Q3 2021 Cooper-Standard Holdings Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the Cooper Steinberg take likely 2021 earnings conference call, joining Nebraska beef and all participants will be in a listen only mode.
Following company prepared comments, we will conduct a question and answer session.
At that time, if you have a question you will need to pass.
What would be the number one key.
As a reminder, this conference call is being recorded in the web cast will be available on the Cooperstein does that site for replay later today I would now like the identical with the larger hendrickson.
Oh of Investor Relations.
Thanks, Vic and good morning, everyone. We appreciate you spending some time with us this morning.
The members of our leadership team, who will be speaking with you on the call. This morning are Jeff Edwards, Chairman and Chief Executive Officer and.
And Jon Banas, Executive Vice President and Chief Financial Officer.
Before we begin I need to remind you that this presentation contains forward looking statements.
While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable.
These statements do involve risks and uncertainties.
For more information on forward looking statements. We ask that you refer to slide three of this presentation and the company's statements included in periodic filings with the Securities and Exchange Commission.
Yeah.
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.
So with those formalities out of the way I'll turn the call over to Jeff Edwards.
Thanks, Roger and good morning, everyone.
We appreciate this opportunity to review our third quarter results and provide an update on our ongoing strategic initiatives and the outlook.
To begin on slide five we provide some highlights or key indicators of our operations performed in the quarter.
We continue to perform at world class levels, and delivering quality products and services to our customers.
And keeping our employees safe.
At the end of the quarter, 98% of our customer scorecards for product quality, we're green and 96% for green for launch.
Most importantly, the safety performance of our plants continues to be outstanding.
In the third quarter, our total safety incident rate was just 0.46 per 200000 hours worked.
Well below the world class rate of 0.57.
I would like to specifically recognize and thank our teams at the 28th Cooper standard plants.
That have maintained a perfect safety record of zero reported incidents for the first nine months of the year.
We are continually striving for zero safety incidents at all of our plants and facilities.
And the dedicated focused employees. If those 28 locations are leading the way and continue to demonstrate that achieving our goal of zero incidents as possible.
Despite lower than expected production volumes, our manufacturing operations and purchasing team.
We're able to deliver $8 million in savings through lean initiatives.
And improving efficiency in the quarter.
S. G E N E expense was down $4 million year over year.
And the combination of past restructuring actions.
And strategic divestitures delivered $5 million in benefits in the quarter.
Unfortunately, we continued to face significant ongoing challenges from volatile customer schedules rich.
Reduced production volumes and tight labor availability in certain markets.
In this low production volume environment, we've not been able to offset the widespread inflationary impacts we're seeing in materials energy transportation and labor.
This despite our improved operating efficiency.
We're taking aggressive actions to mitigate or recover the incremental costs imposed on our business I.
I will provide more color on this initiative in a few minutes.
Moving to slide six.
We're proud of the culture, we have established within our company and the progress, we're making toward world class status with respect to sustainability.
We continue to garner recognition from outside organizations for our progress thus far.
In the recent quarter, we were recognized by Corp magazine for our culture of diversity and inclusion.
We believe this type of recognition as an indication that we are headed in the right direction.
We will continue to work hard to further align our priorities with those of our five stakeholder groups. Because we believe this will play a critical role in driving our long term growth and success.
Now, let me turn it over to John to discuss the financial results of the quarter.
Okay.
Thanks, Jeff and good morning, everyone.
And the next few slides I'll provide some detail on our financial results for the quarter and comment on our balance sheet cash flow.
Liquidity and capital allocation priorities.
And then update our expectations for the remainder of 2021.
On slide eight we show a summary of our results for the third quarter and year to date period with comparisons to the prior year.
Third quarter 2021 sales were $526 $7 million.
Down 22, 9% versus the third quarter of 2020.
The year over year decline was roughly in line with lower global light vehicle production, which continued to be impacted by insufficient supply of semiconductors.
Gross loss for the third quarter was $8 $1 million.
And adjusted EBITA was negative $33 $9 million comp.
Compared to adjusted EBITDA of positive $64 $1 million in the third quarter of 2020.
As with sales profitability was hurt by lower production volumes and volatile customer schedules.
In addition, increasing commodity and material headwinds.
Higher labor costs and general inflation weighed on our results.
Tax expense of $32 million recorded in the third quarter includes a $31 $7 million charge.
18, and a half of which relates to the reversal of tax benefits. We had recorded in the first six months of the year.
Plus $13 $2 million of tax expense for the initial recognition of valuation allowances.
On our December 31, 2020, net deferred tax assets in the United States.
These tax adjustments were driven by increasing historical three year cumulative losses, which led to a change in judgment.
Realize ability of our net deferred tax assets.
Including this tax item, we incurred a net loss for the quarter of $123 $2 million on a U S GAAP basis compared to net income of $4 $4 million in the third quarter of 2020.
Excluding restructuring expense and other items as well as their associated income tax impact.
Adjusted net loss for the third quarter of 2021 was $106 4 million or $6 23 per diluted share.
Compared to an adjusted net income of $3 6 million or <unk> 21 per diluted share in the third quarter of last year.
Capital expenditures in the third quarter totaled $24 million compared to $10 5 million in the same period a year ago.
Year to date, we've invested $76 million in our business largely to support new program launches, which we expect will be up approximately 18% for the full year of 'twenty, one and should remain solid in 2022.
Despite this significant launch activity, we remain committed to keeping capex below 5% of sales for the full year.
Moving to slide nine.
The charts on slide nine provide some additional clarity and quantification of the key factors impacting our results.
