Q3 2022 Cooper-Standard Holdings Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Cooper standard third quarter 2022 earnings conference call.

During the presentation, all participants will be in a listen only mode.

Following company prepared comments, we will conduct a question and answer session at that time. If you have a question you will need to press star one one on your telephone.

As a reminder, this conference call is being recorded and the webcast will be available on the Cooper standard website for replay later today.

I'll now turn the call over to Roger Hendriksen director of Investor Relations.

Thanks, Olivia and good morning, everyone. We appreciate you spending some time on the call 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 Jon Banas, Executive Vice President and Chief Financial Officer.

Before we begin I need to remind you that this presentation contains forward looking statements.

They are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable.

These statements do involve risks and uncertainties.

For more information on forward looking statements. We ask that you refer to slide three of this presentation and the company's statements included in periodic filings with the Securities and Exchange Commission.

This presentation also contains non-GAAP financial measures reckon.

Reconciliations of the non-GAAP financial measures to their most to their most directly comparable GAAP measures.

Included in the appendix to the presentation.

With those formalities out of the way I'll turn the call over to Jeff.

Thanks, Roger and good morning, everyone. We appreciate the opportunity to review, our third quarter and year to date results and provide an update on our business and the outlook going forward.

To begin on slide five we provide some highlights or key indicators of how our operations performed in the third quarter.

We continue to execute at world class levels by delivering quality products and services to our customers and keeping our employees safe.

At the end of the quarter, 98% of our customer scorecards for product quality, where crane.

Our launch performance scorecards, we're at 96% green for the quarter.

More importantly, the safety performance of our plants continues to be outstanding.

Through the first nine months of the year, we have 28 plants that still have a perfect safety record of zero incidents.

I want to recognize the teams at these plants for their continued commitment and leadership.

As they once again confirm that achieving our ultimate goal of zero incidents as possible.

I could not be more proud of the global team for their continued commitment and world class achievements and maintaining a safe workplace for all.

While conditions in the global automotive industry, obviously remain challenging with continuing supply chain uncertainty.

The reduced production levels and high inflationary pressures.

We've maintained our focus on reducing costs across the company.

Our manufacturing operations were to deliver we're able to deliver $22 million in savings.

Through lean initiatives and improving efficiencies in the quarter.

Our <unk> expense was down $7 million year over year as we continue to right size our fixed costs.

And past restructuring actions delivered $2 million in benefits.

In the quarter.

We also saw incremental benefits from our enhanced commercial agreements.

On pricing and cost recoveries in the quarter as more negotiations were concluded and additional adjustments were implemented and realized.

Okay.

Moving to slide six.

Our new product innovations continue to garner recognition from trade groups as well as our customers.

This morning, I am pleased to announce that our advanced thermal plastic thermal management solution for electric vehicles has been named a finalist in the society of plastics Engineers annual automotive innovation and competition.

Our new plastic will 2000 and tubing technology was developed specifically for the operating temperature and pressure environments.

Required for glycol thermal management systems and battery electric vehicles.

It also AIDS in optimizing flow and provides a weight reduction of 60% compared to more traditional <unk> tubing technologies.

Helping to improve overall vehicle efficiency.

Combined with our latest Ergo lock plus quick connect technology. The system also improves the flexibility and efficiency of the OEM Assembly process.

A significant value add for our customers.

While we're pleased to be recognized by the society of plastic engineers were even more pleased with the new business awards that our customers are giving us largely driven by our continued focus on value add innovation.

Turning to slide seven.

Continuing on the topic of product innovation during our last conference call in early August I spoke about the progress, we're making and expanding the scope and opportunities within our fluid handling business.

Internally, we call it our <unk> strategy, which refers to our four critical.

Functions of fluid systems in a vehicle connect convey control and communicate.

Our traditional suite of products is focused primarily on the connect and convey functions.

We have established a track record of providing world class technology in many different types of tubing and related connectors.

And they have garnered recognition and driven new business as I just discussed.

Through our comprehensive product strategy in the joint development agreement with Solari.

We announced in August we are rapidly progressing the.

The development of new Skip generation technology that integrates the functionality of pumps with advanced fluid control.

Routing and connection technologies into a single device. These.

These new systems are expected to further optimize the cost efficiency and complexity of thermal management and technically advanced electric vehicles.

For our OEM customer it will add value through system simplification.

The enhanced performance light weighting and improved fluid management efficiencies.

For Cooper standard the new technology will significantly expand the scope of our product offering.

