Q2 2019 Earnings Call
During the presentation, all participants will be in listen only mode.
Following company prepared comments, we will conduct a question and answer session.
At that time, if you have a question you want to use depressed starkey followed by the one key.
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.
We appreciate your spending some time with us this morning.
Well. These statements 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.
And to the company's statements included in periodic filings with the Securities and Exchange Commission.
This presentation. All could also contains non-GAAP financial measures reconciliations of the non-GAAP financial measures to their most directly comparable.
Yep measures are included in the appendix to the presentation.
So without all the way I will turn the call over to Jeff Edwards.
Okay, Thanks, Roger and good morning, everyone.
As outlined in our press release, our financial results fell short of expectations for the quarter.
We continue to be negatively impacted by weak vehicle production volumes and unfavorable mix in all of our markets.
We expected market weakness in Europe and Asia.
But China once again was weaker than we had planned.
And we could not have anticipated the delayed ramp of production on important new vehicle launch with a key customer here in North America.
The delayed production volume had a significant impact on the quarterly results compared to the second quarter of last year and compared to our plan for this year.
But rest assured we're.
Explaining this not complaining about it.
To that point, our global team, which we recently reorganized under it improved organization structure is focused on mitigating as much of these anticipated and unanticipated market impacts as possible.
By many measures we're achieving record performance.
On slide five we provide some of the highlights of these achievements.
We've been very successful at cutting costs through improved operating efficiency in fact through the first six months of the year, we've taken out $52 million of costs at our plants.
And combined with restructuring savings and lean a purchasing initiatives, we're on pace to achieve our target of $130 million in total cost savings for the full year.
Our product quality continues to be outstanding.
Through the first six months of the year, our customers' scorecards for quality or 94% Green.
Similarly, our safety performance continues at a world class space.
In our total incident rate.
Year to date is down 21% versus last year.
We're especially proud of our 34 locations.
That have a perfect safety record so far this year with zero reportable incidents.
During the second quarter, we successfully executed a company record 84 program launches.
Bringing the total to 121 launches for the year so far.
This is consistent with our plans of more than 270 launches for the full year.
Despite this tremendous challenge our product and program launch teams continue to deliver excellent performance and we're on track to deliver 90% re launches for the year.
We continue to deliver innovations to the market that are driving value for our customers in a competitive advantage for Cooper standard.
Our customers.
Recognizing the value of our innovations with their new orders.
So far this year, our commercial team has booked new sales awards related to innovation products totaling $252 million in the annualized sales, including both new and replacement business.
This is up 122%.
When compared to the first half of 2018.
And they've accomplished this while staying on track with our target to keep customer price give backs at or below 1% for the year.
And finally, our continuous improvement and world class operations are being recognized by our customers and the industry.
We were recently honored to receive the Ford World Excellence Awards.
The General Motors supplier of the year Award. In addition to 20 customer awards for quality and service at the plant in regional level all received since the beginning of the year.
So in summary, our team of dedicated employees are doing an outstanding job with managing the aspects of our business that we can control in the near term.
Beyond this we are in the process of making significant structural decisions within our business.
Ensuring we adapt to changing market dynamics.
And lower global light vehicle production over the longer term.
I will provide more detail on these initiatives our strategy associated with the initiatives in our outlook. Following John's review of the second quarter financial results John .
Thanks, Jeff and good morning, everyone.
In the next few slides I will provide some detail on our financial results for the second quarter and also comment on our liquidity balance sheet profile and capital structure.
On slide seven we show a summary of our results for the second quarter with comparisons to the prior year.
Second quarter, 2019 sales were $764.8 million down 17.6% versus the second quarter of 2018.
The year over year change was driven by the unfavorable volume and mix in all regions as Jess Jeff just described.
The sale of our SBS business.
Unfavorable foreign exchange and customer price reductions.
These were partially offset by increased sales from recent acquisitions.
Gross profit for the second quarter was $98 million compared to $151.4 million in the same period a year ago.
Adjusted EBITDA was $58.1 million or 7.6% of sales compared to $107.9 million in the second quarter of 2018.
