Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Second Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Following the Company's prepared comments, we will conduct a question-and-answer session. 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.

Thank you, Stacy, and good morning, everyone. We appreciate you spending some time with us this morning. The members of our leadership team who will be speaking with you on the call this morning are Jeff Edwards, Chairman and Chief Executive Officer; and Jon Banas, Executive Vice President and Chief Financial Officer. Before we begin, I need to remind you that this presentation contains forward-looking statements. 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 forward-looking statements, we ask that you refer to Slide 3 of this presentation and also 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. With those formalities out of the way, I'll turn the call over to Jeff Edwards.

Thanks, Roger. Good morning, everyone. We appreciate the opportunity to review our second quarter results and provide an update on our ongoing strategic initiatives and outlook. To begin, on Slide 5, we provide some highlights or key indicators of how our operations performed in the quarter. We continue to perform at world-class levels in delivering quality products and service to our customers and keeping our employees safe. At the end of the quarter, 98% of our customer scorecards for product quality were green and 97% were green for launch. Most importantly, the safety performance of our plants continues to be outstanding. In the second quarter, our total safety incident rate was just 0.41 per 200,000 hours worked, well below the world-class rate of 0.57. I'd like to recognize and thank our teams at the 35 Cooper-Standard plants that have maintained a perfect safety record of zero reported incidents for the first half of the year. We are continually striving for zero safety incidents at all of our plants and facilities and these 35 locations are leading the way and continue to demonstrate that achieving our ultimate goal of zero incidents is possible. From a financial perspective, our results were impacted by volatile production schedules, late notice shutdowns and rapidly increasing costs that continued throughout the quarter. Unfortunately, all factors largely outside of our control. In the areas we can control, our teams continue to drive success. Despite lower-than-expected production volumes, our manufacturing operations were able to deliver $12 million in savings through lean initiatives and improving efficiency in the quarter. Our SGA&E expense was down $6 million year-over-year. In the combination of past restructuring actions and strategic divestitures delivered $9 million in benefits in the quarter. While we are continuing to execute well on our operating plans, we faced significant…

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some detail on our financial results for the quarter and comment on our balance sheet, liquidity and capital allocation priorities and then provide an update on our outlook for the remainder of 2021. On Slide 10, we show a summary of our results for the second quarter with comparisons to the prior year. Second quarter 2021 sales were $533.2 million, up 56.6% versus the second quarter of 2020. Despite the year-over-year growth, our sales came in significantly below our plans, primarily due to continuing semiconductor shortages and the impact on our customer production schedules. These sporadic shutdowns often announced on extremely short notice impacted our sales by approximately $200 million in the quarter. Other factors impacting sales were the divestiture of certain unprofitable businesses in Europe and our Legacy India business last July, partially offset by positive foreign exchange. Excluding the impact of divestitures and exchange, organic sales increased by approximately 55%, outpacing total light vehicle growth by 650 basis points. Gross profit/loss for the second quarter was essentially breakeven and adjusted EBITDA in the quarter was minus $14.7 million compared to minus $93.8 million in the second quarter of 2020. As with sales, profitability improved year-over-year, but fell well short of our plans due largely to unanticipated customer shutdowns, volatile production schedules and commodity headwinds. On a U.S. GAAP basis, we incurred a net loss for the quarter of $63.6 million compared to a net loss of $134.2 million in the second quarter of 2020. Excluding restructuring expense and other special items as well as their associated income tax impact, adjusted net loss for the second quarter of 2021 was $51.1 million or $3 per diluted share compared to adjusted net loss of $111.8 million or…

