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

[Operator Instructions] 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 Hendrickson, Director of Investor Relations. Please go ahead.

Thanks, Mel, 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 John 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 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, and good morning, everyone. We appreciate the opportunity to review our third quarter results and, as always, provide an update on our business and outlook going forward. So just beginning on slide 5, I'd like to highlight some of the third quarter data points that we believe are reflective of our continued outstanding operational performance and our ongoing commitment to our company values. In terms of operations and customer service, we continue to deliver outstanding performance on both fronts. On product quality and service, 99% of our customer scorecards were green in the quarter. For new program launches, we continue to deliver strong performance as well, with 97% of those scorecards green, with significantly enhanced launch activity. So again, a shout-out to our plant managers and plant employees as they continue to deliver outstanding performance and value for our customers through their dedication and personal commitment to excellence. I truly appreciate everything they're doing. And as always, the most important operating metric we have is safety performance, and that continues to be excellent. During the third quarter, we had a total incident rate of 0.27 reportable incidents per 200,000 hours worked. That's well below the world-class benchmark of 0.35. Importantly, 36 of our plants have maintained a perfect safety record with a total incident rate of 0 for the first 9 months of this year. That's 61% of all of our production facilities achieving a perfect safety score and demonstrating their ultimate goal of 0 safety incidents is certainly achievable. I'm proud of our entire global team for their focus and achievement in this important operating measure. In terms of cost optimization, we continue to make progress with our manufacturing and purchasing teams, and they delivered $9 million of savings through lean initiatives and other cost-saving programs. This was despite an increase in launch costs resulting from higher-than-planned launch activity, partially related to the recent conquest business that we've booked and mid-program transitions. Total plant launches in the quarter were up more than 100% compared to the third quarter of last year. We also made solid progress in terms of optimizing our fixed cost with an additional $4 million reduction in SG&A expense during the quarter. Finally, we're continuing to leverage world-class service, technical capabilities, and our award-winning innovations to win significant new business. During the third quarter of 2026, we in fact received $149 million in net new business awards, which are expected to drive profitable new growth as they launch over the next few years. Turning to slide 6, just to put this in context, this brings the total net new business awards for the first 9 months of the year to $395 million, essentially already achieving our full-year 2026 goal of $400 million. As you can see in the chart, our new business awards have been accelerating over the past few years as the financial strength of the company has been improving. The good news is that we have available capacity to launch much of this new business over the coming years with minimal incremental capital investment. We're proud to be the supplier that our customers are increasingly turning to for quality components, consistency of delivery, and collaboration on critical design and development of new technologies. With these awards in hand, driving incremental variable contribution margins and a strong commercial pipeline for new business wins ahead, we are increasingly confident that we will be able to execute our plans and achieve our longer-term strategic financial targets for growth, margins, and return on capital. Turning to slide 7, in addition to the new business awards, we continue to garner recognition for accomplishments in quality, culture, and technology innovation. This slide shows just a few of the awards we've received this year from customers, respected industry associations, and the media. We believe these awards are a direct reflection of our special culture here at Cooper Standard. I could not be more proud of our team, and I want to thank our 22,000 employees worldwide for their continued commitment to our core values and for their continuing achievements. Now let me turn the call over to John to discuss the financial results for the quarter.

