Q3 2020 Cooper-Standard Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Cooper Standard's third quarter 2020 earnings Conference call.
During the presentation, all participants will be in listen only mode.
Following company prepared comments, we will conduct a question and answer session at.
At that 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 and the webcast will be available on the Cooper standard website for replay later today.
I would now like to turn the call over to Roger Hendriksen director of Investor Relations.
Thanks, Liz and good morning, everyone.
Thank you for spending some time with us today.
The members of our leadership team, who will be speaking with you on this call. This morning are 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.
While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable. These statements do involve risks and uncertainties.
For more information on forward looking statements, we ask that you refer to slide 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.
Reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures are included in the appendix to the presentation.
With those formalities out of the way I'd like to turn the call over to Jeff Edwards.
Thanks, Roger and good morning, everyone.
We certainly appreciate this opportunity to review our third quarter results and provide an update on the current status of our operations.
We are pleased with the quick recovery of automotive production in the third quarter.
Following a very challenging first half.
Our facilities around the world are adapting well to recently implemented safety protocols.
And there are certainly working hard to keep up with solid customer demand.
As volumes have ramped up we'd have remained focused on delivering value for our customers and continuing execution of our margin enhancement plan.
Our team has done a terrific job in our results for the quarter reflected.
On slide five we provide some highlights from the quarter's performance.
Our operations performance was strong during the third quarter, we continued to deliver world class results for product quality customer service and employee safety.
At the end of the quarter, 96% of our customers' scorecards for product quality were green.
In 98% were green for launch.
Most importantly, the safety performance of our plants continues to be outstanding.
Through the first nine months of the year. Our total safety incident rate was just 0.36 per 100000 hours worked in 32 of our plants still have a perfect record of zero reported incidents.
Our plant managers and their teams are doing a world class job.
From a financial perspective, our plan to improve margins and return on invested capital are gaining traction.
During the third quarter, we were able to deliver 10 million in cost savings through lean initiatives.
And improving operating efficiencies.
Through the first nine months of the year manufacturing cost savings totaled $47 million.
The aggressive actions, we implemented to reduce administrative and overhead costs in 2019.
Early this year resulted in a 12 million dollar reduction in SJ ESG and expense for the quarter.
Versus the third quarter last year.
And our global supply chain optimization initiative is delivering as expected.
Improving results with $14 million in savings during the third quarter.
Combined these initiatives were a significant factor in achieving a 210 basis point improvement in our third quarter adjusted EBITDA margin.
Moving to slide six.
On this slide we summarize the status of our operations by region.
Beginning with Asia Pacific I want to give a strong shout out to the team for achieving a perfect zero incidents safety performance in the third quarter.
Additionally, 10 of 14 manufacturing facilities had zero reported incidents year to date.
This is a clear indication of what is possible with our total safety culture and a full time focus on safety is a top priority for the entire team.
Light vehicle production in the <unk> in Asia continues to rebound following the slow start to the year during the third quarter, our sales outpaced market growth.
And current customer orders are tracking ahead of our original plan levels.
Strong volume combined with continuing success and our cost reduction initiatives.
Helped us drive a strong turnaround in the third quarter and adjusted EBITDA margin for the region.
Hi, Jeff is forecasting an increase in light vehicle production in Q4 versus Q3.
And we will look to leverage the strong production with ongoing lean initiatives and overall improvements in operating efficiencies.
In Europe, we have seven plants that have maintained perfect safety performance through the first nine months of the year.
Safety performance overall for the region remains very strong with total incident rate at better than world class levels.
Light vehicle production in the region has ramped up significantly following shutdowns that impacted Q2.
But remained below last year's level in Q3.
Excluding the impact of the business, we divested at the beginning of the quarter.
Our sales outpaced regional light vehicle production in the third quarter.
Current customer orders are tracking ahead of our original plan levels in our total manufacturing efficiencies are ahead of plan year to date.
The most recent forecasts from Hs anticipates, a sequential increase in light vehicle production in Q4 versus Q3.
But a slight decline year over year.
Finally in the Americas 15 plants in the region have maintained a perfect safety record through the first three quarters of the year.
In an overall total incident rate that is better than world class.
Third quarter light vehicle production in North America was up slightly year over year.
