Q4 2021 Cooper-Standard Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Cooper standard fourth quarter and full year 2021 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 that time, if you have a question you will need to press the star followed by the <unk>.
As a reminder, this conference call is being recorded and the webcast will be available for replay later today.
I would now like to turn the call over to Roger Hendriksen director of Investor Relations.
Thank you Liz and good morning, everyone. We appreciate your continued interest in Cooper standard and we thank you for taking the time to participate in our call. 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 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.
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.
And the company 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.
Included in the appendix to the presentation.
So with those of formal comments out of the way I'll turn the call now over to Jeff Edwards.
Thanks, Roger and good morning, everyone. We appreciate the opportunity to review, our fourth quarter and full year 2021 results and provide an update on our outlook for 2022 and beyond.
To begin on slide five I'd like to discuss some key data points that we believe are reflective of our continued strong commitment to driving sustained value for all of our stakeholders.
For our customers, we continue to deliver world class results in terms of product quality.
Watches and customer service.
At year end, 98% of our customer scorecards for product quality for green.
Our scorecards for project for program launches were 97% green for the year, even as we executed on 12% higher launch volume versus 2020.
Even more importantly.
We had another outstanding year for employee safety, which is always our top priority every day.
For the full year 2021, our safety incident rate.
0.40 per 200000 hours worked well.
While below the world class benchmark of 0.57.
We're especially proud of our 23 plants the completed the year with a perfect safety record of zero reported incidents.
When the automotive market gets tough suppliers often have to deliver the same or more with less resources.
This was certainly the case for us in 2021.
In view of industry headwinds, we focused on further right sizing every aspect of our business.
As a result, we ended the year with nearly 10% reduction in head count when compared to the end of 2020.
While this reduction will drive necessary cost improvements.
For our current business environment.
We also want to acknowledge and recognize the contributions of all of our hard working dedicated employees.
We know that our employees are the heart and soul of the company.
And are definitely a competitive advantage for Cooper standard.
And Thats true now more than ever during this unpredictable business environment as a result of the pandemic.
Our continuous improvement and lean manufacturing initiatives are the definition of doing more with less.
During 2021, our manufacturing teams delivered $33 million in cost savings through these programs.
Which is an outstanding result, when you consider all of the unusual challenges presented by volatile production schedules and lower production volumes.
We also successfully reduced our SGA and <unk> expense by $32 million.
Compared to 2020.
And realized $16 million in savings from our aggressive restructuring actions.
So in total we delivered over $80 million and sustainable cost reductions for the year.
By many measures we had a very successful year.
But unfortunately strong industry headwinds.
Lower production volumes volatile schedules and unprecedented inflation combined to offset our operational cost savings.
Turning to page six.
Complementing our focus on manufacturing excellence is our commitment to sustainability.
We are consistently advancing our efforts.
And resource allocation on environmental social and governance initiatives.
And we are seeing positive momentum throughout the company.
From the plant floor to our product development labs, and the boardroom. The progress we are seeing is encouraging and rewarding.
Our progress in 2021 resulted in improving scores by multiple ESG rating institutions.
In addition, our focus on transparency and reporting sustainability topics placed US ahead of our aspirational comparative peer group in 10 out of 11 high priority categories.
Led by our recently established global Sustainability Council.
We're quickly driving our ESG efforts beyond basic compliance requirements to.
<unk> true strategic alignment within our business and with our stakeholders.
We expect this improving alignment to be the key to enhancing long term value.
And sustainability of our company.
Now I'll turn the call over to John to walk you through the financial details of the quarter and the year.
Thanks, Jeff and good morning, everyone.
And the next few slides I will cover the details of our quarterly and full year financial results.
Put some context around some of the key items that impacted our earnings.
And then provide some color on our balance sheet and liquidity, we're talking about expectations for 2022.
On slide eight we show a summary of our results for the fourth quarter and full year 2021 with comparisons to the prior year.
Fourth quarter, 2021 sales totaled $601 $3 million down 14% versus the fourth quarter of 2020.
The decline was the result of lower volume and mix in all our automotive segments as the semiconductor shortage and other supply chain issues continued to weigh on vehicle production.
The volume and mix impact was partially offset by some positive customer price adjustments in part related to our material recovery initiatives.
From a more positive perspective fourth quarter sales were an improvement of 14% when compared sequentially to the third quarter of this year.
We were encouraged by the increase in production volume and improved stability and schedules that we saw in the latter part of the fourth quarter.
And we are cautiously optimistic that these positive trends will continue.
Adjusted EBITDA for the fourth quarter, 2021 was $2 million or 3% of sales compared.
Compared to $57 million or eight 2% of sales in the fourth quarter of 2020.
The year over year decline was driven primarily by increased material costs. The previously mentioned unfavorable volume and mix.
Higher wages and general inflationary pressure across the board.
Positive customer price adjustments, where only a small offset to the inflation and volume pressures.
On a sequential basis, we saw strong improvement of $36 million and adjusted EBITDA versus the third quarter of this year.
An indication of how we are leveraging both the increased sales as well as our ongoing cost improvements.
On a U S GAAP basis, we incurred a net loss of $102 million in the fourth quarter.
This included certain noncash asset impairments.
Noncash valuation allowances established a net deferred tax assets.
Excluding these and other smaller special items, we incurred an adjusted net loss of $53 million.
We're $2 94 per diluted share for the fourth quarter of 2021.
This compared to adjusted net income of $3 $3 million or <unk> 19 per diluted share in the fourth quarter of 2020.
