Roger Hendriksen - Director, IR Jeffrey Edwards - Chairman & CEO Jonathan Banas - EVP & CFO.

Matthew Koranda - Roth Capital Partners John Murphy - Bank of America Merrill Lynch Mariel Kennedy - Goldman Sachs Group Inc. Gary Hu - Silver Point Capital.

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded and the Webcast will be available for replay later today.

I would now like to turn the call over to Roger Hendriksen, Director of Investor Relations..

Thanks, Marcella, and good morning, everyone. We appreciate you taking the time to participate in our call this morning. We also appreciate your continued interest in our company and your continued following of our news.

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 Jon 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. With that, I'll turn the call over to Jeff Edwards..

Okay. Thanks, Roger, and good morning, everyone. We certainly appreciate your interest in Cooper-Standard and thank you for joining our call. Moving on to Slide 5. Adjusted EBITDA for the quarter was $131 million, that's up more than 26% over last year.

This was also an all-time record result, as the combination of higher sales, our strong market mix and our cost-reduction initiatives all came together in a very positive way. Our focus of achieving world-class safety performance across all of our facilities is firmly on track.

In the fourth quarter of 2017, we achieved a 43% improvement in our total incident rate compared to the 2016 full year rate. This was, once again, our best quarterly safety performance in the company's history. We had another very strong quarter in terms of new program launches with 42 launches in total and 24 of them on global platforms.

We anticipate further positive impact as they ramp up to full production over time. In addition to these current new launches, we continue to win important new business for the future. In the fourth quarter, we were awarded contracts for $108 million in annual net new business with significant awards in each of our key regions.

Finally, we are pleased to announce that we received our fourth production contract for Fortrex during the fourth quarter. With this contract, we now have 3 customers who have purchased Fortrex products.

Although this latest contract is for a small part, it is still highly important, as we believe it will allow this customer to validate the technology and ultimately result in further contract awards. So in all, we received contract awards for our innovation products totaling $45 million in annual sales, including both new and replacement business.

Turning to Slide 6. As we look at the full year, there are a couple of numbers and statistics that really stand out.

Of course, record adjusted EBITDA of $452 million is important and we are pleased with this result, but it is now a measure of the past, whereas our 169 program launches and $453 million in net new business awards point to increasing growth opportunities going forward.

Our teams continue to do an outstanding job of focusing on the customer by providing innovative products, global design of engineering support and flawless launches. This combination is what is driving value and increases in net new business awards. We also had our best full year ever in terms of safety in the workplace.

By making safety our top priority every day, and with the dedicated engagement of all of our employees, we continue to reduce the number and severity of workplace incidents. For the full year, we reduced our total incident rate by 41% versus 2016.

And we are especially proud of the 25 plants and technical centers that completed the year with perfect safety records. We often say that car parts are what we make, but partnering with our communities is really who we are. Therefore, I couldn't be prouder of the 2 metrics on this page that represent our commitment to the community.

Our employees and their families partnered with 74 charities around the world and provided over 10,000 volunteer service hours in 2017. Our second annual corporate responsibility report will be issued in April in conjunction with our proxy.

The report highlights our community and sustainability efforts, and provides an in-depth view of our culture of engagement. Moving to Slide 7. Another key aspect of the Cooper-Standard culture is our continuing focus on innovation.

Over the past 5 years, our I3 team has done an outstanding job of creating new products and technology that bring added value to our customers and create new opportunities for our company and our stakeholders. The list of new developments is long and impressive.

As we look ahead, our innovative products will soon begin to have a more significant financial impact within our core automotive business.

Having booked $220 million in annualized business in 2017, and $464 million since we began to commercialize our innovations in 2016, we anticipate annualized sales of more than $1 billion of the high value-add products within 5 years.

Just to put this in perspective, if we hit our planned sales targets, Fortrex will represent 28% of our sealing business by 2025. We continue to see our culture of innovation and our ability to bring breakthrough innovations to market as a clear and sustainable competitive advantage and a value driver for our shareholders. Moving to Slide 8.

