Good morning, ladies and gentlemen, and welcome to the Cooper Standard Fourth Quarter and Full Year 2021 Earnings Conference Call. During the presentation, all participants will be in listen-only mode. Following company-prepared comments, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press the star followed by the one key. As a reminder, this conference call is being recorded, and the webcast will be available for replay later today. I would now like to turn the call over to Roger Hendriksen, Director of Investor Relations.
Thank you, Liz, and good morning, everyone. We appreciate your continued interest in Cooper Standard, and we thank you for taking the time to participate in our call 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 John Banas, Executive Vice President and Chief Financial Officer. Before we begin, I need to remind you that this presentation contains forward-looking statements.
While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable, these statements do involve risks and uncertainties. For more information on forward-looking statements, we ask that you refer to slide three of this presentation and the company 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 formal comments out of the way, I'll turn the call now over to Jeff Edwards.
Thanks, Roger, and good morning, everyone. We appreciate the opportunity to review our fourth quarter and full year 2021 results and provide an update on our outlook for 2022 and beyond. To begin on slide five, I'd like to discuss some key data points that we believe are reflective of our continued strong commitment to driving sustained value for all of our stakeholders. For our customers, we continue to deliver world-class results in terms of product quality, launches, and customer service.
At year-end, 98% of our customer scorecards for product quality were green. Our scorecards for program launches were 97% green for the year, even as we executed on 12% higher launch volume versus 2020. Even more importantly, we had another outstanding year for employee safety, which is always our top priority every day. For the full year 2021, our safety incident rate was 0.40 per 200,000 hours worked, well below the world-class benchmark of 0.57.
We're especially proud of our 23 plants that completed the year with a perfect safety record of 0 reported incidents. When the automotive market gets tough, suppliers often have to deliver the same or more with less resources. This was certainly the case for us in 2021. In view of industry headwinds, we focused on further rightsizing every aspect of our business. As a result, we ended the year with nearly 10% reduction in headcount when compared to the end of 2020.
While this reduction will drive necessary cost improvements for our current business environment, we also want to acknowledge and recognize the contributions of all of our hardworking, dedicated employees. We know that our employees are the heart and soul of the company and are definitely a competitive advantage for Cooper Standard. That's true now more than ever during this unpredictable business environment as a result of the pandemic. Our continuous improvement and lean manufacturing initiatives are the definition of doing more with less.
During 2021, our manufacturing teams delivered $33 million in cost savings through these programs, which is an outstanding result when you consider all of the unusual challenges presented by volatile production schedules and lower production volumes. We also successfully reduced our SGA&E expense by $32 million compared to 2020 and realized $16 million in savings from our aggressive restructuring actions. In total, we delivered over $80 million in sustainable cost reductions for the year.
By many measures, we had a very successful year, but unfortunately, strong industry headwinds of lower production volumes, volatile schedules, and unprecedented inflation combined to offset our operational cost savings. Turning to page six. Complementing our focus on manufacturing excellence is our commitment to sustainability. We are consistently advancing our efforts and resource allocation on environmental, social, and governance initiatives, and we are seeing positive momentum throughout the company. From the plant floor to our product development labs and the boardroom, the progress we are seeing is encouraging and rewarding.
Our progress in 2021 resulted in improving scores by multiple ESG rating institutions. In addition, our focus on transparency and reporting sustainability topics placed us ahead of our aspirational comparative peer group in 10 out of 11 high priority categories. Led by our recently established Global Sustainability Council, we are quickly driving our ESG efforts beyond basic compliance requirements to true strategic alignment within our business and with our stakeholders. We expect this improving alignment to be the key to enhancing long-term value and sustainability of our company. Now I'll turn the call over to Jonathan P. Banas to walk you through the financial details of the quarter and the year.
Thanks, Jeff, and good morning, everyone. In the next few slides, I will cover the details of our quarterly and full year financial results, put some context around some of the key items that impacted our earnings, and then provide some color on our balance sheet and liquidity before talking about expectations for 2022. On slide eight, we show a summary of our results for the fourth quarter and full year 2021, with comparisons to the prior year. Fourth quarter 2021 sales totaled $601.3 million, down 14% versus the fourth quarter of 2020.
The decline was the result of lower volume and mix in all our automotive segments as the semiconductor shortage and other supply chain issues continued to weigh on vehicle production. The volume and mix impact was partially offset by some positive customer price adjustments, in part related to our material recovery initiatives. From a more positive perspective, fourth quarter sales were an improvement of 14% when compared sequentially to the third quarter of this year. We were encouraged by the increase in production volume and improved stability in schedules that we saw in the latter part of the fourth quarter.
We are cautiously optimistic that these positive trends will continue. Adjusted EBITDA for the fourth quarter 2021 was $2 million or 0.3% of sales, compared to $57 million or 8.2% of sales in the fourth quarter of 2020. The year-over-year decline was driven primarily by increased material costs, the previously mentioned unfavorable volume and mix, higher wages, and general inflationary pressure across the board. Positive customer price adjustments were only a small offset to the inflation and volume pressures.
On a sequential basis, we saw strong improvement of $36 million in adjusted EBITDA versus the third quarter of this year, an indication of how we are leveraging both the increased sales as well as our ongoing cost improvements. On a U.S. GAAP basis, we incurred a net loss of $102 million in the fourth quarter. This included certain non-cash asset impairments, non-cash valuation allowances established on net deferred tax assets. Excluding these and other smaller special items, we incurred an adjusted net loss of $50.3 million or $2.94 per diluted share for the fourth quarter of 2021.