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some details on our financial results for the quarter and discuss our cash flows, liquidity, and aspects of our balance sheet and capital structure, and then provide an update to our 2026 full-year outlook. On slide 9, we show a summary of our results for the third quarter and first 9 months of 2026 with comparisons to the same period last year. Third quarter 2026 sales were $708.6 million, an increase of 1.9% compared to the third quarter of 2025. The increase was driven primarily by favorable volume and mix and to a lesser extent favorable foreign exchange. Adjusted EBITDA in the quarter was $52.8 million compared to the $53.3 million we reported in the third quarter of 2025. On a U.S. GAAP basis, we reported a net loss of $20.4 million in the third quarter of 2026 compared to a net loss of $7.6 million in the third quarter of 2025. Adjusting for restructuring expense, net of tax from both periods, adjusted net loss for the third quarter this year was $2.1 million, or $0.11 per share, compared to an adjusted net loss of $4.4 million, or $0.24 per share in the third quarter of 2025. Our capital expenditures in the third quarter of this year totaled $16 million, or 2.3% of sales. This was higher than the prior-year period due to increased automation and launch-related investments, but in line with our expected full-year run rate of 2% to 3% of sales. We continue to exercise discipline around our capital investments, consistent with our goal of maximizing returns on invested capital. For the first 9 months of the year, sales were $2.1 billion, up 2.3% year-over-year, primarily due to favorable foreign exchange. Adjusted EBITDA for the first 9 months was $157.8 million, and adjusted net loss was $9.6 million. Additional detail on the drivers of the year-over-year changes for the quarter and the first 9 months are shown in the charts on the next couple of slides. Let's move to slide 10. For third quarter sales, favorable volume and mix, net of customer price adjustments and recoveries, had a positive impact on sales of approximately $9 million compared to the same period a year ago. Foreign exchange was a tailwind of approximately $4 million in the quarter versus the third quarter of 2025. Our third quarter adjusted EBITDA benefited from an adjustment to compensation-related expense, reflecting anticipated incentive compensation payouts now being lower than originally planned. Reduced gross tariffs and duties, lower SG&A expense, and lean initiatives and purchasing positively contributed $13 million, $4 million, and $9 million, respectively, compared to the third quarter of last year. More than offsetting these improvements, however, were $13 million of unfavorable volume and mix, net of customer price adjustments and recoveries, $15 million of higher material costs, and $12 million in increased wages and general inflation. The material cost inflation was driven primarily by oil prices, which have remained between $30 to $40 per barrel higher than we planned coming into the year, impacting the pricing of our rubber and plastic feedstocks. Aluminum prices were also higher, driven by supply chain and transport disruption, and continued uncertainty related to the ongoing conflict in the Middle East. We continue to believe we will recover most of these incremental input costs via the index-based contracts and agreements we have in place, as well as through ongoing commercial negotiations. As we said in our last call, the timing of recoveries is still somewhat dependent upon commodity price trends, as well as the time lags inherent in current agreements with our customers. As we've seen in the third quarter, continued elevated commodity prices could further delay the full realization of expected recoveries. Moving to slide 11. Looking at adjusted EBITDA for the first 9 months of the year, our teams have generated $40 million of savings and increased efficiencies in purchasing, supply chain optimization, and lean manufacturing, which continue to benefit our results. Lower-than-planned compensation-related expense versus the same period last year, reductions in SG&A expense of $4 million, and $5 million in savings from past restructuring initiatives were all positive factors for the first 9 months. Nonetheless, these positive items were more than offset by $27 million in wage increases and general inflation, $25 million of higher material costs, $21 million of unfavorable volume and mix, net of customer price adjustments and recoveries, and prior-year royalty settlements of $10 million that did not repeat. Turning to slide 12. In terms of free cash flow, which is defined as cash provided by operations minus CapEx, we had an outflow of $10.8 million in the period. The year-over-year change reflects lower cash earnings and investments in working capital driven primarily by elevated material costs and general inflation, as well as increased cash taxes, cash paid for restructuring initiatives, and capital investments supporting new program launches and automation initiatives. We ended the third quarter with a cash balance of $112.3 million. Coupled with $193.1 million of availability on a recently amended ABL facility, which remains untapped, we had total liquidity in excess of $300 million as of September 30, 2026. We were pleased to successfully complete an amendment to our ABL during the third quarter that enhances our capital structure. The amendment increases the total facility from $180 million up to $200 million, providing additional liquidity and flexibility to support our ongoing operations and strategic priorities. The amendment also extends the stated maturity to September 2031 and improves the financing economics through reduced borrowing spreads and fees. We believe that our current cash and available liquidity, combined with expected future cash generation, provides us with sufficient resources to support the continuing execution of our strategic plans to deliver profitable growth, lower our net leverage, and maximize returns on our invested capital. Turning to slide 13. I'll conclude my prepared comments with a few details on our near-term outlook and the revisions to our 2026 guidance. Following our results for the first 3 quarters, we have reduced our outlook for full-year adjusted EBITDA by approximately $40 million at the midpoint. In the bridge on the right side of slide 13, we break out and quantify the key variables that we expect will drive a solid $30 million or 100-basis-point year-over-year increase in adjusted EBITDA, despite the incredibly challenging market and industry conditions. Cost savings from manufacturing and supply chain lean initiatives are now expected to be approximately $80 million for the full year, which is about $10 million less than our original plan. More significant, however, are increased impacts from commodity costs and delays in customer recoveries as well as continued higher inflation. Combined, these items further reduce our outlook by approximately $30 million for the full year compared to expectations last quarter. While the timing of some of the commodity cost recoveries will now push into 2027, we still expect to recover the majority of the commodity cost increases we will incur in 2026. Jeff will provide a bit more color on these efforts in a few minutes. This concludes my prepared section, so I'll turn it back over to Jeff.

