Cooper-Standard Holdings Inc. (CPS) Earnings Call Transcript & Summary

Hi. Good afternoon. I'm Ryan Brinkman, the automotive equity research analyst here at JPMorgan. Thanks for joining us for the 2020 JPMorgan Automotive Conference being held virtually this year. Before we get going with our next presentation, which is going to be from Cooper-Standard or a discussion, I just wanted to remind the investors that they're able to ask a question of management, and I encourage you to do so. If you type your question in on the conference website, I would be happy to ask your question for you without identifying your name or firm. With that being said, I'd like to welcome Jeffrey Edwards, the Chairman and Chief Executive Officer of Cooper-Standard. Jeffrey, thanks for joining us.

Thanks, Ryan. Good afternoon, everyone. So let's go ahead and…

Go ahead.

Do you want us to go ahead and get started? Or are you going to ask some questions?

Yes. Sure thing. Did you have any introductory remarks or you wanted to go through the presentation? I don't know.

Yes. Let me go through a brief presentation, and then we'll get to the Q&A. Thanks. So we've -- I'm on Slide 4 for those of you joining online. This is really just an overview of the leading market positions that the Cooper-Standard has across all of our core products. The message on this slide is that we continue to be a market leader in the sealing system; fuel and brake delivery, we're #2; and the fluid transfer systems business, #3 globally. And you can see the current share we have 18%, 16%, 11%, respectively, across these 3 different markets. So a lot of white space to grow. We've provided you some color on the key competitors on the far right side of the chart. Slide 5 really just talks about the diverse global customer base that we have, not only within our automotive business, but within the Advanced Technology Group as well. And you can see the ATG customers across the bottom and then the names of all of the global automakers that we serve at the top. And we've provided you a breakdown of our $3.1 billion 2019 revenue by customer. Slide 6 really shows you the advantaged market position that we believe we have as it relates to the mix shift that's really been occurring within the industry for the last several years. And the IHS data on the chart on the left shows you the mix of cars and trucks and crossover vehicles in the global light vehicle production space. You can see in 2020, they suggest a 61.5 million units build, growing to 82 million in 2024, so an 8.4% CAGR in the trucks and crossovers. Why is that important for Cooper-Standard? Because if you look at the revenue that we generate globally, 69% of our revenue comes from those trucks and SUVs. And in North America, it's 81%. So when we think about our content per vehicle, in that particular segment breakdown, you can see that we're 1.9x greater content per vehicle relative to cars globally. And in the North American market, we're 2.8x greater content per vehicle, cars versus trucks and SUVs. So it isn't just about the SAR for us. The mix is important. And if you look at the trend associated with the mix and the growth associated with that over the next 4 or 5 years, it's very favorable for Cooper-Standard. The next slide really shows the flexibility of each of our products as we go across different powertrains, and we provided you a look at internal combustion, hybrid, all electrical and autonomous vehicles. And you can see that our content per vehicle actually goes up for hybrid and electric vehicles because of the additional cooling loops required. The only content we lose would be on a fuel line for our -- for the electric vehicles. So again, we're agnostic to the tailwinds that are really shifting away from internal combustion to hybrid to electric, and I think that speaks volumes for our product portfolio and our competitive position as we go forward. In addition, we've developed a lot of innovation over the last 5 or 6 years within our company. We provided you some information on Slide 8 related to the customer-centric innovation for EVs. And you can see that related to our hose business, we have PlastiCool 2000. We have Easy-Lock for sealing. We have FlushSeal. We've developed a battery pack seal that we think will have terrific support for our customers as well as busbars and then fluid transfer hoses. All of these innovations, we think, will provide us opportunities as we grow with the EV market expansion. We also, on Slide 10, are talking to you about the diversification of our business. Today, obviously, we're virtually all automotive OEM business, very little aftermarket. We have, over the last couple of years, identified a way for us to diversify Cooper-Standard across the nonautomotive rubber market, which today is about 6 -- about a $76 billion market. We've identified on Slide 10 for you a couple the market opportunities we believe we have. First of all, in wiring, cable and building and construction, we believe that our Fortrex material that we have launched as lighter weight certainly performs better in the environment and will provide us opportunities, like it has in automotive in each of these particular segments. We also have an Industrial and Specialty Group that provides product to the industrial and consumer products as well as commercial and recreational groups. One of the things that we'd note here, the takeaway is that we see this business growing at a 20% CAGR over the next 5 years. We also have announced last year a number of new development agreements. We're pleased to say that we expect to have royalty income from one and revenue generated from 2 of the other agreements that we signed last year as we move into 2021. I think that's significant because it says that not only Fortrex within the automotive business, but also Fortrex in the nonautomotive business, is starting to get some traction. So we're really pleased with that and look forward to sharing with you more and more details around it as we move forward. From the operations point of view, we have provided you a look across Asia, across Europe and across the Americas. I won't read these slides to you. But in essence, where we find ourselves today is as we move through August, is over 90% of the pre-COVID volumes have returned to us, so