Cooper-Standard - Earnings Call - Q3 2020

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Cooper Standard Third Quarter twenty twenty Earnings Conference Call. During the presentation, all participants will be in listen only mode. Following company 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.

Speaker 1

Thanks, Liz, and good morning, everyone. Thank you for spending some time with us today. The members of our leadership team who will be speaking with you on this 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 three 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'd like to turn the call over to Jeff Edwards.

Speaker 2

Thanks, Roger, and good morning, everyone. We certainly appreciate this opportunity to review our third quarter results and provide an update on the current status of our operations. We are pleased with the quick recovery of automotive production in the third quarter following a very challenging first half. Our facilities around the world are adapting well to recently implemented safety protocols, and they're certainly working hard to keep up with solid customer demand. As volumes have ramped up, we have remained focused on delivering value for our customers and continuing execution of our margin enhancement plan.

Our team has done a terrific job and our results for the quarter reflect it. On Slide five, we provide some highlights from the quarter's performance. Our operations performance was strong during the third quarter. We continue to deliver world class results for product quality, customer service and employee safety. At the end of the quarter, 96% of our customer scorecards for product quality were green and 98% were green for launch.

Most importantly, the safety performance of our plants continues to be outstanding. Through the first nine months of the year, our total safety incident rate was just 0.36 per one hundred thousand hours worked, and 32 of our plants still have a perfect record of zero reported incidents. Our plant managers and their teams are doing a world class job. From a financial perspective, our plan to improve margins and return on invested capital are gaining traction. During the third quarter, we were able to deliver $10,000,000 in cost savings through lean initiatives and improving operating efficiencies.

Through the first nine months of the year, manufacturing cost savings totaled $47,000,000 The aggressive actions we implemented to reduce administrative and overhead costs in 2019 and early this year resulted in a $12,000,000 reduction in SGA and E expense for the quarter versus the third quarter last year. And our global supply chain optimization initiative is delivering as expected, improving results with $14,000,000 in savings during the third quarter. Combined, these initiatives were a significant factor in achieving a two ten basis point improvement in our third quarter adjusted EBITDA margin. Moving to Slide six. On this slide, we summarize the status of our operations by region.

Beginning with Asia Pacific, I want to give a strong shout out to the team for achieving a perfect zero incident safety performance in the third quarter. Additionally, 10 of 14 manufacturing facilities had zero reported incidents year to date. This is a clear indication of what is possible with our total safety culture and a full time focus on safety as a top priority for the entire team. Light vehicle production in Asia continues to rebound following the slow start to the year. During the third quarter, our sales outpaced market growth and current customer orders are tracking ahead of our original plan levels.

Strong volume combined with continuing success in our cost reduction initiatives helped us drive a strong turnaround in the third quarter and adjusted EBITDA margin for the region. IHS is forecasting an increase in light vehicle production in Q4 versus Q3, and we will look to leverage this strong production with ongoing lean initiatives and overall improvements in operating efficiencies. In Europe, we have seven plants that have maintained perfect safety performance through the first nine months of the year. Safety performance overall for the region remains very strong, with total incident rate at better than world class levels. Light vehicle production in the region has ramped up significantly following shutdowns that impacted Q2, but remained below last year's level in Q3.

Excluding the impact of the business we divested at the beginning of the quarter, our sales outpaced regional light vehicle production in the third quarter. Current customer orders are tracking ahead of our original plan levels and our total manufacturing efficiencies are ahead of plan year to date. The most recent forecast from IHS anticipates a sequential increase in light vehicle production in Q4 versus Q3, but a slight decline year over year. Finally, in The Americas, 15 plants in the region have maintained a perfect safety record through the first March of the year and an overall total incident rate that is better than world class. Third quarter light vehicle production in North America was up slightly year over year.

Our sales declined slightly as a result of delayed launches and model year changeovers on certain key platforms. With the continuing success of our cost reduction initiatives, we were able to increase adjusted EBITDA margin in the North American region despite the lower sales volume. Production levels in Brazil remained weak in Q3 as the COVID-nineteen pandemic continues to weigh on the overall market there. The most recent IHS outlook for North America anticipates a sequential decline of approximately 200,000 units of production in Q4. This is roughly in line with production levels in 2019.

