Good morning, ladies and gentlemen, and welcome to the Cooper-Standard third quarter 2022 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 star one one on your telephone. As a reminder, this conference call is being recorded and a webcast will be available on the Cooper-Standard's website for replay later today. I will now turn the call over to Roger Hendriksen, Director of Investor Relations.
Thanks, Livia, and good morning, everyone. We appreciate you spending some time on the call 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 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 formalities out of the way, I'll turn the call over to Jeff.
Thanks, Roger. Good morning, everyone. We appreciate the opportunity to review our third quarter and year-to-date results and provide an update on our business and the outlook going forward. To begin on slide five, we provide some highlights or key indicators of how our operations performed in the third quarter. We continue to execute at world-class levels by delivering quality products and services to our customers and keeping our employees safe. At the end of the quarter, 98% of our customer scorecards for product quality were green. Our launch performance scorecards were at 96% green for the quarter. More importantly, the safety performance of our plants continues to be outstanding. Through the first 9 months of the year, we have 28 plants that still have a perfect safety record of zero incidents.
I wanna recognize the teams at these plants for their continued commitment and leadership as they once again confirm that achieving our ultimate goal of zero incidents is possible. I could not be more proud of the global team for their continued commitment and world-class achievements in maintaining a safe workplace for all. While conditions in the global automotive industry obviously remain challenging with continuing supply chain uncertainty, reduced production levels, and high inflationary pressures, we've maintained our focus on reducing costs across the company. Our manufacturing operations were able to deliver $22 million in savings through lean initiatives and improving efficiencies in the quarter. Our SG&A expense was down $7 million year-over-year as we continue to right size our fixed costs. Past restructuring actions delivered $2 million in benefits in the quarter.
We also saw incremental benefits from our enhanced commercial agreements on pricing and cost recoveries in the quarter as more negotiations were concluded and additional adjustments were implemented and realized. Moving to slide six. Our new product innovations continue to garner recognition from trade groups as well as our customers. This morning, I'm pleased to announce that our advanced thermoplastic thermal management solution for electric vehicles has been named a finalist in the Society of Plastics Engineers Annual Automotive Innovation Competition. Our new PlastiCool 2000 tubing technology was developed specifically for the operating temperature and pressure environments required for glycol thermal management systems in battery electric vehicles. It also aids in optimizing flow and provides a weight reduction of 60% compared to more traditional EPDM tubing technologies, helping to improve overall vehicle efficiency.
Combined with our latest Ergo-Lock plus quick connect technology, the system also improves the flexibility and efficiency of the OEM assembly process, a significant value add for our customers. While we're pleased to be recognized by the Society of Plastics Engineers, we're even more pleased with the new business awards that our customers are giving us, largely driven by our continued focus on value add innovation. Turning to slide seven. Continuing on the topic of product innovation, during our last conference call in early August, I spoke about the progress we're making in expanding the scope and opportunities within our Fluid Handling business. Internally, we call it our four C strategy, which refers to our four critical functions of fluid systems in a vehicle, connect, convey, control, and communicate.
Our traditional suite of products has focused primarily on the connect and convey functions. We have established a track record of providing world-class technology in many different types of tubing and related connectors, and they have garnered recognition and driven new business, as I just discussed. Through our comprehensive product strategy in the joint development agreement with Saleri, we announced in August we're rapidly progressing the development of new next-generation technology that integrates the functionality of pumps with advanced fluid control, routing and connection technologies into a single device. These new systems are expected to further optimize the cost, efficiency, and complexity of thermal management in technically advanced electric vehicles. For our OEM customer, it will add value through system simplification, enhanced performance, light weighting, and improved fluid management efficiencies.
For Cooper-Standard, the new technology will significantly expand the scope of our product offering and increase our revenue and margin opportunities. Our fluid systems engineers are already collaborating with OEM design teams under multiple non-disclosure agreements to explore how our new capabilities and patented technologies can help them solve some of their biggest system design challenges. The early response has been very favorable, and we're excited about the potential new growth opportunities our expanded capabilities will provide. Moving to slide eight. Our Sealing Products team is also delivering exciting new innovations for the electric vehicle market. Among these are flush seal and frameless sealing systems. These technologies are rapidly becoming favored design choices for the premium and electric vehicle markets as automakers work to differentiate their vehicles through a range of styling options.
