Q2 2022 Cooper-Standard Holdings Inc Earnings Call
today.
I would now like to turn the call over to Roger Hendrickson, Director of Investor Relations.
Thanks, Brianna, and good morning, everyone. Thank you for 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 John Bannis, 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. 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 statement included in periodic filings with the Securities and Exchange Commission.
This presentation also contains non-GAAP financial measures.
Reconciliation 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, good morning everyone. We appreciate the opportunity review for our second quarter.
year-to-date results and provide an update on our business and outlook going forward. on your process, viewing positive ???-B
To begin, on slide five, we provide some highlights or key indicators of how our operations performed in the second quarter. In the second quarter.
We continued to execute at world class levels in delivering quality products and services for our customers and keeping our employees safe. We continue to work for our customers on we continue to open our? started you
At the end of the quarter, 97% of our customer scorecards for product quality were green.
Our launch performance scorecard were also at 97% rain for the quarter.
Most importantly, the safety performance of our plants continues to be outstanding. In the second quarter, our total safety incident rate was just 0.31 per 200,000 hours worked, well below what is considered world class and outperforming our target rate of 0.40. I would like to specifically recognize and thank our teams at the 41 Cooper Standard Plants that have maintained a perfect safety record of zero reported incidents for the first six months of the year. Through their commitment, focus and leadership.
They continue to demonstrate that achieving our ultimate goal of zero incidence is possible. Our manufacturing operations have worked smart and extremely hard to overcome a number of market challenges, including continued erratic production schedules and a tight labor market availability. And a tight labor market availability.
Despite the difficult operating environment, our operations were able to deliver $21 million in savings through lean initiatives and improving efficiencies in the quarter. Thank you.
Our SGA and E expense was down $4 million year over year as we continue to write size for our fixed cost. The SGA and E expense was down $4 million year over year as we continue to write size for our fixed cost. The SGA and E expense was down $4 million year over year as we continue to write size for our fixed cost. The SGA and E expense was down $4 million
and past restructuring actions delivered $2 million in the quarter.
In June , we started to see improvements in overall production volume. In June , we started to see improvements in overall production volume.
and increase benefits from our cost recovery initiatives.
Combined with our improved operating efficiency and lower fixed cost.
The improved volume, mix, and net pricing enabled us to drive positive EBITDA margin and cash flow in the last month of the quarter.
Partially offsetting disappointing results in April and May.
Moving the slide 6.
During the quarter, we continued our efforts to recover incremental costs imposed on our business by rising commodity prices and other market factors that are beyond our control.
While the discussions and outcomes have been different with each customer, we have been able to implement either index based agreements or some other form of price adjustment with most customers.
We now have index based agreements on material costs covering a significant majority of our revenue base.
The index-based agreements cover critical oil-based commodities as well as metals.
is they are already having a positive impact on our results as commodity costs continue to rise.
Importantly, these agreements should significantly reduce the magnitude of commodity price impacts on our business in the future.
In cases where our customers prefer quarterly search arges or other periodic negotiations versus index-based agreements. Get ready or change.
We've implemented negotiated PO price increases, delayed LTAs, reduced quick saving payments, and other adjustments.
In total, our material cost recoveries will exceed the high end of our
Our commercial team has done a great job to achieve these positive results in a very tough environment.
And they've been able to do it in a way that does not compromise customer relationships or our ability to win new business.
This was evidenced by the solid net new business awards. We received in the second quarter.
Also, frankly, none of it would have happened without our world-class operating performance in our engineering execution.
Our customers support Cooper Standard because they trust us to deliver.
As we continue to work together in a very challenging business environment, I want to thank our customers for their engagement in this process, for their ongoing commitment to mutually beneficial business relationships.
Turning the slide seven.
Repleased with the recent recognition of our innovative Fort Trex chemistry platform.
My environment and energy is a top product of 2022.
This marks the fourth prestigious award granted to Fort Trex since it was commercialized in 2018. The award granted to Fort Trex was granted to Fort Trex The award granted to Fort Trex was granted to Fort Trex for the first time in 2018. The award granted to Fort Trex was granted to Fort Trex for the first time in 2018.