Our current customer orders remain a bit below our original plan levels. The consolidated company prevention and mitigation of COVID-nineteen remains a top priority. The added health and safety measures in our facilities appear to have been largely successful, and we're working to offset the related impacts on costs and productivity. Certain government assistance programs, which vary from country to country, have helped in this regard. Moving to Slide seven.

Our teams have maintained constant focus on the execution of our long term strategic initiatives throughout the year. Key areas of focus include optimizing our global footprint and reducing fixed overhead costs. We are pleased with the progress we've made so far, and we are beginning to see the positive impact in our results. Since 2019, we have closed or exited 22 facilities. We are currently in the process of closing or consolidating three more before the end of the year.

We believe we are on track to deliver in excess of $50,000,000 of annualized fixed cost savings in SGA and E and COGS as compared to 2019. While we've made good progress, we continue to identify additional opportunities to further streamline our operations and improve our overall cost structure. We will provide additional details as these plans are finalized. Turning to Slide eight. The execution of our innovation and diversification strategy remains a top priority.

In fact, we've intensified our focus on this strategy by bringing two new directors onto our Board with strong experience and knowledge in material science and related industries. To further leverage their expertise, we have formed a Board subcommittee that is charged with the oversight of our innovation and diversification efforts. We are excited to have these new directors join us at this important stage in growing our business into other industries. Customer demand in our Industrial and Specialty group remains very strong, with the lone exception being our Aviation business. To leverage the strong demand, we are investing in additional capital equipment to modernize and expand our production capabilities and increase our overall capacity.

We remain very optimistic about the growth potential of this business over the longer term. In our Applied Materials Science business, we have signed two new additional development agreements. Consistent with the approach we discussed at the beginning of the year, we are intentionally adding fewer new clients and increasing the emphasis on moving existing technology development towards commercialization. The new agreements are with new customers, but they are within the same markets we have focused on in the past. This is also intentional.

While our material science based on our Fortrex chemistry platform could be applied over a wide range of industries, we believe a concentrated focus will enable us to leverage our knowledge base to speed the development process and ultimately help us capture a broader share of these select markets. We are pleased that the installation of new prototype equipment at our global technology center is nearing completion. When fully operational, we expect this equipment will help accelerate our technology development process and enable us to move rapidly towards commercialization of new materials and technology. Now let me turn the call over to John.

Speaker 3

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some detail on our financial results for the third quarter and also comment on our balance sheet, cash flow and liquidity profile. On Slide 10, we show a summary of our results for the third quarter with comparisons to the prior year.

Speaker 4

Let me touch on some of

Speaker 3

the key figures. Third quarter twenty twenty sales were $683,200,000 down 7,600,000.0 versus the 2019. Lost sales related to the recent divestiture of our business in India and certain operations in Europe accounted for most of the decline, while unfavorable volume and mix and customer price reductions also weighed on the quarter's sales. Excluding the impact of the divestiture, total sales were down less than 1%. Adjusted EBITDA in the third quarter was $64,100,000 or 9.4% of sales, up from $53,800,000 or 7.3 percent of sales in the 2019.

The 19% year over year improvement in adjusted EBITDA was driven primarily by improved operating efficiency, continuing optimization of our supply chain and lower SGA and E expense. In addition, we continue to benefit from various government allowances and subsidies, which were put in place during the second quarter to help offset the impacts of the global COVID-nineteen pandemic. These positive factors were partially offset by unfavorable volume, mix and customer price, typical inflationary pressures and increased accruals for incentive compensation. On a U. S.

GAAP basis, net income for the quarter was $4,400,000 compared to a net loss of $4,900,000 in the 2019. Excluding restructuring expense and other special items, as well as the associated income tax impact of these items, Adjusted net income for the third quarter twenty twenty was $3,600,000 or $0.21 per diluted share compared to $3,800,000 or $0.22 per diluted share in the 2019. Regarding CapEx, our spending in the third quarter was $10,500,000 compared to $35,600,000 in the same period a year ago. Our teams continue to do a terrific job of limiting or deferring capital spending wherever possible in response to recent industry challenges. We anticipate that lower investment levels will continue through the remainder of the year.