Of our most recent Sealing business awards, 30% have been for frameless technology, and we expect this trend will continue. This represents additional growth opportunity as the frameless technology drives a significantly higher content per vehicle, in some cases more than 100% higher than traditional Sealing systems. We continue to believe our investments in product and technology innovation are the key to driving future profitable growth. We expect this will benefit us even further in the months and years ahead as we optimize our cost structure and as production volumes and inflationary pressures normalize. Now let me turn the call over to John to discuss the financial details of the quarter.
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 balance sheet. On slide 10, we show a summary of our results for the third quarter of 2022, with comparisons to the same period last year. Third quarter 2022 sales were $657 million, an increase of nearly 25% versus the third quarter of 2021. Gross profit for the third quarter was $38.6 million or 5.9% of sales. This compares to a gross loss of $8 million in the second quarter of 2021. Adjusted EBITDA in the quarter was $20.5 million, compared to negative $33.9 million in the third quarter of 2021.
The year-over-year improvement was driven primarily by favorable volume and mix, cost recoveries and manufacturing efficiencies, partially offset by continuing commodity and material cost headwinds, higher labor and energy costs, as well as other inflationary pressures. On a U.S. GAAP basis, net loss for the quarter was $32.7 million, compared to a net loss of $123 million in the third quarter of 2021. Excluding restructuring expense and other special items, adjusted net loss for the third quarter of 2022 was $29.5 million or $1.71 per diluted share, compared to adjusted net loss of $106.4 million or $6.23 per diluted share in the third quarter of 2021.
The year-over-year improvement resulted primarily from improved gross profit, reductions in selling, general, administrative, and engineering expenses, and lower income tax expense versus Q3 of 2021, when we recorded a significant charge related to valuation allowances on deferred tax assets in the United States. Our capital expenditures in the third quarter totaled $14.2 million, compared to $20.4 million in the same period a year ago. We continue to have a disciplined focus on capital investments, and we are on track to keep CapEx below 4% of sales for the full year as we committed last quarter. Moving to slide 11. The charts on slide 11 provide some additional insights into the key factors impacting our results for the third quarter.
On the top line, favorable volume and mix, net of customer price adjustments, increased sales by $168 million versus the second quarter of 2021. Improving customer production volume year-over-year was the biggest driver, and customer cost recoveries in the quarter also included in the volume and mix category. Foreign exchange, mainly the euro, reduced sales by $32 million versus the same period last year. The deconsolidation of a joint venture in Asia, which was completed in the first quarter of this year, further impacted sales by $6 million. For Adjusted EBITDA, volume, mix, and net price adjustments, including recoveries, drove a combined $69 million of improvement for the quarter. Lean initiatives in purchasing and manufacturing efficiency contributed $22 million. Reductions in SG&A added $7 million, and savings from past restructuring actions added another $2 million.
As for the headwinds in the quarter, higher material costs amounted to $35 million, and higher wages, compensation-related costs, general inflationary pressures, and other items reduced Adjusted EBITDA by a combined $10 million in the quarter. Moving to slide 12. Looking at these same key operating measures and drivers for the first nine months of the year, sales increased 8.5% compared to the same period in 2021. The increase was driven primarily by improvements in volume, mix, and net price adjustments, with partial offsets from the deconsolidation of the Asian joint venture in the first quarter and unfavorable foreign exchange.
For Adjusted EBITDA, significant improvements from positive volume and mix, net price adjustments, manufacturing and purchasing efficiencies, lower SG&A, and restructuring savings were more than offset by increased material costs, which have now reached $117 million in the first nine months of this year, as well as higher wages and general inflation. Turning to slide 13. In terms of cash flows, cash used by operations during the three months ended September 30 was approximately $10 million, driven primarily by increases in inventory and tooling receivables. With CapEx of approximately $14 million, as mentioned earlier, we had a modest net free cash outflow of approximately $24 million in the quarter. As a result, we ended September with a still solid cash balance of $231 million.
Availability on our revolving credit facility, which still remains undrawn, was $156 million at quarter end, resulting in total liquidity of $387 million as of September 30, 2022. From a liquidity perspective, based on current expectations for light vehicle production and customer demand for our products, we expect our current solid cash balance and access to flexible credit facilities will provide sufficient resources to support our ongoing operations and the execution of planned strategic initiatives for the foreseeable future. Separately, the company's ability to meet its debt service requirements for the next twelve months is contingent upon our ability to refinance our term loan facility. We are continuing discussions with certain investors with respect to potential refinancing alternatives.
