Cooper-Standard Holdings Inc. (CPS) Q2 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Holdings, Inc. Second Quarter 2012 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. Good morning and welcome. I am Glenn Dong, and 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, Chief Financial Officer. As usual, we will conduct a question-and-answer session after providing an update on our business, reviewing our second quarter 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 Presentations section of our Investor Relations website on www.cooperstandard.com. Please note that certain information on this call may be forward-looking and contains statements based on 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 that may be -- that may cause future activities and results of 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 August 9, 2012, which has been posted on our website and furnished on the Form 8-K with the SEC. At this time, I would like to turn the call over to Jim McElya, Cooper Standard's Chairman and Chief Executive Officer.

Thank you, Glenn, and good morning, everyone. I am pleased to provide an overview of the second quarter of 2012. Sales in the quarter were $734.5 million and adjusted EBITDA was $74.1 million or 10.1% of sales. These results illustrate the overall strength of the business despite the economic headwinds in the European market. The challenges facing Europe have a profound impact on automotive production in the region. The downturn in Europe is affecting all automakers in the region, however, the French and Italian automakers are being hit the hardest, and we will need to take actions to address the impact on us. Keith Stephenson will provide further insight on this situation as we outline Cooper-Standard's action plans to minimize the impact. The Asia Pacific region continues to grow, but it has slowed as demand in vehicles in China has softened relative to the peak years of 2010 and 2011. South America's economic slowdown continues, with vehicle production down 4.6% from a year ago. Despite this economic slowdown, Cooper-Standard's sales were up 8.3% from the year-ago levels, reflecting significant launches and excluding foreign currency movement. North America has experienced a strong first half of 2012. But volumes are now expected to level out in the second half coming in between 4.7 million and 4.9 million production units for the year. We are proactively adjusting to the changing volumes across all regions, and we'll manage through these fluctuations while continuing our strategic growth initiatives. Given the focus on Europe, I believe it's important to provide context in regards to the overcapacity and high fixed cost issues facing automakers in the region. The environment in Europe, currently, is much like the environment in North America in 2008 and 2009. Many automakers in the region are working to move production to Eastern Europe…

Thank you, Jim, and good morning, everyone. First, turning to Slide 8. As Jim touched on, we are facing some global economic headwinds, which are negatively impacting vehicle production outside of the North American market. Cooper-Standard is committed to proactively meeting these challenges while continuing to responsibly invest for the future. Specifically in Europe, we have taken steps to match our capacity with current demand through a combination of eliminating temporary employees, utilizing government-sponsored short work programs in Italy and France, and making permanent headcount reductions throughout Western Europe. Since the global financial crisis in 2009, the company has been careful with adding additional permanent direct labor in Western Europe, choosing instead to flex our headcount primarily with temporary workers. In parallel, we've launched a formal process to transfer certain administrative functions, such as financial shared services, CAD, IT and purchasing, to lower cost countries, while opening a production facility in Craiova, Romania. The plant in Romania started production in late June, with initial outputs supporting Ford. Going forward, we are actively evaluating new sites in Eastern Europe for further expansion of our global footprint, which is now planned for 2013. This expansion will support the already committed growth of our business in Europe, while facilitating the transfer of current higher labor content activity. In South America, while the industry has faced some recent turbulence, we have continued forward with the ramping up of a new plant near São Paulo, Brazil. The plant is now fully operational and supplying complete sealing systems to customers such as Honda and Toyota. While it's added some near-term costs, the importance of this facility and other capacity additions will be fully realized later this year as our South American business launches several important new programs. Turning to Slide 9. We continued strong operational performance…

Thanks, Keith. For the second quarter, Cooper-Standard reported sales of $734.5 million, down 3.4% from $760.5 million in the second quarter of last year. The turmoil surrounding the European debt crisis, softness in other regions and resulting volatility in foreign currencies have had a material effect on our numbers for the quarter. Adjusting for $59 million of unfavorable foreign currency movement, Cooper-Standard sales were up 4.3% from the previous year. In North America, we reported sales of $387.3 million, up 5.7% from $366.3 million in the previous year. Sales volume was up 8.3% from a year ago when adjusted for unfavorable foreign currency movements. IHS reported increased North America vehicle production at 24.6% in the quarter. Vehicle production was strong, a large part of this increase was driven by Asian OEs relative to last year's depressed production levels. This reflected our [ph] nonconsolidated joint ventures, which I will discuss later. Europe continues to be very challenging. Vehicle production is down almost 10% for the quarter. Our European operations reported sales of $264.2 million, down approximately $36 million from the same quarter last year. However, sales were relatively flat for the quarter when adjusted for approximately $38 million of unfavorable foreign exchange. Our Asia Pacific sales for the quarter were $48.8 million, down from the previous year of $55.2 million. This decline was attributed to both unfavorable customer and vehicle mix and negative foreign currency movement. Cooper-Standard Brazil generated $34.2 million in sales for the quarter as compared to $39 million a year ago. Vehicle production in South America was down 4.6%. However, our sales volume grew by 8.2% when excluding foreign currency impact. Gross profit for the second quarter was $114.4 million or 15.6% of sales compared to $123.7 million or 16.3% in the same quarter of previous year. Key…

Thank you, Allen. The purpose of this conference call is to also answer questions from our stakeholders. We would ask that media inquiries be handled separately from this call. Such calls should be directed to our Corporate Communications Group, whose contact information is available on our website and on the earnings press release. This concludes the formal portion of our conference call. We will now open the call for questions.

[Operator Instructions] Our first question comes from the line of Kirk Ludtke with CRT Capital Group.

I just have a couple of quick ones. I noticed in the quarter that you bought some of your common stock back, and I'm curious if you could maybe expand on the circumstances and what the criteria is for stock repurchases, both common and preferred, going forward?

Sure. We purchased common stock in the second quarter and preferred in the first. We were authorized by the board to make a certain level of purchases, and we were in the market, when we felt it was appropriate, taking advantage of that.

And can you expand on what the thought process was?

The thought process was, obviously, we felt like it was value at the prices that we purchased. We thought that our cash position was strong, and the stock was lower than we thought it should be, and we made those purchases.

And how about going forward, do you continue?

We still have a remaining balance that's been authorized by the board.

We'll just be opportunistic in this, Kirk. Take a look at it as the opportunities come up.

Okay. And can you talk about how much you can buy within your credit facilities and other whatever contractual limitations you have?

We're still reviewing on what level the board would like to continue these type purchases. We have significant room under our restricted payment basket. We believe we have in excess of $100 million of availability in restricted payments to do these types of transactions, but we're in no way authorized at that level.

Okay. And is there any update on how -- any plans to create some more liquidity in these shares?

Nothing official. We're continuing to evaluate several options, and we have not landed on a specific one to follow at this point.

[Operator Instructions] There appears to be no further questions at this time.

Okay. Well, that's the last question. I'd like to take a moment to summarize today's call. We're pleased again to achieve double-digit EBITDA margin despite a challenging business environment in Europe. We continued to make significant investments in new technology and manufacturing capabilities to enhance our product portfolio and expand our global footprint. As we look forward to the second half of 2012, we continue to closely monitor production volumes, and we'll flex our operations accordingly. Our highly capable global team, combined with our strategic investments, positions Cooper-Standard for continued growth. And thank you for your participation in today's call. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.