Cooper-Standard Holdings Inc. Q1 2023 Earnings Call
I'll be 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.
Again, Thats star 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 would now like to turn the call over to Roger Hendriksen director of Investor Relations.
Thanks, Gerald and good morning, everyone. We appreciate you joining our call today.
The members of our leadership team, who will be speaking with you on the call. This morning are Jeff Edwards, Chairman and Chief Executive Officer, and Jon Banas, Executive Vice President and Chief Financial Officer.
Before we begin I need to remind you that this presentation contains forward looking statements.
While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable. These statements do involve risks and uncertainties.
For more information on our forward looking statements. We ask that you refer to slide three of this presentation and the company's statements included in periodic filings with the Securities and Exchange Commission.
This presentation also contains non-GAAP financial measures.
Reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures.
Are included in the appendix to the presentation.
So with those formalities out of the way I'll turn the call over to Jeff Edwards.
Thanks, Roger and good morning, everyone.
And we certainly appreciate the opportunity to review, our first quarter results and provide an update on our business and outlook going forward.
To begin on slide five we provide some highlights or key indicators of how our operations performed in the first quarter.
I am extremely pleased with our operational performance and the focus our teams have maintained in such a dynamic environment.
We are continuing to execute at world class levels in.
And delivering quality products and services to our customers and in keeping our employees safe.
In fact, we had one of our all time best quarters in terms of product quality with 99% of our customer scorecards being green.
In terms of new program launches are customer scorecards, where again excellent at 96% green for the quarter.
Most importantly, the safety performance of our plants continues to be outstanding.
Through the first three months of the year, we have a total incident rate of just 0.34.
Reportable incidents per 200000 hours worked well below the world class benchmark of $5 seven.
We had 43 plants with a perfect safety record.
<unk> zero reported incidents in the quarter.
I want to recognize the teams at these plants for their continued commitment and leadership as we continue to strive as a company toward our ultimate safety goal of zero incidents.
I could not be more proud of our global team for their continued focus dedication and world class achievements and maintaining a safe workplace for everyone.
<unk> day.
While challenges such as erratic production schedules high inflation in tight labor markets continue to impact our industry. We're doing everything we can to offset these challenges and improve our overall results.
We're continuing our focus on reducing costs.
Although year over year cost reductions are getting harder to achieve.
And as often set in our industry you can't cost cut your way to prosperity. Even so we are continuing our efforts to be as lean as possible our manufacturing and purchasing teams were able to deliver $8 million in savings through lean initiatives and improving efficiencies in the quarter.
These savings combined with some year over year improvements in volume and mix and enhanced commercial agreements on pricing and cost recoveries enabled us to increase our gross margin for the quarter by 94% over the same period a year ago.
So we have made modest progress with more anticipated to come later this year and next.
Finally, we're continuing to win new business awards, especially on electric vehicle programs as a result of our strong customer relationships and the value we provide through our advanced engineering and design capabilities innovative technical solutions and World Class service and.
In the first quarter, our customers awarded us $18 million and net new business awards on their upcoming.
Electric vehicle platforms.
Moving to slide six.
Another indication of our customer relationships valued technology and World class service or the product and service awards, we frequent frequently receive.
We were very pleased to once again be named as a supplier of the year for General Motors, one of our top global customers and I think probably one of the most prestigious awards in our industry.
While the award was announced and presented during the first quarter. It's really an annual award that is reflective of our performance throughout the past year.
This is the sixth consecutive year that we've achieved this GM award and we look forward to continuing and expanding our relationship with them going forward.
Now, let me turn the call over to John to discuss the financial details of the quarter.
Thanks, Jeff and good morning, everyone.
And 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 eight we show a summary of our results for the first quarter of 2023 with comparisons to the same period last year.
First quarter 2023 sales were $682 $5 million.
An increase of 11, 3% compared to the first quarter of 2022.