Fort Trex is the most sustainable material available within the automotive ceiling industry. Fort Trex is the most sustainable material available ??sting Black Rye's
as it provides significantly lower carbon footprint that is environmentally friendly.34
And lighter weight.
with higher performance than traditional ceiling material options.
In addition, we're continuing to develop the material science around four trucks to make it even lighter weight, higher performing, and potentially to use recycled post-consumer waste as feedstock material.
All at which are highly valued characteristics with our customers. Thank you. Thank you. Thank you. Thank you.
Our innovations are part of the value proposition we provide to our customers in a clear differentiator among our competition. We are in a clear differentiator among our competition.
We believe the new developments around four tracks will create additional market opportunities in our ceiling business going forward. We believe the new developments around four tracks will create additional market opportunities to learn a new technologies. forward.
Moving the slide 8.
We're also making significant strides to ensure leadership in the EV market with new products for fluid handling.
We've commercialized multiple innovations within our quick connect and lightweight tubing port folios. in high quality.
And we hope to soon share exciting new advancements in fluid flow control.
which will unlock opportunities to grow content for vehicle and expand margins in the EV space. Literally, that is changing the level of experience. But this is developing in many of the other firms where it standardizes the pried systems and participants power in search of the causes that enter into the fair and systems to grow content for vehicle and expand margins in the souls space. you
These advancements combined with our existing capabilities
allow our OEM customers to further optimize EV fluid
architects yours.
given reduced complexity and increased vehicle performance and range.
I'll turn the call over to John to discuss the financial details of the quarter. The financial details of the quarter.
Thanks, Jeff, and good morning, everyone.
In the next few slides, I'll provide some details on our financial results for the quarter and discuss our cash flows, liquidity, and aspects of our balance sheet.
On slide 10, we show a summary of our results for the second quarter of 2022 with comparisons to the same period last year.
Second quarter, 2022 sales were $605.9 million.
an increase of 13.6% versus the second quarter of 2021.
The year-over-year growth in sales significantly outpaced growth in global light vehicle production.
Driven primarily by our outsized performance in North America and positive commodity cost recovery.
Gross profit for the second quarter was $15.4 million, or 2.5% of sales.
This compares to a gross loss of $900,000 in the second quarter of 2021.
Adjusted EBITDA in the quarter was negative $10.4 million compared to adjusted EBITDA of negative $14.7 million in the second quarter of last year.
The year-over-year improvement was driven primarily by favorable volume and mix.
Cost recoveries and manufacturing efficiencies.
partially offset by continuing commodity and material headwinds and other inflationary pressures.
On a US Gap basis, net loss for the quarter was $33.2 million, compared to a net loss of $63.6 million in the second quarter of 2021.
Net loss for the second quarter of this year included a gain of $33.4 million related to the sale leaseback of a non-corp property in Europe .
Excluding this gain, restructuring expenses, and other special items, as well as their associated income tax impact. Check the presentation and respect questions to your original committee. Kahn sw commission, call the committee to and other special items as well as their associated income tax impact.
Adjusted net loss for the second quarter of 2022 was $58.5 million.
or $3.40 per diluted share.
compared to an adjusted net loss of $51.1 million, or $3 per diluted share in the second quarter of 2021.
The modest change in adjusted net loss resulted from the provision for income tax in the quarter versus the tax benefit we booked in the second quarter of 2021.
The increase in book tax expense essentially offset the improvement we realized in adjusted EBITDA.
Our capital expenditures in the second quarter total $12 million compared to $17 million in the same period a year ago.
We can continue to have discipline focus on capital investments.
And we are on track to keep CAPEX below 4% of sales for the full year as we committed last quarter. For the full year as we committed last quarter.
Moving to final 11.
The charts on slide 11 provide some additional insight and quantification of the key factors impacting our results.
On the top line, favorable volume and mix, net of customer price adjustments,
increased sales by $102 million versus the second quarter of 2021.
Improving customer production volume was the biggest driver with customer cost recoveries in the quarter, also included in the volume mixed category.
Foreign exchange, mainly the euro, reduced sales by $22 million versus the same period last year.
For Adjusted EBITDA, volume, mix, and net price adjustments drove a combined $55 million of improvement for the corner.
The favorable volume in mix was primarily in North American Europe .