we're really pleased with how our plants have started back up. The safety performance is world class in all regions and all plants, and we believe that we're well on our way to recovering. If you would have asked me in March, would we have liked to have been in this position as we head through August, we certainly all would have taken it at this point. So still proud of the team, extremely proud of the relationships we continue to build with the customers, and we provided you some details here in terms of how we're performing in each of the regions. Moving on to Slide 14. This is really the liquidity profile and hopefully give you a sense of some of the financial flexibility and what we're calling a pristine balance sheet as we sit here today. We have no near-term maturities or significant obligations. Our aggressive actions as it relates to reducing spending in general and capital specifically have continued to meet the objectives that we gave the team early during the pandemic. It's also important to note that the current ABL availability has increased to $125 million as a result of receivables starting to back up to the company, as we say. Current liquidity, in line with expectations and is expected to be sufficient over the next 6 months, again, I think, attribute to the plans we put in place in March and how we've executed on managing cash really on a daily basis. We have been attacking this on all fronts and making sure that we're not spending it where we shouldn't be and making sure that we collect it where we need to. And so far, so good. In addition, we've given you some details on the right side of the chart that tells you how we've been able to do that and across each of the areas of the business. I won't read it to you, but you can see probably much like most successful companies at this point, that's how we're managing it. Slide 16 really talks about some of the things that we're still doing this year in terms of levers that we're pulling to improve the overall performance of the business. We actually kicked a number of these initiatives off in 2019, anticipating some downward pressure in the markets, especially China, and we predicted a little bit here in North America as well. This is all pre-COVID, but we had a number of these things in the works, and we've been able to execute them extremely well as we've gone through the last several months. And the first item here shows that we have divested our operations in India. We've exited our rubber hose business in Europe. We have continued to close factories that we didn't need from a capacity point of view. And if you take a look just at the businesses that we divested, you can see that last year, they burned $20 million of cash. They lost $14 million of EBITDA. It was $200 million of revenue, so a significant amount that we took away from -- took off the company. But at the same time, we believe it was the right thing to do. These businesses were not going to cover their cost of capital for the foreseeable future for us, and we decided to divest when the opportunity presented itself, so I think that's really good. In addition, we will close 1 more factory this year to take the total exited over '19 and '20 to 24 facilities. Once again, I think, doing the right thing for the business long term, improving the overall profitability of the company as we've committed. Recently, we're going to get back to a double-digit EBITDA. We're going to get back to a double-digit return on invested capital. We're ahead of schedule on that. The last bullet point on this slide shows that we had a target of $20 million in SGA&E and COGS to come out of the cost in 2020, and we're already at $50 million. That will be the annualized number as we head into 2021. So a terrific uplift from an earnings point of view. And certainly, the factory closures and all of the fixed costs coming out will go a long way to helping the return on invested capital of Cooper-Standard. We've identified these 7 work streams for you that, really, we believe, will ensure that the company returns to the double-digit EBITDA, returns to the double-digit ROIC and sustain that level of performance over time. We've given you the breakdown. You can see the work streams: commercial, indexing, program management, purchasing and supply chain. These are all areas that will have significant impact as we execute each of these initiatives over the course of the next year or 2. We've given you the timing associated with these. We've also given you the basis point impact that we think we'll have. We can get into more of the details when we get into Q&A, if you would like. Moving to Slide 18. This is really the -- what we think is the compelling investment thesis. Our automotive business is focused on 3 core products. There's no distraction in our business. We know who we are, and our customers know who we are. And there's a tremendous amount of respect for the types of products we deliver, the innovation and the way we execute on a day-to-day basis. We told you about the products across each of the powertrains and the fact that they're essential, regardless of powertrain and the mobility option. We're strategically positioned to capitalize on the growth trends of trucks and SUVs. And you see how much greater content per vehicle we have as a result of this segment train -- this segment shift. Strategic diversification, we're leveraging our Advanced Technology and Material Science business beyond the automotive. Certainly, automotive has served us well. But as we grow this part of our business to hopefully achieve somewhere in the 25% or 30% of revenue as we move through the end of this decade, I think that will drive a lot of value creation for Cooper-Standard. And we're rapidly rightsizing our operations. We're reducing costs. We're not talking about it. It is on a PowerPoint presentation. It's what we're doing. We tried to provide you some details around all of those initiatives and timing associated with them as well. And finally, probably the most important thing, we've implemented this defined focus plan to return Cooper-Standard to double-digit return on invested capital, and we'd like to talk to you more about that as we go forward in the session. So with that, Ryan, I will turn it back over to you, and we'll jump into the Q&A.