And increase our revenue and margin opportunities.

Our fluid systems engineers are already collaborating with OEM design teams under multiple nondisclosure agreements to.

To explore how our new capabilities and patented technologies can help them solve some of their biggest system design challenges.

The early response has been very favorable and we're excited about the potential new growth opportunities our expanded capabilities will provide.

Moving to slide eight.

Our sealing products team is also delivering exciting new innovations for the electric vehicle market.

These are flush seal and Frameless sealing systems. These technologies are rapidly becoming favored design choices for the premium and electric vehicle markets as automakers worked to differentiate their vehicles through a range of styling options.

Of our most recent sealing business awards, 30% have been for Frameless technology, and we expect this trend will continue.

And this represents additional growth opportunity as the Frameless technology drives a significantly higher content per vehicle.

In some cases more than 100% higher than traditional sealing systems.

We continue to believe our investments in product and technology innovation are the key to driving future profitable growth.

We expect this will benefit us even further in the months and years ahead, as we optimize our cost structure and as production volumes and inflationary pressures normalize.

Now, let me turn the call over to John to discuss 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 third quarter of 2022 with comparisons to the same period last year.

Third quarter 2022 sales were $657 million, an increase of nearly 25% versus the third quarter of 2021.

Gross profit for the third quarter was $38 6 million or five 9% of sales.

This compares to a gross loss of $8 million in the second quarter of 2021.

Adjusted EBITDA in the quarter was $25 million.

Compared to negative $33 9 million in the third quarter of 2021.

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 cost headwinds.

Higher labor and energy costs as well as other inflationary pressures.

On a U S GAAP basis net loss for the quarter was $32 7 million.

Compared to a net loss of $123 million in the third quarter of 2021.

Excluding restructuring expense and other special items adjusted net loss for the third quarter of 2022 was $29 $5 million or $1 71 per diluted share.

Compared to adjusted net loss of $106 $4 million.

Or $6 in 2000, <unk> <unk> per diluted share in the third quarter of 2021.

The year over year improvement resulted primarily from improved gross profit.

Reductions in selling general administrative and engineering expenses.

And lower income tax expense versus Q3 of 2021, when we recorded a significant charge related to valuation allowances on deferred tax assets in the United States.

Our capital expenditures in the third quarter totaled $14 2 million compared to $24 million in the same period a year ago.

We continue to have a disciplined 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.

Moving to slide 11.

The charts on slide 11 provides some additional insights into the key factors impacting our results for the third quarter.

On the topline favorable volume and mix net of customer price adjustments increased sales by $168 million versus the second quarter of 2021.

Improving customer production volume year over year was the biggest driver.

And customer cost recoveries in the quarter also included in the volume and mix category.

Foreign exchange, mainly the euro reduced sales by $32 million versus the same period last year.

And the deconsolidation of a joint venture in Asia, which was completed in the first quarter of this year.

Weather impacted sales by $6 million.

For adjusted EBITDA volume mix, and net price adjustments, including recoveries drove a combined $69 million of improvement for the quarter.

Lean initiatives and purchasing and manufacturing efficiency contributed $22 million.

Reductions in SGA any added $7 million.

Savings from past restructuring actions added another $2 million.

As for the headwinds in the quarter higher material costs amounted to $35 million in.

And higher wages compensation related costs.

General inflationary pressures and other items reduced adjusted EBITDA by a combined $10 million in the quarter.

Moving to slide 12.

Looking at these same key operating measures and drivers for the first nine months of the year.

Sales increased eight 5% compared to the same period in 2021.

The increase was driven primarily by improvements in volume mix and net price adjustments.

With partial offsets from the deconsolidation of the Asian joint venture in the first quarter and unfavorable foreign exchange.

For adjusted EBITDA significant improvements from positive volume and mix net price adjustments manufacturing and purchasing efficiencies efficiencies.

Lower SG&A and restructuring savings were more than offset by increased material costs, which have now reached $117 million in the first nine months of this year as.

As well as higher wages and general inflation.

Turning to slide 13.

In terms of cash flows cash used by operations. During the three months ended September 30 was approximately $10 million driven primarily by increases in inventory and tooling receivables.

With Capex of approximately $14 million as mentioned earlier, we had a modest net free cash outflow of approximately $24 million in the quarter.

As a result, we ended September with a still solid cash balance of $231 million.

Availability on our revolving credit facility, which still remains undrawn.

It was $156 million at quarter end, resulting in total liquidity of $387 million as of September 32022.

