Good morning, ladies and gentlemen, and welcome to the Cooper-Standard first quarter 2020 earnings conference call. During the presentation, all participants will be in a 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 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.
Thanks, Andrew, and good morning, everyone. We appreciate you spending some time with us today. The members of our leadership team who will be speaking with you on this call this morning are Jeffrey S. Edwards, Chairman and Chief Executive Officer, and Jonathan Banas, Executive Vice President and Chief Financial Officer. In alignment with continuing stay-at-home guidelines in the state of Michigan, we're all calling in from different locations this morning. We ask that you bear with us in the event that we should experience any minor delays or inconsistency due to phone line or network latency. 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's statements included in periodic filings with the Securities and Exchange Commission. This presentation also contains non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures are included in the appendix to the presentation. With those formalities out of the way, I'll turn the call over to Jeffrey Edwards.
Thanks, Roger. Good morning, everyone. Let's start on slide five. It goes without saying that the COVID-19 pandemic has had a major impact on our business. What started out as a strong operating quarter quickly became a test of our emergency response capabilities, flexibility, responsiveness, and resilience. Despite disappointing financial results, we're certainly proud of the way our global teams have handled this adversity. They continue to find ways to become more efficient in our operations, driving $16 million in savings so far this year. With the aggressive actions we implemented last year, we reduced SG&A&E by $16 million. We also achieved another great quarter in launches and product quality, which resulted in record high green customer scorecards for the company. Most importantly, our world-class safety performance continues to outperform benchmarks.
In fact, the first quarter marks our best safety performance in our company's history for total incident rate. Moving to slide six. The company continues to aggressively manage our COVID action plan, and we have aligned our global team around three key priorities: protecting the health and safety of our employees, preserving liquidity, and continued execution of our long-term strategic initiatives. Our emergency response teams were activated around the world and quickly implemented health and safety guidelines to help ensure we were adopting best practices at all of our global locations. In China, where the programs were implemented first, we've had no cases of COVID-19 infection among our employees, even as the plants reopened and operations restarted. Our second priority is preserving liquidity. We were fortunate to begin this quarter with a very solid balance sheet.
As customer operations began to shut down as a result of the COVID-19, we took immediate action to reduce capital spending, intensify our focus on working capital, and reduce costs wherever possible. will provide more details in a few minutes, but we're pleased with the results of the cost-saving initiatives and our current liquidity position. Finally, it is important for us to remain focused on our longer-term strategic initiatives despite the challenges and distractions in our current environment. We have. We continue to rightsize our business and are improving our cost structure globally. One of the two plant closures planned for 2020 is now complete, and the second one is on track to finalize later this year.
In addition, as we announced last week, we've reached an agreement that will enable us to exit some underperforming businesses consistent with the strategy we've been discussing with you the past few quarters. Let me stop there and hand the call to Jonathan to review the financial details of the quarter. After Jonathan's comments, I'll come back on to discuss our operations and outlook. Jonathan?
Thanks, Jeff. Good morning, everyone. In the next few slides, I'll provide some detail on our financial results for the first quarter and also comment on our balance sheet and liquidity profile. On slide eight, we show a summary of our results for the first quarter with comparisons to the prior year.
First quarter 2020 sales were $654.9 million, down 25.4% versus the first quarter of 2019. Lost sales attributed to the COVID-19 pandemic and the sale of our AVS business last year accounted for the bulk of the decline. While unfavorable volume and mix, foreign exchange, and customer price reductions also weighed on the quarter sales. Adjusted EBITDA in the first quarter was $8.3 million, or 1.3% of sales, compared to $64.1 million in the first quarter of 2019. The most significant drivers of the decline in adjusted EBITDA were again attributable to the impact of the global health pandemic and industry shutdowns, weaker volume and mix, and customer price reductions. These were partially offset by improved operating efficiency and other cost reduction initiatives, as well as lower SG&A&E expense. On a U.S. GAAP basis, net loss for the quarter was $110.6 million.