Great. First question is just, we've been asking all the suppliers what they think the ultimate impact is of coronavirus on margin. Clearly, initially, it was very negative. A lot of suppliers are finding sources of savings, being pressed to do more with less, furloughing staff, being more efficient with SG&A, et cetera. You had your own operating improvement initiatives already underway. But do you think that you'll ultimately come out of this even leaner than you otherwise would have been? Or how are you approaching that?

Well, I think we're gaining on a lot of things that needed to happen within the business. We're able to lean it out. We're able to take cost out where it makes sense. We've divested businesses. I don't want to say that it's COVID or not COVID. All I can tell you is that the environment we're working in right now is the environment we're working in, and we're doing quite well. I think it's very efficient. Certainly, when you think about SG&A -- SGA&E, you think about T&E, you think about a lot of other costs that creep in the businesses, we've been able to take those out immediately. I'm sure, like most have. I anticipate some of the best practices that we've learned as a result of managing in this crisis to continue to carry on. I would expect that there are some things that we'll probably revert back to the way we were doing it. But I'm not sure which will be. I think it will be balanced. I know our company is going to be more profitable coming out of it. I don't think that is necessarily COVID-related, but it's really attributed to the plans and the execution of those plans that we put in place.

Maybe a question, too, around capital allocation if that is influenced by the coronavirus crisis. And obviously, you did a debt raise there. Do you need to sort of operate with more capital cushion, more cash going forward? Has your targeted leverage ratio changed? Do you see operating with less debt in the future? What are your thoughts?

Yes. So we -- as you just pointed out, we obviously took the opportunity to go out and buy an insurance policy, right? I mean, ultimately, that's what the secured bond deal was. We didn't know what the future holds even sitting here today just because the summer months have returned to near production levels. It doesn't necessarily mean that people are going to buy the cars and trucks over the course of the next several months that are being produced. I think they will, but we don't know. We also don't know when the science solution is coming for the virus and how ultimately that will impact the whole start-up of the business. So that's what the insurance policy is for. We're in terrific shape from liquidity point of view. Our cash balance at the beginning of the year was outstanding, and we didn't tap the revolver during the entire process here, call it, February through July. So we continue to manage the business extremely well. As we talk about going forward, I would expect us to be back in a similar state where we're talking about not levering the company up above 2, 2.5x. In normal state, we want to get back to a point where we pay back the bond deal after 2 years, get that behind us and then be in a position to manage the strategic initiatives that we needed to manage going forward. I would expect there'll be a few opportunities that we're able to take advantage of still or maybe some that we won't because of the stipulations associated with that insurance policy, but we'll take those one at a time. And in the meantime, we have plenty of cash to run the business, and we have plenty of cash to continue to invest in growing the Advanced Technology Group, investing in the launches and investing in innovation, doing the things that really make it a terrific business going forward and ensure the long-term sustainability of the company.