While these discussions are ongoing and have been constructive, the company has not yet reached an agreement for refinancing its capital structure, and there can be no assurances that such an agreement will be reached. Beyond that, we won't be providing any further details at this time. That concludes my prepared remarks. Let me hand it back over to Jeff.
Thanks, John. To wrap up our discussion this morning, I'd like to touch on our ongoing efforts to further improve our cost structure and then update you on the outlook for the full year. If you'd please turn to slide 15. We're continuing our focus on reducing costs and rightsizing our operations where necessary. These efforts have delivered more than $100 million in savings per year over the past 3 years and already $86 million in the first nine months of this year. As conditions in our markets around the world remain challenging, we're continuing to evaluate our business and seeking ways to improve and further optimize our operational footprint. To be clear, all options are on the table.
We have made good progress and completed a number of cost reduction and rightsizing initiatives this year, as outlined on the slide, and we expect to complete the remaining projects in 2023. In the remaining months of 2022 and into next year, we expect the rate of inflation to slow and our cost reductions, manufacturing efficiencies, and enhanced commercial agreements should allow us to further expand margins and improve cash flow. Turning to slide 16. In terms of our 2022 guidance, we are trimming our full year estimate for sales and Adjusted EBITDA, factoring in the results for the first 9 months of the year, which fell short of our original expectations, primarily due to continued variability in our customers' schedules and weak production volumes.
We now expect full year sales in the range of $2.5 billion-$2.6 billion and Adjusted EBITDA in the range of $45 million-$50 million. The revised range remains very near the low end of our original guidance range for Adjusted EBITDA, despite the disappointing production volume. In addition, the midpoint of these ranges suggests a significant sequential improvement in Adjusted EBITDA margin for the fourth quarter, an improvement we expect to carry forward and build upon into 2023. While there is still a lot of uncertainty in the global economy and in our industry, we continue to successfully manage the aspects of our business that we can control. Our cost structure has improved significantly and is still improving.
Our manufacturing operations are running as efficiently as they ever have, and we continue to fulfill our end of the bargain with our customers, delivering quality products on time and supporting their strategic initiatives and objectives with our technology and innovation. I wanna thank our global team of employees for their continued dedication and their commitment to delivering for our customers and other stakeholders in this challenging environment. I also wanna thank our customers for their continued trust, confidence, and their support in managing through commodity inflation. However, as the weakness and volatility of customer production volumes continue, we will aggressively pursue further commercial enhancements to offset volume shortfalls and related stranded costs, as well as ongoing inflationary pressures. Despite all the noise and uncertainty in our industry, I'm confident that the innovative products, sustainable solutions, and value that we're providing to our customers will ultimately be fairly compensated.
This will enable us to drive increasing long-term value, not only for our customers, but for all of our stakeholder groups, including our employees, communities, suppliers, and our investors. This concludes our prepared comments, so let's open up the call for Q&A.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone. If you are using a speakerphone, please pick up the handset before entering your request. One moment, please, as we assemble the queue for questions. Now, first question coming from the line of Mike Ward with Benchmark. Your line is open.
Thank you very much. Good morning, everyone.
Good morning.
Jeff, on the Ford earnings call, the company cited $1 billion lump sum payments to suppliers or for supplier settlements. In addition, it said it was not just for commodities, but for other things like disruption in production schedules. I think Cooper has the highest or among the highest exposure to Ford on a relative basis. Can you walk us through that process? I think you mentioned in your comments that part of those settlements were implemented and realized. I mean, is it the type of thing where the material costs are kind of straightforward, and then with the production disruption and some of the other stuff, the freight, it sounds like there are several buckets. Am I reading that correctly?
You're correct, Mike. The first bucket that we've been talking about specifically this year is obviously the raw material component of the cost buckets, if you will. We are pleased that we've completed those negotiations really with all of our customers. Many we have now indexing contracts in place. Others, we have quarterly surcharges in place that address the material cost inflation that we've been bearing, quite frankly, for a number of months. I would say consider the negotiation related to material closed. Going forward, we expect that we'll be at or above the high end of our recovery that we've had historically.
