Earnings Call Transcript
Cooper-Standard Holdings Inc. (CPS)
Earnings Call Transcript - CPS Q3 2021
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Third Quarter 2021 Earnings Conference Call. 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.
Roger Hendriksen, Director of Investor Relations
Thanks, Vic, 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 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. So with those formalities out of the way, I’ll turn the call over to Jeff Edwards.
Jeff Edwards, CEO
Thanks, Roger. Good morning, everyone. We appreciate this opportunity to review our third quarter results and provide an update on our ongoing strategic initiatives and the 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 services 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 96% were green for launch. Most importantly, the safety performance of our plants continues to be outstanding. In the third quarter, our total safety incident rate was just 0.46 per 200,000 hours worked, well below the world-class rate of 0.57. I would like to specifically recognize and thank our teams at the 28 Cooper-Standard plants that have maintained a perfect safety record of 0 reported incidents for the first 9 months of the year. We are continually striving for zero safety incidents at all of our plants and facilities, and the dedicated, focused employees at those 28 locations are leading the way and continue to demonstrate that achieving our goal of zero incidents is possible. Despite lower-than-expected production volumes, our manufacturing operations and purchasing team were able to deliver $8 million in savings through lean initiatives and improving efficiency in the quarter. Our SGA&E expense was down $4 million year-over-year. And the combination of past restructuring actions and strategic divestitures delivered $5 million in benefits in the quarter. Unfortunately, we continued to face significant ongoing challenges from volatile customer schedules, reduced production volumes, and tight labor availability in certain markets. In this low production volume environment, we’ve not been able to offset the widespread inflationary impacts we’re seeing in materials, energy, transportation and labor. This, despite our improved operating efficiency. We’re taking aggressive actions to mitigate or recover the incremental costs imposed on our business. I will provide more color on this initiative in a few minutes. Moving to Slide 6. We’re proud of the culture we’ve established within our company and the progress we’re making toward world-class status with respect to sustainability. We continue to garner recognition from outside organizations for our progress thus far. In the recent quarter, we were recognized by Corp! Magazine for our culture of diversity and inclusion. We believe this type of recognition is an indication that we are headed in the right direction. We will continue to work hard to further align our priorities with those of our 5 stakeholder groups, because we believe this will play a critical role in driving our long-term growth and success. Now let me turn it over to Jon to discuss the financial results of the quarter.
Jon Banas, CFO
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, cash flow, liquidity and capital allocation priorities, and then update our expectations for the remainder of 2021. On Slide 8, we show a summary of our results for the third quarter and year-to-date period, with comparisons to the prior year. Third quarter 2021 sales were $526.7 million, down 22.9% versus the third quarter of 2020. The year-over-year decline was roughly in line with lower global light vehicle production, which continues to be impacted by insufficient supply of semiconductors. Gross loss for the third quarter was $8.1 million and adjusted EBITDA was negative $33.9 million, compared to adjusted EBITDA of positive $64.1 million in the third quarter of 2020. As with sales, profitability was hurt by lower production volumes and volatile customer schedules. In addition, increasing commodity and material headwinds, higher labor costs, and general inflation weighed on our results. Tax expense of $32 million recorded in the third quarter includes a $31.7 million charge, $18.5 million of which relates to the reversal of tax benefits we have recorded in the first 6 months of the year, plus $13.2 million of tax expense for the initial recognition of valuation allowances on our December 31, 2020, net deferred tax assets in the United States. These tax adjustments were driven by increasing historical 3-year cumulative losses, which led to a change in judgment on the realizability of our net deferred tax assets. Including this tax item, we incurred a net loss for the quarter of $123.2 million on a U.S. GAAP basis, compared to net income of $4.4 million in the third quarter of 2020. Excluding restructuring expense and other items, as well as their associated income tax impact, adjusted net loss for the third quarter of 2021 was $106.4 million or $6.23 per diluted share compared to an adjusted net income of $3.6 million or $0.21 per diluted share in the third quarter of last year. Capital expenditures in the third quarter totaled $20.4 million compared to $10.5 million in the same period a year ago. Year-to-date, we have invested $76 million in our business, largely to support new program launches, which we expect will be up approximately 18% for the full year of ‘21 and should remain solid in 2022. Despite this significant launch activity, we remain committed to keeping CapEx below 5% of sales for the full year. Moving to Slide 9. The charts on Slide 9 provide some additional clarity and quantification of the key factors impacting our results. On the top line, unfavorable volume and mix, net of customer price adjustments, reduced sales by $165 million versus the third quarter of 2020. Again, the biggest driver was the customer schedule reductions related to ongoing semiconductor shortages. Foreign exchange, mainly related to the Chinese RMB, the Canadian dollar, the Brazilian real and the euro, contributed $9 million to sales in the quarter. For adjusted EBITDA, unfavorable volume and mix, net of price, had a negative impact of $64 million year-over-year, driven mainly by the semiconductor-related customer schedule reductions, as well as customer price adjustments. Commodity and material