And sequentially adjusted net loss improved by 53%.
For the full year 2021, our sales totaled $2 $3 3 billion, a decrease of one 9% versus 2020.
The main driver of the decline was the divestiture of certain European operations in our India business on July one of 2020.
As well as unfavorable volume and mix.
These negative factors were partially offset by favorable foreign exchange benefiting the top line.
Adjusted EBITDA for the year came in at negative $8 million compared to positive $35 7 million in 2020.
Again, the key driver was significantly higher material costs higher wages and general inflation.
Unfavorable volume and mix and the non recurrence of certain Covid related government assistance also contributed to the decline.
These negative factors were only partially offset by improved operating efficiency lower SG&A and <unk> expenses.
And the other cost saving and lean initiatives, we have been executing.
Full year net loss was $322 8 million.
Which included noncash asset impairments deferred tax asset valuation allowances restructuring charges and other special items.
Adjusted for the net impact of these items, we incurred a net loss for the year of $222 million.
Or $13 <unk> per diluted share.
From a capex perspective, we ended the year at $96 million or four 1% of sales.
This compared to Capex of $91 8 million or three 9% of sales in 2020 with the increase primarily related to higher program launches.
Moving to slide nine.
The charts on slide nine quantify the significant drivers of the year over year changes in our sales and adjusted EBITDA for the fourth quarter.
For sales unfavorable volume and mix net of customer price adjustments reduced sales by $93 million.
FX was a further negative impact of $3 million during the quarter.
For adjusted EBITDA, lower SGA expense was a positive variance of $12 million compared to the prior year.
And savings from restructuring initiatives added $5 million.
These improvements were more than offset by $15 million of unfavorable volume and mix net of price adjustments.
$30 million and increased material costs.
And $26 million from wage increases general inflation and other items.
Moving to slide 10.
For the full year unfavorable volume and mix net of customer price adjustments reduced our sales by $31 million.
Divestitures further reduced sales by $65 million.
Favorable foreign exchange was a positive partial offset of $50 million.
For full year adjusted EBITDA, a number of positive factors benefited results.
Including $33 million from improved operating efficiencies.
$32 million from lower SGA any expense.
$16 million in savings from earlier restructuring initiatives.
But these improvements were more than offset by $64 million and higher material costs.
$41 million and higher wages and general inflation.
$15 million related to the discontinuation of Covid related benefits.
And $7 million of unfavorable volume and mix.
Moving to slide 11.
In terms of free cash flow.
We experienced a modest outflow of $24 million in the quarter.
Essentially in line with our expectations.
Our teams did an outstanding job of reducing inventory in our plants as production schedules began to stabilize.
And of collecting on tooling receivables from our customers.
This helped to keep net cash used in operations at just $4 million in the quarter, Despite rising sequential sales.
In addition, our continued focus on conserving cash resulted in capex coming in at just $20 million, which was lower than what we had expected heading into the quarter.
With cash on hand of $248 million.
And an additional $148 million of availability on our revolver.
We ended the year with total liquidity of $396 million.
Given our outlook for improving industry trends and our successful execution of ongoing cost reduction initiatives.
We believe this certainly provides adequate capital for the funding needs of the company.
Turning to slide 12.
On this slide we provide our initial guidance for 2022, along with our expectations for regional light vehicle production that forms the basis of our annual plan.
For this year, we expect sales in the range of two six to $2 8 billion.
And adjusted EBITDA in the range of $50 million to $60 million.
We believe these estimates are appropriately conservative given the continuing uncertainties within our industry and.
And the macroeconomic trends in each of our key operating regions.
We will continue to invest in our business conservatively in 2022 with Capex expected to be in the range of $90 million to $100 million.
Which is similar to 2021.
As a percentage of sales this would put us at less than 4%.
So continuing modest investment in the business primarily to fund growth on our new customer programs.
Cash restructuring in 2022 is estimated at $20 million to $30 million.
The majority of this investment will be focused on further right sizing of our operations and overhead in Europe , consistent with our driving value initiatives.
The restructuring investment is expected to have a payback period, ranging between one and two years.
Finally, as reflected on our balance sheet at December 31, we.
We anticipate receiving a tax refund of more than $50 million in 2022 related to prior year U S income tax returns.
Net of ongoing cash tax payment requirements, we expect our net cash tax refund of $30 million to $40 million for the year, which will further strengthen our already solid liquidity position.
Moving to slide 13.
Yeah.
The chart on Slide 13 provides some additional detail around the main positive and negative factors impacting our 2022 adjusted EBITDA outlook.
These are broad estimates based on current market conditions, and our own assumptions for the remainder of the year.
And reflect the midpoint of the adjusted EBITDA range, we provided.
We expect volume and mix, including customer price adjustments to drive $130 million of improvement in 2022.
The positive impacts of our cost recovery initiatives are also included here.
With improving volume, we also expect to drive significant improvements in manufacturing efficiencies, adding approximately $70 million and adjusted EBITDA for the year.
These anticipated gains and efficiency should be more than enough to offset expected increase in general and wage inflation and even the planned normalization of incentive compensation in 2022.
However, we still face an expected $70 million in incremental headwinds.
For material cost inflation this year that won't be covered through improved operational efficiencies.
As mentioned earlier, we believe our initial guidance is appropriately conservative given the uncertainties in the marketplace.
Further with recent announcements from some of our customers delaying production and continuing supply chain challenges.
We believe such conservatism is warranted.
