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spk06: cash balance of approximately $106 million. Combined with $149 million of availability on a revolving credit facility, which was undrawn at quarter end, we had solid total liquidity of approximately $255 million as of March 31st, 2023. Based on our current outlook and expectations for light vehicle production, commercial support in the way of sustainable pricing from our customers, and demand for our products, we believe our current cash on hand, expected cash generation, and access to flexible credit facilities will provide sufficient resources to support our ongoing operations. That concludes my prepared remarks, so let me turn it back over to Jeff.
spk07: Thanks, John. Over the next few minutes, I'd like to provide you with an update on some of our commercial initiatives that are intended to ensure that we will be adequately compensated for the value we offer our customers. I will also highlight some of our strategic initiatives that we believe are moving us forward to significant transformation as a company, significantly elevating our ability to deliver even further value that our customers need and are willing to pay for. Then I'll conclude with a few comments on our outlook for the remainder of the year. So please turn to slide 12. We're continuing to work collaboratively with all of our customers to recover incremental costs related to inflationary pressures and establish sustainable pricing that will enhance quality of earnings and value creation over the long term. During the quarter, we further limited our risk exposure from commodity and material costs by initiating index-based agreements with additional customers. As it relates to commodity volatility, We believe we are now better positioned than we've ever been before. As it relates to non-commodity inflation and sustainable pricing, we're continuing negotiations with all customers. Negotiations have been constructive and given the value that our products and services provide them, our customers have been very supportive. While negotiations are ongoing, we expect to achieve further positive outcomes that will drive improving financial results going forward. We have also been working with our customers to improve cash flow. As part of the progress to date, we've been able to implement more favorable terms on the trade receivables and on the repayment of customer-owned tooling. We're making solid progress and anticipate further good news in coming quarters as these agreements are implemented. Turning to slide 13. So part of what gives us confidence in our ongoing commercial discussions is the added value and expertise we provide our customers through the strategic integration of advanced digital tools in our engineering and design process. By using tools such as Design by Analysis, Virtual Validation, and our AI-based Formula Link tool for compound development, we significantly sped up our overall design process and we've reduced our engineering costs. These advancements have been critically important in the rapid industry transition to new energy vehicles. is we're now able to design and deliver highly complex systems and optimized technical solutions faster. We are winning new business as a result. In addition, we're increasingly being recognized by our customers as a valued technology partner in design, functionality, and sustainability. We've also invested in advanced proprietary digital tools to enhance manufacturing efficiency. Our Pulse OEE system, our wireless asset tracker, and LiveLine, which is our AI-based automated process control system, are a few examples. These are enabling us to reduce scrap, improve efficiency in our secondary operations, plan and conduct maintenance more effectively, and really improve our overall asset utilization. Combined with our suite of digital tools, we've been able to partially, as a partial driver of the reductions in our SG&A expense and fixed manufacturing costs over the past few years. But we believe there is even more opportunity ahead as we leverage these advanced tools and technical capabilities to grow and optimize our business. They're allowing us to expand into adjacent and complementary product lines, as we are now doing in our fluid business. And they're also enabling us to provide incremental value for our customers through more highly advanced, technically sophisticated products and services, which we believe will support more sustainable pricing moving forward. Consistent with our company mission, we believe that by becoming the first choice of the stakeholders we serve, in this case our customers, we will ultimately maximize our value creation opportunities. Turning to slide 14. As you know, each year we publish our corporate responsibility report to provide details on the way we are servicing various stakeholders. This year's report, which we have titled Creating Sustainable Solutions Together, will be available online within the next two weeks. The report will provide you with many insights regarding not only what we do, but who we are and the values that guide us as individuals and as a company every day. We highly recommend you check out the report. It will be certainly worth your time. Turning to slide 15, now I will conclude our prepared remarks this morning with a few thoughts on our outlook for the rest of 2023. First, I want to highlight that we fully expect to achieve significantly improved financial results in each of the