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spk00: All participants will be in listen-only mode. Following the company's prepared remarks, we will conduct a question and answer session. At that time, if you have a question, you will need to press star 1 on your telephone to join the queue. As a reminder, this conference call is being recorded, and the webcast will be available on the Cooper Standard website for replay later today. I would now like to turn the call over to Roger Hendrickson, Director of Investment Relations. Please go ahead.
spk01: Thanks Rocco and good morning everyone. Thank you for spending some time with us this morning. The members of our leadership team who will be speaking with you on the call this morning are Jeff Edwards, Chairman and Chief Executive Officer, and John Banas, Executive Vice President and Chief Financial Officer. Before we begin, I need to remind you that this presentation contains forward-looking statements. While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable, these statements do involve risks and uncertainties. For more information on forward-looking statements, we ask that you refer to slide 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'll turn the call over to Jeff Edwards.
spk05: Thanks, Roger. Good morning, everyone. We appreciate the opportunity to review our second quarter results and provide an update on our business and outlook going forward. To begin on slide five, we provide some highlights or key indicators of how our operations performed in the second quarter. We've maintained our focus and dedication to delivering quality products and exceptional service to our customers and to keeping our employees safe in our workplaces around the world. In terms of product quality, 98% of our customer scorecards were green in the quarter. We also had 98% green scorecards for new program launches. We continue to achieve outstanding performance from our operations, delivering value to our customers. In addition, the safety performance of our plants continues to be outstanding. During the second quarter and through the first six months of the year, we had a total incident rate of just 0.33 reportable incidents per 200,000 hours worked, well below the world-class benchmark of 0.57. Leading this outstanding safety performance were the 37 plants that have maintained a perfect safety record of zero reported incidents through the first six months of the year. I want to recognize the teams at these plants for their ongoing commitment and leadership as we continue to strive for the ultimate safety goal of zero incidents for the company overall. I could not be more proud of our global team for their continued commitment and world-class achievements in this most important KPI. As market conditions and production volumes are improving, we're not letting up on our efforts and commitment to maximize operational efficiency and become as lean as possible. During the second quarter, our manufacturing and purchasing teams delivered $16 million in savings through lean initiatives and improving efficiencies. We're also maintaining our focus on non-manufacturing fixed costs and keeping them as low as possible. And when you consider SGA and e-expense, we were pleased to see more than a full percentage point decline as a percentage of sale. Finally, we're continuing to win new business awards, especially on electric vehicle programs. These wins are a result of our strong customer relationships and the value we provide through our advanced engineering and design capabilities, innovative technical solutions, and world-class service. In the second quarter, our customers awarded us $84.9 million in net new business awards. including $36.4 million on their upcoming electric vehicle platforms. So we're very pleased to see our hard work drive meaningful improvement in our financial results. The combination of a leaner cost structure in our enhanced commercial agreements, leveraged across increasing production volumes, is powerful. I will now turn the call over to John to give you the financial details for the quarter.
spk04: Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some details on our financial results for the quarter, discuss our cash flows, liquidity, and aspects of our balance sheet. On slide seven, we show a summary of our results for the second quarter of 2023 with comparisons to the same prior period last year. Second quarter 2023 sales were $723.7 million. an increase of 19.4% compared to the second quarter of 2022. The increase was driven by favorable volume and mix across all regions and our enhanced commercial agreements, primarily in Europe. The positive volume and mix were partially offset by unfavorable foreign exchange. Gross profit for the second quarter was $77.7 million, or 10.7% of sales. This compares to a gross profit of only $15.4 million, or just 2.5% of sales in the second quarter of 2022. Adjusted EBITDA in the quarter was $47.9 million compared to negative $10.4 million in the second quarter of last year. The year-over-year improvement was driven primarily by favorable volume and mix, enhanced commercial agreements, and lean savings achieved in manufacturing and supply chain, all partially offset by ongoing inflation headwinds in areas such as energy and labor costs, as well as the impact of unfavorable foreign exchange. During the second quarter, we made further progress in our commercial negotiations to recover inflation and establish sustainable pricing overall, and are seeing the incremental positive impact on our results. Negotiations with certain customers are ongoing, and the timing for concluding them remains open. So similar to