Earnings Call Transcript - CPS Q2 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Second Quarter 2025 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. Please go ahead, sir.

Roger S. Hendriksen, Director of Investor Relations

Thanks, Sylvie, and good morning, everyone. Thank you for spending some time with us this morning. The members of our leadership team who will be speaking with you on the call this morning are Jeff Edwards, Chairman and Chief Executive Officer; and 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. The presentation also contains non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to their more directly comparable GAAP measures are included in the appendix to the presentation. So with those formalities out of the way, I'll now turn the call over to Jeff Edwards.

Jeffrey S. Edwards, CEO

Thanks, Roger, and good morning, everyone. And as always, we appreciate the opportunity to review our second quarter results and provide an update on our business and the outlook going forward. To begin on Slide 5, I'd like to highlight some second quarter data points that we believe are reflective of our continuing outstanding operational performance and our ongoing commitment to our core company values. In terms of operations and customer service, I'm extremely proud to report that we ended the second quarter with a record 100% of our total 317 customer scorecards for quality and service being green. This is such an amazing accomplishment, frankly, and it speaks volumes to the dedication and commitment of our manufacturing teams around the world. It's also an indication of how effective the new digital tools we've deployed in our plants can be at identifying potential challenges and, more importantly, enabling corrective actions before they become bigger issues. So a huge shout out to our manufacturing leadership team, our plant managers, and our plant employees for this remarkable result. Thank you all very much. For new program launches, we continue our outstanding service level with 97% customer scorecards being green despite increased launch activity, as we've discussed. Frankly, these are amazing operational statistics that reflect our total company commitment to providing the best possible value for our customers as well as our internal commitment to excellence in all that we do. Also, in our plant operations, safety performance continues to be excellent. During the second quarter, we had a total incident rate of 0.26, reportable incidents per 200,000 hours worked. That's well below the world-class benchmark of 0.47. Even more important, 44 of our plants have maintained a perfect safety record with a total incident rate of 0 for the first half of the year. Just to frame that, that's 75% of all of our production facilities achieving a perfect safety score and demonstrating that our ultimate goal of zero safety incidents is certainly achievable. We are proud of the entire global team for their focus and achievement in the most important operating measure for our company. In terms of cost optimization, we had another solid quarter with our manufacturing and purchasing teams delivering $25 million of savings through lean initiatives and other cost-saving programs. In addition, the restructuring and headcount optimization initiative that we implemented beginning in the second quarter of last year has been driving cost savings as we planned. In the second quarter, that initiative actually yielded another $4 million in year-over-year savings. Finally, we are continuing to leverage world-class service, technical capabilities, and our award-winning innovations to win new business. During the second quarter of 2025, we were awarded $77 million in net new business awards. We're proud to be the supplier that our customers increasingly turn to for quality components, consistency of delivery, and collaboration on the design and development of new technologies and critical systems for some of their most important vehicle platforms. Turning to Slide 6, with our product quality and customer service levels at all-time highs, our relationships with our customers, frankly, have never been better. As a result, we continue to amass an impressive number of important awards from our customers, the latest being the Ford Supplier of the Year. In addition, we are proud to be selected to collaborate with the Renault Group on their Emblème project. That's an eco-conscious family demo car that aims to reduce CO2 emissions over its life cycle. The groundbreaking project integrates two of Cooper-Standard's low-carbon, high-performance vehicle innovations, the FlexiCore thermoplastic body seal and our FlushSeal sealing system. But more important than hardware in the trophy case, is the way these quality relationships enable us to continue to negotiate and navigate today's business environment. This has been clearly evident in our recent discussions on tariff impacts, which are now largely complete with the most important commercial negotiations now behind us for the year. Importantly, our focus in the second half can be 100% on sustaining our operational excellence and executing our plans to achieve our long-term goals and objectives. I look forward to speaking more about this in the next few minutes. But for now, I'll turn the call over to Jon to review the financial details of the quarter.