On the topline unfavorable volume and mix net of customer price adjustments reduced sales by $165 million versus the third quarter of 2020.
Again, the biggest driver was the customer schedule reductions related to ongoing semiconductor shortages.
Foreign exchange, mainly related to the Chinese RMB the Canadian dollar.
The Brazilian real and the euro contributed $9 million to sales in the quarter.
Yeah.
For adjusted EBITDA unfavorable volume and mix net of price had a negative impact of $64 million year over year, driven mainly by the semiconductor related customer schedule reductions as well as customer price adjustments.
Commodity and material input costs were $21 million higher which brings the year to date impact to $34 million.
Commodity inflation has continued to ramp up much faster than we had anticipated in each successive quarter of the year.
We now expect a full year increase of approximately $60 million compared to our initial expectations of $15 million when the year began.
And $20 million higher for the year than we expected just three months ago.
Other negative drivers were $11 million in write downs of certain accounts receivable deemed to be unrecoverable and $14 million from wage increases general inflation and other items.
The write down of receivables are recorded as a credit loss in SGA expense was.
It was largely related to the bankruptcy proceedings of a divested JV partner in China.
On the positive side lean initiatives and manufacturing and purchasing drove a combined $8 million in cost savings for the quarter.
And run rate <unk> expense was $4 million lower.
Moving to slide 10.
Cash used in operations during the three months ended September 32021 was an outflow of approximately $51 million.
Driven by the cash net loss incurred and increases in working capital, namely inventories.
<unk> from volatile customer production schedules.
Combined with Capex of approximately $20 million, we had a total third quarter free cash outflow of approximately $71 million.
Despite the outflow we ended the third quarter with a solid cash balance of $253 million.
In addition, availability on our revolving credit facility, which still remains undrawn.
<unk> $127 million, resulting in total liquidity of $380 million as of September 32021.
With our cash conservation efforts and on going negotiations with our customers to recover incremental costs from commodity inflation and volatile production schedules.
We expect to sustain a level of liquidity that will support ongoing operations and the execution of planned strategic initiatives.
Regarding capital allocation priorities, our top priority continues to be to sustain and grow our business profitably.
We will continue to make modest investments in capital equipment and technologies to launch important new programs for our customers.
With a disciplined focus we anticipate capex of approximately $100 million for the full year 2021, and within the range of 4% to 5% of sales on average overtime with nearly all of that dedicated to new program launches.
As we look ahead, another priority will be to reduce the interest burden on the company by addressing the senior secured notes that we issued in 2020.
That said, we are continually evaluating our liquidity needs and overall capital structure in relation to market conditions and opportunities.
We may adjust our priorities from time to time in light of market fluctuations.
Turning to slide 11.
Yeah.
We have updated our full year guidance to reflect our year to date results.
Rising commodity and other cost pressures and lower expectations for fourth quarter light vehicle production volumes as compared to our outlook heading into the third quarter.
We now see sales for the year in the range of two $3 billion to $234 billion.
And adjusted EBITDA loss in the range of 25 million to $10 million.
Our outlook for cash restructuring remains unchanged as we expect to continue our planned fixed cost reduction initiatives throughout the fourth quarter.
And cash taxes should be approximately $10 million for the full year.
With that I'll turn the call back over to Jeff.
Okay, Thanks, John and to wrap up our discussion this morning, I'd like to provide an update and some additional detail on our strategies to diversify our business.
Leverage growth in the electric vehicle market and our outlook related to our longer term return on invested capital improvement goals.
Please turn to slide 13.
Innovation and diversification remain key parts of our long term strategy and we're making good progress in both areas.
Moving to the category of good news. This morning, we're very pleased to announce that subsequent to the end of the third quarter, we finalized our first commercial agreement with a global footwear manufacturer.
The agreement grants the customer license to use <unk> technology and the manufacturer of their footwear products.
Cooper standard will receive licensing fees and ongoing volume based royalties.
Within established minimum value.
The agreement is for a 10 year term and is non exclusive.
In accordance with the terms of the agreement.
We can't disclose the identity of the footwear manufacturer or the specific financial terms.
I will say, though that the amendment fees and royalties will be sufficient to offset all of the investments we've made in our applied material science business to date.
Our discussions in technology development work with other footwear manufacturers is continuing.
And we hope that this first agreement will be a catalyst to future opportunities in the footwear industry.
Beyond footwear, we're exploring a number of exciting opportunities to leverage the performance and sustainability aspects of <unk> technology <unk>.
Including reducing rolling resistance of tires.
We're in the early stages, but the initial development work shows good potential.
We continue to believe that superior physical performance characteristics and the lower carbon footprint for tracks chemistry platform represents a clear competitive advantage for us in our automotive business, our materials science business and in our industrial and specialty products business as well.
We remain optimistic about our about opportunities to grow in diverse markets over the longer term as some of these development projects are completed.
Turning to slide 14.
The momentum of the electric vehicle market is continuing IHS estimates that battery electric vehicle production will increase at an average rate of 39% over the next four years, reaching approximately 18% of the total market by 2025.
We see this market transition is a clear opportunity and we're leveraging our innovation reputation for world class customer service.
In engineering expertise to win significant business in this hyper growth segment.
In the third quarter, we were awarded a $30 million in annualized net new business on electric vehicle platforms.
For the first nine months, New EV business awards totaled $88 million.
Key innovations driving our success in this market include our plastic <unk> family of products.
