Cooper-Standard - Earnings Call - Q3 2021

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Cooper Standard Third Quarter twenty twenty one Earnings Conference Call. During the presentation, all participants will be in a 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, Vic, 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

Speaker 2

they

Speaker 1

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. So with those formalities out of the way, I'll turn the call over to Jeff Edwards.

Speaker 3

Thanks, Roger. Good morning, everyone. We appreciate this opportunity to review our third quarter results and provide an update on our ongoing strategic initiatives and the outlook. To begin, on Slide five, we provide some highlights or key indicators of how our operations performed in the quarter. We continue to perform at world class levels in delivering quality products and services to our customers and keeping our employees safe.

At the end of the quarter, 98% of our customer scorecards for product quality were green and 96% were green for launch. Most importantly, the safety performance of our plants continues to be outstanding. In the third quarter, our total safety incident rate was just 0.46 per two hundred thousand hours worked, well below the world class rate of 0.57. I would like to specifically recognize and thank our teams at the 28 Cooper Standard plants that have maintained a perfect safety record of zero reported incidents for the first nine months of the year. We are continually striving for zero safety incidents at all of our plants and facilities.

And the dedicated, focused employees at those 28 locations are leading the way and continue to demonstrate that achieving our goal of zero incidents is possible. Despite lower than expected production volumes, our manufacturing operations and purchasing team were able to deliver $8,000,000 in savings through lean initiatives and improving efficiency in the quarter. Our SGA and E expense was down $4,000,000 year over year. And the combination of past restructuring actions and strategic divestitures delivered $5,000,000 in benefits in the quarter. Unfortunately, we continued to face significant ongoing challenges from volatile customer schedules, reduced production volumes and tight labor availability in certain markets.

In this low production volume environment, we've not been able to offset the widespread inflationary impacts we're seeing in materials, energy, transportation and labor, this despite our improved operating efficiency. We're taking aggressive actions to mitigate or recover the incremental costs imposed on our business. I will provide more color on this initiative in a few minutes. Moving to Slide six. We are proud of the culture we've established within our company and the progress we're making toward world class status with respect to sustainability.

We continue to garner recognition from outside organizations for our progress thus far. In the recent quarter, we were recognized by Corp Magazine for our culture of diversity and inclusion. We believe this type of recognition is an indication that we are headed in the right direction. We will continue to work hard to further align our priorities with those of our five stakeholder groups, because we believe this will play a critical role in driving our long term growth and success. Now let me turn it over to John to discuss the financial results of the quarter.

Speaker 4

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some detail on our financial results for the quarter and comment on our balance sheet, cash flow, liquidity and capital allocation priorities and then update our expectations for the remainder of 2021. On Slide eight, we show a summary of our results for the third quarter and year to date period with comparisons to the prior year. Third quarter twenty twenty one sales were 5 and $26,700,000 down 22.9% versus the 2020. The year over year decline was roughly in line with lower global light vehicle production, which continued to be impacted by insufficient supply of semiconductors.

Gross loss for the third quarter was $8,100,000 and adjusted EBITDA was negative $33,900,000 compared to adjusted EBITDA of positive $64,100,000 in the 2020. As with sales, profitability was hurt by lower production volumes and volatile customer schedules. In addition, increasing commodity and material headwinds, higher labor costs and general inflation weighed on our results. Tax expense of $32,000,000 recorded in the third quarter includes a $31,700,000 charge, dollars 18.5 of which relates to the reversal of tax benefits we had recorded in the first six months of the year, plus $13,200,000 of tax expense for the initial recognition of valuation allowances on our 12/31/2020 net deferred tax assets in The United States. These tax adjustments were driven by increasing historical three year cumulative losses, which led to a change in judgment on the realizability of our net deferred tax assets.

Including this tax item, we incurred a net loss for the quarter of $123,200,000 on a U. S. GAAP basis compared to net income of $4,400,000 in the 2020. Excluding restructuring expense and other items as well as their associated income tax impact, adjusted net loss for the 2021 was $106,400,000 or $6.23 per diluted share compared to an adjusted net income of $3,600,000 or $0.21 per diluted share in the third quarter of last year. Capital expenditures in the third quarter totaled $20,400,000 compared to $10,500,000 in the same period a year ago.

Year to date, we have invested $76,000,000 in our business, largely to support new program launches, which we expect will be up approximately 18% for the full year of 'twenty one and should remain solid in 2022. Despite this significant launch activity, we remain committed to keeping CapEx below 5% of sales for the full year. Moving to Slide nine, the charts on Slide nine provide some additional clarity and quantification of the key factors impacting our results. On the top line, unfavorable volume and mix, net of customer price adjustments reduced sales by $165,000,000 versus the 2020. Again, biggest driver was the customer schedule reductions related to ongoing semiconductor shortages.

Foreign exchange, mainly related to the Chinese RMB, the Canadian dollar, the Brazilian real and the euro contributed $9,000,000 to sales in the quarter. For adjusted EBITDA, unfavorable volume and mix net of price had a negative impact of $64,000,000 year over year, driven mainly by the semiconductor related customer schedule reductions as well as customer price adjustments. Commodity and material input costs were $21,000,000 higher, which brings the year to date impact to $34,000,000 Commodity inflation has continued to ramp up much faster than we had anticipated in each successive quarter of the year. We now expect a full year increase of approximately $60,000,000 compared to our initial expectations of $15,000,000 when the year began and $20,000,000 higher for the year than we expected just three months ago. Other negative drivers were $11,000,000 in write downs of certain accounts receivable deemed to be unrecoverable and $14,000,000 from wage increases, general inflation and other items.