input costs were $21 million higher, which brings the year-to-date impact to $34 million. Commodity inflation has continued to ramp up much faster than we had anticipated in each successive quarter of the year. We now expect a full year increase of approximately $60 million compared to our initial expectations of $15 million when the year began, and $20 million higher for the year than we expected just 3 months ago. Other negative drivers were $11 million in write-downs of certain accounts receivable deemed to be unrecoverable, and $14 million from wage increases, general inflation, and other items. The write-down of receivables is recorded as a credit loss, and SGA&E expense was largely related to the bankruptcy proceedings of a divested JV partner in China. On the positive side, lean initiatives in manufacturing and purchasing drove a combined $8 million in cost savings for the quarter and run rate SGA&E expense was $4 million lower. Moving to Slide 10. Cash used in operations during the 3 months ended September 30, 2021, was an outflow of approximately $51 million, driven by the cash net loss incurred and increases in working capital, namely inventories, resulting from volatile customer production schedules. Combined with CapEx of approximately $20 million, we had a total third quarter free cash outflow of approximately $71 million. Despite the outflow, we ended the third quarter with a solid cash balance of $253 million. In addition, availability on our revolving credit facility, which still remains undrawn, was $127 million, resulting in total liquidity of $380 million as of September 30, 2021. With our cash conservation efforts and ongoing negotiations with our customers to recover incremental costs from commodity inflation and volatile production schedules, we expect to sustain a level of liquidity that will support ongoing operations and the execution of planned strategic initiatives. Regarding capital allocation priorities, 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. With a disciplined focus, we anticipate CapEx of approximately $100 million for the full year 2021, and within the range of 4% to 5% of sales on average over time, with nearly all of that dedicated to new program launches. As we look ahead, another priority will be to reduce the interest burden on the company by addressing the senior secured notes that we issued in 2020. 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 fluctuations. Turning to Slide 11. We have updated our full year guidance to reflect our year-to-date results, rising commodity and other cost pressures, and lower expectations for fourth quarter light vehicle production volumes, as compared to our outlook heading into the third quarter. We now see sales for the year in the range of $2.30 billion to $2.34 billion, and adjusted EBITDA loss in the range of $25 million to $10 million. Our outlook for cash restructuring remains unchanged as we expect to continue our planned fixed cost reduction initiatives throughout the fourth quarter, and cash taxes should be approximately $10 million for the full year.
Jeff Edwards, CEO
Okay. Thanks, Jon. And to wrap up our discussion this morning, I’d like to provide an update and some additional detail on our 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 13. Innovation and diversification remain key parts of our long-term strategy, and we’re making good progress in both areas. Moving to the category of good news this morning. We’re very pleased to announce that subsequent to the end of the third quarter, we finalized our first commercial agreement with a global footwear manufacturer. The agreement grants the customer license to use Fortrex technology in the manufacture of their footwear products. Cooper-Standard will receive licensing fees and ongoing volume-based royalties with an established minimum value. The agreement is for a 10-year term and is non-exclusive. In accordance with the terms of the agreement, we can’t disclose the identity of the footwear manufacturer or the specific financial terms. I will say, though, that the minimum fees and royalties will be sufficient to offset all of the investments we’ve made in our Applied Material Science business to date. Our discussions in technology development work with other footwear manufacturers is continuing, and we hope that this first agreement will be a catalyst to future opportunities in the footwear industry. Beyond footwear, we’re exploring a number of exciting opportunities to leverage the performance and sustainability aspects of Fortrex technology, including reducing rolling resistance of tires. We’re in the early stages, but the initial development work shows good potential. We continue to believe that superior physical performance characteristics and the lower carbon footprint of the Fortrex chemistry platform 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. We remain optimistic about opportunities to grow in diverse markets over the long term, as some of these development projects are completed. Turning to Slide 14. The momentum of the electric vehicle market is continuing. IHS estimates that battery electric vehicle production will increase at an average rate of 39% over the next 4 years, reaching approximately 18% of the total market by 2025. We see this market transition as a clear opportunity, and we’re leveraging our innovation, reputation for world-class customer service, and engineering expertise to win significant business in this hyper-growth segment. In the third quarter, we were awarded $30 million in annualized net new business on electric vehicle platforms. For the first 9 months, new EV business awards totaled $88 million. Key innovations driving our success in this market include our PlastiCool family of products, which offers highly engineered thermoplastic tubing solutions for glycol applications over a wide range of temperatures, up to 150 degrees centigrade. PlastiCool also offers reduced emissions and carbon footprint, improved recyclability and reduced weight compared to more traditional products, making it a highly desirable option for the EV market. This type of innovation is enabling us to grow our EV business faster than the overall market. Based on existing book business and anticipated future awards, we expect to grow our sales on EV platforms at an average rate of approximately 50% annually over the