Which offers highly engineered thermal plastic tubing solutions for glycol applications over a wide range of temperatures up to 150 degrees centigrade.
Plastic cool off also offers reduced emissions and carbon footprint.
Improved recyclability.
And reduced weight compared to more traditional products.
Making it a highly desirable option for the EV market.
This type of innovation is enabling us to grow our EV business faster than the overall market.
Based on existing book business and anticipated future awards, we expect to grow our sales on EV platforms, and an average rate of approximately 50% annually over the next four years compared to the expected market growth of 39%.
As reflected in our quarterly results and outlook as John described we and other automotive suppliers continue to face significant cost headwinds due to ongoing erratic production schedules lower overall production volumes supply chain delays and disruptions.
And persistent widespread inflation.
Virtually everything we buy to support our operations has increased in price over the past nine months.
We are taking further aggressive actions to offset these headwinds include.
Including commercial supply chain and internal cost reduction initiatives.
With our customers we are taking a multi faceted approach that includes negotiating price increases.
<unk> or delayed price concessions.
And expanded commodity indexing programs.
We're targeting recovery of more than $100 million overall.
We've made good progress in our negotiations to date.
But have more work ahead to achieve the target.
We believe our status as a preferred supplier and technology partner puts us in a solid position to have these difficult discussions.
We are also working with suppliers.
To implement indexed based contracts.
Extend the payment terms.
And we are pushing back against unjustified price increases and surcharges.
We're doing everything we can to ensure consistency of supply.
While trying to limit the impact of this daunting wave of inflation.
Internally, we're focused on conserving cash by limiting discretionary spending carefully managing capital investments and accelerating collections of tooling and other receivables.
These actions enable us to continue funding new program launches and the future growth of our business.
While near term sales remained suppressed by ongoing weak production levels.
In terms of the outlook you could say, we're planning for the worst.
With headwinds continuing but.
But remaining optimistic that strong and consumer demand will drive a rapid rebound in light vehicle production when widespread supply chain challenges.
To be resolved.
Turning to slide 16.
To conclude our presentation. This morning, I want to provide an update on our driving value initiatives.
And our progress toward achieving sustainable double digit return on invested capital.
But we've made substantial improvements in many areas of our business.
Current market headwinds have more than offset those operational gains in recent quarters.
On the graphic on slide 16, we've highlighted two work streams that focus on managing the impacts of increasing commodity and material costs.
As just discussed.
These work streams are clearly more critical and more challenging now.
When we when we first laid out the driving value plans.
Given the current challenging market conditions it.
It may take us a little longer than we had anticipated to reach these areas.
These targets, but we are making progress.
And I assure you that we will maintain and remain committed to achieving the long term goals of double digit return on invested capital and adjusted EBITDA margins.
If we achieve our $100 million cost recovery target.
We could still be largely on track.
Next I'd like to thank our global team of employees for their continued hard work and commitment.
I also want to thank our customers for their continued trust and support as we work through these turbulent times together.
This concludes our prepared remarks.
We would now like to open the call to questions.
Yeah.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press <unk>.
Alright, followed by the number one key on your telephone.
Question has been answered and you would like to be Julien registration you may do so by pressing the bounty and.
If you are using a speaker phone please pick up the handset before entering your request one woman.
As we assemble that Jamie.
Questions.
Our first question comes from Mike Wood with.
<unk> Mike. Please go ahead.
Everyone.
Just first off on the.
Sneaker agreement is this the company that you started doing.
I guess the development technology development agreement with back in 2019.
That's probably about right Mike I think it's been a couple of years now that we've been working with with this particular, we've had several things.
This particular, one is in a couple of years, yes.
What is the what do you think the timing is.
You would see revenue should go up.
In your financial statements.
Yeah.
Yes without disclosing.
Product plans that they have Mike it's difficult to get into that conversation, but that probably in the neighborhood of 12 months to 18 months from now.
As the production.
Outlook.
And the nature of the agreement with the <unk>.
It's 100% margin right straight cash.
There's no cross border.
Yes, we will get into more of those details in the fourth quarter, but but that's that's directionally correct.
Okay.
Material costs run.
No.
Lessons you've learned just a couple of years ago, you went through where you took a hit.
Some of the commodity inflation with.
Some of the vehicle manufacturers and I think you're largely successful getting some of that back in your commercial negotiations is it.
Easier this time or are there any lessons learned or how does that work worked through.
Yes, I think given the sophisticated audience. We have this morning in the automotive industry I would tell you it's no different than what you've done what you've experienced in the past for certain customers.
Where we don't have.
Business Thats ready to be sourced to us over the course of the next several months they tend to.
Have conversations.
Probably in a way that that you and I would hope for.
For customers that we have new business coming at us over the next several months those conversations aren't quite as joyful.
But somewhere in between will we'll work it out and I would anticipate that.
Debt.
Over the next month or two.
For the most part anyway, we'll know exactly where we will end up so by the end of the year I think we'll give you some real concrete direction in those regards but.
It's a tough tough time, we're in obviously our customers are too.
And we're all trying to work through it together now.
Art.
With new contracts have come on are they going to be more of a traditional supplier pass through type of agreements, where you're kind of stuck with these legacy type agreements.
While for new programs, obviously, we're able to price at the current <unk>.
Commodity rate and indexing is part of what we do.
So I shouldn't really is in the rears its whatever we had is what we have and we're trying to yes.
Negotiate.
The best we can if they agree to put indexing in.
As the train has already left the station and sometimes those are good deals sometimes those aren't good deals and you just have to take it sort of one at a time by customer.
