Q1 2020 Earnings Call
During the presentation, all participants will be in listen only mode.
Following company prepared comments, we will conduct a question and answer session.
The time, if you have a question you will need to press the star followed by the one key.
As a reminder, this conference call is being recorded in 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.
Thanks, Andrew and good morning, everyone.
I appreciate you spent some time yesterday.
The members of our leadership team will be speaking with you on this call. This morning are Jeff Edwards, Chairman and Chief Executive Officer.
Jon Benet Executive Vice President and Chief Financial Officer.
You know one continuing stay at home guidelines and state of Michigan <unk>, calling in from different locations. This morning. So we ask that you bear witness in the event that we should experience any minor delays or inconsistency into the phone line or network late latency.
Before we begin I need to remind you that this presentation contains forward looking statements.
Well there are made based on current factual information on 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 you refer to slide three 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.
And so it isn't done 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 wells from the called <unk>.
Thanks, Roger and good morning, everyone.
Let's start on slide five.
It goes without saying that they called it 19 pandemic has had a major impact our business.
What started out as a strong operating quarter quickly became a test of our emergency response capabilities flexibility response, if necessary resilience.
Despite disappointing financial results were certainly proud of the way our global teams have handled this adversity.
They continue to find ways to become more efficient in our operations.
Driving 16 million in savings so far this year.
And what's the aggressive actions, we implemented last year, we reduced S.G.A. any by $16 million.
We also achieved another great quarter in watches and product quality.
Which resulted in record high green customer scorecards for the company.
And most importantly, our world class safety performance.
Continues to outperform benchmarks.
In fact, the first quarter marks our vast safety performance in our company's history.
For total incident rate.
Moving to slide six.
The company continues to aggressively manage our co. Good action plan and we have aligned our global team around three key priorities.
Protecting the health and safety of our employees.
Preserving liquidity.
And continued execution of our long term strategic initiatives.
For emergency response teams were activate it around the world and quickly implemented health and safety guidelines to help ensure we were adopting best practices and all of our global locations.
In China, where the programs were implemented first.
We've had no cases of cold at 19 infection.
Among our employees.
Even as the plants reopened and operations restarted.
Our second priority is pervert preserving liquidity.
Fortunate to begin this quarter with a very solid balance sheet.
This customer operations began to shutdown as a result of Nicole good night team.
We took immediate action to reduce capital spending.
Intensify or focus on working capital.
And reduce costs wherever possible.
John will provide more details in a few minutes.
We're pleased with the results of the cost saving initiatives.
And our current liquidity position.
Finally, it is important for us to remain focused on our longer term strategic initiatives.
Despite the challenges and distractions in our current environment.
And we have.
We continue to rightsize our business.
Our improving our cost structure globally.
One of the two plant closures plan for 2020.
It is now complete in the second one is on track to finalize later this year.
In addition, as we announced last week Weve reached an agreement that will enable us to exit some underperforming businesses consistent with a strategy we've been discussing with you.
Past few quarters.
Let me stop there and hand, the call to John to review the financial details of the quarter.
After John's comments I'll come back on to discuss our operations and outlook John.
Thanks, Jeff and good morning, everyone.
In the next few slides I'll provide some detail on our financial results for the first quarter.
And also comment on our balance sheet and liquidity profile.
On slide eight.
We show a summary of our results for the first quarter with comparisons to the prior year.
First quarter 2020 sales were 654.9 million.
The only 25.4% versus the first quarter of 2019.
Lost sales attributed to the covert 19 pandemic and the sale of our ABS business last year accounted for the bulk of the decline.
Well unfavorable volume and mix foreign exchange and customer price reductions also weighed on the quarter sales.
Adjusted EBITDA in the first quarter was 8.3 million or 1.3% of sales compared to $64.1 million in the first quarter 2019.
The most significant drivers of the decline in adjusted EBITDA, We're again attributable to the impact of the global health pandemic an industry shutdowns.
Weaker volume and mix and customer price reductions.
These were partially offset by improved operating efficiency and other cost reduction initiatives as well as lower SG a any expense.
On the U.S. GAAP basis net loss for the quarter was $110.6 million.