Our sales declined slightly as a result of delayed launches in model year changeovers on certain key platforms.
With the continuing success of our cost reduction initiatives, we were able to increase adjusted EBITDA margin in the North American region. Despite the lower sales volume.
Production levels in Brazil remained weak in Q3 as the COVID-19 pandemic continues to weigh on the overall market there.
The most recent Hs outlook for North America anticipates, a sequential decline of approximately 200000 units of production in Q4.
This is roughly in line with production levels in Q4 of 2019.
Our current customer orders remain a bit below our original plan levels.
The consolidated company prevention and mitigation of COVID-19 remains a top priority.
The added health and safety measures in our facilities appear to have been largely successful.
And we're working to offset the related impacts on cost and productivity.
Certain government assistance programs, which vary from country to country have helped in this regard.
Moving to slide seven.
Our teams have maintain constant focus on the execution of our long term strategic initiatives throughout the year.
Key areas of focus include optimizing our global footprint and reducing fixed overhead costs.
We are pleased with the progress we've made so far and we are beginning to see the positive impact in our results.
Since 2019, we have closed or exited 22 facilities we.
We are currently in the process of closing or consolidating three more before the end of the year.
We believe we are on track to deliver in excess of $50 million of annualized fixed cost savings in ESG, any and Cogs as compared to 2019.
While we've made good progress we continue to identify additional opportunities to further streamline our operations and improve our overall cost structure.
We will provide additional details as these plans are finalized.
Turning to slide eight.
The execution of our innovation and diversification strategy remains a top priority.
In fact, Weve intensified our focus on this strategy by bringing two new directors onto our board with strong experience and knowledge in material science and related industries.
To further leverage their expertise we have formed a board subcommittee that is charged with the oversight of our innovation and diversification efforts.
We are excited to have these new directors join us at this important stage in growing our business into other industries.
Customer demand in our industrial and specialty group remains very strong with the lone exception being our aviation business.
To leverage the strong demand we are investing in additional capital equipment to modernize and expand our production capabilities and increase our overall capacity.
We remain very optimistic about the growth potential of this business over the longer term.
In our applied materials science business, we have signed two new additional development agreements.
Consistent with the approach we discussed at the beginning of the year, we are intentionally adding fewer new clients and increasing the emphasis on moving existing technology development towards commercialization.
The new agreements are with new customers.
But they are within the same markets. We are focused on in the past.
This is also intentional.
While our material science based on our four tracks chemistry platform could be applied over a wide range of industries. We believe a concentrated focus will enable us to leverage our knowledge base to speed the development process and ultimately help us capture a broader share of these select markets.
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We are pleased that the installation of new prototype equipment at our global Technology Center is nearing completion.
When fully operational we expect this equipment will help accelerate our technology development process and enable us to move rapidly towards commercialization of new materials and technology.
Now, let me turn the call over to John.
Thanks, Jeff and good morning, everyone.
In the next few slides I will provide some detail on our financial results for the third quarter and also comment on our balance sheet cash flow and liquidity profile.
On Slide 10, we show a summary of our results for the third quarter with comparisons to the prior year.
Let me touch on some of the key figures.
Third quarter 2020 sales were $683.2 million down.
Down 7.6 versus the third quarter of 2019.
Lost sales related to the recent divestiture of our business in India in certain operations in Europe accounted for most of the decline.
While unfavorable volume and mix and customer price reductions also weighed on the quarter sales.
Excluding the impact of the divestiture total sales were down less than 1%.
Adjusted EBITDA in the third quarter was $64.1 million or 9.4% of sales.
Up from $53.8 million or 7.3% of sales in the third quarter of 2019.
The 19% year over year improvement in adjusted EBITDA was driven primarily by improved operating efficiency.
Continuing optimization of our supply chain and lower SG a any expense.
In addition, we continued to benefit from various government allowances and subsidies, which were put in place during the second quarter to help offset the impacts of the global COVID-19 pandemic.
These positive factors were partially offset by unfavorable volume mix and customer price.
Typical inflationary pressures and increased accruals for incentive compensation.
On a us GAAP basis net income for the quarter was $4.4 million compared to a net loss of $4.9 million in the third quarter of 2019.
Excluding restructuring expense and other special items as well as the associated income tax impact of these items.