Okay. And then you've undergone a number of dispositions recently, including in India, certain parts of your European operations. How do you go about deciding which businesses to dispose? Are there sort of shot clocks in other parts of your business coming down right now? How patient are you going to be in terms of turning them around? And then when you do ultimately dispose of them, if that is what you do, are we talking about cash proceeds or instead cost to wind them down or dowries, et cetera?

Well, clearly, we're always committed to the customers and the businesses that we've invested in historically, and that wasn't anything that changed in a flip of the switch. So we worked extremely hard with our customers and with our local management teams in these businesses, be it product or be it geography. We had just decided last year actually before the COVID-19 impact that we were really done with what we could influence and what we could impact due to dynamics outside of our company's control. And so once we decided that, it was a done deal. And we moved forward and we executed on something that's going to make the company a lot stronger. Your second part of your question is, do you have any more of those to do yet, and I suppose the short answer, as you sit here today, the answer would be yes, unless we can come up with a way to get those business fixed in short order. We, frankly, don't have a whole lot more patience left for a couple of those businesses. We'll see how it goes. But at the same time, you have to have a -- where there's a seller, there needs to be a buyer. And given the environment we're in, we probably have a little bit more time to work our way through it before we're going to be in a position to exit anything else. I've said publicly, the one that still remains for us is Brazil. We've invested there heavily. We've supported everything our customers have asked us to do. Unfortunately, there just isn't a solution that's good enough for them or good enough for us going forward. So I would point to that as a potential one that may be next. We'll see.

And is there an update you can provide on the nonautomotive Fortrex opportunity? In the past, you've spoken of a really very large addressable market there. Looks like you're getting there. You're about to assume getting maybe some royalties. Just given the relatively costly debt, so I'm curious if you've ever evaluated the potential for a sale rather than licensing of the intellectual property rights there. If -- do you think that the value of that IP is being reflected in your consolidated valuation today?

Well, I'll answer the last part first. I mean, to be fair, we don't have revenue and earnings outside of the automotive business that we can really talk about. It isn't material. And ultimately, you'd be disclosing pricing of the business that you do have. So what we do -- what we have said is that we have booked a significant number of license agreements with potential clients. What we've said today is we expect that 2 of those will be generating revenue next year. That's new news, and I think that's really positive as we go forward. Last year, we had announced a deal, and maybe some on the line saw that PolyOne, now Avient, is also a partner of ours. We have licensed them to go out and pursue Fortrex opportunities within their customer bases. And hopefully, that will begin generating. That's the royalty stream that we referred to and that you just referred to. The stream of earnings and revenue from those other 2 that I mentioned will be in the form of selling raw material to a particular new customer, and then those customers ultimately producing product that they sell today, paying us for the raw material that they're using to make those products. So it's a big step. It's an important step. It may seem small from a revenue and earnings point of view, and it probably will be when you put it in the context of the whole company, but the fact that we're there and we're winning in those markets is a testament to the technology, it's a testament to the chemistry platform that Fortrex is built on, and that's why we're excited about the next decade growing that business.

Great. I have gotten a couple of questions here from investors. The first one is, what is the cash cost of remaining restructuring/plant closure programs? With volumes slightly down through 2021, how will you position CapEx and other liquidity needs?