We are factoring in the recovery of our fair share of the higher material costs, but there are no guarantees on the level of recovery, we will ultimately achieve.
On the other hand, there is potentially some upside opportunity if production volumes come back stronger than expected in the back half of the year.
Or if material costs unexpectedly begin to moderate.
Finally, let me emphasize that we believe we are in very good shape from a liquidity perspective.
We have a solid cash balance along with an undrawn revolving credit facility.
And we anticipate sizable cash inflows from not only the tax refund.
But also a sale leaseback of a noncore property to further bolster our cash balance during the year.
As a result, we expect to have more than sufficient resources to continue our focus on growing our top line expanding margins and working with our customers to ensure that we're being fairly compensated for the cost and value of the products we supply.
Based on the November 2023 maturity of our term loan b.
We will likely be in the market later this year to refinance that tranche of debt.
With a maturity date in 2024, the pay down of our senior secured notes is less of a priority at this point.
That concludes my prepared comments, so let me turn the call back to Jeff.
Thanks, John before concluding our discussion this morning, I want to share a few thoughts regarding our near term and longer term outlook for the global light vehicle market.
And for Cooper standard specifically.
Moving to slide 15.
Our ability to cover the rapidly increasing costs.
We face from unprecedented widespread inflation will certainly be a key factor in our success this year.
We've significantly leaned out our cost structure to offset what we can.
But we have little room for further cuts without adversely impacting our ability to deliver quality products and world class service that our customers demand and deserve.
We have no choice, but to insist that our customers pay for a fair portion of these cost increases.
Last quarter, we announced that we would aggressively pursue recovery of $100 million and costs from our customers.
We've made good progress in this effort through a combination of price increases.
Delayed price concessions increased index based contracts and other means.
To date, we're tracking towards the high end of our historical recovery range of 40% to 60%.
Most of our customers have been willing to engage with us and these cost recovery discussions.
But others frankly have not.
As material costs continue to rise, we will again be asking our customers to pay a fair share of the increases.
If customers remain unwilling to come to the table that can only lead to a more difficult conversation later this quarter.
In terms of our index based contracts with customers. We have historically had good coverage on rubber components.
In the current environment, we're pushing to expand coverage to our metal components as well.
Most customers recognize the challenge higher metal costs are creating for their suppliers and have been willing to engage with us in meaningful discussions.
We expect to firm up our recovery and indexing actions on metals by the end of this first quarter.
Our purchasing team has also been working diligently with our suppliers to increase indexed based purchase contracts.
They have more than doubled the percentage of our annual direct material purchases that are covered by index based pricing and this should help us avoid massive price swings.
And unfair or predatory pricing going forward.
As long as we face these unprecedented inflationary headwinds our cost recovery initiatives with customers will certainly continue.
Given their demonstrated ability to pass costs on to their end customers through higher prices, we expect them to fairly consider the needs of the supplier community.
Of course, we can never lose focus on our own efficiencies lean initiatives and operational excellence.
This year, we will continue to optimize our European operations.
And rationalize our overhead and fixed costs globally.
Some of these actions will have an upfront cost, but all will provide short term cash payback.
Ultimately, we are confident that our leaner cost structure and strong relationships with our customers and suppliers will allow us to get back to the levels of profitability and returns that our investors expect.
And deserve.
Turning to slide 17.
Because of our strong customer relationships.
World Class service and innovative technology, we continue to win new business and supply critical components on some of the industry's most desirable and popular vehicle platforms.
On slide 17, we provide a list of our anticipated top 10 vehicle programs for 2022.
The vehicle images and names reflect the lead vehicle on each key platform.
We are proud of the continued strong mix of our top programs, which maintains a heavy weighting on trucks Suvs and global platforms.
This strong mix provides us with maximum opportunity to increase product content per vehicle and sales over time.
Combined these top platforms represent approximately 40% of our planned 2022 revenue.
On an unweighted basis, our content per vehicle across these top 10 platforms is expected to be approximately $155. This year.
Turning to slide 18.
Our strategic focus on light trucks, and Suvs puts us in a great position to benefit from the current light vehicle market trends.
As shown in the chart on the left the light vehicle market is poised for significant growth over the next five years with passenger car growth estimated at nearly 4% annually and trucks and Suvs growing at over 7%.
The one year growth rates for 2022 are expected to be even higher at 6% and 11% respectively.
For Cooper standard over 70%.
Of our 2022 global revenue is expected to come from trucks and Suvs.
In North America, the proportion is approaching 90%.
And importantly, our content our average content per vehicle on trucks and Suvs is two one times our content on cars.
Globally, and two seven times the average car content.
In North America.
As a result of our strategic focus on the trucks and SUV segment we.
We expect our revenue to grow at an average rate of 9% annually over.
Over the next five years.
Significantly outpacing the broader light vehicle market.
Turning to slide 19.
We're also in a solid position to outpace market growth and the most important electric vehicle segment.
We're currently a supplier on four of the top five and 14 of the top 25 EV EV.
<unk> globally.
Over the past two years, we were awarded more than $200 million in annualized new business on future electric vehicle platforms.
In fact in 2021 net new business awards on electric vehicles exceeded our awards on traditional drivetrain vehicles.
Based on these contract awards and future target business.
Our current outlook is for revenue growth in the EV sector of approximately 50% annually over the next five years compared to industry growth of approximately 38%.
Our portfolio on commercialized innovation products.
Technical expertise and manufacturing capabilities have been the key to our success in this high growth segment.
Now turning to slide 20.