The most significant driver of the decline in adjusted EBITDA was weaker volume and mix, including the impact of delayed ramp up production on key launches.
Also contributing to the decline were general inflation customer price reductions.
Raw materials, and the net impact of acquisitions and divestitures.
These were only partially offset by the success of our continuing cost reduction initiatives.
The sale of our SBS business resulted in a gain of $189.9 million recorded in the quarter.
The effective tax rate on the gain was 22% or about $42 million accounting for the majority of our total tax expense of $44.2 million in the quarter.
However, the cash tax rate on the gain on sale was only 7.9% due to tax loss and tax credit carry forwards in the U.S and Europe .
With the U.S. GAAP effective tax rate of 23.4% for the quarter and 24.8% year to date, we now anticipate any t. are in the range of 21% to 25% for the full year.
On a GAAP basis net income for the quarter was $145.3 million versus net income of $41.9 million in the second quarter 2018.
Excluding the gain on sale related taxes and other special items adjusted net income for the second quarter.
Was $5.4 million or 31 cents per diluted share.
From a capex perspective, our spending in the second quarter was $35.9 million or 4.7% of sales.
Down from $38.8 million in the same period a year ago.
This was in line with our expectations for the quarter and consistent with our plan to reduce capex by more than 15% for the full year.
Moving to slide eight.
The charts on slide eight quantify the significant drivers of the year over year change in our sales and adjusted EBITDA.
For sales volume and mix net of customer price reductions reduced sales by $100 million year over year.
And the impact of FX was another $26 million negative.
The net impact of acquisitions and divestitures was a negative $38 million combined.
For adjusted EBITDA, our ongoing efforts and lean manufacturing and operational efficiency drove $27 million in cost savings for the quarter.
These savings were more than offset by $53 million unfavorable volume and mix net of price reductions.
North America had the biggest volume and mix impact due to customer delays on the ramp of production on an important new program launch and the discontinuation or run out of certain passenger car programs.
In addition to the unfavorable volume and mix, we also had $8 million in higher commodity cost.
And a net negative impact of $4 million from acquisitions and divestitures.
General inflation, such as wages rent and utilities.
And other expenses accounted for $12 million and other incremental costs.
Moving to slide nine.
We continue to maintain a strong balance sheet and credit profile.
We ended the second quarter with $311 million of cash on hand.
With cash on hand, and availability on our revolving credit facility, we had solid liquidity of $470 million as of June Thirtyth 2019.
Our total debt at the end of June was $792 million.
Down from $907 million at the end of the first quarter of this year.
Net debt was 481 million.
This is down from $645 million at the end of the first quarter and compares to net debt of $317 million at the end of the second quarter last year.
Our net debt to trailing 12 month adjusted EBITDA at the end of June was 1.8 times compared to 0.7 times at the end of June 2018.
Turning to slide 10 few more thoughts on the balance sheet and cash flow.
We closed on the sale of our ABS business on April Onest 2019, with a total sales price of $265.5 million.
Following adjustment for certain liabilities assumed by the buyer we received $243.4 million proceeds during the second quarter.
We estimate that the net proceeds following post closing adjustments fees and cash taxes, yet to be paid will be in the range of $215 million to $220 million.
For purposes of this discussion and slide we view the upper end of that range, but the final amount may vary.
Shortly after closing the transaction, we used $115 million of the proceeds to completely pay down the balance of our us revolving credit facility.
As well as some local debt balances in China.
We also use $30 million of cash to repurchase shares in the second quarter.
The rest of the proceeds remain on our balance sheet, giving us improved flexibility to manage the business.
Given the prevailing conditions in global automotive markets. We believe this to be a prudent allocation of the proceeds.
As it relates to cash flow free cash flow was down in the first half of the year compared to the same period last year due largely to lower earnings.
We continue to expect to generate positive free cash flow in the second half and for the full year, we expect to be essentially free cash flow neutral, which would deliver a solid improvement over full year 2018.
To summarize while pleased with the strengthening of our balance sheet and the overall financial condition of our company.
