Cooper-Standard Holdings Inc
NYSE:CPS
Earnings Call Analysis
Q4-2023 Analysis
Cooper-Standard Holdings Inc
The year has ended with a strong performance, with overall sales climbing by 12%, a rate that comfortably eclipses industry benchmarks. Much of this success can be attributed to the commercial team's concerted efforts to ensure fair compensation for the company's products and services. Impressively, $56 million in cost savings were realized due to the efficient execution of defined lean programs in manufacturing and purchasing. These proactive steps, combined with beneficial commercial arrangements, allowed the company to offset inflationary pressures and achieve a substantial enhancement in gross margin of over 500 basis points through the year.
The company exhibits financial health with a significant free cash flow of $62 million in Q4 and a noteworthy increase in net cash from operating activities, reaching $79.7 million—an increase of $105.5 million compared to the previous year. This is primarily a result of improved cash earnings and efficient working capital management. Despite $17.6 million in capital expenditures, the company retains robust liquidity with $154.8 million in cash and $162.4 million available through a credit facility, totaling $317.2 million in overall liquidity. This financial backdrop provides confidence about the company's ability to manage interest payments and sustain operations.
The company's leadership conveys a strong and optimistic outlook based on a culture of innovation that brought in $176 million worth of new business in 2023. They tout breakthroughs like integrated coolant manifolds for electric vehicles, the FlushSeal technology for enhanced aerodynamics in sealing, and an expanded Fortrex licensing agreement with Nike. These technological accomplishments not only reinforce customer trust but also provide new growth avenues. Moreover, the Industrial and Specialty Group is poised for over 20% growth in the coming three years, with expectations of significant EBITDA margins, highlighting potential in various industrial segments.
As part of an overarching strategic plan, the company has addressed cost control by streamlining its operations, which is expected to lead to higher profitability as global production volumes rise. This includes considering exits from unprofitable businesses to improve cash flow. The company's 2024 guidance reflects an anticipation of continuing margin expansion and moderate revenue growth due to consistent global vehicle production. The company aims to maintain a growth rate that surpasses industry averages and to further cost savings despite inflationary challenges.
The organization has showcased prudent financial management by completing a comprehensive refinancing strategy. This effort has brought about significant improvements in debt terms, reducing future cash interest expense by approximately $10 million annually. Such financial maneuvering has also adjusted the company's consolidated net leverage ratio to 3.5 times, creating a more stable and manageable capital structure for future endeavors.
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Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] 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.
Thanks, Laura, and good morning, everyone. We appreciate your continued interest in Cooper-Standard, and 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 Jon Banas, Executive Vice President and Chief Financial Officer. To remind you that this presentation contains forward-looking statements. While they are made based on current factual information and certain assumptions and plans that management currently believes to be reasonable, these statements do involve risks and uncertainties. For more information on forward-looking statements, we ask that you refer to Slide 3 of this presentation and the company's statements included in periodic filings with the Securities and Exchange Commission. 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.
[indiscernible] 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 2023 results and provide an update on our outlook for 2024 and beyond. To begin on Slide 5, I'd like to highlight some key data points that we believe are reflective of our strong commitment to operational excellence in our core company values. In 2023, we continued to deliver world-class results in terms of product quality, program launches and service for our customers. This is reflected by our 98% green product quality scorecards and 97% green program launch scorecards. Even more importantly, we had our best year ever in terms of employee safety. For the full year 2023, our safety incident rate was just 0.32 per 200,000 hours worked, surpassing our previous best for 2022 and well below the world-class benchmark of 0.57. We're especially proud of our 24 plants that completed the year with a perfect safety record of 0 reportable incidents. The dedicated teams in these plants continue to affirm that our long-term goal of 0 safety incidents is achievable.
We also delivered strong revenue growth in 2023 through a combination of new program launches and successful implementation of sustainable pricing. Overall, our total sales increased by 12%, significantly outpacing industry production. I want to thank our commercial team for their achievements during the year as they worked closely with our customers to ensure we receive fair value for the products and services we provide. In addition to the top line growth, we had another solid year in improving operating efficiencies. Our manufacturing and purchasing teams combined to deliver $56 million in cost savings through defined lean programs and initiatives. Combining increased operating efficiencies with our enhanced commercial agreements, we were able to more than offset continuing inflation headwinds and deliver over 500 basis points of improvement in gross margin for the year.
Importantly, the margin expansion is continuing in all of our operating segments. And for the first time, all 4 segments were profitable at the EBITDA level for the full year. We've made a lot of progress over the past 2 years, but we recognize we have more work to do. We expect to build on the successes of 2023 to drive further value for all of our stakeholders in 2024.
Turning to Page 6. Complementing our focus on manufacturing efficiency and customer service excellence is our commitment to doing business the right way with uncompromised honesty, transparency and integrity. This is 1 of our core values is an important component of our overall company culture. It's who we are.
Several weeks ago, we were pleased to once again be named to Newsweek's list of America's most responsible companies. We see this type of recognition as an external acknowledgment of the quality of our company culture in how we conduct ourselves every day. We believe our culture is key to recruiting and retaining the best talent in our industry. And further, when combined with world-class technology and customer service, it's an important factor in winning and retaining business from our customers around the world.