Thanks, Jon. To wrap-up our discussion this morning, I'd like to provide an update and some additional detail on our near-term strategies to diversify our business, leverage growth in the electric vehicle market and our outlook related to our longer term return on invested capital improvement goals. Please turn to Slide 15. Innovation and diversification remain key parts of our long-term strategy. We continue to make progress with our advanced technology group to leverage our material science and manufacturing expertise in diverse industrial markets that complement our automotive business. In our Applied Material Science business, we have successfully concluded the technology development phase with two footwear customers and we are working on commercial negotiations with both. We are also continuing in the commercial phase for our products and technology in the building materials space. While it is too soon to tell, when we might conclude these commercial discussions, but the work and focus on our end certainly continues. We are continuing our technology development work with other customers in the footwear space and we have received initial inquiries regarding opportunities in some new industries, which we believe have some merit. As I mentioned earlier, desire for alternative materials with lower carbon footprint is driving interest in Fortrex, almost as much as its superior physical performance characteristics. We believe the lower carbon footprint represents a clear competitive advantage for us in our Automotive business, our Materials Science business and in our Industrial and Specialty Products business as well. Within our Industrial and Specialty Group, customer demand for our products overall remains steady. However, like many segments of our industry, we are facing challenges related to labor availability, supply chain and other market disruptions, which are limiting near-term growth. Our investment in additional production capacity within the ISG group in Europe is…

Thank you. Our first question comes from Mike Ward of Benchmark.

Thanks. Good morning, everyone. Maybe just to focus on a little bit on some of the commodity and material cost issues. To try to put some parameters on it, I'm guessing your commodity material purchase number is somewhere around $1 billion. Is there a percentage that is not already indexed? And is that where the exposure is? And are those things subject to commercial negotiation? And so for that $40 million you've targeted this year, how much would you expect to recover?

Hey Mike. Good morning. It’s Jon. Thanks for the question. Let me take both sides of the equation, both the supplier indexing side and then the customer side after that. Last call, we talked about our evolution on the indexing with our supplier side, and we're making very good progress. We ended last year with only 15% of our spend indexed. And on the call last time, we're up to about 25%. We're now approaching about 30% and on track to finish the year. We had about 45% of our overall material spend indexed. And that's on $1.1 billion to $1.2 billion of direct materials that we're purchasing. And most of that 45% projection is on what we're referring to as grow suppliers, which are going to be strategic to us and provide inputs for products that are significantly impacted by those raw material markets. So I think in terms of the strategic supplier base that we're working to continue to build through our overall initiatives there. On the customer side, we're making progress there as well to get on index contracts with those customers. And for right now, we're approaching about 20% to 25% of the commodity inflation that we've incurred is going to be addressed by index contracts. Now typically, those are on a lag. So you get the recovery effect a quarter or two later down the road. And the rate of recovery is going to vary by commodity, of course, depending on how those indices fluctuate that go above and beyond. And recovery rates are also going to be different across the types of commodities because certain industries and entry points when we get on those arrangements are going to dictate how much we can recover. So getting those mechanisms in place is going to be key going forward. The rest of the inflation will be more of direct negotiation with our customers to yield further recovery on those items, okay. So hopefully, that frames the situation for you, Mike.

Okay. And so on the customer side, how high can you get with the index? I mean, no one is fully covered, but can you get up to north of 50%, 75%?

Yes. I don't know if we'll get that high just because of a lot of our bill of materials aren't heavily weighting on those purchased commodities, Mike, so think about the additional value-add and other components that aren't indexing

Right.

There doesn't allow us to get up to that high of a percentage. But nonetheless, we're working to move the needle upwards.

Okay. And any reason why you wouldn't be able to recover a normalized sum from the manufacturers?

Yes. Mike, this is Jeff. I think that's certainly our objective. We've said historically, 40% to 60% is what we expect to recover. I guess, it’s like anything else, when its 40% to 60% of a small number, you kind of deal with it, where its 40% to 60% of a much higher number than that's something that's going to require extensive discussion. And that's really where we're at. As I said in our remarks, this is unprecedented. I mean, clearly, I think, the good news is our customers are raising prices. So I think to expect that the supply base will also be on the receiving end of some help is what we expect, and I'm sure the lobbies will be full, and you'd be taking a number. But certainly, we all have similar challenges here and I'm sure we'll work through it together.