The write down of receivables recorded as a credit loss in SGA and E expense was largely related to the bankruptcy proceedings of a divested JV partner in China. On the positive side, lean initiatives in manufacturing and purchasing drove a combined $8,000,000 in cost savings for the quarter and run rate SGA and E expense was $4,000,000 lower. Moving to Slide 10. Cash used in operations during the three months ended 09/30/2021 was an outflow of approximately $51,000,000 driven by the cash net loss incurred and increases in working capital, namely inventories resulting from volatile customer production schedules. Combined with CapEx of approximately $20,000,000 we had a total third quarter free cash outflow of approximately $71,000,000 Despite the outflow, we ended the third quarter with a solid cash balance of $253,000,000 In addition, availability on our revolving credit facility, which still remains undrawn, was $127,000,000 resulting in total liquidity of $380,000,000 as of 09/30/2021.

With our cash conservation efforts and ongoing negotiations with our customers to recover incremental costs from commodity inflation and volatile production schedules, we expect to sustain a level of liquidity that will support ongoing operations and the execution of planned strategic initiatives. Regarding capital allocation priorities, our top priority continues to be to sustain and grow our business profitably. We will continue to make modest investments in capital equipment and technologies to launch important new programs for our customers. With a disciplined focus, we anticipate CapEx of approximately $100,000,000 for the full year 2021 and within the range of 4% to 5% of sales on average over time, with nearly all of that dedicated to new program launches. As we look ahead, another priority will be to reduce the interest burden on the company by addressing the senior secured notes that we issued in 2020.

That said, we are continually evaluating our liquidity needs and overall capital structure in relation to market conditions and opportunities. We may adjust our priorities from time to time in light of market fluctuations. Turning to Slide 11, we have updated our full year guidance to reflect our year to date results, rising commodity and other cost pressures and lower expectations for fourth quarter light vehicle production volumes as compared to our outlook heading into the third quarter. We now see sales for the year in the range of $2,300,000,000 to $2,340,000,000 and adjusted EBITDA loss in the range of $25,000,000 to $10,000,000 Our outlook for cash restructuring remains unchanged as we expect to continue our planned fixed cost reduction initiatives throughout the fourth quarter. And cash taxes should be approximately $10,000,000 for the full year.

With that, I will turn the call back over to Jeff.

Speaker 3

Okay. Thanks, John. And to wrap up our discussion this morning, I would like to provide an update and some additional detail on our strategies to diversify our business, leverage growth in the electric vehicle market and our outlook related to our longer term return on invested capital improvement goals. Please turn to Slide 13. Innovation and diversification remain key parts of our long term strategy, and we're making good progress in both areas.

Moving to the category of good news this morning, we're very pleased to announce that subsequent to the end of the third quarter, we finalized our first commercial agreement with a global footwear manufacturer. The agreement grants the customer license to use Fortrex technology in the manufacture of their footwear products. Cooper Standard will receive licensing fees and ongoing volume based royalties with an established minimum value. The agreement is for a ten year term and is non exclusive. In accordance with the terms of the agreement, we can't disclose the identity of the footwear manufacturer or the specific financial terms.

I will say, though, that the minimum fees and royalties will be sufficient to offset all of the investments we've made in our Applied Materials Science business to date. Our discussions in technology development work with other footwear manufacturers is continuing, and we hope that this first agreement will be a catalyst to future opportunities in the footwear industry. Beyond footwear, we're exploring a number of exciting opportunities to leverage the performance and sustainability aspects of Fortrex technology, including reducing rolling resistance of tires. We're in the early stages, but the initial development work shows good potential. We continue to believe that superior physical performance characteristics and the lower carbon footprint Fortrex chemistry platform represents a clear competitive advantage for us in our automotive business, our material science business and in our industrial and specialty products business as well.

We remain optimistic about opportunities to grow in diverse markets over the longer term as some of these development projects are completed. Turning to Slide 14. The momentum of the electric vehicle market is continuing. IHS estimates that battery electric vehicle production will increase at an average rate of 39% over the next four years, reaching approximately 18% of the total market by 2025. We see this market transition as a clear opportunity, and we're leveraging our innovation, reputation for world class customer service and engineering expertise to win significant business in this hyper growth segment.

In the third quarter, we were awarded $30,000,000 in annualized net new business on electric vehicle platforms. For the first nine months, new EV business awards totaled $88,000,000 Key innovations driving our success in this market include our PlastiCool family of products, which offers highly engineered thermoplastic tubing solutions for glycol applications over a wide range of temperatures up to 150 degrees centigrade. Plasticool also offers reduced emissions and carbon footprint, improved recyclability and reduced weight compared to more traditional products, making it a highly desirable option for the EV market. This type of innovation is enabling us to grow our EV business faster than the overall market. Based on existing book business and anticipated future awards, we expect to grow our sales on EV platforms at an average rate of approximately 50% annually over the next four years compared to the expected market growth of 39%.

As reflected in our quarterly results and outlook, as John described, we and other automotive suppliers continue to face significant cost headwinds due to ongoing erratic production schedules, lower overall production volumes, supply chain delays and disruptions and persistent widespread inflation. Virtually everything we buy to support our operations has increased in price over the past nine months. We are taking further aggressive actions to offset these headwinds, including commercial, supply chain and internal cost reduction initiatives. With our customers, we're taking a multi faceted approach that includes negotiating price increases, reduced or delayed price concessions and expanded commodity indexing programs. We're targeting recovery of more than $100,000,000 overall.