This included a $74.1 million noncash charge for adjusting the net assets of the plant divestiture to fair value.
Along with project costs related to the transaction that Jeff mentioned earlier.
Excluding these charges restructuring expense and other special items adjusted net loss for the first quarter 2020 was $36.5 million or $2.16 per diluted share.
From a capex perspective.
Our spending in the first quarter was $50.6 million.
While this is down from $59.6 million in the same period a year ago.
It may appear relatively high given the current industry challenges.
Most of our Capex in Q1 is actually the cash outflow on commitments made in Q4 last year.
Well before the impact of the health crisis was known.
In response to the current situation and the aggressive actions. We're taking you should expect significantly lower capital expenditures for the remainder of the year.
Moving to slide nine.
The charts on slide nine quantified the significant drivers of the year over year changes in our sales and adjusted EBITDA.
For sales the impacts related to covert 19 approximated $115 million.
The divestiture of our SBS business further reduced sales by $78 million.
Unfavorable volume and mix none of price reductions.
Reduced sales by another $16 million year over year.
While foreign currency fluctuations resulted in a negative impact of $14 million.
For adjusted EBITDA ongoing efforts and lean manufacturing and operational efficiency drove $16 million and cost savings for the corn.
We also benefited from $12 million lower S.G.A. any expense as a result of some of the cost reduction initiatives, we implemented last year.
These savings were essentially in line with our full year expectations.
And in the normal quarter, they would see more impressive.
However, these efforts taking cost out more than offset by the approximate 40 million dollar impact from the covert 19 situation.
Unfavorable volume mix and price reductions accounted for $25 million and the decline in adjusted EBITDA.
And the sale of our E V S business accounted for another 7 million.
Moving to slide 10.
As of March 31st our balance sheet and liquidity remains so.
We ended the first quarter with $302 million of cash on hand.
The typical seasonal outflow from year end was primarily attributable to capital spending which as mentioned earlier has been largely committed in Q4 last year.
In addition to cash on hand, we had $146 million of availability on our ABL revolving credit facility.
For total liquidity, a $448 million as of March 31st 2020.
As you may have seen in the <unk> 8-K, we filed recently, our cash balance improved to $340 million as of April 28.
And our ABL facility remains undrawn.
So we believe we have adequate financial flexibility to manage through near term market dislocations.
In view of industry conditions were carefully monitoring our liquidity outlook by conducting detailed cash forecasts and analyses on a weekly basis.
We have taken aggressive measures to reduce and eliminate discretionary items and deferred costs and spending wherever we can.
We have reduced capital spending plan by approximately 30% compared to our original plan for the year.
This amounts to approximately $35 million to $40 million.
And we have levers to reduce another 20% if customers further delay or cancel new program launches in response to a pandemic.
Other cost reductions and deferrals, we have implemented include the furlough of manufacturing labor.
The cancellation of all open hiring requisitions saving $1 million to $3 million this year.
Restriction of all business travel.
Saving approximately $7 million to $10 million.
And the personal deferral of salary workforce payroll.
Delaying payments of approximately $28 million to year end or possibly into next year if necessary.
We're also leveraging government programs, where we can which vary by country.
Some of the more significant opportunities include deferred payroll tax payments in the U.S. of approximately $7 million to $10 million.
And deferred U.S. pension contributions of approximately $3 million.
In addition to these actions we have intensified focus on working capital management initiatives to accelerate tooling collections from our customers.
We expect that our accounts receivable balance will decline as our major OEM customers in North America remain shut down and sales remain low.
This will result in a corresponding temporary decline in the borrowing base and availability under our ABL facility.
However, we expect the borrowing base to build back up.
Customers coming back on line in the next few weeks.
Based on the aggressive savings and deferral actions we've taken.
And our current expectations for the restart of European and North American customer operations.
We believe we have and will have sufficient liquidity to sustain our operations for the next 12 months.
Being said due to the incredible degree of uncertainty in our industry and the markets we serve.
We may consider various options to add to our liquidity to serve as an additional backstop for us OEM operations don't resume as we expect.
Or if there is a resurgence of the health crisis that results in additional downtime.
We would only expect to do something here if the terms are reasonable and made sense for our situation.