We're continuing to invest strategically in innovation across all aspects of our business.
This includes the development of the new materials and products that are driving the new business awards that I just mentioned as.
As well as advancements in efficiencies and sustainability in our plant operations and manufacturing processes.
For manufacturing process, we have developed lifeline, which is an artificial intelligence based machine control technology that uses real time data feedback to automatically optimize extrusion lines.
This technology has already been installed in nine locations.
And as proven has proven to improve product quality.
<unk> scrap.
And contributions to landfills.
And improve operator efficiency.
We plan to rollout the technology to nine more locations, where the complexity of products and process warranted.
The investment is small for each location and the payback can be measured in just a few months.
We're also utilizing our AI modeling capabilities within the industry 4.0 framework to help drive improved asset utilization across the company.
And accelerate the development of new alternative material compounds.
For asset utilization, our AI capabilities help us in several ways, including.
Predictive maintenance modeling.
And equipment deployment and allocation.
On the materials side, we've had an extremely agile response to increasing costs and supply chain constraints.
And our AI modeling has allowed us to quickly determine alternative compounds without negatively impacting product quality or performance.
In addition, we continue to invest in a wide range of promising projects to improve performance cost and sustainability of our materials.
We've recently developed capabilities to reduce the cost of <unk>.
By conducting critical chemical processes in line, rather than buying pre processed feedstock.
In addition, we're continuing our collaboration with <unk>.
To explore the use of post consumer waste, such as shopping bags and water bottles as a source of chemical inputs.
Both lifeline and the advances in four tracks represent clear achievements and efficiency quality sustainability and competitive advantage.
Benefits that will extend to our customers and all stakeholders.
Moving to slide 21.
To wrap up our discussion this morning, I want to briefly highlight our revised purpose mission and values statement that we introduced internally last week and announced publicly a couple of days ago.
We remain focused on creating value for all stakeholders and our revised purpose statement places a stronger emphasis on collaborating together with all stakeholder groups to drive sustainable solutions to the value creation equation.
The new language really only codifies the changes we have been driving within our culture of our company over the past couple of years.
Our culture has clearly evolved over this time and has become.
Even more aligned we believe with a diverse interests of our customers our employees, our investors and the communities, where we both live and work every day.
At the same time, we're continuing our focus and drive towards our strategic financial targets of double digit adjusted EBITDA margin and double digit return on invested capital.
These targets have not changed and we believe that further realignment of our priorities and values will help us achieve those strategic goals.
Clearly we have had a setback on the timing of when we expected to achieve those goals due to the hyperinflationary environment of 2021.
And what lies ahead this year.
The good news is that we have significantly improved our internal cost structure.
And the operating efficiency.
And we can leverage these accomplishments when production volumes normalize.
Assuming that we can successfully offset the inflationary pressures through commercial negotiations and contract indexing, which we fully expect to do.
We believe we can be back on track to reach or stretch strategic goals for adjusted EBITDA margins.
And return on invested capital by 2024.
And finally I want to thank our global team of employees for their continued commitment and dedication in these challenging times.
I also want to thank our customers for their continued trust confidence and support.
Together, we have a bright future.
And many opportunities ahead.
This concludes our prepared comments so let's open it up for Q&A. Thank you.
Thank you.
Ladies and gentlemen, if you'd like to ask a question. Please press the star followed by the one on your telephone.
If your question has been answered and you would like to withdraw your registration you may do so by pressing the pound key.
And if youre 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 Kirk Ludtke with Imperial capital. Please go ahead.
Good morning.
Good morning, Kurt you hear me Okay.
Thank you for the call and the presentation very helpful.
I have a couple of follow ups with respect to the guidance.
You mentioned that you feel like Youre in good shape with respect to liquidity.
And I think that math.
Makes sense $400 million liquidity at year end.
And I'm just curious.
What do you expect to happen with respect to working capital you've got a pretty significant increase in revenues in this forecast.
Curious what kind of a use will working capital be.
Actually Kurt with with respect to working capital, we still have some further opportunities that we continue to drive.
One of those is what we do look at every single year and Thats the inventory balances within the manufacturing footprint. So we think there's there's still opportunity to drive some working capital improvements for the whole year.
Then the next biggest piece would probably be on the tooling balances, where whereby we've always historically had over $100 million of tooling tied up on our own balance sheet as we build tools on behalf of our customers. So we see a significant level of opportunity within the tooling element of working cap.
As well so if you put those two significant pieces together, despite a rising sales level throughout the year each sequential quarter as we see it we think working capital is expected to be slightly positive for the year.
Thank you that's very helpful.
With respect to this bridge.
The guidance is very helpful on it.
It includes I guess, another $70 million of.
Commodity headwinds in fiscal 'twenty two.
Can you help us how do you how do you forecast commodity prices.
That's very difficult generally how did you how did you go about arriving at the $70 million.
Well, we use a variety of sources.
The main one which we look at commodity index projections based on the IHS market data. So we actually look at those very discreetly and plug them into our systems and try to get granular all the way down to the product and platform level to understand the impact on what.
We're projected to make.
During the year.
And then where those cost curves are actually heading so very robust process as we as we use that data.
Down to the program and part level detail Kurt so.
We know that for.
For example for 2022, the curves are showing that rubber prices will be up another.
Almost 60% year on year.
And we saw that in Q4, the exit rates were ECM rubber components continue to rise throughout 2021. So we're seeing that continue on into 'twenty two from a carryforward effect.
Same phenomenon on steel.