last quarter, we did conclude some negotiations shortly after the end of the reporting period. And as a result, we did not recognize the full pricing impact of these negotiations in Q2 as originally expected, but we will see the retroactive benefit in our results when we report on the third quarter. As remaining negotiations are concluded successfully, we expect to see further improvements in top line growth and margin expansion in the remaining quarters of the year. On a U.S. GAAP basis, net loss for the quarter was $27.8 million, compared to a net loss of $33.2 million in the second quarter of 2022. The current quarter included $8.5 million in restructuring costs. Excluding the special items and the related tax impact from both periods, adjusted net loss for the second quarter of 2023 was $20 million, or $1.15 per diluted share, compared to adjusted net loss of $58.5 million, or $3.40 per diluted share in the second quarter of 2022. The year-over-year improvement resulted primarily from higher sales and improved gross profit, partially offset by higher interest expense. Our capital expenditures in the second quarter totaled $17.5 million, or 2.4% of sales, compared to $12 million, or 2% of sales, in the second quarter of last year. We continue to have discipline around capital investments which remain primarily focused on customer launch readiness. We expect to keep our CapEx at around 3% of sales for the year as we committed in our full year guidance. In the first half of 2023, sales totaled $1.4 billion, an increase of 187.3 million or 15.4% versus the first half of 2022. Adjusted EBITDA was $60.4 million in the first half compared to negative $10 million in 2022. This year-over-year increase of $70.6 million is a clear sign of our continuing progress. Adjusted net loss for the first half was $66.1 million or $3.83 per share compared to a net loss of $109.9 million or $6.40 per share in the first half of 2022. CapEx in the first six months was 46.8 million or 3.3% of sales, which again is in line with our full year target of approximately 3% of sales. Moving to slide eight. The charts on slide eight provide additional insights into some key factors impacting our results for the second quarter. For revenue, Favorable volume and mix, including net customer price adjustments, increased sales by $123 million versus the second quarter of 2022. Improving customer production volumes year over year were the biggest driver, with customer price adjustments in the quarter also benefiting the volume and mix category. Net foreign exchange, mainly related to the Chinese RMB and the Canadian dollar, reduced sales by a net $5 million versus the same period last year. For adjusted EBITDA, volume, mix, and net price adjustments drove a combined $55 million of improvement for the quarter. Lean initiatives in purchasing and manufacturing efficiencies contributed $16 million year over year, and material cost improvements were a benefit of $9 million in the quarter. These positive contributors were partially offset by certain ongoing headwinds in the quarter. General inflation, including energy, salaries, wages, and transportation and other costs, reduced adjusted EBITDA by $15 million in the quarter. The impact of foreign exchange was $6 million, primarily related to the Mexican peso, Canadian dollar, and Polish zloty. Moving to slide nine. Looking at the analysis for the first half of the year, for sales, favorable volume mix and net price adjustments added $209 million versus the same period last year, while foreign exchange was an offset of $21 million. For adjusted EBITDA, favorable volume mix and net price adjustments added $95 million compared to last year. Manufacturing and purchasing efficiencies added $24 million, and material economics were a favorable $5 million. These positive factors were partially offset by $33 million of general inflationary headwinds for items such as labor, utilities, and transportation costs, $14 million of foreign exchange, and $6 million in various other impacts. Moving to slide 10. Looking at cash flow and liquidity, cash used in operations was approximately $13 million in the second quarter of 2023, which reflected semiannual cash interest payments made in June, the payout of prior year compensation-related accruals, and other changes in working capital, all which offset improved operating income. As mentioned earlier, CapEx was approximately $17 million in the second quarter, primarily reflecting the timing of program launch activity. Free cash flow was an outflow of approximately $31 million in the quarter. With this free cash result, we ended June with a cash balance of approximately $73 million. Our revolving credit facility was undrawn at quarter end. With $157 million of availability on our ABL, and cash on the balance sheet, we had solid total liquidity of approximately $230 million as of June 30th. We believe that the cash balance at the end of the quarter was likely the low point for the year based on seasonality, increasing sales volume, and the timing of payments from our customers. So we do expect stronger cash flow in the second half of the year. And it's important to note that during July, our cash balance had already significantly improved from June 30th. Based on our current outlook and expectations for light vehicle production, improving operating efficiencies, and subject to the successful completion of and the further benefit from enhanced commercial agreements from our customers, we believe that we'll be cash flow positive in the second half and for the full year. Further, 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 comments, so let me hand it back over to Jeff.