Adjusted net income for the third quarter, 2020 was $3.6 million or 21 cents per diluted share count.
Compared to $3.8 million or 22 cents per diluted share in the third quarter of 2019.
Regarding capex, our spending in the third quarter was $10.5 million compared to $35.6 million in the same period a year ago.
Our teams continue to do a terrific job of limiting or deferring capital spending wherever possible in response to recent industry challenges.
We anticipate that lower investment levels will continue through the remainder of the year.
Moving to slide 11.
The chart on slide 11 walks the significant drivers of the year over year changes in our third quarter adjusted EBITDA.
Our ongoing efforts in lean manufacturing and operational efficiency drove $10 million in cost savings for the quarter, while positive results from our global supply chain optimization efforts contributed another $14 million.
We also benefited from $12 million of lower ESG any expense as a result of the organizational streamlining we proactively implemented last year.
As well as the elimination of all discretionary spending in response to the pandemic.
Rounding out the positive factors ongoing benefits from COVID-19 related government assistance programs.
And the divestiture of unprofitable operations added a net 4 million and $3 million respectively.
Unfavorable volume mix and price adjustments.
Normal inflationary pressures.
And accruals for incentive compensation mentioned before were partial offsets to the improvement in adjusted EBITDA.
The unfavorable volume and mix impacts were primarily in North America, and Europe, while volume and mix was favorable in Asia Pacific.
Regarding incentive compensation recall that in the third quarter of 2019, we reversed incentive compensation accruals. When it became clear we will not hit our minimum targets for bonus payout.
This year, we have continued to accrue for a partial payout.
The resulting year over year headwind related to higher incentive compensation in Q3, 2020 was approximately $22 million.
We can continue to improve our operating efficiencies and we are taking real cost side of our business.
It's encouraging to see the results of all this hard work now falling through to the bottom line.
And we're not done yet.
As Jeff mentioned, we are continuing to evaluate opportunities to further optimize optimize our operating footprint and improve our cost structure over time.
In the near term however, as we turn to calendar year 2021, we anticipate the discontinuation of Covidien related assistance programs gradual increases in discretionary spending.
And unfavorable volume and mix could pressure our margin run rate by 100 to 150 basis points versus this most recent quarter.
Moving to slide 12.
While we are pleased with the improvements in our margins free cash flow was definitely a highlight of our third quarter performance.
Strong cash provided by operations and continued conservative capital investment combined to drive over $89 million in free cash flow in the quarter.
As a result, we ended the third quarter with $463 million of cash on hand.
In addition availability on our revolving credit facility increased to $150 million as we had predicted.
Resulting in total liquidity of $613 million as of September Thirtyth 2020.
The revolving facility remains undrawn.
In light of the considerable uncertainty, which persist in the industry and with economic conditions generally.
Given the COVID-19 cases are once again, increasing we continue to monitor our liquidity carefully.
Along with detailed forecasting we're continuing aggressive measures to reduce and defer capital expenditures costs and discretionary spending wherever we can.
And we are maintaining our intense focus on working capital management.
Among other initiatives, we are working to accelerate both accounts receivable and tooling collections from our customers as well as to bring down inventory levels.
Lastly, a few comments on our asset allocation priorities.
We issued $250 million of senior secured notes back in May.
We took this prudent action to provide a cash cushion that would allow us to maintain sufficient liquidity should the industry shutdowns have extended longer than were anticipated.
Or if the industry were to go through a second wave of shutdowns.
Our current intent, which remains subject to future market conditions.
Is to preserve our cash balance as much as possible.
Generate additional cash over the next two years.
And de lever as soon as markets in contract terms allow.
With that let me turn the call back over to Jeff.
Thanks, John to wrap up our discussion this morning, I'd like to provide an update on some additional detail on our ROI see improvement plan in some broad comments on our outlook.
This graphic represents the formalized framework, we're using to improve our financial performance and ultimately drive improved return on invested capital.
Our focus in this important area as a key driver of our improved results for the quarter.
This initiative has also become the roadmap for our longer longer term planning process.
As we have said we are on a two to three year journey to return to double digit ROI see.
Today, we've added some additional detail to the graphic providing key targeted metrics from our three year strategic plan.
With the successful execution.