While cost recoveries were spread more proportionally across all regions.
Lean initiatives and manufacturing efficiency contributed $21 million to EBITDA in the quarter.
while further reductions in SG-A&E and savings from past restructuring actions added a combined $6 million. 99-ye careission-friendly finance. million dollars.
Unfortunately, these positives were more than offset by higher material costs of $40 million.
and higher wages, compensation related costs, general inflationary pressures, and other items totaling $33 million.
Commodity inflation continued to ramp up in the second quarter, but we expect a rate of increase to slow somewhat over the remainder of the year.
In addition, as the commercial recovery agreements that Jeff mentioned are implemented, we expect to see increasing offsets to the material inflation headwinds.
Moving to slide 12.
at the same key operating measures and drivers for the first half of the year.
Sales were slightly better versus the first half of last year. With improvements in volume, mix, and net price adjustments,
being mostly offset by the impacts of the deconsolidation of an Asian joint venture last quarter in unfavorable foreign exchange.
For adjusted EBITDA, significant improvements from positive volume and mix, net price adjustments,
Manufacturing and purchasing efficiencies.
Lower SGA and restructuring savings were more than offset by increased material costs, wages, and general inflation and other items.
Turning to slide 13.
In terms of cash flows, cash provided by operations during the three months ended June 30th, 2022 was an inflow of approximately $12 million. In terms of cash flows, cash flows were an inflow of approximately $12 million.
Driven primarily by the $51 million of tax refunds received in the quarter, and to a lesser extent, the positive contribution from lower inventories.
All partially offset by the cash loss incurred in the quarter.
With capex of approximately $12 million, we were essentially at breakeven free cash flow for the second quarter.
As a result, we ended June with a solid cash balance of $250 million.
Availability on a revolving credit facility, which still remains undrawn.
Increased to $156 million, resulting in total liquidity of $407 million as of June 30, 2022.
a sequential improvement from the end of the first quarter.
We remain in very good shape from a liquidity perspective.
We believe we have more than sufficient resources to sustain our operations.
Launch plan new programs to drive profitable growth.
and execute strategic initiatives to improve margins over the longer term.
We also expect our enhanced commercial agreements and anticipated improvements in vehicle production volumes will allow us to generate improved cash flow in the relatively near term and increasing over the next few years.
In terms of our balance sheet, last month we announced that we hired Goldman Sachs as our financial advisor to assist us in the process of refinancing a portion of our debt, and that process is ongoing.
We are in discussions with certain investors and we believe the actions we have taken to improve our financial performance and maintain liquidity will allow us to get the refinancing done.
Beyond that, we can't provide any further details at this time.
That concludes my prepared comments. So let me turn it back over to Jeff.
Thank.
Thanks, John , and to wrap up our discussion this morning, I'll touch on ongoing efforts to further improve our cost structure, and then update you on our outlook for the full year. So please turn to slide 15. So please turn to slide 15.
We've made substantial progress in our journey to right size our operations and optimize our cost structure, driving more than $100 million in savings per year over the past three years.
But we clearly have more work to do as reduced customer production volumes and unprecedented inflationary pressures have continued to outpace and offset our cost reduction achievements. And offset our cost reduction achievements.
We have begun implementing a number of further cost reduction in right sizing initiatives as outlined on the slide. And we expect to complete some of the critical projects in 2023.
In addition, we continue to evaluate our real estate portfolio.
Some of the strategic actions we have identified will provide opportunities.
for asset sales or sale leaseback.
which could help to fund our further planned optimization initiatives.
As we move through the back half of 2022 and approach 2023,
We expect the rate of inflation to slow and our cost reductions, manufacturing efficiencies, and enhanced commercial agreements will combine to begin driving margins higher.
Turning this slide 16.
In terms of our 2022 guidance, we are reaffirming our full-year estimate for adjusted EBITDA in the range of $50 to $60 million.
As we leverage better than expected operating efficiencies and material cost recoveries across improving production volumes in the second half of the year. In the second half of the year.
We trimmed the upper end of our range for sales just slightly based on the first half production volumes coming in lower than plan.
It was some offset to be realized in the second half.
We've also trimmed our estimate for catbacks.
and raised our expectation for income tax benefits based on first half results.