We've made good progress in our negotiations to date, but have more work ahead to achieve the target. We believe our status as a preferred supplier and technology partner puts us in a solid position to have these difficult discussions. We are also working with suppliers to implement indexed based contracts, extend payment terms, and we are pushing back against unjustified price increases and surcharges. We're doing everything we can to ensure consistency of supply while trying to limit the impact of this daunting wave of inflation. Internally, we're focused on conserving cash by limiting discretionary spending, carefully managing capital investments and accelerating collections of tooling and other receivables.

These actions enable us to continue funding new program launches in the future growth of our business, while near term sales remain suppressed by ongoing weak production levels. In terms of the outlook, you could say we're planning for the worst, with headwinds continuing, but remaining optimistic that strong end consumer demand will drive a rapid rebound in light vehicle production when widespread supply chain challenges begin to be resolved. Turning to Slide 16. To conclude our presentation this morning, I want to provide an update on our driving value initiative and our progress toward achieving sustainable double digit return on invested capital. While we have made substantial improvements in many areas of our business, current market headwinds have more than offset those operational gains in recent quarters.

On the graphic on Slide 16, we have highlighted two work streams that focus on managing the impacts of increasing commodity and material cost, as just discussed. These work streams are clearly more critical and more challenging now than when we first laid out the driving value plans. Given the current challenging market conditions, it may take us a little longer than we had anticipated to reach these areas these targets, but we are making progress. And I assure you that we will maintain and remain committed to achieving the long term goals of double digit return on invested capital and adjusted EBITDA margins. If we achieve our $100,000,000 cost recovery target, we could still be largely on track.

Next, I'd like to thank our global team of employees for their continued hard work and commitment. I also want to thank our customers for their continued trust and support as we work through these turbulent times together. This concludes our prepared remarks. We would now like to open the call to questions.

Speaker 0

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

Speaker 5

Hi, everyone. Jeff, first off, on the sneaker agreement, is this the company that you started doing, I guess, the development technology development agreement with back in 2019?

Speaker 3

That's probably about right, Mike. I think it's been a couple of years now that we've been working with this particular we've had several, but this particular one has been a couple of years, yes.

Speaker 6

What is the what do

Speaker 5

you think the timing is of when you would see revenue show up in your financial statements?

Speaker 3

Yes. Without disclosing product plans that they have, Mike, it's difficult to get into that conversation. Probably in the neighborhood of twelve to eighteen months from now is the production outlook.

Speaker 5

Okay. And the nature of the agreement with the it's 100% margin, right? It's just straight cash? There's no cost to it?

Speaker 4

Yes, we'll get into more

Speaker 3

of those details in the fourth quarter, but that's directionally correct.

Speaker 5

Okay. And on the material cost front, now what were the lessons you learned just a couple of years ago you went through where you took a hit from some of the commodity inflation with some of the vehicle manufacturers? And I think you were largely successful getting some of that back in your commercial negotiations. Is it easier this time? Or are there any lessons learned?

Or how does that work through?

Speaker 3

Yeah. I think given the sophisticated audience we have this morning in in the automotive industry, I I would tell you it's no different than than what you've what you've experienced in the past. For certain customers, where we don't have business that's ready to be sourced to us over the course of the next several months, they tend to have conversations, probably in a in a way that that you and I would hope for. For customers that that we have new business coming at us over the next several months, those conversations aren't quite as joyful. But somewhere in between, we'll we'll work it out.

And and I would anticipate that that over the next month or two, for the most part anyway, we'll know exactly where we where we'll end up. So by the end of the year, I think we'll give you some real concrete direction in in those regards. But it's a tough tough time we're in. Obviously, our customers are too, and we're all trying to work through it together.

Speaker 5

Now are with new contracts that come on, are they gonna be more the traditional supplier pass through type agreements? Or are you kind of stuck with these legacy type agreements?

Speaker 3

Well, for new programs, obviously, we're able to price at the current commodity rate and indexing as part of what we do. Your question really is in in the rears, it's it's whatever we had is what we have, and we're trying to

Speaker 2

Yeah.

Speaker 5

Yeah.

Speaker 3

Negotiate, you know, the best we can. If they agree to put indexing in as the train has already left the station, sometimes those are good deals, sometimes those aren't good deals, you just have to take it sort of one at a time by customer.

Speaker 5

Right. Now John, you mentioned that these senior notes, the no call provision expires. I think it's mid-twenty two, correct?

Speaker 4

Yes, Mike. It's June 1 is the first opportunity for the non call date.

Speaker 5

Okay. You have to call all the notes? Or can you call part of them? And is there a minimum cash balance do you think you need with cash or credit facilities to go forward? Just have the cash on the balance sheet.

Speaker 4

Yes, Mike, I think I got the gist of that question. You broke up a little bit at the end. But let me start with the minimum cash. What I've said in the past and what we're still kind of thinking is a good level is that we're comfortable in something in the range of 150,000,000 to $180,000,000 of cash on hand. And then we still have the access to our revolving credit facility, which we have not tapped into at this point.

So we think that's the minimum cash required to run the business going forward. As far as the non call date, you can do partial, but our intent is to look at that 13% really expensive debt and see what we can do to take out all of it. So we'll keep you up to date on developments here over the next six months as we look at the opportunities within the capital

Speaker 5

Perfect. Thanks, Jeff. Thanks, Jeff.

Speaker 0

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

Speaker 7

Good morning. I guess my first question is, can you help us get a sense of the timing of the $100,000,000 plus of raw material recoveries that you're in discussions with

Speaker 2

your customers?