Of our plans, we anticipate improving gross margins to greater than 15% of sales.
Maintaining ESG any expense at less than 9% of sales.
And improving adjusted EBITDA margins to greater than 10% of sales.
The plan also anticipates continued focus on generating cash by carefully managing capital expenditures.
Targeted at less than 5% of sales.
While optimizing working capital.
Clearly we cannot guarantee we will achieve all of these targets within the next three years, but I can assure you that our team is working hard to deliver on all aspects of the plan that we control.
I have great confidence in our team and we are all aligned to execute on clearly defined initiatives.
In the near term our industry and the global economy faced significant uncertainty.
That makes the forecasting even more difficult than normal.
Increasing coated cases in various states and countries pose the risk of further closures of portions of our economy.
Unemployment levels, though improving remain high.
Consumer confidence has been hurt by the pandemic and I don't think we will know the full geopolitical impacts of our election for sometime to come.
So given the high level of economic uncertainty, we're not providing formal financial guidance at this time.
While we continue to remove real costs from the business, we do not expect margin increases to be perfectly linear.
As John mentioned earlier certain coded related government programs that are benefiting us today are scheduled to run out at year end.
As always light vehicle production volume and mix will be an important factor in our business results.
We are encouraged by the strong rebound in light vehicle production following the pandemic.
For releases are looking strong in the fourth quarter so far.
On the other hand, we're also seeing challenges with labor productivity and availability in certain locations simply due to quarantines and other restrictions.
Overall, we anticipate finishing the year strong if planned production levels hold.
Lastly, I want to thank our global team of employees for their continued hard work and focus on driving strong improvements across our company.
I would also like to thank our customers for their continued trust and support.
This concludes our prepared comments, we would like to open the call to questions.
Thank you, ladies and gentlemen, if youd like to ask a question. Please press the star followed by the one on your telephone.
If your question has been answered any we'd like to withdraw your registration you may do so by pressing the pound key.
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 Mike Ward with benchmark. Please go ahead.
Thanks, Good morning, everyone.
Hi, Mike.
Just quick on line six when you're seeing current customer order levels are approximately 92% of original plan in Europe.
Is that plan from pre coated or is that recent plan.
Thats pre coven, Mike Okay.
Secondly, could you provide a bit more detail on the positive swing we saw in Asia.
Yes, I think that the.
Results of China, rebounding faster than anybody would have.
Imagine given what was happening at the beginning of this year I think are certainly number one I know the market just came back faster than than I think anyone would have predicted number two our teams have continued to as we have said across the company are really attack it from a cost and a fixed cost point of view and.
Then finally, our commercial organization has done a really terrific job of of getting us paid frankly.
Okay.
On slide eight.
Just trying to get an idea of how this the sequence works. So you have two new development contracts with these material science projects. So you signed a development agreement, which hopefully leads to a license agreement, which hopefully leads commercialization is that correct.
Thats correct, Mike. It's the same process that we've been talking about now for a couple of years and we're really pleased with the progress on those agreements that we've signed over the last couple of years in that we just talked about two additional ones that just keep the pipeline fill.
Filled up frankly.
Okay, and then now on the two that there are two right now that are commercialized.
And wire and cable and elastomers is alright.
We have not said publicly Mike what those are but clearly wiring cable.
Well the avian maybe holding.
Then came out and said it is commercialized right.
Yeah, I'm really talking about the numbers associated with the deal. So we've talked about names, but we havent put numbers to it which I think was your question right.
Well I mean, I know their commercial on what that was going to my next question have we seen any.
Income yet from either the commercialized products or is there any indication of quarters are pending orders that sort of thing.
Yes, we havent disclose.
We disclosed any of that because as Weve said.
We have so few customers in these spaces that.
Disclosing anything financially kind of disclose as your price so it'll be a while before we are able to do that.
But safe to say that the amount of.
Revenue and earnings associated with HMS, it's going to be a couple of years down the road before we can disclose those things because of just the few clients that we do have that are in that commercialization stage.
Stage, so stay tuned for more of that as we go forward, but right now we've we've kept it pretty.
For the under wraps, Okay, and if there were revenues that were generated in 2021, where would that show up.
As far as a segment standpoint.
Hum would it show up you don't.
Matt.
In that other category or is it going to be somewhere else.