remaining quarters of the year. Our initial plan and full year guidance anticipated that the first quarter would be the toughest given the expected timing of our commercial settlements. So that is consistent with our plan. Our financial results are very dependent upon industry production volumes and specifically the production volumes from our top customers and key platforms in each region. We continue to see a lot of change in industry production forecasts and customer production schedules, so that certainly makes planning a bit difficult. But our current outlook for production volume remains positive and anticipates continued modest year-over-year growth overall, driven primarily by increases in Europe and in North America. The outlook for inflation is a moderate headwind. We currently expect moderate inflationary pressures will continue through the remainder of the year and costs will remain at elevated levels. Recent reductions in global oil production and tight labor availability in certain markets may represent inflationary risks to our outlook if they continue. On the commercial side, We expect to successfully advance customer negotiations in the remainder of the year to further offset inflation and establish sustainable pricing in all of our segments. As we saw in the first quarter, however, the timing for closing any customer agreement is certainly more difficult to predict. Overall, our outlook for 2023 remains very positive. We will plan to give a more detailed update and formal guidance as we typically do in conjunction with our second quarter results. I want to thank our global team of employees for their continued dedication and their commitment to excellence and delivering value for our customers and all stakeholders. I also want to thank our customers for their continued trust, confidence, and support in managing through this challenging industry environment and for their increasing recognition of the value of our products, technologies, and services we provide them. I believe we are approaching an inflection point in the relatively near term as we benefit from improved volume and enhanced commercial agreements with sustainable price increases. Over the longer term, we believe we will drive increasing value by continuing to transform our products, our services, and our company with advanced digital tools and technology that meet and exceed the demands of today's mobility industry. This concludes our prepared remarks, so let's open the call for Q&A.
spk00: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1-1 on your telephone. If you are using a speakerphone, please pick up on the handset before entering your request. One moment, please, as we assemble the queue for questions. Our first question comes from Michael Ward of The Benchmark Company. Your line is now open.
spk08: Thank you. Good morning, everyone. Just a question on the commercial agreements. Is some of what we're seeing over the last three, four, five quarters just the maturing of the process? When you say more sustainable pricing, I assume that's referring to just more consistent commercial agreements where you don't have to have these big lumps or waiting.
spk07: Is that fair? Good morning, Mike. This is Jeff. Thanks for the question. So I'd put it in two buckets. One is the index-based pricing. agreements that we now have virtually with every customer in the world. So that's a raw material approach for recovery that we haven't had in the past. And as raw material prices go up, we recover. As they go down, we give some of that back to the OEM. The sustainable pricing, Frank.
spk08: Okay, so that deal is negotiated.
spk07: You don't have to redo it every quarter or anything like that. It's ongoing. It's already negotiated. It's in place for all contracts going forward. Related to your second question regarding sustainable pricing, that's just real simple. We have prices out there in all regions that don't allow us to get a return on the investments that we've made. And we're back in with each customer renegotiating those prices on existing product. And certainly that impacts the price of the new business going forward much easier there because we've already won that business at higher price. So it's really about getting price increases to offset all the other inflation that's taken place and also the volume that hasn't been there as forecasted. So that's really what we're doing to make sure that Europe, North America, and Asia all return to these sustainable levels of profitability so that we don't have to go back in every year and talk about price. Okay.
spk08: And based on the timing or based on the regional performance on the EBITDA level, it looks like Europe was probably the one that was slow in the commercial negotiations. Is that fair?
spk07: Yeah, I would say this about Europe. I mean, the timing is probably fair because we certainly have concluded several that didn't allow us to book it in the first quarter. I will say that. What I will tell you on Europe going forward, Mike, and we've mentioned this here quite often, that we were set to burn... close to $100 million in cash in Europe over the next two years if we didn't address sustainable pricing in Europe. And as I sat here today, I'm very confident that that's not going to happen. The negotiations are going well. Our customers are proving that we're a valued supplier in Europe, and I really look forward to those results hitting our bottom line in the second half of the year.