This compared to adjusted net income of $3.3 million or $0.19 per diluted share in the fourth quarter of 2020. Sequentially, adjusted net loss improved by 53%. For the full year 2021, our sales totaled $2.33 billion, a decrease of 1.9% versus 2020. The main driver of the decline was a divestiture of certain European operations in our India business on July 1, 2020, as well as unfavorable volume and mix. These negative factors were partially offset by favorable foreign exchange benefiting the top line. Adjusted EBITDA for the year came in at -$8 million compared to + $35.7 million in 2020.
Again, the key driver was significantly higher material costs, higher wages, and general inflation. Unfavorable volume and mix and the non-recurrence of certain COVID-related government assistance also contributed to the decline. These negative factors were only partially offset by improved operating efficiency, lower SGA&E expenses, and the other cost saving and lean initiatives we have been executing. Full year net loss was $322.8 million, which included non-cash asset impairments, deferred tax asset valuation allowances, restructuring charges and other special items.
Adjusted for the net impact of these items, we incurred a net loss for the year of $222 million, or $13.04 per diluted share. From a CapEx perspective, we ended the year at $96 million or 4.1% of sales. This compared to CapEx of $91.8 million or 3.9% of sales in 2020, with the increase primarily related to higher program launches. Moving to slide nine. The charts on slide nine quantify the significant drivers of the year-over-year changes in our sales and adjusted EBITDA for the fourth quarter.
For sales, unfavorable volume and mix, net of customer price adjustments, reduced sales by $93 million. FX was a further negative impact of $3 million in the quarter. For adjusted EBITDA, lower SGA&E expense was a positive variance of $12 million compared to the prior year, and savings from restructuring initiatives added $5 million. These improvements were more than offset by $15 million of unfavorable volume and mix, net of price adjustments, $30 million in increased material costs, and $26 million from wage increases, general inflation, and other items.
Moving to slide 10. For the full year, unfavorable volume and mix, net of customer price adjustments, reduced our sales by $31 million. Divestitures further reduced sales by $65 million. Favorable foreign exchange was a positive partial offset of $50 million. For full-year adjusted EBITDA, a number of positive factors benefited results, including $33 million from improved operating efficiencies, $32 million from lower SGA&E expense, and $16 million in savings from earlier restructuring initiatives. These improvements were more than offset by $64 million in higher material costs, $41 million in higher wages and general inflation, $15 million related to the discontinuation of COVID-related benefits, and $7 million of unfavorable volume and mix.
Moving to slide 11. In terms of free cash flow, we experienced a modest outflow of $24 million in the quarter, essentially in line with our expectations. Our teams did an outstanding job of reducing inventory in our plants as production schedules began to stabilize and of collecting on tooling receivables from our customers. This helped to keep net cash used in operations at just $4 million in the quarter, despite rising sequential sales. In addition, our continued focus on conserving cash resulted in CapEx coming in at just $20 million, which was lower than what we had expected heading into the quarter.
With cash on hand of $248 million and an additional $148 million of availability on our revolver, we ended the year with total liquidity of $396 million. Given our outlook for improving industry trends and our successful execution of ongoing cost reduction initiatives, we believe this certainly provides adequate capital for the funding needs of the company. Turning to slide 12. On this slide, we provide our initial guidance for 2022, along with our expectations for regional light vehicle production that forms the basis of our annual plan.
For this year, we expect sales in the range of $2.6 billion-$2.8 billion and adjusted EBITDA in the range of $50 million-$60 million. We believe these estimates are appropriately conservative given the continuing uncertainties within our industry and the macroeconomic trends in each of our key operating regions. We will continue to invest in our business conservatively in 2022, with CapEx expected to be in the range of $90 million-$100 million, which is similar to 2021.
As a percentage of sales, this would put us at less than 4%, so continuing modest investment in the business, primarily to fund growth on our new customer programs. Cash restructuring in 2022 is estimated at $20 million-$30 million. The majority of this investment will be focused on further rightsizing of our operations and overhead in Europe, consistent with our driving value initiatives. The restructuring investment is expected to have a payback period ranging between one and two years. Finally, as reflected on our balance sheet at December 31, we anticipate receiving a tax refund of more than $50 million in 2022 related to prior year U.S. income tax returns.
Net of ongoing cash tax payment requirements, we expect a net cash tax refund of $30 million-$40 million for the year, which will further strengthen our already solid liquidity position. Moving to slide 13. The chart on slide 13 provides some additional detail around the main positive and negative factors impacting our 2022 adjusted EBITDA outlook. These are broad estimates based on current market conditions and our own assumptions for the remainder of the year and reflect the midpoint of the adjusted EBITDA range we provided.
We expect volume and mix, including customer price adjustments, to drive $130 million of improvement in 2022. The positive impacts of our cost recovery initiatives are also included here. With improving volume, we also expect to drive significant improvements in manufacturing efficiencies, adding approximately $70 million in adjusted EBITDA for the year. These anticipated gains in efficiency should be more than enough to offset expected increase in general and wage inflation and even the planned normalization of incentive compensation in 2022.
