Cooper-Standard Holdings Inc. (CPS) Q4 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cooper Standard Fourth Quarter and Full Year 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded this morning, and the webcast will be available for replay later today. I would now like to turn the call over to Glenn Dong, Treasurer of Cooper Standard. Please, go ahead.

Thank you, Michelle. Good morning, and welcome. I am Glenn Dong. I will be acting as the moderator for today's call. Speaking on behalf of the company are Jim McElya, our Chairman and Chief Executive Officer; Keith Stephenson, Chief Operating Officer; and Allen Campbell, our Chief Financial Officer. As usual, we will conduct a question-and-answer session after providing an update on our business, reviewing our fourth quarter and full year performance and discussing our outlook for 2012. The presentation we'll be using for this morning's call will be available after the call under the presentation section of our Investor Relations website on www.cooperstandard.com. Please note that certain information in this call may be forward-looking and contains statements based upon current plans, expectations, events and market trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties that cannot be predicted or quantified, and may cause future activities and results from operations to differ materially from those discussed. For additional information, we ask that you refer to the company's filings with the Securities and Exchange Commission. This call is also intended to be in compliance with Reg FD and is open to institutional investors, security analysts, media representatives and other interested parties. A reconciliation of certain non-GAAP financial measures used during this call can be found later in this presentation and in our press release dated March 12, 2012, which has been posted on our website and furnished on the Form 8-K with the SEC. At this time, I'd like to turn the call over to Jim McElya, our Chairman and Chief Executive Officer.