This included a $74.1 million non-cash charge for adjusting the net assets of the planned divestiture to fair value, along with project costs related to the transaction that Jeff mentioned earlier. Excluding these charges, restructuring expense and other special items, adjusted net loss for the first quarter 2020 was $36.5 million, or $2.16 per diluted share. From a CapEx perspective, our spending in the first quarter was $50.6 million. While this is down from $59.6 million in the same period a year ago, it may appear relatively high given the current industry challenges. Most of our CapEx in Q1 is actually the cash outflow on commitments made in Q4 of last year, well before the impact of the health crisis was known. In response to the current situation and the aggressive actions we are taking, you should expect significantly lower capital expenditures for the remainder of the year.
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 sales, the impacts related to COVID-19 approximated $115 million. The divestiture of our AVS business further reduced sales by $78 million. Unfavorable volume mix net of price reductions reduced sales by another $16 million year-over-year, while foreign currency fluctuations resulted in a negative net impact of $14 million. For adjusted EBITDA, our ongoing efforts in lean manufacturing and operational efficiency drove $16 million in cost savings for the quarter. We also benefited from $12 million in lower SG&A&E expense as a result of some of the cost reduction initiatives we implemented last year. These savings were essentially in line with our full year expectations, and in a normal quarter, they would seem more impressive.
These efforts at taking cost out were more than offset by the approximate $40 million impact from the COVID-19 situation. Unfavorable volume mix and price reductions accounted for $25 million of the decline in adjusted EBITDA, and the sale of our AVS business accounted for another $7 million. Moving to slide 10. As of March 31st, our balance sheet and liquidity remain solid. We ended the first quarter with $302 million of cash on hand. The typical seasonal outflow from year-end was primarily attributable to capital spending, which, as mentioned earlier, has been largely committed in Q4 of last year. In addition to cash on hand, we had $146 million of availability on our ABL revolving credit facility for total liquidity of $448 million as of March 31st, 2020.
As you may have seen in the 8-K we filed recently, our cash balance improved to $340 million as of April 28th, and our ABL facility remains undrawn. We believe we have adequate financial flexibility to manage through near-term market dislocations. In view of industry conditions, we are carefully monitoring our liquidity outlook by conducting detailed cash forecasts and analyses on a weekly basis. We have taken aggressive measures to reduce and eliminate discretionary items and defer costs and spending wherever we can. We have reduced our capital spending plan by approximately 30% compared to our original plan for the year. This amounts to approximately $35 million-$40 million. We have levers to reduce another 20% if customers further delay or cancel new program launches in response to the pandemic.
Other cost reductions and deferrals we have implemented include the furlough of manufacturing labor, the cancellation of all open hiring requisitions, saving $1 million-$3 million this year, restriction of all business travel, saving approximately $7 million-$10 million, and the partial deferral of salary workforce payroll, delaying payments of approximately $28 million to year-end, or possibly into next year if necessary. We're also leveraging government programs wherever we can, which vary by country. Some of the more significant opportunities include deferred payroll tax payments in the U.S. of approximately $7 million-$10 million and deferred U.S. pension contributions of approximately $3 million. In addition to these actions, we have intensified our focus on working capital management and initiatives to accelerate tooling collections from our customers. We expect that our accounts receivable balance will decline as our major OEM customers in North America remain shut down and sales remain low.
This will result in a corresponding temporary decline in the borrowing base and availability under our ABL facility. However, we expect the borrowing base to build back up with customers coming back online in the next few weeks. Based on the aggressive savings and deferral actions we have taken and our current expectations for the restart of European and North American customer operations, we believe we have, and will have, sufficient liquidity to sustain our operations for the next 12 months. That being said, due to the incredible degree of uncertainty in our industry and the markets we serve, we may consider various options to add to our liquidity that serve as an additional backstop for us if OEM operations don't resume as we expect, or if there is a resurgence of the health crisis that results in additional downtime.
We would only expect to do something here if the terms are reasonable and make sense for our situation. With that, let me turn the call back over to Jeff.