With that let me turn the call back over to Jeff.
Thanks, John What's the next few slides I'll provide some highlights.
Related to the current status of our operations as well as our expectations for.
Restarting production and some commentary on some of the strategic initiatives that I mentioned earlier.
So if you would please turn to slide 12.
In China.
All of our plants were shut down for approximately six weeks during January and February due to the spread of the cobot 19 throughout that region.
The good news is that once new health and safety measures were put in place a phased restarted production began in late February.
Aligned with government directives and of course customer schedules.
All 12 of our plants have resumed production and we're currently operating at approximately 75%.
Of capacity with 97% staffing levels.
Due to reduced customer demand.
The new health and safety measures we implemented included.
Health and temperature screenings mandatory use of personal protective equipment.
Separation barriers among our work cells.
And increased social distancing at our plants.
These measures have proven effective so far as we've had no known cases.
Of Cobot 19 in our manufacturing facilities in the region.
The successful guidelines implemented in China serve as a playbook for us to follow as we returned to work in Europe.
And here in North America.
In Europe customers began to idle operations in early March.
And most of our plants were closed by mid March.
A few plants maintain limited production to support essential businesses.
As well as automotive customers in Asia.
Faced restart of production is now underway in Europe.
And we will ramp up production as needed to support customer schedules and requirements.
In North America, most of our plants in the U.S. in Canada closed in late March.
Our plants in Mexico close by late April.
As in Europe, our non automotive plants remained open during the crisis to support essential businesses and production of emergency equipment.
We now expect our customers in North America to begin a phase to restart of operations next week.
The good news is the Mexican government has the into automotive production as essential business. It has agreed to allow operations to commence in alignment with the U.S. in Canada.
Due to the abrupt shutdowns around the world.
We have a significant amount of finished goods inventory on hand.
And we expect will facilitate our transition to work over the next few months.
Based on customer release, we expect to ramp up our operations to approximately 80% of our pre cobot planned levels.
By the end of June.
Turning to slide 13.
I mentioned that our advanced technology group plants remained open throughout the health crisis.
To us this is a clear validation of our diversification strategy.
And part of the reason we've continued to invest.
And those new markets.
We're especially proud of our combined teams efforts to design and produce new customized components.
Personal protective equipment and medical devices that were critical at the peak of the pandemic.
Our collaboration with customers, who is outstanding and they develop these products in record time.
In terms of new business development, and RMBS materials science business, our activity has been delayed due to travel restrictions.
It makes it impossible to conduct critical testing activities, our customers laboratories and facilities.
While we face a near term delay on some of our project timing, we certainly don't expect a significant impacts over the longer term.
Turning to slide 14.
One of our top priorities continues to be the execution of our longer term strategic initiatives.
Despite our current challenges and disruptions.
I'm very pleased that we were able to come to an agreement to.
To exit certain underperforming.
And or non core operations.
Consistent with what I referred to as becoming.
Profitable by getting smaller in Europe.
The agreement includes 11 plants with approximately 2500 employees.
Across four countries.
We will be exiting our rubber fluid transfer systems business.
And a specialty sealing business in Europe.
As well as all of our consolidated operations in India.
To be clear the reason for the exit of the rubber Fts business in Europe is really due to a lack of scale.
She has been created by frankly to many players who frequently behavior rationally.
And it's just time for us to move on.
The Fts product group.
Remains a strategic core business in other regions.
The specialty sealing business in Italy was non core.
In India is a market that has lacked significant scale for us.
Growth and profit.
And it continued to burn.
Gosh, we're essentially the entire time.
We've been operating there.
While the transaction will reduce our overall sales by approximately 200 million annually.
We expect to have significant positive impact on our profit margins and cash flow going forward.
Based on the negative $14 million adjusted EBITDA.
And negative 20 million of free cash flow these businesses generated last year.
Moving to slide 15 [laughter].
Because of the unprecedented nature of the current industry downturn.
There's a lot of uncertainty regarding potential rebound of automotive demand in production.
Hi, Jeff estimates.
As shown on these charts suggest light vehicle production could return to 2019 levels in just a couple of years.
I don't know if these estimates are too optimistic or too pessimistic and no one really does.