Right.
John You mentioned that these senior notes the no call provision expires.
It's mid 'twenty two correct.
Yes, Mike It's June 1st as the first opportunity for the non call date. Okay. Do you have is it do you have all the know Turkey can you call part of them and is there a minimum.
Cash balance do you think you need.
With cash or credit facilities to go forward.
Let me start with the cash on the balance sheet.
Okay.
And Mike I think I got the Gist of that question you broke up a little bit at the end, but let me start with the minimum cash.
What I've said in the past and what we're still kind of thinking is a good level is that we're comfortable in something in the range of $150 million to $180 million of cash on hand.
And then we still have the access to our revolving credit facility, which we have not tapped into at this point. So we think thats the minimum cash required to run the business going forward as.
As far as the other non call date, you can do partial but.
Our.
Intent is to look at that 13% really expensive debt and see what we can do to take out all of it.
So we'll keep you up to date on developments here over the next six months as we look.
Look at the opportunities within the capital markets.
Perfect. Thanks, John.
Thanks, Joe.
Our next question comes from Brian <unk> with Baird. Please go ahead.
Good morning, I guess my first question is can you help us get a sense of the timing of the $100 million plus of raw material recoveries that you are in discussions with your.
With your customers.
Yes. We've asked this is Jeff we've asked for recoveries starting October 1st to be clear.
Obviously, we can we can ask whatever we want to.
And where in the world.
In the.
The stage of negotiation, where in some cases, we've achieved that in other cases.
Negotiations are still ongoing right. So that's why I mentioned I do believe that by the end of the calendar year.
By the end of the fourth quarter for us.
We will have a very good idea of where each of these negotiations will.
We will take out so there is the probably the gist of the question was do you have any of this in your guidance for the rest of this year. The answer is we do not.
Okay.
That is helpful and how should we be thinking about these recoveries as it sort of just a flat amount or are you changing some of the structure of the contracts, where you are now more index based rather than a fixed price basis.
It's a combination that each customer is different.
In some cases, we already have the indexing with certain customers on certain commodities.
It's our objective going forward that that for the new business that we're quoting in the new business that will come into our company in the future years indexing is what we want to do.
A lot of the business that we have in the rears. It doesn't include that.
Historically, we have said, 40% to 60% of raw material.
Inflation is what we have have recovered.
That was prior to this.
Hyperinflation moment that we're that we're in right now that gives you some idea of the historical recovery rate.
Great that's helpful. There.
Just thinking about the growth in Evs.
The numbers you said.
But.
What.
Alright, as Youre, feeling or maybe what is your exposure right now to fuel lines. Thank you and your results you combine that.
With breaks as well.
But could we see some of that gains at evs be offset by declines in a few lines.
Yes to a large extent it Ryan we've given some color on this in the past.
Past quarters, but basically the EV fluid systems.
Can be anywhere from 30% to 50% more content.
Then the than the.
Bice engine fluids, so for us we definitely want more evs.
Because the content, even if you take the fuel line out our content is up Cigna.
Significantly in and of course that varies.
As you go from the passenger car market up to the the.
The small Suvs mid Suvs large suvs the bigger the vehicle the.
The much larger the content.
For us and so we actually are going to enjoy the transition from ice to hybrid to battery electric vehicle in the segment hybrid actually.
As doubling because obviously you got to.
<unk> got two powertrains that youre that youre managing from a fluid point of view, but.
The good news when you move into to Evs.
That number goes up substantially as well, obviously, we're working with customers to improve the efficiency.
Those systems, so as we go forward.
We will have a lot more insight for you on the specifics of the content per vehicle.
Some of these as we get closer to launch.
Great just two more just you didn't provide any update on free cash flow how much cash if any do you expect to burn in the fourth quarter.
Yes, Brian I'll take that one this is John.
We do expect a modest free cash outflow in Q4, just given the nature of production levels.
With the reduced losses that we would anticipate in Q4 on higher volumes that will be mitigated somewhat but keep in mind, we do have a significant interest cash coupon due.
Effectively December one.
Coming up so that's $30 million of cash coming out the door.
But we should see some some favorable working capital benefits to offset that and with the guidance. You can you can squeeze the math on capital expenditures are worth about another $25 million for the year, but.
As Jeff described earlier.
Looking at all discretionary spending we're managing the capital expenditure area and part of these customer negotiations or are looking at tooling and other outstanding receivables to see if we can get accelerated payment terms on those and then on the supply side also looking to extend days payable outstanding.
We renegotiate some of these contracts so all of that told in the short term here in Q4 should result in a modest free cash outflow.
Okay, and then just finally.
We think about next year.
The refinancing of the 13% notes.
Youre going to probably have to address the term loan b at the same time.
So how are you thinking about timing because obviously you could be in a situation where you may save on coupon on the on the first lien notes.
Terminal B right now is priced at L plus 200.
Not sure if you're going to be able to reprice that term loan. There. So just how are you thinking about this.
Probably pushes attacking both at the same time, just look to get a sense of your thought process.
Sure. It's a good question.
The term loan B comes due in 2023.
You never want to have that come current on your balance sheet. So clearly it's top of mind for us to look at the total cap structure here over the next six months.
And figure out the best alternative for us going forward.
I said in my prepared remarks subject to market conditions as always so we'll see how the production environment as in starting the year Q1.
If it is.
As optimistic as abundant and say in our in our customers believe then we should be in a good situation overall as far as looking at the total cap structure, but for now we're <unk>.
Looking at all alternatives and you're still rolling out of equity raise correct.
