Cooper Standard divestment to boost bottom line

NOVI, Mich.—A decision by Cooper Standard Holding Inc. to divest some of the company's plants in Europe and India is a case of addition by subtraction.

The move, involving its rubber fluid transfer and specialty sealing businesses in Europe and most operations in India, allows the Novi-based firm to rid itself of money-losing operations. So when the transaction with Mutares SE & Co. KGaA is complete, Cooper Standard immediately will become more profitable, Chief Financial Officer Jon Banas said in an interview with Rubber & Plastics News.

"Over the last several quarters, we've been discussing publicly a strategy to become smaller and more profitable in certain regions, mainly the European market," Banas said. "This is consistent with our longer-term strategy of exiting businesses that are not covering their cost of capital."

And for Cooper Standard, that has meant finding a way out of the fluid transfer business on the rubber side in Europe.

"It lacked the scale due to too much competitor capacity and irrational competition in the European market. The Indian business, for us, lacked scale and growth due to the overall stagnant economic development," the chief financial officer said.

Cooper Standard is not receiving any proceeds from the ownership transfer, but instead sees value in getting out from under the drag the operations are having on its bottom line.

Mutares, an investment firm based in Munich, said the deal will show off its turnaround expertise. "The acquisition would strengthen the Mutares Automotive segment and offers significant synergy potential to the Elastomer Solutions Group," Johannes Laumann, Mutares chief information officer, said in a statement.

Mutares will gain two rubber fluid transfer systems plants in Poland and one in Spain that supply automotive manufacturers. A factory in Italy that's part of the deal makes finished goods as well as compounds for specialty sealing products for the European operations. Mutares also will take control of seven locations in India making sealing, fuel and brake products and systems. An information technology development office in India is excluded from the deal.

The decision to divest comes after Cooper Standard undertook a strategic review of operations last year, Banas said. "Ever since we've been in the market, we haven't been able to make money just because of the lack of significant scale," the CFO said of Europe.

The operations being divested involve about 2,500 employees and sales of nearly $200 million in 2019. But they also cost Cooper Standard a loss of about $14 million in adjusted earnings before interest, taxes, depreciation and amortization.

"If you divest those operations, the money stops being burned up," Banas said.

Finding Mutares to take the operations off Cooper Standard's books also allows the company to avoid the potential cost of having to shut down the operations.

"It's a key win for us once we close the deal," he said. "The good news is it's not like a broader restructuring action where you have to use a lot of Cooper Standard cash to shut down a facility or make redundant employees. That can get expensive, especially in regions like Europe."

Cooper Standard actually is giving Mutares "a minor amount" of money to cover working capital needs of the divested businesses. The deal is expected to close during the second quarter.

Cooper Standard finds itself in a turnaround situation after a rise in raw material costs coupled with downward pricing pressure from automotive customers buying the company's finished goods created pressure on profitability during the past couple years.

Along with those two factors, the company also has experienced significant volume and product mix changes in both China and Europe that have amounted to a nearly $200 million hit in recent years, the CFO said.

Cooper Standard has been pulling "many levers" to cut costs and return the company to profitability, and there's more work to be done, Banas said. "I would call it an evolution over the next couple years. It didn't degrade overnight. It won't recover overnight for us."

Cooper Standard reported a loss of $110.6 million, or $6.55 per diluted share, on sales of $654.9 million for the first quarter.

That loss mainly consisted of a non-cash charge of $74.1 million related to assets being held for sale. Adjusting for that non-cash charge, the net loss was $36.5 million, or $2.16 per diluted share, for the quarter ended March 31.

First quarter results in 2019 saw a loss of $5.4 million, or 31 cents per diluted share, on revenue of $878 million, the company said. After adjustments, the profit was $9.9 million, or 56 cents per diluted share.

The company also had what it termed a "strong cash balance" of $301.8 million at the end of the first quarter.

Continued reorganization at Cooper Standard comes during a difficult time as the world battles the spread of the COVID-19 virus.

"It's been challenging for the company and the industry, of course," Banas said. "But we've managed through it and we remain focused on these long-term objectives."

"And with the customer restart plans that we know about in North America and Europe over the next several weeks, we feel we are well-prepared to resume production in alignment with those customer requirements," he said.

But that resumption will take place with a focus on keeping employees safe in the workplace, he added, with appropriate use of personal protective equipment and other safety measures.

News of the latest divestitures comes on the heels of a March announcement that the company would close two other "significant" facilities on top of 10 closures made last year in Asia, North America and Europe.