Which is why we see such a wide range of estimates from various analysts and forecasting services, especially in the near term.
Due to this high degree of uncertainty.
We're not able to provide the typical financial guidance at this time.
What I would tell you is that we will continue to work closely with our customers to provide high quality products and service.
And where they need.
We will continue to build on our already strong relationships.
And if need be we will be prepared to step up to support our customers should they have other suppliers, who are not able to fulfill their commitments.
During these challenging market conditions.
Moving to slide 16.
As we move forward in the near term, we will continue our aggressive actions to improve our cost structure and carefully manage cash flows.
As we adapt to the changing market and lower revenue.
Over the longer term, we expect it to execute.
On a defined plan to restore our return on invested capital to the levels at our stakeholders deserve and expect from us.
The plan includes.
Identified initiatives in all areas of our company.
Including our commercial manufacturing engineering.
Purchasing and supply chain.
As well as our administrative and management functions.
Building on the cost reduction actions, we initiated in 2019.
We were well on our way and the implementation of this plan prior to the advent of the Kogut 19 pandemic.
We have an outstanding team of dedicated employees, we have strong market positions, leading technology and excellent customer relationships I have every confidence in our ability to deliver improved results as we execute on these plans.
By managing the things that we can control in our business and by quickly adapting to the things that we can't directly control.
Let me close by thanking our employees for their continued hard work and commitment to excellence.
They pulled together a very challenging time challenging circumstance.
I'd also like to thank our customers are continued support trust.
And we look forward to collaborating closely with them as the global automotive production comes back online.
This concludes our prepared comments.
So we will allow open the phone lines for Q1 eight please.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press the star followed by the one key on your telephone.
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First question comes from the line of Michael Ward with benchmark. Please go ahead.
Thank you good morning, everyone.
Jeff on the EPG side are you still on track for some meaningful revenue starting to come in in 2021.
Our non automotive non automotive.
Yeah, Mike so on the on the TG, where we have is GE and where we have a on now.
The IC business is what I was referring to is running during the.
Yeah, I bring that down that we were about 60%.
Up and running in the essential markets are the on that I was referring to the testing and so forth that we work.
We were in the process those folks are doing when the when the airlines all shutdown so that that's postponed a little bit here, while we are.
While we get back.
At some level of normalcy going going forward, but as it relates to 80 GE and in total we won't report separately there might get until probably 23 before that the revenue and earnings crossover any level looks.
[noise] meaningful or material materiality. So it's just a 10% is that the bogey.
[music].
Yeah, 10% is probably what we will what we will go with that's right. That's what we've said.
Okay and drawn on the Capex.
I think originally you were looking at Capex in the range of 140 year 150 until based on what you're saying you're looking at for the rest of last nine months cap spending somewhere around 60 million down from about 100 million last year is at the right ballpark.
Your your math is good there Mike yeah, Okay, that's the kind of expectation.
And then the when you talked about your liquidity outlook or does that based on the I'd just forecast that you have there.
Yes, it's that Mike coupled with our customer releases you know, it's because we're getting releases into the system.
System here.
For the next call. It six weeks, so orders our view of what they're telling us coupled with Hs over the summer time and into Q3 Q4.
So as we look at just kind of the the cash aspects of the business.
Really million early June or the biggest uses though right.
Yeah, that's that's rates call it through through mid June is the.
As the cash burning time, and then once once production starts back up and we start collecting receivable money and towards the end of June. Then then we start generating cash again, okay and there is any of your debt subject to covenants.
No. There's no no financial covenants are known me I haven't talked about that.
And maybe Jeff one lessening on from a structural standpoint.
Is there anything within the company that prevents you to getting back to double digit margins at the EBITDA level.
Nothing actually what we talked about this morning, Mike is a very detailed than aggressive plan to do that we we began pulling those levers in 19, we've got a number of things. We're working on this and again I want to be clear this isn't cobot 19.
Generated this is something that we announced last year that we were we were going to be doing we're aggressively pursuing it and I believe that.
The team is very focused on getting back to that level.
Thank you very much good luck.
Thanks, Mike.
Thank you and our next question comes from the line of Brian.
With Baird. Please.
Please go ahead.