Yes, Mike It's John It would show up in that other category you are okay. Okay. All.
All right. Thank you very much.
You're welcome.
Our next question comes from Joseph Foresi with Cantor Fitzgerald. Your line is now open.
Hi, Thanks for taking the call Keith can you give us an idea on some of the expenses that will be coming back into the PNM will that maybe were deferred or any catch up payments that vendors allowed you to differ on during the Cove in period.
Yes. This is Jeff so we just at a high level related to what we what we just talked about in our prepared remarks clearly during the.
Pandemic period here.
We have had travel and entertainment virtually on lockdown with few exceptions and as it relates to supporting.
Launches.
And.
That's the number that John referred to that obviously.
Obviously going forward there will be some of that that creeps back in but I want to make one thing clear that we have learned a lot.
During the the locked down if you will in terms of using technology to Q to communicate with our teams around the world that will certainly have a lasting impact.
On a reduced ESG any expense.
But I think it's a bit unrealistic to think it's going to stay at the lowest levels in history.
There will be some expense that that comes back next year, that's what John was referring to but it will be significantly lower than previous years, because we've learned so much about how to how to conduct and run this business.
In a virtual mode that we have now implemented many of those things into our business plan for 21 through 23 that will have a lasting impact and thats. How we ensure that it will have a lasting impact is because that's that's how we're.
Managing and facilitate sizing and staffing the business and ultimately Thats, how we are building the budgets going forward.
Okay, great. Thank you and does the on your bank facilities are your first lien.
Docs allow you to buy back any of the sub notes in the open market.
Yes, it does have its John here.
The agreements do allow us to do that in the open market and clearly the price looks attractive as theyre through trading.
Yeah.
68, I think is the most recent trade that happened but.
But at this point, we're focused on capital preservation is given the uncertainty that both Jeff and I have been been referring to here.
And then plus once we get back in the market activity, we would take would be driving that price for it backup so overtime that would that would hit to the the attractiveness of going doing there. So at this point in time, we're just sitting back and.
And then.
Preserving liquidity as we go forward.
Got it thanks for the time.
Our next question comes from Brian Dirubbio with Baird. Please go ahead.
Good morning, I'd like to focus on Europe for a second.
How close are we to getting we're seeing Europe returned.
Positive EBITDA and possibly even positive free cash flow.
Yes, Brian This is Jeff I think Dick.
Big picture, we're probably we'll need through 21 as we get into 22 I would expect.
Net income to return to a positive level.
Okay. So it is we think about because obviously it was a lot of investors are were just.
Focusing on the cash strains on the company.
And so.
Yes from what you're seeing today.
Europe could still be a cash drain and in 2021.
That's correct we are still in the middle as I've mentioned earlier here, we're in the middle of identifying additional fixed costs to come out of our business and.
Thats, primarily by Europe, and we've done a lot already.
Become smaller and more profitable in Europe with this divestiture that we just did this year.
Next year, we'll take a look at our our existing footprint and do some things there to remove significant fixed costs that will.
We'll spend for us in 22 and 23.
Just and I fully recognize that exiting businesses is a very expensive proposition in Europe.
How should we think about sort of the the upfront costs of you, possibly shuttering some capacity.
You know versus the the when the payback period of that cost.
As I mentioned in my prepared remarks, we are in the process of finalizing.
Several things.
That would be one of the several things were in the process of finalizing and we'll have more information as we get into either the end of the fourth quarter or early in the first quarter regarding all of those initiatives that I referred to Andy in the prepared remarks.
Understood Thats fair finally, just as we think about Capex.
It's going to be under 5%, you're targeting under 5% going forward.
But no material amount I think historically two thirds of your Capex spending was related to new customer up program launches, which.
Ultimately does get reimbursed through the tooling receivables as title that equipment transfers to the lease so should we be thinking about capex more on a net basis post the re tooling reimbursement what does that number really look like.
Hey, Brian its John action.
Actually we did.
We segregate separate separate colleges.
Tooling receivables from our Capex, so when we referred to capital expenditures being under 5% of sales that would be Cooper standard owned tooling and equipment whereby the customer owned tools are a separate line on our balance sheet and you're absolutely right, we do get reimbursed either in lump sum.
