Good morning ladies and gentlemen and welcome to the Cooper-Standard First Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in listen-only mode. Following company prepared comments, we will conduct a question-and-answer session.

[Operator Instructions] 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..

Great. Thanks, Joey, and good morning, everyone. Thank you for spending some time with us today. The members of our leadership team who will be speaking with you on the call this morning are, Jeff Edwards, Chairman and Chief Executive Officer; and Jon Banas, Executive Vice President and Chief Financial Officer.

Also joining us this morning is Jeff DeBest, Senior Vice President and President of our Advanced Technology Group. While Mr. DeBest won't be part of our prepared presentation, he will be available to answer questions when we get to Q&A. 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 3 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. That said, I'll turn the call over to Jeff Edwards..

Okay. Thanks Roger, and good morning, everyone. I'd like to begin on slide 5 with a few key data points from the first quarter. Sales in the quarter were $880 million, reflecting continued soft market demand in China and Europe, as well as some mix-specific weakness in North America and unfavorable foreign exchange rates.

These were partially offset by incremental sales related to our recent acquisitions in both our automotive and non-automotive businesses. Adjusted EBITDA for the quarter was $66 million. This was lower than last year, but essentially in line with original expectations for the quarter.

Unfavorable volume and mix, price reductions and higher material costs contributed to the year-over-year decline. In addition, we had increased cost for engineering, tooling and prototype development, related to future program launches.

Combined these more than offset the $25 million of cost savings that we generated through our lean initiatives and improved operating efficiencies. During the quarter, we successfully executed 43 program launches, in line with our plans for more than 270 new launches in the full year.

As the new programs ramp up over the course of the year, we expect them to have a positive impact on sales and margins in each successive quarter. Our employees' commitment to providing the highest-quality products and services continues to be recognized by our customers with service and quality awards.

But more importantly, we're being recognized with new business awards. During the first quarter, our net new business awards totaled $76 million. Our product and material science innovations are also contributing to increased demand, both in our Automotive business and in our Advanced Technology Group.

During the first quarter we received contract awards related to our innovation products, totaling $81 million in annualized sales, including both new and replacement business, and this is up 16% versus the first quarter of 2018.

So at a high level, weakening market demand generally, lower volumes on the certain key programs, and higher material costs continue to impact our business in the first quarter. This was largely consistent with what we expected, and what we have said in our previous call.

On the positive side, we continue to make progress with our customers on commercial negotiations, and we've also been successful with our proactive efforts to further reduce our costs. These combined with incremental volume from new launches throughout the year should have a positive impact on margins going forward.

Now I'd like to turn the call over to Jon, for more detailed discussion on our financial results. Following his presentation, I'll come back on to cover a few topics related to our strategy for profitable growth, diversification and also our outlook for the remainder of the year..

Okay. Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some detail on our financial results for the first quarter, and also comment on our liquidity, balance sheet profile, and capital structure. On slide 7, we show a summary of our results for the first quarter of 2019 with comparisons to the prior year.

First quarter sales were $880 million, down 9% versus the first quarter of 2018. The year-over-year change was driven by unfavorable volume and mix in all regions, unfavorable foreign exchange, and customer price reductions. These were partially offset by increased sales from our recent acquisitions.

Gross profit for the first quarter was $117.5 million, compared to $170.9 million in the same period a year ago. Adjusted EBITDA was $66.4 million or 7.5% of sales, compared to $122.6 million in the first quarter of 2018. Our ongoing cost reduction efforts were more than offset by the industry headwinds of weaker volume and mix.

Higher material costs, general inflationary pressure on wages and utilities, higher tooling and engineering activity related to future launches, and customer price reductions were also negative factors year-over-year.

SG&A expense increased in the first quarter, due primarily to additional costs from newly acquired businesses, general inflation, and divestiture-related expenses associated with the recent sale of our AVS business. These were partially offset by savings from our ongoing cost reduction initiatives.