next 4 years compared to the expected market growth of 39%. As reflected in our quarterly results and outlook, as Jon described, we and other automotive suppliers continue to face significant cost headwinds due to ongoing erratic production schedules, lower overall production volumes, supply chain delays and disruptions, and persistent widespread inflation. Virtually everything we buy to support our operations has increased in price over the past 9 months. We are taking further aggressive actions to offset these headwinds, including commercial, supply chain, and internal cost reduction initiatives. With our customers, we’re taking a multifaceted approach that includes negotiating price increases, reduced or delayed price concessions, and expanded commodity indexing programs. We’re targeting a recovery of more than $100 million overall. We’ve made good progress in our negotiations to date, but have more work ahead to achieve the target. We believe our status as a preferred supplier and technology partner puts us in a solid position to have these difficult discussions. We are also working with suppliers to implement indexed-based contracts, extended payment terms, and we are pushing back against unjustified price increases and surcharges. We’re doing everything we can to ensure consistency of supply while trying to limit the impact of this daunting wave of inflation. Internally, we’re focused on conserving cash by limiting discretionary spending, carefully managing capital investments, and accelerating collections of tooling and other receivables. These actions enable us to continue funding new program launches and the future growth of our business while near-term sales remain suppressed by ongoing weak production levels. In terms of the outlook, you could say we’re planning for the worst with headwinds continuing but remaining optimistic that strong end-consumer demand will drive a rapid rebound in light vehicle production when widespread supply chain challenges begin to be resolved. Turning to Slide 16. To conclude our presentation this morning, I want to provide an update on our driving value initiative and our progress toward achieving sustainable double-digit return on invested capital. While we’ve made substantial improvements in many areas of our business, current market headwinds have more than offset those operational gains in recent quarters. On the graphic on Slide 16, we’ve highlighted 2 work streams that focus on managing the impacts of increasing commodity and material costs as just discussed. These work streams are clearly more critical and more challenging now than when we first laid out the driving value plans. Given the current challenging market conditions, it may take us a little longer than we had anticipated to reach these areas—these targets, but we are making progress. And I assure you that we will maintain and remain committed to achieving the long-term goals of double-digit return on invested capital and adjusted EBITDA margins. If we achieve our $100 million cost recovery target, we could still be largely on track. Next, I’d like to thank our global team of employees for their continued hard work and commitment. 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 remarks. We would now like to open the call to questions.
Operator, Operator
Our first question comes from Mike Ward with Benchmark.
Mike Ward, Analyst
Jeff, first off, regarding the sneaker agreement. Is this the company with which you started the technology development agreement back in 2019?
Jeff Edwards, CEO
That’s probably about right, Mike. I think it’s been a couple of years now that we’ve been working with this particular one.
Mike Ward, Analyst
What do you think the timing is for when you would see revenues appear in your financial statements?
Jeff Edwards, CEO
Yes, without disclosing product plans that they have, Mike, it’s difficult to get into that conversation. But probably in the neighborhood of 12 to 18 months from now is the production outlook.
Mike Ward, Analyst
And the nature of the agreement with it is 100% margin, right? It’s just straight cash. There’s no cost to it?
Jeff Edwards, CEO
Yes. We’ll get into more of those details in the fourth quarter, but that’s directionally correct.
Mike Ward, Analyst
And on the material cost front. Now, what were the lessons you’ve learned? Just a couple of years ago, you went through, where you took a hit from some of the commodity inflation with some of the vehicle manufacturers. And I think you were largely successful getting some of that back in your commercial negotiations. Is it easier this time? Or are there any lessons learned? Or how does that work through?
Jeff Edwards, CEO
Yes. I think, given the sophisticated audience we have this morning in the automotive industry, I would tell you, it’s no different than what you’ve experienced in the past. For certain customers where we don’t have business that’s ready to be sourced to us over the course of the next several months, they tend to have conversations probably in a way that you and I would hope for. For customers that we have new business coming at us over the next several months, those conversations aren’t quite as joyful. But somewhere in between, we’ll work it out. And I would anticipate that over the next month or two, for the most part anyway, we’ll know exactly where we’ll end up. So by the end of the year, I think we’ll give you some real, concrete direction in those regards. But it’s a tough time we’re in. Obviously, our customers are, too, and we’re all trying to work through it together.
Mike Ward, Analyst
Now with new contracts that come on, are they going to be more the traditional supplier pass-through type agreements you’re kind of stuck with these legacy type agreements?
Jeff Edwards, CEO
For new programs, we are able to set prices based on the current commodity rates, and indexing is part of our approach. The issue lies in the past agreements; we are working to negotiate the best terms possible. If the other party agrees to include indexing, we may find ourselves with advantageous or less favorable deals, and we need to handle each situation individually by customer.
Mike Ward, Analyst
Now Jon, you mentioned that these senior notes, the no-call provision expires, I think it’s mid-’22, correct?
Jon Banas, CFO
Yes, Mike, June 1 is the first opportunity for the non-call date. Yes.