While there's still a lot of uncertainty in the global economy, in our industry, I'm very optimistic about our future and the opportunities that lie ahead.
Our cost structure has improved significantly and is still improving. Our manufacturing operations are running as efficiently as they ever have.
And we now have commitments in place from our customers to help us address continuing inflation challenges. Before we begin, called it time to give just a couple of points of asking address continuing inflation challenges.
As I said a few quarters ago, with our newly streamlined cost structure and customer commitments to pay their fair share of materials, I believe we are back on track to achieve our strategic targets for adjusted EBITDA margin and return on invested capital as industry production volumes normalize over the next few years.
I want to thank our employees for their continued commitment and dedication.
From the plant floor, literally, with some employees actually sleeping at some of our locations during China's recent shutdowns. A solution from the couture is controlling all majority of the Hulk hem tunnel shells the land manager whodesant media channels the cat time. A where and wherever there is very low actor and in parts of the evening. Fins are all headaha and scary groups in flames. We can realize that theètement that thedown ? ?i the. That's how it's done.
to our engineering and design facilities, to our headquarters offices.
And now the many, many home offices. I could not be more proud of our teams and how they've stepped up collaboration, intensified their focus and delivered remarkable progress toward our goals in the first half of the year. of the year.
I also want to again thank our customers for their continued trust, confidence and support as we work together to create sustainable solutions that drive long-term value for them and all of our stakeholders. And all of our stakeholders.
This concludes our prepared remarks, but let's open up the call for Q&A. Thank you.
Thank you. Ladies and gentlemen, if you would 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 star, followed by the one key again.
And if you are using a speakerphone, please pick up the handset before entering your request. One moment please while we assemble the Q&A.
Your first question comes from Mike Ward with Benchmark. You may be dead.
Thanks. Good morning, everyone.
Jeff, I wonder if you can give us an update on some of the non-automotive efforts, specifically with Fortrex.
Good morning, Mike. Thanks for the question. We continue to make very good progress. We continue to make very good progress.
with the first product launch slated for the first quarter of 23. And as we discussed before, we aren't able to announce who that's with at this time, but we will after the product itself launches. We will after the product itself launches.
In addition, we mentioned
next generation, four tracks.
and the things that make it very attractive and frankly more attractive for automotive customers moving forward is also making it more attractive for that particular customer in the footwear space. Of course there is, although there wereReportone who had the access to automotive space.
So we're very excited about how we've executed.
We've had people in their facilities over the last couple months. We've passed all of the manufacturing hurdles that they had for us, and we expect a successful launch during the first quarter.
And that's new information. I don't remember hearing that. So the product will be launched 1Q23?
That's correct.
Thank you. I'll start with the second thing on your slide 15.
You talk about 100 million in annualized savings achieved. And we can see that in the six month numbers, but it looks like some of these other inflationary cost measures in the other category that John mentioned are exceeding. It looks like you're offsetting about 2-thirds of them. Or some of those costs, the inflationary pressure is transitory. And will we see them start to subside? And how does that look like? It took over the next six to 12 months.
Yeah, I'll let John talk about that in terms of the go forward, but just to be clear, what we have set out to negotiate with our customers has in the automotive space has resulted in us covering about 65% of the company's revenue going forward within that space agreements.
there's a substantial additional portion of revenue that's covered with these quarterly surcharge payments that I mentioned in my prepared remarks.
So if you take a look at that in total, and historically we've recovered 40 to 60 percent,
with these new index agreements as well as the other approach to
Recovering our inflationary raw material costs.
we are in the range of 65 to 75 percent of our
raw material inflation being covered under this new approach.
We were also able to negotiate.
some recovery from last year that we brought into this particular quarter.
So we are going to get into the specific details by customer for obvious reasons. We are very pleased as we sit here halfway through the year with not only what we've accomplished for the first half, but more importantly, the impact that will have on a go-forward basis. logistical Possibility.
Okay, so somebody's going to go over to John to address the other part of your question, Mike. Okay.