However, we still face an expected $70 million in incremental headwinds from material cost inflation this year that won't be covered through improved operational efficiencies. As mentioned earlier, we believe our initial guidance is appropriately conservative given the uncertainties in the marketplace. Further, with recent announcements from some of our customers delaying production and continuing supply chain challenges, we believe such conservatism is warranted. We are factoring in the recovery of a fair share of the higher material costs, but there are no guarantees on the level of recovery we will ultimately achieve.
On the other hand, there is potentially some upside opportunity if production volumes come back stronger than expected in the back half of the year, or if material costs unexpectedly begin to moderate. Finally, let me emphasize that we believe we are in very good shape from a liquidity perspective. We have a solid cash balance along with an undrawn revolving credit facility, and we anticipate sizable cash inflows from not only the tax refund, but also a sale leaseback of a non-core property to further bolster our cash balance during the year.
As a result, we expect to have more than sufficient resources to continue our focus on growing our top line, expanding margins, and working with our customers to ensure that we're being fairly compensated for the cost and value of the products we supply. Based on the November 2023 maturity of our Term Loan B, we will likely be in the market later this year to refinance that tranche of debt. With a maturity date in 2024, the paydown of our senior secured notes is less of a priority at this point. That concludes my prepared comments, so let me turn the call back to Jeff.
Thanks, John. Before concluding our discussion this morning, I wanna share a few thoughts regarding our near-term and longer-term outlook for the global light vehicle market and for Cooper Standard specifically. Moving to slide 15. Our ability to cover the rapidly increasing costs we face from unprecedented widespread inflation will certainly be a key factor in our success this year. We've significantly leaned out our cost structure to offset what we can, but we have little room for further cuts without adversely impacting our ability to deliver the quality products and world-class service that our customers demand and deserve.
We have no choice but to insist that our customers pay for a fair portion of these cost increases. Last quarter, we announced that we would aggressively pursue recovery of $100 million in costs from our customers. We've made good progress in this effort through a combination of price increases, delayed price concessions, increased indexed base contracts, and other means. To date, we're tracking toward the high end of our historical recovery range of 40%-60%. Most of our customers have been willing to engage with us in these cost recovery discussions, but others, frankly, have not.
As material costs continue to rise, we will again be asking our customers to pay a fair share of the increases. If customers remain unwilling to come to the table, it can only lead to a more difficult conversation later this quarter. In terms of our index-based contracts with customers, we have historically had good coverage on rubber components. In the current environment, we're pushing to expand coverage to our metal components as well. Most customers recognize the challenge higher metal costs are creating for their suppliers and have been willing to engage with us in meaningful discussions.
We expect to firm up our recovery and indexing actions on metals by the end of this first quarter. Our purchasing team has also been working diligently with our suppliers to increase index-based purchase contracts. They have more than doubled the percentage of our annual direct material purchases that are covered by index-based pricing, and this should help us avoid massive price swings and unfair or predatory pricing going forward. As long as we face these unprecedented inflationary headwinds, our cost recovery initiatives with customers will certainly continue.
Given their demonstrated ability to pass costs on to their end customers through higher prices, we expect them to fairly consider the needs of the supplier community. Of course, we can never lose focus on our own efficiencies, lean initiatives, and operational excellence. This year, we will continue to optimize our European operations and rationalize our overhead and fixed costs globally. Some of these actions will have an upfront cost, but all will provide short-term cash payback. Ultimately, we are confident that our leaner cost structure and strong relationships with our customers and suppliers will allow us to get back to the levels of profitability and returns that our investors expect and deserve.
Turning to slide 17. Because of our strong customer relationships, world-class service, and innovative technology, we continue to win new business and supply critical components on some of the industry's most desirable and popular vehicle platforms. On slide 17, we provide a list of our anticipated top 10 vehicle programs for 2022. The vehicle images and names reflect the lead vehicle on each key platform. We are proud of the continued strong mix of our top programs, which maintains a heavy weighting on trucks, SUVs, and global platforms. This strong mix provides us with maximum opportunity to increase product content per vehicle and sales over time.
Combined, these top platforms represent approximately 40% of our planned 2022 revenue. On an unweighted basis, our content per vehicle across these top 10 platforms is expected to be approximately $155 this year. Turning to slide 18. Our strategic focus on light trucks and SUVs puts us in a great position to benefit from the current light vehicle market trends. As shown in the chart on the left, the light vehicle market is poised for significant growth over the next five years, with passenger car growth estimated at nearly 4% annually and trucks and SUVs growing at over 7%. The one-year growth rates for 2022 are expected to be even higher at 6% and 11% respectively.
For Cooper Standard, over 70% of our 2022 global revenue is expected to come from trucks and SUVs. In North America, the proportion is approaching 90%. Importantly, our content, our average content per vehicle on trucks and SUVs is 2.1x our content on cars globally and 2.7x the average car content in North America. As a result of our strategic focus on the trucks and SUV segment, we expect our revenue to grow at an average rate of 9% annually over the next 5 years, significantly outpacing the broader light vehicle market.
Turning to slide 19. We're also in a solid position to outpace market growth in the most important electric vehicle segment. We're currently a supplier on four of the top five, and 14 of the top 25 EV platforms globally. Over the past two years, we were awarded more than $200 million in annualized new business on future electric vehicle platforms. In fact, in 2021, net new business awards on electric vehicles exceeded our awards on traditional drivetrain vehicles. Based on these contract awards and future target business, our current outlook is for revenue growth in the EV sector of approximately 50% annually over the next five years, compared to industry growth of approximately 38%.