Mike Ward, Analyst
Do you need to call all the notes, or can you call some of them? Is there a minimum cash balance you think is necessary, whether in cash or credit facilities, to move forward? Just the cash on the balance sheet…
Jon Banas, CFO
Yes, Mike, I think I got the gist of that question. You broke up a little bit at the end. But let me start with the minimum cash. What I’ve said in the past, and what we’re still kind of thinking is a good level, is that we’re comfortable in something in the range of $150 million to $180 million of cash on hand. And then we still have access to our revolving credit facility, which we have not tapped into at this point. So we think that’s the minimum cash required to run the business going forward. As far as the non-call date, you can do partial, but our intent is to look at that 13% really expensive debt and see what we can do to take out of all of it. So we’ll keep you up-to-date on developments here over the next 6 months, as we look at the opportunities within the capital markets.
Operator, Operator
Our next question comes from Brian DiRubbio with Baird.
Brian DiRubbio, Analyst
I guess my first question is, can you help us get a sense of the timing of the $100 million plus of raw material recoveries that you’re in discussions with your customers?
Jeff Edwards, CEO
Yes. This is Jeff. We have requested recoveries starting October 1. We can make whatever requests we choose, and we are currently in negotiations. In some cases, we have reached agreements, while in others, discussions are still ongoing. I believe that by the end of the calendar year, specifically by the end of our fourth quarter, we will have a clear understanding of the outcomes of these negotiations. Regarding your question about whether we have included any of this in our guidance for the remainder of the year, the answer is no, we have not.
Brian DiRubbio, Analyst
And how should we be thinking about these recoveries? Is it sort of just a flat amount? Or are you changing some of the structure of the contracts where you’re now more indexed-based rather than fixed price base?
Jeff Edwards, CEO
It’s a combination. Each customer is different. In some cases, we already have indexing with certain customers on certain commodities. It’s our objective going forward that for the new business that we’re quoting, and the new business that will come into our company in the future years, indexing is what we want to do. For a lot of the business that we have in the rears, it doesn’t include that. Historically, we have said, 40% to 60% of raw material inflation is what we have recovered. That was prior to this hyperinflation moment that we’re in right now. But to give you some idea of the historical recovery rate.
Brian DiRubbio, Analyst
Considering the growth in electric vehicles, the figures you mentioned sound promising. However, I am curious about your current exposure to fuel lines. It appears that you've combined that with brakes in your results. Could some of the gains in electric vehicles potentially be counterbalanced by a decline in fuel lines?
Jeff Edwards, CEO
Yes, to a large extent, Brian. We’ve given some color on this in past quarters. But basically, the EV fluid systems can be anywhere from 30% to 50% more content than the ICE engine fluids. So for us, we definitely want more EVs, because the content—even if you take the fuel line out, our content is up significantly. And of course, that varies as you go from the passenger car market up to the small SUVs, mid SUVs, large SUVs. The bigger the vehicle, the much larger the content for us. And so we actually are going to enjoy the transition from ICE to hybrid to battery electric vehicle in the segment. Hybrid actually is doubling because, obviously, you’ve got two powertrains that you’re managing from a fluid point of view. But the good news when you move into EVs is that number goes up substantially as well. Obviously, we’re working with customers to improve the efficiency of those systems. So as we go forward, we’ll have a lot more insight for you on the specifics of the content per vehicle on some of these, as we get closer to launch.
Brian DiRubbio, Analyst
Just two more. You didn’t provide any update on free cash flow. How much cash, if any, do you expect to burn in the fourth quarter?
Jon Banas, CFO
Yes, Brian, I’ll take that one. This is Jon. We do expect a modest free cash outflow in Q4 due to the nature of production levels. With lower losses anticipated in Q4 because of higher volumes, that should help somewhat. However, we have a significant interest cash payment of $30 million due around December 1, which will impact our cash flow. We expect some favorable working capital benefits to help counterbalance that. In terms of capital expenditures, those are projected to be around $25 million for the year. As Jeff mentioned earlier, we are reviewing all discretionary spending and managing our capital expenditures. We are also negotiating with customers regarding tooling and outstanding receivables to secure accelerated payment terms. Similarly, we are looking to extend our days payable outstanding as we renegotiate some contracts. Overall, in the short term for Q4, we should see a modest free cash outflow.
Brian DiRubbio, Analyst
As we consider next year and the refinancing of the 13% notes, we will likely need to address the Term Loan B at the same time. What is your perspective on the timing? You could potentially save on the coupon for the first lien notes, but the Term Loan B is currently priced close to $100, making it uncertain whether you can reprice that loan. Are you planning to tackle both matters simultaneously? I would appreciate hearing your thought process on this.
Jon Banas, CFO
That's a good question. The Term Loan B is due in 2023, and we want to avoid having it become current on our balance sheet. It's important for us to assess our total capital structure over the next six months and determine the best options moving forward. As I mentioned earlier, this is always subject to market conditions. We'll monitor the production environment at the beginning of the year. If Q1 turns out to be as optimistic as some analysts and our customers believe, we should be in a favorable position regarding our overall capital structure. For now, we are considering all available alternatives.
Operator, Operator
Our next question comes from Joseph Farricielli with Cantor Fitzgerald.
Joseph Farricielli, Analyst
First question, a bit of housekeeping. Slide 10 shows free cash flow of negative $71.1 million, but on a quarter-over-quarter basis, cash was down by $82.2 million. So what accounts for the $11 million difference?