Yeah at this point with the stock price where it's at.
The dilution impact on current shareholders doesn't really make make a lot of sense for us to go out with an equity raise and use that to to refinance any of the debt.
But we will keep that as an alternative and we're always watching it.
Got it I appreciate the thoughts thank you.
Thanks Brent.
Yeah.
No.
Our next question comes from Joseph <unk> with Cantor.
Fitzgerald. Please go ahead.
Good morning, first question bit of housekeeping Slide 10 shows free cash flow of negative 71, one but on a quarter over quarter basis cash was down by.
Believe it's 82.2, so what's the 11 odd million dollars difference.
Yes, Joseph Youll see when we issue our full 10-Q later today, we have some local borrowing lines around the world and we just had we simply had a pay down and some bank debt over in China makes up most of that difference.
Okay, and then thinking of cash and what you said for for minimum liquidity.
What kind of working cap at all.
Drain or our investment rather or are we going to see when things start to turn back on and have you thought about where your liquidity position will be at that time.
Yeah, except when does that time right.
We're monitoring the production levels as we go forward I guess.
Good news in that working capital story is as we have maintained a higher inventory levels.
Just because of the volatile production schedules. So you wont win when production levels do rise you won't see a significant outflow for inventory buildup back that you would typically see in the seasonal production environment now, we're still working to bring those inventory levels down by the end of the year.
Two more.
Our right sized the level of inventory I think we ended above a $190 million on the balance sheet here in September.
So we will bring that number down.
And then as I.
I've said before we're also looking at tooling and other receivables to bring those collections and earlier rather than have those extend out so.
When the industry production levels, new ramp up Youre, absolutely right you do typically see a working capital usage, but I think in this case it will be a little bit more moderated than typical.
Okay, and then last question.
Looking at auto production, just topline isn't isn't always a good guide and looking at what.
Some of your customers have idled could you give a breakout.
Per platform <unk>.
Generally sedans Suvs trucks.
What your exposure is.
Yes. Joseph this is Jeff I think we've been through this a few times, but clearly trucks and Suvs crossovers those those type of vehicles rep.
Ah represents 80 plus percent of our revenue.
It's a very important number and here in North America.
Virtually the whole the whole business I mean, we just have a lot.
Of content in trucks, and Suvs and crossovers, so as those vehicles pick back up here in the North American market.
So goes Cooper standard.
Okay.
Yes, that's what I thought and honestly I thought your top line this quarter was down more than I.
I would've expected given.
SUV and truck sales.
Chip's going towards the more profitable vehicles so.
Thank you for confirming that and that's it for me thanks guys.
Welcome and thanks.
Ladies and gentlemen, if you would like to ask a question. Please press the star followed by number of <unk>. Our next question comes from Derrick Wenger with concise capital. Please go ahead.
Yeah.
Vic I think you need to move Derek into the question queue, please or out of the queue and into the current.
One moment Sir.
Yes.
Okay.
Let's move Bruce <unk>, our next question.
And that will come from the line of Bob Amenta with Jpmorgan. Please go ahead.
Thank you a couple of clarifications, the $11 million JV is that of a non cash even though you're putting it in EBITDA.
It's noncash for now Bob.
As we understand it the bankruptcy process in China could take a couple of years before before we see that that issue settle out. So for now we've taken a conservative position to to put up a reserve for that $11 million.
But it's money that excuse me that you thought you would collect.
Youre not going to collect it or is it money you have to pay out.
It's money we thought.
It's money, we thought we were going to collect that is now subject areas and question, whether we're going to get that recovery or not okay.
Okay and then.
On the.
The bridge I guess with the obviously the volume mix thing has seen almost like 40% decremental I mean, I don't know if thats.
There's a lot of stuff in there the 165 loss sales 65 lost EBITDA. The other two items that general inflation and the material economics.
Yes.
See what they are year to date in quarter, but is there a general historical percentage I know, we're maybe a little unusual times, how extreme some of these increases.
Increases are but.
Do you usually recover 50% of that 75 over time I mean is there I mean, clearly youre not going to get all of it.
How does that work between the pass throughs and other mechanisms you have what percent could we assume you should normally recover.
Hey, Bob Let me comment real quick on your volume and mix.
Duration keep in mind, when we when we present those numbers. It does include customer price. So it's not just the straight flow through effect of production volume changes, okay. So keep that in mind.
Jeff already addressed it by saying our historical recovery has been anywhere from 40% to 60% on the commodity side on materials.
Typically what we would do in normal inflationary times would be offset those call it wage inflation or.
<unk> utility inflation with our cost saving initiatives.
With the <unk>.
Significant levels that we're seeing in all of those categories.
The.
The rise in all of the input costs et cetera, as far outpacing any ability in the short term to to whittle away at it through our own cost reduction initiatives.
So the big number I think youre looking forward at the 40% to 60% level.
And as we've indicated we're still in conversations with our with our customers about how to how to call that back.
Okay.
Quick ones on the minimum liquidity or I guess you'd call that minimum cash I guess I just wanted to.
<unk> parsing words here, but the $1 50 to 175 minimum number would you.
Be comparing that to the cash plus your unused availability or would you just be comparing that to your current cash.
Do you view those two is kind of the same thing cash and revolver availability.
Recall that the overall liquidity.
Okay.
And so Q4 I know you mentioned.
The interest payment and some of the other stuff in your guide, obviously implies zero to modestly negative EBITDA.
Working capital all of that.
Yes.