Beyond our core automotive business, we continue to leverage our culture of innovation to make progress with our adjacent markets business. Our first license within this business will begin to produce wire and cable cover products with Fortrex technology in the third quarter of this year.

They are also considering using Fortrex for a number of additional product lines. So we are in discussions to expand our existing license agreement with that particular partner. In addition, as you may have seen our announcement last week, we've hired a President for our Advanced Technology group. Jeff DeBest will join our team in March.

His focus will be to build a world-class team to advance the growth of our innovative technology in nonautomotive parts, initially focusing on concluding some of the current negotiations with potential licensees for Fortrex technology. He will also help us identify new opportunities and define our priorities for this business.

We continue to believe that there are numerous businesses, industries as well as market segments that will benefit from our material science. We have really only begun to scratch the surface in defining what our Advanced Technology Business can become and the impact it will have on our ROIC and obvious company valuation.

Now let me turn the call over to Jon..

Thanks, Jeff, and good morning, everyone. In the next few slides, I will provide some additional detail on our quarterly and full year financial results, and will also comment briefly on the impact of U.S. tax reform, our capital structure and balance sheet profile.

On Slide 10, we show a summary of our results for the fourth quarter and full year 2017 with comparisons to the prior year. Fourth quarter sales were a record $937.9 million, up 7.1% over the fourth quarter of 2016.

The strong improvement over last year was driven by solid gains in volume and mix in North America and Europe, as well as favorable foreign exchange, offset by customer price adjustments.

On a regional basis, compared to the fourth quarter of last year, North American sales were up 5.3%, Europe sales up 12.8%, Asia Pacific sales up 1.9% and South America sales increased 22.3%. Adjusted EBITDA for the fourth quarter was $131.2 million or 14% of sales, compared to $103.8 million or 11.9% of sales in the fourth quarter of last year.

The year-over-year improvement was a result of improved volume and mix, contributions from acquisitions and restructuring savings and lower compensation-related expense, partially offset by increased customer price adjustments.

We did see continued commodity cost inflation on certain raw materials throughout the year, but we were able to substantially mitigate the impact on us through supply chain optimization efforts. On a regional basis, Europe has been impacted the most by these higher material costs.

We expect commodity price pressures to continue into 2018, and are implementing strategies that will leverage our global scale to help offset higher costs. Net income for the quarter on a U.S. GAAP basis was $28.5 million. This included the impact of U.S. tax reform, which I'll detail in a minute, as well as a number of other special items.

On an adjusted basis, net income for the quarter was $63.6 million or $3.42 per diluted share, up 32% and 34% respectively versus the fourth quarter of 2016. For the full year, sales of $3.62 billion were up 4.2% over last year. Adjusted EBITDA, at $452 million, was up 8.5% year-over-year. Full year net income was $135.3 million, or $7.21 per share.

Adjusted for the impact of U.S. Tax Reform and other special items, net income for the year was $208 million, an increase of 6.7% versus the adjusted number for 2016. This equates to $11.08 per diluted share, up 6.4% versus the prior year.

From a CapEx perspective, launching new business, continued investment in innovation, expansion of our Spartanburg plant, and advance of our new Fortrex launches and the continued build-out of our state-of-the-art tube plant in China, brought us close to our target of 5% of sales for the full year. Moving to Slide 11.

With our strong results in 2017, we extended our track record for improving margins year-over-year. At 12.5% of sales, our adjusted EBITDA margin for the year was in line with the guidance we provided and a solid 50 basis points higher than 2016.

Over these past few years, reducing costs through improving operating efficiency and supply chain optimization have been key drivers of our margin expansion. While there is still room for improvement in these areas, we realize we can't solely rely on costdowns.

Further realization of savings from our European restructuring program, proactive steps to lower overhead costs, increasing sales of high value-added products and our adjacent market materials science business are expected to drive further margin expansion in the years ahead. Moving to Slide 12.