Okay. I was just surprised when you mentioned that you might be able to get some recovery from the disruption and the unplanned shutdowns.

Well, I guess, going after it is where it starts. So we see how we go.

That's why they call it negotiation.

Right.

Now, Jeff, one of the things. Can you talk a little bit about the process you're going to use to get to your 10% ROIC?

Yes. And we continue to do that. Mike, we certainly have been working on this now for the last 1.5 years, almost two years. It starts certainly with the business being more competitive from a fixed cost point of view. And we have been really attacking the footprint issues in all of our major regions. So here in North America, we have. Certainly in Europe, we've announced a number of closures and then we right-sized, the Asia given the significant change in volumes in China. We also dramatically have reduced our SGA&E costs across the business to support the company. We've peeled businesses away that weren't covering their cost of capital and we've sold those. And so we're in a much better position from a lean point of view. Yet at the same time, we've still focused on execution. So we don't have surprises. We don't surprise our customers with quality issues or bad launches. We don't surprise our investors with performance that from quarter-to-quarter is in trouble because we haven't invested in the appropriate amount of resources in the company. So we've right-sized it. We don't have too many of anything and we don't have too few of anything if we've done this right. And I think our performance around quality, cost, safety, delivery, launch is a good leading indicator that we have right-sized it. I'm confident that the supply chain issues albeit really challenging this year and I don't see it becoming less challenging in the third and fourth quarter I think it will just be different. Next year, we expect the volumes to rebound and be very strong and in fact, that lines up very nicely with what we're doing from a restructuring and getting our costs in line. We expect 2022 and 2023 to be really strong years for us and the company is ready to execute. So we believe the double-digit return on invested capital sustainable level return on invested capital will be ours in 2023. I fully expect 2023 will be the first full-year of us executing that way. And you'll see quarters next year, I'm sure, where we're showing clear indications that we are reaching that level, all based on the transparency that we've shown around the driving value plan. Clearly, the raw material inflation is a different wild card. But we have to go figure it out with our customers and our suppliers how to make that an affordable line item rather than what its turning into right now and I'm committed to doing that.

Perfect. Just one last thing. Have you seen, like in July and going into August with your big customer, have some other programs stabilized, particularly some of the more important ones for you. They were really hit hard in the second quarter, and I know that took its toll on you. But have you seen some stability, they seemed to allude, do they had a better handle on the chip supply issue, and it sounds like they're doing a better job managing their production. Have you seen it with your orders from them?

Unfortunately, not.

It's still volatile?

Right.

Okay. Thank you very much.

You bet.

Our next question comes from Brian DiRubbio from Baird. Please go ahead.

Good morning. So maybe starting Jon with you. At the midpoint, your EBITDA guidance is down by $100 million. I think you cited that raw materials are now $40 million worse than expected. Can you just sort of help us dissect that $100 million between was production and other labor costs?

Sure, Brian. It’s really a couple of main buckets, right. It’s the whole microchip impact from Q2 and that's going to trickle into here in early Q3 that is really impacting the overall year's results. And I referenced that in my prepared remarks about how much we're already down there and how much revenue was lost on the chip shortage issue overall. So when you take out the estimated profit pull-through on that $200 million, 75% of which was in North America, and here you range anywhere from 25% to 35% contribution margin on average. You can see it’s a pretty big degradation overall in our expectations at the midpoint. The next main bucket is what we've been talking a lot about is the commodity side as well as inefficiencies caused by the production variability. So think about not being able to flex labor fast enough based on really, really tight notices from our customers, freight economics, labor economics and quite frankly, availability shortages on the labor side, all leading to higher economics on that side of the shop. So it’s not only the $40 million of commodities, but it’s the other inflationary effect all throughout the Board. So between those two main buckets, I'll call it overall general inflation plus commodities and then the microchip impact that gets you most of the way there on the midpoint degradation.