We'll be up another 26% of that $70 million incremental component and then the plastics resins and other specialty things will will make up the difference.
To get to that one.
<unk> $70 million incremental inflation hope that helps.
No that's very helpful and then lastly, and I'll.
Step aside.
Can you give us some sense for the cadence of the of the full year guidance.
At least maybe Directionally, how you expect the year to progress.
Yes, we don't want to give.
The quarterly breakdown, there Curt, but I think generally you think the first half will look very similar to what Q4 did.
As the Oems continue to.
Work out supply chain issues and chips to some extent still and then as the year progresses that sequentially continues to improve.
That's at least what the IHS forecasting would have.
Lets believe in terms of the overall production environment that it continues to build sequentially throughout the rest of the year. So the second half in other words, it looks a little bit better than the first half.
Great. Thank you very much.
Thank you.
Our next question comes from Mike Ward with benchmark.
Thanks, very much good morning, everyone.
John maybe just to follow on what Curt was talking about there on the the walk on the bridge you have for 2022 and the $70 million.
Does that include any recovery.
No Mike in my prepared remarks, I indicated that the recovery will be in that.
The volume mix price column, which is the $130 million. So you see the net impact of <unk>.
That was the actual price.
Is that the recovery from last year, the $100 million or is there.
That's what I'm trying to bridge. So last year, you talked about Jeff mentioned $100 million in cost recovery and you should get you are on target to hit the high end of your historical recovery rates of say $60 million I assume that $60 million was in that 130. Then you have the additional 70 are you are you expecting any recovery on the additional material.
<unk> this year from.
That $70 million.
Yes.
I would characterize that as it's pretty fluid as far as the cadence of when you start seeing that recovery.
Much more timely usually just a quarter lag when you're when you think in terms of indexes.
And.
But but that recovery is an ongoing process. For example, we realize the small portion in the fourth quarter of 2021.
Around 10 million bucks or so.
Most of that was primarily on index contracts that were already in place. So as our teams continue to negotiate there's going to be a lag effect of the recovery and a gradual catch up on a percentage basis.
So if we look at some of the outside metrics for different steel aluminum prices is it fair to say that.
The impact is greater than the first half and as we get to the second half.
Chance, we start to see better recovery in the second half of the year from the impact of a higher prices in the first quarter fourth quarter that sort of thing is that we're looking at.
Yes, we do see the projections indicate that a lot of the commodity prices will come down later on in the year like so yes.
Your triangulation.
Okay.
I've heard some some of the suppliers talk about getting recovery I mean, the stops starts.
The sudden changes in schedules, particularly with some of your key components of your key programs.
It's causing a headache now there are some suppliers that are getting recovery for some of those costs is that included in your $100 million bucket.
Or is that something that youre getting is having success with.
Yeah in my prepared remarks, Mike I referred to the other bucket, if you will and Thats where.
Some of that would would reside so it's on the table, it's being discussed being negotiated in some cases, we've got it in some cases, it's still being negotiated.
Yes.
But it sounds like the vehicle manufacturers are a little more accepting of some of these negotiations and they have been in the past.
That's because we're getting still radiation.
Yes.
For that meeting.
Yes.
John just to clarify could you went through your remarks about the capital priorities and refinancing in the debit.
I wanted to make sure I was on par with what you were talking about.
Sure Mike.
I'll just reiterate.
Based on the current thinking current balance sheet structure, and and what's ahead of us in terms of maturities. We think the first priority will be addressing the term loan b.
That comes due in November of 2023. So technically is would be current later here in Q4 of 2022. So we want to get ahead of that.
Obviously, you had maturity in that income and currency.
And.
That's about $325 million.
Yes, that's exactly right.
Okay.
Sure.
I'm sorry, and then the next thing is the seniors than we had been we had been optimistic on being able to exercise the call option on the senior secured note.
But at this time, we're going to focus on the term loan B and then tackle the senior secured debt at a later date.
If youre able to awesome. Thank you very much guys.
Thanks, Mike.
Our next question comes from Brian <unk> with Baird.
Good morning.
Questions for you.
First of all can you help us explain what the source of the $30 million EBITDA gain you had in corporate and other for the fourth quarter.
Yes, Brian a portion of that is.
Is ongoing.
Overall recoveries in our ISG business, because remember Corp.
Corporate and other includes what we referred to as our advanced Technology group. So it has.
Our technical rubber and industrial and specialty products business located in that so as they were able to be profitable in the quarter, including some recovery efforts. That's what you are seeing that in that category.
Okay is that.
Is that sustainable.
That 13 million just sort of a one off.
I wouldn't call it necessarily completely a one off but some of it is is nonrecurring and that 13.
So I wouldn't extrapolate that for the whole year.
Okay understood.
Got a question.
A lot of confusion around.
The increased total liquidity.
A few questions. There I think you said you didn't draw on your revolver, but gross debt was up by my calculation $15 $6 million.
And I'm looking at your accounts receivables were up by $8 6 million tooling receivables were down by $6 million and inventory was down by $40 million.
With a borrowing base of sensibly lower how is the availability higher quarter over quarter on.
Your revolver.
The revolver availability is based entirely on U S and Canadian inventory balances and accounts receivable. So as as production continued to sequentially increase in the North American market Q3 to Q4.
Despite us bringing down inventory levels.
<unk> saw availability increase.
A hold back of 10% on overall availability because of the fixed charge coverage ratio element in there Brian .
