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

So for the next presentation, we've got Cooper-Standard with us. And we're pleased to have the CEO and CFO, right? We have Jeffrey Edwards and Jonathan Banas

Thank you. Good to be here.

Thank you so much for taking the time.

Maybe just diving right into it, we'll just like recap of second quarter results for the investors you guys reported last week. Solid set of results on the top line. And we saw like some compression on the EBITDA margin. I just wanted to recap just some highlights of what were some of the onetime items you guys saw in the second quarter and how was like overall production tracking? And how should we think about just the drivers of the results?

Yes. I think as we looked at the second quarter results, clearly impacted for us was basically an inflation quarter, we actually suggested it would be at the end of the first quarter because oil prices impact our company in a good way, every a [ barrel ] of oil up is $450,000 of EBITDA up or down. Our business plan for the year was at $65 and the average price of oil in the second quarter was over $90. So obviously, a big impact. If you just keeping it real simple if you look at the impact that the commodities had in addition to a little bit of tariff, it was around an $18 million hit for the quarter. So if you add the [ $18 ] on to the $53 that we reported, we're probably ahead of every thing that people said, but there's not much we can do about that. The good news is we have index contracts with our customers. So effective July 1, the price increases for oil went from [ 65% ] to call it, low 90s, and we began to recover the monies in the third quarter that we gave away in the second. So assuming the conflict is over at some point in time here in the quarter, in the third quarter, we would recover most of what we inherited by the end of the year, probably a little bit would spill over into the first quarter of next year as well. But I'm done predicting the end to the Middle East conflicts. So I'll just leave it at that.

Makes sense. I think just like stitching it from there, the second half walk because you guys are looking at the guidance, you tightened a little bit of the range but largely like unchanged. And it implies like a steep ramp up in like the margin level from here. Is that like more on the -- along the confidence of how much you've taken in net recoveries till now in the month of July or maybe some new underlying assumptions that you've taken for oil prices? Just the puts and takes there? And like how much conservatism, if any, is baked into it, to go to the lower or high end of the range?

Yes. I think start with the good news. I think our our top line is basically what we expected it would be for the first half of the year and is tracking as well. There's always puts and takes with volume and mix in our industry. There was a little bit of put and take in the first half. There'll probably be some of that in the second half. But I would use the word stable when I talk about the business, really in all the regions. So that's the good news. The intent with the second half guidance that we put out there is in essence, we would recover virtually all of the inflation that hit us in the second quarter. We would recover all that in the third and then some into the fourth, and that's the reason for the increase. If you go back and look at the business over the last 3 years and you look at the -- we ended last year just under our margins anyway have expanded every year. We're at just under 12% in '25. We're tracking above that this year, our 2030 projections or 15%. So if you draw a line from [ 23% ] to [ 30% ], we're still right on that line. Obviously, you have virtually no volume uptick in those numbers, right? It's basically a flat 90 million units between now and 2030 is what the forecasting folks are saying. So that's what's in our numbers. If there's volume upside, then the numbers get better. In addition to that, we'll triple our return on invested capital over the course of the next 3 years. We were 7% last year. So you can do the math by the time we get to '[ 28 ], we feel very positive about the health and the trajectory of the company. And in fact, by 2030, we expect it to be about $3.8 billion on the top line. So up $1 billion from [ $25 million ] to [ $30 million ], all organic growth. So a lot of positives going on. And we feel very good about the cost base, the pricing that's been established in the world and the indexing agreements that we have that allow us to really defend ourselves through times like this, right? Historically, that hasn't been the case with these new contracts. And for the first time, we put those in effect July 1. And it's working. It just doesn't feel like that when you look at the quarterly result, but the overall health of the business is very good.

Makes sense. And just double tapping on the raw mats piece, right? Given just like the correlation over there, how much of this is like a direct headwind that you ways face in terms of the raw mats that you procure material costs? And how much would be like an indirect effect of just like freight or any reimbursement you have to give to like T2 or 3s. Can you size us -- you gave some numbers on the model, right, like for every [indiscernible].And how much is like the -- what's the assumption that you guys have taken in the latest guidance on an oil price range because we've had like other companies, like [ rubber ] companies, tire companies and all also going through [indiscernible] dynamic there with a lot of swing. So just walk us through those pieces.

Yes, our assumption in the guidance is basically we're going to recover what we -- what it cost us in the second quarter. We'll recover that in the third and the fourth. If there is continued inflation headwinds in the third, then you obviously recover that with that same quarter lag. But assuming that the price of oil remains below our current [ $92 ] then we should be fine. But there's fluctuations, as you know, in the past 30 days that I think it's been -- the range is something like [ 77 ] to [ 97 ] so there's still a lot of volatility there. And the way the indexes work, you just take an average for the quarter, then that becomes your new price point. So let's see how it plays out. Do you want to talk about the rest Jon [ on ] other inflation and some of those costs that were embedded in the total GAAP for the quarter?

Yes. It's not just an oil story for us. About 70% of what we incurred in Q2 was oil-based inflationary pressures. But in our fluid business, we also procure metals, namely stainless steel and aluminum inputs, which there was about $3 million worth or about 30% of our commodity inflation in the quarter as well. Good news there is we also have index contracts with our customers to recover most of that. Similar quarterly lag. I mean we'll get that most of that back by the end of this year. We expect -- but the whole geopolitical environment is making all costs high. So you think transportation costs, utility bills are rising as well. Those aren't necessarily directly [ indexable ]. If there's shocks in the system, we can approach the customers to go back and recover some of that. But normally, we offset that with our own purchasing and manufacturing lean initiatives from a cost-saving standpoint to cover off any of the normal inflationary pressures.