Thanks, Jonathan. With the next few slides, I'll provide some highlights related to the current status of our operations as well as our expectations for restarting production and some commentary on some of the strategic initiatives that I mentioned earlier. If you would please turn to slide 12. In China, all of our plants were shut down for approximately six weeks during January and February due to the spread of the COVID-19 throughout that region. The good news is that once new health and safety measures were put in place, a phased restart of production began in late February, aligned with government directives and, of course, customer schedules. All 12 of our plants have resumed production, and we're currently operating at approximately 75% of capacity with 97% staffing levels due to reduced customer demand.
The new health and safety measures we implemented included health and temperature screenings, mandatory use of personal protective equipment, separation barriers among our work cells, and increased social distancing in our plants. These measures have proven effective so far as we've had no known cases of COVID-19 in our manufacturing facilities in the region. The successful guidelines implemented in China serve as a playbook for us to follow as we return to work in Europe and here in North America. In Europe, customers began to idle operations in early March, and most of our plants were closed by mid-March. A few plants maintained limited production to support essential businesses as well as automotive customers in Asia. A phased restart of production is now underway in Europe, and we will ramp up production as needed to support customer schedules and requirements.
In North America, most of our plants in the U.S. and Canada closed in late March. Our plants in Mexico closed by late April. As in Europe, our non-automotive plants remained open during the crisis to support essential businesses and production of emergency equipment. We now expect our customers in North America to begin a phased restart of operations next week. The good news is that the Mexican government has deemed automotive production as essential business and has agreed to allow operations to commence in alignment with the U.S. and Canada. Due to the abrupt shutdowns around the world, we have a significant amount of finished goods inventory on hand that we expect will facilitate our transition to work over the next few months. Based on customer release, we expect to ramp up our operations to approximately 80% of our pre-COVID-19 plan levels by the end of June.
Turning to slide 13. I mentioned that our Advanced Technology Group plants remained open throughout the health crisis. To us, this is a clear validation of our diversification strategy and part of the reason we've continued to invest in those new markets. We're especially proud of our combined teams' efforts to design and produce new customized components for personal protective equipment and medical devices that were critical at the peak of the pandemic. Their collaboration with customers was outstanding, and they developed these products in record time. In terms of new business development in our Advanced Material science business, our activity has been delayed due to travel restrictions that make it impossible to conduct critical testing activities in our customers' laboratories and facilities. While we face a near-term delay on some of our project timing, we certainly don't expect a significant impact over the longer term. Turning to slide 14.
One of our top priorities continues to be the execution of our longer-term strategic initiatives, despite our current challenges and disruptions. I'm very pleased that we were able to come to an agreement to exit certain underperforming and/or non-core operations. Consistent with what I've referred to as becoming profitable by getting smaller in Europe. The agreement includes 11 plants with approximately 2,500 employees across four countries. We will be exiting our rubber fluid transfer systems business and a specialty sealing business in Europe, as well as all of our consolidated operations in India. To be clear, the reason for the exit of the rubber FTS business in Europe is really due to a lack of scale, which has been created by, frankly, too many players who frequently behave irrationally, and it's just time for us to move on. The FTS product group remains a strategic core business in other regions.
The specialty sealing business in Italy was non-core. India is a market that has lacked significant scale for us, growth, and profit, and it continued to burn cash for essentially the entire time we've been operating there. While the transaction will reduce our overall sales by approximately $200 million annually, we expect to have significant positive impact on our profit margins and cash flow going forward based on the - $14 million of adjusted EBITDA and - $20 million of free cash flow these businesses generated last year. Moving to slide 15. Because of the unprecedented nature of the current industry downturn, there's a lot of uncertainty regarding potential rebound of automotive demand and production. IHS estimates, as shown on these charts, suggest light vehicle production could return to 2019 levels in just a couple of years.