From a liquidity perspective based on current expectations for light vehicle production and customer demand for our products.

We expect our current solid cash balance and access to flexible credit facilities will provide sufficient resources to support our ongoing operations and the execution of planned strategic initiatives for the foreseeable future.

Separately, the companys ability to meet its debt service requirements for the next 12 months is contingent upon our ability to refinance our term loan facility.

We are continuing discussions with certain investors with respect to potential refinancing alternatives.

And while these discussions are ongoing and have been constructive.

The company has not yet reached an agreement for refinancing its capital structure.

And there can be no assurances that such an agreement will be reached.

Beyond that we won't be providing any further details at this time.

That concludes my prepared remarks, so let me hand, it back over to Jeff.

Thanks, John and to wrap up our discussion this morning, I'd like to touch on our ongoing efforts to further improve our cost structure and then update you on the outlook for the full year. So if you'd please turn to slide 15.

We're continuing our focus on reducing costs and right sizing our operations where necessary. These efforts have delivered more than $100 million in savings per year.

Over the past three years and already $86 million in the first nine months of this year.

As conditions in our markets around the world remain challenging we're continuing evaluating our business and seeking ways to improve and further optimizing our operational footprint.

To be clear all options are on the table.

We've made good progress and completed a number of cost reduction and right sizing initiatives. This year as outlined on the slide and we expect to complete the remaining projects in 2023.

And the remaining months of 2022 and into next year, we expect the rate of inflation to slow and our cost reductions manufacturing efficiencies and enhanced commercial agreements should allow us to further expand margins and improve cash flow.

Turning to slide 16.

In terms of our 2022 guidance.

We are trimming our full year estimate for sales and adjusted EBITDA.

Factoring in the results for the first nine months of the year, which fell short of our original expectations, primarily due to continued variability in our customer's schedules and weak production volumes.

We now expect full year sales in the range of two 5% to $2 6 billion and adjusted EBITDA in the range of $45 million to $50 million.

So the revised range remains very near the low end of our original guidance range for adjusted EBITDA. Despite the disappointing production volume.

In addition, the midpoint of these ranges suggests a significant sequential improvement in adjusted EBITDA margin for the fourth quarter.

An improvement we expect to carry forward and build upon into 2023.

While there is still a lot of uncertainty in the global economy and in our industry. We continue to successfully manage the aspects of our business that we can control.

Our cost structure has improved significantly and is still improving.

Our manufacturing operations are running as efficiently as they ever have and.

And we continue to fulfill our end of the bargain with our customers delivering quality products on time and supporting their strategic initiatives and objectives with our technology and innovation.

I want to thank our global team of employees for their continued dedication and their commitment to delivering for our customers and other stakeholders in this challenging environment.

I also want to thank our customers for their continued trust confidence and their support in managing through commodity inflation. However is the weakness and volatility of customer production volumes continue.

We will aggressively pursue further commercial enhancements to offset volume shortfalls and related stranded costs.

As well as ongoing inflationary pressures.

Despite all the noise and uncertainty in our industry I am confident that the innovative products sustainable solutions and value that we're providing to our customers will ultimately be fairly compensated.

This will enable us to drive increasing long term value not only for our customers, but for all of our stakeholder groups include.

Including our employees communities suppliers and our investors.

This concludes our prepared comments, so let's open up the call for Q&A.

Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star followed by one one on your telephone.

Using a speakerphone please pick up the handset before answering your request.

One moment, please as we assemble the queue for questions.

Now first question coming from the line of Michael Ward with Benchmark. Your line is open.

Thank you very much good morning, everyone.

Joe on the.

On the fourth earnings call. The company cited a $1 billion in lump sum payments to suppliers for supplier settlements.

Yeah.

It said it was not just for commodities, but for other things like disruption production schedules.

I think Cooper has the highest among the highest.

Exposure to forward on a relative basis can you walk us through that process. I think you mentioned in your comments that part of those.

Settlements were implemented and realized.

I mean is the type of thing where the material costs are kind of straightforward and then with the production disruption in some of the other stuff the freight.

It sounds like there are several buckets am I reading that correctly.

Youre correct Mike.

The first bucket that we've been talking about specifically this year is obviously the raw material.

Ponant of the.

Of the cost buckets, if you will and we are we are.

Pleased that we've completed those.

Those negotiations really with all of our customers.

Many we have now indexing contracts in place others.

We have quarterly surcharges in place that address.

The material cost inflation that we've been that we've been bearing quite frankly for for a number of number of months. So I would say consider.