Jonathan P. Banas, CFO

Thanks, Jeff, and good morning, everyone. In the next few slides, I'll provide some details on our financial results for the quarter and discuss our cash flows, liquidity, and aspects of our capital structure. On Slide 8, we show a summary of our results for the second quarter and first six months of 2025 with comparisons to the same period last year. Second quarter 2025 sales were $706 million, a decrease of 0.3% compared to the second quarter of 2024. The slight decrease was driven primarily by unfavorable volume and mix, including net customer price adjustments, partially offset by favorable foreign exchange. Adjusted EBITDA in the quarter was $62.8 million, an increase of more than 23% when compared to the $50.9 million we reported in the second quarter of last year. Importantly, we were able to drive further margin expansion of 170 basis points versus the same period a year ago despite lower sales and production volumes. On a U.S. GAAP basis, we reported a small net loss of $1.4 million in the second quarter compared to a net loss of $76.2 million in the second quarter of 2024. Adjusting for restructuring and other items from both periods as well as the related tax impacts, adjusted net income for the second quarter of 2025 was positive $1 million or $0.06 per diluted share compared to adjusted net loss of $11.3 million or $0.64 per diluted share in the second quarter of 2024. Our capital expenditures in the second quarter of 2025 totaled $7.8 million or 1.1% of sales, which was lower than the second quarter of last year, owing largely to the timing of new launched projects. We continue to exercise discipline around capital investments in order to maximize our returns on invested capital. For the first six months of 2025, our sales dipped on unfavorable foreign exchange and slightly lower volume, mix, and net price adjustments. But despite lower revenue, our gross profit margin increased by 200 basis points, and our adjusted EBITDA margin improved by 300 basis points compared to the same six-month period a year ago. We were also very pleased to achieve positive GAAP net income in the first half of the year, which was an amazing improvement of more than $6 per share versus last year. Moving to Slide 9, the charts on Slide 9 provide additional insights and quantification of the key factors impacting our results for the second quarter. For sales, unfavorable volume and mix, net of customer price adjustments reduced sales by approximately $7 million compared to the second quarter of 2024. This impact was partially offset by favorable foreign exchange of approximately $4 million. For adjusted EBITDA, lean initiatives in purchasing and manufacturing contributed $25 million in savings and cost reductions year-over-year. Savings from the implementation of restructuring initiatives added $4 million compared to the second quarter of 2024, and favorable foreign exchange was a tailwind of approximately $3 million in the quarter. Partially offsetting these improvements were $16 million of unfavorable volume and mix, including customer price adjustments and $6 million in increased costs from higher wages and general inflation. Moving to Slide 10, on Slide 10, we present the same type of year-over-year bridge analysis for the first half of the year. Sales declined by approximately $12 million or just less than 1%, driven primarily by unfavorable foreign exchange. Adjusted EBITDA in the first half increased by more than $41 million or more than 51% compared to the first half of 2024. The improvement was driven primarily by $45 million of manufacturing and purchasing efficiencies, $12 million of restructuring savings, and $5 million of favorable foreign exchange. These positive drivers were partially offset by $16 million of unfavorable volume and mix and approximately $13 million of higher wages and general inflation. We are pleased with our improving results in the first half of the year as our focus on controlling costs, delivering exceptional performance, and the launch of more profitable programs are having the positive impacts we had planned and expected despite production volumes being lower than planned expectations. Moving to Slide 11, looking at cash flow and liquidity, net cash used in operating activities was approximately $16 million in the second quarter of 2025 compared to $12 million in the second quarter of 2024. Capital spending, as mentioned earlier, was approximately $8 million in the second quarter, resulting in net free cash outflow of approximately $23 million for the quarter. This is consistent with the second quarter of last year despite cash interest paid being more than $14 million higher this year. We ended the second quarter with a cash balance of approximately $122 million. Combined with $151 million of availability on our ABL facility, which remained undrawn, we had solid total liquidity of approximately $273 million as of June 30, 2025, which we believe is sufficient to support the continuing execution of our business plans and profitable growth objectives. And importantly, following the solid results of the first half and considering our current outlook for production volumes in the remainder of the year, we believe we are on track to achieve positive free cash flow for the full year. Further, as we continue to focus on delevering through earnings growth, achieving the midpoint of our guidance range for full-year adjusted EBITDA, combined with our expectations for positive free cash flow, would result in a net leverage ratio below 4x at the end of this year. We are pleased that our improving results and solid future prospects are being recognized by our stakeholders, including credit rating agencies such as Moody's, who recently upgraded their outlook on Cooper-Standard from stable to positive. With respect to our capital structure, we are actively evaluating various options to strengthen our balance sheet and further improve our cash flows and are carefully monitoring conditions in the credit markets. We are optimistic that as we continue to deliver improving results, we will be able to refinance our first and third lien notes with more favorable terms and rates. With that, let me turn it back over to Jeff.