I don't know if these estimates are too optimistic or too pessimistic. No one really does, which is why we see such a wide range of estimates from various analysts and forecasting services, especially in the near term. Due to this high degree of uncertainty, we're not able to provide the typical financial guidance at this time. What I would tell you is that we will continue to work closely with our customers to provide high-quality products and service and where they need them. We will continue to build on our already strong relationships. If need be, we will be prepared to step up to support our customers should they have other suppliers who are not able to fulfill their commitments during these challenging market conditions. Moving to slide 16.
As we move forward in the near term, we will continue our aggressive actions to improve our cost structure and carefully manage cash flows as we adapt to the changing market and lower revenue. Over the longer term, we expect to execute on a defined plan to restore our return on invested capital to the levels that our stakeholders deserve and expect from us. The plan includes identified initiatives in all areas of our company, including our commercial, manufacturing, engineering, purchasing, and supply chain, as well as our administrative and management functions. Building on the cost reduction actions we initiated in 2019, we were well on our way in the implementation of this plan prior to the advent of the COVID-19 pandemic. We have an outstanding team of dedicated employees. We have strong market positions, leading technology, and excellent customer relationships.
I have every confidence in our ability to deliver improved results as we execute on these plans by managing the things that we can control in our business and by quickly adapting to the things that we can't directly control. Let me close by thanking our employees for their continued hard work and commitment to excellence. They've pulled together in a very challenging time, challenging circumstance. I'd also like to thank our customers for their continued support and trust, and we look forward to collaborating closely with them as the global automotive production comes back online. This concludes our prepared comments. We'll allow open phone lines for Q&A, please.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press the star followed by the one key 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 are using a speakerphone, please pick up the handset before entering your request. One moment, please, while we assemble the queue for questions. Our first question comes from the line of Michael Ward with Benchmark. Please go ahead.
Thank you. Good morning, everyone. Jeff, on the ATG side, are you still on track for some meaningful revenue starting to come in in 2021, or non-automotive?
Yeah, Mike. On the ATG, where we have ISG and where we have AMS, the ISG business is what I was referring to as running during the pandemic. We were about 60% up and running in the essential markets. The AMS, I was referring to the testing and so forth that we were in the process of doing when the airlines all shut down. That's postponed a little bit here while we get back to some level of normalcy going forward. As it relates to ATG in total, we won't report separately there, Mike, until probably 2023 before the revenue and earnings cross over any level of meaningful or materiality.
Is that 10%? Is that the bogey on that?
Yeah, 10% is probably what we will go with. That's right. That's what we've said in the past.
Okay. Jonathan, on the CapEx, I think originally you were looking at CapEx in the range of $140 million or $150 million. Based on what you're saying, you're looking at, for the rest of the last nine months, CapEx spending somewhere around $60 million, down from about $100 million last year. Is that the right ballpark?
Yeah. Your math is good there, Mike. Yeah.
Okay.
That's our expectation.
When you talked about your liquidity outlook, is that based on the IHS forecast that you have there?
Yeah, it's that, Mike, coupled with our customer releases, because we're getting releases into the system, the EDI system here, for the next, call it six weeks. Our view of what they're telling us, coupled with IHS over the summertime and into Q3 and Q4.
Okay. As we look at just kind of the cash aspects of the business, really May and early June are the biggest uses. Is that right?
Yeah, that's right. Call it through mid-June is the cash burning time. Once production starts back up and we start collecting receivable money in towards the end of June, then we start generating cash again.
Okay. Is any of your debt subject to covenants?
No. There's no financial covenants or no maintenance covenants on the debt.
Okay. Maybe Jeff, one last thing. From a structural standpoint, is there anything within the company that prevents you to getting back to double-digit margins at the EBITDA level?
Nothing. Actually, what we talked about this morning, Mike, is a very detailed and aggressive plan to do that. We began pulling those levers in 2019. We've got a number of things that we're working on. Again, I want to be clear, this isn't COVID-19 generated. This is something that we announced last year that we were going to be doing. We're aggressively pursuing it, and I believe that the team is very focused on getting back to that level.
Thank you very much. Good luck.
Thank you.
Thanks, Mike.
