Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Second Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Following the Company's prepared comments, we will conduct a question-and-answer session.

As a reminder, this conference call is being recorded and the webcast will be available on the Cooper-Standard website for replay later today. I would now like to turn the call over to Roger Hendriksen, Director of Investor Relations..

Thank you, Stacy, and good morning, everyone. We appreciate you spending some time with us this morning. The members of our leadership team who will be speaking with you on the call this morning are Jeff Edwards, Chairman and Chief Executive Officer; and 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 3 of this presentation and also 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..

Thanks, Roger. Good morning, everyone. We appreciate the opportunity to review our second quarter results and provide an update on our ongoing strategic initiatives and outlook. To begin, on Slide 5, we provide some highlights or key indicators of how our operations performed in the quarter.

We continue to perform at world-class levels in delivering quality products and service to our customers and keeping our employees safe. At the end of the quarter, 98% of our customer scorecards for product quality were green and 97% were green for launch. Most importantly, the safety performance of our plants continues to be outstanding.

In the second quarter, our total safety incident rate was just 0.41 per 200,000 hours worked, well below the world-class rate of 0.57. I'd like to recognize and thank our teams at the 35 Cooper-Standard plants that have maintained a perfect safety record of zero reported incidents for the first half of the year.

We are continually striving for zero safety incidents at all of our plants and facilities and these 35 locations are leading the way and continue to demonstrate that achieving our ultimate goal of zero incidents is possible.

From a financial perspective, our results were impacted by volatile production schedules, late notice shutdowns and rapidly increasing costs that continued throughout the quarter. Unfortunately, all factors largely outside of our control. In the areas we can control, our teams continue to drive success.

Despite lower-than-expected production volumes, our manufacturing operations were able to deliver $12 million in savings through lean initiatives and improving efficiency in the quarter. Our SGA&E expense was down $6 million year-over-year.

In the combination of past restructuring actions and strategic divestitures delivered $9 million in benefits in the quarter. While we are continuing to execute well on our operating plans, we faced significant ongoing challenges from customer schedules, reduced production volumes and inflation.

We are taking aggressive actions to mitigate or recover the incremental cost imposed on our business. With all due respect, we do not intend to use our balance sheet to finance the supply chain issues or the inflation of raw materials at these new levels.

Our world-class quality, service and innovative technology, continue to garner recognition and awards from our customers. During the second quarter, we were again recognized by General Motors as a Supplier of the Year in two product categories. This marks the fourth consecutive year that we have received these honors.

In addition, 20 of our manufacturing facilities were recognized with General Motors Quality Excellence Award. We are very proud of our global team for their professionalism and consistency in delivering value to our customers year-after-year. Our customer relationships simply have never been better. Moving to Slide 7.

In conjunction with the Supplier of the Year award, we were also pleased to receive General Motors Coveted Overdrive Award.

The Overdrive Award is a distinction reserved for suppliers who display outstanding achievement within high priority areas, including sustainable value streams, total enterprise cost and profitability, safety, launch excellence, accelerating innovation and nurturing relationships.

In our case, we received the award for our Fortrex chemistry platform and its significant contribution to sustainability.

While Fortrex offers superior product performance in the areas of compression set, resilience, weatherability and resistance to degradation from exposure to ultraviolet rays and overall durability, its sustainability impact that is even more powerful.

Fortrex offers dramatic reduction in greenhouse gas emissions through an estimated four pound system weight savings, improved manufacturing efficiencies and the elimination of high use energy process capital equipment. In total, Fortrex offers up to 53% reduction in total life cycle carbon footprint versus traditional materials.

We continue to believe that our Fortrex chemistry platform with all of its inherent benefits will become an increasing competitive advantage and growth driver for us as current and new customers become familiar with the significant advantages it provides, especially given its carbon footprint and sustainability impact. Moving to Slide 8.

We continue to build a corporate culture that places a high-value on long-term ESG performance and sustainability. To assure our continued progress, our Global Sustainability Council will provide executive level oversight for the company's sustainability strategy and ensure alignment and integration with business goals and stakeholder priorities.

In addition, the Council will track the rapidly evolving standard measures in global best practices to help drive Cooper-Standard toward world-class performance and sustainability. We are proud of our culture we've established within the company.