spk08: Well, that's a big number. And in Europe, is that part of the delta, well, from Q4 to Q1, currency year over year was in 8 million. How did currency stack up relative to Q4? And was that all in Europe?
spk06: Mike, this is John. It wasn't all in Europe sequentially, Q1 to Q4. But the euro was a significant driver when you look at the results that we posted in the end of 2021, sorry, 2022 until the first quarter of this year. Inflation was a big driver, continuing, obviously. But FX with the euro and other currencies driving higher sales with negative earnings pull through was actually a big part of the sequential bridge. Perfect. Thank you very much.
spk02: Thank you. One moment as I prepare the queue.
spk00: Our next question comes from the line of Brian DeRivivio by Baird. Your line is now open.
spk05: Good morning, gentlemen. A couple of questions for you. John, first, with the change in the terms that were talked about with AR and tooling, what kind of release could we see from working capital this year?
spk06: We're continuing. I'll start with tooling. Brian, thanks for the question. We're looking to continue the efforts that we've been talking about for the last couple quarters as far as not using Cooper's balance sheet to fund our customers' assets. And we've been running about $100 million of customer-owned tools that sit in our balance sheet until they meet the requirements to actually bill once they're finally approved and they're ready to start production. So the efforts there have been to implement progressive payments along the way, whether that's upfront deposits before we kick the tools off or whether it's interim milestones whereby we get reimbursed on a regular basis for monies that are spent to date and we don't have to wait 12 months, 18 months, or even longer to get reimbursed by our customers. So the global team is continuing to drive that number down, but you can think about certainly a double-digit decrease in that $100 million that we're looking to drive and unlock towards the end of this year. We're making incremental progress every day, so I won't point to anything here in our Q1 results, but you should see a benefit as we close the year out. From a customer term standpoint, we are continuing to see that benefit cash flows and unlock working capital. Certainly, you know, in Q1, we always have a working capital outflow when it comes to the sales ramp. You know, we're purchasing more inventory because we're able to bleed it down at year end. But then also with the sales rise, you are putting incremental receivables on the balance sheet as of March 31st. So seasonality would typically have you seeing those via usage of working capital. And this is no exception, but it has been mitigated by the terms changes that Jeff alluded to, and we'll continue to see that in the next couple quarters.
spk05: So I guess maybe put it that way, and I understand the seasonality. Are we expected to see a source of cash growth? from receivables as well in 23, or is that something that may take a little bit longer to realize on a cash basis?
spk06: Well, it remains to be seen whether that continues out towards the end of the year into the following. I think the biggest benefits we'll see this year are related to tooling and inventory reductions.
spk05: Got it. Fair enough. Then, as we're looking at the progression, obviously better than last year, but what does the company really need to have happen for it to get back up to historic profitability? Supply chains are a little bit better. I know inflation is still a problem, but I'm trying to understand how quickly can you get to a sustainable rate of EBITDA and cash generation? Is that something you think is achievable in the next 12 months, or is that going to take a little bit longer?
spk07: Hey, Brian. It's Jeff. Clearly, the sustainable price negotiations that we're going through as we speak and that we expect to conclude here in the second quarter are the primary foundation, if you will, to get Europe, especially Europe, back to a level of generating positive cash flow. Clearly, when you see the industry operating at 85 million units, You see North America, I guess, struggling to get to 15 and sustainable 15 million units. Those numbers, we all want to see them go substantially higher. Clearly, the global volumes probably need to be somewhere closer to 100 million to be considered a good year. And I think here in North America, we'd all like to see those 17 or 18 million unit years. That would certainly return us to double-digit ROIC and double-digit EVA TA everywhere. But in the short term, because volume is not expected to be quite that strong, our focus is continue to take costs out of the business where we can and negotiate all of these sustainable price increases so that we're cash positive everywhere and that we're back to a level of profitability that we don't have to keep talking about each quarter.