As it relates to income tax in the quarter, we had net tax expense of $2.3 million on a loss before income taxes of $1.3 million. This resulted in an unusual U.S. GAAP effective tax rate or ETR of negative 181%. This was due to the mix of our earnings across various tax jurisdictions. In jurisdictions where we earned profits, a tax expense is recorded.

While in jurisdictions where we incurred losses, we were not able to recognize tax benefits due to valuation allowances. For the full year, we anticipate an ETR in the range of 16% to 18%. On a GAAP basis, we incurred a net loss of $3.5 million in the quarter versus net income of $56.8 million in the first quarter of 2018.

On an adjusted basis, net income was $11.8 million or $0.67 per diluted share. Adjusted ETR was 34%, significantly higher than our expected full year rate of 16% to 18%, again driven by the mix of earnings. This higher tax rate in the quarter impacted adjusted EPS by $0.15.

From a CapEx perspective our spending in the first quarter was $59.6 million or 6.8% of sales and down from $67.9 million or 7% of sales in the same period a year ago. This was in line with our expectations for the quarter and consistent with our plans to reduce CapEx and drive improved free cash flow in the full year. Moving to slide 8.

The charts on slide 8 lay out the significant drivers of the year-over-year change in our sales and adjusted EBITDA for the first quarter. For sales last year Q1 was an all-time record sales performance for us, making for a challenging comparison given current market conditions.

Volume and mix net of customer price adjustments reduced sales by $106 million year-over-year and the impact of FX was an additional $37 million negative. These were partially offset by $55 million in sales related to recent acquisitions.

For adjusted EBITDA our ongoing efforts in lean manufacturing and operational efficiency drove $25 million in cost savings for the quarter. These savings were more than offset by $57 million of reduced margin related to unfavorable volume and mix net of price.

North America was impacted the most by the volume and mix issue as certain important programs were going through model year changeovers or in some cases were discontinued and production was reduced faster than we had anticipated.

In Europe and Asia we continue to see weak overall industry production volumes consistent with what we experienced beginning in the third quarter of last year.

In addition to the unfavorable volume and mix we also had $9 million in incremental engineering tooling and prototype activity primarily related to future launches and $8 million in higher commodity costs. General inflation such as wages, rents, utilities and other expenses accounted for another $8 million in incremental cost year-over-year.

Moving to slide 9. We continue to maintain a strong balance sheet and solid credit profile. We entered the first quarter with $262 million of cash on hand. Our total debt at the end of March was $907 million and net debt was $645 million. This compares to net debt of $338 million at the same time last year.

With cash on hand and availability on our revolver we had solid liquidity of $370 million as of March 2019. Our gross debt to trailing 12 months adjusted EBITDA at the end of the first quarter was 2.8 time, while net debt to EBITDA was 2.0 times. These figures don't reflect the sale of our AVS business which closed on April 1.

The announced sale price was $265.5 million and after certain customer adjustments and applicable taxes and fees the net proceeds from the sale will be in the range of $220 million to $225 million.

Not in our cash balance or debt ratios as reported at quarter end these proceeds from the transaction will significantly enhance our already strong balance sheet. Finally a few thoughts on cash flow and capital structure, free cash flow for the first quarter improved by $17 million compared to the first quarter of 2018, despite the lower earnings.

This was primarily the result of favorable timing on accruals and accounts payable and lower capital spending in the period, as mentioned earlier. Offsetting these positive drivers were delays in customer payments in Asia and an increase in tooling receivables ahead of customer launches.

With our continued strong balance sheet and overall credit profile, we believe we have adequate liquidity to support our strategic plans and priorities going forward. In terms of capital allocation, our investment and profitable growth whether organic or through strategic acquisition remains the top priority.

Now, let me turn the call back over to Jeff..

Okay. Thanks, Jon. For the next few minutes, I want to focus on our near-term outlook and what we're going to do to advance our profitable growth strategy. So let's move to slide 11. As Jon mentioned in his discussion on capital allocation, investment and growth both organic and inorganic continues to be our top priority.