Thank you. Our next question comes from the line of Brian DiRubbio with Baird. Please go ahead.
Good morning. A couple of questions for you. The divestiture that you announced last week, can you give us any indication if you're receiving any proceeds or not from that?
This is Jonathan. No proceeds there.
No proceeds there? Okay.
Yeah.
Great. Then as we look at your amended ABL agreement, you recently took the tooling receivables out of the borrowing base and mentioned that you established that as a separate line. Is that part of your thinking for additional liquidity?
No. What we're thinking about as far as the tooling receivable element is that we're approaching customers where we can to see if we can get accelerated payments from them. As you look at the profile of the tooling receivables, they're generally collected when the tools themselves are PPAP right before start of production. You look at our $139 million or so tooling receivable balance as of March 31st, and that's ratable across the launch cadence. Instead of waiting till the end, customers have been agreeable to, call it progress payments or in certain cases, upfront payments to bring cash in the door sooner rather than waiting the extended period of time until launch. That's what we're thinking about on the tooling side.
Got it. That is helpful. It's just going back to the estimates that you had on production between the three regions. Maybe different question on that is at what levels do you think you need in order for the company to break even on a free cash flow basis?
Brian, let me get you, Jonathan.
Sure. This is Jonathan again. What we've done is because currently Europe and Asia Pacific are currently cash users, we mainly focus on the North America region when we talk in terms of cash break-even levels. What we've calculated in the past and currently seems to hold true is that the cash break-even level is about 12 million units in North America, and the net operating profit level is eight million units. You can kind of use that as your ballpark.
Got it. Just with the deferrals that you have for this year between salary, pension, and payroll tax, do you have a number of what that cash impact will be for next year? Or is it too early to tell?
Too early to tell, some of those deferrals, like for example, the payroll tax item, that can be spread over 2021 and 2022. While we'll save about $7 million-$10 million, that's spread 50/50 over the next two years after 2020. Then, as I mentioned in my prepared remarks, the salary piece should industry production bounce back to the level where we're in the position to reimburse, we could pay that in Q4. If it's not, then we could potentially pay that in 2021.
Understood. Thank you for your time.
Thank you.
Thank you. Our next question comes from the line of John Levin with Levin Capital. Please go ahead.
Yes. Could you update us on the developments in Fortrex as a special? In reading the release, I couldn't tell what degree of progress has been made and over a broad term, what kind of progress do you still anticipate? There were big projections and hopes for what seems like a great product at some point.
Yeah. Thanks, John. This is Jeffrey Edwards. I'll take that. What I was saying in my prepared remarks is obviously the testing activity that we were undertaking when COVID occurred, a lot of that was happening in Asia. That has been postponed while the airlines are off, if you will. As it relates to the long-term projection, as I said in my remarks, I don't believe it'll have any impact. We're still very pleased with how Fortrex is behaving in our automotive business. We continue to ramp that up there. We also believe that through the process that we have laid out for everybody the last couple of years, that it's gaining momentum on the non-automotive side. This would be a short-term issue because of the engineers not being able to get around and work with each other. Longer term, no impact.
Can I follow up perhaps on the call? I mean, there are other people. I would make a question and a point. The question you comment about Asia, does that mean there's not much domestic activity going on? I would also suggest that in reading your reports and listening to you, if you could break out this promising area, you might have more investor confidence. It's very hard when it's melded or merged with other products.
Was that a question for me, John?
Well, the first was why you referred to Asia. I assume the same kind of delay is going on in domestic markets, but maybe Fortrex doesn't have much potential in domestic markets is what you were saying.
No, that's what you said. I said that it was delayed in Asia because that's where we were doing our testing here in the first quarter. We continue to have activity in both North America as well as Asia. As far as breaking it out when it becomes material and significant, we plan to do that as we've talked in the past. Thanks for the question.
Great. Okay. I'm just trying to get people focused on this issue, obviously. It was meant to be a constructive question. Thank you.
Thank you. As a reminder, ladies and gentlemen, if you have a question, please press star one on your telephone. Once again, that's star one. Our next question comes from the line of Robert Amenta with JP Morgan. Please go ahead.