spk05: Got it. And just a final question. You mentioned material costs were a headwind of about $3 million. Do we see that becoming a tailwind at any point this year, or are we just going to be just trying to catch up throughout the year?
spk06: Hey, Brian, it's John. When we came into the year, we thought it may be a very minor headwind overall, single digits in terms of inflationary pressures on the commodity side for the whole year, because we knew we would be facing a bit of a lag effect on some of the purchase commodities here in Q1, and you're seeing the impact of that. There's some good news when you look ahead on certain of the inputs, perhaps on the rubber side, but we're also starting to see signs of pressure in the metals area in the way of cold rolled steel. So there could be some volatility. We don't see anything significant at this point, but we're obviously watchful of where those trends are heading. And the good news here is in many cases, we do have the the customer support in the way of the index contracts that will help recover a significant portion of any commodity inflation that does come our way.
spk05: Great.
spk03: Appreciate all the thoughts. Thank you.
spk06: Thanks, Brian.
spk02: Thank you. One moment as I prepare the queue.
spk00: Our next question comes from the line of Patrick Sheffield. of Beach Point Capital Management. Your line is now open.
spk04: Hey, guys, thanks for taking my questions. Could you repeat how much you said you were going to burn in Europe over the next two years? I missed that comment.
spk07: Yeah, Patrick, it's Jeff. So what I said was our business plan that we were looking at, I guess, six months ago, right, when we first compiled it, showed us in consecutive years burning $40 to $45 million each year. So what I was saying to Mike is that we were going to burn $100 million in cash over a two-year period in Europe if we didn't address sustainable pricing and if we didn't address the other inflationary costs that we needed recovery on, like raw material and getting the prices indexed as we've already negotiated. And then I went on to say that I'm confident that that's not going to be the case based on the the way the customers are negotiating with us. And I'm very pleased about that. I think that when you go into a tough negotiation and one that requires the type of adjustments that we needed in Europe, you don't really know what the customer's response is going to be until you ask. And clearly, we're a valued supplier in Europe, and the negotiations are reflecting that. So as we work our way through the second half of the year, I said that I expect you'll see those those prices reflected in the bottom line of the business. And we're pretty proud of that.
spk04: Okay, great. And just, you know, broadly looking, you know, high level at Q4 to Q1 sequential performance, you know, seeing revenues increase and EBITDA decrease, what were the biggest, I don't know if you could, you know, provide some buckets similar to what you do on a year over year basis. And was there a big change by region or? Was it kind of broad-based?
spk06: Patrick, it's John. I'll take that one. Generally broad-based, but in Q4 of last year, we did have commercial agreements get locked in and settled in Q4 of last year. So that certainly helped the quarterly performance in Q4. And those one-timers don't necessarily repeat. We are continuing to make good progress on the commercial front, as Jeff has been talking about here. But because of the magnitude of that one-time deal we booked in Q4 of last year, you're seeing that decline. It's mostly all that. I talked to Mike about the FX impact. There's about $6 million of FX quarter over quarter to the negative that is impacting profitability. But the positive lean initiatives, both on our purchasing front and our manufacturing front, continue to benefit the comps sequentially. So, you know, all in, those are kind of the pieces that you'll see. Certainly the North American volumes picking up and the European volumes that remain strong, Q4 into Q1, also benefit the sequential Q. So how much of the decline was that one-time benefit in Q4?
spk04: It sounds like 6 million negative on FX and other stuff was positive. So it's kind of the bulk of that.
spk06: The negatives were the FX and the negatives were the FX and the good news booked in Q4 that didn't repeat here in Q1. Okay.
spk04: All right. That makes sense. And then you guys were providing color on volumes and margins you'd get in a more normal year. What kind of global volumes would you need to get back to just cash flow positive everywhere, where we sit today?