We believe it will be a key factor in our long-term growth and success as we further align our priorities with those of our stakeholders. Now, let me turn the call over to Jon to discuss the financial details of the quarter..

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some detail on our financial results for the quarter and comment on our balance sheet, liquidity and capital allocation priorities and then provide an update on our outlook for the remainder of 2021.

On Slide 10, we show a summary of our results for the second quarter with comparisons to the prior year. Second quarter 2021 sales were $533.2 million, up 56.6% versus the second quarter of 2020.

Despite the year-over-year growth, our sales came in significantly below our plans, primarily due to continuing semiconductor shortages and the impact on our customer production schedules. These sporadic shutdowns often announced on extremely short notice impacted our sales by approximately $200 million in the quarter.

Other factors impacting sales were the divestiture of certain unprofitable businesses in Europe and our Legacy India business last July, partially offset by positive foreign exchange. Excluding the impact of divestitures and exchange, organic sales increased by approximately 55%, outpacing total light vehicle growth by 650 basis points.

Gross profit/loss for the second quarter was essentially breakeven and adjusted EBITDA in the quarter was minus $14.7 million compared to minus $93.8 million in the second quarter of 2020.

As with sales, profitability improved year-over-year, but fell well short of our plans due largely to unanticipated customer shutdowns, volatile production schedules and commodity headwinds. On a U.S. GAAP basis, we incurred a net loss for the quarter of $63.6 million compared to a net loss of $134.2 million in the second quarter of 2020.

Excluding restructuring expense and other special items as well as their associated income tax impact, adjusted net loss for the second quarter of 2021 was $51.1 million or $3 per diluted share compared to adjusted net loss of $111.8 million or $6.61 per diluted share in the second quarter of 2020.

Regarding capital expenditures, our spending in the second quarter was $17 million compared to $12.3 million in the same period a year-ago. We are continuing our focus on disciplined capital investment in our business and we remain committed to keeping CapEx below 5% of sales for the full-year. Moving to Slide 11.

Unfortunately, the unusual market dynamics created by the virus-related shutdowns last year and the semiconductor-related shutdowns this year make year-over-year variances difficult to define, and those dynamics really obscured the very real improvements we are making in our business. The charts here on Slide 11 provides some clarity.

For sales, favorable volume and mix, net of customer price adjustments added $187 million to the topline. The non-recurrence of the industry-wide COVID shutdowns was the biggest positive driver, but was partially offset by the reduced production volumes related to the semiconductor shortages.

Foreign exchange mainly related to the euro, Chinese RMB and Canadian dollar contributed $24 million to sales in the quarter, while divestitures reduced sales by $18 million.

For adjusted EBITDA, improved volume and mix net of price contributed $65 million year-over-year, driven by the non-recurrence of the COVID shutdowns, offset by reduced production volumes related to semiconductor supply disruption as well as customer price reductions.

Improvements in operating efficiency and lean initiatives in both manufacturing and purchasing drove a combined $21 million in cost savings for the quarter. We also benefited from $6 million in lower SGA&E expense and $6 million from the divestiture of unprofitable businesses.

On the negative side, increasing commodity and material costs were a negative $12 million impact in the quarter, while wage increases, general inflation and other items were a further $7 million impact. Commodity inflation has ramped up much faster than we had anticipated in our operating plans for the year.

We now expect a full-year increase of approximately $40 million compared to our initial expectations of $15 million increase when the year began. While we are working to offset the increases through our supply chain initiatives, this inflation will be a continuing impact on our results in the second half of the year.

As Jeff mentioned earlier, we are taking aggressive actions with customers and suppliers to mitigate or recover these incremental costs. Moving to Slide 12. Cash used in operations during the three months ended June 30, 2021 was an outflow of $54 million, driven by the net loss incurred and temporary changes in working capital.

Combined with CapEx of $17 million, we had a total second quarter cash outflow of $71 million. Despite the outflow, we ended the second quarter with a continuing strong cash balance of $335 million.

In addition, availability on our revolving credit facility, which remains undrawn was $117 million, resulting in total liquidity of $453 million as of June 30, 2021.