<unk> negotiation related to material.

Closed and going forward, we expect.

But we'll we'll be at the above the high end of our of our recovery that we've had historically, so think about 70% recovery.

<unk> of all raw material inflation.

Going forward of course, when it goes the other way then we share that back with.

With the with the customer so very pleased with how Thats, all transpired and as I mentioned, I think our customers for working with us and allowing us to get to a point, where we think it's sustainable.

Your other question is the bucket related.

Start stop labor.

Trade energy costs and the like those negotiations continue.

<unk> are typically handled more in terms of surcharges.

With with customers and I would expect us.

To continue to recover more and more of that into 'twenty. Three that was in my in my prepared remarks. So I think that we're confident that theyre going to work with us to help.

Recover recover those shortfalls, but.

It's still a very challenging environment, we would really like if.

If we had our magic wand out there we would waive it and just if the volumes would have hit per their releases in the third and fourth quarter wed have a much different conversation right now, but unfortunately the.

The volumes as I said in my prepared remarks continue to be short of the releases that are out there and thats, causing even more headwind and hence more challenging conversations with our customers going forward.

So when I look at the bridge analysis.

John in your chart 12, and it had.

$117 million and material economics through the first nine months.

Is that money that will be recovered or is it because I think you mentioned that the.

The recoveries are included in the.

Volume and mix.

Correct. So.

117.

Yes, Mike the 117 on the bridge page there is the gross commodity cost. The recoveries you are right. We include those in the volume and mix bucket as we've historically included price in those rows of the of those charts.

So as Jeff mentioned, you can think of in terms of being around that 70 plus percent of recovery.

On that 117.

Both from.

Current period perspective, as well as some catch up on 2021.

Commodity inflation that we're able to call back this year.

Okay. So you've recovered part of the 117, but not all of it so part of that will come over the next couple of quarters.

Yes, there is a kind of a.

Order delay or perhaps a two quarter delay as those index contracts reset and then youre doing a look back period on the previous quarter or two to do the recovery mechanism.

Okay and on the general inflation and other the $69 million would that include any of the impact from the start stop.

That would not necessarily in that bucket what it would include as your general economics, your labor inflation transportation costs utility bills going up the start stops those are really inherent in the <unk>.

And the cost of goods sold manufacturing bucket.

Degrade.

<unk> activities and the efficiencies we were able to gather so they kind of go against that area as opposed to the other bucket.

Okay, so that could be over and above the material recovery. So for the next two quarters does recover in 2023.

So we're up north of $100 million potential recovers.

That's the goal.

Okay.

John just one last question on the term loan.

Any significance.

Now current as it relates to your.

The refinancing activities.

Today is technically the the date the term loan goes current.

I'll emphasize that.

As of right now it's a date on the calendar, we're still engaged in those constructive conversations with with investors too.

Look at the capital structure.

And arrive at a potential refinancing alternative.

Mike There is no impact on our debt agreements right now because that is current.

Or anything like that there's no default situation.

It's just that it's now within 12 months of coming due.

Okay. Thanks, John Thanks, Jeff.

Okay Mike.

Thank you one moment our next question.

And our next question coming from the line of Steve <unk> with Sidoti Your line is open.

Brookline Bancorp.

Call us on the call.

Do you want to follow up a little bit.

The previous questions because im looking at the EBITA margin in North America, we did see some some growth than I would've expected a little bit more.

Improvement I'm trying to get a sense is that the continued inflationary pressures is that the starting and stopping that youre that youre.

You've added labor and you're just not getting the volume.

And you were expecting I'm trying to get a sense of what we're seeing on that margin line.

Yes, Steve this is John .

Take that North America was certainly.

Pressured along with the entire company on the commodity side as well as those other inflationary pressures that ate into the what you would have otherwise expected from the benefit of the uplift in volume and mix activity during the quarter year over year. So if I look across.

That $35 million of commodity inflation for the quarter nearly $15 million of that was hit in North America. Similarly within that.

The general economics that are really higher than the $10 million, because there's pluses and minuses in that other row on the bridge.

There is over $6 million of what I'll call the normal wage slash utilities slashed transportation inflationary pressures hitting the north American market. So they are doing well when the volumes are coming back as Jeff indicated.

But those other inflationary pressures are certainly.

Eating into the performance there.

You see based on the bridge Youre not seeing much easing at this point.