Think about 70% recovery of all raw material inflation going forward. Of course, when it goes the other way, then we share that back with the customer. Very pleased with how that's all transpired. As I mentioned, I thank our customers for working with us and allowing us to get to a point where we think it's sustainable. Your other question is the bucket related to start-stop, labor, freight, energy costs, and the like. Those negotiations continue. Those are typically handled more in terms of surcharges with customers. I would expect us to continue to recover more and more of that into 2023. That was in my prepared remarks.
I think that we're confident that they're gonna work with us to help recover those shortfalls. It's still a very challenging environment. We would really like, if we had our magic wand out there, we would wave it. If the volumes would've hit per the releases in the third and fourth quarter, we'd have a much different conversation right now. Unfortunately, the volumes, as I said in my prepared remarks, continue to be short of the releases that are out there, and that's causing even more headwind and hence more challenging conversations with our customers going forward.
You know, when I look at that bridge analysis, John, in your chart twelve, and it had $117 million in material economics through the first nine months. Is that money that will be recovered, or is 'cause I think you mentioned that the recoveries are included in the volume and mix. Correct? Is that 117?
Yeah, Mike, the $117 on the bridge page there is the gross commodity costs. The recoveries, you're right, we include those in the volume and mix bucket as we've historically included price in those rows of those charts. As Jeff mentioned, you can think it in terms of, you know, being around that 70%+ of recovery on that $117 both from a, you know, current period perspective as well as some catch up on 2021 commodity inflation that we're able to call back this year.
Okay. You recovered part of the $117, but not all of it. Part of that will come over the next couple of quarters.
Yeah. There's a kind of quarter delay, perhaps a two-quarter delay.
Okay.
As those index contracts reset, and then you're doing a look back period on the previous quarter or two to do the recovery mechanism.
Okay. On the general inflation and other, that $69 million, would that include any of the impact from the start-stop?
That would not necessarily in that bucket. What it would include is your general economics, your labor inflation, transportation costs, utility bills going up. The start stops, those are really inherent in the cost of goods sold manufacturing bucket. You know, they degrade the lean activities and the efficiencies we're able to gather. They kind of go against that area as opposed to the other bucket.
That could be over and above the material recoveries for the next two quarters as we recover in 2023. We're up north of $100 million for potential recoveries.
That's the goal. Yep.
Okay. John, just one last question. On the term loan, is there any significance that it is now current as it relates to your, the refinancing activities?
You know, Mike, today is technically the date the term loan goes current. I'll emphasize that, you know, that's as of right now, it's a date on the calendar. We're still engaged in those constructive conversations with investors to look at the capital structure and arrive at a potential refinancing alternative. Mike, there's no impact on our debt agreements right now because that is current, or anything like that. There's no default situation. It's just that it's now within 12 months of coming due.
Okay. Thanks, John. Thanks, Jeff.
Okay, Mike.
Thank you. One moment for our next question. Our next question coming from the line of Steve Ferazani with Sidoti. Your line is open.
Good morning, Jeff. Morning, John. Appreciate all the color on the call. Do wanna follow up a little bit of the previous questions 'cause I'm looking at the EBITDA margin in North America, where you did see some growth, and I would've expected a little bit more improvement. I'm trying to get a sense, is that the continued inflationary pressures, is that the starting and stopping that you've added labor and you're just not getting the volume that you were expecting? Trying to get a sense of what we're seeing on that margin line.
Yeah, Steve, this is John. I'll take that. North America was certainly, you know, pressured along with the entire company on the commodity side as well as those other inflationary pressures that ate into the what you would have otherwise expected from the benefit of the uplift in volume and mix activity during the quarter year over year. If I look across that $35 million of commodity inflation for the quarter, nearly $15 million of that was hit in North America. Similarly, within that, the general economics that are really higher than the $10 million 'cause there's pluses and minuses in that other row on the bridge.
You know, there's over $6 million of what I'll call the normal wage/utility/transportation inflationary pressures hitting the North American market. They are doing well when the volumes are coming back, as Jeff indicated. Those other inflationary pressures are certainly eating into the performance there.