Our portfolio of commercialized innovation products, technical expertise, and manufacturing capabilities have been the key to our success in this high-growth segment. Now turning to slide 20. We're continuing to invest strategically in innovation across all aspects of our business. This includes the development of the new materials and products that are driving the new business awards that I just mentioned, as well as advancements in efficiencies and sustainability in our plant operations and manufacturing processes.
For manufacturing process, we have developed Liveline, which is an artificial intelligence-based machine control technology that uses real-time data feedback to automatically optimize extrusion lines. This technology has already been installed in nine locations and has proven to improve product quality, reduce scrap and contributions to landfills, and improve operator efficiency. We plan to roll out the technology to nine more locations where the complexity of products and process warrant it. The investment is small for each location, and the payback can be measured in just a few months.
We're also utilizing our AI modeling capabilities within the Industry 4.0 framework to help drive improved asset utilization across the company and accelerate the development of new alternative material compounds. For asset utilization, our AI capabilities help us in several ways, including predictive maintenance modeling and equipment deployment and allocation. On the material side, we've had an extremely agile response to increasing costs and supply chain constraints, and our AI modeling has allowed us to quickly determine alternative compounds without negatively impacting product quality or performance.
In addition, we continue to invest in a wide range of promising projects to improve performance, costs, and sustainability of our materials. We've recently developed capabilities to reduce the cost of Fortrex by conducting critical chemical processes in line rather than buying pre-processed feedstocks. In addition, we're continuing our collaboration with MIT to explore the use of post-consumer waste, such as shopping bags and water bottles, as a source of chemical inputs. Both Liveline and the advances in Fortrex represent clear achievements in efficiency, quality, sustainability, and competitive advantage, benefits that will extend to our customers and all stakeholders. Moving to slide 21.
To wrap up our discussion this morning, I wanna briefly highlight our revised purpose, mission, and value statement that we introduced internally last week and announced publicly a couple days ago. We remain focused on creating value for all stakeholders, and our revised purpose statement places a stronger emphasis on collaborating together with all stakeholder groups to drive sustainable solutions to the value creation equation. The new language really only codifies the changes we have been driving within our culture of our company over the past couple years.
Our culture has clearly evolved over this time and has become even more aligned, we believe, with the diverse interests of our customers, our employees, our investors in the communities where we both live and work every day. At the same time, we're continuing our focus and drive towards our strategic financial targets of double-digit adjusted EBITDA margin and double-digit return on invested capital. These targets have not changed, and we believe the further realignment of our priorities and values will help us achieve those strategic goals.
Clearly, we have had a setback on the timing of when we expected to achieve those goals due to the hyperinflationary environment of 2021 and what lies ahead this year. The good news is that we have significantly improved our internal cost structure and operating efficiency, and we can leverage these accomplishments when production volumes normalize. Assuming that we can successfully offset the inflationary pressures through commercial negotiations and contract indexing, which we fully expect to do, we believe we can be back on track to reach our stretch strategic goals for adjusted EBITDA margins and return on invested capital by 2024.
Finally, I wanna thank our global team of employees for their continued commitment and dedication in these challenging times. I also want to thank our customers for their continued trust, confidence, and support. Together, we have a bright future and many opportunities ahead. This concludes our prepared comments, so let's open it up for Q&A. Thank you.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press the star followed by the one on your telephone. If your question has been answered and you would like to withdraw your registration, you may do so by pressing the pound key. If you're using a speakerphone, please pick up the handset before entering your request. One moment please, as we assemble the queue for questions. Our first question comes from Kirk Ludtke with Imperial Capital. Please go ahead.
Good morning.
Morning, Kirk. Can you hear me?
Hey. Thank you for the call and the presentation. Very helpful. I have a couple follow-ups with respect to the guidance. You mentioned that you feel like you're in good shape with respect to liquidity and I think that math makes sense, you know, $400 million of liquidity at year-end. I'm just curious, what do you expect to happen with respect to working capital? You've got a pretty significant increase in revenues in this forecast. I'm curious, what kind of a use will working capital be?
Actually, Kirk, with respect to working capital, we still have some further opportunities that we continue to drive. One of those is what we do look at every single year, and that's the inventory balances within the manufacturing footprint. We think there's still opportunity to drive some working capital improvements for the whole year.
The next biggest piece would probably be on the tooling balances, whereby, you know, we've always historically had over $100 million of tooling tied up on our own balance sheet as we build tools on behalf of our customers. We see a significant level of opportunity within the tooling element of working capital as well. If you put those two significant pieces together, despite a rising sales level throughout the year, each sequential quarter as we see it, we think working capital is expected to be slightly positive for the year.
Thank you. That's very helpful. With respect to this bridge to the guidance is very helpful, and it includes, I guess, another $70 million of commodity headwinds in fiscal 2022. Could you help us, you know, how do you forecast commodity prices? You know, it's- t hat's very difficult generally. How did you go about arriving at the $70 million?
Well, we use a variety of sources. The main one which we look at commodity index projections based on the IHS Markit data. We actually look at those discretely and plug them into our systems and try to get it granular all the way down to the product and platform level to understand the impact on what we're projected to make during the year and then where those cost curves are actually heading. A very robust process as we use that data down to the program and part level detail, Kirk.
You know, we know that, for example, for 2022, the curves are showing that rubber prices will be up another almost 60% year-on-year. You know, we saw that in Q4 the exit rate where EPDM rubber components continued to rise throughout 2021. We're seeing that continue on into 2022 from a carry forward effect. Same phenomenon on steel- t hey'll be up another 26% of that $70 million incremental component. Plastics, resins, and other specialty things will make up the difference to get to that overall $70 million incremental inflation. Hope that helps.