To me, that's more than modest outflow in that $50 million give or take but but either way and then and then next year. We don't know all your guidance for Capex and everything but all in with interest it seems to be a couple hundred million dollars give or take so I.
It just seems like youre going to burn cash.
Fourth quarter, and next year, and I know, you're doing some things to kind of cut cost. So so.
Time will tell but.
How.
How close I mean, it seems like youre going to get close to that number I guess, maybe not and Thats why I was asking about liquidity are at $3 80, now I mean, it could be down to low two hundreds I mean.
I just wonder if.
Do you have any thoughts on how close you are cutting it or I know youre not going to issue equity, but I just didn't know what other things you have at your disposal.
Asset sales clearly maybe now is not the best time for that but what other things if anything is out there. Besides just trying to cut some costs here and there.
Yes, it clearly asset sales could come into play, but you are right you don't sell in.
The bottom of it.
Market. So you wouldn't get any any meaningful proceeds from that.
But there are other.
Legacy assets that we were taking a look at.
There are other other alternatives and options that we're looking at what we've already talked about our cost cutting and reduction initiatives around the world that should start bearing.
Some some cash savings here as we go forward.
But clearly that's coupled in the short term with some restructuring cash outflow that or it's already in our guidance right. So.
Clearly, it's top of mind for Us and that's why we're we're looking at every single area.
Not only spend but other opportunities that were that we could have on there to manage to that.
Stay above that minimum liquidity level as we've been talking about so I am not going to get into 2022 at this point in time, so too early for us in our planning process to give you any color there, but let's just say it's top of mind for US. Okay. And then just lastly in generically on Europe.
Obviously, the last couple of years, I mean negative EBITDA, but even before that if I go back in time.
Margin wise, three 4%, where the US was kind of 15, 16%.
Structurally or just generically can you.
Clearly the simple answer is why are you in Europe Im sure Theres reasons.
Can't just leave there tomorrow, but generally speaking Europe versus the U S or in North America, what it just doesn't seem like it was ever really that good.
Clearly positive 30 of EBITDA is better than negative 20, but but generally speaking what is it about there that are you just not big enough there or what's kind of the issue over there.
Yes, Bob This is Jeff I think the <unk>.
For Cooper standard it isn't about whether were.
Big or small in Europe.
The issue for US is really on the fluid side of our business in the ceiling side.
We actually do fairly well and the outlook going forward for sealing in Europe is positive the challenge for US is fluid always has been.
And we're working through that that's what a lot of the conversations we've had this year in relationship to.
The restructuring has been about theres been some cost savings taken out in Europe, but there's a lot more to go we also.
So the rubber business for hoses over there the rubber hose business in Europe.
Not too far back. So there is some stranded costs that we need to get out of that business as we head into 'twenty, two and we're committed to doing that so we will be smaller but will be more profitable in Europe going forward, we'll talk a little bit more about that.
When we get into the guidance for 'twenty two.
And the <unk>.
'twenty two calendar year.
That's all I had thank you.
Our next question comes from Joe here.
With Beach point capital. Please go ahead.
Yeah.
Hi.
I was wondering if you would be able to provide an update on.
On your plan for <unk>.
Latin America business.
Yes. This is Jeff I think the conversation that we just had in terms of.
Assets.
And what we plan to do with with certain parts of our of our business that continues to fall short of.
Brazil business has been part of the conversation here and we said that by the end of this year we would.
Get to that that conclusion.
Didn't necessarily think that we're going to have the.
The challenges from a supply chain and in hyper inflation that we're dealing with right now so it might not be the best of time as John just said.
To make those decisions, but I will say this our teams in in Brazil has done a terrific job of taking cost out.
In managing the price as well as inflation.
In that in that market. So I think at least as it relates to self help.
That we have driven ourselves they have they've done a very good job, whether thats going to be enough to push us into a category a fair return on investment.
We will we will probably need a little bit more time than the end of this year given all of the variables that I just spoke of.
But.
That is one that that we still owe a decision on.
Okay.
Okay.
If we could just look at the results between second quarter and third quarter.
Revenue was down around $6 5 billion, while EBITDA was down right now.
$18 million sequentially would.
Would you mind, providing a quick bridge on those results.
Sure. So here its John here.
I can walk you through but.
The significant driver overall is going to be the commodity inflation the acceleration that we're facing but.
With revenue down about $9 million or so as you said.
Globally.
Just a few million dollars of EBITDA pull through in the current business run rate and just the.
The pure volume and mix calculation.
But then when you layer on commodity inflation and other inflationary pressures.
That's almost.
$12 million or higher compared to the second quarter and all in experience right.
Then on top of that the biggest other driver is that.
Our bad debt reserve that we put out for the $11 million. So.
Those are big variance drivers are what's what's.
Causing that outsized degradation, but let me break down some details for you by region. Okay. So.
Contrary to the North American market actually.
We're down almost 6% the market production was down five 7%.
Cooper standard volumes were up nine 6%. So it was actually an outsized performance when you think about it.
An earlier question on what platforms, we're on and the heavy weighting towards trucks, Suvs and the prioritization of our customers have there that kind of indicates why were able to outpace the overall market here in North America.
Europe and Asia, we were right in line with the market declines our volumes.
Fluctuated right accordingly, with both of those areas.
And we were favorable in the Brazilian market.
Actually.
<unk> up 3% or so in terms of volumes, while the market was down 5%.
So hopefully that kind of helps you paint the bridge picture, but it's really all about commodity and other inflationary pressures and that bad debt expense.
Alright, thank you.
Okay.