Okay. That is helpful. On the labor side, a number of my companies have been troubled by just the labor shortages. Are you just seeing just people have new interest or is it a wage issue, is it just – people are just waiting until the end of September until their extra unemployment benefits expire? I'm just trying to get your sense of what the potential issues are there on the labor side.

Yes. This is Jeff. I think we are seeing some improvement in certain states. Let me start by saying that. I think that clearly staying home and making the same money or almost the same money probably was the driver there. And I think as those policies are changed, then I think the issue for us anyway has shown some improvement and I would expect that to continue. We don't have many locations anymore that we feel – we just have a shortage of workers, if you will. I think government policy drove a lot of what you've seen.

Understood. Yes, hearing a lot of that. Jeff, are you able to disclose what your EV sales are today? I'm just trying to triangulate some of the growth that you've been talking about and I'm trying to get a sense what the base is?

We haven't broken it down that way as we work our way through the year. I'm sure as we close out this year and start next year, we'll have a lot more detail around how we've done in 2021 and we'll provide you that.

Okay. And then Jon, back to you. What would you say is the company's minimum cash needs?

Yes. Brian, we think long and hard about this obviously and been analyzing it with the new size of the company and state of the industry. So our current thinking is we can operate anywhere from $150 million to $180 million of minimum cash. Keep in mind, we do have that access to our undrawn revolver, so that adds a significant amount of liquidity in the pipeline that we typically aren't tapping. In fact, we haven't used it for several years, but it’s a nice backstop for us. So I think about it in terms of that, Brian, we do have obviously some excess cash, if you will, on the balance sheet now just because of we're maintaining it to work through the industry disruptions, fluctuations, et cetera. And if you think back a year ago, we took out the senior secured notes just for that reason, back then it was COVID-related. Now it’s COVID plus Microchip-related. And so that backstop is just providing us additional assurance that our liquidity situation is a good one. So as we work toward the next 11 months, we'll right-size the capital structure and then fine-tune it going forward.

Got it. And then final one for me. Nice to hear that you're going to make a decision on South America by year-end. Just as we think about cash restructuring costs, could that potentially be higher or lower in 2022 versus 2021?

Well, we haven't contemplated the final decision on what Brazil might mean to that restructuring cash. But with the programs we have in place now, we'll be down considerably from the $40 million to $45 million in cash that we'll spend this year.

Perfect. Thanks for the time.

Okay. Thanks, Brian.

Your next question comes from Mike Cazayoux from KDP Investment Advisors. Please go ahead.

Hi. Thanks for taking my question. This kind of related to an earlier question asked about the components of the decrease in EBITDA. And I'm just looking at your guidance for revenue and it's basically unchanged, maybe down 3% at the midpoint. So that implies you think you're going to have some catch-up in the third and fourth quarter from what you lost in the second. So I'm trying to understand how the reduced volume is related to the decline in EBITDA?

Hi Mike. This is Jon. Thanks for the question. I alluded to this in my prepared remarks. What's masking the overall decline in revenue for us from a production volume standpoint is favorable foreign currencies. So when you think about the euro appreciation, the Chinese RMB as well as the Canadian dollar, we're seeing an increase in sales to the tune of $80 million or so from our previous guidance range on sales. But that's obviously offset by the Microchip shortages, the $200 million that I alluded to earlier. So if you net those two off, that's how we came up with the new range on revenue. So the production volume associated with our revenue is coming down well.

Okay. Thank you.

Thanks, Mike.

Your next question comes from Josh Taykowski from Credit Suisse. Please go ahead.

Hey guys. Thanks for taking the questions. I wanted to just, I guess dig in a little bit more on the sequential decline for EBITDA. Obviously, a really tough operating environment out there, but is it possible to do an approximate walk on the sequential EBITDA decline from 1Q to 2Q, just that $53 million decline bucket between either volume or inflationary impacts or otherwise?