Part of that investment is focused on bringing new innovations to market that provide value to our customers. These innovations clearly contributed to the significant increase in net new business wins over the past few years as shown in the chart on the left. They're also providing higher profit margins than the traditional products they replace.

The increase in net new business awards beginning in 2016 is leading to record launch activity for us this year as those programs go into production and you can see this on the chart on the right.

The second and third quarters of this year will represent the peak of launch activity for the year, and we expect these new launches to drive incremental revenue and profits for us as production ramps up to full run rate on these platforms. Moving to slide 12.

On slide 12 we show a few of the significant programs that we're launching with the start of production in 2019. As you know the Ford Explorer has been an important vehicle for us historically. The latest model is particularly important as it's a first major program with the full-static ceiling system made with the Fortrex technology.

Other significant launches for us this year, include the BMW 1 Series in Europe and the Range Rover Evoque in China along with the other vehicles that you see on the slide. In total, we now expect to execute over 270 new launches this year. Moving to slide 13.

Another key component of our profitable growth strategy is diversification outside of the automotive industry. We are pleased to announce that we have signed two new agreements to license Fortrex technology to develop and commercialize custom-blended materials for applications outside the automotive industry.

The first is with the leading Chinese sportswear manufacturer. The second is with the major North American manufacturer of materials for the building and construction industry.

In addition to licensing the use of Fortrex technology, we will also supply Fortrex materials to these companies for any next-generation products arising under these agreements. These agreements demonstrate the versatility of Fortrex chemistry platform in the wide range of potential applications for the technology.

They are also indicative of the evolution of our strategy towards compound sales and delivery which is in addition to the technology licensing and royalty business model.

As these new agreements advance towards commercialization, we're quickly developing our strategy for high volume, material mixing and logistics anticipating the demand that future agreements are expected to drive. So turning to slide 14.

As we look to the remainder of 2019 and ahead to 2020 we recognize the need to aggressively manage our cost structure. We've already taken many proactive measures to rationalize headcount and operations, concentrate administrative functions in best cost countries, streamline our management structure, eliminate non-essential IT projects and many more.

The result has been significant reduction in costs already, but more will be required. Given where production volumes and customer demand are today, we are accelerating the optimization of our footprint in China and North America. We've already closed one plant in China this year and two more are planned for closure.

In North America, we had two facilities scheduled for closure in 2020 and 2021. The closures are now being moved into 2019 and we continue to evaluate additional opportunities to reduce fixed cost. These initiatives will help offset the impacts of the current production environment and better position us for future opportunities.

Including our typical lean initiatives and improving operating efficiencies, we're targeting total cost savings of more than $130 million for the year. We will also continue our focus on working capital reductions and lower capital spending to improve free cash flow year-over-year.

At the same time, our team remains focused on the successful execution of the record number of new launches that we've discussed. The heavy launch activity will carry on through the third quarter and increased production volumes should begin to benefit us in the back half of this year. Turning to slide 15.

Given our progress to-date on these initiatives and our view of the major automotive markets generally, we believe we're on track to deliver full year results for adjusted EBITDA consistent with our initial guidance, despite lowering our outlook for sales.

As our cost-saving initiatives continue to gain traction and our new launches ramp-up, we expect margins to improve sequentially each quarter of the year.

In addition, with our strong balance sheet and the proceeds from the sale of our AVS business, we're well positioned to consider additional strategic acquisition opportunities consistent with our profitable growth strategy. This concludes our prepared comments. So we'll now open the phone lines for Q&A..

Thank you. [Operator Instructions] And it looks like our first question will come from the line of Matt Koranda with Roth Capital Partners. Please go ahead. Your line is now open..

Hey, guys. Good morning..

Good morning, Matt..

Hey, Matt..

I just wanted to cover the 2019 outlook as a start. So you're taking $200 million out of revenue at the midpoint holding the EBITDA guide. I guess, just -- noted the actions that you're -- that you've referenced in the prepared remarks about incremental facility closures and everything.

But, I guess, what actions -- are there any other actions you can call out or details about that, that give you confidence in limited further decrementals? I guess, taking out $200 million from the revenue line, but not changing EBITDA. It'd be helpful to get your thoughts on that..