Yeah, Mike, you asked kind of essentially if any of those inflationary Edwin's will subside or if they're sticky to use that term. And in that other bucket, you have areas such as wages, labor rates, energy cost, and transportation charges being the biggest pieces. And most of that is fairly sticky. We don't see that going away. In fact, when we came into the year and gave our original guidance six months ago.
charges being as high as they are, we're seeing a bigger headwind there. So don't see them going away anytime soon and as you pointed out, our ongoing cost reduction efforts typically will go towards offsetting those and so the team is continuing to be focused on those efficiencies both on the manufacturing and
But some of those can be recovered, right, like the energy and the transportation.
Some of those costs can you can try to recover from the vehicle manufacturers? Is that what you're talking about? Correct Mike, this is Jeff and we are in the process of... Correct Mike, this is Jeff and we are in the process of...
of negotiating those recoveries we certainly expect.
the vast majority, if not 100% of the energy costs to be recoverable. And we're in those discussions as we speak.
Okay, so just from a cadence standpoint, so we're going to get a, it sounds like we're going to get a pretty good dose of recoveries in the second half, maybe even the fourth quarter, right? But then once you get beyond that, you're kind of caught up and is in a little bit more steady state with your contracts. The 65, 75% seems like it's standard in the industry. Most suppliers have some exposure. Is it, am I reading that correctly?
That's correct. I think that...
You know, we use a range of 40 to 60 percent that we've recovered historically. And that for us means over the course of the past 10 years. But if you look at it even closer during the period of time before the pandemic and then into the pandemic.
We were probably at the low end of that range, and now we're going to be above the high end of that range. So we think this is not only good for business today, but also sets up a very fair approach for our customers going forward. So we're very pleased with what we've been able to get done on the current book of business that we have operating on our plants today, and equally as important the business that we'll launch.
this year, next year, and the following year. That's great. Thank you. Thank you very much, everyone. Thank you very much, everyone. Thank you very much, everyone.
Okay, Mike. Your next question comes from Steve Ferzani with Sudoti. Please go ahead.
Morning everyone. Thanks for all the detail on the call. Just digging a little bit into the EBITDA guidance: obviously you have the now additional headwinds of FX.
And then thinking about that 65 to 75% material recovery, I'm just trying to think about what's built into guidance both in terms of effects and materials, even though materials, you get more cover in a second half. And then thinking about what's built into guidance, I'm just trying to think about what's built into guidance, and what's built into guidance,
Yes, Steve, I'll try to address the FX question. Clearly when the euro is now almost at parity with the US dollar, our revenues do come down. So part of the guidance reset on the top line, as Jeff mentioned, was first F volumes, but also the FX impact that you'll see on our Euro-denominated sales, translating at a lower amount than the otherwise would have in the past.
It's a little bit more nuanced when you think about the cost base around the world, namely in Europe whereby a lot of our costs are in local currencies other than the Euro, which is our selling currency. So you do have some cross currency effects that mitigate the top line decrease overall. So as the revenue might come down, so do the costs come down as well when you're thinking of Czech Corona, Polterstlade or other local currencies that we deal with locally.
So we don't see that as a big component of the EBITDA for the second half of the year. Rather, it's the buckets we've already been talking about, higher commodity inflation, further exacerbating things by an incremental, 40 more million dollars in the second half of the year than we've already incurred this year, or in the first half of the year, and then the ongoing other inflationary pressures.
But those are all offset by the commercial recoveries that Jeff has been describing, as well as second half volumes will be stronger than the first half, we believe.
And with the commercial recovery that's much stronger in the second half given that the agreements really implemented second half right.
stronger in the second half given that the agreements really implemented second half rent the new ones.
This is Jeff. So it spread out. Some of them started already in the second quarter. Some are obviously impacting the third and fourth. Keep in mind, as I mentioned, we also had some recovery in the quarter that was a result of retro price increasing back to last year. So what you'll see in the third and in the fourth quarter.
is a direct result of the indexing agreements kicking in.
Okay, fair enough. And so to answer your question, it will be stronger in the second half than it was in the first half, just to be clear.
Perfect.
When I think about how your guidance is going to translate into cash flow, we've certainly discussed this in the past.
Clearly when volumes picking up it should...
create greater demand on working capital, but you're carrying such high inventory to begin with. Does that not play out in the second half that you don't have that significant working capital pressure?