Yeah, that's very helpful. Then lastly, I'll step aside. Can you give us some sense for the cadence of the full year guidance? At least maybe directionally, how you expect the year to progress?
Yeah, we don't wanna give the quarterly breakdown there, Kirk, but I think generally you think the first half will look very similar to what Q4 did, as the OEMs continue to you know, work out supply chain issues and chips to some extent still. As the year progresses, that sequentially continues to improve. That's at least what IHS forecasting would have us believe in terms of the overall production environment, that it continues to build sequentially throughout the rest of the year. The second half, in other words, looks a little bit better than the first half does.
Great. Thank you very much.
Thank you.
Our next question comes from Mike Ward with Benchmark.
Thanks very much. Good morning, everyone. John, maybe just to follow on what Kurt was talking about there on the walk and the bridge you have for 2022 and the $70 million. Does that include any recovery?
No, Mike. In my prepared remarks, I indicated that the recovery will be in that the volume mix price column, which is $130 million. So you see the net impact of both-
Now, in that-
impact of price.
Is that the recovery from last year, the $100 million, or is there? That's what I'm trying to bridge. Last year you talked about, Jeff mentioned a $100 million in cost recovery, and you're on target to get the high end of your historical recovery rate. Say $60 million. I assume that $60 million was in that $130 million. You have the additional $70 million. Are you expecting any recovery on the additional material economics this year from that $70 million?
Yeah, Mike, I would characterize that as it's pretty fluid as far as the cadence of when you start seeing that recovery. Much more timely, usually just a quarter lag when you think in terms of indexes. You know, but that recovery is an ongoing process. You know, for example, we realized a small portion in the fourth quarter of 2021, around $10 million or so. Most of that was primarily on index contracts that were already in place. As our teams continue to negotiate, there's gonna be a lag effect to the recovery and a gradual catch-up on a percentage basis.
Okay. If we look at some of the outside metrics for different steel, aluminum prices, is it fair to say that the impact is greater in the first half, and as we get to the second half, there's a chance we start to see better recovery in the second half of the year from the impact of the higher prices in the first quarter, fourth quarter, that sort of thing? Is that what we're looking at?
Yeah. We do see the projections indicate that a lot of the commodity prices will come down later on in the year, Mike. Yeah, your triangulation works.
Jeff, I have heard some of the suppliers talk about getting recovery for, I mean, these stop-starts and, you know, the sudden changes in schedules, particularly like with some of your key components or your key programs, it's causing a headache. Now, there are some suppliers that are getting recovery for some of those costs. Is that included in your $100 million bucket? You know, is that something that you're having success with?
Yeah, in my prepared remarks, Mike, I referred to the other bucket, if you will, and that's where some of that would reside. It's on the table. It's being discussed, it's being negotiated. In some cases, we've got it. In some cases, it's still being negotiated.
It sounds like the vehicle manufacturers are a little more accepting of some of these negotiations than they have been in the past, whether that's because they've gotten...
I'm still waiting.
...stable pricing. Still waiting. Check's in the mail.
I'm still waiting for that meeting. Yeah, I'm still waiting for that.
Yeah. John, just to clarify, you went through your remarks about the capital priorities and the refinancing and the debt, and I just wanted to make sure I was on par with what you were talking about.
Yeah. Sure, Mike. I'll just reiterate, you know, based on the current thinking, current balance sheet structure and what's ahead of us in terms of maturities, we think the first priority will be addressing the Term Loan B. That comes due in November of 2023. So technically it would be current later here in Q4 of 2022. So we wanna get ahead of that, obviously maturity and that thing coming current.
Okay. That's about $325 million?
Yes, that's exactly right.
Okay. I'm sorry, then the next thing was the senior notes.
Yeah, you know, we had been optimistic on being able to exercise the call option on the senior secured notes. This time we're gonna focus on the Term Loan B and then tackle the senior secured notes at a later date.
If you're able to. Awesome. Thank you very much, guys.
Thanks, Mike.
Our next question comes from Brian DiRubbio with Baird.
Good morning. Couple of questions for you. First off, can you help us explain what the source of the $13 million EBITDA gain you had in corporate and other for the fourth quarter?
Yeah, Brian, a portion of that is ongoing, you know, overall recoveries in our ISG business. 'Cause remember, you know, corporate and other includes what we refer to as our Advanced Technology Group. It has our technical rubber and industrial and specialty products business located in that. As they were able to be profitable in the quarter, including some recovery efforts, that's what you're seeing in that category.
Okay. Is that sustainable or is that $13 million just sort of a one-off?
I wouldn't call it necessarily completely a one-off, but you know, some of it is non-recurring in that $13 million.
Okay.
I wouldn't extrapolate that for the whole year.
Okay. Understood. I got a question, lot of confusion around the increased total liquidity- a few questions there. I think you said you didn't draw on your revolver, but gross debt was up by my calculation $15.6 million. And I'm looking at your accounts receivable, you know, were up by $8.6 million. Tooling receivables were down by $8.6 million, and your inventory was down by $40 million. With your borrowing base ostensibly lower, how is the availability higher quarter-over-quarter on your revolver?