Speaker 3

Yes. We've asked this is Jeff. We've asked for recoveries starting October 1, to be clear. Obviously, we can ask whatever we want to. And we're in the stage of negotiation where, in some cases, we've achieved that.

In other cases, the negotiations are still ongoing, Ryan. So that's why I mentioned I do believe that by the end of the calendar year, so by the end of the fourth quarter for us, we will have a very good idea of where each of these negotiations will take out. So there's probably the road just to the question was, do you have any of this in your guidance for the rest of this year? The answer is we do not.

Speaker 7

Okay. That is helpful. And how should we be thinking about these recoveries? Is it sort of just a flat amount? Or are you changing some of the structure of the contracts where you're now more index based rather than a fixed price based?

Speaker 3

It's a combination. Each customer is different. In some cases, we already have indexing with certain customers on certain commodities. It's our objective going forward for the new business that we're quoting and the new business that will come into our company in the future years, indexing is what we want to do. For a lot of the business that we have in the rears, it doesn't include that.

Historically, we have said 40% to 60% of raw material inflation is what we have recovered. That was prior to this hyperinflation moment that we're in right now. But to give you some idea of the historical recovery rate.

Speaker 7

Great. That's helpful there. And, you know, just thinking about the growth in EVs, I mean, the numbers you said sound great. But what is your feeling or maybe what is your exposure right now to fuel lines? I think you, in your results, you combine that with brakes as well.

But could we see some of that gains in EVs be offset by declines in fuel lines?

Speaker 3

Yes, to a large extent, Ryan. We've given some color on this in quarters. But basically, the EV fluid systems can be anywhere from 30% to 50% more content than the ICE engine fluids. So for us, we definitely want more EVs because the content even if you take the fuel line out, our content is up significantly. And of course, that varies as you go from the passenger car market up to the small SUVs, mid SUVs, large SUVs.

The bigger the vehicle, the much larger the content for us. And and so we we actually are going to enjoy the transition from ICE to hybrid to battery electric vehicle in in the segment. Hybrid actually is doubling because, obviously, you've got two powertrains that you're managing from a fluid point of view. But the good news when you move into EVs, that number goes up substantially as well. Obviously, we're working with customers to improve the efficiency of those systems.

So as we go forward, we'll have a lot more insight for you on the specifics of the content per vehicle on some of these as we get closer to launch.

Speaker 7

Great. Just two more. Just you didn't provide any update on free cash flow. How much cash, if any, do you expect to burn in the fourth quarter?

Speaker 4

Yes, Brian, I'll take that one. This is John. We do expect a modest free cash outflow in Q4, just given the nature of production levels. With reduced losses that we would anticipate in Q4 on higher volumes, that will be mitigated somewhat. But keep in mind, we do have a significant interest cash coupon due effectively December 1 of coming up.

So that's $30,000,000 of cash going out the door. We should see some favorable working capital benefits to offset that. And with the guidance, can squeeze the on capital expenditures are worth about another $25,000,000 for the year. But as Jeff described earlier, we're looking at all discretionary spending. We're managing the capital expenditure area.

And part of these customer negotiations are looking at tooling and other outstanding receivables to see if we can get accelerated payment terms on those. And then on the supply side, looking to extend days payable outstanding as we renegotiate some of these contracts. So all that told, in the short term here in Q4 should result in modest free cash outflow.

Speaker 7

Okay. And then just finally, as we think about next year and the refinancing of the 13% notes, you know, you're going to probably have to address the Term Loan B at the same time. So how are you thinking about timing? Because obviously you could be in a situation where you may save on coupon on the first lien notes, but your term loan B right now is priced at L plus 200. Not sure if you're going to be able to reprice that term loan there.

So just how are you thinking about this? You could have probably purchased attacking both at the same time? Just love to get a sense of your thought process.

Speaker 4

Sure. It's a good question. The term loan B comes due in 2023, and you never want to have that come current on your balance sheet. So clearly, it's top of mind for us to look at the total cap structure here over the next six months and figure out the best alternative for us going forward. I said in my prepared remarks, subject to market conditions as always.

So we'll see how the production environment is in starting the year, Q1, if it is optimistic, as the pundits say and our customers believe, then we should be in a good situation overall as far as looking at the total cap structure. But for now, we're looking at all alternatives, Brian.

Speaker 7

And you're still ruling out an equity raise, correct?

Speaker 4

Yes. At this point, with the stock price where it's at, the dilution impact on current shareholders doesn't really make a lot of sense for us to go out with an equity raise and use that to refinance any of the debt. We'll keep that as an alternative and we're always watching that.

Speaker 7

Got it. Appreciate the thoughts. Thank you.

Speaker 4

Thanks, Brian.

Speaker 0

Our next question comes from Joseph Foreschelli with Cantor Fitzgerald. Please go ahead.

Speaker 8

Good morning. First question, a bit of housekeeping. Slide 10 shows free cash flow of negative 71,100,000.0 But on a quarter over quarter basis cash was down by I believe it's 82,200,000.0 So what's the $11 odd million difference?

Speaker 4

Yes Joseph, you'll see when we issue our full 10 Q later today we have some local borrowing lines around the world. And we just had we simply had a pay down in some bank debt over in China. This makes up most of that difference.

Speaker 8

Okay. And then thinking of cash and what you said for minimum liquidity, what kind of working capital drain or investment rather are we going to see when things start to turn back on? And have you thought about where your liquidity position will be at that time?

Speaker 4

Yes, except when is that time, right? We're monitoring the production levels as we go forward. I guess the good news in that working capital story is we have maintained a higher inventory levels just because of the volatile production schedules. So you won't when production levels do rise, you won't see a significant outflow for inventory buildup back that you would typically see in the seasonal production environment. Now we're still working to bring those inventory levels down by the end of the year to more right sized level of inventory.