We remain focused on increasing free cash flow and improving our credit profile.
We believe we are well positioned to manage through the current challenges in the market, while pursuing our long term strategy for profitable growth.
Now, let me turn the call back to John .
Okay. Thanks, John with the next few slides I want to provide some perspective on our longer term strategy and more importantly, the actions, we're taking to improve our financial results going forward.
So moving to slide 12.
A core component of our long term profitable growth strategy is a continued focus on innovation.
Our success in this area is an increasing competitive advantage for us.
As I discussed earlier, it's driving significant new sales awards.
Our for Trex material has dominated the innovation conversation for some time. It is just one of the many innovations we offer.
We continue to advance a full pipeline of innovative products and technology.
Our new flush sealed technology was just introduced to the market during the second quarter and Weve already sold it for production on an exciting new premium electric vehicle.
It is gaining attention with all of our customers and we are in the midst of a global road show.
Featuring this product on site at customer locations.
With the premium sleek appearance.
And improved Arrow co sticks. This technology provides we believe this first contract award is just the first of many.
Moving to slide 13.
Looking ahead, we have a number of additional innovations that we expect to introduce to the market before the end of the year.
Light Whos, three farmer, Whos, three and armour too.
Of all garnered significant attention from our customers due to the high performance in weight savings they provide.
In some cases, they can drive cost savings for our customer while still providing an enhanced margin for us.
Importantly, we are leveraging our expertise in materials science to deliver innovation across all of our product lines.
Moving to slide 14.
We continue to make solid progress on our strategy to diversify our business. The current state of the global manufacturing industry is a perfect example, why this strategy is so important in the long run.
We're very pleased to have signed another.
The agreement to develop Fortrex technology for applications beyond the automotive industry.
The latest agreement.
As with a large multi national industrial company based in Asia.
Who will be focusing initially on three or four potentially high volume product applications.
The breadth of their overall business provides potential for more applications in the future as well.
Our advanced material science business remains on track.
With the goals and objectives that we laid out for you at the first of the year.
Having signed three new fork trucks agreements so far.
We still expect to sign one to three more for a total of four to six by the end of the year.
These agreements continue to demonstrate the versatility of the Fortrex chemistry platform.
In the wide range of potential applications for the technology.
We continue to be excited and optimistic about the long term potential of this side of our business.
Turning to slide 15.
As we consider the trends in the near term outlook.
For light vehicle production and customer demand around the world.
We must position our company to deliver value in the new normal environment in Asia and in Europe .
Our current view of these markets is that light vehicle production will remain at or below current levels.
At least through 2021 and possibly longer.
As a result, we're taking significant steps to align our production capacity with the anticipated lower vehicle demand.
We now expect to initiate the closure of eight plants by the end of the year.
Including five in Asia, and three in North America.
In Europe , we believe we can become more profitable by becoming smaller.
In all regions around the world, if we cannot fix the underperforming businesses to at least cover our cost of capital we will exit them.
In North America, the plant closures will help us achieve the planned synergies related to recent acquisitions.
We believe this market remains fundamentally strong with underlying support from a growing economy and continuing consumer preference for light trucks ash using crossovers.
Our new North America program launches ramp up.
As planned for this year.
We believe our North American operations can exit the year at a run rate EBITDA margin.
Once again in the high teens.
We are accelerating our transition to a pure global organization structure and we believe this will help us drive significant synergies and cost savings.
We expect to further flatten the organization structure.
Leverage global scale.
And better align the priorities between manufacturing engineering supply chain and commercial teams.
Our uniform way across the globe.
Details will be provided.
During our fourth quarter.
Related to this we've begun an important supply chain initiatives that will dramatically reduce complexity and better leverage global scale on more than $2 billion in annual direct commodity and equipment spend.
This is a joint project.
With collaboration among all of our major global functions. We expect this to drive significant reductions in the cost of materials in the 2020% 2023 time period.
Continuing our focus on improved cash flow, we plan to reduce our capital spending to reinvestment ratio of one or lower in 2020.
We also plan to reduce our inventory days on hand to 21 in the near term with a longer term goal to get to 14.