We expect our strong cash balance, anticipated positive cash generation in the second half of the year and access to flexible credit facilities will provide ample resources to support our ongoing operations and the execution of planned strategic initiatives. So we are comfortable with our current liquidity position and outlook.

Regarding capital allocation going forward, our top priority continues to be to sustain and grow our business profitably. We will continue to make modest investments in capital equipment and technologies to launch important new programs for our customers.

We anticipate CapEx in the range of $100 million to $115 million for the full-year of 2021 and within the range of 4% to 5% of sales on average over time. As we look out to next year, a priority will be to paydown the senior secured notes that we issued in 2020 during the initial height of the pandemic.

With less than a year now before the no call provision expires, we remain confident in our plans to paydown the debt and reduce the interest burden on our business. That said, we are continually evaluating our liquidity needs and overall capital structure in relation to market conditions and opportunities.

We may adjust our priorities from time-to-time in light of market conditions and fluctuations. Turning to Slide 13. As you saw in our press release, we have updated our full-year guidance. Much of the change in guidance is already reflected in our first half results, which fell short of our original plan by nearly $80 million in adjusted EBITDA.

The revision to guidance also reflects significant incremental cost pressure related to commodities and materials, wage increases and general inflation carrying forward through the remainder of the year.

The biggest driver, of course, is the reduction in expected full-year light vehicle production volume in North America, which is down more than 10% from our original guidance, with much of the decline coming on some of our most important platforms. Strengthening FX rates are partially masking the production revenue decline overall.

Based on current customer schedules and industry forecasts, we do expect production volumes will begin to improve in the latter part of Q3 and continue to increase through Q4. We left the adjusted EBITDA range fairly broad as customer schedules continue to change significantly on almost a daily basis.

In fact, our sales outlook for Q3 has declined nearly $50 million over the past three weeks alone. So we are still facing a high degree of uncertainty in the current quarter.

If current production forecasts are realized and we continue the successful execution of our driving value initiatives as planned, we still anticipate that adjusted EBITDA margins can reach to high-single digits in Q4 of this year. That concludes my prepared comments. So let me turn it back to Jeff..

Thanks, Jon. To wrap-up our discussion this morning, I'd like to provide an update and some additional detail on our near-term strategies to diversify our business, leverage growth in the electric vehicle market and our outlook related to our longer term return on invested capital improvement goals. Please turn to Slide 15.

Innovation and diversification remain key parts of our long-term strategy. We continue to make progress with our advanced technology group to leverage our material science and manufacturing expertise in diverse industrial markets that complement our automotive business.

In our Applied Material Science business, we have successfully concluded the technology development phase with two footwear customers and we are working on commercial negotiations with both. We are also continuing in the commercial phase for our products and technology in the building materials space.

While it is too soon to tell, when we might conclude these commercial discussions, but the work and focus on our end certainly continues. We are continuing our technology development work with other customers in the footwear space and we have received initial inquiries regarding opportunities in some new industries, which we believe have some merit.

As I mentioned earlier, desire for alternative materials with lower carbon footprint is driving interest in Fortrex, almost as much as its superior physical performance characteristics.

We believe the lower carbon footprint represents a clear competitive advantage for us in our Automotive business, our Materials Science business and in our Industrial and Specialty Products business as well. Within our Industrial and Specialty Group, customer demand for our products overall remains steady.

However, like many segments of our industry, we are facing challenges related to labor availability, supply chain and other market disruptions, which are limiting near-term growth.

Our investment in additional production capacity within the ISG group in Europe is expected to enable a return to growth over the longer term as our markets begin to rebound from the impacts of COVID and other market disruptions. We remain optimistic about the opportunities to grow in diverse markets over the longer term.

We expect to have more definitive news to share in the near-term. Turning to Slide 16. The momentum of electric vehicle market is continuing. It is creating growth opportunities for us with our traditional customers and opening doors for us with many new customers.

We continue to leverage our innovation, reputation for world-class customer service and engineering expertise to win significant new business in this hyper growth segment. In the first half of the year, we were awarded $59 million in annualized net new business on electric vehicle platforms. This is 41% higher than in the same period last year.

The awards are with 25 different customers and include awards in all of our product groups.