spk05: Thanks, John. Over to the next. few minutes, I'll provide you with a status update on our continuing commercial negotiations and other strategic initiatives we're executing to drive increasing value in the near term and in the years ahead. Then I'll conclude with a few comments on our outlook for the remainder of the year, including our full year guidance. So please turn to slide 12. We're continuing to work 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. Last year, our commercial priority was to reduce and limit our risk exposure from commodity and material costs globally. Having successfully concluded those negotiations early this year, Our focus is now on achieving fair and sustainable pricing that accounts for current input costs, market dynamics, as well as the value we deliver for our customers. We prioritized our European business first to address negative margins and unsustainable cash flow. Most of our customers have been supportive and we've successfully concluded negotiations with the majority of them. You saw the positive impact in our European segment results for the quarter. Commercial negotiations with customers in other regions are progressing. As John already mentioned, we expect to conclude more negotiations in the third quarter. We're also advancing our commercial efforts to improve cash flow. Our progress to date includes implementation of more favorable payment terms on trade receivables and customer-owned tooling, as well as supplier-funded tooling. We expect these changes will have a meaningful, positive impact on our cash flow going forward. Turning to slide 13, concurrent with our commercial initiatives, we are continuing to optimize our operating footprint and business portfolio to accelerate value creation and improve profitability. We believe there are still opportunities to further improve our cost structure by directing more of our new business to advantage production facilities over time, and reducing our exposure to high-cost labor markets. We will also consider divesting non-core businesses that don't meet our strategic minimum rates for margins, ROI, or future growth, similar to what we have done before. Our commitment to either fixing or exiting underperforming businesses remain a central part of our strategy to restore our margins and returns on invested capital to double-digit levels. Turning to slide 14, another element of our strategy is to leverage our Fortrex technology and portfolio of products to extend our competitive advantage in automotive businesses and expand our business profitability through diverse market applications. In automotive applications, we're now able to go to market with micro-dense Fortrex, which provides even further weight reduction and lower carbon footprint while providing superior performance in sealing systems. In addition, we expect to begin the rollout and installation of equipment to optimize Fortrex production early next year. The manufacturing process improvements will give Fortrex further competitive advantage over traditional materials, and we expect it will drive further market penetration with our automotive customers. Beyond automotive markets, we're pleased to report that a new high-end line of running shoes with a Fortrex foam midsole is finally available for sale in stores and online. Our footwear customer remains pleased with the new technology, and they have praised the new line of shoes publicly. Ultimately, consumers will determine the future demand and production levels of the shoes, and we're excited that consumers will now be able to try them out. Turning to slide 15, to conclude our presentation this morning, Let me reiterate that I am proud of our team's accomplishments in the first half of the year and pleased with the progress we've made in improving the profitability of our company. We are in a far better position than we were a year ago, but we are still a long way from our objective with much more room for improvement. We believe we are in the early stage of margin inflection as all of our cost improvement efforts and enhanced commercial agreements come together with continued higher industry production volumes over the next few quarters. If current production forecasts and schedules hold up, we expect our full-year results to be within the ranges we provided in our original guidance. If actual production levels continue to exceed expectations, as they did in Q2, there could be some upside to our ranges and outlook. But we're not predicting that at this time, given that there could also be risks to the downside due to any number of factors, including the timing for closing or implementing any achieved commercial agreements, the possibility of extended OEM labor negotiations, or other market disruptions. I want to thank our customers for their continued trust, confidence, and support. We remain committed to supporting them with existing and exciting innovations, world-class design and engineering services, and as always, flawless program launches and quality products. This concludes our prepared comments, 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 then 1 on your telephone to join the queue, and star then 2 on your telephone to remove your name. If you are using a speakerphone, we ask that you please pick up your handset before entering your request. One moment, please, as we assemble the queue for questions. Today's first question comes from Michael Ward with Benchmark. Please go ahead.
spk02: Thank you very much, and good morning, everyone. A couple of things. You talked about the commercial agreements, and it sounds like there are two parts to it. There's the retro benefit, and then there's the new pricings that you have specifically. And I think all of the suppliers are dealing with the retro. Then there's pricing, and it sounds like you've prioritized different regionally. Is that what we're looking at?