And further optimize receivables and payables.
Our entire global organization is aligned to execute this near term transition in connection with our long term strategy and objectives.
Turning to slide 16.
The initiatives we've laid out for you are already beginning to reduce costs in the second half of the year.
But not sufficiently to offset the first half volume impacts.
Most of the benefits will not be realized until 2020 and beyond.
Given our first half results and the expectation of continued weak volumes in Asia and Europe , we've revised our full year outlook as shown on slide 16.
While we expect the positive impact to second half sales as new launches ramp to full production.
We're not assuming volume loss to production delays in the second quarter.
Will be made up this year.
Using the Midpoints of the sales and EBITDA ranges you can see what we do expect improvement in EBITDA margin in the second half.
We want to again, thank our global team for their commitment to driving change and value creation in a very challenging environment.
We would also like to thank our customers for their continued trust and confidence.
This concludes our prepared comments. So we'll now open the phone lines for Q and a.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press the star key followed by the one key on your telephone.
If your question has been answered when you wish.
We'd like to withdraw your registration you may do so by pressing the pound key.
And if you are using a speakerphone please pick up the handset before entering your request one moment. Please as we assemble the queue for questions.
Our first question or comment comes from the line of Mike Ward from Seaport Global Your line is open.
Thank you good morning, everyone.
Where am I.
Jeff I want to make sure I caught this right did you say you do not your assumptions for your guidance do not expect the lost volume from the new program ramp to be made up in the second half Yeah. We took a conservative view there for the second half Mike and its its considerably behind the original plan. So we just felt that it was prudent to.
To take that bit of a conservative approach for the second half that's correct.
Okay. That's despite the fact that you know the company your customer is adding another line written in hiring employees, so you're just being ultra conservative.
Yeah again, I Havent engine, you know us, we don't really like to talk to or from for our customers. In these situations. So I wont indicate wouldn't want was ordered war that aspect, but based on the information we have available. We just felt that was.
For this this period I mean again, we're talking about six months here to make up a considerable number of vehicles and we just thought.
For our business it was prudent to take this approach for next year I'm sure things are going to be.
On track and everything is going to be going extremely well.
Okay is the flush steel product different than the four trucks based windows so like in the explore.
Yes, it is Mike Theres actually a potential for incorporating the fortrex technology within the flush feel within the flush seal product.
But flush seal is really the way that the glass is aligned with the sheet metal and with the structure of the vehicle itself to a much smoother sleeker appearance and acquired or feel we call apparel acoustics.
Oh, yes, it's a new program, but can actually incorporate in the material signs of orders, Okay and went in the vehicles launched into Q.
No that one hasn't launched has been sold well I got you. Okay. The awards are production award was given okay is how does content compare with traditional sealing products.
Oh.
As we do with all our innovations we tried to we try to get additional content and hopefully improve value for the customers and value for our shareholders as well. Okay. One just one last thing you mentioned that you had eight plants targeted to close by the end of this year.
And I guess five in Asia, I think is what you said.
When you look at those closures are these plants shut complete gone or are they more fall than a volume comes back that that can be turned back on.
In a relatively short period of time.
Yeah for the Asia.
What print 'em, Mike This is Jeff Bob It's it's the mothball approaches as we've talked in the past I think for US it's more prudent to it.
To move our lines and consolidate lines into the number of plants that we actually need.
Now for the foreseeable future as the volume comes back there than we have the flexibility to open those back up yes, and when does your new business in China, and China start to accelerate.
Well, we're we're launching a significant amount of new business in China as we as we speak the issue there has more to do with the with the volume and mix for us than it does number of new new programs.
Just to give you some color around that the data would suggest that from a customer point of view in China. If you just look at year over year volume and mix reductions for all customers in China that number is.
A little bit over 13% year over year down if you look at the Cooper standard volume and mix associated with that customer group ours is down about 30%. So a significant number of vehicles that we happen to be.
Sourced on.
Our significantly down from from the previous years.
Volume so that that really is our our issue. The good news is I guess, if you try to find some good news in that as we have.
A tremendous amount of.
