 through 23, we will be launching.

More and more of that type of business on the heels of these license agreements that we have signs in 19, and we expect to sign more in 2020. So if you think about.

24 month.

Period of time as you as you get into the.

Labs and develop the product that they need and then settle on the pricing and then develop it and get it into to production I mean, that's going to be it.

Probably at 24 month on average.

Time period to get it where you're actually generating revenue and earnings so hopefully that helps but it but but some of those license agreement term almost 12 months old.

So we should we're getting closer to some of those starting to turn into yes, yes, starting to.

We havent in let me just be real clear in.

Every one of those that are that are in that 2019 bucket I mean, we still haven't established pricing on any of them. Yet. So that's hopefully helps you understand where we are in in the process. So it's impossible for me to even give you an indication of the revenue and earnings.

When we are still in price negotiations alright, but there hasn't been anything that suggests that it would be a step back you're still theres still pressing forward with the development side of it.

Yes, I mentioned in my prepared remarks that were actually investing in.

Additional tooling and equipment to help speed up the development process because it theres just such a.

Demand there that we need to address them. So you can imagine if we're spending capital I can assure you. It's it's real.

Sounds good. Thank you okay. Thanks, very much thanks, Mike.

Thank you again to ask a question. Please press star one thing I touched on telephone again, that's star one on your touched on telephone to ask a question.

Our next question comes from a line of Glenn Chen.

Buckingham Research your line is open.

Hey, good morning, gentlemen, thanks for taking the question.

Several factors that in fact.

In the back half of 2019, we have a strike slow explore launch a pricing dynamics within the industry et cetera.

But I don't see them reflected in your 2020.

Guidance walk shit direct should one expect the nonrecurring so those factors to the tailwind.

In 2020.

Hey, Glenn it's John Yeah. It's a good question the but there they will be a tailwind to some extent when you think about the GM strike.

Never is as Jeff just talk to you a little bit about.

Explore.

We're still seeing that below the planned levels, where we had anticipated and certainly below the levels of the prior model that was still being built in Q1 of last year. So it won't be as significant of a tailwind as you would imagine.

If there are still figuring out all three shifts there.

On the explore and working through efficiencies there.

We're we're just dealing with what we've got into the planned levels for right now on unexplored.

And then what you don't see on the guidance walk. If you will is is pricing and other kind of kind of normal headwinds for us that are kind of eat into the the good news on the GM strike going away.

Okay.

And then free cash flow so it's expected to be positive this year.

But presumably lower.

Implied.

So I.

First on Capex and it's going.

The guidance you loss rate implies they leave.

That's slightly less than 5% sales for my question is is that sustainable.

Maintenance level.

No. It's not that's not just strictly maintenance level. In fact, most of that is program specific related you always have a maintenance included in that bucket, but I would call it.

Over 70% program related and the rest is.

Regulatory health and safety or or ongoing maintenance type type activities. So that as we think thats a sustainable level.

With with a lot of the restructuring activities that we've taken around the world. There's a there's a certain focus to re purpose and reutilize slash refurbished equipment.

And move it around the world as best we can so that is helping us feeling when we're disciplined on the capital spending side of things as well done.

Very good and then national more broadly.

Back to free cash flow.

Well the positive this year.

Presumably working capital will be a source of cash can you just talked about.

The levers that you have left to fall John.

Sure.

The the the team is continuing to take days out of inventory in March towards a world class level. The World class Bogey is about 14 days on hand, and we ended 2019 with a touch above 21 days, so there's significant opportunity for the teams.

Continue to sequentially drawdown, those inventory levels and put cash on the balance sheet.

Similarly, with the the supply chain optimization initiatives that Glenn I'm, sorry that Jeff talked about earlier.

We're looking to Commonize days payable around the world as well and for US everyday payable is about $7 million of cash for us. So I think we racked up to about 55 days of payables right now globally and in effector increases like we think it will that can be.

Nice source of funds for us overall.

So those are the two two big levers we have there theres of course, the the other piece of the equation is the accounts receivable side.

Not much leverage we have as far as collecting the normal receivables, but we are optimistic on the tooling side not leave that monies in the balance sheet for too long.

Okay. So on payables, Johnny said, you guys right 55 days globally.

Yeah, that's a that approximation of 55 days global Yep Okay.

Good good that get down to potentially.

Well, the though the longer term goal with actually get it up to about 60 days would be would be the longer term goal for us that what I won't happen. All this year, but you know every day like I said is $7 million. So.

The team is working very hard to standardize those terms with suppliers around the world and and really drive that number.

Okay very good that's it for me thanks.

Thanks.

Thank you. Our next question comes from Josh pick ASCII of credit Suisse.

Please go ahead.

Hey, Thanks, guys. Just a couple from me just follow up on working capital I'm, just trying to get a little bit more granular.

On what you think.

Ballpark inflow for 2020 could be.

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

Okay.

Fair.

And next question just more broadly.

Obviously, a lot of cash on the balance sheet any near term plans.

For that cash.

Now what we always talk about John just continue to invest in innovation, we've been very successful with that.

Certainly restructuring we've talked about some of that the this morning is.

As well as we think about.

The industry consolidation that has to take place within our segment and we don't have anything plan, but that's one of the that's one of the other buckets.

We want to maintain a very strong cash position as the market continues to.

Take a break here and we see downward pressure in all major regions, we want to be in an offensive position.

This time.

When when that occurs so that we can help our customers figure out how to clean up. This mess. So those are those are some of the things that were the work we're doing.

Got it and Josh just a concluding thought for me, it's John again.

You know just given the the industry dynamic and volatility no. Other plans in the capital side of the balance sheet that we would we would contemplate this year with the cash we've gotten the balance sheet.

Sure.

Okay.

Then I guess the final from me the two additional facilities you've got targeted no for closure by 2021, it looks like those are.

To simulate larger facilities versus the other 10 that youve kind of targeted throughout 2019 any additional color on kind of what the the volumes look like in those two facilities.

Yeah, just generally.

Certainly customer.

Driven.

He is.

One reason and then the second when we as we continue to.

To streamline and consolidate and get more efficient we don't need as much space. So the combination of both of those things.

Okay. That's it for me thanks, guys.

All right.

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

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

Thanks again for joining this will conclude our call.

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

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