The revolver availability is based entirely on U.S. and Canadian inventory balances and accounts receivable. As production continued to sequentially increase in the North American market, Q3 to Q4, despite us bringing down inventory levels, you saw availability increase. You know, there is a holdback of 10% on overall availability because of the fixed charge coverage ratio element in there, Brian. That $148 million reflects that 10%. There's some minor letters of credit that work against the contractual availability as well. That's how you get to the $148 million.
Okay. That's helpful. How big is the sale-leaseback expected to be?
I can't give you the exact magnitude because the deal's not yet closed, so we can't contractually disclose the sale proceeds at this time. However, they will be sizable. If I think about it in terms of our free cash outflow for the year, that's kinda projected in the math, they won't entirely make up that free cash flow outflow, but they'll certainly fill in a lot of that usage hole. Okay? We'll be able to talk more about that when the deal closes in Q1.
Got it. Just two minor ones. Your payables did extend a little bit- I noticed that it was also mentioned on the slide deck. How much do you think you can press that?
Yeah, Brian, what we're working towards is a global average of around 60 days. That's our, you know, aspirational target here. You know, we're approaching 57 days as we close the year-end. Just as a frame of reference, every day we take out, it's worth about $6 million in working capital for us. So there's probably a day or so of further opportunity we're marching towards in 2022, but it's a hard go get, especially in a tough supply environment like we're dealing with today. We haven't given up.
Okay. Then just finally, technically on the refi, I'm a little confused why you wouldn't address both the first lien notes and the Term Loan B simultaneously. It seemed that, you know, it would be easier to get both done at the same time 'cause there's less uncertainty from the Term Loan B's holder's perspective, how you're gonna address the first lien notes, you know, shortly thereafter.
I'm a little confused. Even though your cost of borrowing of the Term Loan B is more than likely gonna be up pretty substantially, you know, I'm guessing there would've been a little bit of opportunity to reduce that 13% coupon. I'm just trying to get a sense of how you're thinking about this and why you're not addressing both at the same time.
A little bit goes by, too. There's still continued uncertainty in the market and us maintaining that total liquidity that we've talked about in the past of about $150 million or so to run the business day in and day out. The preference would be to bring down that $250 million overall because we took that out as a quote-unquote insurance policy two years ago at the start of the pandemic. Thinking that we wouldn't need to tap into it, but at the time didn't know how long the pandemic would last, if there was gonna be further production complete stop and shutdowns throughout the industry. That was always the goal, right?
As we sit here today, and then we're still dealing with a little bit of market uncertainty how the year progresses, we think there will be more of an opportunity to do this two-step. Certainly as market conditions allow, we are modeling and working with our partners to say, is there a path to do both at the same time or do the Term Loan B first because of the maturity element to it?
Understood. Appreciate the call. Thank you.
Yep, you're welcome, Brian.
Our next question comes from Steve Ferazani with Sidoti.
Morning, everyone. Thanks for taking my questions. I do wanna ask again about those, I think the material costs you're expecting in 2022. I'm trying to get a sense with your guidance, is that based on where you already have succeeded in negotiations in terms of cost recovery or your hopes? Is there more upside to that number or downside?
Yeah, this is Jeff. I think we've included what you would call in our pocket, right? Now as we just talked, there's still further conversation going on, which wouldn't be included in the outlook.
Can you give us some update on your successful or lack of success in terms of moving towards indexing and how the automakers respond to it given the current environment?
Yeah. I think the response has been very, very positive. Obviously the detail of the negotiation around what number you start with determines whether we say yes or whether we say no.
Any updates in terms of other divestments in terms of non-profitable markets or businesses and where you would be, or is that kind of on hold given market conditions?
Yeah, so far on hold, I assume you're talking about South America there.
Yeah.
We continue to improve that business and work with our suppliers as well as our customers to get above break even, and we think we have a pathway to do that. I would say that that's still part of options that are on the table. You know, the market timing associated with divesting it, you know, wouldn't be very good right now. If it happens, it would be, you know, in the future. We're still hopeful that we can make it a positive cash flow business and stay in it and support our customers. but, you know, TBD.
Okay, fair enough. Just last one for me in terms of talking about that double-digit EBITDA margin type target, which, say, now maybe 2024. I'm trying to get a sense. Clearly, when you put that out there, a lot changed fast. Trying to get a sense of what kind of a market conditions you need to get there beyond material cost stabilization, right? If we have a huge rebound in automotive production in 2022, 2023, we don't really know where we're gonna be in 2024. What types of levels are you thinking about, market conditions are you thinking about to get there in 2024?
Yeah. We provided that earlier, but I would just recommend you take a look at the IHS forecast for 2022, 2023, 2024 and 2025. We've used that primarily to make the statements that we've made to you this morning.
Okay. Fair enough. Thank you.
Our next question comes from Josh Taykowski with Credit Suisse.
Hey, thanks for taking the questions. I guess I first wanted to start just on the sale-leaseback. Heard that question a few minutes ago. I think I missed the update there. Is there any info you can provide on what that is?
Yeah. Josh, this is John. What we view it as a non-core property over in Europe, where we just really looked at the long-term need for certain of the buildings on the space. The property had a legacy plant that we had closed years ago, as well as some lab space and headquarters type space there, in addition to a manufacturing plant that's currently still running.
The sale-leaseback gives us some flexibility over time to remain on that property, but it does unlock some capital for us to be used throughout the system. Like I mentioned a few minutes ago, deal's not yet closed. It's expected to close in Q2, so we'll be able to give you a little bit more color on the size of the proceeds. Again, it will be a sizable inflow of cash for us.