Jon Banas, CFO
Yes, Joseph, when we release our full 10-Q later today, you'll see that we have some local borrowing lines globally, and we recently paid down some bank debts in China. This accounts for most of that difference.
Joseph Farricielli, Analyst
And then, thinking of cash and what you said for minimum liquidity, what kind of working capital drain, or investment rather, are we going to see when things start to turn back on? And have you thought about where your liquidity position will be at that time?
Jon Banas, CFO
Yes, we are monitoring production levels as we move forward. The good news regarding working capital is that we have maintained higher inventory levels due to volatile production schedules. Therefore, when production levels do increase, we won’t experience a significant outflow for inventory buildup that is typically seen in a seasonal production environment. We are still working to reduce our inventory by the end of the year to more optimal levels. In September, we ended with over $190 million on the balance sheet, and we plan to reduce that number. As I mentioned earlier, we are also focusing on tooling and other receivables to expedite collections rather than let them extend out. When industry production levels increase, there is usually a working capital usage; however, in this instance, it is expected to be more moderate than usual.
Joseph Farricielli, Analyst
And then last question. Looking at auto production, just top line isn’t always a good guide, and looking at what some of your customers have idled. Could you give a breakout per platform generally, sedans, SUVs, trucks, what your exposure is?
Jeff Edwards, CEO
Yes, Joseph. I think we’ve been through this a few times, but clearly, trucks and SUVs and crossovers represent 80-plus percent of our revenue. So it’s a very important number. And here in North America, it’s virtually the whole business. I mean, we’ve just have a lot of content in trucks and SUVs and crossovers. So as those vehicles pick back up here in the North American market, so goes Cooper Standard.
Operator, Operator
Our next question comes from Derrick Wenger with Concise Capital.
Jeff Edwards, CEO
Vic, please move Derrick into the question queue or take him out of the queue and include him in the current discussion.
Operator, Operator
Let’s move to our next question, which will come from Bob Amenta with JP Morgan.
Bob Amenta, Analyst
A couple of clarifications. The $11 million JV, is that a non-cash, even though you’re putting it in EBITDA?
Jon Banas, CFO
It's non-cash for now, Bob. As we understand it, the bankruptcy process in China could take a couple of years before that issue is resolved. So for now, we've taken a conservative approach to set aside a reserve for that $11 million.
Bob Amenta, Analyst
But it’s money that you thought you would collect, and you’re not going to collect it? Or is it money you have to pay out?
Jon Banas, CFO
It’s the money we expected to collect, which is now raising questions about whether we will achieve that recovery.
Bob Amenta, Analyst
On the bridge, it seems like there is a significant volume mix impact that could be around a 40% decline. There's mention of $165 million in lost sales and $65 million lost to EBITDA. We will need to examine the effects of general inflation and material economics for the quarter to date. Is there a typical historical recovery percentage we can refer to? I understand we might be in somewhat unusual times given the extent of these increases, but do you generally recover 50% or 75% over time? Clearly, it’s unlikely that you’ll recover all of it. How does the recovery process work with regards to pass-throughs and other mechanisms? What percentage can we generally expect to recover?
Jon Banas, CFO
Yes, Bob, let me quickly address your observation regarding volume and mix. When we share those numbers, keep in mind that they include customer pricing. So, it's not just the direct impact of changes in production volume. Jeff mentioned that historically, we have recovered between 40% and 60% on the commodity side concerning materials. Typically, during normal inflationary periods, we would offset wage or rent increases with our cost-saving initiatives. However, the significant rises we are currently experiencing in all these areas are far exceeding our short-term ability to manage costs through reductions. The key figure you’re looking for is the 40% to 60% range. As we’ve noted, we are still discussing with our customers how to address this.
Bob Amenta, Analyst
I have a couple of quick questions. Regarding the minimum liquidity, which you referred to as minimum cash, I wanted to clarify the $150 million to $175 million minimum amount. Are you comparing that to the cash you have along with your unused availability, or just to your current cash? Do you consider those two aspects, cash and revolver availability, to be essentially the same?
Jon Banas, CFO
Yes. Call that overall liquidity.
Bob Amenta, Analyst
In the fourth quarter, I understand you mentioned the interest payment and some other factors. Your guidance suggests a range of zero to slightly negative EBITDA, and considering working capital, it seems to imply a more significant outflow, around $50 million. Additionally, for next year, we don’t have all your guidance yet on CapEx, but combined with interest, it seems like it could be a couple hundred million. So, it appears you will be burning cash in the fourth quarter and next year. I know you are taking steps to reduce costs, but it seems like you could be nearing that figure. Currently, you are at $380 million, and it could potentially drop to the low 200s. I wonder if you have any insights on how close you might get to that number. I understand you won't issue equity, but I’m curious about other options you might have available. While asset sales might not be the best strategy right now, what other possibilities exist besides merely cutting costs here and there?