148 reflects that that 10% and then theres some minor letters of credit that work against the contractual availability as well that's how you get to the 140.
Okay.
Helpful. How big is the sale leaseback you expect it to be.
I can't give you the exact magnitude because the deals not yet closed so we can't contractually disclose the sale proceeds at this time, however, they will be sizable and if I think about it in terms of.
Our free cash outflow for the for the year, that's kind of the projected in the math.
They won't.
Tirelessly makeup that free cash level, but they'll certainly fill in a lot of that usage whole okay.
We will be able to talk more about that when the deal closes in Q1.
Got it and then just two minor ones.
Your payables did extend a little bit I noticed that it was also mentioned on the slide deck.
How much do you think you can press that.
Okay.
Yes, Brian what we're working towards is a global average of around 60 days.
Our aspirational target here.
We're approaching 57 days as we closed the year end and just as a frame of reference every day, we take out its worth about $6 million in working capital for us So theres probably.
A day or so further opportunity we're marching towards in 2022, but.
Hard go get especially in a.
A tough supply environment like we're dealing with today.
Haven't given up.
Okay, and then just finally tactically on the refi.
I'm a little confused why you wouldn't address both.
The first lien notes and the term loan b simultaneously seem that.
It would be easier to get bolt on at the same time, because there is less uncertainty from the terminal MBS holders perspective, how are you going to address.
Firstly notes shortly thereafter.
So.
Even though your cost of borrowing of the terminal would be more than likely you're going to be up pretty substantially.
<unk>.
I'm guessing that would've been a little bit of opportunity to reduce that 13% coupon.
I'm, just trying to get a sense of how youre thinking about this and why are you not addressing both at the same time.
A little bit gun goes by two there is still continued uncertainty in the market and.
Maintaining that total liquidity that we've talked about in the past of about $150 million or so to run the business day in and day out so.
The preference would be to bring down that $250 million overall, because we took that out as a quantico and insurance policy two years ago at the start of the pandemic.
Thinking that we would need to tap into it but at the time didn't know how long the pandemic with last if there was going to be further production complete stop and shutdowns throughout the industry. So that was always the goal right. So as we sit here today, and we're still dealing with a little bit of market uncertainty.
Progresses.
There'll be more of a.
An opportunity to do this two step, but certainly as market conditions allow we are modeling and working with our partners to say is there a path to do both at the same time or do the term loan b first because of the maturity element to it.
Understood I appreciate the color. Thank you.
Youre welcome Brian .
Our next question comes from Steve <unk> with Sidoti.
Good morning, everyone. Thanks for taking my questions I do want to ask again about those from material costs, you're expecting in 2022, I'm trying to get a sense with your guidance.
Is that based on where you already have succeeded in negotiations in terms of cost recovery or your hopes is there more upside to that number down.
Downside.
Yes. This is Jeff I think we have.
We've included.
You would call in our pocket right, so and now as we just talk there is still further conversation going on.
Which wouldn't be included in the in the outlook.
Can you give us some update on your successful.
Lack of success in terms of moving towards indexing and how the automakers respond to it given the current environment.
I think the response has been very very positive.
Obviously, the detail of the negotiation around what number you start with.
Determines whether we say, yes, or whether we say now.
Yes.
Any updates in terms of other divestments in terms of.
Non profitable markets or businesses, and where you would be or is that kind of on hold given market conditions.
Yes, so far on hold I assume you are talking about South America, there and we continue to.
To improve that business and work with our suppliers as well as our customers two to get above breakeven and we think we have.
Our pathway to do that but.
But I would say that that's that's still part of.
Options that are on the table, but.
The market.
<unk> associated with.
With divesting it wouldn't be wouldn't be very good right now so if it happens it would be in the future, but we're still hopeful that that.
We can make it a positive cash flow business.
And stay in it and support our customers but.
TBD.
Fair enough and then just last one for me in terms of talking about that double digit EBITDA margin type of target, which you see now maybe 2024 I'm trying to get a sense clearly when you put that out there a lot changed fast finally get a sense of what kind of a market conditions you need to get there beyond.
Material cost stabilization right, if we have a huge rebound.
In automotive production in 'twenty two 'twenty three we don't really know where we're going to be in 2024, what types of levels are you thinking about market conditions, you're thinking about to get there in 2024.
And we provided that earlier, but I would just recommend you take a look at the IHS forecast for 'twenty, two 'twenty three 'twenty four and 'twenty five.
And we've used that.
Primarily to to make the statements that we've made to you. This morning.
Okay fair enough. Thank you.
Our next question comes from Josh Makowski with credit Suisse.
Hey, Thanks for taking the questions I guess first wanted to start just from a sale leaseback.
Heard that question a few minutes ago, I think I missed.
The update there is there any info you can provide on what that is.
Yes.
Josh This is John .
This is.
What we viewed as a noncore property over in Europe , where we just really looked at the long term need for that.
Certain of the buildings on this space.
The property had.
The legacy plant that we had closed years ago as well as.
Some lab space and headquarters type space. There. In addition to a manufacturing plant that is currently still running so the sale leaseback gives us some flexibility.
Overtime to remain in that property, but it does unlock some some capital for us to be used throughout the system.
Like I mentioned, a few minutes ago deals not yet closed as expected to close in Q Q2, So we'll be able to give you a little bit more color on the size of the proceeds, but but again it will be a sizeable inflow of cash for us.
Got it that's helpful. Thanks, Jeff.
I guess just turning.
Two the sequential EBITDA improvement in <unk> I know, we've talked about commercial settlements a lot.