I think we ended above $190,000,000 on the balance sheet here in September. So we'll bring that number down. And then as I've said before, we're also looking at tooling and other receivables to bring those collections in earlier rather than have those extend out. So when the industry production levels do ramp up, you're absolutely right, you do typically see a working capital usage. But I think in this case, it'll be a little bit more moderated than typical.

Speaker 8

Okay. And then last question, looking at auto production, just top line isn't always a good guide. And looking at what some of your customers have idled, could you give a breakout per platform generally sedans, SUVs, trucks, what your exposure is?

Speaker 3

Yes, Joseph, this is Jeff. I think we've been through this a few times, that clearly trucks and SUVs, crossovers, those type of vehicles represent 80 plus percent of our revenue. So it's a very important number. And here in North America, it's virtually the whole business. I mean, we just have a lot of content in trucks and SUVs and crossovers.

So as those vehicles pick back up here in the North American market, so goes Cooper Standard.

Speaker 8

Okay. Yes, that's what I thought. And honestly, I thought your top line this quarter was down more than I would have expected given SUV and truck sales chips going towards the more profitable vehicles. So thank you for confirming that. And that's it for me.

Thanks guys.

Speaker 4

You're welcome. Thanks.

Speaker 0

Our next question comes from Derek Wenger with Concise Capital. Please go ahead.

Speaker 1

Vic, I think you need to move Derek into the question queue, please, or out of the queue and into the current.

Speaker 0

One moment, sir. Let's move first to our next question. And that will come from the line of Bob Amanta with JPMorgan. Please go ahead.

Speaker 9

Thank you. A couple of clarifications. The $11,000,000 JV, is that a noncash even though you're putting it in EBITDA?

Speaker 4

It's noncash for now, Bob. The as we understand it, the bankruptcy process in China could take a couple of years before we see that issue settle out. So for now, we've taken a conservative position to put up a reserve for that $11,000,000

Speaker 9

So but it's money that you thought you would collect and you're not going to collect it? Or is it money you have to pay out?

Speaker 4

It's money we thought we were going to collect that is now subject or is in question, whether we're going to get that recovery or not.

Speaker 9

Okay. Okay. And then on the bridge, I guess, with the obviously, the volume mix thing is it seems almost like 40% decremental. I mean, I don't know if that's there's a lot of stuff in there, the 165 lost sales, 65 lost EBITDA. But the other two items, the general inflation and the material economics, you know, and see what they are year to date and quarter, but is there a general historical percentage?

I know we're in maybe a little unusual times how extreme some of these increases are, but do you usually recover 50% of that, 75% over time? I mean, is there I mean, clearly you're not going to get all of it. How does that work between the pass throughs and other mechanisms you have? What percent could we assume you should normally recover?

Speaker 4

Bob, let me comment real quick on your volume and mix observation. Keep in mind when we present those numbers, it does include customer price. So it's not just the straight flow through effect of production volume changes, okay? So keep that in mind. Jeff already addressed it by saying our historical recovery has been anywhere from 40% to 60% on the commodity side on materials.

Typically, what we would do in normal inflationary times would be offset those, call it, wage inflation or rent utility inflations with our cost saving initiatives. Here, with the significant levels that we're seeing in all those categories, the rise in all the input costs, etcetera, is far outpacing any ability in the short term to whittle away at it through our own cost reduction initiatives. So the big number I think you're looking for is the 40% to 60% level. And as we've indicated, we're still in conversations with our customers about how to call that back.

Speaker 9

Okay. And a couple of quick ones. And on the minimum liquidity, or I guess you called it minimum cash. I guess I just wanted to I don't know if it's parsing words here. But the one fifty to one seventy five minuteimum number, would you be comparing that to the cash plus your unused availability or would you just be comparing that to your current cash?

Do you view those two as kind of the same thing, cash and revolver availability?

Speaker 4

Yes, I call that the overall liquidity.

Speaker 9

Okay. So Q4, know you mentioned the interest payment and some of the other stuff. Your guide obviously implies zero to modestly negative EBITDA, working capital, all that. I that's I mean, to me, that's more than modest outflow and that's $50,000,000 give or take. But either way, and next year, we don't know all your guidance yet for CapEx and everything, but all in with interest, it seems to be a couple $100,000,000 give or take.

So it just seems like you're going to burn cash fourth quarter and next year. And I know you're doing some things to kind of cut costs. I guess time will tell. But how I mean, seems like you're gonna get close to that number. I guess maybe not.

That's why I was asking about the quiddary. You're at $3.80 now. I mean, it could be, you know, down to to low 2 hundreds. I mean, I I just I just wonder if if you have any thoughts on how close you're cutting it or I know you're not going to issue equity, but I just didn't know what other things you have at your disposal. I mean, asset sales clearly, maybe now is not the best time for that.

But what other things, if anything, is out there besides just trying to cut some costs here and there?

Speaker 4

Yes. Clearly, asset sales could come into play, but you're right. You don't sell in the bottom of a market. So you wouldn't get any meaningful proceeds from that. But there are other legacy assets that we're taking a look at.

There are other alternatives and options that we're looking at. We've already talked about our cost cutting and reduction initiatives around the world that should start bearing some cash savings here as we go forward. But clearly, that's coupled in the short term with some restructuring cash outflow that are it's already in our guidance, right? So clearly, it's top of mind for us, and that's why we're looking at every single area of not only spend, but other opportunities that we could have on there to manage to that and stay above that minimum liquidity level as we've been talking about. So I'm not going to get into 2022 at this point in time.