As you're all aware, Congress passed the Tax Cut and Jobs Act, which was signed into law in late December. As a result, we recorded a charge of $32.5 million for deemed repatriation of accumulated foreign earnings as of the end of December 2017. This tax will be payable over 8 years beginning in 2018.

We're also required to restate our deferred tax balances to recognize the reduced corporate rate of 21% and other law provisions. This resulted in $1 million charge to our 2017 earnings. The overall impact of these charges was $1.80 per diluted share in the fourth quarter.

Regarding the likely impact of tax reform in 2018 and beyond, we're still in the process of analyzing all the provisions. However, overall, we expect a net favorable impact to our effective tax rate, lowering it to the low to the mid-20s, as well as a favorable impact on our U.S. cash taxes.

We also expect to repatriate approximately $50 million from Canada back to the U.S. in 2018 with no additional tax impact. In terms of our overall capital allocation policy, nothing has significantly changed as a result of tax reform. However, if our customers demand increases, we will be in an excellent position to invest to support that growth.

We will continue to invest in our businesses and product launches around the world, as well as look for strategic acquisitions to further develop our capabilities, expand our customer base and improve our footprint. Moving to Slide 13. Our balance sheet and credit profile continue to strengthen. We ended 2017 with $516 million of cash on hand.

This was after using more than $55 million to repurchase approximately 515,000 shares of our common stock during the year. Our total debt at year-end was $758 million with our net debt declining to $242 million. This compares to $283 million at the same time last year. Our gross debt to adjusted EBITDA is 1.7x, down from 1.8x at the end of 2016.

On a net basis, our overall leverage ratio is currently just 0.5x. With cash on hand and an undrawn revolver, we maintain a solid level of liquidity at $714 million. Free cash flow for the fourth quarter was very strong at $160 million, up from $134 million last Q4.

This was driven in large part, by our positive operating results, typical seasonal patterns of working capital and lower accounts receivable following the consolidation of our European factoring programs and finalization of price negotiations with certain customers. For the full year, free cash flow was $127 million.

We expect continued strength in cash generation in the future. When combined with our strong balance sheet and credit profile, we expect it will support our strategic plans and priorities. With this in mind, as I mentioned earlier, our approach to capital allocation remains consistent. Now let me turn the call back over to Jeff..

Okay, thanks, Jon. And to wrap up our discussion this morning, I just want to take just a minute to review our guidance for 2018. So let's move to Slide 15. So 2017 was an outstanding year for our company, but we fully understand that what matters to our stakeholders is whether we can sustain and surpass those record results in 2018.

In spite of some headwinds within the automotive industry, we believe that we can. We anticipate some increased pricing pressure from our customers, especially in North America, which will impact the top line somewhat.

However, we expect to continue to expand margins by around 50 basis points for the year through better asset utilization and cost absorption in China, savings from restructuring in Europe and continued improvements in operating efficiencies in all regions.

We're also taking proactive steps to reduce our fixed overhead costs as investments in IT infrastructure are now enabling us to work smarter and more efficiently. With all of this, we expect to be able to offset price pressures as well as anticipated increases in commodity costs and inflation.

CapEx will be slightly higher in 2018, as we prepare for a dynamic ramp-up of sales and production in China next year, and as we complete the expansion of over Spartanburg plant ahead of the launch of our first major Fortrex program.

While it will not likely have significant impact on our financial results in 2018, we remain very excited about our opportunities in our adjacent markets businesses. As we continue to build our team and organization under the direction of our new Group President, we anticipate an acceleration of activity and results in this area.

We continue to believe our company is in a better position to drive increased stakeholder value than ever before. We are looking forward to another strong year in 2018, and I want to certainly thank our engaged workforce for their sustained efforts in executing our plans and strategies.

And we want to thank our customers for their continuing support and trust. This concludes our prepared comments. So we'll now open the phone lines for Q&A..

[Operator Instructions]. Our first question comes from the line of Matt Koranda from Roth Capital Partners..

We could discuss the -- just a bit more color on the pricing environment that you referenced in North America. Are you seeing any of that spill over into other regions? And then maybe you could also just touch on how, if at all, you can use your innovation products to offset some of the pricing pressure that you're seeing on the base products..