Thanks, John. In this last portion of our call, I'd like to again comment on our high-level strategic imperatives and how we believe these are positioning us for continuing profitable growth over the next few years. So please turn to slide 15. The charts on slide 15 provide, we think, a good summary of the progress that we've made in restoring the financial strength of the company over the past few years. Gross profit and adjusted EBITDA have increased steadily despite reduced or flat production volumes in our 2 largest operating regions. Our continued operational excellence and strategic execution have driven the improved results, and we believe there is certainly more to come. Turning to slide 16. Over the next 3 years, we expect to benefit from the continued optimization of our cost structure, variable contribution margins on new programs now being launched, incremental sales of value-added innovations, future launches of the record new business awards we've received over the past 2 years, and further efficiencies as we continue to leverage the digital transformation of virtually every function across our business. Moving to slide 17, to this point, we were an early adopter of using AI tools to drive operational efficiencies, beginning with our FormulaLink technology that launched in 2020 and revolutionized our process for developing new material compounds. This was followed in 2021 with the launch of LiveLine, our proprietary automated process control technology that has reduced scrap, improved product quality, and improved the overall efficiency of our extrusion line operations. And over the past few years, we began the rollout of CSAI Star that is essentially a repository of the many AI agents that have been developed within our various operations and makes them available for use company-wide. But the next phase of our AI journey, the business process orchestration phase, has the potential to contribute and streamline functions across our entire value chain. Development of this capability is already well underway and is being led by Chris Couch, whom we have recently appointed as our Chief AI Officer, in addition to his role as President of the Fluid Handling business segment and Chief Technology Officer. We're extremely excited about this latest AI initiative and the potential for even further operating efficiencies it is expected to drive as we continue to grow our business over the next several years. We believe this process orchestration capability will enable us to scale our top line by more than $1 billion over the next several years without requiring a commensurate increase in headcount and costs. Stay tuned as this initiative rolls out. The financial impact will be very exciting. Turning to slide 18, before wrapping up this morning, I want to provide a bit of color on how we're addressing the ongoing inflation crisis that is impacting our business and frankly the industry. Believe me when I tell you we're making every effort to turn this current crisis into future opportunity, and I am confident that we will be a stronger company as a result of what we're doing. Since this was the first time that our index-based commercial agreements have been tested in a significant way, we're taking the opportunity to learn from the experience and make meaningful, positive adjustments to those agreements. We are actively engaged in productive discussions with our customers to improve the timing of cost recoveries going forward and to refine the indices used in these agreements. We believe the discussions will lead to a further de-risking of our business in future periods of hyperinflation, but it will also enhance our recoveries in the near term. We're also taking the opportunity to push back on traditional practices for things like financing customer tooling, which unduly burden the balance sheet of Cooper Standard and, frankly, all suppliers. We expect to drive positive changes related to customer tooling that will enhance our ability to generate cash from operations going forward. We believe we are appropriately managing and improving all aspects of our business that we can control in this dynamic environment. As a result, we expect to be a stronger company and deliver improved results again in 2027. Turning to slide 19, to summarize and conclude our message this morning, we believe that we remain on track to achieve our longer-term strategic financial targets over the next 3 to 5 years that we provided you. In view of recent industry dynamics, we're taking the opportunity to improve and further de-risk our business going forward, and we expect to be a stronger company in '27 and continue the trend of improving our financial performance as well. In addition, we expect to continue to deliver exceptional value for our customers and we believe they will continue to support us as a valued supplier. And I certainly want to thank our customers for their continued trust and support. I remain extremely positive about our opportunities and outlook over the next several years. With our improved cost structure, strong pipeline of upcoming projects, program launches, outstanding customer relationships, and a global team I would take over any other in the industry, I'm confident that we will deliver the long-term value our stakeholders expect and certainly deserve. This concludes our prepared remarks, so let's move into Q&A.

[Operator Instructions] Our first question comes from Mike Ward with Citigroup.

I think to start, if I look at your charts on slides 11 and 13 when you're going through the adjusted EBITDA bridge, the general inflation and material economics, are they net of recoveries?

No, Mike, that's a good question. Those are shown gross. Any kind of customer recoveries or price adjustments we can glean are included in volume and mix. Obviously, there's a commercial element to that, and we've historically combined any recoveries or price adjustments in that volume and mix category. What you see as far as the general inflation, material cost inflation, those are gross numbers.

Okay, so then if I compare the 9 months to 12 months, so 11 and 13, and I subtract them out and kind of look at what it assumes for the fourth quarter, it looks like manufacturing is a pretty big delta when you go for the full year compared to the 9 months. It's about a $40 million swing, and then volume price, and that's where those recoveries are coming, that's a $26 million positive. And then there are offsets for additional inflation, it looks like. But when you look at those numbers and you compare them, it does look like, I guess, you get a volume mix on the manufacturing side. You get the benefit, and then you get recoveries. Am I looking at it right? So when I go from what you saw in 9 months and what you expect for the year, that's a big part of the upside you see in 4Q.