So too early for us in our planning process to give you any color there, but just say it's top of mind for us.

Speaker 9

Okay. And then just lastly and generically on Europe, obviously, last couple of years, I mean, negative EBITDA. But even before that, if I go back in time, margin wise, 3%, percent where The U. S. Was kind of 15%, 16%.

Structurally or just generically, can you tell I mean, clearly the simple answer is why are you in Europe? I'm sure there's reasons you can't just leave there tomorrow. But generally speaking, Europe versus The U. S. Or North America, what it just doesn't seem like it was ever really that good.

Clearly positive 30 of EBITDA is better than negative 20. But generally speaking, what is it about there that are you just not big enough there? Or what's kind of the issue over there?

Speaker 3

Bob, this is Jeff. I think that for Cooper Standard, it isn't about whether we're big or small in Europe. The issue for us is really on the fluid side of our business. And then the ceiling side, we actually do fairly well, and outlook going forward for ceiling in Europe is positive. The challenge for us is fluid, always has been, and we're working through that.

That's what a lot of the conversations we've had this year in in relationship to to restructuring has has been about. There's been some cost savings taken out in Europe, but there's a lot more to go. We also sold the rubber business for hoses over there, the rubber hose business in Europe, not too far back. So there's some stranded costs that we need to get out of that business as we head into 2022, and we're committed to doing that. So we will be smaller, but we'll be more profitable in Europe going forward.

We'll talk a little bit more about that when we get into the guidance for 2022, early in the 2022 calendar year.

Speaker 9

All right. That's all I have. Thank you.

Speaker 0

Our next question comes from Zohir Avni with Beach Point Capital. Please go ahead.

Speaker 7

Hi. I was wondering if you would be able to provide an update on your plan for the Latin America business.

Speaker 3

Yeah. This is Jeff. I think, the conversation that we just had in terms of assets, and and what we plan to do with with certain parts of our business that continues to fall short. Our Brazil business has been part of the conversation here, and we said that by the end of this year, we would get to that conclusion. I didn't necessarily think that we were going to have the challenges from a supply chain and hyperinflation that we're dealing with right now.

So it might not be the best of time, as John just said, to make those decisions. But I will say this, our teams in Brazil have done a terrific job of taking cost out and managing the price as well as inflation in that market. So I think at least as it relates to self help, that we have driven ourselves, they have they've done a very good job. Whether that's going to be enough to push us into a category of fair return on investment, we will probably need a little bit more time than the end of this year given all of the variables that I just spoke of. But, that is one we still owe a decision on.

Speaker 7

Okay. And if we could just look at the results between second quarter and third quarter. Revenue was down around $6,500,000 while EBITDA was down around $19,000,000 sequentially. And so would you mind providing a quick bridge on those results?

Speaker 4

Sure, Zohir. It's John here. I can walk you through, but the significant driver overall is going to be the commodity inflation, the acceleration that we're facing. But with revenue down about $9,000,000 or so, as you said, globally, that has just a few million dollars of EBITDA pull through in the current business run rate on just the pure volume and mix calculation. But then when you throw it layer on commodity inflation and other inflationary pressures, that's almost $12,000,000 or higher compared to the second quarter than all in experience, right?

Then on top of that, the biggest other driver is that the bad debt that we reserve that we put up for the $11,000,000 So those big variance drivers are what's causing that outsized degradation. But let me break down some details for you by region, okay? So contrary to the North American market actually being down almost 6%, the market production was down 5.7%. Cooper Standard volumes were up 9.6%. So it's actually an outsized performance when you think about an earlier question on what platforms we're on in the heavy weighting towards trucks, SUVs and the prioritization our customers have there, that kind of indicates why we're able to outpace the overall market here in North America.

Europe and Asia, we were right in line with the market declines. Our volumes fluctuated right accordingly with both of those areas. And we were favorable in Brazilian market, actually being up 3% or so in terms of volumes while the market was down 5%. So hopefully that kind of helps you paint the bridge picture, but it's really all about commodity and other inflationary pressures and that bad debt expense.

Speaker 7

Great. Thank you.

Speaker 0

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

Speaker 10

Hey guys, thanks for taking the questions. If you look at the 8% to 9% EBITDA margins you were doing in second half of last year even versus the negative 6% this quarter. How you bucket that 15% margin swing? I know material inflation is a big piece of that, but if you had to split that 15% in between volumes and production volatility versus material costs versus anything else, what would be the estimate?

Speaker 4

Josh, it's John. Yes, I'd say, yes, you're on the right track as far as the commodity inputs being the biggest driver in the variability in production schedules. But also keep in mind last year, Q3 and Q4, we were benefiting from various governmental programs around the world due to the COVID pandemic. So that had favorable good news in the back half of last year as the governments were offering various types of support. That's essentially gone away, and you don't see that coming through again.

And if memory serves, Q4 of last year, that was about 200 basis points of favorability in our Q4 results. So the overall environment, the stopstarts and the inefficiencies that has caused us, coupled with commodity inflations, are your very biggest drivers.

Speaker 10

Got it. And then just a clarification on the last question. The bigger EBITDA swing overseas was in Asia. You touched on it a minute ago, 5% sequential increase in revenue, yet EBITDA declined negative 2% to negative 14% quarter over quarter. That's primarily that $11,000,000 charge bad debt?

Speaker 4

Yes, exactly. It's $11,000,000 bad debt plus some material economics.