Thank you. Good morning. A couple quick questions on cash flow. You guys delineated the payroll taxes and pensions and obviously CapEx. The one other area that I had from your prior call, that would be taxes. Obviously, we can mess with that on our own. But with the cash reorg, I heard a $30 million- $40 million kind of number previously. Is that pretty much set in stone? Is it higher? Is it going to be lower given everything that's going on this year?
Yeah, Robert, it's Jonathan. I can take that one. You can expect that to be actually lower than we had originally planned at the year-end call. We've kind of looked at the restructuring plan that we had in place for the year, and then we dialed that back as we look for the production levels to ramp back up, and then we can reassess the overall footprint and any levers we can pull there.
Okay. Is it modestly lower, like 5%-10%, or is it 50% lower? Just to give a ballpark kind of-
I would call it more closer to the 50% level. It will still affect the plant closure that Jeff referred to earlier. That'll happen in the late summertime, so we'll have a moderate outflow there. I call it 50% of the levels we had planned on at the beginning of the year.
Okay. Maybe you addressed the working capital, but obviously you had kind of a $50 million year-over-year better. I mean, $11 million in versus $40 million out kind of. Rest of the year, I would think if the ramp-up starts up here soon, that maybe you would use some working capital here in the second quarter. If we're at + $11 million through three months, for the full year, do you expect to be positive, negative, flattish based on what you see as the ramp-up now?
Yeah. Bob, this is Jonathan again. With the respect to the ramp up, you would normally think that there would be a significant working capital usage there. Because of the North America and Europe shutdowns were so abrupt in the middle of March, we closed the quarter still with a fair amount of inventory on hand. We won't need to go out and procure a bunch of inventory to restart our production, that'll help working capital here in Q2 and moderate what you would expect to be a normal outflow. With clearly, you're right, we've been collecting on receivables, that helps the inflow in here in Q2. Then, the payables are still going out the door. You could think about it through Q3.
By the end of Q3, that gets more back to a break-even level on overall working capital movements and should carry through to the rest of the year.
Okay. For the full year, including Q1, again, when I say roughly breakeven on the ±$25 million either way, it seems like working capital should not be a material use or source of cash for the entire year then. It seems like.
Yeah, that's how we're modeling it right now, Bob. Without giving specificity on the numbers, I think you're thinking about it correctly.
Okay. Just lastly, you guys called out the COVID and the EBITDA impact, which I thought was helpful. Some others just kind of gave a revenue impact. that is, if you want to call it decremental margin, 115 and 40 of EBITDA on that's a 35%. If we go in 3x that, if it's $350 million revenue hit this quarter just based on production, clearly a 35 decremental is a $100-ish or more million of EBITDA. Is there anything you could point to in that EBITDA versus sales impact that would be better or worse as a percentage or anything that would change me just putting in whatever I assume the sales hit is and taking a comparable EBITDA kind of hit as a percent?
Yeah. Without giving you the exact percentages, let me try to answer it this way. The 35% or so decremental margin, what we tried to do there, and clearly it's unprecedented, so this is our best approximation of the impact. Clearly you have the lost volume and the related pull-through, but you're also incurring expenses that you can't just turn off. Think about it in canteens in the plant or certain impacts that still go on even though the plant's not running, that were specifically identifiable to the COVID-19 shutdown. That's why what would normally be a 20%-30% decremental margin rises up to 35% or so. I don't expect the 35% to carry forward through the rest of the year or the rest of the Q2 shutdown. I would just call it somewhere south of that.
Okay, fair enough. Thanks. That's all I had.
All right. Thanks, Bob.
Thank you. It appears there are no more questions. I would now like to turn the call back over to Roger Hendriksen.
Okay, thanks everybody. We appreciate your participation this morning, and we'll look forward to engaging in further conversations as the days and weeks unfold. If you do happen to have any additional questions, please feel free to reach out at any time. Thanks again. This concludes our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.