Right. Just moving on to just the customer profile concentration and the kind of OEMs that you guys are partnered with more than half of your business like comes from the [ Detroit 3 ]. You've got like a couple of more OEMs like top 5 go up like 60% to 70%. How do you think that mix has changed over time? And is there room for that to change going ahead just given that having these outsized exposures would mean that you guys would see some cadence swings when it comes to like a [ Novelis ] kind of a situation or like a truck platform change for GM in the fourth quarter. So just wanted to get your thoughts there on how you're thinking about that.

Yes. I'll just back up to -- I mean, the industry is 90 million units globally and kind of projected to hang around that number for the next 4 or 5 years. So how I think about that is 10 years ago, 75% of the revenue for the company was the North American manufacturers. And today, it's closer to 50%. I think going forward, as the China auto industry continues to grow. I mean today, it's roughly 30% of the global market. So that clearly means that if you're not diversifying with the China market, and I think you probably are going to end up with an extreme amount of business, call it, your entire market is tied up in 70% if you're not with the China customers. And so in our case, we're very pleased that it is our [ fastest ] growing region, our fastest-growing customer base. And not just for the China domestic, but as they grow share globally, we're very excited to be part of their export supply base. And so today, as an example, let's just say they're right around 28 million units of production in China and about 40% of that is being exported this year. I'm sure that will vary in years to come, but the other thing that's happening is we're also part of their plans as they build factories in Europe and other places in Southeast Asia. We are going to be supplying them the product that we supply everybody. So I tend to think about it going forward, every vehicle that's produced. So those 90 million units require every part we make. So we ought to be able to figure out how to thrive in an environment where there's 90 million units produced and we produce everything that those 90 million units need. So I think we'll carve out our fair share. We'll continue to balance appropriately in all regions of the world. The other thing that's changed over the past 10 years, as we [ sit ] here today, we are profitable in every single region in the world. We have very clear hurdle rates for our prices with every customer along every product line or we don't take the business. And so that's the reason we have returned to a level of profitability and why our projections over the next 5 years continue to show significant organic growth. And the final point I would make there is with our business, this year, we'll book $400-plus million of net new business. All of that will launch over the next few years. And so about every 6 years, we're building out programs and new ones are replacing them. And for 3 straight years, our net new business, margins exceed the products that they're replacing. So when we put together a 5-year outlook like we have through 2030, you can go out to 2029. By the end of this year, we'll have 80-plus [ percent ] of our '29 revenue already booked. So we feel pretty solid about the forecast. We don't control volume and mix. We don't control conflicts from a geopolitical point of view. But what we can control, we're managing pretty well.

Makes sense. Well, we're on the China piece, right? Like on both a I think you disclosed -- have you sized how much is coming in from China. And within that, any mix of life foreign versus domestic OEMs and also like 20% of the market is exposed. So I think this earnings season, almost all the suppliers were talking about how exposed they are to some of these export platforms. So any granularity there on how you're thinking about it? And also on the new business bookings number of $400 million, how much of that is with Chinese OEMs or maybe domestics? And when would that materially weave into the numbers in the later off of the decade?

Yes, I'll start with the last part first. So of the $400-plus million that we'll book. This year, I think we're suggesting externally the 20% of that is tied to the China manufacturers to answer your question. And if you look at our fluid business and our [ sealing ] business, I think this year, that number is kind of split in half, half of it is new business for sealing, half of its new business for fluid. The dynamic that's really important for our fluid business is this shift that's taking place from the ICE powertrains to battery and to hybrid. And if you compare just as a simple baseline, if you look at, let's just assume 90 million units today were all ICE or not, but it helps my story. 90 million units were ICE, if 15% become electric vehicles, then our fluid business content per vehicle goes up 20%. Let's say, 50% of the market by 2035 will be electric or hybrid. Same 90 million units. But half of the market will generate somewhere between a 20% and a 50% content per vehicle upside for our Cooper fluid business. So it's a really interesting dynamic that's taking place across the world as they shift to, call it, a balanced portfolio of hybrid and electric vehicles. And if we don't book one more vehicle, our content still goes up 20% to 50% with the fluid business. So I think that's also a way that we are "insulating" or in some way, creating a a business model that will stand the test of time within the portfolio. It doesn't matter what powertrain goes in it. Every vehicle still needs every part that we're producing, of course, a fuel line and an electric vehicle that goes away. But the content that I gave you of 20% up is net of fuel lines coming out. So it's a really good story for us. It's a great growth story. The other thing I will say to all of you because most of [ his ] own vehicles, I would think, and if you think about the critical nature of what we produce, if you have a ceiling system and you take your car through the car wash and you get wet, you're probably never buying another one of those vehicles. If you park one in your garage or in your driveway at night, you end up with something on the ground that's not supposed to be there. You're probably never buying one of those vehicles. That's why we get all the business because especially in the case of the Chinese domestics that are trying to build a quality brand globally, they don't want to take a chance that either one of those events is going to create a customer dissatisfier that will be very, very difficult to overcome with new brands. So again, I think that's one of the reasons why we're being chosen and trusted with our innovation, with our quality, with our engineering, with our global footprint, the ability to deliver products that are critical to customer satisfaction is very high. And so we're proud of that history, and we're certainly proud of the existing relationships we've had for 60 years, but looking forward to the next 60 and building additional relationships with the new automakers.