Speaker 10

Got it. And then just looking at the guide, if you do the math, it implies close to a $60,000,000 burn pre working capital. I know you said that it should be a modest cash outflow for 4Q. Maybe you've got some inventory that you're still working to unwind and some tooling. But how should

Speaker 0

we think

Speaker 10

about working capital in the context of that $60,000,000 burn? Is it just looking for a bit of a range, I guess, is it 30,000,000 to $40,000,000 Is it a little bit less than that, a little bit more? How should we think about that?

Speaker 4

Yes, I've given all the color I want to give at this point, Josh, just given all the moving pieces. So I've given you the qualitative aspects of how it comes together. But because of the various initiatives we've got going on around the world, there's a lot of puts and takes there.

Speaker 10

Okay. And then next question, just wanted to cover, I guess, in a little bit more detail the goal for these commercial settlements. The $100,000,000 that you got out there now, how would you frame that for compared to the actual headwinds that you faced year to date, I guess, in the context of that 40% to 60% historical success rate. Is that kind of in line?

Speaker 3

Yes. This is Jeff. I think the target that we put out there and the letters that we sent out to our customers reflected reality of our business. So our commercial teams are in negotiation as we speak, and the targets are clear for our customers, and the targets are clear for our folks that are negotiating to those targets.

Speaker 10

Got it. And does the the 100,000,000, this got asked previously, is is if you if you got all that you set out for, like that $100,000,000 how much of the goal is retroactive versus you get the recovery later down the road once this inflationary period starts to subside?

Speaker 3

Yes. Again, the October 1 request that that went out with the 100,000,000 of of help required was was based on the reality of the the commodity inflation and as it as it was occurring within our company. So, again, we didn't just make up the October 1 date. And so each customer is is talking to us about how they can help us recover those costs. There's a bunch of moving parts and a bunch of different levers that can be pulled.

I talked about those in my in my prepared remarks. And so each one of them are different. I I think that that as I mentioned earlier, by the end of the calendar year, we will have a very good idea of of the result of those negotiations. So we'll just we'll just stick to that. I I don't wanna provide any more detail, any more color.

I don't use earnings calls to give my customers performance reviews, so we've probably given enough of that today.

Speaker 10

Okay. Fair enough. I mean, does the $100,000,000 include anything else besides material costs? I know there's been other suppliers out there talking about trying to recoup whatever estimate they have for costs incurred for the volatility in production schedules or other inflationary labor, things like that? Or is it just is it just for materials?

Speaker 3

All in. Everything you just described.

Speaker 10

Okay. Got it. I think that's it.

Speaker 3

Okay. Thank you.

Speaker 0

Our next question comes from Patrick Sheffield with Beach Point Capital. Please go ahead.

Speaker 2

Hey, guys. Thanks for taking squeezing me in. Not to belabor the point, one last try here on the 100,000,000. You guys get different categories of where you expect to get those savings from. Is there any, like, directional, you know, guidance you can give as far as how much of that is from price increases versus other initiatives?

Is it mostly price increases that that would drive the $100,000,000 And then I just wanted to confirm the $100,000,000 is like an annual cost number, like an EBITDA improvement theoretically. Is that right?

Speaker 3

Yeah. And so first of all, the answer to the question is yes. There's price increases. We also are very focused on cash. And so any as I mentioned in my prepared remarks, there's discussions going on about tooling payments and other costs associated with our business that we typically would absorb, that we're asking them to absorb.

So, each customer, is different. Each status, in how they would like us to address the recovery is probably different. And and I also tried to give you some color in terms of the leverage of these negotiations. They're they're they're based on business that that we have today, but it's also business that we wanna keep tomorrow and new business that we wanna win tomorrow. And depending on where you are in those different slots of of of life, you know, they're they're more apt to help when when you don't have a lot of of new business that's coming your way.

And when you do have a lot of new business coming your way, then then those negotiations are more difficult. So you also know who our largest customers are. It's it's pretty simple. We we've given that breakdown many times, and and so you you know that that we've got three or four people that that need to, pay their fair share here, and that's what we're that's what we're focused on. So we'll, we we feel really good about the engagement.

We feel good about the the atmosphere of the negotiations. And and and I I appreciate everything our customers are doing to to try to help us, and and I'm sure everybody else that's sitting in their lobby these days.

Speaker 2

Okay. Great. And, quickly on on restructuring for '21, see the guide for '45, to '50 or '60. Any preliminary thoughts as to if that number is going be higher or lower in 2022?

Speaker 4

Yes. On our last call, I mentioned that we expect it to be significantly lower than the current spend rate, and nothing would change how we're viewing that right now.

Speaker 2

Great. And then finally, on the bad debt write down, are there any others? Is this sort of a one off? Is there anything else that like that that might might be going on in the region, or is that fully captured?

Speaker 4

This was with just one particular former joint venture. So we we are obviously still in in the region and and managing through the the challenging industry environment there. So I can't say whether if anything else is coming our way, but not that we know of at this time.

Speaker 2

Okay. Thanks a lot guys.

Speaker 4

Okay. Thanks.

Speaker 0

Next question comes from Chris Wong with Barclays. Please go ahead.

Speaker 11

CHRISTOPHER Hey, most of my questions are answered. Just wondering if that $100,000,000 recovery that you're requesting from October to year end, is that included in any shape or form in your guidance?

Speaker 3

Hi Chris, this is Jeff. As I said before, no it's not.

Speaker 11

Okay. And then take a step back in terms of, you know, your overall COGS base, you know, can you give me a sense like, you know, what is the overall raws as a percentage of COGS? And then in terms of raw material, know you have, you know, all kinds of different flavors, you the rubber and all kinds of derivatives. Can you kind of maybe give us a little bit more sense of what are the buckets that are moving the most for you?