You see here, I mean, based on the bridge, you're not seeing much easing at this point. Some of that might be what's coming out of inventory, not quite clear. Are you getting any sense beyond energy that there's some easing to your inflationary pressures where you can start really catching up beyond just the contracts you have in place now?
Steve, let me just clarify. Are you speaking in terms of commodities or all the other inflationary buckets?
Throwing them all in. I'll leave it open-ended for you.
Okay. Well, certainly the rate of increase of inflation is subsiding somewhat, but it's certainly not going down, and you're not experiencing any deflationary benefits or tailwinds for us in the quarter. You know, looking ahead, perhaps there's some longer term commodity prices that are projected to come down. As of right now, the inflation is still running high.
Certainly relative to year-over-year, as we see it. As you know well, energy costs in terms of natural gas and electricity and labor inflation, those are sticky, and those don't tend to revert back and deflate. I think we'll be facing those for a long time here now.
In previous quarters, you talked about cash on the balance sheet going to remain relatively stable this year, despite the challenging environment. We did see it come down a bit this quarter. It looks almost entirely related to higher inventory. How are you thinking about cash management over the next couple of quarters, assuming we're maintaining this sort of challenging environment?
I'd characterize it this way, Steve, that cash is top of mind for everybody in the company. We're continuing to monitor all discretionary spending and preserve Cooper-Standard cash and protect the balance sheet, if you will. While we don't typically provide you know, guidance on free cash flow, we do obviously expect an increase in EBITDA in Q4 here. The typical seasonality where we can draw down inventories as production levels drop towards the end of the year will definitely you know, be a positive benefit to cash flow in the quarter.
Keep in mind, Q4, we do have interest payments to the tune of about $30 million on both our unsecured notes and our senior secured notes that hit in November and December. You know, we'll have to manage through the working capital side offset by those interest coupons in Q4.
Great. Appreciate it. If I could just get one more in. In terms of any updates in terms of Fortrex marketing to outside of your typical customer base.
Yeah, Steve, this is Jeff. We continue to march towards the launch of the first new deal. I think that's been pushed into the early second quarter, but still basically on target what we've talked about. We are having continuing discussions with that particular customer about expanding the opportunities, but we don't have anything to share specifically related to that other than to tell you that those conversations continue to happen at a pretty good pace.
Thanks, everyone. Appreciate the time.
Okay.
Thank you. One moment, please, for our next question. Our next question coming from the line of Jeffrey Seely from Clancer. Your line is open.
Good morning. Could you tell us or give an update on Brazil? I recall Ford was closing a plant there, and you had some restructuring expenses in South America. Any update specific to that and restructuring in general?
Yes, this is Jeff. On Brazil, our teams have done a very good job of reducing costs and also managing the price recoveries from our customers there. We do expect, as we look forward to 2023, that they will be in a pretty healthy position, assuming they can continue to close the deals with the customers that they have to close here in the quarter. We are encouraged by the potential upswing in profitability in Brazil.
That was a co-located. You were in a customer plant, correct?
We have a variety of manufacturing footprints there. The one you're speaking of with Ford is history. What I'm talking about is what's left and the fact that we'll be profitable in 2023 based on all the work that's been done there this year. I think what you were referring to is my comments in previous quarters about all options are on the table as it relates to that business footprint. I'm encouraged that as I sit here today, I think there is a way forward for us in Brazil, and it's directly related to the effort of that management team there and the leadership to get the business turned around. We're pleased about that.
Okay, that's great. Last question. Is Goldman still engaged as your advisor for the refinancing?
Yes.
Perfect. Thank you, guys.
Thanks, Jeff.
Thank you. One moment, please, for our next question. Our next question coming from the line of Brian DiRubbio with Baird. Your line is open.
Good morning, Jeff and John. Just a couple of questions from me. Can you, Jeff, maybe help us get a sense what operating cadence or the operating rate of the plants have been over the last quarter versus maybe at the worst point of the production issues?
Yeah, I think the volume over the course of 2022 continues to be up versus what we saw in 2021, as John talked to you about. My biggest concern is that, especially related to the third quarter and the fourth quarter, there was a lot of conversation from our customers about the strength of the third quarter and the strength of the fourth quarter, and it was frankly reflected in the releases. I'm really talking about here in North America with these comments. Then in both instances, the actual volumes fell considerably short.