Yes. Josh, I do have an analysis, give me a minute to dig it out here and I can walk you through. But when you think about Q1, the year started off in a good state overall for all the regions. But then all of them were impacted in one way or another by the Microchip shortages overall. But then think about the $12 million of commodity inflation that we incurred being equally spread across the Board. So the $3 million in North America, $3 million in Europe and then the rest in China and a bit more in South America. So when you do that walk across most of the Microchip impact, as I've said earlier 75% of it was in North America. So the biggest set of declines from Q1 to Q2 hit us in the North America region, that would really bring down overall profitability and you can see that in the segment results in the press release overall. Equally – on the positive side, equally across the Board, very favorable developments on the manufacturing efficiencies that Jeff talked about. So North America continues to take cost out and become more efficient. Europe was very, very successful in doing the same during the quarter. So sequentially, you see those improvements working in the positive favor to offset those COVID and Microchip shortage declines.

Got it. That's very helpful. Thank you. And then just a question on the guide for 2021. Does the new EBITDA range include any assumption on the recovery of that $40 million or is that kind of net of some recovery?

Josh, just a minor portion. As we've been discussing, a lot of this will turn into commercial negotiations and that we can't really predict the timing of when those recoveries will be received or when those negotiations will conclude. So at this point, the known amount is only around that 20% I referred to earlier, that is on index contracts that we can expect on a quarterly lag.

Got it. Okay.

It appears there are no more questions. I would now like to turn the call back over to Roger Hendriksen. I'm sorry, we have a question from Chris Wang from Barclays.

Hey. How are you? Thank you for taking the call. I just want to clarify on the last question, I ask a different way. So if we are thinking your only recovered index contract on the commodities, if the wage stays high, the general inflation stays high, is there any downside risk to the current full-year guidance of 75% to 105% or that is fully baked in, more of a kitchen size table number?

Chris, it is all in at this point. So you'll see upside if those negotiations are quick and we conclude them faster. But as of now, everything we know about in terms of inflationary pressures are in these numbers.

Got it. And I know you said things are moving fast. So understandable, obviously, OEM we're getting to a little bit weaker second half as well. But I'm just looking at some of your peers, their 2Q numbers with somewhat similar customer mix, they're doing a little bit better. What is sort of the differential between you guys and I'm just trying to understand what kind of really happened for you guys, but not necessarily for some of your peers?

Hey, Chris. I think it comes down to the weighting of that semiconductor Microchip shortage impact for us and then the customer mix for us overall. Like I referred to earlier, 75% of that $2 million is in the North America D3 programs, which are typically very, very key programs for us, very profitable programs for us overall. So when you lose revenue on those, it creates an outsized degradation in our profitability.

Got it. And then the low end is 75% versus high end 105% is just a matter of how severe the semi shortage is going to be in the second half.

Correct.

Got it. All right. Thank you very much.

Thanks Chris.

We have a follow-up question from Mike Cazayoux from KDP Investment Advisors. Please go ahead.

Hi. Thanks. Ford obviously is your biggest customer, quarter to a third of the business and they were particularly hard hit by the chip shortage. What do you think your numbers would look like if you didn't have Ford as a client?

Yes. Mike, we typically don't break out individual customer revenues like that, just obviously from commercial sensitivity standpoint. But when you breakdown the overall North America estimate, most of the 75% of that $200 million was Ford-related, I'd say in excess of 50%. So I'll let you do your own calculation there.

Perfect. Thank you.

Okay, Mike.

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

Okay. Thanks again everybody for joining us this morning. Should any of you have additional questions, please feel free to reach out to me directly and we'd be happy to do follow-ups as much as you would like and certainly look forward to continuing that dialogue. This concludes our call this morning, so you may disconnect. Thank you.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.