The transition to electric vehicles represents significant upside opportunity for us in terms of content per vehicle as much as 20% upside for a battery electric versus comparable internal combustion vehicle platform, and the content per vehicle advantage is even higher for hybrid vehicles. Turning to Slide 17.

To conclude our presentation this morning, I want to provide a brief update on our driving value initiative and our progress toward achieving sustainable double-digit return on invested capital.

Given all the noise between last year's COVID shutdowns and this year's semiconductor-related issues, it’s difficult to really see the significant progress we've made by just looking at the comparative financial statements. Jon talked about the continued improvements in manufacturing efficiency and the lower SGA&E costs.

I think when you do the math to add-back the impacts of the semiconductor issues, you will understand how far we have come by streamlining our overhead costs and continuing to focus on manufacturing excellence. These combined initiatives have restored the long-term viability and outlook of our company.

And we certainly don't intend to give it back through price concessions or by absorbing the impacts of the schedules and material cost increases. We are engaging in commercial negotiations to recover costs incurred from late schedule changes and rapidly rising commodity prices.

We are also working aggressively to expand commodity indexing programs with our customers and suppliers. Of course, these activities don't get any easier with the current market volatility and uncertainty.

However, as we continue to deliver outstanding value to our customers in terms of product quality, overall service and innovation, we believe we are well positioned to have these conversations.

We continue to win new business on quality platforms that will help us fill capacity in Asia and enhance content per vehicle and contribution margins globally. Central to this are the new programs in electric vehicles that I just spoke about. Finally, we have made good progress in our evaluation of the South America market.

I think we'll be ready to make a final decision on our future in that region by year-end.

In summary, we are continuing the successful execution of our driving value plan with its related work streams, and we believe we are on track to reach our stated goals of achieving and sustaining double-digit EBITDA margins and ROIC within the next couple of years.

I want to thank our employees for their continued hard work and focus on driving strong improvements across our company. I also want to thank our customers for their continued trust and support as we work through these turbulent times together. This concludes our prepared comments. We would now like to open the call to questions..

Thank you. Our first question comes from Mike Ward of Benchmark..

Thanks. Good morning, everyone. Maybe just to focus on a little bit on some of the commodity and material cost issues. To try to put some parameters on it, I'm guessing your commodity material purchase number is somewhere around $1 billion.

Is there a percentage that is not already indexed? And is that where the exposure is? And are those things subject to commercial negotiation? And so for that $40 million you've targeted this year, how much would you expect to recover?.

Hey Mike. Good morning. It’s Jon. Thanks for the question. Let me take both sides of the equation, both the supplier indexing side and then the customer side after that. Last call, we talked about our evolution on the indexing with our supplier side, and we're making very good progress. We ended last year with only 15% of our spend indexed.

And on the call last time, we're up to about 25%. We're now approaching about 30% and on track to finish the year. We had about 45% of our overall material spend indexed. And that's on $1.1 billion to $1.2 billion of direct materials that we're purchasing.

And most of that 45% projection is on what we're referring to as grow suppliers, which are going to be strategic to us and provide inputs for products that are significantly impacted by those raw material markets. So I think in terms of the strategic supplier base that we're working to continue to build through our overall initiatives there.

On the customer side, we're making progress there as well to get on index contracts with those customers. And for right now, we're approaching about 20% to 25% of the commodity inflation that we've incurred is going to be addressed by index contracts. Now typically, those are on a lag.

So you get the recovery effect a quarter or two later down the road. And the rate of recovery is going to vary by commodity, of course, depending on how those indices fluctuate that go above and beyond.

And recovery rates are also going to be different across the types of commodities because certain industries and entry points when we get on those arrangements are going to dictate how much we can recover. So getting those mechanisms in place is going to be key going forward.

The rest of the inflation will be more of direct negotiation with our customers to yield further recovery on those items, okay. So hopefully, that frames the situation for you, Mike..

Okay.

And so on the customer side, how high can you get with the index? I mean, no one is fully covered, but can you get up to north of 50%, 75%?.

Yes. I don't know if we'll get that high just because of a lot of our bill of materials aren't heavily weighting on those purchased commodities, Mike, so think about the additional value-add and other components that aren't indexing.