Moving to Slide 11. The chart on Slide 11 walks the significant drivers of the year over year changes in our third quarter adjusted EBITDA. Our ongoing efforts in lean manufacturing and operational efficiency drove $10,000,000 in cost savings for the quarter, while positive results from our global supply chain optimization efforts contributed another $14,000,000 We also benefited from $12,000,000 of lower SGA and E expense as a result of the organizational streamlining we proactively implemented last year as well as elimination of all discretionary spending in response to the pandemic. Rounding out the positive factors, ongoing benefits from COVID-nineteen related government assistance programs and the divestiture of unprofitable operations added a net $4,000,000 and $3,000,000 respectively. Unfavorable volume mix and price adjustments, normal inflationary pressures and accruals for incentive compensation mentioned before were partial offsets to the improvement in adjusted EBITDA.

The unfavorable volume and mix impacts were primarily in North America and Europe, while volume and mix was favorable in Asia Pacific. Regarding incentive compensation, recall that in the 2019, we reversed incentive compensation accruals when it became clear we would not hit our minimum targets for bonus payout. This year, we have continued to accrue for a partial payout. The resulting year over year headwind related to higher incentive compensation in Q3 twenty twenty was approximately $22,000,000 We can continue to improve our operating efficiencies, and we are taking real costs out of our business. It's encouraging to see the results of all this hard work now falling through to the bottom line, and we're not done yet.

As Jeff mentioned, we are continuing to evaluate opportunities to further optimize our operating footprint and improve our cost structure over time. In the near term, however, as we turn to calendar year 2021, we anticipate the discontinuation of COVID related assistance programs, gradual increases in discretionary spending and unfavorable volume and mix could pressure our margin run rate by 100 to 150 basis points versus this most recent quarter. Moving to Slide 12. While we are pleased with the improvements in our margins, free cash flow was definitely a highlight of our third quarter performance. Strong cash provided by operations and continued conservative capital investment combined to drive over $89,000,000 in free cash flow in the quarter.

As a result, we ended the third quarter with $463,000,000 of cash on hand. In addition, availability on our revolving credit facility increased to $150,000,000 as we had predicted, resulting in total liquidity of $613,000,000 as of 09/30/2020. The revolving facility remains undrawn. In light of the considerable uncertainty which persists in the industry and with economic conditions generally, given COVID-nineteen cases are once again increasing, we continue to monitor our liquidity carefully. Along with detailed forecasting, we are continuing aggressive measures to reduce and or defer capital expenditures, costs and discretionary spending wherever we can.

And we are maintaining our intense focus on working capital management. Among other initiatives, we are working to accelerate both accounts receivable and tooling collections from our customers as well as to bring down inventory levels. Lastly, a few comments on our asset allocation priorities. We issued $250,000,000 of senior secured notes back in May. We took this prudent action to provide a cash cushion that would allow us to maintain sufficient liquidity should the industry shutdowns have extended longer than were anticipated or if the industry were to go through a second wave of shutdowns.

Our current intent, which remains subject to future market conditions, is to preserve our cash balance as much as possible, generate additional cash over the next two years and delever as soon as markets and contract terms allow. With that, let me turn the call back over to Jeff.

Speaker 2

Thanks, John. To wrap up our discussion this morning, I'd like to provide an update on some additional detail on our ROIC improvement plan and some broad comments on our outlook. This graphic represents the formalized framework we're using to improve our financial performance and ultimately drive improved return on invested capital. Our focus in this important area is a key driver of our improved results for the quarter. This initiative has also become the roadmap for our longer term planning process.

As we have said, we are on a two to three year journey to return to double digit ROIC. Today, we've added some additional detail to the graphic, providing key targeted metrics from our three year strategic plan. With the successful execution of our plans, we anticipate improving gross margins to greater than 15% of sales, maintaining SGA and E expense at less than 9% of sales and improving adjusted EBITDA margins to greater than 10% of sales. The plan also anticipates continued focus on generating cash by carefully managing capital expenditures targeted at less than 5% of sales while optimizing working capital. Clearly, we cannot guarantee we'll achieve all of these targets within the next three years, but I can assure you that our team is working hard to deliver on all aspects of the plan that we control.