Steve, you're absolutely right. Normally in a rising sales environment you would see a working capital usage, but because we are sitting on over $180 million of inventory right now as of June , that will actually be a benefit for us in the second half of the year as we're not procuring as much for Q3 manufacturing into Q4. So that is a lever for us to offset the rising sales as you put more accounts receivable on the balance sheet with the shipments. So it should be in good shape there.
Great, and I did want to ask about you mentioned the potential to introduce recycled materials into I believe it was on Fortrex production. I'm trying to think about whether that was something you developed or was that customer driven. I'm just trying to figure out what the customer response will be given that there's some higher cost but if they want to tout their green position it could be positive. That's it.
What do you expect the reaction and have you had customers coming to you for this? Yes, this is Jeff. We have developed that with an outside...
partner and we are in the process of getting ready to go to market with it in the third quarter.
So we anticipate a terrific reaction, not only...
Keep in mind, Fortrex was a premium priced product. It's on significant.
SUVs today in the market.
These enhancements that we're talking about, they're just going to make it even more attractive for our customers and probably more affordable in areas that before was deemed, uh, more affordable.
Too much of a premium product, I suppose.
So we're really looking for...
That's correct.
Oh, it has to go.
Perfect. That's it for me guys. Thanks so much.
Thanks, Steve.
Your next question comes from Brian de Rubio with Baird. We go ahead.
Good morning gentlemen. A few questions for me. First of all, John , could you sort of frame up what the potential opportunities with these sort of reposition of your real estate and conducting cell and lease backs? Thank you.
Yeah, Brian , good morning. Thanks for the question. We really haven't talked about the size of the opportunity there, but I'll qualitatively describe it as, you know, it could be a sizable proceeds. You saw in the first half of this year we were able to unlock a considerable amount of capital with a call it a non-strategic site in Europe and had almost $50 million U.S. of proceeds related to that sale.
could be sizable and similar in nature to what we've already done.
Okay, that's helpful. And, Anna, John , you said you're reticent to mention anything about the refinancing. I respect that. Just maybe quickly, is it still the company's plan to have something in place prior before the term loan becomes current in November ?
Yeah, Brian , thanks for the question, and I'll just stick with whatever I've already told you.
Okay, understood on there. Jeff, just switching gears. You know, what are the contingencies for your European operations if we get a phase three sort of crisis and there's an allocation of natural gas to consumers before businesses? To consumers before businesses?
Yeah, Brian , so obviously we can flex our plants as low as we need to. So if that's your question, I think more positively the outlook we have in the second half in Europe and in fact in the fourth quarter, I can tell you that the outlook, we haven't seen volume like that in years. So I have a question.
a positive view of the second half in Europe for our spur quarter. Obviously is always including the August shutdown, but even that quarter is comparable to what we've seen in the first two quarters. Fourth is very strong. If obviously events that are outside of anyone's control or any automotive industry occur, then we have the ability to...
to flex down from a cost point of view and we would. Right now we're planning to be ramping up to support the additional volume, if I can be positive in that in that sense.
Got it. I'm not trying to be extremely negative. It's just...
There's greater than a zero chance that that could occur. So it's a question on a lot of investors' minds. Just on your, Jeff, we talked about this before. You said, given the return of that business over the years. I'm going to talk to you about this.
You know, what is...
What is the ability for Cooper to sort of get proper returns out of the European business? And I guess how much of your US business is tied to the business in Europe ? So if you walked away from Europe and this is completely hypothetical, but if you walked away from Europe , how much of your US business would be impacted by that?
I'll take the first half of the question. So we will be profitable in Europe in 2023. So we will be profitable in Europe in 2023.
And by 2024, when we have executed several of the initiatives that we have left to execute, we expect that business to be in the high single digits from a EBITDA point of view. That word, word.
very focused on getting a few more actions completed in Europe here in the next 12 months or so.
And then we expect that to be a big contributor going forward. As it relates to the second half of your question, I think customers have...
proven to you and I that they can be in markets if they make money and they can be out of markets if they don't. And I absolutely agree with that strategy. I absolutely agree with that strategy.
Got it. Just final one, the benefit that you got in the second quarter from the recovery of 2021 war material charge. How big was that?