Right..

There doesn't allow us to get up to that high of a percentage. But nonetheless, we're working to move the needle upwards..

Okay.

And any reason why you wouldn't be able to recover a normalized sum from the manufacturers?.

Yes. Mike, this is Jeff. I think that's certainly our objective. We've said historically, 40% to 60% is what we expect to recover. I guess, it’s like anything else, when its 40% to 60% of a small number, you kind of deal with it, where its 40% to 60% of a much higher number than that's something that's going to require extensive discussion.

And that's really where we're at. As I said in our remarks, this is unprecedented. I mean, clearly, I think, the good news is our customers are raising prices. So I think to expect that the supply base will also be on the receiving end of some help is what we expect, and I'm sure the lobbies will be full, and you'd be taking a number.

But certainly, we all have similar challenges here and I'm sure we'll work through it together..

Okay. I was just surprised when you mentioned that you might be able to get some recovery from the disruption and the unplanned shutdowns..

Well, I guess, going after it is where it starts. So we see how we go..

That's why they call it negotiation..

Right..

Now, Jeff, one of the things.

Can you talk a little bit about the process you're going to use to get to your 10% ROIC?.

Yes. And we continue to do that. Mike, we certainly have been working on this now for the last 1.5 years, almost two years. It starts certainly with the business being more competitive from a fixed cost point of view. And we have been really attacking the footprint issues in all of our major regions. So here in North America, we have.

Certainly in Europe, we've announced a number of closures and then we right-sized, the Asia given the significant change in volumes in China. We also dramatically have reduced our SGA&E costs across the business to support the company. We've peeled businesses away that weren't covering their cost of capital and we've sold those.

And so we're in a much better position from a lean point of view. Yet at the same time, we've still focused on execution. So we don't have surprises. We don't surprise our customers with quality issues or bad launches.

We don't surprise our investors with performance that from quarter-to-quarter is in trouble because we haven't invested in the appropriate amount of resources in the company. So we've right-sized it. We don't have too many of anything and we don't have too few of anything if we've done this right.

And I think our performance around quality, cost, safety, delivery, launch is a good leading indicator that we have right-sized it. I'm confident that the supply chain issues albeit really challenging this year and I don't see it becoming less challenging in the third and fourth quarter I think it will just be different.

Next year, we expect the volumes to rebound and be very strong and in fact, that lines up very nicely with what we're doing from a restructuring and getting our costs in line. We expect 2022 and 2023 to be really strong years for us and the company is ready to execute.

So we believe the double-digit return on invested capital sustainable level return on invested capital will be ours in 2023. I fully expect 2023 will be the first full-year of us executing that way.

And you'll see quarters next year, I'm sure, where we're showing clear indications that we are reaching that level, all based on the transparency that we've shown around the driving value plan. Clearly, the raw material inflation is a different wild card.

But we have to go figure it out with our customers and our suppliers how to make that an affordable line item rather than what its turning into right now and I'm committed to doing that..

Perfect. Just one last thing. Have you seen, like in July and going into August with your big customer, have some other programs stabilized, particularly some of the more important ones for you. They were really hit hard in the second quarter, and I know that took its toll on you.

But have you seen some stability, they seemed to allude, do they had a better handle on the chip supply issue, and it sounds like they're doing a better job managing their production.

Have you seen it with your orders from them?.

Unfortunately, not..

It's still volatile?.

Right..

Okay. Thank you very much..

You bet..

Our next question comes from Brian DiRubbio from Baird. Please go ahead..

Good morning. So maybe starting Jon with you. At the midpoint, your EBITDA guidance is down by $100 million. I think you cited that raw materials are now $40 million worse than expected.

Can you just sort of help us dissect that $100 million between was production and other labor costs?.

Sure, Brian. It’s really a couple of main buckets, right. It’s the whole microchip impact from Q2 and that's going to trickle into here in early Q3 that is really impacting the overall year's results. And I referenced that in my prepared remarks about how much we're already down there and how much revenue was lost on the chip shortage issue overall.

So when you take out the estimated profit pull-through on that $200 million, 75% of which was in North America, and here you range anywhere from 25% to 35% contribution margin on average. You can see it’s a pretty big degradation overall in our expectations at the midpoint.