But is it possible to frame up for us going from the negative.
$34 million in <unk> to the positive $2 million in <unk>.
<unk> how much of that was driven purely by commercial settlements that you were able to put in your pocket during the quarter.
Yes, Josh I said, a few minutes ago that that would.
Recoveries, there were about $10 million.
Clawing back some of that commodity inflation and again a lot of that was on index contracts, but when you when you put the volume and mix, which was positive in all of our major regions together to the tune of about 75 million Bucks in revenue.
At about the 30.
30% pull through that's the majority of calling that back.
Clearly further worsening of commodities.
Quarter over quarter, when we went from a $21 million in Q3 up to $30 million in Q4.
<unk> continued our significant headwinds that we're facing that are spilling over into 2022, obviously.
The manufacturing organization continue to take cost out as well as the restructuring initiatives that we had paying dividends there.
So that kind of gives you the the main pieces of the sequential walk overall.
Got it okay. So the 10 million I know you said a lot of that was an index. So does that does that.
Net out from the $100 million target.
Or is that just kind of general indexing that you would expect to get anyways.
No that would be part of that part of that go away.
Like Jeff said, we're approaching that a variety of different ways stray PEO changes index contracts absence of.
Contractual gift bags et cetera.
Got it so so during the quarter just to confirm it a little bit different way.
There wasn't some.
Material kind of onetime lump sum payment that you got on a commercial recovery, that's kind of helping out the quarter.
No.
Okay.
The corporate other bucket I know someone else asked about this but the $13 million you said a portion of it was one off portion of it was was not is there any.
Guidance, you can give on what the split of that is.
Now I'll just leave it to my my past comments.
Okay.
And next one for me just on SG&A.
$58 $5 million during the quarter.
About flat with <unk>, but I know in <unk>, you took that that bad debt expense charge call. It $10 million I think it was so I guess comparing to <unk> Europe call. It 9 million bucks or so so what's kind of.
Driving that during <unk>.
Josh I don't have that at my fingertips, but a little bit is the ongoing.
Call. It wage inflation, probably is as there is turnover in the system, which were experienced a lot of you are hiring people back at slightly higher wage wage rates I think that contributes to some of it but within that bucket. It's not just salary that's all.
All of the other costs in the business.
That.
Within that SGA bucket that can can be rising along with overall inflationary pressure and the good news here is that we see that that percentage coming down in 2022.
And further with the increase in sales and further restructuring initiative that Jeff and I have already talked about today. So we see continued benefit there and the SGA.
Okay.
And then just a couple of questions from me on the.
The 22 guide.
<unk>.
I'm looking at the 20% to $30 million of cash restructuring costs, maybe thats the best place to start.
Any way you can bucket for us whats that going to the between kind of the three buckets, whether it's manufacturing savings or <unk>, how should we think about the split of that.
It's real.
Call. It a 60 40 split.
60% of it I said in my prepared remarks was primarily related to European actions that were already in flight.
If you recall in 2021, we addressed direct and indirect labor at some of our high cost facilities. These werent plant closures, but they were overall reductions in the labor force there.
As production levels have come down revenue levels have come down. So there is a carryover effect is as youre paying over time for those those past actions.
So like I said about 60% of the $30 million and the remainder is as incremental actions as we look across like I, just described a minute ago SGA.
Holistically, but also above the plant.
Cost of goods sold so it's not in the manufacturing facilities, but its above the plant organization that we're looking to to address with the remainder of that restructuring money in 'twenty two.
Okay.
I guess the last one for me just more of a modeling question I know youre not going to give kind of quarterly splits on on your guide for 'twenty, two as far as cadence but.
Just thinking about recovery over the course of 'twenty two how should we think about.
What's your contribution margin is today, given the environment plus some of the actions that you've taken on the cost side.
That's my first question and then just.
Along that same line of.
The cost actions on SG&A is there an estimate you can give us on kind of what the run rate.
Magnitude of fixed costs that you've got running through.
<unk> currently.
Yeah.
Let me, let me tackle the first one Josh.
I think Jeff alluded to that we are actively continuing negotiate here and so there's a lot of those.
Our efforts will come to fruition as Q1 closes so youre not going to see necessarily a big influx of recovery money in Q1, as we see it but there could be an element where in Q2 or beyond there could be a retro effect going back to the beginning of the year, but as of right now as the team continues to build.
That.
That pipeline.
It will increase throughout the Q2 and beyond.
Where you'll see that step change okay.
Then I guess a little bit more on your second question are you asking what the fixed cost base is four.
The plant structure I didn't really quite get the yes, just like you got your Cogs line item I think $5 40 in <unk> what percentage of that would you say is fixed.
Type costs.
Well, let me break it down like this a 48% of that was materials.
So you can see the sizable headwind that we're facing.
And then the rest would be your labor and your fixed cost component overall okay.
Got it Okay fair enough.
Our next question comes from Joseph <unk> with Cantor.
Hi question on the sale leaseback I know you don't want to give the proceeds but it seems like the description of the property is something that wasn't needed why are you doing a sale leaseback and not just <unk>.
An outright sale.
Because we still need to.
Conduct business for a short period of time on that particular location and I think it's also important to note that this isn't a.
Our reaction to.
The overall liquidity situation in the company in fact this this particular.
Project has been on our radar now for the last couple of years.
And we've been running some processes to determine the <unk>.
The best value and the timing associated with when we should do it.
And that's that happen to be.