Thanks, Glenn, and good morning, everyone. I'm pleased to once again report the results of the solid fourth quarter and capping a strong year of growth for Cooper Standard Automotive. Turning to Slide 5 in the presentation. In 2011, sales grew 18.2% to $2.85 billion from $2.4 billion in 2010, driven by higher industry volumes, favorable currency exchange movement and revenue from our businesses acquired during the year. Our North American sales increased $169 million or 14%, and our international sales increased $270 million -- excuse me, or 23.2%, with $150 million coming from our Cooper Standard France joint venture. Adjusted EBITDA for the full year increased 17% to $324.1 million, and we were once again able to achieve double-digit adjusted EBITDA margins of 11.4%. Our base business produced 12% adjusted EBITDA compared to 7.3% achieved by our joint ventures. Keith will address actions that we are taking to improve the margins in our joint ventures later on in the presentation. Now turning to the fourth quarter, we have strong financial performance with top line growth of 15.2%, reflecting higher industry volumes, favorable currency exchange movement and revenues from operations acquired in 2011. Revenue from our legacy business grew by $34 million or 5.7%, and we recorded adjusted EBITDA for the fourth quarter of 9.6% or 10.2% when acquisitions are excluded. During the year, we completed the USi acquisition, the joint venture with Nishikawa in Thailand, and our joint venture in France. And in a moment, Keith will expand on additional benefits that we are seeing from these transactions. We received net business awards totaling $403 million on an annualized basis in 2011. These awards include new business, incremental replacement and conquest business. And as always, future events, including variations in production volumes from original estimates, program modifications, cancellations and other changes could alter these numbers. Turning to Slide 6. At the beginning of the year, we set out several priorities for 2011 and we worked diligently to execute on these. During the year, we aggressively pursued business on global platforms, which helped to contribute in overall net new business wins for the year. We successfully launched new technology to aid our customer in improving, providing more fuel-efficient and lower-emission vehicles. During the year, we launched our second generation exhaust gas recirculation module with Audi and a new generation of water pumps with Nissan, Renault, and PSA. We were also awarded our first wastegate actuator with Volkswagen, throttle valve program at General Motors and the next-generation fuel rail program with Chrysler. In the ceiling business, we were pleased to receive Safe Seal programs with Renault, Nissan and Daimler. This is our innovative obstacle detection sensor technology, which focuses on occupant safety to prevent injury when interacting with automatic windows, sliding doors and lift gates. As we continue to meet our customers' growing needs for global platform supply, we have further expanded our product capabilities around the world. In fluid, we expanded our hose business in Poland and are currently localizing production in China. For anti-vibration systems, we added capacity in Poland and India. Another priority was to grow our share of sales in Asia-Pacific and the South American regions. In this regard, we added a new ceiling facility in São Paulo, Brazil and acquired a 20% position in Nishikawa, Thailand and expanded our footprint in India. We also worked closely with our customers to obtain cost adjustments to effectively manage our raw material costs and leverage our global purchasing power to ensure supply of raw materials in all regions of the world. Now before discussing our 2012 priorities, I'd like to spend a moment on Slide 7 discussing the current global industry environment. We expect the global auto industry production volumes to grow significantly over the forecast horizon, with volumes going from 80.6 million units in 2012 to 98.9 million units in 2016. Production volumes in North America are expected to continue to grow and will likely ramp up from 14.4 million units in 2012 to 19 million units in 2016. The current increase that we have been seeing in North America has been led to pent-up demand and an improving economy. Though we expect to see Europe -- the European market continue to be soft in the short term, we expect European production volumes to grow from 19.2 million units in 2012 to 22.2 million units in 2016. Volumes in Asia continue to be a bright spot, with strong sales in China and India. Overall, production in the region grows from 40.5 million units in 2012 to 50.5 million units in 2016. South America has been flat due in part to the expiration of certain government incentives, and we expect volumes in 2012 of 4.6 million units to grow to 5.8 million units in 2016. Given the excess capacity in the European market, we remain focused on participating in the restructuring, as exemplified by our FMEA transaction in 2011. We are also proactively rationalizing our cost structure across Western Europe to further offset the lower volumes. Finally, increasing world demand and regional uncertainties have been escalating oil prices, which will again emphasize small fuel-efficient vehicles that we are already positioned on globally. We are equally well prepared with a portfolio of technology solutions to help our customers improve the fuel economy and reduce the emissions. On Slide 8, our priorities for 2012 build on the initiatives from 2011, as the industry dynamics remain largely intact. As we continue our focus on organically growing our top line, we have challenged our sales and business development teams to aggressively pursue growth opportunities for our existing product portfolio. We also continued to invest in advanced technologies to service the growing demand of thermal and emission solutions and have added several new products that have already resulted in new business. We will continue our focus on winning business on global platforms, as we expect to see an increase in global platform opportunities in the next 12 to 18 months. We also expect to push further into emerging markets, and we'll be ramping up our latest facilities in India, Brazil and Romania. We have also invested the capital in the human resources in these emerging markets to support the growth. We closed 2 plants in Europe in the last 2 years to improve our cost structure. And while Keith will provide the details on these closings, I want to point out we are very disciplined in our approach to improve our cost structure in Europe to offset the lower volumes. As I remarked a moment ago, raw material costs remain challenging, and we are proactively working to offset these costs in all regions of the world. Now I'd like to turn the call over to Keith Stephenson, our Chief Operating Officer. Keith?