Yes, sure, Matt. This is Jeff. Right now we're calling it -- some increased pressure here in North America. I think that's the best way for us to characterize it. I don't see anything different in the other regions than we have talked about in the past. We're not talking about a lot here.

I mean, this is probably still, call it in the 1.9 percent-ish range, which is up. We've always talked about 1.5% to 1.7% in the past with you. So it's a little bit over what we considered the normal. Again, keep in mind, the innovation strategy on our part certainly helps.

I mean, I think that we would be probably talking about more pricing pressure, not less, number one.

Number two, as we sell and replace the portfolio within our core automotive business going forward, the innovation that we're out there selling, especially the product that is differentiating us in the market, we're very pleased with those particular prices going forward.

And I suppose if we weren't in a position to -- if we were just a me too out there trying to replace our core business that the pricing pressure would be more substantial. So there are benefits both in today's environment, but more importantly in replacing the portfolio that we have..

Okay, that's helpful.

And then I was wondering if you guys could help us quantify the headwind that you're expecting from raw materials in 2018? And is most of that related to carbon black? Or are there other items you could call out for us?.

Matt, this is Jon. Yes, in 2018, we're expecting overall commodity inflation of about $27 million or so. $17 million of that is on the chemical side and $10 million of that is on the metal side. So your supposition is correct and most of that's coming from carbon black side of things. That's the preponderance of the impact that we had in 2017 as well.

That cost us about $14 million year-over-year in terms of commodity inflation in carbon black..

Got it. And then just shifting gears, if we could drill down into Asia for a moment. Everything else in terms of growth seemed in line with our expectations, but Asia seemed a little lighter than I would have expected.

Were there any issues with program launches? Or just programs not performing as expected in Q4? Or maybe if you could just break down the performance in terms of growth in Asia during the quarter? And then how that spills into your 2018 outlook?.

Sure, Matt. It's Jon again. So for the quarter, keep in mind the segment profit aspect is an all-in type number. So it includes allocation of corporate interest charges, it includes D&A, it includes any restructuring-related cost or asset impairments and the like.

So specific to Asia Pacific in the quarter, we had to take a charge in our Korea business of about $6 million for asset impairments. So that was a significant headwind to the segment profit number overall. In terms of our product launches, they actually went famously.

It was a really great quarter in terms of product launches and the team handling the load on the plate as they ramped up business there in Q4 of '17. The only operational issues, we had our small spill , if you will, in our India business. That was a little bit more of an additional headwind.

But from an ongoing operational aspect of things, things were great..

Got it. Maybe last one for me on Fortrex.

You mentioned a small new Fortrex program in the prepared remarks and how that gives you a toehold with a particular customer and you expect more ahead as they validate its -- I guess, how much time do you expect that they would need to validate a product like that once it's on an existing program? And I guess, what I'm trying to get at is when should we look for more follow-on orders to come?.

Yes Matt, this is Jeff. So a couple of ways for you to think about this. The 2 of the orders that we've already talked to you about within Fortrex, were actually running changes that customers put into their vehicles in a period of a few months once they determined that Fortrex was a solution for particular issues that they wanted to address.

And then the other orders are longer term where we want a significant order in 2 years after we win it, or 2.5 years after we win it, it goes into production. I would expect going forward back to my comment about 28% of our sealing business will convert over to Fortrex by 2025.

That conservative estimate is based on us winning programs in the future and then launching those 2 to 3 years after we win it.

Because of a couple of these that have happened in the short term where running changes have presented themselves and our teams have been able to execute and get Fortrex components into two different vehicles to address customer issues.

I think more of those things will present themselves in the future as we get our material approved across all of our customer base. So in the short term, it's always a little bit slower as you gain those approvals.

But once you're in the system, I think that they will be pooling us a whole lot more than we've seen in the first couple of years, this is how I would characterize it. But none of that is really in the projection that I talked about as far as the 28% sealing portfolio. So I think it can go even faster..