Good information going forward. So it allows us to really take out costs and to address the fixed cost would that work that I've just spoke about are going forward. So.
We will we will get the cost out in the footprint will reflect that particular environment until that particular environment improves.
Perfect. Thank you.
Okay.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then the number one key on your telephone.
Our next question or comment comes from the line of Mickey Daily from any asset management. Your line is open.
Good morning, Thanks for taking the call.
Good morning.
You bought back $30 million in stock in the quarter and you've got.
Room left on the.
We purchased authorization deal with that.
Continue the yen the cadence of the buyback.
Between now and the end of the year and secondly, when you do that you thinking that accelerated.
Format or open market repurchases.
Hi, Mike This is John .
The the $30 million program was was an accelerated share repurchase program as you pointed out so we get initial delivery of 80% of those shares and technically the program is still open.
As as our banking partner covers the shares.
Yeah. The to date, so far we bought him back at about an average of $43 per share.
As I mentioned in my prepared remarks, though we are going to sit back and I think a little bit here for the rest of the year as we as we work through the industry dynamics and we don't have any further plans at this point to spend any of the further $98 million authorization that we still have open.
Okay, that's covering.
Okay. Thanks, so much good luck preset your candor.
Thank you.
Thank you. Our next question or comment comes turned a lot of protein Gupta from Goldman Sachs. Your line is open.
Boutique are you there.
Yeah.
Hello.
Go ahead Sir.
I'm sorry can you hear me.
Yes, Yes, we hear you know pretty go ahead.
Okay, Okay, Great Oh, <unk> I said, thanks for taking my question. So my question was specifically around the guidance that you have provided.
And it's like I've got if I'm kind of doing a you know I'm a high level calculations around a implications from one niche what's his two edge revenues off obviously softer by a margin profile looks much stronger.
Can you just help US bridge the gap in terms of where exactly are this improvement in margin is coming from despite.
What looks like lower revenue.
Yeah <unk> this is John again.
You know Jeff alluded to this in his prepared remarks is a the second half profitability it looks to improve for us the significant driver there a year over year and sequentially is going to be the is a significant launch cadence that we've got scheduled this year, we've got 272 launches and.
83 of those launch in Q3, and another 68 launch in Q4, so as the the launches we've had to year to date.
Our full run rate exiting the year and those other ones come on line, we expect to have.
Increased absorption improved profitability in the back half of the year.
Okay and.
One follow up question around around these launches would be in terms of visibility obviously, you mentioned to you.
Some some of the largest kind of surprise to the negative in terms of volume. So what is the visibility level in terms of.
As you know these launches actually getting done and actually getting the volumes.
That you're modeling in your guidance.
Yeah. This is Jeff So I think we're very confident in what we have Bob.
Just said related to the guidance of the vehicle that we referred to as a challenge during the during the quarter.
As I mentioned, we're being somewhat conservative in the back half.
Related to the making up those units that were lost in the second quarter. Our that's our decision that we've that we've taken so that gives us a high level of confidence that what we do have in there I was going to I was going to happen.
Okay. If I may finally at any time any commentary around which regions. These new launches are kind of spread across is it similar to your revenue mix right now or is that you know more more concentrated in a particular region.
Yeah for take its John again, I can give you some some further breakdown.
Of the full year 272 programs 163 of those are actually global platforms, and a 109 or regionally.
When you look at the actual of the actual platforms themselves, but in Q3 and Q4, the North America region will launch another 45 programs.
Europe , we will launch another 38.
Asia will launch 58.
In South America will launch another 10, so you can see its.
Very global.
Program and aggressive launch schedule that we have for all of our regions.
Got it thank you for the color and best of luck.
Thank you.
Thank you.
It appears there are no there are no more questions in the queue I would now like to turn the call back over to Mr. Roger Hendriksen.
Okay. Thanks, everybody for your questions. We appreciate your participation. This morning, and we would invite you to reach out to US. If you have further follow up calls in the coming days and weeks and we thank you for your participation today and look forward to speaking to be two again soon.
This concludes our call. Thanks.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.