I'm sorry, can you say that again? You said you had mentioned earlier that in the second quarter period you got a recovery of some of the raw material increases, a one-time recovery from 2021. So obviously that was a boost to the results. Can you quantify how big that boost was?
Yeah, we haven't really gotten into breaking down the detail of those customer negotiations, Brian , for obvious reasons. I mean, we're giving you the high level impact that it'll have going forward. There's a lot of good information in there and formulas that I think will help you quantify it, but as it relates to the specifics of what we recovered and from who, I'm kind of keeping that.
inside for obvious reasons.
is inside for obvious reasons. Fair enough. Appreciate the time. Thank you.
Okay, buddy. Thanks, Brian .
Your next question comes from Kirk Lupeke with Imperial Capital. Please go ahead.
Hello guys.
Thank you for the morning curve.
Thank you for the call on the presentation. It's very helpful.
Just a couple of follow-ups. Could a profitable Europe would be...
You know, a big development. Could you elaborate on how you get there and maybe, you know, in chunks, how that bridge would look? that bridge would look.
Yeah, I think we've given you some insight there, but let me just repeat it. So we obviously have.
continue to do a lot of self help.
initiatives in Europe as it relates to reducing our fixed costs there. Many reductions have come in terms of...
plants coming off the map, SGA and E reductions.
customer price increases on business that was not profitable.
going forward there will be more of all of that required here in the next 12 to 15 months to get to the point that I said earlier about making money in 23 and back to a clearing hurdle rates for 24. So the good news is we don't have to have
50 balls in the air to get done what we need done in Europe . We have a very select.
few levers yet to pull and we know what those are and we're in the process of executing it.
That's hopeful. Very encouraging.
You mentioned tens of millions of dollars from sale lease backs. What has changed?
that
allows you to realize, you know, make those deals happen now.
or is it just they've been in the works like the last one they've been in the works for a long time and it just
It's just now coming to fruition or is it a little bit of both?
Joe, sorry, Kurt, it's John . We really just started to look around for alternative sources of capital to fund the strategic initiatives that Jeff was just describing to you. And really the one we closed in Q1 of this year really didn't take that long to come do fruition. We started marketing that property in late Q3 or early Q4 of last year. And so within three, four months time, we were able to lock that deal up.
So this isn't a long-tailed initiative. It's just really looking for creative opportunities. It's just really looking for creative opportunities.
That's helpful. Thank you. And then two quick ones. That's it.
You mentioned the other inflation, it's been, I think, a $58 million ahead wind year to date. What is the full year expectation on that? What is the full year expectation on that?
For, well the 58 is a broad bucket that includes not only what I'll call the recurring inflation, so your typical.
you know salary inflation, wages, utility bills and the light going up. But a significant portion that is also what I'll call normalized compensation related expenses. If you think about the last several years, there has been zero incentive compensation paid by the company and what we're looking for towards in the full year guidance this year is a normative payout under those compensation related programs.
So you do have a bit of a headwind there year over year as well. And then, you know, clearly with the global industry environment, we're invested in several joint ventures. So within that $58 million year to date, you also have the operational performance of those joint ventures. And as so goes the industry, typically so goes those investments for us. So that's all included in there overall. Discreetly, Kurt, I'd say the wages in general economics.
Within those components are about $50 million on a full year basis.
whereas the normalized expenses is another 30. So that kind of gives you a lot of the pieces there to model with.
So at least 80 for the full year.
Yes.
Got it. And then lastly,
a lot of moving pieces here I'm sure but what what what do you think working capital will be in you know will it be a source for use in the
in the second half.
Yeah, I addressed this with Steve a few minutes ago as well. We definitely see working capital reductions, mostly in inventory, in the back half of this year that will benefit cash flows. To the extent that sales continue to rise, of course, though accounts receivable may get locked up as EBITDA performance improves in the later half of the year. But in conjunction with the commercial efforts, we're also looking to optimize...
our tooling balances that sit in working capital as well and really looking to bring those down. And in historical frame of reference curve for us is we were tying up $100 million each year of Cooper cash or capital building tools on behalf of our customers.
and really with the efforts that we've been undertaking, it's really no longer trying to be the bank of our customers, but instead get upfront payments or progressive payments along the way as we build those tools. So we're not locking up so much working capital at a time. So that's another lever we can continue to see benefiting us in the second half of the year. And with those moving pieces, we'll see how the working capital shakes out. And we'll see how the working capital shakes out.