spk05: Yeah. Good morning, Mike. This is Jeff. Clearly, our priority is we started the year. was to get Europe to a cash flow position that wasn't burning cash at the rate that we were talking about, right? And if you remember, we said that if we didn't get that fixed, we would burn $90 million between this year and next year in Europe. So that's why it was a priority, and we've gotten it fixed, and you can see that in our numbers. A few more negotiations will take place here the rest of the year, but for the most part, everybody has done a really good job in Europe. You know about the indexing that we exercised and executed during the first half of the year with all of our customers. So that's basically done everywhere, and that addresses the material volatility that we've experienced in the past. And then finally was what we called sustainable pricing going forward. So in years past, I think some suppliers, including this one, would accept lump sum payments to try to bridge a short-term gap regarding inflation. Obviously, with three straight years of, you could call, record inflation across the board, that was no longer acceptable. So we set out to put a negotiation in place virtually with every customer in the world to address pricing going forward. And that's the bucket we refer to as sustainable pricing. What I would tell you is by the end of the third quarter, Mike, that should basically all be completed for the most part, and the retros will be accounted for accordingly. So when you look at our results at the end of the third quarter, I'm quite sure that it will be a much easier thing for me to talk about and a much easier thing for you to see from an accounting point of view. So I would just encourage everybody to wait for those results. And I think you'll see much of what you saw here in the second quarter, but everything should be much clearer as it relates to how much pricing we've gotten here in 2023. And then for us, more importantly, or at least equally important, I guess, is what is going to carry over into 2024. Hopefully that was an explanation that answered all of your questions.
spk02: Perfect. Yep. And then, you know, you've been talking for several quarters, you know, that it's got to be great if we've got industry volume back. And we're starting to get closer to more normalized levels. And we've seen this positive. I think, John, in your chart there, you had like a $95 million delta in the first half. And we're still 10 or 15 percent below more normalized levels. Is that the type of magnitude we can look at as far as delta as we go forward, get up to more normalized levels? As far as impact, is that the first chunk of it, and then maybe it cools down a little bit?
spk05: This is Jeff. Mike, I think that as we all have tried to predict volumes over the last couple of years, we find that that's been less than accurate, I guess. But what I'm very encouraged about now is that we have reached a point where the volumes are predictable and we're starting to see a slight increase in those volumes here in 2023. And based on what our customers are saying about the next couple years, we would expect that the volumes will continue to increase over that period of time. We're all encouraged by that. I think we need to see a quarter or two of it, and we're hopeful that it will become a lot clearer as we get to the end of this year. So as we roll out guidance for 24, as we always do in January or February, that we'll be able to predict your question. And I'm confident that we'll be a whole lot better at doing that this year than any of us have been the last couple years. That's what we're encouraged by, and I expect it to go up.
spk02: So in the 25, 26 time period, if we get back to more historical levels of production in North America, Europe, China, China's already, but North America, Europe, is that we can expect, you know, you know, operating income or EBITDA income north of 300 million or getting close to those double digit type margins that you're talking about?
spk05: Yeah, Mike, you see that what we believe is that we have done a great job reducing our fixed costs. Our company is continuing to find other ways to take those costs down. So as the volumes increase, we clearly expect to see that fall to the bottom line. And as I've said publicly several times, we expect double-digit EBITDA, double-digit return on invested capital, to be back in our corner over the next couple years here as those volumes increase, yes.
spk02: Okay. And just lastly, on page 14, as it relates to Fortrex, there were two things that stood out. The first one with the sneakers, congratulations on them finally getting on the market. Is the sneaker company APL?
spk04: Is that the brand?
spk05: Sorry, Mike. I didn't hear your question. What was the specific?
spk02: As it relates to the shoes, the sneakers, is it APL? Is that the brand? No. Okay.
spk05: Can you tell us what the brand is, or are you still restricted? We're still restricted, but we're working on that. Okay. I bought a pair. I can tell you that.
spk02: Love to be able to find them. Just lastly, you mentioned there are tire applications. I don't know if that may be the first time I've seen that. Is that going back to your old partner days with Cooper Tire? What are you looking at with that?