The increase was driven by favorable volume and mix, primarily in North America and Europe .
And our enhanced commercial agreements.
These were partially offset by unfavorable foreign currency exchange.
Gross profit for the first quarter was $41 8 million or six 1% of sales.
This compares to a gross profit of $21 $5 million or just three 5% of sales in the first quarter of 2022.
Adjusted EBITDA in the first quarter was $12 5 million compared to $100000 in the first quarter of 2022.
The year over year improvement was driven primarily by favorable volume and mix.
Cost recoveries and favorable price adjustments.
And lean savings initiatives all.
All partially offset by ongoing inflation headwinds in areas, such as energy and labor costs as well as the impact of unfavorable foreign exchange.
We made good progress in our commercial negotiations to recover inflation and establish sustainable pricing in the quarter.
And we are beginning to see the positive impact on our results.
However, certain negotiations that we expected would have been concluded in the first quarter have carried into the second.
As we continue our focus on achieving sustainable price.
We expect more of these negotiations will be successfully concluded in the second quarter and beyond.
And we anticipate this will drive improvements in top line growth and margin expansion in the remaining quarters of the year.
On a U S GAAP basis net loss for the quarter was $134 million compared to a net loss of $61 4 million in the first quarter of 2022.
The current quarter included an $81 $9 million loss on refinancing and extinguishment of debt related to the transactions that we closed early in the first quarter.
The first quarter 2023, net loss also included $2 $4 million in restructuring costs.
Excluding these items and the related tax impact adjusted.
Adjusted net loss for the first quarter was $46 $2 million or $2 68 per diluted share.
Compared to an adjusted net loss of $51 4 million or $3 per diluted share in the first quarter of 2022.
The year over year improvement resulted primarily from improved gross profit, partially offset by higher interest expense.
Our capital expenditures in the first quarter totaled $29 3 million or four 3% of sales.
Compared to $32 3 million or five 3% of sales in the same period a year ago.
We continue to have a disciplined focus on capital investments.
And we're committed to keeping capex at around 3% of sales for the full year.
Moving to slide nine.
The charts on slide nine provide additional insights into some of the key factors impacting our results for the first quarter of 2023.
For revenue favorable volume and mix, including net customer price adjustments increased sales by $86 million versus the first quarter of 2022.
Improving customer production volume year over year was the biggest driver.
With customer cost recoveries and price adjustments in the quarter also benefiting volume and mix category.
Foreign exchange, mainly related to the euro the Chinese RMB and the Canadian dollar reduced sales by $17 million versus the same period last year.
For adjusted EBITDA volume mix, and net pricing, including the recoveries and price adjustments drove a combined $39 million of improvement for the quarter.
Lean initiatives and purchasing and manufacturing efficiency contributed $8 million year over year.
These positive contributors were partially offset by certain ongoing headwinds in the quarter.
General inflation, including energy salaries wages, and transportation and other costs reduced adjusted EBITDA by $18 million in the quarter.
The impact of foreign exchange was $8 million, while material costs were higher by $3 million.
Moving to slide 10.
We are pleased to have started the year with positive cash from operations and positive free cash flow.
Cash provided by operations was approximately $30 million in the first quarter of 2023.
Driven primarily by improved sales volume operating performance and working capital efficiencies.
As mentioned earlier Capex was approximately $29 million.
Primarily reflecting the timing of program launch activity.
Free cash flow was approximately $1 million in the quarter ending March 31 2023.
With the improved volume and operating leverage we are generating we ended March with a cash balance of approximately $106 million.
Combined with $149 million of availability on our revolving credit facility.
Which was undrawn at quarter end.
We had solid total liquidity of approximately $255 million as of March 31, 2023.
Based on our current outlook and expectations for light vehicle production commercial support.
Support in the way of sustainable pricing from our customers.
And demand for our products, we believe our current cash on hand expected cash generation and access to flexible credit facilities will provide sufficient resources to support our ongoing operations.