When you look at an inventory number that's up considerably from what we would have expected it to be on these particular revenue points, it's directly related to the fact that the releases were there and then the volumes were pulled out and didn't happen. That's part of the challenge. Look, we know that our customers are doing the best they can. I'm just stating the facts. That's that volatility, if you will, continues to impact us, and I'm sure other suppliers as it relates to the efficiencies that we really need, the stability that we really need out of the releases.
If we get that stability and then most importantly, if it's up, then that results in a much healthier environment. Unfortunately, that's not where we are. Let's see how 2023 takes off. We expect that many of the supply chain issues that have hit us the last few years are going to be subsiding based on most reports. I'm hoping that'll add a level of stability to the release process. That helps us get the right amount of labor, get the right amount of inventory and be as efficient as we can on the manufacturing side. Hopefully that answers your question.
No, that helps. Thank you. John, last earnings call, you had mentioned that there was other potential opportunities for a sale-leasebacks. Just wanna see if there's any updated thoughts on that front.
Yeah, Brian, thanks for the question. Nothing new to report on that front. We continue to look at those opportunities to unlock some capital. We haven't entered into any sale-leaseback transactions since we did the large one in Europe in Q1. You know, those options are still on the table for us. If it makes sense economically and the you know, the cap rates are such that they plug into our cost of capital nicely and don't burn in ongoing operations with you know, significant lease expense to unlock that capital, then we'll go ahead and enter into those. For now, we're just continuing to investigate opportunities across the entire real estate footprint.
Okay. Switching gears, just focusing on Europe for a second. Is the biggest headwind that you're experiencing there, is it just, you know, the, you know, operating cadence, or is it the energy costs? Just trying to get a sense of, you know, what you need to occur to get Europe from turning EBITDA positive.
Yeah, this is Jeff Edwards. As we've said before, we recognize we have some fixed cost issues that we ultimately need to address in Europe, and we have plans to do that. That's kind of under the bucket of what we can control. We also have a significant challenge there with many of our prices, frankly, as we've absorbed a lot of the non-raw material inflation. I'm talking about the non-raw material inflation at this point has really eaten away at what margins we did have in Europe.
We're having those conversations with customers, and I expect here over the next 30-60 days that those will become extremely pointed and extremely important as it relates to at least getting us to a point where we can see an improvement in our European business. The final point that's been a big challenge there obviously is the volumes, right? They have dropped off a cliff starting in the third quarter. You know, when you look at the macroeconomic challenges, the geopolitical challenges in Europe, it continues to create a significant headwind for everybody. Hence is what I said before. For us, all options are on the table for Europe. Much like we've talked about Brazil.
Ultimately, these businesses have to begin generating a return for us, or the options are pretty clear. While we are hopeful that our customers will continue to agree with what we need in order to maintain a fair relationship there, we'll see how that goes over the course of the next several months, and we'll keep you posted.
Got it. Final question for me. You know, as it pertains to inflation, the metal prices and other commodities have started to decline off their February peaks. If I'm hearing you correctly, is it now more of just the energy and labor that sort of replaced the commodity inflation that's impacting the business?
This is Jeff. Well, obviously, when you talk about energy costs going up, I mean, that impacts a lot of buckets. But we are hopeful that when we talk about labor, when we talk about freight, when we talk about utilities, that we're able to get to a deal in Europe with those customers that will allow us to at least get whole and hopefully start to make our way towards a positive business environment there. You know, we can't continue to give away parts. It's just not feasible. Believe me, those conversations are happening. They're pointed. It's not personal.
We just gotta get to a point where we're able to make money there and sustain it, and we're either gonna do that or we're gonna do something else.
Understood. Appreciate all the thoughts. Thank you.
You bet.
Thank you. One moment, please, for our next question. Our next question coming from the line of Kirk Ludtke with Imperial Capital, Yelena Salpin.
Hello, everyone. Thank you for the call. Just a couple follow-ups. You know, with respect to the customer relationships, are you negotiating. Would you describe what you're negotiating as one-time price adjustments, or is the nature of the relationship changing such that, you know, these, you know, material costs are becoming more of an automatic pass-through?