Or buy a piece price over time, so that that 5% or below number is equipment that we're utilizing and thats why were able to to have a more of an influence on efficiencies and re purposing of that equipment and in that youre seeing that in the disciplined capex number coming down here of late.
Okay. Thanks for the clarification appreciate it thank you.
Sure.
Our next question comes from Mike Kelly with KDP investment Advisors. Please go ahead.
Hi, congratulations on a great quarter.
It looks like your EBITDA margins for this quarter of 9.5% and you said your goal is to get them above.
10%. So you look like you're just about there but.
But you also said you can't guarantee over the next three years that you did you would reach that so I'm. Just wondering is this this this quarter, an anomaly or in terms of margins or.
Can we expect it to remain at these levels going forward.
Hey, Mike It's John again in my prepared remarks, I kind of referred to that the benefits were seeing on the governmental programs related to co hvid and the absence of spend that Jeff just was giving some color on a few minutes ago.
So really that 100 to 150 basis points I referred to would come off that 9.4% run rate in Q4, when you think about.
The net 4 million positive impact for us in Q3, you can see that on a bridge in the presentation.
There is actually $6 million of good news from government grants in various benefits around the world in various countries. So like we had indicated we anticipate that running out here at the first of the year, so really not a.
Go forward run rate item that you can count on coming back and then the the the increase in discretionary spending such as business travel overtime creeping back in.
We'll add.
Half of that 100, and 150 basis points number that I just talked about.
Okay.
And.
On the 13% secured notes they they also have a 35% equity call back.
Would that be something that you might consider depending on how the stock reacts.
Yes, again here not not in the short term I think where we're just looking to preserve cash balances just because of the significant uncertainty and as things stabilize and we get a few quarters behind us here into next year and we can take a look at some of those type of activities. So.
So more to come there.
As far as other capital structure type.
Opportunities or allocation options.
Clearly, we're limited by fixed charge coverage ratios under the term loan and.
And those secured notes so not really an option at this time until that fixed charge coverage ratio gets back about two.
Mike This is Jeff Edwards, let me, let me just add on to the the question you were asking about our our long term.
Expectation regarding double digit EBITDA as a percent of sales we have said.
Earlier this year, we've said on this call.
And we will continue to say that that we have certainly a line of sight to achieve that 10% plus level of performance as we exit 2002, so that hasn't changed.
What we did say is that there is a lot of things in the industry that we don't control and so we are absolutely committed to that number as we exit 22.
Assuming that the industry volume and mix.
That that we've highlighted as important not just important to us important everybody I'll hold so that's probably the reason for that.
The question that you asked based on the words that we use but it was more related to what we don't control than it was to what we control hopefully that helps.
Yes. Thank you.
Our next question comes from Nike Hill with Kristen Capital. Please go ahead.
Thanks for taking my question.
It's been a long time coming but that was really a strong quarter on multiple fronts. So congratulations to Jeff John and the team.
Given your successful operational improvements and cost cutting and divestitures.
I am actually struggling to get to a negative EPS number that the analyst consensus half Q4 for 2021.
Im not looking for specific guidance, but I would greatly appreciate a directional indication.
And given that you just posted positive earnings in this past quarter in the midst of covert.
Was hoping that maybe you could.
The spell the.
2021 negative EPS.
Number that consensus half and just say that you're hopeful it will be positive. Thank you congratulations.
Thanks, Mike It's John here, yes.
Yes, I think.
I can't speak to the consensus models that were built but we do have confidence here in the recent performance that will will continue into into next year.
You are actually right, we're not in a situation, where we're going to give.
That type of guidance, but keep in mind that half of this year, we didn't have the higher interest load overall that that we will have going forward based on this unsecured note repurchases or sorry purchase issuance.
So that will that will be a drain on EPS going.
Going forward into next year, but.
But the the stabilization of the business and those volumes coming back we'll certainly.
We will benefit us and allow us to to hold that margin perspective going going forward. So more to come as we as we round the year out like and we'll be issuing formal guidance at that time, and we'll be able to shed a little bit more color on on that activity for us, but as we as we sit here today, we're pretty comp.
Thank you good luck guys.
Thanks.
Our next question comes from Josh Raskin with Credit Suisse. Please go ahead.