Jon Banas, CFO
Yes. Clearly, asset sales could come into play. But you’re right. You don’t sell in the bottom of a market. So you wouldn’t get any meaningful proceeds from that. But there are other legacy assets that we’re taking a look at. There are other alternatives and options that we’re looking at. We’ve already talked about our cost-cutting and reduction initiatives around the world that should start bearing some cash savings here as we go forward. But, clearly, that’s coupled in the short term with some restructuring cash outflow that’s already in our guidance, right? So, clearly, it’s top of mind for us, and that’s why we’re looking at every single area of not only spend, but other opportunities that we could have on there, to manage through that and stay above that minimum liquidity level, as we’ve been talking about. So I’m not going to get into 2022 at this point in time. So it’s too early for us in our planning process to give you any color there, but just say it’s top on mind for us.
Bob Amenta, Analyst
Lastly, regarding Europe, the past couple of years have shown negative EBITDA. If I look further back, the margins were around 3% to 4%, while the U.S. had margins of about 15% to 16%. Can you explain why you remain in Europe? Clearly, there are reasons you can't exit immediately. Generally, how does Europe compare to the U.S. or North America? It seems like the performance has never been strong. Positive EBITDA of $30 million is certainly better than negative $20 million, but what are the challenges in that region? Are you simply not large enough there, or what are the underlying issues?
Jeff Edwards, CEO
Yes, Bob, this is Jeff. For Cooper-Standard, the size in Europe doesn't really matter. The main issue for us is related to the fluid side of our business. On the sealing side, we perform quite well, and the outlook for sealing in Europe is positive. However, fluid has always been a challenge for us, and we are working to address that. Much of our discussions this year regarding restructuring have focused on this. While we have implemented some cost savings in Europe, there is much more to accomplish. Additionally, we recently sold our rubber hose business in Europe, which has left us with stranded costs that we need to eliminate as we approach 2022, and we are committed to this goal. Thus, while we may be smaller, we will be more profitable in Europe moving forward. We will provide more details when we discuss our guidance for 2022 early in the calendar year.
Operator, Operator
Our next question comes from Zohair Azmi with Beach Point Capital.
Unidentified Analyst, Analyst
I was wondering if you would be able to provide an update on your plan for the Latin America business?
Jeff Edwards, CEO
Yes. This is Jeff. I think the conversation that we just had in terms of assets and what we plan to do with certain parts of our business that continues to fall short. Our Brazil business has been part of the conversation here, and we said that by the end of this year, we would get to that conclusion. I didn’t necessarily think that we were going to have the challenges from a supply chain and hyperinflation that we’re dealing with right now. So it might not be the best of time, as Jon just said, to make those decisions. But I will say this, our teams in Brazil have done a terrific job of taking costs out and managing the price as well as inflation in that market. So I think, at least, as it relates to self-help that we have driven ourselves, they’ve done a very good job. Whether that’s going to be enough to push us into a category of fair return on investment, we will probably need a little bit more time than the end of this year, given all of the variables that I just spoke of. But that is one that we still owe a decision on.
Unidentified Analyst, Analyst
And if we could just look at the results between second quarter and third quarter, revenue was down around $6.5 million, while EBITDA was down around $19 million sequentially. And so would you mind providing a quick bridge on those results?
Jon Banas, CFO
Sure, Zohair, it's Jon here. I can explain. The main factor affecting us is the increase in commodity inflation we are experiencing. With revenue decreasing by about $9 million globally, as you mentioned, this results in only a few million dollars of EBITDA pull-through at the current business run rate based on volume and mix. When we factor in commodity inflation and other inflationary pressures, the total impact is nearly $12 million or more compared to the second quarter. Additionally, we also have the significant factor of the $11 million bad debt reserve. These major variances are leading to the considerable decline we are observing. Now, let me provide some details by region. In North America, despite the market being down nearly 6% and production down 5.7%, Cooper-Standard's volumes increased by 9.6%. This strong performance can be attributed to our focus on trucks and SUVs, which our customers prioritize, allowing us to outperform the overall North American market. In Europe and Asia, our volumes have aligned with the market declines. Conversely, in Brazil, we saw a positive performance with volumes up about 3% while the market decreased by 5%. I hope this clarifies the situation, but the key issues revolve around commodity inflation, other inflationary pressures, and net bad debt expense.
Operator, Operator
Our next question comes from Josh Taykowski with Credit Suisse.
Josh Taykowski, Analyst
If you look at the 8% to 9% EBITDA margins you were doing in the second half of last year, even versus the negative 6% this quarter, how do you bucket that 15% margin swing? I know material inflation is a big piece of that. But if you had to split that 15% in between volumes and production volatility versus material costs versus anything else, what would be the estimate?
Jon Banas, CFO
Hey, Josh, this is Jon. Yes, I’d say, you’re on the right track as far as the commodity inputs being the biggest driver in the variability and production schedules. But also keep in mind, last year, Q3 and Q4, we were benefiting from various governmental programs around the world due to the COVID pandemic. So that had favorable good news. And in the back half of last year, as the governments were offering various types of support, that’s essentially gone away, and you don’t see that coming through again. And if memory serves, Q4 of last year, that was about 200 basis points of favorability in our Q4 results. So the overall environment, the stop-starts, and the inefficiencies that has caused us, coupled with commodity inflations, are your very biggest drivers.