Our next question comes from Josh <unk> with Credit Suisse. Please go ahead.
Hey, guys. Thanks for taking my questions. If you look at the eight to nine.
Percent EBITDA margins, you were doing second half of last year, even versus the negative 6% this quarter.
How do you how do you bucket that that 15% margin swing I know material inflation is a big piece of that but if you had to split that 15% in between.
Volumes in production volatility versus material costs versus anything else what would be the.
We estimate.
Yes.
Hey, Josh it's John Yeah, I'd say youre on the right track as far as the commodity inputs.
Being the biggest driver and the variability in production schedules, but also keep in mind last year Q3, and Q4, we were benefiting from various governmental programs around the world due to the Covid pandemic. So that had favorable good news in the back half of last year as the governments were offering various types of support.
That's essentially gone away and you don't see that coming through again, if memory serves Q4 of last year that was about.
200 basis points of favorability in our Q4 results so.
The overall environment the stops starts and the inefficiencies that has caused us coupled with commodity inflations are your biggest drivers.
Got it and then just.
Clarification.
On the last question.
The bigger bigger EBITDA swing overseas was in Asia, you touched on it a minute ago.
5% sequential increase in revenue yet.
EBITDA declines negative two to negative 14 quarter over quarter, that's primarily that $11 million charge bad debt.
Yes, exactly that's 11 million bad debt plus some some material economics.
Got it.
And then.
Just looking at the guide.
If you do the math that implies.
Close to $60 million burn pre working capital.
I know you said that it should be a modest cash outflow for <unk>, maybe you've got some inventory that you are still working to unwind some tooling, but how should we think about working capital in the context of that 60 million burn.
Is it.
Just looking for a bit of a range I guess is it is it $30 million to $40 million is it a little bit less than that little bit more how should we think about that.
Yes.
Although the color I want to give at this point, Josh just given all the moving pieces. So I'll give you given you the qualitative aspects of how it comes together, but because of the the various initiatives we've got going on around the world. There's a lot of puts and takes there.
Okay.
And then.
Next question just wanted to come.
Cover.
And a little bit more detail the goal for these commercial settlements.
The 100 million that.
<unk> got out there now.
Or would you frame that for compared to the actual headwind that you faced.
Year to date.
Yes in the context of that 40%, 60% historical success rate is that kind of in line.
Yes. This is Jeff I think that the target that we put out there in the letters that we sent out to our customers reflected the reality of our of our business. So.
Our commercial teams are in.
In negotiation as we speak in and.
The targets are clear for our customers and the targets are clear for our folks that are negotiating to those targets.
Got it and does the $100 million.
This got asked previously but.
Yes.
If you if you've got all of that you set out for about $100 million how much of the goal is retroactive versus you get the recovery later down the road once this.
Sherri period starts to subside.
Yes again.
The October 1st request that went out with.
<unk>.
The $100 million.
<unk> help.
Required.
Not to belabor. The 0.1 last try here on the $100 million you guys do have different categories of where you expect to get those savings from is there any like directional.
Our guidance you can give as far as how much of it is from.
From price increases versus other initiatives.
Mostly price increases that that.
And that would drive the $100 million and then I just wanted to confirm the $100 million as like an annual cost number like an EBITDA improvement theoretically.
Right.
Yeah. So first of all the answer to the question is yes, there is price increases.
We also.
We're very focused on cash and so any as I mentioned in my prepared remarks, there's discussions going on about tooling payments in.
In other <unk>.
Costs associated with our business that we typically would absorb that we're asking them to absorb so.
Each customer is different each status and how they would like us to address the recovery is probably different than I also.
Tried to give you some color in terms of.
The leverage of these negotiations are there they are based on business that we have today, but it's also a business that we want to keep tomorrow in new business that we want to win tomorrow.
And depending on where you are in those.
Slots of.
Of life.
There are more.
To help.
When you don't have a lot of.
New business Thats coming your way and when you do have a lot of new business coming your way and those negotiations are more difficult. So.
You also know who our largest customers are it's pretty simple, we've given that breakdown anytime soon.
So you know that we've got three or four people that need to.
Their fair share here and that's what we're that's what we're focused on so.
We feel really good about the engagement we feel good about the the atmosphere of the negotiations.
And.
I appreciate everything our customers are doing to.
To try to help us and I'm sure everybody else Thats sitting in their lobby these days.
Yes.
Okay great.
On restructuring and for.
For 'twenty, one and see the guide for 45.
50 or 60.
Any preliminary thoughts as to if that number is going to be higher or lower in 'twenty two.
Yeah.
On our last call I mentioned that we expect it to be significantly lower than the current spend rate and nothing would change how we're doing that right now.
Great and then finally on the on the bad debt write down are there any others.
Or is this sort of a one off is there anything else like that that might be going on in the region or.
Is that fully captured.
This was with just one particular former joint venture. So we are obviously still in the region and managing through the challenging industry environment. There. So I can't say whether is there anything else is coming our way, but not that we know of at this time.
Yeah.
Okay. Thanks, a lot guys.
Okay. Thanks.
Our next question comes from Chris <unk> with Barclays. Please go ahead.
Oh, Hey, most of my questions are answered.
I was just wondering if that $100 million recovery.
Now you are requesting from October to year end is that included in any shape or form.
Got it.
Hi, Chris This is Jeff.
As I said before no it's not.
Okay.
And then take a step back in terms of overall Cogs base can give me a sense like how what is the overall raws as it.
Percentage of Cogs, and then in terms of raw material I know you have all kinds of different flavors.