Got it. That's helpful. Thanks, Jeff. I guess just turning you know to the sequential EBITDA improvement in 4Q. I know we've talked about commercial settlements a lot. You know, but is it possible to frame up for us, you know, going from you know the negative $34 million in 3Q to the positive $2 million in 4Q, how much of that was you know driven purely by commercial settlements that you were able to you know put in your pocket during the quarter?
Yeah, Josh, I said a few minutes ago that the recoveries there were about $10 million of clawing back some of that commodity inflation. Again, a lot of that was on index contracts. When you put volume and mix, which was positive in all of our major regions together to the tune of about $75 million in revenue at about that 30% pull-through, that's the majority of clawing that back.
You know, clearly further worsening of commodities quarter-over-quarter. You know, when we went from $21 million in Q3 up to $30 million in Q4, it's continued significant headwinds that we're facing that are spilling over into 2022, obviously. You know, the manufacturing organization continued to take costs out, as well as the restructuring initiatives that we had paying dividends there. That kind of gives you the main pieces of the sequential walk overall.
Got it. Okay. The $10 million, I know you said a lot of that was on index. Does that net out from, you know, the $100 million target? Or is that just kind of general indexing that you would expect to get anyways?
No, that would be part of that. Go back. 'Cause like Jeff said, we're approaching that a variety of different ways, straight PO changes, index contracts, absence of contractual give backs, et cetera.
Got it. During the quarter, just to confirm in a little bit different way, there wasn't some, you know, material kind of one-time lump sum payment that you got on a commercial recovery that's kind of helping out the quarter?
No.
The corporate other bucket- I know someone else asked about this, but the $13 million, I know you said a portion of it was one-off, a portion of it was not. Is there any, you know, guidance you can give on, you know, what the split of that is?
No, I'll just leave it to my past comment.
Okay. Next one for me, just on SG&A, you know, $58.5 million during the quarter, about flat with 3Q. I know in 3Q, you took that bad debt expense charge, call it $10 million, I think it was. I guess comparing to 2Q, you're up, you know, call it $9 million or so. What's kind of driving, you know, that during 4Q?
Josh, I don't have that at my fingertips, but a little bit is the ongoing, call it, wage inflation probably as there's turnover in the system, which we're experiencing a lot of. You're hiring people back at slightly higher wage rates. I think that contributes to some of it. Within that bucket, it's not just salaries, it's all of the other costs in the business that are within that SGA bucket that can be rising along with that overall inflationary pressure.
The good news here is that we see that percentage coming down in 2022 and further with increase in sales and further restructuring initiatives that Jeff and I have already talked about today. We see continued benefit there in the SGA&E drop.
Okay. Just a couple of questions from me on, you know, the 2022 guide. I'm looking at the $20 million-$30 million of cash restructuring costs. Maybe that's the best place to start. Any way you can bucket for us, you know, what's that going to be between, you know, kind of the three buckets, whether it's manufacturing savings or SGA&E? How should we think about the split of that?
It's really a call it a 60/40 split. 60% of it, I said in my prepared remarks, was primarily related to European actions that were already in flight. If you recall, in 2021, we addressed direct and indirect labor at some of our high-cost facilities. These weren't plant closures, but they were overall reductions in the labor force there as production levels had come down, revenue levels had come down. There's a carryover effect as you're paying over time for those past actions.
Like I said, about 60% of the $30 million. The remainder is incremental actions as we look across, like I just described a minute ago, SGA&E holistically, but also above the plant cost of goods sold. It's not in the manufacturing facilities, but it's above the plant organization that we're looking to address with the remainder of that restructuring money in 2022.
Okay. I guess the last one for me, just more of a modeling question. I know you're not gonna give kind of quarterly splits on your guide for 2022 as far as cadence. You know, just thinking about recovery over the course of 2022, how should we think about, you know, what your contribution margin is today given the environment, plus some of the, you know, the actions that you've taken on the cost side? That's my first question. You know, just along that same line of the cost actions on SGA&E, is there an estimate you can give us on, you know, kind of what the run rate magnitude of fixed costs that you've got running through, you know, COGS currently?
Yeah, let me tackle the first one, Josh. I think Jeff alluded to that we're actively continuing to negotiate here. A lot of those efforts will come to fruition as Q1 closes. You're not gonna see necessarily a big influx of recovery money in Q1 as we see it. There could be an element where in Q2 or beyond, there could be a retroactive effect going back to the beginning of the year.
As of right now, as the team continues to build that pipeline, it'll increase throughout the Q2 and beyond, where you'll see that step change. I guess a little bit more on your second question. Are you asking what the fixed cost base is for, the plant structure? I didn't really quite get that.
Yeah, just like you got your COGS line item, I think $540 in Q4. You know, what percentage of that would you say is fixed, you know, type cost?
Well, let me break it down like this. 48% of that was materials, right?
Okay.
You see the sizable headwind that we're facing, and then the rest would be your labor and your fixed cost component overall. Okay?
Got it. Okay. Fair enough.
Our next question comes from Joseph Farricielli with Cantor.
Hi. Question on the sale-leaseback. I know you don't wanna give the proceeds, but it seems like the description of the property is something that wasn't needed. Why are you doing a sale-leaseback and not just an outright sale?