Some of that might be what's coming out of inventory not quite clear, but are you getting any sense beyond energy that theres. Some easing inflationary pressures, where you can start really catching up beyond just the contracts you have in place now.

Steve Let me just clarify are you speaking in terms of commodities or all the other inflationary buckets.

Throw on them, all and leave it open for Ya.

Okay, well certainly the rate of increase of inflation is subsiding somewhat but it's certainly not good.

<unk> down and Youre, not really experienced any deflationary benefits or tailwind for us in.

In the quarter.

Looking ahead, perhaps there is some longer term commodity prices that are projected to come down but as of right. Now the inflation is still running high certainly relative year over year as we see it and as you know well.

Energy costs in terms of natural gas and electricity and.

And labor inflation, those are sticky and those don't tend to revert back and deflate. So they will be facing those for a long time here now.

Previous quarters, you talked about cash on the balance sheet.

Going to remain relatively stable this year, despite the challenging environment, we did see it come down a bit this quarter it looks almost entirely.

Related to higher inventory, how are you thinking about both cash management over the next couple of quarters, assuming we're maintaining sort of challenging.

Environment.

I'd characterize it this way Steve that cash is top of mind for everybody in the company.

We're continuing to monitor all disk.

Discretionary spending and preserve Cooper standard cash and protect the balance sheet. If you will.

And while we don't typically provide.

<unk> on free cash flow we.

We do obviously expect an increase in EBITDA in Q4 here.

And is it typical seasonality, where we can draw down inventories as production levels drop towards the end of the year.

We will definitely.

B, a positive benefit to cash flow in the quarter, but keep in mind Q4, we do have interest payments to the tune of about $30 million on both our unsecured notes and.

Our senior secured notes that hit in November and December So we'll have to manage through.

The working capital side offset by those interest coupons and Q4.

Great appreciate it and then if I could just get one more in in terms of any updates in terms of for trucks marketing.

So outside of your tip.

Typical customer base.

Steve This is Jeff.

We continue to March towards the launch of the first shoe deal.

I think thats been pushed into the early second quarter, but still basically on target with what we've what we've talked about and then we are having continuing discussion with that particular customer.

About expanding the opportunities, but we don't have anything to share specifically related to that other than to tell you that those those conversations continue to to happen at a pretty good pace.

Thanks, everyone appreciate the time.

Okay.

Thank you one moment please for our next question.

And our next question coming from the line of Jefferies.

Sir your line is open.

Good morning could you tell us or give a update on Brazil, I recall Ford was closing a plant there.

And you had some restructuring expenses in South America any update specific to that in restructuring in general.

Yes, Jeff on on Brazil, our teams have done a very good job of reducing.

Costs and also managing the.

The price recoveries from from our customers there we do expect.

We look forward to 'twenty three that.

That they will be in a pretty healthy position, assuming they can continue to.

To close the deals with the customers that they have to close here in the quarter, but.

We are encouraged by the.

The potential upswing.

And profitability in Brazil.

And that was a co located you were on a customer and a customer plant correct.

We have.

A variety of <unk>.

Manufacturing footprints there.

The one youre speaking up with with forward is history. So what I'm talking about is what's left and the fact that.

That will be profitable in 2003, it based on all the work that's been done there this year I think.

What you were referring to as Mike My comments in previous quarters about.

All options are on the table as it relates to that that business footprint.

Courage to that as I sit here today I think there is a way forward for us in Brazil, and it's directly related to the the effort of that that management team there and the leadership to to get the business turned around so we're pleased about that.

Okay. That's great and then last question is Goldman still engaged as your advisor further refinancing.

Yes.

Perfect. Thank you guys.

Thanks, Joe.

Thank you one moment please for our next question now.

Next question coming from the line of Brian <unk> with Baird. Your line is now open.

Yes.

Good morning, Jeff and John just a couple of questions from me can you, Jeff maybe help us get a sense of what operating cadence or operating rate of other plants have been over the last quarter versus maybe at the worst point of the production issues.

Yes, I think the.

The volume over the course of 2022.

<unk> continues to be.

Up versus what we saw in 2021 as John talked to you about.

My biggest concern is that.

Especially related to the third quarter and the fourth quarter.

There was a lot of conversation.

From our customers about the strength of the third quarter and the strength of the fourth quarter and it was frankly reflected in in their releases.

And I'm really talking about here in North America with these comments.

And then in both instances.

The actual volumes fell considerably short.

So when you look at an inventory number that's that's up considerably from what we.

I would have expected it to be on these particular.