I have great confidence in our team, and we are all aligned to execute on clearly defined initiatives. In the near term, our industry and the global economy face significant uncertainty that makes forecasting even more difficult than normal. Increasing COVID cases in various states and countries pose the risk of further closures of portions of our economy. Unemployment levels, though improving, remain high. Consumer confidence has been hurt by the pandemic, and I don't think we will know the full geopolitical impacts of our election for some time to come.

So given the high level of economic uncertainty, we're not providing formal financial guidance at this time. While we continue to remove real costs from the business, we do not expect margin increases to be perfectly linear. As John mentioned earlier, certain COVID related government programs that are benefiting us today are scheduled to run out at year end. As always, light vehicle production volume and mix will be an important factor in our business results. We are encouraged by the strong rebound in light vehicle production following the pandemic.

Our customer releases are looking strong in the fourth quarter so far. On the other hand, we're also seeing challenges with labor productivity and availability in certain locations, simply due to quarantines and other restrictions. Overall, we anticipate finishing the year strong if planned production levels hold. Lastly, I want to thank our global team of employees for their continued hard work and focus on driving strong improvements across our company. I would also like to thank our customers for their continued trust and support.

This concludes our prepared comments. We would like to open the call to questions.

Speaker 0

Thank Our first question comes from Mike Ward with Benchmark. Please go ahead.

Speaker 5

Thanks. Good morning, everyone. Good morning, Mike. Jeff, quick on Line six, when you're saying current customer order levels are approximately 92% of original plan in Europe is that plan from pre COVID or is that recent plan?

Speaker 2

That's pre COVID Mike.

Speaker 5

Okay. Secondly, could you provide a bit more detail on the positive swing we saw in Asia?

Speaker 2

Yes, I think the results of China rebounding faster than anybody would have imagined, given what was happening at the beginning of this year, I think are certainly number one, the market just came back faster than I think anyone would have predicted. Number two, our teams have continued to, as we've said across the company, really attack it from a cost and a fixed cost point of view. And then finally, our commercial organization has done a really terrific job of getting us paid frankly. Okay.

Speaker 5

On Slide eight, I'm trying to get an idea of how this sequence works. So you have two new development contracts with these material science projects. So you sign a development agreement, which hopefully leads to a license agreement, which hopefully leads to commercialization. Is that correct?

Speaker 2

That's correct, Mike. It's the same process that we've been talking about now for couple of years. And we're really pleased with the progress on those agreements that we've signed over the last couple of years. And we just talked about two additional ones that just keep the pipeline filled up, frankly.

Speaker 5

Okay. And then now on the two that there are two right now that are commercialized, wire and cable and elastomers, is that right?

Speaker 2

We have not said publicly, Mike, what those are. But clearly, wire and cable

Speaker 6

Well,

Speaker 5

ABN came out and said it is commercialized, all right?

Speaker 2

Yes. I'm really talking about the numbers associated with the deal. So we've talked about names, but we haven't put numbers to it, which I think was your question, right?

Speaker 5

Well, know they're commercialized. That was going be my next question. Have we seen any income yet from either the commercialized products? Or is there any indication of orders or pending orders, that sort of thing?

Speaker 2

Yes, we haven't disclosed any of that because as we've said, we have so few customers in these spaces that disclosing anything financially kind of discloses your price. So it'll be a while before we're able to do that. But safe to say that the amount of revenue and earnings associated with AMS, it's going to be a couple of years down the road before we can disclose those things because of just the few clients that we do have that are in that commercialization stage. So stay tuned for more of it as we go forward. But right now, we've kept it pretty under wraps.

Speaker 5

Okay. And if there were revenues that were generated in 2021, where would that show up like as far as a segment standpoint? Would it show up in that other category? Or is it going be somewhere else?

Speaker 3

Yes Mike, it's John. It would show up in that other category. You're right.

Speaker 6

Okay.

Speaker 5

Okay. All right. Thank you very much.

Speaker 2

You're welcome.

Speaker 0

Our next question comes from Joseph Foresioli with Cantor Fitzgerald. Your line is now open.

Speaker 7

Hi. Thanks for taking the call. Can you give us an idea on some of the expenses that will be coming back into the P and L that maybe were deferred or any catch up payments that vendors allowed you to defer on during the COVID period?