Speaker 4

Yeah, sure, Chris. This is John. The main inputs that you can kind of categorize them in three main buckets. You've got rubber is clearly the largest input cost that we've got, followed by metals and then plastics. And if you think about the 34 plus million we've already incurred this year and the $60 we'll face for the full twelve months, about 65% of that inflation is based on the rubber area.

Another 25% is on metals. So I think steel and aluminum in that category and then about 10% coming out of plastics and resins. So that's kind of the overall the inflationary impact of how that breaks down. In terms of our direct materials, you'll see in our 10 Q direct materials as a percent of sales is about 47% in the Q3 timeframe. We don't break it down by direct raw materials, but it's more about the overall materials that we're buying that going into that 47%.

Speaker 11

Got you. That's helpful. And I mean, there's a bit of a lift in terms of sales sequentially. Can you talk about, you know, the visibility to broken down by continent?

Speaker 4

Yeah, when you look at continent by continent, the IHS forecast has North America up about 7% compared to Q3. And then Europe is supposed to be up about 31%, Q3 to Q4. And the overall Asian market up about another 12.5% or so. So if you kind of factor that in with our weighting of revenue, that's how you get to our overall sales increase. Clearly, there is two schools here.

One is the IHS forecast And then we also have the short term customer releases that we manage to. And so we're triangulating both of those data points into the guidance range that you see.

Speaker 11

Gotcha. That's helpful. And I say I missed on a couple of things. One is you said 4Q you're going to have modest cash outflow with working capital. Is that right?

Speaker 4

Yes. I'm rethinking the term modest, to be honest with you. We're going to have a cash outflow with the current outlook, the interest load and then the capital expenditure we got in front of us. And we've got a lot of positive offsets that we're working towards to bring that cash outflow down.

Speaker 11

Got it. And I know that you didn't really get a lot of working capital back even with obviously sales a little bit lower in the quarter. What's sort of your expectation now in 4Q and going to 2022, hopefully, into that recovery phase when your sales is going to be higher?

Speaker 4

Yes, I answered this a few minutes ago, right? The biggest reason why we didn't see the benefit of lower revenue on the working capital front in Q3 was because of the higher inventory levels. And as those come down and we don't need to buy as much in a rising sales environment, we should get some of that working capital back.

Speaker 11

Got it. Okay. Thank you very much.

Speaker 4

All right. Thanks, Chris.

Speaker 0

Our next question comes from Jared Will with Deutsche Bank. Please go ahead.

Speaker 6

Yeah. I think most of my stuff has been answered, but, I mean, talking about, like, the path to margin improvement and the buckets you've identified, the the material inflation coming into this year was right. We didn't we didn't think it was gonna be like this. So if you were to and part of this part of the improvement and maybe part of the 100,000,000 that you'll be able to sort of bucket into the into that bucket. I mean, if if if costs hold here or pull back next year, you'll be able to catch up on your customer negotiations, and that'll sort of accrete the margins on its own.

Right? But the other part of my question is if if we were to remove that that material cost inflation, how do you where do you think you are on on all these other initiatives and executing on those to get yourself back to the to the margins you're you're shooting for? I understand that the material cost inflation set you back. How do you sort of grade yourself on the progress on on all the other stuff?

Speaker 3

Yeah, Jared. This is Jeff. I I said in my remarks, if we get that, then we're largely back on our on our timing. And and what I've said in a number of, of these conversations is that 2023 was the first full year we expected to be a double digit return on invested capital and double digit EBITDA. And we said as we exited '22, we would be able to demonstrate that.

So that was pre all of the the conversation we were just just having regarding inflation. Obviously, that didn't include significant supply chain shortages or shutting down our most profitable vehicles and and causing start and stop from a production standpoint that that traps significant inventory costs and labor and all of that. We've talked about all that this morning. If we talk about the glass is half full here, then what we have is the lowest inventory level in the history of the automotive industry, I think. We have the most new vehicles coming on the market.

We have EVs that are going to create incredible brand opportunities and pent up demand. I believe, Cooper Standard has never been in a better position from a cost point of view internally, given what we can control. We still have work to do in Europe, and we still have work to do in China, to get those regions profitable. And we'll take next year to continue to work our way through that. That's been the plan.

North America, we need to get these plants up and running, and I'm sure our customers feel the exact same way. And as soon as that happens, the demand is there, and I think you're going to see a tremendous result. And clearly, the raw material inflation is real. The costs that we're absorbing as a result of the supply chain challenges are real, and that's why we've asked for more than $100,000,000 of price increases. And so that's about as simple as I can say it.

I remain extremely optimistic about this industry and about the future. I've never been more confident in our in our company, both in terms of of what we have done to this point to set it up for long term success and sustainability. I think we have the best talent in the industry, and I think that they wanna stay here, and and the culture is a big deal. And the relationships we have with our customer have never been better. I can promise you that.

And and we're gonna do everything we can to continue to deliver for them as we negotiate some of the toughest contracts that we've ever had to negotiate. And and I'm confident that we'll get it done, and and we aren't gonna whine about it. We're just gonna go to work and continue to focus on the things that we can control, and and I know our customers will help us the best they can. So that's sort of the the synopsis.

Speaker 2

Great. Thanks.

Speaker 0

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

Speaker 1

Okay. Thanks, everybody. We really appreciate your engagement and insightful questions this morning, and we certainly look forward to future conversations. This will conclude our call. Thank you.