Thank you, Jim, and good morning. Slide 10 is an overview of what I'll discuss with you over the next few minutes. As was mentioned earlier, our top line performance improved by 18% in 2011. The company also continued a busy year of launch activity, setting its position on global platforms with major OEMs. In the second quarter of 2011, the company established a joint venture based in France, with operations in Poland and India. During the second half of 2011, the company again integrating this business to put us in a position to realize synergy savings and consolidation benefits despite a softening market in Europe. A clear strength of Cooper Standard is our global footprint. In 2011, we completed or initiated several important actions that will further enhance our abilities to support our customers in all regions of the world while responsibly managing overhead structure. Finally, we continue to execute operationally while dealing with raw material challenges and market fluctuations primarily in Europe. Slide 11 shows our 2011 sales by region and product group and includes approximately $305 million of sales from non-consolidated joint ventures. Our sales profile continues to evolve, with Asia now representing almost 13% of our total revenue, including sales from our joint venture relationships. Cooper Standard has several important joint venture relationships with companies such as Nishikawa Rubber Company and Hasco (SAIC) Company. These partnerships have allowed us to accelerate our progress in emerging markets like Thailand and China. On the product side, we continue to be the global leader in sealing systems, holding the #1 position in North America, South America, Europe, China and India. Jim described our recent wins in the thermal management and emission categories. The company is making a significant investment in these new technologies while also localizing production of our traditional fuel and brake line business to improve our competitive position in emerging markets. Slide 12 shows some of our fourth quarter launches by global customer base. Our fourth quarter launch activity include the entire ceiling system of a new-generation Fiat Panda in Europe, as well as ceiling system in the high-volume Fiat Palio in South America. In North America, we have launched fuel, brake and TOC products on the new Lincoln MKX and multiple products on the popular GM Chevy Cruze. We also support the Cruze and Chevy Malibu programs in Asia, which further highlights our global support of our core customers. Finally, we launched a ceiling system on the new Honda Civic in South America, earning out a busy finish to 2011. Turning to Slide 13. In the second quarter of 2011, the company completed a unique transaction with a French government agency called FMEA and the French power builders PSA and Renault from a joint venture company for hose, ceiling and anti-vibration products. This venture was formed in part to address overcapacity in France, which impacted Cooper Standard's financial performance. The joint venture company named Cooper Standard France is owned 51% by Cooper Standard and operates facilities in France, Poland and India. The clear strategic objective of the joint venture are as follows: First, extend Cooper Standard's global position -- leadership position in the ceiling business; expand hose and AVS capabilities to Europe and India, which allows Cooper Standard to better compete and win global platforms for these products; strengthen our relationship with the French OEMs; consolidate the Western European ceiling industry of broadening Cooper Standard's footprint in Eastern Europe and India; and finally, provide full funding for the closure of Cooper Standard's Beclair, France ceiling facility. The logic of the joint ventures remains solid. However, given the drop in vehicle production in Europe and the fact that Cooper Standard as majority owner is reporting 100% of the JV sales, owning 51% of the JV earnings, new JV had a near-term dilutive effect on certain financial metrics. The company is aggressively pursuing several actions to improve financial performance, be more in line with traditional Cooper Standard levels. This includes completing the integration of the acquired business in the Cooper Standard while realizing synergy savings; executing the closure of the Beclair, France facility, which was completed in December 2011; and rationalizing overhead and staff costs, which is in progress. On the growth side, the company has been awarded incremental business in multiple markets by both PSA and Renault while effectively competing for hose and AVS programs with global OEMs. Slide 14 illustrates our continued progress on evolving our global footprint to support customers and grow our business in developing markets. As previously mentioned, our French joint venture added manufacturing capacity in France, Poland and India. In parallel with this transaction, we took actions to responsibly manage our capacity in mature markets, with the decision to permanently close our Beclair, France ceiling facility. This action was completed in the fourth quarter of 2011. Additionally, we are consolidating our hose capacity in North America, the closing of facility in Bowling Green, Ohio, and transferring the assets into existing U.S.A. and Mexico plants. This action is expected to be completed in the first quarter of this year. Consistent with the needs of our customers, as well as the growth of our business, we are committed to launching 3 new manufacturing sites in the coming months. This includes a new plant near São Paulo, Brazil that has recently started production, a new fluid and ceiling plant in Craiova, Romania and an expansion of facilities in Chennai, India. The Romania and India facilities are expected to be operational in the second quarter of 2012. As one of our operating disciplines, we're committed to proactively manage our footprint and install capacity in both mature as well as developing markets. Turning to Slide 15. We continue to effectively manage our headcount and cost structure consistent with regional market conditions. In North America and Asia, this has been ramping up production output and increasing utilization of our installed capacity. In Europe, we are flexing our workforce through a combination of reduction in temporary workers, short-work programs and a permanent reduction of some capacity in Western Europe. During 2012, the company realized significant lean savings. This was despite supply challenges with certain raw materials, which limited our flexibility. This situation is now improving, but managing our raw material costs remains a clear priority for the organization. Over the past year, the company has successfully integrated the USi acquisition in North America to continue to make progress with the French joint venture. Most recently, the company acquired the ceiling business of Sigit in Europe. We are now consolidating this business into our existing Italy and Poland facilities. Finally, the company was awarded numerous quality and service awards from our customers in 2011. Most recently, we received awards from Honda in South America for quality performance, from Chrysler for supply performance and from Maruti Suzuki in Asia for support of new programs. Now I'll turn the call over to Allen.