Revenue points, it's directly related to the fact that the releases were there and then the volumes were pulled out.

And didn't happen. So that's part of the the challenge and look we know that our customers are doing the best they can.

I'm, just stating the facts.

And so that's.

That volatility if you will continues to impact us and Im sure other suppliers.

As it as it relates to to the efficiencies that we really need the stability that we really need out of the out of the releases and if we get that stability and then most importantly, if it's if it's up.

Then that results in a much healthier environment. Unfortunately, that's not where we are so let's see how 2003.

X off we expect that many of the supply chain issues that.

That has hit US the last few years are going to be subsiding based on most reports so I'm, hoping that will add.

Level of.

Stability to the to the release process and then that helps us.

Get the right amount of labor and get the right amount of inventory and be as efficient as we can on the manufacturing side.

Hopefully that.

Answers your question.

<unk> helps thank you.

John less.

Earnings call you had mentioned that there was.

Other potential opportunities for sale leasebacks, just wanted to see if there's any updated thoughts on that front.

Yes, Brian .

Thanks for the question nothing new to report on that front, we continue to look at those opportunities too.

<unk> capital we have.

<unk> entered into any sale leaseback transactions in since we did the the large one in Europe in Q1.

Those options are still on the table for us and if it makes sense economically in the.

The cap rates are such that.

They plug into our cost of capital are nicely and don't burn in.

Ongoing operations with.

Significant lease expense to unlock that capital then we will go ahead and enter into those but for now we're just continuing to investigate opportunities.

Opportunities across the entire real estate footprint.

Okay, and switching gears, just focusing on Europe for a second.

Is the biggest headwind that youre experiencing there is it just the.

Operating cadence or is it the energy cost just trying to get a sense.

No.

What you would need to occur to get Europe from turning EBITDA positive.

Yes. This is Jeff so as we've said before we recognize we have some fixed cost.

Issues that that we ultimately need to address.

In Europe , and we have plans to do that.

So thats kind of under the bucket of what we can control.

We also have a significant challenge there.

With many of our our prices frankly.

We've absorbed a lot of the and I'm talking about the non raw material inflation at this point is really eaten away at what margins we did have.

In Europe , and so we're having those conversations with with customers and I expect here over the next 30 to 60 days that that those.

We will become extremely.

Pointed and extremely important as it relates to at least getting us to a point, where we're weak and can see an improvement in our in our European business. The final point, that's been a big challenge. There obviously is the volumes right. They may have dropped.

Off a cliff star.

Starting in the third quarter and.

When you look at the macroeconomic challenges the geopolitical challenges in Europe .

It continues to create a significant headwind for everybody.

Hence as what I said before.

All options are on the table for Europe .

Much like we've talked about Brazil. Ultimately these businesses have to begin generating a return for us.

The options are pretty clear and so while we are hopeful that our customers will continue to.

To agree with with what we what we need in order to.

To maintain a fair relationship there.

We'll see how that goes over the course of the next several months and we'll keep you posted.

Got a final question for me.

So depletion.

Metal prices and other commodities have started to decline off their February peaks.

If im hearing you correctly is it now more of the just energy and labor that's sort of replace the commodity inflation that's impacting the business.

Since Jeff while obviously when you talk about energy costs going up I mean that impacts.

A lot of buckets.

But we we are hopeful that.

Then when we talk about labor when we talk about freight when we talk about.

Utilities that we're able to get to a deal in Europe with those customers that will allow us to.

To at least get whole and hopefully.

Start to make our way towards towards a positive business environment there.

We can't continue to give away parts, it's just not feasible and believe me.

Conversations are happening appointed.

It's not personal we just got to we got to get to a point, where we're able to make money there and sustain it and we're either going to do that or we're going to do something else.

Understood I appreciate all the thoughts thank you.

You bet.

Thank you one moment. Please for our next question now next.

Next question coming from the line of Kurt <unk> with Imperial capital. Your line is now open.

Hello, everyone.

Thank you for the call.

Just to just a couple of follow ups.

With respect to the customer relationships.

Are these are you negotiating would you describe what you're negotiating as one time.

Adjustments or is the nature of.

The relationship changing such that these.

Material costs are becoming more of an automatic pass through.

Yes Q4.

The material side of it as we've talked before we probably have 65% or so of our total company revenue is now indexed related to the raw material cost portion.

So that's a significant improvement over where we were.

The other ones are quarterly surcharges that really act.

In a similar way.

So we're confident that those deals that we've cut.

<unk> are also sustained.