Hey, guys, Jeff John Congratulations on a really outstanding quarter I, just couple of questions actually one.
Just piggybacking on one of the first question you got wanted to dig in a little bit on the regional performance in Asia I guess, starting with revenue is is it possible to give any more context on what drove the outperformance there relative to the market I'm doing my math correctly it looks like.
18% up year over year, excluding the divestiture versus kind of 11% I'd be just take itracs estimates so any.
Any any additional detail you can provide there maybe talk.
Talk about which customers and may perform better than others.
Yeah, Josh it's John.
Can you shed a little bit more light there.
Yield for us our customer mix over in China is much more significantly weighted to the western joint venture Oems as opposed to the the China Domestics and.
Last year 2019 that business was down.
Almost 30%, while the market was down 15% to 19% or so so you've got that mix phenomenon of our customer base and so this year you are seeing strong improvements year over year and volumes coming out of those those western join.
Joint venture Oems in particular for us what we saw volume improvements driven by.
The GM OEM.
OEM joint ventures.
On some global programs. So that has certainly helped helped the mix for us year over year and why we had some outsize performance compared to to the market overall.
Got it Super helpful. And then I guess on just keeping an eye on that on EBITDA. It looks like a lot of the the growth in the turnaround came from cost increases any any additional light you can shed there.
As far as the overall magnitude of the cost reductions that we've taken out Josh is that the that your question.
Well just in the in the in the K It looks like 14, and a half of the increase was related to what you what you call cost increases.
So is that just yet I guess.
Thank God and yes, I got the question now.
I remember in my prepared remarks, we talked about the the bonus variation of being about $22 million.
Year over year in the prior year, we actually reversed accruals. So that showed up as income in the quarter.
To the tune of $10 million, whereas this year, we're continuing to accrue and you've got $11 million of expense. So the combined year over year impact in that cost reduction or slash increase column in the in the 10-Q is showing a $21 million overall variance year over year.
Got it okay.
And then final question too is thinking about.
Just one final question for me on working capital timing for Fourq, you had a nice working capital release.
This quarter, how should we think about working capital in the final quarter of the year kind of in the context of this being a little bit different of a year in conjunction with kind of the normal Fourq you working capital release.
Yep, It's John again, Josh clearly.
Clearly strong cash flow in the quarter here in Q3, driven by the improved earnings.
Modest capex low that we had as well as the working capital changes the ramp up in sales you're always going to have an outflow of accounts receivable, but nonetheless.
We had better performance in inventory and accounts payable that we pay more slowly than our customers pay us. So thats always a good working capital position to be in so really.
Some some great performance here in Q3.
But then Q4 is typically our strongest strongest cash flow quarter of the year seasonality, because we're collecting our receivables and the pro.
Production levels wind down in mid December so given the seasonal inflows. We had in Q3 were expecting Q4 free cash flow essentially neutral and then still deliver on that overall positive free cash flow in the second half of the year that we talked about last.
Got it appreciate the color thanks, guys. Congrats congrats again.
Thanks, Josh.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
Our next question comes from Bob Amenta with Jpmorgan. Please go ahead.
Yes. Thank you just.
One I guess follow up or clarification on the.
That 100 to 150 basis point.
Downward shift from the nine and a half you did this quarter I just want to make sure is that are you, saying like for example in 2021 for the year that that Youre thinking EBITDA margins could be 8% to 8.5% is that is that how I should read that am I reading too much specificity into that.
Well it wasn't intended to certainly give guidance for next year.
So Bob you know think about those governmental programs like I mentioned $6 million is about 90 basis points that will go away just because of those programs will line down around.
Around the world. So that is why we just wanted to put that out there from a from a go forward run rate perspective. We wanted you to appreciate that that's not a continuing income item or cost offset item.
Okay, Yes, and that's fine I, just again for for modeling I mean, I would think I.
I mean, even if you do less revenues in Q4, you are still going to be $2.3 billion to $2.4 billion revenues. This year with a horrible second quarter. So one would presume hopefully that revenues are higher next year and Matt.
Matt start drawing an 8% margin on that's not that's not terrible so.
No its not where you want to get too, but I just didnt.
I, just wasnt didnt want to read too much into a comment and extrapolated over an entire year next year, but thats fine I understand what you're you're saying and then I guess just following up on that working capital question someone just asked.