Good morning, a couple of questions for you or.
He to substitute that you announced last week.
Can you give us any indication if you're receiving any proceeds are not from that.
This is John no proceeds there.
No proceeds there okay yeah.
Great and then as we look at the you were amended agreement you recently took the tooling receivables Oh, the borrowing base and mentioned that you could establish let as a separate lines is that part of your thinking for additional liquidity.
No, but we're thinking about as far as the tooling receivable element is.
Is that we're approaching customers, where we can do to see if we can get accelerated payments from them because as you look at the the profile of tooling receivables, they're they're generally collected when the tools themselves are p. path right before started production.
And so you look at EUR $139 million or so of accounts receivable or sorry tooling receivable balance.
As of March 31st and that is ratable across the the launch kids. So instead of waiting till the end customers have been agreeable to call it progress payments or in certain cases upfront payments to to bring cash in the door sooner rather than waiting the extended period of time until March so that's worth thinking about on the tooling side.
Got it that is helpful. Then, it's just going back to the estimates do you had on production between the three regions.
Maybe different <unk> a question on that is at what levels do you think you need in order for the company didn't break even on the free cash flow pieces.
Yeah rich.
Sure. This is John again.
So what we've we've done is because currently Europe and Asia Pacific are currently cash users, we namely focus on the North American region. When we talk in terms of cash breakeven levels.
And what Weve calculated in the past and currently seems though to hold true is that they cash break even level is about 12 million units in North America and the operating profit level is 8 million units. So you can kind of use that as as your ballpark.
Got it and just.
The deferrals that you have for this year between salary pension and payroll taxes, you haven't number what that cash and come back the for next year.
Too early to tell.
Too early to tell that if at some of those deferrals. The like for example, the payroll tax item that can be spread over 21 and 22. So while we'll save about seven to 10 million you know that spread 50 50 over the next two years after 2020.
And then as I mentioned in my prepared remarks, Steve the salary piece.
Should should industry production bounce back to the level, where we're we're in the position to to reimburse we could pay that in Q4.
If it's not than we could potentially pay that and and in Q I'm sorry in 2021.
Understood. Thanks for your talk.
Thank you.
Thank you.
Our next question comes from the line of John living with live in capital. Please go ahead.
Yes.
Could you update us on developments in four tricks.
Especially because I couldn't in reading the release I couldn't tell what degree of progress is being made and Overbroad term what kind of progress do you still anticipate.
Projections and hopes for what seems like a great product at some point.
Yeah. Thanks, Jon This is Jeff Edwards I'll take that so what I was saying in my prepared remarks is obviously the.
Testing activity that we were undertaking.
Encoded occurred.
That is.
A lot of that was happening in Asia.
So that has been postpone while the airlines are.
Off if you will as it relates to the the long term projection as I said in my in my remarks, I don't believe it will have any any impact so we're still.
We're still very pleased with how we're tracks is behaving in our automotive business.
We continue to to a ramp that up there and we also believes that.
Through the the process that we have got laid out for everybody. The last couple of years that it's gaining momentum on the non automotive side. So this would be a short term.
Issue because of the engineers, not being able to get around and work with each other.
Longer term I know impact.
If I if can I follow up perhaps on the call them in their other people, but I wouldn't make I would make a question in a point. The question you comment about Asia does that mean, there's not much domestic activity going on and I would also suggest that reading your report to listen to you. If you could you break out this promising area.
You might have more investor confidence and very hard when it.
Merged with other products.
It was was that a question for me John well. The first was why you referred to Asia I assume the same kind of delay is going on domestic markets, but maybe before tricks doesn't have much potential in domestic markets is what you were saying.
No that's what a that's what you said I said that it was delayed in.
Asia, because that's where we're doing our testing here in the in the first quarter, we continue to I have activity in both.
North America as well as.
Asia and as far as breaking breaking it out when it becomes material and significant we plan to do that as we as we've talked in the past. So thanks for the question Greg. Okay. I'm, just trying to get people focus on what the this issue. Obviously it was meant to be a constructive question. Thank you okay.
Thank you and as a reminder, ladies and gentlemen, if you have a question. Please press star one on your telephone.