Josh Taykowski, Analyst
I would like to clarify the last question. The significant EBITDA change overseas was in Asia, as you mentioned earlier. We experienced a 5% sequential increase in revenue, but EBITDA fell to negative 14% quarter-over-quarter. This decline is mainly attributed to the $11 million bad debt charge.
Jon Banas, CFO
Yes, exactly. It’s $11 million bad debt plus some material economics.
Josh Taykowski, Analyst
Looking at the guidance, the calculations suggest a nearly $60 million cash burn before considering working capital. You've mentioned that the cash outflow for the fourth quarter should be modest. Perhaps there's some inventory involved, but you're also addressing some tooling issues. Can you provide insight on how we should view working capital in relation to that $60 million burn? Are we looking at a range of $30 million to $40 million? Is it slightly below that or slightly above? How should we approach this?
Jon Banas, CFO
Yes. I’ve shared all the information I can at this moment, Josh, considering all the moving parts. I’ll provide the qualitative details on how it all fits together. However, due to the various initiatives we have underway globally, there are many factors to consider.
Josh Taykowski, Analyst
Next question. I wanted to discuss in more detail the goal for these commercial settlements, specifically the $100 million you have out there now. How would you compare that to the actual challenges you've faced year-to-date, in light of the historical success rate of 40% to 60%? Is that about in line?
Jeff Edwards, CEO
Yes. This is Jeff. I think the target that we put out there, and the letters that we sent out to our customers, reflected the reality of our business. So our commercial teams are in negotiation as we speak, and the targets are clear for our customers, and the targets are clear for our folks that are negotiating to those targets.
Josh Taykowski, Analyst
And regarding the $100 million that was mentioned earlier, have you achieved all that you aimed for? If not the full $100 million, how much of that goal is retroactive, and how much will you recover later when this period of inflation begins to ease?
Jon Banas, CFO
Yes. Again, the October 1 request that went out with the $100 million of help required was based on the reality of the commodity inflation and as it was occurring within our company. So, again, we didn’t just make up the October 1 date. And so each customer is talking to us about how they can help us recover those costs. There are a bunch of moving parts and a bunch of different levers that can be pulled. I talked about those in my prepared remarks. And so each one of them are different. I think that, as I mentioned earlier, by the end of the calendar year, we will have a very good idea of the result of those negotiations. So we’ll just stick to that, and I don’t want to provide any more detail, any more color. I don’t use earnings calls to give my customers’ performance review. So we’ve probably given enough of that today.
Josh Taykowski, Analyst
I mean, does the $100 million include anything else besides material costs? I know there’s been other suppliers out there talking about trying to recoup whatever estimate they have for costs incurred for the volatility in production schedules or other inflationary labor, things like that? Or is it just for materials?
Jon Banas, CFO
All in, everything you just described.
Operator, Operator
Our next question comes from Patrick Sheffield with Beach Point Capital.
Patrick Sheffield, Analyst
Not to belabor the point. One last try here on the $100 million. You guys gave different categories of where you expect to get those savings from. Is there any like directional guidance you can give as far as how much of that is from price increases versus other initiatives? Is it mostly price increases that would drive the $100 million? And then I just wanted to confirm the $100 million is like an annual cost number, like an EBITDA improvement, theoretically. Is that right?
Jeff Edwards, CEO
Yes, there will be price increases. We are also very focused on cash. As I mentioned in my prepared remarks, there are discussions about tooling payments and other associated costs that we typically cover, which we are now asking customers to take on. Each customer situation is unique, and their preferences for addressing cost recovery vary. The effectiveness of these negotiations is tied to our current business, as well as our desire to retain existing clients and acquire new ones. Depending on how much new business we have coming in, the negotiations can become easier or more challenging. We are aware of who our largest customers are, and there are a few key players that need to contribute fairly to these costs. We are optimistic about the ongoing discussions and appreciate our customers' efforts to support us, along with others who are currently in our lobby.
Patrick Sheffield, Analyst
And quickly on restructuring for ‘21. We see the guide from 45% to 50% or 60%. Any preliminary thoughts if that number is going to be higher or lower in ‘22?
Jon Banas, CFO
Yes. On our last call, I mentioned that we expect it to be significantly lower than the current spend rate, and nothing would change how we’re viewing that right now.
Patrick Sheffield, Analyst
Are there any other bad debt write-downs, or is this a one-time occurrence? Is there anything similar happening in the region, or has everything been accounted for?
Jon Banas, CFO
This was with just one particular former joint venture. So we are, obviously, still in the region and managing through the challenging industry environment there. So I can’t say whether anything else is coming our way, but not that we know at this time.
Operator, Operator
Our next question comes from Chris Wang with Barclays.
Chris Wang, Analyst
Most of my question is answered. Just wondering if that $100 million recovery that you’re requesting from October to year-end, is that included in any shape or form in your guidance?