Thanks, Keith. Turning to Slide 17, we had another strong quarter with overall sales up $92 million from the fourth quarter of last year to $695.7 million. For the year, our sales increased to $2.85 billion, driven by an increase in volumes in most regions and favorable foreign exchange movement of $70.9 million. In addition, USi acquisition and our French joint venture provided $157.9 million of incremental sales. Sales were especially strong in North America, with sales up 14%. Gross profit for the quarter was $97.6 million or 14% of sales compared to $96.8 million or 16% of sales in the fourth quarter of 2010. On a full year basis, our gross profit was $450.6 million or 15.8% of sales. The increase in gross profit reflect our revenue growth, along with a slight contribution from our acquisitions, offsetting higher raw material costs. Our SG&A costs for the quarter were $66.7 million, and on a year-to-date basis, $257.6 million, a decrease of $1.2 million from the prior year quarter and a $5.9 million increase on a full year basis. For the year, overhead costs from acquisitions and increased engineering, research and development costs offset certain one-time compensation expenses in 2010. We reported net income for the quarter of $23.2 million compared to net income of $14.8 million in 2010. Adjusted EBITDA of $67 million compared to adjusted EBITDA of $62 million for the prior year. The increase was due primarily to increased production volumes, offsetting higher raw material costs. On Slide 18, our adjusted EBITDA for the year was $324.1 million or 11.4% of sales after making the customary adjustments. Starting with the 2011 net income of $102.8 million, you can see the walk to $288.2 million of unadjusted EBITDA. From here, we add back $32.3 million of restructuring, net of $19.9 million attributed to French JV minority interest, we purchased accounting write-up of inventory of $0.7 million and $10.8 million of emergence-related stock compensation. The remaining adjustment of $7.9 million relates to a gain on a partial sale of a joint venture interest offset by certain corporate development activities during the year. Moving on to Slide 19. Joint ventures play a significant role for Cooper Standard and impact our financial reporting in different ways. This slide distinguishes some key metrics between our base business and joint ventures. In 2012, our base business -- in 2011, our base business generated sales of $2,459,000,000, with a gross profit of 17% and adjusted EBITDA of $295 million or 12% as a percentage of sales. For the same period, we see that our joint ventures generated sales in a consolidated basis of $395 million, the gross profit at 8.5% and adjusted EBITDA of $29 million or 7.3% as a percentage of sales. The joint venture margins, which trail our base business, are primarily driven by current lower returns in our Cooper Standard France joint venture, further emphasized by the company accounting for 100% of the sales, but reported adjusted EBITDA being reduced by 49% of net income. The joint ventures provide important strategic elements relative to customer and footprint coverage. We anticipate margin improvement in these operations of -- as our joint venture relationships tour. Turning to Slide 20. We have 2 additional views of our sales composition. The bar on the left breaks down sales of our legacy business against sales contributed from recent acquisitions. The bar on the right shows sales of our unconsolidated JVs, which are not reflected as revenue on our financial statements. These joint ventures include Hasco (SAIC), Sujan in India, Nisco North America and Nishikawa, Thailand, which total $305.4 million in sales. These joint ventures provide lower-cost option than greenfields and are important to our business as they support our Asian OE initiatives and provide us the critical footprint and alliances needed for success on global platforms. Turning to Slide 21. The company generated cash from operations of $126.5 million for the quarter and $172.3 million on a full year basis. During the year, we invest $108.3 million in capital expenditures to support the business, product launches and expansion around the world. During 2011, the company acquired Sigit, USi and formed the CSF joint venture. The net of these 3, given the cash contributed by the CSF partner, increased cash balances by $28.5 million. The company also benefited by $16 million from the partial sale of a joint venture interest. Major cash outflows for the year included the purchase of an equity interest in Nishikawa's Thailand operations for $10.5 million, our normal cash dividends on our 7% convertible preferred securities of approximately $7 million and debt repayments of approximately $10 million related to debt outside the U.S. We utilized $7.5 million of cash to buy back and retire shares over preferred securities. Cash was negatively impacted by $6.1 million from foreign exchange movements. Overall, we generated net cash of $67.3 million for the year, ending the year with just over $360 million of cash on the balance sheet. Turning on to Slide 22. As you can see, we ended the year with very strong cash and liquidity positions. Cash on the balance sheet of approximately $360 million and undrawn revolver of $125 million. The company's balance sheet leverage continues to improve, with our net leverage improving by 30% from the previous year to $127 million and net leverage ratio of 0.4x based on adjusted EBITDA of $324.1 million. We do not have major debt maturities until 2018 except for some minor debt repayments outside of U.S. Moving on to our guidance for 2012 on Slide 23. We expect to generate between $2.85 billion and $2.95 billion in sales and to have CapEx spending of between $110 million and $120 million as we continue to invest in advanced technology and expand our presence in emerging markets. We also expect to incur cash restructuring expenses of between $45 million and $55 million, approximately 1/2 of which will be related to Cooper Standard France joint venture restructuring. We anticipate that our cash taxes will be in the range of $25 million to $30 million. The above guidance assumes 2012 North American production volume of 14.4 million units and European production volume of 19.2 million. I would now like to turn the call back to Glenn.