That concludes my prepared remarks, so let me turn it back over to Jeff.
Thanks, John over the next few minutes I'd like to provide you with an update on some of our commercial initiatives that are intended to ensure that we will.
Be adequately.
Compensated for the value we offer our customers I'll also highlight some of our strategic initiatives that we believe are moving us forward to significant transformation as a company.
Significantly elevating our ability to deliver even further value that our customers need and are willing to pay for.
Then I'll conclude with a few comments on our outlook for the remainder of the year.
So please turn to slide 12.
We're continuing to work collaboratively with all of our customers to recover incremental costs related to inflationary pressures and establish sustainable pricing that will enhance quality of earnings and value creation over the long term during the quarter, we further limited or <unk>.
Risk exposure from commodity and material costs by initiating indexed based agreements with additional customers.
As it relates to commodity volatility. We believe we are now better positioned than we've ever been before.
As it relates to non commodity inflation and sustainable pricing, we're continuing negotiations with all customers.
Negotiations have been constructive and given the value that our products and services provide them our customers have been very supportive.
While negotiations are ongoing we expect to achieve further positive outcomes that will drive improving financial results going forward.
We have also been working with our customers to improve cash flow as part of the progress to date, we've been able to implement more favorable terms on the trade receivables.
And on the repayment of customer owned tooling.
We're making solid progress and anticipate further good news in coming quarters as these agreements are implemented.
Turning to slide 13.
So part of what gives us.
Confidence in our ongoing commercial discussions is the added value and expertise we provide our customers through the strategic integration of advanced digital tools, and our engineering and design process.
By using tools such as designed by analysis virtual validation.
Our AI based Formula link tool the compound for compound development.
We significantly sped up our overall design process and we've reduced our engineering costs.
These advancements have been critically important in the rapid industry transition to new energy vehicles.
As we're now able to design and deliver highly complex systems and optimized technical solutions faster.
We're winning new business as a result.
In addition, we are increasingly being recognized by our customers as a valued technology partner in design functionality and sustainability.
We've also invested in advanced proprietary digital tools to enhance manufacturing efficiency.
Our pulse OA system.
Our wireless asset tracker.
And lifeline, which is our AI based automated process control system are a few examples.
These are enabling us to reduce scrap.
Improve efficiency in our secondary operations.
Plan and conduct maintenance more effectively and really improve our overall asset utilization.
Combined with our suite of digital tools.
We've been able to partially as a partial driver of the reductions in our SG&A expense and fixed manufacturing costs over the past few years, but we believe there's even more opportunity ahead as we leverage these advanced tools and technical capabilities to grow and optimize our business.
They are allowing us to expand into adjacent and complementary product lines. As we are now doing in our fluid business.
And they are also enabling us to provide incremental value for our customers through more highly advanced technically sophisticated products and services, which we believe will support more sustainable pricing moving forward.
Consistent with our company mission, we believe that by becoming the first choice of the stakeholders. We serve in this case our customers.
We will ultimately maximize our value creation opportunities.
Turning to slide 14.
As you know each year, we publish our corporate responsibility report to provide details on the way we are servicing various stakeholders. This year's report, which we have titled creating sustainable solutions together.
We will be available online within the next two weeks.
The report will provide you with many insights regarding not only what we do but who we are and the values that guide us as individuals and as the company every day.
We highly recommend you check out the report.
It will be certainly worth your time.
Turning to slide 15.
Now I will conclude our prepared remarks. This morning with a few thoughts on our outlook for the rest of 2023.
First I want to highlight that we fully expect to achieve significantly improved financial results in each of the remaining quarters of the year.
Our initial plan and full year guidance anticipated that the first quarter would be the toughest given the expected timing of our commercial settlements.
That is consistent with our plan.
Our financial results are very dependent upon industry production volumes and specifically the production volumes from our top customers and key platforms in each region.