Sustainable, which is why we said earlier that that we feel going forward that were at a 70% recovery rate I'll use the words that you just used that's automatic.

Going forward, whereas in the past they have been.

Ongoing price negotiations, so thats the thats, the substantial improvement or substantial change we've made.

Really in the foundation of this business and I feel very good about that.

Related to those other costs of product that's in production.

Labor.

Great utilities.

Utilities.

Things that everyone's dealing with going going up.

While you get to quote those costs on your new business going forward in the business that we've yet to launch would reflect.

Additional costs the business that you have in production today requires you to go back and negotiate those recoveries separately.

And that's what we're doing and we expect.

That will have similar results.

As we look at our 2023 book of business.

In recovering at least our fair share of those other buckets.

Thank you that's helpful. So it sounds like you've derisked the business.

And would you say that the.

The margins.

What would be similar.

I think we believe that we have reduced the volatility we've reduced the risk if you will.

Of raw material.

Ups and downs.

And Thats good we believe it's good for the customer and we believe it's good good for us.

And that's that's positive related to those other buckets you historically wouldn't have seen such large increases in labor and freight and so forth.

Energy costs, certainly coming this winter, especially in Europe .

Although probably not as is.

Terrible as originally thought still op.

We believe that.

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But it's fair to have those items on the table when we're discussing.

Cost sharing and lean initiatives in VA in long term contracts.

<unk> accepted lta's.

And different environment. So those those are all the things that are in the center of the table. When you are having this conversation.

All we want is to keep something that's fair.

We are going to continue to.

To reduce prices when costs are going up at the level they are in.

Pretty straightforward.

Got it. Thank you that's helpful.

Okay, and then just one other with respect to the production specifically in the.

In the next couple of quarters in Europe .

I understand that.

Inflation is still.

There I'm just curious have you.

Are there any real risks to production.

Energy rationing.

That type of thing.

It's hard to you don't have a crystal ball, but.

How do you think about that type of risk.

Yes, I don't have a crystal ball, but I can tell you that.

I can read my current financial statements and clearly the revenue is.

Suppressed.

And I don't see anything in the near future that is going to change that and so hence these these conversations about cost recovery.

And getting to a point where.

Europe can generate positive cash flow.

Is more than we can do by ourselves.

We need help from our customers.

Ticket a.

Footprint and a sustainable foundation there.

That will allow us to.

Continue to.

To make positive gains related to cash flow in Europe until things return to normal I have no idea.

When that is so we're just treating it as if it's going to be bad for a while.

Got it but in terms of your customers' production levels or are you hearing about about schedule is being altered by actual rationing of energy.

No. Okay I appreciate it thank you very much.

Thank you one moment please for our next question.

And our next question coming from the line of.

Ben Briggs with on X financial your line is now open.

Yes, hi, guys. Thank you for taking the questions most of mine surrounding inflation.

We're answer answered already so thank you.

As it relates to labor, though are you able to hire the number of employees that you need at wages that are attractive to the company.

Given the labor in inflationary environments.

Yeah.

Hi, This is Jeff I think in most markets.

We have.

But clearly we have.

Certain certain plants and uncertain.

States and in certain regions around the world.

That we think those those headwinds or something.

Something that is going to need to be addressed on a long term basis. So.

I think that.

Whether you are.

Working in retail or whether youre working in fast food or whether you're working in manufacturing I think you kind of have a similar.

Feeling right now that labor is tight.

Costs are going up.

What we do is try to make sure that we provide the type of environment.

Competitive for our employees.

And that they believe they have a long term future.

That will help support their families and that's what we try to to make sure that we do we arent.

Trying to pay the most but we recognize that that we have to pay a competitive wage and so on.

All of those.

Wages for us virtually in every region have increased.

I would say that we have at least gotten to a point where we.

We have enough people lined up outside that we can that we can feel like we can run the facilities. The way we need to run them as long as we are willing to pay the wages that that the market is demanding right now so.

Hopefully that answers your question, yes that does that does thank you.

Then the second question I had so SG&A this quarter came in at about $45 million.

<unk> is really well below where it's been historically and it shows a lot of your cost cutting initiatives are bearing fruit should we think of this call it roughly $45 million level.

New run rate.

Or do you think that's going to that's going to go back up or change materially going forward.

Ben This is John I would say, it's in the ballpark or.

The efforts that you described that we're continuing to look at all all cost not just SGA and make sure it's right sized and rationalized for our current.

Size and footprint.