If we again under my assumption that sales will be higher next year than they were this year would we presume that working capital next year would have to be an outflow or you aim of cash are you aiming to try to do some things to make with inventories or whatever to make that more of a neutral next year.
Yes, Bob It's John again, we definitely have working capital initiatives that are there remain in flights in their long term in nature. So think about inventory levels coming down over time think about days payable going up as we work to rationalize their supply base.
So both of those should be.
Accretive to working capital each each successive year here is how we're looking at it but you are actually right in a in a rising sales environment you always have you.
Are you typically have a working capital usage on the accounts receivable or tooling receivable side. So we're looking to to optimize that as best we can with the initiatives we've got in place.
Okay, and then just lastly.
Capex you, obviously I just budget a math year to date, obviously, it's on one of your slides 4.5%.
I think five is kind of a goal is there anything if I'm looking at next year that you deferred this year that would make next year have to be greater than 5% just because of things you Didnt do this year.
Even if it's just a one year catch up basically.
No Bob there there was some timing differences of delayed customer launches in that but we don't think there's anything thats going into to raise that.
Capex spend above 5% next year.
Okay, great great quarter. Thanks.
Thanks, Bob.
Our next question comes from Wolfe Jaffe with FBR Research. Please go ahead.
Hi, everyone.
I will.
First and foremost I'd really like to just say thank you for Adeptly enduring 2020.
It's not over yet wolf, but thanks, [laughter] very true not over yet open end jinx.
The.
Discussion around safety earlier in the call seemed.
Seemed very impressive.
Is this something we should get used to or was this really an anomaly.
Thanks will this is Jeff.
Definitely can continue to get used to it we have.
We've made it a priority for almost a decade now and I think the teams have.
Certainly each year continued to move it closer to world class and and we use the terms today to.
Highlight the number of facilities in the world that we we have zero incidents and this is due to the leader.
The leadership of our plant managers and their teams and everyone that supports them inside the company to make it a top priority and we're extremely proud of the culture that exists related to this particular metric and.
And I can assure you that the priority that being number one is going to change anytime soon.
Well as a shareholder I appreciate it so.
Please thank the team for for the safe CEVA safe operations.
A question on your comment with respect to Europe.
I thought you guys had said to the.
The orders are running ahead of schedule on Europe, but the slide says 92% of original plan May maybe you guys misspoke or maybe I Miss heard the slide correct.
Or maybe there is a timing that is.
No we'll fight I think slides correct.
It's just our original expectations for the year.
Is the reference to to the plan so coming into it and pre Covance is that reference so otherwise the akorn.
The current performance running ahead of.
Current levels of Hs is that reference I think.
Oh ahead of current levels of it yes.
Well the comment was the slide is referring to our original business plan coming into 2020 pretty cold cuts.
Gotcha, Okay. So thats the differential.
Okay, and then with respect to the the question just asked a moment ago on working capital.
You had said that you expect Q4 free cash flow to be neutral were you, saying that you expect the impact of working capital in Q4 to be neutral or the total free cash flow should should basically busy euro in Q4.
Total free cash flow.
Got you, Okay, and then on one of the slides you talked about $50 million.
Of savings I guess that slide seven.
I I'm, assuming that means a $50 million.
The incremental savings on top of.
The savings from plant closures et cetera is that correct.
They do.
There is.
A lot going on there wolf that that were looking to attack the $50 million includes.
Cost Takeouts red.
Relative to 2019 levels in both ESG any fixed cost as well as above the plant Cogs.
So.
These are these aren't plant actions necessarily but their overall oversight and in in governance aspects of running the business.
So really when we look at any incremental planned actions on the direct labor side or on the actual facility closures those would be increment.
Okay. So so it's incremental okay.
Wonderful those are my questions. Thanks.
Thank you again for the hardware.
Okay. Thanks will.
It appears there are no more questions I would now like to turn the call back over to Roger Hendriksen.
Alright. Thanks, everybody. We appreciate you joining the call this morning and for your continuing interest in Cooper standard if.
If you have further questions that we didnt address on the call or just want to get into a little bit more detail. Please feel free to reach out to me directly.
We look forward to staying in touch this concludes our call today. Thanks again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating by you may now disconnect.
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