Speaker 2

Yeah, this is Jeff. So we just at a high level related to what we just talked about in our prepared remarks. Clearly, during the pandemic period here, we have had travel and entertainment virtually on lockdown with few exceptions as it relates to supporting launches. And that's the number that John referred to that obviously, going forward, there'll be some of that that creeps back in. But I want to make one thing clear that we have learned a lot during the lockdown, if you will, in terms of using technology to communicate with our teams around the world that will certainly have a lasting impact on reduced SGA and E expense.

But I think it's a bit unrealistic to think it's going to stay at the lowest levels in history. There will be some expense that comes back next year. That's what John was referring to. But it will be significantly lower than previous years, because we've learned so much about how to conduct and run this business in a virtual mode that we have now implemented many of those things into our business plan for 'twenty one through 'twenty three that will have a lasting impact. And that's how we ensure that it will have a lasting impact is because that's how we're managing and facilitating and staffing the business.

And ultimately, that's how we're building the budgets going forward.

Speaker 7

Okay, great. Thank you. And does the do your bank facilities or your first lien docs allow you to buy back any of the subnotes in the open market?

Speaker 3

Yes, Joseph, it's John here. The agreements do allow us to do that in the open market. And clearly, the price looks attractive as they're trading at $68 I think is the most recent trade that happened. But at this point, we're focused on capital preservation, just given the uncertainty that both Jeff and I have been referring to here. And then plus, once we get back in the market, any activity we would take would be driving that price right back up.

So over time, that would hit the attractiveness of going and doing that. So at this point in time, we're just sitting back and preserving liquidity as we go forward.

Speaker 7

Got it. Thanks for the time.

Speaker 0

Our next question comes from Brian DeRubbio with Baird. Please go ahead.

Speaker 8

Good morning. I'd like to focus on Europe for a second. How close are we to getting or seeing Europe return to positive EBITDA and possibly even positive free cash flow?

Speaker 2

Yes, Brian, this is Jeff. I think big picture, we're probably we'll need through 2021. As we get into 2022, I would expect net income to return to a positive level.

Speaker 8

Okay. So as we think about because obviously, as a lot of investors are, we're just focusing on the cash drains on the company. And so from what you're seeing today, Europe could still be a cash drain in 2021?

Speaker 2

That's correct. We are still in the middle as I've mentioned earlier here, we're in the middle of identifying additional fixed costs to come out of our business, and that's primarily Europe. And we've done a lot already to become smaller and more profitable in Europe with this divestiture that we just did this year. Next year, we'll take a look at our existing footprint and do some things there to remove significant fixed costs that will spend for us in 'twenty two and 'twenty three.

Speaker 8

Just I fully recognize that exiting businesses is a very expensive proposition in Europe. How should we think about sort of the upfront costs of you possibly shuttering some capacity versus payback period of that cost?

Speaker 2

Yes. As I mentioned in my prepared remarks, we are in the process of finalizing several things. That would be one of the several things we're in the process of finalizing, and we'll have more information as we get into either the end of the fourth quarter or early in the first quarter regarding all of those initiatives that I referred to in the prepared remarks.

Speaker 8

Understood. That's fair. Finally, just as we think about CapEx, it's going to be under 5%. You're targeting under 5% going forward. But material amount of that, I think historically two thirds of your CapEx spending was related to new customer program launches, which ultimately does get reimbursed through the tooling receivables as title of that equipment transfers to the OEs.

So should we be thinking about CapEx more on a net basis post the retooling reimbursement? And what does that number really look like?

Speaker 3

Hey Brian, it's John. Actually we separate tooling receivables from our CapEx. So when we refer to capital expenditures being under 5% of sales, that would be Cooper Standard owned tooling and equipment. Whereby the customer owned tools are a separate line on our balance sheet. And you're absolutely right, we do get reimbursed either in lump sum or by a piece price over time.

So that 5% or below number is equipment that we're utilizing. And that's why we're able to have more of an influence on efficiencies and repurposing of that equipment. And that you're seeing that in the disciplined CapEx number coming down here of late.

Speaker 8

Okay. Thanks for the clarification. Appreciate it. Thank you.

Speaker 6

Sure.

Speaker 0

Our next question comes from Mike Casayou with KDP Investment Advisors. Please go ahead.