The next main bucket is what we've been talking a lot about is the commodity side as well as inefficiencies caused by the production variability.

So think about not being able to flex labor fast enough based on really, really tight notices from our customers, freight economics, labor economics and quite frankly, availability shortages on the labor side, all leading to higher economics on that side of the shop.

So it’s not only the $40 million of commodities, but it’s the other inflationary effect all throughout the Board. So between those two main buckets, I'll call it overall general inflation plus commodities and then the microchip impact that gets you most of the way there on the midpoint degradation..

Okay. That is helpful. On the labor side, a number of my companies have been troubled by just the labor shortages.

Are you just seeing just people have new interest or is it a wage issue, is it just – people are just waiting until the end of September until their extra unemployment benefits expire? I'm just trying to get your sense of what the potential issues are there on the labor side..

Yes. This is Jeff. I think we are seeing some improvement in certain states. Let me start by saying that. I think that clearly staying home and making the same money or almost the same money probably was the driver there.

And I think as those policies are changed, then I think the issue for us anyway has shown some improvement and I would expect that to continue. We don't have many locations anymore that we feel – we just have a shortage of workers, if you will. I think government policy drove a lot of what you've seen..

Understood. Yes, hearing a lot of that.

Jeff, are you able to disclose what your EV sales are today? I'm just trying to triangulate some of the growth that you've been talking about and I'm trying to get a sense what the base is?.

We haven't broken it down that way as we work our way through the year. I'm sure as we close out this year and start next year, we'll have a lot more detail around how we've done in 2021 and we'll provide you that..

Okay. And then Jon, back to you.

What would you say is the company's minimum cash needs?.

Yes. Brian, we think long and hard about this obviously and been analyzing it with the new size of the company and state of the industry. So our current thinking is we can operate anywhere from $150 million to $180 million of minimum cash.

Keep in mind, we do have that access to our undrawn revolver, so that adds a significant amount of liquidity in the pipeline that we typically aren't tapping. In fact, we haven't used it for several years, but it’s a nice backstop for us.

So I think about it in terms of that, Brian, we do have obviously some excess cash, if you will, on the balance sheet now just because of we're maintaining it to work through the industry disruptions, fluctuations, et cetera. And if you think back a year ago, we took out the senior secured notes just for that reason, back then it was COVID-related.

Now it’s COVID plus Microchip-related. And so that backstop is just providing us additional assurance that our liquidity situation is a good one. So as we work toward the next 11 months, we'll right-size the capital structure and then fine-tune it going forward..

Got it. And then final one for me. Nice to hear that you're going to make a decision on South America by year-end.

Just as we think about cash restructuring costs, could that potentially be higher or lower in 2022 versus 2021?.

Well, we haven't contemplated the final decision on what Brazil might mean to that restructuring cash. But with the programs we have in place now, we'll be down considerably from the $40 million to $45 million in cash that we'll spend this year..

Perfect. Thanks for the time..

Okay. Thanks, Brian..

Your next question comes from Mike Cazayoux from KDP Investment Advisors. Please go ahead..

Hi. Thanks for taking my question. This kind of related to an earlier question asked about the components of the decrease in EBITDA. And I'm just looking at your guidance for revenue and it's basically unchanged, maybe down 3% at the midpoint.

So that implies you think you're going to have some catch-up in the third and fourth quarter from what you lost in the second.

So I'm trying to understand how the reduced volume is related to the decline in EBITDA?.

Hi Mike. This is Jon. Thanks for the question. I alluded to this in my prepared remarks. What's masking the overall decline in revenue for us from a production volume standpoint is favorable foreign currencies.

So when you think about the euro appreciation, the Chinese RMB as well as the Canadian dollar, we're seeing an increase in sales to the tune of $80 million or so from our previous guidance range on sales. But that's obviously offset by the Microchip shortages, the $200 million that I alluded to earlier.

So if you net those two off, that's how we came up with the new range on revenue. So the production volume associated with our revenue is coming down well..

Okay. Thank you..

Thanks, Mike..

Your next question comes from Josh Taykowski from Credit Suisse. Please go ahead..