Thank you, Allen. The purpose of this conference call is to also answer questions from our stakeholders. [Operator Instructions] This concludes the formal portion of our conference call. We will now open the call to questions.

[Operator Instructions] Our first question comes from Kirk Ludtke from CRT Capital Group.

I just wanted to touch on the 2012 guidance for a second. The sales guidance is flattish, and I was curious if you could share with us how much net new business you expect to launch in 2012?

It is fairly flattish. I think it's an indication of what we see in Europe, and then also some round out of business we had in North America. We do not have our net new business number specifically for 2012. We've given the 403, which will spread out between 2 years and 4 years from now on a go-forward basis.

Okay. Is there a -- maybe I missed this. Did you provide a backlog as of year-end, the total net new business backlog?

No, we did not.

Okay. And in terms of just the puts and takes and the bridge between 2011 and 2012, would you say that the volume overall will be a negative because of Europe?

There's a couple of things to look at for us. FX is going to be a big player to the negative year-over-year if I look at '12 versus '11. We're going to have prices that are normal in the industry, I would expect. And then we'll have some improvement due to our acquisitions for a full year. And then volume, we'll have positive in some regions and negative in Europe.

Okay, that's helpful. How -- can you share how much the acquisitions will add in 2012 versus 2011?

Well, I think you can get that fairly easily if you look at what we report as incremental for 2011, which was $158 million. That represented by all but 4 months of 2011. So you could probably take 1/2 of that and round down a little bit because it's Europe predominantly.

Okay, that's very helpful. I appreciate it. And you mentioned in the press release that the materials likely be a drag and also the entities that you're consolidating are generating lower margins. Would -- is it safe to say that consolidated margins will be down directionally 2012 versus '11?

I don't think we're going to say that today, no.

Your next question comes from Cerraud Jean [ph] from BHR Capital.

I had a quick question on sort of your plans to return capital. When you guys were going to sort of complete that review process and when you would come back to market with kind of an update in terms of either share repurchase or continued -- or a dividend?

Yes, we -- the company and the board looked at very strategic options last year for the company, and I think we went public with some of that but not all of it. The company will continue to look at what's appropriate options for its capital structure. We'll look at what's out available in the marketplace and what opportunities exist. But we're not in a position to put out in the market any specific plans.

I'll just add to that, that all options are still on the table. We're looking at all opportunities to do what's right for the company.

Your next question comes from Chris Mayer from Agora Financial.

I want to know if you had any updated thoughts on moving the stock to a major exchange?

That is definitely one option that we're looking very closely at. There's some events that have to take place. But it's on our radar. We're not in position to say anything yet today.

[Operator Instructions] Your next question comes from Tom Shandell from Golden Tree Asset.

I don't know if you've mentioned this, but can you isolate the effect of raw material price increases on results during 2011? In other words, on a dollar basis.