Speaker 9

Hi. Congratulations on the great quarter. It looks like your EBITDA margins for this quarter of 9.5% and you say your goal is to get them above 10%. So you look like you're just about there. But you also said you can't guarantee over the next three years that you'd reach that.

So I'm just wondering, is this quarter an anomaly in terms of margins? Or can we expect it to remain at these levels going forward?

Speaker 3

Mike, it's John again. In my prepared remarks, I kind of referred to the benefits we're seeing on the governmental programs related to COVID and the absence of spend that Jeff just was giving some color on a few minutes ago. So really that 100 basis to 150 basis points I referred to would come off that 9.4% run rate in Q4. When you think about the net $4,000,000 positive impact for us in Q3. You can see that on the bridge in the presentation.

There's actually $6,000,000 of good news from government grants and various benefits around the world in various countries. So like we had indicated, we anticipate that running out here at the first of the year. So really not a go forward run rate item that you can count on coming back. And then increase in discretionary spending such as business travel over time creeping back in will add half of that 150 basis point number that I just talked about.

Speaker 9

Okay. And on the 13% secured notes, they also have a 35% equity callback. Would that be something that you might consider depending on how the stock reacts?

Speaker 3

Yes. Again, here not in the short term, Mike. We're just looking to preserve cash balances just because of the significant uncertainty. And as things stabilize and we get a few quarters behind us here into next year, then we can take a look at some of those type of activities. So more to come there.

As far as other capital structure type opportunities or allocation options, Clearly, are limited by fixed charge coverage ratios under the term loan and those secured notes. So not really an option at this time until that fixed charge coverage ratio gets back above two.

Speaker 2

Mike, this is Jeff Edwards. Let me just add on to the question you were asking about our long term expectation regarding double digit EBITDA as a percent of sales. We have said earlier this year, we've said on this call, and we'll continue to say that we have certainly line of sight to achieve the 10% plus level of performance as we exit 2022. So that hasn't changed. What we did say is that there's a lot of things in the industry that we don't control.

And so we are absolutely committed to that number as we exit 2022, assuming that the industry volume and mix that we've highlighted is important, not just important to us, important to everybody, holds. So that's probably the reason for the question that you asked based on the words that we used, but it was more related to what we don't control than it was to what we control. Hopefully, helps.

Speaker 6

Yes. Thank you.

Speaker 0

Our next question comes from Mike Cahill with Crispin Capital. Please go ahead.

Speaker 4

Thanks for taking my question. It's been a long time coming, but that was really a strong quarter on multiple fronts. So congratulations to Jeff, John and the team. Given your successful operational improvements and cost cutting and divestitures, I'm actually struggling to get to a negative EPS number that the analyst consensus has you for 2021. I'm not looking for a specific guidance, but I would greatly appreciate a directional indication.

And given that you just posted positive earnings in this past quarter in the midst of COVID, I was hoping that maybe you could dispel the 2021 negative EPS number that consensus has and just say that you're hopeful it will be positive? Thank you. Congratulations.

Speaker 3

Thanks, Mike. It's John here. Yes, I think I can't speak to the consensus models that were built, but we do have confidence here in the recent performance that will continue into next year. You're absolutely right, we're not in a situation where we're going to give that type of guidance. But keep in mind that half of this year, we didn't have the higher interest load overall that we will have going forward based on the secured note repurchase sorry, purchase issuance.

So that'll be a drain on EPS going forward into next year. But the stabilization of the business and those volumes coming back will certainly will benefit us and allow us to hold that margin perspective going forward. So more to come as we round the year out, Mike, and we'll be issuing formal guidance at that time, and we'll be able to shed a little bit more color on that activity for us. But as we sit here today, we're pretty calm.

Speaker 4

Our

Speaker 0

next question comes from Josh Takowski with Credit Suisse. Please go ahead.

Speaker 6

Hey, guys. Jeff, John, congratulations on really an outstanding quarter. Just a couple of questions. Actually, one, just piggybacking on one of the first questions you got. I wanted to dig in a little bit on the regional performance in Asia.

I guess starting with revenue, is it possible to give any more context on what drove the outperformance there relative to the market? If I'm doing my math correctly, it looks like 18% up year over year, excluding the divestiture versus kind of 11% if you just take IHS estimate. So any additional detail you can provide there or maybe talk about which customers may have performed better than others?