Yeah. Kirk, for the material side of it, as we've talked before, we probably have 65% or so of our total company revenue is now indexed related to the raw material cost portion. So that's a significant improvement over where we were. The other ones are quarterly surcharges that really act in a similar way. So we're confident that those deals that we've cut are also sustainable, which is why we said earlier that we feel going forward that we're at a 70% recovery rate. I'll use the words that you just used, that it's automatic going forward, whereas in the past, they've been ongoing price negotiations.
That's the substantial improvement or substantial change we've made, really in the foundation of this business, and I feel very good about that. Related to those other costs of product that's in production, labor, freight, utilities, those things that everyone's dealing with going up, while you get to quote those costs on your new business going forward and the business that we've yet to launch would reflect those additional costs. The business that you have in production today requires you to go back and negotiate those recoveries separately. That's what we're doing. We expect that we'll have similar results as we look at our 2023 book of business in recovering at least our fair share of those other buckets.
Thank you. That's helpful. It sounds like you've de-risked the business. Would you say that the margins would be similar? In other words, you're-
Yeah, I think we believe that we have reduced the volatility, we've reduced the risk, if you will, of raw material ups and downs. That's good. We believe it's good for the customer, we believe it's good for us, and that's positive. Related to those other buckets, you historically wouldn't have seen such large increases in labor and freight and so forth. Energy costs certainly coming this winter, especially in Europe, although probably not as terrible as originally thought, still up. We believe that it's fair to have those items on the table when we're discussing cost-sharing and lean initiatives and VAVE and long-term contracts that you accept at LTAs, you know, in different environments.
Those are all the things that are in the center of the table when you're having this conversation. All we want is to keep, you know, something that's fair, and we aren't gonna continue to reduce prices when costs are going up at the level they are. It's pretty straightforward.
Got it. Thank you. That's helpful.
Okay.
Just one other. With respect to the production, specifically in the next couple quarters in Europe, you know, understand that, you know, inflation is still there. I'm just curious, are there any real risks to production like energy rationing, you know, that type of thing? I know it's hard to. You don't have a crystal ball, but, you know, how do you think about that type of risk?
Yeah, I don't have a crystal ball, but I can tell you that I can read my current financial statements and clearly the revenue is suppressed. I don't see anything in the near future that's going to change that. Hence these conversations about cost recovery and getting to a point where Europe can generate positive cash flow is more than we can do by ourselves. We need help from our customers to get a footprint and a sustainable foundation there that will allow us to continue to make positive gains related to cash flow in Europe until things return to normal. I have no idea when that is. We're just treating it as if it's gonna be bad for a while.
Got it. In terms of your customers' production levels, are you hearing about schedules being altered by actual rationing of energy?
No.
Okay, I appreciate it. Thank you very much.
Thank you. One moment please for our next question. Now next question coming from the line of Benjamin Briggs with StoneX Financial. Your line is open.
Yeah. Hi, guys. Thank you for taking the questions. Most of mine surrounding inflation were answered already, so thank you. As it relates to labor, though, are you able to hire the number of employees that you need at wages that are attractive to the company, just given the labor and inflationary environments?
This is Jeff. I think in most markets, but clearly we have certain plants in certain states and in certain regions around the world that we think those headwinds are something that's gonna need to be addressed on a long-term basis. I think that whether you're, you know, working in retail or whether you're working in fast food or whether you're working in manufacturing, I think you kind of have a similar feeling right now that labor is tight, costs are going up. What we do is try to make sure that we provide the type of environment that's competitive for our employees and that they believe they have a long-term future that will help support their families.
That's what we try to make sure that we do. We aren't trying to pay the most, but we recognize that we have to pay a competitive wage. All of those wages for us virtually in every region have increased. I would say that we have at least gotten to a point where we have enough people lined up outside that we can feel like we can run the facilities the way we need to run them, as long as we're willing to pay the wages that the market's demanding right now. Hopefully that answers your question.
Yeah, that does. Thank you. As a second question I had, so SG&A this quarter came in at about $45 million, which is really well below where it's been historically, and it shows a lot of your cost-cutting initiatives are bearing fruit. Should we think of this, call it roughly $45 million level, as a new run rate? Or do you think that's gonna go back up or change materially going forward?
Ben, this is John. I'd say it's in the ballpark. You know, the efforts that you described that we're continuing to look at all costs, not just SG&A, and make sure it's right-sized and rationalized for our current size and footprint will be ongoing. We were continuing to look for further opportunities, not only at SG&A row, but across the full P&L. You know, we'll continue to drive that down and make sure it is right-sized, as I mentioned. The only one thing I would call out in the quarter, when you're looking at the run rate, you also have to look at all of the compensation-related structures that we've got in place.