Sequentially, we're always going to experience, or we typically I should say, experience a strong positive cash flow in Q4. That's the typical seasonality and we wouldn't expect anything different this year.
Thank you. That's very encouraging.
That's all I have. Thanks, Kurt. Okay, thanks, Kurt. Thanks, Kurt.
Your next question comes from Joseph Veritelli with Cantor Fitzgerald. Please go ahead. J Jeep motor
Good morning. Sorry if I missed this. The prior period cost recovery, where on the P&L did you book that?
Joe, it's John . Because that is a customer price element, if you will, we include the recovery up in the revenue line.
Oh, okay. And I think this was already asked you're not giving.
A magnitude of what that recovery was or did you?
We did not give a magnitude. We're going to give you the reference, Jeff, talk about being at the high end of our historical range. We're going forward. That should be between 65 and 75% recoveries on that commodity side.
Oh, right, okay, okay, good enough. And then last question is your cash. Where is it on a global basis? I think we've discussed this before. Are you able to easily access all of your cash in a timely manner or cost effective as well?
Yeah, very efficient cash arrangements for us around the world. We do keep requisite balances in each of the regions just to a fund ongoing operations, but we can very efficiently move cash around the world as necessary to fund certain geographies if we needed to. So no restrictions locked up on that 250 million or so that we closed June with.
Okay. Okay, great. Thank you very much for taking the questions.
Thanks.
Our final question comes from Alex Graff with Cowan. Please go ahead.
Thank you. I just wanted to follow up again on the working capital item. Just specifically on inventories, what do you see as an appropriate level of inventory going forward, especially given the OEM production volatility and the high level of inventory you mentioned the company is currently carrying?
Yeah, Alex, a great question in the team is coming to work every day thinking about what that engineer level of inventory should be going forward. The challenge you've pointed it out already is the stop start volatility that are manufacturing teams and plants around the world have had to deal with.
And that's why you see the in excess of $180 million on our balance sheet as of June . At year ends or the last several years, you see that number coming down to $145, $150 million of inventory. And so the goal is to be in that ballpark. By the time 2022 closes and things stabilize. But that really is situationally dependent on their customers and their ability to.
normalize their own production schedules and get back to a stable release
So hopefully that helps.
Definitely very helpful. Thank you very much. And then in terms of the, I just want to kind of remind myself here, the typical lag for the material costs recover again, do you say that's like a two to three-quarter lag or what was the time frame for that?
Yeah, Alex is John again. It depends on the particular commodities. Some of the inputs we have on a one quarter lag, others might be six months out or a touch longer. So it really is across the board in terms of, well, our call forward buys are locking in certain prices for a quarter or two at a time to look forward and do that. What I will tell you is, we are seeing the rate of inflationary pressures across the board.
of all the buckets, so I think rubbers, metals, plastics, and other specialty inputs for us. The rate of increase is stabilizing, but we don't see it coming back down anytime soon. So the rest of the year, we're still on track to face about $100 million of material economics in 2022.
Got it. And presumably, you know, if we saw, you know, called the broader benchmark indices come down, is it safe to assume that the contract pricing is obviously variable in that nature that it would also start to the pricing that you're getting on your products will come down and concert with, you know, the overall commodity indices.
Generally, yes, but again, there's a lag effect there as well. It's not current prices that impact current selling price to our customers, but there's a mechanism under the various index arrangements that we have that you look back to previous quarter or six months and reset prices accordingly. So there's a lag on what we're buying and there's also a lag on the catch-up recoveries.
Understood. Very helpful. Thank you for all the clarifying questions. That's it for me.
Thanks, Alex.
It appears that there are no more questions at this time. I would now like to turn the call back over to Roger Hendrickson.
Okay, thanks everybody for joining our call today. We appreciate the engaging conversation, questions. If you'd have further questions who would like to get a hold of us, please feel free to reach out to me directly. Look forward to talking to you again soon. Thank you.
This concludes today's conference call. You may now disconnect.
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