Speaker 3

Yes, Josh, it's John. I can shed a little bit more light there. For us, our customer mix over in China is much more significantly weighted to the Western joint venture OEMs as opposed to the China domestics. And last year 2019, that business was down almost 30%, while the market was down 15% to 19% or so. So you've got that mix phenomenon of our customer base.

And so this year, you're seeing strong improvements year over year in volumes coming out of those Western joint venture OEMs. In particular for us, we saw volume improvements driven by the GM OEM joint ventures and some global programs. So that has certainly helped the mix for us year over year and why we had some outsized performance compared to the market overall.

Speaker 6

Got it. Super helpful. And then I guess on just keeping on that, on EBITDA. It looks like a lot of the growth and the turnaround came from cost increases. Any additional light you can shed there?

Speaker 3

As far as the overall magnitude of the cost reductions that we've taken out, Josh, is that your question?

Speaker 6

Well, just in the K, it looks like $14,500,000 the increase was related to what you call cost increases. Is that just I guess sorry, go ahead.

Speaker 3

Yes, I got the question now. I remember in my prepared remarks, we talked about bonus variation of being about $22,000,000 year over year. In the prior year, we actually reversed accruals. So that showed up as income in the quarter to the tune of $10,000,000 whereas this year, we're continuing to accrue and you've got $11,000,000 of expense. So the combined year over year impact in that cost reductionincrease column in the 10 Q is showing a $21,000,000 overall variance year over year.

Speaker 6

Got it. Okay. And then final question, just just thinking one final question for me. Working capital timing for 4Q had a nice working capital release this quarter. How should we think about working capital in the final quarter of the year kind of in the context of this being a little bit different of a year in conjunction with kind of the normal 4Q working capital release?

Speaker 3

Yes. It's John again, Josh. Clearly strong cash flow in the quarter here in Q3, driven by the improved earnings, the modest CapEx load that we had as well as the working capital changes. The ramp up in sales, you're always going to have an outflow of accounts receivable. But nonetheless, we had better performance in inventory and accounts payable that we pay more slowly than our customers pay us.

So that's always a good working capital position to be in. So really, some great performance here in Q3. But then Q4, it's typically our strongest cash flow quarter of the year seasonality because we're collecting on receivables and the production levels wind down in mid December. So given the seasonal inflows we had in Q3, we're expecting Q4 free cash flow essentially neutral and then still deliver on that overall positive free cash flow in the second half of

Speaker 2

the year that we talked about last time.

Speaker 6

Got it. Appreciate the color. Thanks guys and congrats again.

Speaker 3

Thanks,

Speaker 0

Our next question comes from Bob Amenta with JPMorgan. Please go ahead.

Speaker 10

Yeah. Thank you. Just one, I guess, follow-up or clarification on the that 100 to 150 basis point downward shift from the 9.5 you did this quarter. I just want to make sure is that are you saying like, for example, in 2021 for the year that you're thinking EBITDA margins could be 8% to 8.5%? Is that how I should read that?

Or am I reading too much specificity into that?

Speaker 3

Well, wasn't intended to certainly give guidance for next year. So Bob, think about those governmental programs, like I mentioned, dollars 6,000,000 is about 90 basis points. That will go away just because of those programs will wind down around the world. So that's why we just wanted to put that out there from a go forward run rate perspective. We wanted you to appreciate that.

That's not a continuing income item or cost to offset item for us.

Speaker 10

Okay. And that's fine. I just again for modeling, I mean, would think I mean, even if you do less revenues in Q4, you're still going to be 2,300,000,000.0 to $2,400,000,000 of revenues this year with a horrible second quarter. So one would presume hopefully that revenues are higher next year. I mean, I'd start throwing an 8% margin on that.

That's not terrible. So, I know it's not where you want to get to, but I just want to read too much into a comment and extrapolate it over an entire year next year. But that's fine. I understand what you're saying. And then I guess just following up on that working capital question, someone just asked, if we again, under my assumption that sales will be higher next year than they were this year, would we presume that working capital next year would have to be an outflow or are you aiming of cash or are you aiming to try to do some things to make with inventories or whatever to make that more of a neutral next year?