Your next question comes from the line of John Murphy from BOA..

To follow up to the -- [indiscernible] line of question and your answer there. How fast can you win and change over a program midstream as opposed to a standard 2 or 3 year out on Fortrex and eventually even ArmorHose once you're in the system.

Could this be a 6- to 12-month changeover? Could it be actually that quick?.

Yes, the last one, Jon, that we just won, it's on a new pickup truck here in the U.S., and that was less than six months..

Okay. So as you get into -- as you penetrate an automaker with Fortrex or ArmorHose, but once you're in the system, things can just start flipping like that. Is that correct? Or was that an all-new penetration that you had with Chrysler -- [indiscernible] Chrysler, I should say..

That was a new component that they wanted spec-ed with the Fortrex material to help address an improvement item they were focused on. And I think it's a great example and it's a good question. Our customers are starting to talk to us about Fortrex. And it's now going both ways in terms of where it can be applied and what makes the most sense.

And it's now part of the vocabulary, it's part of the spec that's in the system for many of our largest customers. And I'm really excited, we're really close to getting, let me just call it, Germany signed up next. And then I think that will really have a positive impact going forward and we're really close with that one..

That's really helpful. And then if we think about Europe and Asia. Traditionally, there is differences in mix that drive regional deltas in operating margins for some suppliers.

But I'm just curious, for you, if there is any reason that you to think with growth in Europe, Asia, and even in South America, there is any specific reason why you couldn't ultimately get to margins similar to North America.

And I know there is some loaded costs in these -- segment margins aren't perfect on a pure operating basis, but directionally, obviously, North America is very high and those are fairly low, ramp break even plus or minus.

Five or 10 years out with restructuring and business wins and growth, is there just a structural reason those margins couldn't get there? Or is this just timing?.

Yes, let me take it -- take each one of those. So in Europe, we've said that this will be our first year that will be double-digit EBITDA and that's on the tailwind of getting the restructuring behind us. I think Europe going forward, will be in the low double-digit area, Jon.

I think that until the market dynamics there change, that's probably where we are for Europe. They'll continue to improve going forward, but you're not going to see us deliver Europe with the way we're delivering North America. Asia, switching gears to there.

There is no reason why we won't begin to move into the mid-teens and then to the upper teens as we ramp up our China business early next decade. We will -- we have high expectations there in terms of EBITDA margin as well as achieving high teens, probably even as high as 20% ROIC in China as we fill up those plants.

And then I guess, we should bring out the band because we will actually make money in South America this year for the first time in a long time.

So I'm not making any predictions there in terms of how or what the margins could be, but our teams have done a great job taking cost out of our footprint there and getting ready for, what I'll call, a market revitalization in Brazil and we're seeing that already as we start into 2018.

And we are predicting that we'll make significant strides there throughout '18 and '19. Keep in mind, all the way back to 2016, I think we lost $18 million in that region. So the fact that we'll actually make money there this year is really a terrific story. so hopefully that answered your question..

That's very helpful. And then on the tax situation. Bringing this $50 million from Canada to the U.S., where is that $50 million in cash going to go to? And if we think about lower cash tax rate going forward.

What are the implications for that incremental cash? Is that going to go to investment and the business, more aggressive restructuring, shareholders? What's the thought process by this nice little bump in free cash and this money coming down from Canada?.

Yes John. It's Jon again. Similar to my scripted comments, no real change in what we're going to use that cash for. We've got over 206 product launches coming up here in 2018. We'll continue to spend money on putting the infrastructure behind those. We've got our eye out continually for strategic M&A.

Then we would put the funds to use in -- and really it's about investing in the business, taking further costs out as we go forward. We do have a -- continue to spend in our innovation, not only production, but our processes there. So we'll invest in the innovation side as well as our IT infrastructure.

We're continuing to build that out to take advantage of a common IT infrastructure and the efficiencies that brings to the table..

And to continue on there Jon, this is Jeff. I think the other 2 things, and we've highlighted this already, but just directly address the question. The material science business, the adjacent market, the technology group that Jeff Debest will be running for us going forward.