Once again this star one.
Our next question comes from the line of Bob them into with JP Morgan. Please go ahead.
Thank you good morning, a couple quick questions on cash flow you you guys delineated you know the payroll taxes and pensions and obviously capex. The one other area that I had from your prior call that would be me attacks is obviously, a you know we could weaken mess with that on around but where the cash reorg I have a 30 to 40 kind.
On a number previously.
Is that pretty much set in stone is it higher is it going to be lower given everything that's going on this year.
Yes, Bob it's John I can take that one.
You can expect that to be a to actually lower than we had originally planned at the yearend call.
It was kind of looked at the the restructuring plan that we had in place.
For the year and then we've dialed that back as we as we look for the production levels to ramp back up and then we'll can reassess the overall footprint and any levers we can pull there.
I mean is it modestly lower like five to 10 or is it like 50% lower just just to give a ballpark I would I would call. It a more closer to the 50% level will still affect the a the plant closure that Jeff referred to earlier that'll happen in the in the late summer time, So we'll have a moderate outflow there but.
Or call it 50% of the levels, we had planned on at the beginning of the here.
Okay, and then and maybe you addressed the working capital, but obviously you you had kind of a 50 million year over year better I mean 11 in versus 40 out kind of rest at a year I mean I would think.
If the ramp up starts up here soon that maybe you would you would use some working capital here in the second quarter I'm just if we're at plus 11 through three month for the full year do you expect to be positive or negative flattish I mean based on what you see as the ramp up now.
Yes.
This is John again, the with the with respect to the ramp up you you would normally think that there would be a significant working capital usage, there, but because of the North American Europe shutdowns were so abrupt in the middle of March.
We closed the the quarter still with a fair amount of inventory on hand, so we we won't need to go out and procure a bunch of.
Inventory to restart our production and so that will help working capital here in Q2 and moderates what you would expect to be a normal outflow and with with clearly you're right, where we've been we've been collecting on receivables. So that's that helps the inflow.
And here in Q2, but then the payables are still going out the door.
And you can think about it through their Q3.
By the end of Q3 that gets more back to a breakeven level on an overall working capital movements and should carry through to the rest of the year.
Okay. So for the full year, including Q1, I mean again, when I say, roughly breakeven plus or minus 25 million either way I mean, it seems like.
Working capital should not be a material use or source of cash for the entire year that thing, but yes. That's that's how we're our modeling it right now Bob but without given specificity on on the numbers I think you're you're thinking about it correctly.
And then just lastly, you guys called out the covenant and the EBITDA impact, which I thought it was helpful. Some others just kind of gave a revenue impact but.
That is it you know if you want to call. It decremental margin you know one 115 at 40 of EBIT day on that's a 35% if we.
If we go in three times that you know if it's if it's 350 million revenue hit this quarter just based on production clearly a 35.
Decremental is 100 ish or more familiar it'll be but is there anything you could point too as you know in that EBIT da versus sales impact that would be better worse as a percentage or anything that would change me just putting in whatever I assume the sales it isn't taking a comparable.
EBIT da kind of hit as a percent.
Yeah that without giving you the exact percentages, but let me try to answer it. This way you know the P, 35% or so decremental margin, what we tried to do there and clearly it's unprecedented. So this is our best approximation of the impact, but clearly you have the last fall.
And the related pull through but you're also incurring expenses that you can't just turn off.
Think about it and can teams in the plant or.
Certain impacts that that's still go on even though the plants not running.
That were specifically.
Identifiable to the cold shutdown and that's why you know what would normally be a 20% to 30% detrimental margin rises up to 35.
Percentage or so so <unk> I don't expect a 35% to carry forward through the rest of the year or are they the rest of the Q2 shutdown.
So then that would just call it somewhere south of that.
Okay Fair enough. Thanks, that's all I had.
Alright, Thanks Bye.
Thank you.
And it appears there are no more questions I would now like to turn the call back over to Roger Hendriksen.
Okay. Thanks, everybody. We appreciate your participation. This morning, and we'll look forward to engaging in further conversations as the days and weeks unfold. We don't do you happen to have any additional questions. Please feel free to region at any time.
Thanks again this concludes our call.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.
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