Now so I want to make sure that we're clear on that but the positive is that we found a buyer they're flexible in terms of allowing us to stay there for a short period of time as we transitioned some some business.
And then they will they will take over that property and transform it if you will.
And there'll be more details around the specifics here as we work our way towards the end of the.
The first quarter and then it will be pretty obvious.
Okay. Okay. Good.
<unk>.
The you were talking about the the term loan and the refinancing and you made a comment that implies that youre working with an adviser have you hired.
A banker or some kind of adviser to assist with your capital structure.
Yes, Joe let me be clear I did not imply that.
We have a core.
Team of banking groups, who are been a long time.
Partners in our capital structure.
So it's just conversations with those that I'm, referring to we havent anyone to be clear.
Perfect. Thank you and then finally, the last is on the cash restructuring.
And as we know.
Auto parts supply companies Youre always changing productions.
Always have those costs, but we're when when do we start to see this become.
And this is down year over year, but when do we see this become a smaller line item any color there or thoughts.
Yes, Joe to be Frank if you look back to my comments in Q3 Q3, we thought 2022 would be in the teens, but as we as we look throughout the 22 business plan, we just realizes that a little bit more needed to be done to right size that cost structure going forward. So I think.
As we get through 'twenty two there is no other.
Planned actions and our long term.
Our business plans or strategic plans that are being contemplated right. Now. So we hope this sets us up very very well for return to double digit margins and double digit ROIC accordingly.
Good and then final question.
Could you give us some context on on the.
Hi.
Commodity recovery conversations how it relates to the.
The conversation with new new wins and new contracts.
And how it relates to the old is it just the customers, saying guys. This is the black and white of the contract you signed it live up to it but on the new ones will consider others or.
Just some color there as to how those those conversations are are going about.
Sure. This is Jeff just keep in mind that the programs that were.
Quoting and that we've been quoting since the fall.
Reflect all of these additional costs so as those launch in the future.
Those arent those arent problems those are.
Those are programs that will reflect today's today's cost.
The programs that we have in our plants today that we're producing and shipping product.
Fall into the other category that you talked about which require us to go in and renegotiate if you will recoveries be it inflation.
Volatility.
Or or other cost increases.
We've been dealing with in terms of volume and mix, let's call. It.
And those require.
Basically renegotiating the deal to your to your words.
The existing product and that requires.
US to explain why we need it and the customers to agree to give it.
Some of those are easier than others.
Okay. Good enough. Thank you.
Our next question comes from Doug Larson with Bank of America.
Yes, hi, guys. Thanks.
Thanks, so much for all the detail.
Just two quick questions.
Can you bridge you have.
Lean manufacturing a positive 70.
Million in 2022.
The next step is for for us to try to forecast 2023 and four.
How do we think about that lean improvement kind of in two.
2023 can you just give us some some view of how much you're seeing the ability do you have in that and that lead number.
Yes, I think in my this is Jeff in my prepared remarks, I talked about it being.
Sustainable going forward I mean, Thats I guess, you look at you've got to try to find some positive in the insanity that we're dealing with and I think clearly our plants have continued to find.
Find ways to take out costs to help us offset some.
Some of the categories that we've talked about today those things do carry carry forward and we'll be in.
A much better position.
When we get back to normal production volumes.
So there has to be very strong market demands everywhere in the world.
So when we talk about double digit EBITDA ROIC in 2004.
Versus what we had originally.
We're planning to be 23.
It should tell you what we think we truly believes that that we will be able to recover the costs here in the short term to allow us to improve sequentially.
Sequentially as we go through this year.
And then the cost base that we head into 'twenty three with.
We believe is sustainable and not just the fixed cost and an additional changes we're going to make in our fixed cost structure. This year about what we discussed from an SG&A point of view when you start looking at that as a percentage of sale in 'twenty three 'twenty four with the additional growth will be at record low levels.
And that includes adding compensation back in for incentive comp.
Is it in our numbers, so obviously for <unk> 'twenty, one so being able to really come out of it much much stronger.
And then we went into it we believe is sustainable and Thats why we are reflecting the optimism for 'twenty three 'twenty four 'twenty five.
We're just pedaling fast to get their hustle.
That's super helpful. And then my last question.
Trying to piece together some of the free cash flow thoughts around 2022 so.
It looks like working capital was going to be a potential source.
Potentially meaningful.
And the sale leaseback I think you've commented would maybe make up some of the gap on the free cash flow.
Are you able to think about free cash flow than our year over year change in cash for.
For 2022 to be reasonably close to breakeven given the working capital in the sale leaseback or is that kind of going to four and limb.
I think you'll get you get close to that point, Doug, but keep in mind the sale leaseback item won't be in traditional quote unquote free cash flow.
But clearly it benefits the liquidity situation and the cash balance at the end of the year Okay.
Right, Okay. So on the cash flow.
Not not breakeven.
But the sale leaseback will help below that to.
The cash flow line to have liquidity.
You're pretty close to where we are today despite.
EBITDA being kind of.
Less than normal.
You got it helpful.
Great. Thanks, so much that's it for me I appreciate it.
Okay. Thanks, Doug.
Yes.
That concludes our question and answer session I would now like to turn the call back over to Roger Hendriksen.
Thanks, everybody for the questions and for your participation today really appreciate it if there are other questions outstanding that we weren't able to get through this morning. Please feel free to reach out to me give me a call and we'll make sure that your questions are addressed thanks again for participating this concludes our call.
This concludes today's conference call. Thank you for participating you may now disconnect.
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