Yes, Matt. This is Jeff. I think, as we said, obviously, we're very confident as we launch these new programs that our margins are higher, on the new ones than most of the ones that they've replaced. So, I think, that's a level of confidence that we have there.

In addition, there were many actions that we were taking last year, some of which we had to pay for in the first quarter, of course. But those will have continued impact on SG&A going forward and some substantial improvements as you might imagine. Of course, we have the additional investments that we're making in our ATG business to ramp that up.

So some of it's paying for that ramp up. In addition, last year as you remember we acquired a couple companies within the ATG business and one within our core Automotive business in fuel and brake. And those, obviously, haven't been part of our portfolio for long.

So there's still opportunities to continue to get after synergies that we identified when we acquired those companies and that will take place the rest of this year and a little bit into next year. So it's sort of a -- hopefully, that's the summary we're looking for.

That's basically why we were able to hold our EBITDA at the same time we're feeling the pressure on the top line. And again, I think, this is the industry we're in and we recognize that there's ups and downs related to the top line, but what we're controlling is what we can control and that's on the cost side.

So, I think, the teams are doing a great job, are executing on launches. It's second to none and that gives us a level of confidence that we won't have surprises related to all those launches as well..

Okay. Fair enough. And then, I guess, it looks like you're holding the cash restructuring guide. And I think you had already spent roughly $18 million in Q1, so already pretty much at the midpoint of that. But you guys did highlight some incremental plant closures in China and pulling forward some stuff in North America.

So are we going to be at the high end of that range? Or could you help us out there just in terms of your thought process on that?.

Yes, Matt, it's Jon. When we set the range, we left it at about $10 million wide, because we thought there might be additional cash coming in for this year, or I should say outgoing this year. And -- so you're exactly right, it's closer probably to the top end of that range as we pull forward those other actions into 2019..

Okay. And then, last one.

I mean, your balance sheet, obviously, is not an immediate issue here, but when we think about sort of net leverage in the 2 times range and some sustained choppiness in sort of the global cycle, I guess, how do we think about use of proceeds from the AVS business? Is the prudent move to deploy all of that toward debt paydown? I know you mentioned the M&A, but you're stuck at a relatively low multiple here and you got a pretty decent buyback authorization in place.

I mean, how do we think about the thought process for capital allocation going forward..

Hey, Matt, it's Jon again. I'll go first and then I can turn over to Jeff for any other thoughts. But I think for us the prudent move is initially some debt paydowns. If you think back to the acquisitions we did in Q3 and Q4 of last year we did tap on our ABL facility to the tune of about $75 million collectively to do those deals.

So we traditionally as you know we're not a borrower on the ABL facility. So we're thinking that initially the paydown at that borrowing level of about $75 million or so. And then to fund ongoing cash needs over in Asia-Pacific region, we've also had some local borrowing lines that we may take the opportunity to pay those down as well.

So think about half of the proceeds generally will go down to paying down the debt that we took out to do acquisitions in the previous year and then the other half will be left over for a variety of different needs..

I would just add. Matt, this is Jeff. As you've listened to us discuss use of proceeds over the past several years one of the areas that we weren't able to frankly do near as much consolidation within our sectors as we wanted because everything was going strong in Europe and China and North America at the same time.

Now that you see the pressure in Europe and China impacting really the entire segment we're also seeing opportunities present themselves that may make sense from a consolidation point of view.

So to be sitting here with the balance sheet we have today will allow us to play offense, if we should find an opportunity that makes sense for our company and for all the stakeholders. So we are paying very close attention to those opportunities as well in addition to what Jon said..

All right. I will leave it there. Thanks guys..

Thank you, Matt. [Operator Instructions] Our next question in queue will come from the line of Michael Ward with Seaport Global. Please go ahead. Your line is now open. .