A rubber and all kinds of derivative can you kind of maybe give us a little bit more sense of what are worried that bucket. They are moving and most are for you.
Yeah.
Yeah sure Chris This is John.
The main inputs that you can kind of categorize them in three main buckets, you've got rubber is clearly the largest input costs that we've got followed by metals and plastics.
And if you think about the the 34 plus million we've already incurred this year and the 60 will face.
For the full 12 months about.
About 65% of that inflation is based on the rubber area.
Another 25% is on metals, so I think our steel and aluminum and.
In that category, and then about 10% coming out of plastics and resins.
That's kind of the overall.
The inflationary impact of how that breaks down in terms of our direct materials.
Youll see in our 10-Q direct materials as a percent of sales is about 47% in the Q3 timeframe.
We don't break it down by direct raw materials, but it's more about the overall materials that we're buying.
They are going into that 47%.
Got you that's helpful.
I mean, there is a bit of a lift in terms of sales sequentially.
I can't can't can't talk about the visibility to that and probably broken down by continent.
Yes, when you look at the continent by continent.
The IHS forecast as North America up about 7%.
Compared to Q3.
And then Europe is supposed to be up about 31% Q3 to Q4 and the overall Asian market up about another 12, 5% or so.
So if you kind of factor that in with our weighting of revenue that's how you get to our overall sales increase.
Clearly.
There is two schools here one is the IHS forecast and then we also have the short term customer releases that we manage to and so we're triangulating both of those data points into the guidance range that you see.
Gotcha.
That's helpful.
I think I missed a couple of things one is <unk>.
<unk>, you're going to have modest cash outflow with working capital or is that right.
Yes.
We're thinking that the term modest to be honest with you but.
We're going to have in a cash outflow with the.
With the current outlook the interest load and then the capital expenditures that we got in front of US and we've got a lot of positive offsets that we're working towards to bring that cash outflow down.
Got it and noted that you didn't really get a lot of working capital back even with obviously sales a little bit lower in the quarter.
What's sort of the expectation now for Q and go into 'twenty, two and hopefully I answered that recovery phase.
It sounds there's going to be higher.
Yeah I answered this a few minutes ago right. The biggest reason why we didn't see the benefit of lower revenue on the working capital front in Q3 was because of the higher inventory levels.
And as those come down and.
And we don't need to buy as much in a rising sales environment, we should get some of that working capital back.
Got it okay. Thank you very much.
Alright, Thanks, Chris.
Yeah.
Our next question comes from Jonathan <unk> with Deutsche Bank. Please go ahead.
Yeah.
So it has been answered but.
Talking about like the past.
Margin improvement in the buckets youth.
<unk> identified the material inflation coming into this year was.
We didn't we didn't think it was going to be like this so if you were to.
And part of this part of the improvement and maybe part of the $100 million, you'll be able to sort of bucket into the.
Into that bucket.
If.
Cost hold here or pullback.
Next year, you'll be able to catch up on your.
Customer negotiations.
That'll sort of accretive to margins.
On its own right, but the other part of my question is.
If.
If we were to remove that material cost inflation.
How do you where do you think you are on all these other initiatives.
And executing on those to get yourself back to the margins here.
<unk> I understand that the material cost inflation set you back.
How do you sort of grade yourself on the progress on all the other stuff.
Yes, Jared this is Jeff I said in my remarks, if we get that then we're largely back on our on our timing and what I've said in a number of these.
These conversations is that 2023 was the first full year, we expected.
To be a double digit return on invested capital and double digit EBITDA and we said as we exited 22, we would be able to demonstrate that so that was pre all of the.
The conversation we were just having regarding inflation obviously.
That didn't include significant supply chain shortages of shutting down our most profitable vehicles.
And causing.
Start and stop from a production standpoint that traps significant inventory costs and labor and all of that we've talked about all of that this morning.
If we talk about the glasses half full here than what we have is the lowest inventory level in the history of the automotive industry I think.
We have the most new vehicles coming on the market, we have evs that are in it create incredible.
Brand opportunities and pent up demand I believe.
Cooper standard has never been in a better position from a cost point of view internally given what we can control we still have work to do in Europe, and we still have work to do in China.
To get those regions profitable.
And we'll take next year to continue to work our way through that that's been the plan.
North America, we need to get these plants up and running and I'm sure our customers feel the exact same way.
And as soon as that happens the demand is there and I think youre going to see.
Tremendous.
<unk>.
And clearly the raw material inflation is real.
The costs that we're absorbing as a result of the supply chain challenges are real and that's why we've asked for more than $100 million of price increases.
And so that's about as simple as I can say it I remain extremely optimistic about this industry and about the future.
I've never been more confident in our in our company. Both in terms of what we have done to this point to set it up for long term success and sustainability I think we have the best talent in the industry.
And I think that they want to stay here and the culture is a big deal.
The relationships, we have with our customer have never been better I can promise you that.
And we're going to do everything we can to continue to deliver for them as we negotiate some of the toughest contracts that we've ever had and negotiate and I'm confident that we'll get it done.
And we aren't going to whine about it we're just going to go to work and continue to focus on the things that we can control.
I know our customers will help us the best they can to that.
Sort of the.
The synopsis.
Yeah.
Great. Thanks.
It appears there are no more questions I would now like to turn the call back right the Roger Hendriksen.
Okay. Thanks, everybody, we really appreciate your engagement and insightful questions. This morning, and we certainly look forward to future conversations this will conclude our call. Thank you.
Okay.
Okay.
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