Hey guys. Thanks for taking the questions. I wanted to just, I guess dig in a little bit more on the sequential decline for EBITDA.

Obviously, a really tough operating environment out there, but is it possible to do an approximate walk on the sequential EBITDA decline from 1Q to 2Q, just that $53 million decline bucket between either volume or inflationary impacts or otherwise?.

Yes. Josh, I do have an analysis, give me a minute to dig it out here and I can walk you through. But when you think about Q1, the year started off in a good state overall for all the regions. But then all of them were impacted in one way or another by the Microchip shortages overall.

But then think about the $12 million of commodity inflation that we incurred being equally spread across the Board. So the $3 million in North America, $3 million in Europe and then the rest in China and a bit more in South America. So when you do that walk across most of the Microchip impact, as I've said earlier 75% of it was in North America.

So the biggest set of declines from Q1 to Q2 hit us in the North America region, that would really bring down overall profitability and you can see that in the segment results in the press release overall. Equally – on the positive side, equally across the Board, very favorable developments on the manufacturing efficiencies that Jeff talked about.

So North America continues to take cost out and become more efficient. Europe was very, very successful in doing the same during the quarter. So sequentially, you see those improvements working in the positive favor to offset those COVID and Microchip shortage declines..

Got it. That's very helpful. Thank you. And then just a question on the guide for 2021.

Does the new EBITDA range include any assumption on the recovery of that $40 million or is that kind of net of some recovery?.

Josh, just a minor portion. As we've been discussing, a lot of this will turn into commercial negotiations and that we can't really predict the timing of when those recoveries will be received or when those negotiations will conclude.

So at this point, the known amount is only around that 20% I referred to earlier, that is on index contracts that we can expect on a quarterly lag..

Got it. Okay..

It appears there are no more questions. I would now like to turn the call back over to Roger Hendriksen. I'm sorry, we have a question from Chris Wang from Barclays..

Hey. How are you? Thank you for taking the call. I just want to clarify on the last question, I ask a different way.

So if we are thinking your only recovered index contract on the commodities, if the wage stays high, the general inflation stays high, is there any downside risk to the current full-year guidance of 75% to 105% or that is fully baked in, more of a kitchen size table number?.

Chris, it is all in at this point. So you'll see upside if those negotiations are quick and we conclude them faster. But as of now, everything we know about in terms of inflationary pressures are in these numbers..

Got it. And I know you said things are moving fast. So understandable, obviously, OEM we're getting to a little bit weaker second half as well. But I'm just looking at some of your peers, their 2Q numbers with somewhat similar customer mix, they're doing a little bit better.

What is sort of the differential between you guys and I'm just trying to understand what kind of really happened for you guys, but not necessarily for some of your peers?.

Hey, Chris. I think it comes down to the weighting of that semiconductor Microchip shortage impact for us and then the customer mix for us overall. Like I referred to earlier, 75% of that $2 million is in the North America D3 programs, which are typically very, very key programs for us, very profitable programs for us overall.

So when you lose revenue on those, it creates an outsized degradation in our profitability..

Got it. And then the low end is 75% versus high end 105% is just a matter of how severe the semi shortage is going to be in the second half..

Correct..

Got it. All right. Thank you very much..

Thanks Chris..

We have a follow-up question from Mike Cazayoux from KDP Investment Advisors. Please go ahead..

Hi. Thanks. Ford obviously is your biggest customer, quarter to a third of the business and they were particularly hard hit by the chip shortage.

What do you think your numbers would look like if you didn't have Ford as a client?.

Yes. Mike, we typically don't break out individual customer revenues like that, just obviously from commercial sensitivity standpoint. But when you breakdown the overall North America estimate, most of the 75% of that $200 million was Ford-related, I'd say in excess of 50%. So I'll let you do your own calculation there..

Perfect. Thank you..

Okay, Mike..

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

Okay. Thanks again everybody for joining us this morning. Should any of you have additional questions, please feel free to reach out to me directly and we'd be happy to do follow-ups as much as you would like and certainly look forward to continuing that dialogue. This concludes our call this morning, so you may disconnect. Thank you..

This does conclude today's conference call. Thank you for your participation. You may now disconnect..