We continue to see a lot of change in industry production forecasts and customer production schedules. So that certainly makes planning a bit difficult.
But our current outlook for production volume remains positive and anticipates continued modest year over year growth overall, driven primarily by increases in Europe .
And in North America.
The outlook for inflation.
As a moderate headwind. We currently expect moderate inflationary pressures will continue through the remainder of the year and costs will remain at elevated levels.
Recent reductions in global oil production.
And tight labor availability in certain markets may represent inflationary risks to our outlook if they continue.
On the commercial side.
We expect to successfully advance customer negotiations.
In the remainder of the year to further offset inflation and.
And establish a sustainable pricing in all of our segments.
As we saw in the first quarter. However, the timing for closing any customer agreement.
It's certainly more difficult to predict.
Overall, our outlook for 2023 remains very positive we will plan.
To give a more detailed update and formal guidance as we typically do in conjunction with our second quarter results.
I want to thank our global team of employees for their continued dedication and their commitment to excellence and delivering value for our customers and all stakeholders I also want to thank our customers for their continued trust confidence and support in managing through this challenging industry environment.
And for their increasing recognition of the value of our products technologies and services, we provide them.
I believe we are we are approaching an inflection point in the relatively near term as we benefit from improved volume and enhanced commercial agreements with sustainable price increases over.
Over the longer term, we believe we will drive increasing value by continuing to transform our products our services and our company with advanced digital tools and technology that meet and exceed the demands of today's mobility industry.
This concludes our prepared remarks, so let's open the call for Q&A.
Ladies and gentlemen, if you would like to ask a question crews.
Star followed by one one on your telephone if youre using a speakerphone. Please pick up on the handset before entering your request.
One moment, please as we assemble the queue for questions.
Our first question comes from Michael Ward of the Benchmark Company. Your line is now open.
Thank you good morning, everyone.
Question on the commercial agreements.
Some of what we're seeing over the last 345 quarters, just the maturing of the process. When you say more sustainable pricing I assume notes, referring to just more consistent commercial agreements, where you don't have to have these big lumps of waiting is that fair.
Hi, Good morning, Mike suggest thanks for the thanks for the question.
So I'd put it in two buckets one is the index based price.
Agreements that we now have virtually with every customer in the world. So that's a raw material approach for recovery that we haven't had in the past and is as raw material prices go up we recover as they go down we give some of that back to the to the OEM the sustainable.
Okay, so that feels good.
We'll have to redo it every quarter or anything like that.
Ongoing it's already negotiated it's in place for all contracts going forward.
Related to your second question.
Gardening sustainable pricing, that's just real simple we have prices out there in all regions.
That don't allow us to get a return on the investments that we've made and we're back in with each customer renegotiating those prices on existing products and certainly that impacts the price of the new business growing going forward.
Easier there because we've already won that business at higher price. So it's really about getting price increases to offset all the other inflation that has taken place.
And also the volume.
That hasnt been there as.
As forecasted so.
That's really what we're doing.
To make sure that that Europe , North America, and Asia. All return to these these sustainable levels of profitability. So that we don't have to go back every year and talk about price.
Okay and based on the timing or based on the regional.
Performance on the EBITDA level it looks like Europe was probably the one that was slow on the commercial negotiations is that fair.
Yes, I would say this about Europe I mean, the timing is probably fair because we.
We certainly have concluded several that didn't allow us to book it in the first quarter I will say that what I will tell you on on Europe going forward, Mike and we've mentioned this year quite often.
We were we were set to burn.
Close to $100 million in cash in Europe over the next two years, if we didn't address sustainable pricing in Europe , and as I sat here today, I am very confident that thats not going to happen.
The negotiations are going well and our customers are proving that we're a valued supplier in Europe and I really look forward.
To those results hitting our bottom line in the second half of the year.
That's a big number.
In Europe is that part of the Delta.
From Q4 to Q1 currency year over year was an $8 million, how the currency stack up relative to Q4 and was that all in Europe .