Speaker 3

Yes, Bob, it's John again. We definitely have working capital initiatives that are there remain in flight and they're long term in nature. So think about inventory levels coming down over time, think about days payable going up as we work to rationalize our supply base. So both of those should be accretive to working capital each successive year here is how we're looking at it. But you're absolutely right, in a rising sales environment, you always have where you typically have a working capital usage on the accounts receivable or tooling receivable side.

So we're looking to optimize that as best we can with the initiatives we've got in play.

Speaker 10

Okay. And then just lastly, CapEx, you obviously I just if I do the math year to date, obviously it's on one of your slides, think 4.5%, I think 5% is kind of a goal. Is there anything if I'm looking next year that you've deferred this year that would make next year have to be greater than 5% just because of things you didn't do this year, even if it's just a one year catch up basically?

Speaker 3

No, Bob. There was some timing differences of delayed customer launches in that, but we don't think there's anything that's going to raise that CapEx spend above 5% next year.

Speaker 10

Okay, great. Great quarter. Thanks.

Speaker 6

Thanks, Paul.

Speaker 0

Our next question comes from Wolfe Jaffe with EBR Research. Please go ahead.

Speaker 11

Hi, everyone.

Speaker 6

Hi, Wolfe.

Speaker 11

First and foremost, I'd really like to just say thank you for a deptly enduring 2020.

Speaker 3

Not over yet, Wolf, but thanks.

Speaker 11

Very true. Not over yet. I hope I didn't jinx it. The discussion around safety earlier in the call seemed very impressive. Is this something we should get used to?

Or was this really an anomaly?

Speaker 2

Thanks, Wolfe. This is Jeff. You definitely can continue to get used to it. We've made it a priority for almost a decade now. And I think the teams have certainly each year continued to move it closer to world class.

And we use the terms today to highlight the number of facilities in the world that we have zero incidents. And this is due to the leadership of our plant managers and their teams and everyone that supports them inside the company to make it a top priority. And we're extremely proud of the culture that exists related to this particular metric. I can assure you that the priority of it being number one isn't going to change anytime soon.

Speaker 11

As a shareholder, appreciate it. So please thank the team for the safe operations. A question on your comment with respect to Europe. I thought you guys had said that the orders are running ahead of schedule in Europe, but the slide says 92% of original plan. Maybe you guys misspoke or maybe I misheard.

Is the slide correct? Or maybe there's a timing

Speaker 3

I think the slide is correct. It's just our original expectations for the year is the reference to the plan. So coming into and pre COVID is that reference. So otherwise the current performance running ahead of current levels of IHS is that reference I think.

Speaker 11

Oh, ahead of current levels of IHS?

Speaker 3

Well, the comment was. The slide is referring to our original business plan coming into 2020 pre COVID.

Speaker 11

Got you. Okay. So that's the differential. Okay. And then with respect to the question just asked a moment ago on working capital, you had said that you expect Q4 free cash flow to be neutral.

Were you saying that you expect the impact of working capital in Q4 to be neutral or that total free cash flow should basically be zero in Q4?

Speaker 3

Total free cash flow.

Speaker 11

Got you. Okay. And then on one of the slides you talk about $50,000,000 of savings, guess that's Slide seven. I'm assuming that means $50,000,000 of incremental savings on top of the savings from plant closures etcetera. Is that correct?

Speaker 3

There is a lot going on there, Wolf, that we're looking to attack. The $50,000,000 includes cost takeouts relative to twenty nineteen levels in both SGA and E fixed cost as well as above the plant COGS. So these aren't plant actions necessarily, but they're overall oversight in governance aspects of running the business. So really when we look at any incremental plant actions on the direct labor side or on actual facility closures, those would be incremental.

Speaker 11

Okay. So it's incremental. Okay. Wonderful. Those are my questions.

Thank you again for the hard work.

Speaker 1

Okay. Thanks, Wolfe.

Speaker 0

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

Speaker 1

All right. Thanks, everybody. We appreciate you joining the call this morning and for your continuing interest in Cooper Standard. If you have further questions that we didn't address on the call or just want to get into a little bit more detail, please feel free to reach out to me directly. We look forward to staying in touch.

This concludes our call today. Thanks again.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

Speaker 6

Goodbye.