spk07: Patrick, this is Jeff. Yeah, what I was saying earlier was an answer that the context wasn't what you just asked. Clearly, the volumes that we have forecasted and the pricing that we are negotiating gets us back to cash flow positive, which is your question. The question that was asked earlier was when do we get back to sort of the double-digit level performance that we have always come to know here and related to EBITDA and related to ROIC. And that's when I talked about the larger volume forecast out there, probably 25 or so. I'm not sure. It keeps changing. But we're going to see a 3% or so increase in the second half of this year. I'll take it. and I would expect that next year is probably going to be up a little bit as well, and then we'll see how 2024 plays out, and then we'll talk about 2025. But at least the volume news going forward is more positive than it's been in the last three years. How about that?
spk04: Yep, that helps. And then, you know, just looking at Q1 performance, how did that compare to your internal expectations when you guys? at the budget, I guess, at the end of last year.
spk07: Yeah, I think the Q1, as I said, was pretty much what we thought it was going to be, with the exception of timing associated with a couple commercial negotiations that didn't allow us to book the type of retros that we were planning for. But that catches up over time here, so I'm not too worried about it. I think the volumes were basically what we thought they were going to be. We think they're going to be a little bit stronger in Europe and North America second half of the year. So that's what we think. And we'll talk to you about our guidance if there's any updates there in the July call, like we usually do.
spk03: Okay, great. Appreciate it, guys.
spk00: Thank you for your question. Again, as a reminder, to ask a question, you will need to press star 1-1 on your telephone. I'll give it just a second to see if anyone else would like to ask a question. Our next question comes from Ben Briggs of Stonex Financial. Your line is now open.
spk01: Good morning, guys. Thank you for holding the call and for taking the questions. So, you know, all around kind of not a bad quarter, I think, sets you up to come in somewhere close to guidance. One thing that I had a question on here, though, is the gross margin. So I'm wondering if you can provide any more clarity. I know you said you would see improvements. in gross margin um over the course of the year but if you could just get any more granular on kind of what the pace of gross margin expansion should be looks like we took certainly a step forward on a year-over-year basis um with gross margin this quarter but um kind of kind of a step back on a sequential basis so any more granularity there would be appreciated
spk06: Hey, Ben, it's John. Are you looking for the forward look or what happened from Q4 into Q1 of this year? I just wanted to understand your question. I guess both. I guess both. Okay. Well, certainly the items I already talked about as far as the sequential bridge, most of those, in fact, do benefit gross profit as well. Anytime you have commercial wins or losses, they impact the top line and then immediately gross profit, they fall through at 100%, right? And then in the purchasing front, being direct materials are a significant portion of our cost of goods sold, any benefit you see there, and then the efficiencies we get in our manufacturing environment, both of those would be positive benefits and drivers to the gross profit sequentially, period over period. FX is kind of smattered all over the P&L, so you can't peg that to one individual line item. But presumably a portion of that $6 million I already talked about would impact the gross profit negatively as well. Going forward, we don't guide to the gross profit level. And as we've already said, we're not updating guidance here today for you. But the commercial work streams and the sustainable pricing that we've been so intently focused on will certainly drive gross profit improvements. as will the entire organization coming to work every day to continue to look at the cost structure and drive efficiencies across all areas. So those will be the big pieces. You'll continue to see gross profit improve each quarter and the overall financial results, as we've already said earlier today.
spk01: Okay. All right. That's helpful. Thank you.
spk00: Thank you for your question. It appears there are no more questions. I would now like to turn the call back over to Roger Henderson for closing remarks. The floor is yours.
spk03: Okay. Thanks, everybody, for joining the call and for your engagement, your questions.
spk06: We look forward to speaking with you again. If further questions come up, please feel free to reach out to us directly, and we'll talk to you soon.
spk03: Thanks very much.
spk00: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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