Mike This is John it wasn't all in in Europe sequentially Q1 to Q4.
But the euro was a significant driver when you look at the results that we posted in the end of 2021, sorry, 2022 until the first quarter of this year.
Relation.
<unk> was a big driver continuing obviously, but the FX with the euro and other currencies driving higher sales with negative earnings pull through.
It was actually a big part of the sequential bridge.
Thank you very much.
Thank you one moment I havent cleared the queue.
Our next question comes from the line of Brian <unk>. Your line is now open.
Good morning, gentlemen, a couple of questions for you John first.
The change in the terms that you talked about with <unk>.
And tooling, what kind of release can we see from working capital this year.
We're continuing I'll start with tooling Bryan thanks for the question.
We're looking to continue the efforts that we've been talking about for the last couple of quarters as far as not using Cooper's balance sheet to fund our customers' assets.
And we've been running about $100 million of customer owned tools that sit on our balance sheet until they meet the requirements to to actually bill.
Once they are finally approved and they are ready to start production.
So the efforts there have been too.
Implement progressive payments, along the way, whether that's upfront deposits before we kick the tools off or whether its interim milestones whereby we get reimbursed on a regular basis for monies that are spent to date and.
And we don't have to wait 12 months 18 months or even longer to get reimbursed by our customers.
The global team is continuing to drive that number down.
But you can you can think about.
Certainly a double digit increase in that 100 million decreased our decrease in that $100 million.
We're looking to drive and unlock towards the end of this year, we're making incremental progress every day, so I won't point to anything here on our Q1 results, but you should see a benefit as we closed the euro.
From a customer term standpoint, we are we are continuing to see.
That.
Benefit cash flows and unlock working capital certainly in Q1, we always have a working capital outflow.
When it comes to the sales ramp.
<unk>.
Purchasing more inventory because we were able to bleed it down at year end, but then also with the sales rise you are putting in incremental receivables on the balance sheet as of March 31. So you seasonality would typically have you seen those via usage of working capital and this is no exception, but it has been mitigated by the.
The terms changes that Jeff alluded to and we'll continue to see that in the next couple of quarters.
So I guess, maybe put it away and I understand the seasonality are we expected to see.
Source.
A source of cash from receivables as well in 'twenty three or is that something that may take a little bit longer to realize on a cash basis.
Well it remains to be seen whether that continues out towards the end of the year into the following I think the biggest benefits. We will see this year are related to tooling and inventory reductions.
Got it fair enough.
And then.
As we're looking at the progression, obviously better than last year, but what.
Does the company really need to have happen.
Back up to historic profitability.
Supply chains are a little bit better.
I know inflation is still a problem but.
Trying to understand.
How quickly can you get to sort of a sustainable rate of EBITDA and cash generation.
Is that something you think is achievable in the next 12 months or is that going to take a little bit longer.
Hey, Brian It's Jeff <unk>.
Clearly the sustainable price negotiations that we're going through as we speak.
And that we expect to conclude here in the in the second quarter are the primary.
<unk>.
Foundation, if you will to get Europe .
Especially Europe back to a level of generating positive cash flow.
Clearly when you see the industry operating at 85 million units.
North America.
I guess struggling to get to 15 and sustainable a sustainable 15 million units those numbers, we all want to see them.
Go substantially higher.
Clearly the global volumes, probably need to be somewhere.
Closer to 100 million to be considered a good year and I think here in North America, we'd all like to see by those 17 or 18 million unit gears.
That would certainly return us to double digit ROIC and double digit EBITDA everywhere.
But in the short term because volume is not expected to be quite that strong.
Okay. Thanks, everybody for joining the call and for your engagement and your questions. We look forward to speaking with you again, if further questions come up please feel free to reach out to us directly.
And we'll talk to you soon thanks very much.
Okay.
Thank you for your participation today's conference. This does conclude the program you may now disconnect.