No, we have not mentioned -- we have not stated that on a dollar basis. It did have some basis movement in our gross profit and our EBITDA. If you look at the change year-over-year and if you look at our 10-K, you can get the impact related to the joint venture and the acquisitions. And then you can look at the delta and you can say the majority of the delta is driven by raw materials.

So I don't want to put words in your mouth, but you're saying if I take out the effect of the JVs and the acquisitions, the change in margin was largely due to raw material shifts?

That's fair.

But more specifically, what we weren't able to cover because we obviously gone off a lot in lean -- in our lean manufacturing. We're very proud of our results in lean manufacturing. That and other actions covered a significant portion of the raw material increase, as well as adjustments that we're able to get with the customer.

Okay. And the movements in raw material, I guess, the raw materials that largely drive this. I mean, I assume rubber is one. Can you note what some of the other raw materials that have big movements are?

Synthetic rubber is the big driver. It's EPDM. Natural robber, not so much. So primarily there. So the EPDM, carbon black, steel, would probably be the 3 big drivers.

Okay. And what are trends in those commodities in 2012 thus far?

We're seeing right now is that the EPDM, as Jim mentioned, was accelerated cost last year. We've had a slowdown in the ramp-up of those costs and they are relatively stable for the first quarter of this year. And we're being very careful as we look forward on those trends going forward. Carbon black is kind of our second largest commodity that we buy. And in carbon black, that's been relatively stable through the first quarter. And again, we're looking very closely at the out quarters for this year. We also buy a significant amount of resin materials, and those have stabilized as well. So through the first quarter, some of the increases that we saw last year have stabilized. And we are aggressively trying to reformulate our materials, et cetera, to make sure that we manage these costs effectively on a go-forward basis.

Some of these costs, obviously, are impacted by oil and the price of oil. So we're watching it very closely, and so are our customers. As I don't think anybody really knows what's going to happen with the price of oil here going forward.

All right. I gather resins and carbon black are driven by oil.

Yes, there's certainly a connection there. And to a lesser extent, EPDM as well or synthetic rubber, as Jim mentioned, is as well.

Okay. And how far out will you go to make forward purchases to lock in that price?

The markets changed on us quite a bit. We used to be able to do that in several years back. But given tight supply from some of the raw materials, it's very hard to buy out more than a few -- a month maybe. So we're -- we do not have the billy on EPDM, for example, that we used to have.

Next question comes from Kirk Ludtke from CRT Capital Group.

I just had a couple other questions. I just wanted to make sure I understood all the cash requirements in 2012. And maybe you mentioned this and I missed it, but will you be funding the pension to any significant extent?

Yes. It'll -- it'd be similar to what we did last year. There'll be a sizable contribution in the first quarter for us anyway.

So that was what, $34 million?

It'd be plus or minus that number.

Yes. And what is expense in 2012, do you know?

Expense is going to be or less than a -- about a quarter of that. About a quarter of that number.

Okay, great. And my guess is working capital will be flattish, is that -- or does that actually become a use as material costs increase?

No, it'll be -- it'll move relative to our sales, flat...

Okay. And I noticed that you repurchased some preferred and -- it looks like in the fourth quarter, and I'm just curious if you could give us some color as to what prompted that and if -- I guess that's just a little bit color as to what you're thinking in terms of that.

All right. That was in reaction to an opportunistic -- an opportunity was put in front of us, and it was very close to intrinsic value. And so periodically, the company may do a type of transaction. Not a large one, obviously, as you can tell.

I have no further questions in queue. I'll turn the call back over to presenters for closing remarks.

With that last question, I'd like to thank you for joining us today. I know that I speak for the management team in saying that we're very proud of the job that was done by our employees in 2011. Working together, we're able to further expand in emerging markets, integrate strategic acquisitions, win significant new business, drive strong financial performance and successfully launch new technologies. As a result, in 2012, we are better positioned than ever to compete and win in the market and to grow shareholder value. We look forward to communicating with you again in the coming quarters. And on behalf of Cooper Standard, I'd like to thank you for your continued support. Thank you.

This concludes today's conference call. You may now disconnect.