Yes, you're absolutely right, Mike. The ongoing run rate, you get the full benefit, for the most part, in Q4 of a lot of those savings initiatives as the projects are implemented and you get a clean run at them. And keep in mind the performance of both the manufacturing and purchasing organizations. You know, Jeff described how Q3 launches are up 100% compared to the prior year. This was a heavy, heavy launch year. And so there's always challenges and changeover activities that go along with that that were impacting the first 9 months. Q4 tends to be a lighter launch period, and so we expect the performance to ramp up in Q4. You also get the full run rate of rebate impacts that the purchasing organization negotiates as you meet volume commitments on the supply side. So you'll see more of those pulling through in Q4 overall.

Okay. And then it looks like -- so that's how you're getting to the upside from a margin standpoint in Q4.

Yes, but we're still fighting back general inflation and commodity inflation. You see those two continue to be offsets and very challenging for us.

Okay. Jeff, on your chart that you talked about, the net new business, and that's new awards less any programs that fell off, is that correct?

Yes. Yes, that's correct, Mike. That's the definition now we've used for many years. So nothing's changed there.

Nothing's changed. And then if I look at it, later in your charts you talk about a 3-year type roll-in process. So if I'm looking at, you had a big increase in '25 and '26, so if I take a base of $2.7 billion in 2024, you're kind of looking at it where it starts to hit in '27, '28, where some of these new businesses start to roll in. And that's where you're getting up north to the $3.5 billion range. Is that correct?

Yes. That's correct, Mike. That's the roughly $1 billion of net new business that we've been talking about launching as '27, '28, '29, and '30 arrive. And that's why we continue to be very confident in that outlook and those strategic targets that we've provided. We know what that business is, we know what the margins are. The only thing we don't know, as always, is volume and mix, but otherwise, in terms of the price and the cost associated with selling those products, it's already established, so the forecasts are pretty solid.

Okay, and they're all new commercial agreements you put in a few years ago. Were all part of those programs? And it's also... and the programs in higher margin that you focused on.

That's correct. Everything that -- what we've been saying all along is that the hurdle rates that we established to get the business projected to go on this, call it, 15% journey by the time we got to 2030, those programs are here. They're being developed. They're being prepared to launch. And we've consistently been at or above those hurdle rates, which is why we were able to come out with a strategic plan last year, talking about really '25 through '30 and achieving 15% EBITDA as a company.

And John, any reason why the working capital won't turn positive for the year?

Mike, as you know, our fourth quarter is historically a very, very strong working capital release for us, and we don't expect anything different this time around. And as you know as well, we're proactively managing all aspects of that working capital bucket that we can control, right? So inventory reductions, accounts payable terms and negotiations, and to a lesser extent, tooling that Jeff talked about in his prepared remarks. However, there are some other things in that bucket this year that are unique. Think government tariff refunds. We can't control the timing when the government pays us, but those are significant. And we're also actively working on those commodity cost recoveries as well. So those could tie up working capital between now and the end of the year. We're continuing to drive it and drive the positive free cash flow in Q4 as best we can. And we'll see how things shake out given the continued inflationary impacts we're facing and the drag on earnings that that's presenting to us.

Perfect. Thank you very much, everybody.

Thanks, Mike.

Thank you. Thank you.

Next question comes from the line of Doug Carson with Bank of America.

I want to talk a little bit more about the bridge. There's kind of a lot riding on Q4 here to try to get to an EBITDA maybe in the neighborhood of $82 million to kind of meet guidance. The visibility in the lean manufacturing, that you're hoping to get $40 million out, we've already got kind of a month of the quarter underneath our belt. Is there more visibility in that than there is in, like, your tariff rebates? Trying to just bridge my $82 million -- like how I'm modeling to $82 million EBITDA -- I've got to kind of have a lot of confidence in that lean manufacturing coming through.

Yes, Doug, this is Jeff. I think if there's anything that we tend to circle and say we have a high level of confidence both historically and today, that's in our manufacturing teams and their ability to perform and hit these numbers. So that one is pretty good to go. The big challenge we have, obviously, is what's the price of oil going to be next week and the following week and next month and so on and so forth, and the headwind that continues to provide us. We also have significant commercial conversations going on to try to recover as much of that owed to us this year as we can. So as always in this industry, commercial negotiations are probably those that are most difficult to forecast. So we've done our best to come up with what we think is an achievable commercial recovery plan, and that is what's reflected here. Are we going for more? Of course. But this, I think, is appropriately reflected, and the risk associated with getting everything we want is appropriately reflected.