Jeffrey S. Edwards, CEO

Thank you, Jon, for the exciting update and great work. In the remaining part of our call, I want to revisit our high-level strategic priorities I discussed earlier, as well as share more details about our strategic plans for each operating segment and how we envision these strategies will develop over the next few years. I'll finish with an overview of our short-term outlook and updated guidance for 2025. Please turn to Slide 13. Our strategies and operational plans are centered on the four strategic priorities outlined on Slide 13. As a global team, we established this framework a couple of years back. By aligning our company around these common goals, we've driven substantial improvements across nearly all facets of our business. With enhanced operational performance and stability, we've started focusing more on long-term planning and the strategies that align with our objectives. In that spirit, we recently tasked our two product presidents to collaborate with their teams globally to devise long-term strategies for their businesses that will not only meet our outlined strategic goals but also elevate Cooper-Standard's value creation in the upcoming years. We presented these plans to our Board of Directors last month, and they expressed strong support, which is encouraging. While there's limited time to delve into specifics today, I will provide a brief overview of each plan to highlight that presentation to the Board, which is part of our routine business review and aligns with the timing of this call. Turning to Slide 14, the sealing system strategy focuses on maintaining operational excellence that has restored our financial strength and leveraging our global expertise in engineering, design, and manufacturing. Our sealing team is expected to achieve greater efficiencies in processes and asset allocation through digital tools, driven by our network and supported by artificial intelligence. We're rolling out our proprietary digital tools, C S Factory, in key global locations, with plans for wider deployment across all manufacturing facilities. This team also aims to accelerate the design and validation process for new products, catering to customers in developing markets with shorter product development cycles. Additionally, the sealing team will emphasize customer feedback and swiftly introduce innovative products and technologies that will add value for our clients and enhance both content per vehicle and market share. Moving to Slide 15, since 2023, the sealing business has secured over $300 million in new business awards, giving us a clear view of upcoming program launches with improved variable contribution margins during the planning period. We anticipate executing these plans successfully, alongside further cost optimizations, to deliver an average revenue growth of around 6% over the next five years for our sealing division, with substantial increases in EBITDA margins and return on capital reaching roughly 20% by 2030. Now, let’s examine the fluid handling systems strategic plan in detail on Slide 16. The fluid handling strategy seeks to maximize the organization's potential by expanding geographically with our key and rapidly growing customers, capitalizing on trends in hybrid vehicles to boost content per vehicle, and rolling out innovative products, including thermal management solutions and our award-winning eCoFlow family of products. The fluid handling team plans to maintain a relentless focus on cost optimization and top-tier manufacturing execution to enhance margins further. If you look at Slide 17, like the sealing segment, the fluid handling division has received significant program awards that are expected to drive growth and improved profitability as these programs launch. We project an average annual growth of about 8% for our fluid handling business over the next five years. As manufacturing execution and cost optimization continue to improve, we expect EBITDA margins for this segment to rise to around 16%, with return on invested capital nearing 30% within the five-year planning period. As profits and cash flow improve, self-funded growth could present additional opportunities too. While we are confident in our ability to execute our strategic plans and reach these targets, we're not issuing specific guidance for 2030 yet, as that may be premature. Nonetheless, we acknowledge the challenges faced by the industry related to global production volumes, but we feel more positioned now than ever in our company's history to plan effectively, launch new business, and deliver on our commitments. It is important to note that our planning does not currently factor in any increase in volumes, particularly in the North American market, where we used a maximum estimate of about 15.3 million units. Any volume increase beyond that would be a positive addition to our strategy. Industry volumes are poised to recover eventually. To wrap up our prepared remarks today, let's address the near term and our outlook for the remainder of 2025. There remains considerable uncertainty surrounding U.S. trade policy and potential tariffs that may influence the global automotive industry. While industry production forecasts for the second half of the year have shown slight improvement, they still fall short of earlier expectations before these trade and tariff concerns emerged. For Cooper-Standard, we successfully negotiated agreements with our customers to offset most direct tariff impacts. With these negotiations behind us, we can prioritize execution and operational excellence while remaining agile for any production volume changes. Turning to Slide 19, after a strong performance in the first half that exceeded our plans and given our ongoing operational success, we are confident in increasing our full-year guidance for adjusted EBITDA, which you can see on the table. The waterfall chart on the right outlines the factors affecting our outlook for 2025 compared to 2024 actuals. The most significant contributors to this outlook are improvements in manufacturing and purchasing, although production volume, including product mix, remains the most variable factor over the next five months. As always, we extend our gratitude to our customers and stakeholders for your ongoing trust and support as we work to enhance operational efficiency, boost profit growth, and create sustainable long-term value. This concludes our prepared remarks, and we are now ready to move into the Q&A session.