With the unfortunate continued pressure on production volumes overall, in our lowering of our guidance that we talked to you about a few minutes ago, you know, the bonus plan for the year won't be at 100% payout. You do see a slight decline in SG&A related to taking that bonus level down to, call it, the 75% range. That would be not in your go-forward run rate.
Got it. Thanks. That's very helpful. I appreciate that. That's it for me.
Thank you. Now our last question in queue coming from the line of, with Soher Amir with Bridgepoint Capital. Your line is open.
Hi. Thanks for taking my call. Most of my questions have been addressed, but I just wanted to talk about what initial thoughts you guys can share about how 2023 might look. You mentioned during the call that Q4 might be a better indication of run rate, and I was wondering if you might provide guidance on how we could extrapolate forward. Yeah, this is Jeff. I think I said during the prepared remarks that if you look at the margin improvement in the fourth quarter, you know, we expect to continue to build on that in 2023. That's kind of where we're leaving it today as it relates to 2023. Clearly, we've talked a lot about volume. We've talked a lot about release versus actual production. We need stability in 2023.
We need numbers that we can take to the bank and run our plants off of. I'm hopeful that that's what we're gonna get. Allow us to, you know, get a little closer here to the end of the year when our customer starts to put out numbers that are hopefully accurate for the quarter. Clearly, when you look at some of the folks out there that do forecasting for a living, they continue to talk about some softening versus what they originally thought 2023 was going to be. That's really what we're seeing right now. It would be too early for us to assume what each of our customers are gonna do.
We usually wait until the call to talk about the year-end and February, March time period, and then we'll have a better understanding of what 2023 top line is gonna look like.
With regards to the incremental costs that come as releases and actual production don't match, can you give us a sense of how much of a headwind that's been this year?
Well, you saw the inventory for the quarter, right? That's one large bit of cash that you know we spent because the releases were up. You know, it doesn't just make itself. We have labor and plants running and people building this stuff that ultimately didn't sell. That's one way for me to describe it for you.
Are there, like, other incremental costs that aren't just inventory timing related that are also impacted by this? Or should we just think of this as more of like a cash working capital impact?
Now, clearly, when our volumes are suppressed like they are now and we have, you know, the fixed cost base that we have in each of our regions, I mean, volume is important. I mean, we need, like everybody, the volume to return and to get back to a normal way of operating rather than the stop-start and overbuilding of inventories and then depleting those the next quarter. Those are just inefficiencies that when you're in manufacturing, you don't like. Again, I don't wanna harp on it from a customer point of view. They're doing the best they can with what they have as well. We're just highlighting the facts.
I guess, if I were to phrase it in a different way. If you guys had been given, like, the actual production levels in the releases that you guys, like, the actual realized production levels, obviously volumes would still be low, but I'm wondering how much lower would costs be if you knew, like, what to produce, ignoring sort of the inventory buildup? I'm wondering, are there other operating costs that are higher because you guys had expected you needed to produce more and then you guys didn't? Or, like, how should I sort of model, like, cost decreases potentially because with better production schedules in future years?
Yeah, I'm not gonna get into that breakdown. I think we take that offline if you wanna get into that with Roger. Clearly, in our case, I can assure you that the actual production level in the third quarter, each of the months, and so far in the fourth quarter, are down substantially from what we saw. I think it's clear that the expectation from the customer was that they were gonna be up too. This isn't a surprise just from the supplier side of it. It's happened across the board.
If you want more detail in terms of modeling, which is what you just asked for, I suggest you get a hold of Roger after the call, and he can walk you through more details.
All right. Thanks so much.
Thank you. It appears that there are no more questions. I would now like to turn the call back over to Roger S. Hendriksen.
Okay. Thanks, everybody. We appreciate you joining the call and appreciate all the good, insightful questions. As Jeff mentioned, if you do have further questions or would like to engage further, please feel free to reach out to me and we'll make arrangements to do that. Again, thanks for joining the call. You can disconnect, and have a great day.
Ladies and gentlemen, that does end our conference for today. Thank you for your participation. You may now disconnect.