Thanks, good morning everyone. Jon on that slide 8 when you go through the bridge analysis there are a couple of things. First off on the volume and mix impact on revenue and adjusted EBITDA. And so, I think if my numbers are right, it was roughly $25 million in Q3, $50 million in Q4 and now it looks like closer to $60 million..

$57 million yes..

Yes. What are you putting in that number? I mean it just seems like a huge impact given the impact on the revenue..

Yes. When you do the math the close to 50-some percent seems to be unusual. Mike I agree with your conclusion there. And so there's both price and the volume affect in those numbers. But if you break it down by region, I think it'll be helpful. And the Europe and Asia stories are very, very similar. It's what we've been saying for the last six months.

And now the - just overall production levels are driving that down. And at our average pull-through rate of around 30% or so across-the-board you can see the degradation in those regions..

Some customer's close to zero. It is a production….

Yes exactly. Some of them -- some global players are close to zero there..

Okay.

So now does that start to soften? Or does that start to -- the impact starting -- your commercial negotiations start to kick in -- for the benefit of your commercial negotiations begin kick-in, in 2Q right?.

They're starting to take root in Q1. And then, yes, you are right. They'll ramp-up as the year progresses..

Okay.

So as we look forward -- so even if we have the impact on that adjusted EBITDA should decline or should lessen as we get through the year?.

Yes. It is and like as Jeff said as well as we launch our new product portfolio later on in the year, those incremental margins will help the rate as well. But I did want to offer Mike in my prepared remarks, I alluded to North America being the most significant driver….

Sure..

… there. So I did want to add some color there..

And a lot of that's changeover right?.

A lot of that is absolutely changeover. But there's also some programs that are balancing out as well..

Okay..

And then as the business has launched, the new products there namely the Fortrex platform on the Explorer in the back half of the year we'll see margin improvement as well..

Okay. Also on that chart, if the acquisition impacted $55 million, but I don't see any corresponding impact on adjusted EBITDA.

Is it insignificant? Is that what that means?.

As of now, the year-over-year effect is below our overall long-term automotive business range there Mike. So the $55 million in revenue, call it around a 10% pull-through on that. So that's just included net in the volume and mix number there..

inflation and then the acquired businesses and it looks like -- is that what that $9 million the engineering prototype tooling? Is that what that is -- that's in SG&A?.

Part of it is. The engineering portion is there. But there's also -- as we build up the Applied Material Science business infrastructure, there are some incremental year-over-year SG&A related to that as well. But like Jeff said, the new acquired businesses, as we find the synergies that were in the business case.

When we made those acquisitions, we believe the SG&A numbers are going to come down. And we still ran the AVS business for Q1 as well. So, that's kind of included in those overall SG&A numbers as well. So you should see numbers naturally declining as that business is no longer in our numbers going forward..

Okay.

If I could ask you one question on the -- Jeff on the award with the Chinese sportswear manufacturer, is that a contract manufacturer or is that a brand name?.

Yeah Mike this is Jeff Edwards. So with Jeff DeBest here in the room with us I've asked him to if there were questions on the details which we appreciate you asking he'll give you just a little bit of an overview here on what that is. And so I'll turn the call back to Jeff DeBest..

Thanks. Yeah Mike. Thanks for the question. Yes. It's a brand. It's a recognized global brand for sportswear produce in China. And we will be making a more formal announcement of that agreement here in the middle of May..

Okay.

Could it be a U.S.-based company that has the material produced in China? Is that what it is?.

No. It's not..

So it's a Chinese -- China-based company that is the manufacturer and buyer?.

That's correct..

Okay, thank you very much..

Thanks Mike. And presenters at this time I am showing no additional questions in the queue. I'd like to turn the call back over to Roger Hendriksen..

Okay. Thanks everybody. And we appreciate you joining our call as usual. And certainly appreciate you joining our call as usual. And we look forward to your questions in future engagement. If you should have other questions, as the day goes on or in the coming days or weeks, we look forward to speaking with you soon. Thanks again. This concludes our call..

Thank you, team and thank you to all of our participants for joining us today. This does conclude today's call. You may now disconnect. And have a wonderful day..