I'll be ongoing so we were continuing to look for further opportunities.

Not only it at that low SG&A row, but across the full P&L.

We will continue to drive that down and make sure. It is right sized as I mentioned, the only one thing I would I would call out in the quarter when Youre looking at the run rate. You also have to look at all of the compensation related structures that we've got in place.

The.

But the unfortunate continued pressure on production volumes overall.

And our lowering of our guidance that we talked to you about a few minutes ago.

The bonus plan for the year, we won't be at 100% payout. So you do see.

The slight decline in SGA and E <unk>.

Related to taking that bonus level down to call it the 75% range.

That would be not in your go forward run rate.

Got it thanks.

That's very helpful. I appreciate that.

That's it for me.

Yeah.

Thank you.

Question coming from the line up.

With still here Amir with Beach point capital Your line is open.

Hi.

Thanks for taking my call.

Most of my question have been addressed.

I just wanted to talk about.

Any initial thoughts you guys can share about how 2023 might look.

Mentioned during the call that Q.

Q4 might be a better indication of run rate.

Wondering if you might provide guidance on how we could extrapolate.

Forward.

Yes. This is Jeff I think I said during the prepared remarks that if you look at the margin improvement in the in the fourth quarter, we expect to continue to build on that in 'twenty three.

That's kind of where we're leaving it today as it relates to 'twenty three clearly and we've talked a lot about volume we've talked a lot about.

Release versus actual production.

We need stability in 'twenty three.

Numbers that we can take to the bank and.

Around our plants off up I'm hopeful that that's what we're going to get.

So allow us to.

Get a little closer here to the end of the year when our customer starts to put out.

Numbers that are that are.

Fully accurate for the.

For the quarter clearly when you look at some of the.

The folks out there that do forecasting for a living they continue to talk about.

Some softening versus what they originally thought 23 was going to be.

So that's that's really what we're seeing right now and it would be too early for us to.

To assume what each of our customers are going to do and so we usually wait until the <unk>.

The call to talk about the year end and.

February March time period, and then we'll have a better understanding of what.

23 top line is going to look like.

And with regards to the incremental cost that come.

Really.

Actual production don't match can you give us a sense.

How much of a headwind that's been this year.

Yes.

Well you saw the inventory for the quarter, Alright, and so that's that's one large.

A bit of cash that we spent.

Because the releases were up so.

It doesn't just.

<unk> itself, so we have labor and plants running and people building this stuff that ultimately didn't sell so.

That's one way for me to describe it for you.

Are there like other incremental costs that alright.

Inventory timing related.

Also in talking about that or should we just think of that.

More like.

Cash working capital.

Now clearly when our volumes are suppressed like they are now and we have the <unk>.

Fixed cost base that we have in each of our regions I mean volume is important we need.

We need like everybody.

The volume to return and to get back to a normal way of operating rather than the stop start and overbuilding of inventories and then depleting those the next quarter and and those are just inefficiencies that.

When you are in manufacturing you don't like it.

Again, I don't want to.

PARP on it from a customer point of view they are doing the best they can with what they have as well.

Just highlighting.

The facts.

I guess, if I rephrase it.

It had been.

Given like the actual production levels in the releases.

Thank you guys.

Actual realized production levels.

Obviously volume there'll be low, but I'm wondering how much lower wood cost be if you knew what to produce ignoring sort of the inventory buildup. I'm wondering are there other operating costs that are higher.

You guys had expected do you need to produce more and then by then.

Or like.

How did you guys would've modeling cost decreases potentially.

Better production schedules in future years.

Yes, im not going to get into that breakdown I think we can take that offline. If you want to get into that with Roger but that clearly.

In our case I can assure you that the the.

The actual production level in the third quarter each of the months.

And so far in the fourth quarter are down substantially from what we we saw and I think it's clear that the expectation from the customer was that they were going to be up too. So this isn't.

A surprise just.

From the from the supplier side of it.

Happened across the board, but if you want.

If you want more detail in terms of modeling, which is what you just ask or I suggest you get a hold of Roger after the call and he can he can walk you through more details.

Alright, Thanks, good luck.

Thank you. It appears that there are no more questions I would now like to turn the call back over to Roger Hendriksen.

Okay. Thanks, everybody. We appreciate you joining the call and I appreciate all the good insightful questions.

As Jeff mentioned, if you do have further questions or would like to engage further please feel free to reach out to me.

And we will make arrangements to do that again, thanks for joining the call you can disconnect and have great day.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

Okay.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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