Yes. So we're about at the end of the restructuring that we had identified in 2019 for 2020. I don't anticipate a lot yet to be done next year. There'll probably be a little bit, but in comparison to what we've just done, not a whole lot. In terms of capital for this year, we've said that we'll be between $100 million and $110 million. That's down from a plan of $150 million. $150 million was down from an actual from the year before -- the years before. Probably, in the neighborhood of $200 million to $220 million is what we've averaged in the past 4 or 5 years. So I think that the capital this year at $100 million to $110 million probably isn't sustainable as we launch more programs. And when you think about the majority of the capital that we do spend on an annualized basis, it's for new program launches. So I certainly hope that, that continues and the industry isn't pushing out launches. We certainly have been awarded our fair share of new programs. So I would think it will probably return to the -- just under 5% that we've said, somewhere between 4.5% and 5% would be the capital for '21 and '22 and forward.

I've gotten a question here, too. It says seems there is a healthy opportunity to grow via selectively expanding market share. Can you detail the commercial work stream a bit more? A couple of questions. What does Cooper-Standard have to get better at in order to achieve net new -- more net new business and net price?

Yes. So on the commercial front, we've said this for the last many months, we've always averaged between 1.5% and 1.7% net price down really over the course of the past 10 years. We had one year that we had to give back 2%, and that happened to be on top of significant raw material inflation. So we ended up taking about $160 million of a haircut in our margin because of those 2 things that happened really over a period of about 12 to 18 months. So now what we're suggesting is that on the raw material front, with our supply base, where we've typically had about 1/3 of that cost indexed and with our customers where we've had 1/3 of that product indexed, we want to double that. So we want 2/3 of our products tied off to indexing, which will help smooth out the peaks and valleys of inflation and deflation and make us a little more predictable and forecastable over the horizon. In addition to that, we've said last year and this year that our net price giveback needs to be 1% or better. We hit that number last year. I expect us to get that number this year, high probability that will happen next year. To date, we haven't had a lot of headwind in terms of winning our fair share of business, despite taking that type of a position on pricing. Part of that is that we have innovation that others don't have. The other part is that we launch in a foreseen way. We happen to be green on virtually every program. We have a great relationship with the engineering groups within Cooper-Standard and those that we interface with at our customer level. So there's a trust that's been built up, and there's a desire not to shift product around for just price, which is a good thing. That doesn't mean that price isn't always going to be a topic. But right now, I think that our customers, along with the Cooper-Standard approach to this, are in fairly good lockstep agreement with where we are. I would tell you that there's always going to be conversations and difficult conversations around pricing, at least I can speak for the last 36 years in the industry. It isn't going away, but you just have to manage through it, and everybody has to come out as a winner. And in our case, that just means that we can't invest in businesses that we don't generate enough return to cover our cost of capital. And look, our customers understand that. They want us to be successful just like we want them to be successful.

Okay. And it looks like on the low and high end of the ROIC improvement parameters on Slide 17, sort of like 875 to 1,075 bps of improvement and that returns you to double-digit levels. Do you get back to where you were at the lower or high end? Or do you exceed the previous levels? And then what is this offsetting? If you're just sort of getting back to a double-digit ROIC, was it primarily the volume headwinds in the industry in '18 to '19 before coronavirus, compounded by the lower COVID-19 volumes? Or was there a softer execution, some sort of -- what are you fighting back from here?

Yes. Well, certainly, the revenue of the company is significantly less because of some of the divestitures and other decisions that we've taken in terms of 2 large businesses that we've divested. So flexing and getting our costs back in line with the new normal, that took a little bit of time. So that was part of it. I explained the significant headwind regarding raw material escalation. We ended up, obviously, eating some of that. Customers pay for some, but we certainly absorbed that. We had a couple of heavy years on pricing, so we've taken care of that in the negotiation. So we're saying minimum of 10%, Ryan. And we expect that, over time, we'll continue to perform above that hurdle rate. For us, I think that's enough at this point. We don't need to talk about doing something other than getting back to those 10% above hurdle rates and then managing that going forward. And really, it's a cost play. We can control that. We need to manage it. We need to own it. Nobody is going to do it for us, and we accept the responsibility that comes along with that.

Okay. Great. Looks like we're about out of time here, so I really appreciate you taking the time to walk us through it. Thanks a lot.

Okay. Ryan, all the best. Take care.

You, too. Thank you.