Because we still need to conduct business for a short period of time on that particular location. I think it's also important to note that this isn't a reaction to the overall liquidity situation in the company. In fact, this particular project has been on our radar now for the last couple years, and we've been running some processes to determine the best value and the timing associated with when we should do it.
That's happened to be right now. I wanna make sure that we're clear on that. The positive is that we've found a buyer. They're flexible in terms of allowing us to stay there for a short period of time as we transition some business. They will take over that property and transform it, if you will, and t here'll be more details around the specifics here as we work our way towards the end of the first quarter, and then it'll be pretty obvious.
Okay, good. You were talking about the term loan and the refinancing, and you made a comment that implies that you're working with an advisor. Have you hired a banker or some kind of advisor to assist with your capital structure?
Yeah, Joe, let me be clear. I did not imply that. We have a core team of banking groups who have been our longtime partners in our capital structure. It's just conversations with those that I'm referring to. We haven't hired anyone, just to be clear.
Perfect. Thank you. Then finally, the last is on the cash restructuring. As we know with auto parts supply companies, you're always changing productions and you always have those costs. When do we start to see this become a... This is down year-over-year, but when do we see this become a smaller line item? Any color there or thoughts?
Yeah, Joe, to be frank, if you look back to my comments in Q3, we thought 2022 would be in the teens. As we looked throughout the 2022 business plan, we just realized that a little bit more needed to be done to right size that cost structure going forward. I think as we get through 2022, there's no other planned actions in our long-term business plans or strategic plans that are being contemplated right now. We hope this sets us up very, very well for return to double-digit margins and double-digit ROIC accordingly.
Okay, good. Final question. Could you give us some context on the commodity recovery conversations? How it relates to the conversation with new wins and new contracts and how it relates to the old. Is it just the customer saying, "Guys, this is the black and white of the contract. You signed it, live up to it, but on the new ones, we'll consider others?" Or what. Just some color there as to how those conversations are going about.
Sure. This is Jeff. Just keep in mind that the programs that we're quoting and that we've been quoting, you know, since the fall, reflect all of these additional costs. As those launch in the future, you know, those aren't problems. Those are programs that'll reflect today's costs. The programs that we have in our plants today that we're producing and shipping product fall into the other category that you talked about, which require us to go in and renegotiate, if you will, recoveries, be it inflation, volatility, or other cost increases that we've been dealing with in terms of volume and mix, let's call it.
Those require basically renegotiating the deal, to your words, of existing product. That requires us to explain why we need it and the customers to agree to give it. Some of those are easier than others.
Okay, good enough. Thank you.
Our next question comes from Doug Karson with Bank of America.
Yes. Hi, guys. Thanks so much for all the detail. Just two quick questions. In your bridge, you have lean manufacturing, a positive $70 million in 2022. The next step is for us to try to forecast 2023 and 2024. How do we think about that lean improvement in 2023? Could you just give us some view of how much sustainability you have in that lean number?
This is Jeff. In my prepared remarks, I talked about it being sustainable going forward. I mean, that's. I guess you look at. You gotta try to find some positive in the insanity that we're dealing with. I think...
Right.
...clearly our plants have continued to find ways to take out costs to help us offset some of the categories that we've talked about today. Those things do carry forward, and we'll be in a much better position when we get back to normal production volumes, i n what proves to be very strong market demands everywhere in the world. So when we talk about double-digit EBITDA, ROIC in 2024 versus what we had originally were planning to be 2023, that should tell you what we think.
We truly believe that we will be able to recover the costs here in the short term to allow us to improve sequentially as we go through this year. Then the cost base that we head into 2023 with, we believe is sustainable. Not just the fixed cost and then additional changes we're gonna make in our fixed cost structure this year, but what we've discussed from an SGA&E point of view.
When you start looking at that as a percentage of sales in 2023 and 2024 with the additional growth, I mean, we'll be at record low levels. That includes adding compensation back in for incentive comp that isn't in our numbers, obviously, for 2021. Being able to really come out of it much stronger than we went into it, we believe is sustainable, and that's why we're reflecting the optimism for 2023, 2024, and 2025. We're just pedaling fast to get there, that's all.
That's super helpful. Then my last question. I'm trying to piece together some of the free cash flow thoughts around 2022. It looks like working capital is gonna be a potential source, potentially meaningful. The sale lease back, I think you commented, would maybe make up some of the gap on the free cash flow. Are we able to think about a free cash flow then or year-over-year change in cash, for 2022 to be reasonably close to breakeven given the working capital and the sale lease back? Or is that kinda going too far on a limb?
I think you get close to that point, Doug. But keep in mind, the sale-leaseback item won't be in traditional, quote-unquote, "free cash flow." Clearly it benefits the liquidity situation and the cash balance at the end of the year. Okay?
Right. Okay. You mean cash flow, not breakeven, but the sale-leaseback will help below the cash flow line to have liquidity. You're pretty close to where we are today, despite the EBITDA being kind of, you know, less than normal.
You got it.
It's helpful. All right. Thanks so much. That's it for me. I appreciate it.
Okay. Thanks, Doug.
That concludes our Q&A session. I would now like to turn the call back over to Roger Hendriksen.
Hey, thanks everybody for the questions and for your participation today. We really appreciate it. If there are other questions outstanding that we weren't able to get to this morning, please feel free to reach out to me. Give me a call and we'll make sure that your questions are addressed. Thanks again for participating. This concludes our call.
This concludes today's conference call. Thank you for participating. You may now disconnect.