spk05: What we can tell you about the tire application is that a customer has asked us to work with a couple of the tire manufacturers to see if by utilizing Fortrex in the compound that we can help address The friction component, as they go forward and produce tires for EVs, that is a big issue related to battery life. And so we're working on some advanced projects there. So that's what that refers to. The other conversation that I had with you today regarding Fortrex, was related to automotive ceiling, and we're extremely excited about that. Today, we have, let's call it $50 million or so in Fortrex ceiling already in the automotive industry. As we move forward and apply what I just discussed with you this morning, we see the revenue opportunity there somewhere in the neighborhood of $150 million, so tripling the the amount of product that we have in the marketplace over the next couple of years, that's going to be engineered into product here starting beginning of the year. We're really excited because that will help not only reduce weight, but it also addresses emissions as it relates to us producing that product for our customers. So I think there's going to be a big benefit for all of our customers around the world as we introduce that improved product to each of them here in January of 24. So those are the two discussions regarding Fortrex. Thank you, Jeff. Thank you, everyone.
spk00: Thank you. And ladies and gentlemen, if you'd like to ask a question, please press star then one. Once again, that is star and then one if you have a question. Today's next question comes from Brian DeRubio with Baird. Please go ahead.
spk03: Good morning, gentlemen. A few questions for you. Maybe just starting off, John or Jeff, that's a small divestiture earlier this week. I guess you're not going to disclose what that was, the proceeds on the call, but are there any other small divestiture opportunities that you see that you can enact on over the next year or so?
spk05: Yeah, I'll take that one since You're correct. We aren't going to disclose the amount. But this is Jeff. So what we have always done is identify the non-strategic. So that's what this is. And we've also addressed underperforming businesses in certain regions. We either get them fixed or they end up going someplace else. And so the short answer is yes, there are still some that fall into that category. But as we work our way through this year, we are hopeful that we're at the end of those, at least for the foreseeable future here. I think we've stabilized South America, as you've seen in the results. We've stabilized Europe, as you've seen in the results. And we're hopeful that North America and China will regain the type of volumes that make them the leaders that we've always expected them to be in our business and in the industry. And that's kind of where we are right now. So I wouldn't expect to see many more as we head forward, at least for the next year.
spk03: Understood. Appreciate that color there. Just on the commercial agreements that you're renegotiating, I just want to make sure I got this correct. Is it safe to assume that you received the number of catch-up payments in 2023 and the results in 2024 will be absent those and it'll just be then on the go-forward commercial range that you have?
spk05: This is Jeff again. So just to be clear, the lump sum type of recoveries that we book in any particular year obviously don't carry forward. The sustainable price increases that I keep referring to and the indexed contracts for the raw material that goes into the products, those two buckets will continue to create a sustainable and improving business for us 24 and beyond. That's why we've negotiated it that way. We reached a point where we couldn't deal with anything other than that. We've explained that to our customers. They have been, for the most part, extremely supportive of that. And that's why I mentioned before at the end of the third quarter, I think most of that will be clarified within our results. And we will be able to explain the retro portion of it that hits in the third quarter. And then we're hopeful that things smooth out for the fourth quarter and for 24, and it will allow us to have a very intelligent conversation about it at the end of the third quarter. That's how I think it's going to work out at this stage.
spk03: Great. That clarity would be phenomenal. Just on the guidance, you know, you're seeing, you know, slightly better light field production here in U.S., know in in europe just but you didn't change the guidance it's just your effort to be conservative at this point in time this is jeff yes okay fair enough and then just finally uh john can you just remind me what the minimal liquidity is that you guys need to operate can't find that on my nose yeah brian uh what we've talked about in the past is um having 100 to 125 of
spk04: minimum liquidity. And when I define that, I include cash on the balance sheet as well as access to our ABL facility and other smaller revolving credit facilities around the world. So that's how I would continue to look at it today. Nothing's really changed in that perspective.
spk03: Excellent. Appreciate all the color as always. Thank you.
spk04: Thanks, Brent.
spk00: Thank you. And it appears there are no more questions at this time, so I'd like to turn the call back over to Roger Hendrickson.
spk01: Okay, thanks, everybody. We appreciate the engagement in the call today, and if there are other questions that you didn't ask this morning and would like to ask in a different environment, please feel free to reach out to me directly, and we'll have any discussion that you'd like. Thanks again for joining the call, and we appreciate your participation. That'll conclude our call this morning. Thank you.
spk00: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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