Obviously, we're excited about having an experienced leader join us to take that on. My expectation there is that we will be able to invest a lot faster in that business as a result of what we're talking about from a cash standpoint. We're excited about that.

I think the other thing that we're looking at, in the nonautomotive business, there is a number of M&A opportunities in that space and we really put our magnifying glasses on for opportunities in that group, both in our ISG business as well as how do we go faster on the material science, adjacent market business..

I'm sorry, Jon, maybe I'd give one more comment. Just keep in mind that in both Europe and Asia, they're both cash users as they are in their respective growth cycles.

So we wouldn't anticipate bringing any cash back from either of those regions as they continue to build up growth significantly in China, and do the turnaround and exit the restructuring initiatives there in Europe..

Yes. No, that makes sense. I appreciate that. Jeff, back on the material science investment ramp-up there and then the exit.

Is this very much focused on the science side? Or is there some sort of capacity? I would imagine it's more on the R&D and science side as opposed to manufacturing, right?.

It is. We're bringing in a leader. We expect given the volume of activity right now coming at us that we're going to have to add some additional resources there for sure.

As we convert these NDAs over to actual contracts and licenses, of course, there is engineering and prototyping and startup costs associated with helping our new customers get the product into the market faster.

So no matter how you look at that business, that's going to be in a growth mode and we're just fortunate that we're in a position that we have the cash to put in it and we have a high expectation on the returns that we'll get..

Your next question comes from the line of David Tamberrino from Goldman Sachs..

This is Mariel Kennedy on for David. So I just had a question on the adjacent business. I think you guys had referenced about a ratio of 25% to 30% as a target there.

What sort of time frame would we be looking at for this?.

Yes, Mariel, this is Jeff. I think that's a fair number. I accept that. It will depend, as I mentioned, we have a product launch already this summer as we head through the summer into the third quarter in Japan. I believe that, that business is on target.

We don't have an announcement to make the day on our next opportunity, but I can assure you that it's very near. And again, that business model is very much in line with what we're talking about here. I would say 2019, 2020 before we start to see a level of activity that you would consider significant enough to talk about on this call..

Okay, that helps. And then I guess, just a follow-up on those.

Between that nonauto business, what sort of split would you see between traditional products and more material science products? And most of that business would be in North America to start, I assume?.

Yes. Most of the activity that we're talking about is in North America. Could you give me that -- the other part of that question, again? I didn't quite get it..

Yes.

So looking at the split of the business between traditional products and more material science products, what sort of split would we expect to see? What we're seeing for the overall business? Or would it be more leveraged more to the material science?.

Merril, it's Jon. What we're collectively terming the adjacent business does include our industrial and specialty products group as well. And currently, that is about $160 million of sales, predominately here in North America, you're correct. So will continue to grow that as best we can and look for M&A activity that would support that growth strategy.

That fits into that overall 25% to 30% that you're referring to..

Your next question comes from the line of Gary Hu from Silver Point Capital..

Yes, just a quick question on your top line guide. I know that you guys highlighted that you'll have some pricing pressures in North America. But I was just wondering if there is anything else you'd call out as driving that? And then separately, I was wondering, what euro FX assumption you're using for your full year guide..

Yes. Gary, let me start with the euro assumption. The average for '17 was about $1.13 and when we go through our planning process, we start that in the fall and we look at forward rates at the time. So we're in a similar ballpark for the forward rates than when we set our plan. So you can model that into your numbers.

On the European pricing side, I think that was your -- first part of your question. That is in line with that 1.5% to 1.75%. Again, that Jeff referred to earlier overall, that's been our historical impact..

And then just other than the pricing pressures in North America.

Was there anything else that you would call out as driving the top line guide?.

No. I think those are the significant drivers there..

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

Okay. Thanks everybody. Again we appreciate your joining the call. We appreciate your questions and your continued engagement with Cooper-Standard. If you have further questions or would like to get in further touch with our management team, please give me a call. I look forward to speaking with you soon. Thank you..