Jeff Edwards, CEO
Chris, this is Jeff. As I said before, no, it’s not.
Chris Wang, Analyst
Can you provide an overview of the overall raw materials as a percentage of COGS? Additionally, in terms of raw materials, considering the various flavors and derivatives you have, can you explain which categories are seeing the most movement?
Jon Banas, CFO
Yes, this is Jon. You can categorize the main inputs into three main areas. Rubber is clearly our largest input cost, followed by metals and then plastics. So far this year, we have incurred over $34 million, and we anticipate facing around $60 million for the full year. Approximately 65% of that inflation is attributed to rubber, another 25% to metals, particularly steel and aluminum, and about 10% comes from plastics and resins. This explains the overall inflationary impact. Regarding our direct materials, you'll find in our 10-Q that direct materials account for about 47% of sales in the third quarter. While we don’t provide a breakdown of direct raw materials, this percentage reflects the total materials we purchase.
Chris Wang, Analyst
And I mean, there is a bit of a lift in terms of sales sequentially. Can you talk about the visibility to that and probably broken down by continents?
Jon Banas, CFO
Yes. When you look at the continent-by-continent, the IHS forecast has North America up about 7% compared to Q3; and then Europe is supposed to be up about 31%, Q3 to Q4; and the overall Asian market up about another 12.5% or so. So if you kind of factor that in with our weighting of revenue, that’s how you get to our overall sales increase. Clearly, there are two schools here. One is the IHS forecast. And then we also have the short term customer releases that we manage too. And so we’re triangulating both of those data points into the guidance range that you see.
Chris Wang, Analyst
And I noted you didn’t really get a lot of working capital back, even with, obviously, sales a little bit lower in the quarter. What’s sort of your expectation now in 4Q and going to ‘22, hopefully, into that recovery phase, when your sales is going to be higher?
Jon Banas, CFO
Yes. I answered this a few minutes ago, right? The biggest reason why we didn’t see the benefit of lower revenue on the working capital front in Q3 was because of the higher inventory levels. And as those come down, and we don’t need to buy as much in a rising sales environment, we should get some of that working capital back.
Operator, Operator
Our next question comes from Jared Weil with Deutsche Bank.
Jared Weil, Analyst
I believe most of the questions have been addressed, but regarding the path to improving margins in the areas you've highlighted, we were caught off guard by the material inflation this year. If you consider the potential improvement, possibly part of the $100 million allocated to that category, if costs stabilize or decrease next year, you could regain ground in your customer negotiations, which would naturally benefit margins. Additionally, if we exclude the impact of material cost inflation, how do you assess your progress on the other initiatives aimed at returning to your targeted margins? I recognize that material cost inflation has hindered your progress, but how do you evaluate your advancements in addressing the other areas?
Jeff Edwards, CEO
Yes. Jared this is Jeff. I said in my remarks, if we get that, then we’re largely back on our timing. And what I’ve said in a number of these conversations is that, 2023 was the first full year we expected to be at double-digit return on invested capital and double-digit EBITDA. And we said as we exited ‘22, we would be able to demonstrate that. So that was pre all of the conversation we were just having regarding inflation. Obviously, that didn’t include significant supply chain shortages or shutting down on the most profitable vehicles and causing start and stop from a production standpoint that traps significant inventory costs and labor and all of that. We’ve talked about all that this morning. If we talk about the glass is half full here, then what we have is the lowest inventory level in the history of the automotive industry. I think we have the most new vehicles coming on the market. We have EVs that are going to create incredible brand opportunities and pent-up demand. I believe Cooper-Standard has never been in a better position from a cost point of view internally, given what we can control. We still have work to do in Europe, and we still have work to do in China to get those regions profitable, and we’ll take next year to continue to work our way through that. That’s been the plan. North America, we need to get these plants up and running. And I’m sure our customers feel the exact same way. And as soon as that happens, the demand is there, and I think you’re going to see a tremendous result. And clearly, the raw material inflation is real. The costs that we’re absorbing as a result of the supply chain challenges are real, and that’s why we’ve asked for more than $100 million of price increases. And so, that’s about as simple as I can say it. I remain extremely optimistic about this industry and about the future. I’ve never been more confident in our company, both in terms of what we have done to this point, to set it up for long-term success and sustainability. I think we have the best talent in the industry, and I think that they want to stay here. And the culture is a big deal, and the relationships we have with our customer have never been better, I can promise you that. And we’re going to do everything we can to continue to deliver for them, as we negotiate some of the toughest contracts that we’ve ever had to negotiate. And I’m confident that we’ll get it done, and we aren’t going to whine about it. We’re just going to go to work and continue to focus on the things that we can control, and I know our customers will help us the best they can. That’s sort of the synopsis.
Operator, Operator
It appears that there are no more questions. I would now like to turn the call back over to Roger Hendriksen.
Roger Hendriksen, Director of Investor Relations
Thanks, everybody. We really appreciate your engagement and insightful questions this morning, and we certainly look forward to future conversations. This will conclude our call. Thank you.