Operator, Operator

And our first question comes from Kirk Ludtke at Imperial Capital.

Kirk Ludtke, Analyst

Thank you for sharing the 2030 targets, which I find intriguing. Regarding the sealing segment, it appears there's an additional $400 million in revenue, with $300 million coming from new business. Am I interpreting that correctly?

Jonathan P. Banas, CFO

Yes, I think your math is right.

Kirk Ludtke, Analyst

Okay. And then the rest looks like the other $100 million is some modest increase in production and possibly pricing or mix or something like that?

Jeffrey S. Edwards, CEO

Yes, Kirk, this is Jeff. As I mentioned, the volume assumption we used when we developed the strategy we recently reviewed with the Board was based on S&P's forecasts from last year, which extended through 2026 and 2027. In our business plan for 2025, 2026, and 2027, we relied on those figures. I don't want to label them negatively, but I guess I just did. Regarding any increase above 15.3 million units in North America, the outlook is fairly flat. We didn't revise our numbers upwards due to higher volumes as is typically seen in our industry. We adhered to the forecast from S&P extending into the 2028 period, which indicated only a couple of percent growth each year, so not significant at all.

Kirk Ludtke, Analyst

Okay. Great. And the math on the fluid side, $600 million of incremental revenue. Are you sharing how much net new business is in that number?

Jeffrey S. Edwards, CEO

We have detailed net new business for these product groups since we adjusted our management and external reporting. Each quarter, we provide insights into our bookings and the corresponding powertrain. We have also shared data on content per vehicle for internal combustion engines, hybrids, and electric vehicles, highlighting the increase in content for each. Last quarter, we discussed the vertical integration that our fluid teams are pursuing, which offers system integration opportunities. While our outlook includes what we currently know, the specific impact of vertical integration on content per vehicle is not part of that. Additionally, any potential future consolidation opportunities in that sector are not reflected in our current figures. Therefore, what we present is based on our existing business activities and the content we recognize today without overestimating projections. As the industry moves towards more hybrids and fewer electric vehicles, we expect those figures to improve significantly.

Kirk Ludtke, Analyst

Yes, that's helpful. So is it correct to say that if there is $100 million in other sealing, there is also $100 million in other fluid? That would mean you have $500 million in net new business in fluid over the next 5 years?

Jeffrey S. Edwards, CEO

That's fine. You can say that.

Kirk Ludtke, Analyst

Yes. Okay. Well, that's so 80% of the incremental $1 billion is booked?

Jeffrey S. Edwards, CEO

That's correct.

Kirk Ludtke, Analyst

The margin expansion is partly due to optimizing our footprint. Could you provide more details on that and how you determine what is optimal in a tariff environment?

Jeffrey S. Edwards, CEO

Yes. So as we've talked, we have a very detailed process for all of our new business. We have hurdle rates. We have margin expectations. We're tracking the variable contribution margin on all those businesses from the time of award until we launch it. It's a key performance indicator that gets a lot of attention and has the last several years. And so we're very confident that the pricing that's in this strategy plan that you're referring to are real. We're doing it today. There isn't any hockey stick or anything like that, that's built into these numbers. It's based on the fundamentals of what's being reported today. And then as those improvements from a cost point of view come into our business, obviously, that improves margins on the business that we've booked. But also pricing is a big part of it. We're managing that very closely. Obviously, the changes that occur in our product tend to be late in the cycle. And so those increases also are very important because typically, costs are going up, so prices have to go up. We're just much more disciplined around all of it. So I would tell you that our forecasting has improved immensely and not just within the business year like we're talking about here in 2025 that in '26, '27, '28 and then out there in '29 and '30 because our business is sourced to us so far in advance, we have a pretty good idea of what it is and what the prices are three years out. And so it's got some pretty good accuracy, if you will, even when we get out into that fourth and fifth year.

Kirk Ludtke, Analyst

Okay. I appreciate that. And then I guess, lastly, just kind of backing into the math here, you're forecasting at the midpoint adjusted EBITDA of $235 million for fiscal '25 and something north of $500 million for fiscal '30?

Jeffrey S. Edwards, CEO

Yes, that's your math.

Operator, Operator

And our next question will be from Michael Ward at Citi Research.