Now let me turn the call over to Jon to review the financial details of the quarter.
Thanks, Jeff, and good morning, everyone. In the next few slides, I'll cover the details of our quarterly and full year financial results, put some context around some of the key items that impacted earnings and then provide some color on our cash flow, balance sheet and liquidity. So please turn to Slide 8. On Slide 8, we show a summary of our results for the fourth quarter and full year 2023 with comparisons to the prior year. Fourth quarter 2023 sales totaled $673.6 million, an increase of 3.7% versus the fourth quarter of last year. We were able to achieve this growth despite the lost sales related to the UAW work stoppage and the sale of our technical rubber business in Europe as well as our share of a joint venture in Asia earlier this year -- earlier last year. Adjusted EBITDA for the fourth quarter 2023 was $27.6 million or 4.1% of sales, essentially in line with our results for the fourth quarter of 2022, despite the impacts of the strike.
On a U.S. GAAP basis, we incurred a net loss of $55.2 million in the fourth quarter. This included certain noncash charges for pension settlements, restructuring and asset impairments. Excluding these and other special items, we incurred an adjusted net loss of $31.1 million or $1.79 per diluted share for the fourth quarter of 2023. This compared to an adjusted net loss of $31.9 million or $1.85 per diluted share in the fourth quarter of 2022.
For the full year 2023, our sales totaled $2.8 billion, an increase of 11.5% versus 2022. Again, the main drivers of the increase were favorable volume and mix and our new enhanced commercial agreements, with the UAW strike and the divestitures being partial offsets. Adjusted EBITDA for the year came in at $167.1 million compared to $37.9 million for the full year 2022. Favorable volume and mix, including sustainable price adjustments and inflation recoveries, improved operational efficiencies and lower raw material costs were the key drivers of the improvement. Continuing inflationary pressures, unfavorable foreign exchange and higher performance-related compensation were partial offsets.
Full year net loss was $202 million. This included the loss we incurred on refinancing and extinguishment of debt, restructuring expenses, pension settlement charges and other special items. Adjusted for the net impact of these items, we incurred a net loss for the year of $82.3 million or $4.74 per diluted share. This is a significant improvement when compared to the adjusted net loss of $171.5 million or $9.98 per diluted share we recorded in 2022.
From a CapEx perspective, we spent $80.7 million in 2023, which is around 2.9% of sales. This compared to CapEx of $71 million or 2.8% of sales in 2022. Moving to Slide 9. The charts on Slide 9 and 10 quantify the significant drivers of the year-over-year changes in our sales and adjusted EBITDA for the fourth quarter and the full year, respectively. For sales in the fourth quarter, favorable volume and mix, including customer price adjustments and recoveries, increased sales by $25 million. This was net of approximately $31 million in lost sales related to the UAW strike. Foreign exchange added $11 million, while divestitures were an offset of $11 million.
For adjusted EBITDA, favorable volume and mix, including price adjustments and inflation recoveries, added $8 million in the quarter. This was net of approximately $10 million from lost volume related to the UAW strike. Manufacturing and purchasing efficiencies accounted for another $15 million of the improved results. These improvements were offset by $17 million of general inflation, such as wage increases and higher energy expenses, and $12 million in other items, including certain year-end accrual adjustments.
Moving to Slide 10. For the full year, favorable volume and mix, net of customer price adjustments and recoveries, increased our sales by $315 million. The full year sales impact of the UAW strike, which is included here, was approximately $34 million. Unfavorable foreign exchange impacted sales by $5 million, and the divestiture of our technical rubber business in Europe as well as our share of a joint venture in Asia further offset sales growth by $20 million combined.
For full year adjusted EBITDA, the positive factors included $171 million from improved volume and mix, including customer price adjustments and inflation recoveries, $56 million from improved manufacturing and purchasing efficiencies and $25 million in lower material costs. These improvements were partially offset by $65 million in higher wages and general inflation, $18 million in unfavorable exchange and $40 million in other items, including higher performance-based compensation year-over-year. The EBITDA impact of the UAW strike was approximately $11 million, which we included in the volume and mix category.
Moving to Slide 11. We are pleased to end the year with strong free cash flow of $62 million in the fourth quarter. Net cash provided by operating activities was $79.7 million, an increase of $105.5 million compared to the same period last year. The increase was driven primarily by improved net cash earnings and changes in working capital as we were able to leverage the more stable production environment versus the prior year to better optimize inventories and accounts receivable, as well as focusing on the collection of customer tooling receivables.
Capital expenditures came in at $17.6 million for the quarter as we continue our intense focus on cash preservation and improving asset utilization. With cash on hand of $154.8 million and an additional $162.4 million of availability on our revolving credit facility, we ended the year with total liquidity of $317.2 million. Based on our current outlook and expectations for light vehicle production, improving operating efficiencies and somewhat moderating inflation pressures, we believe our current cash on hand, expected future cash generation, and access to flexible credit facilities will provide ample resources to make required interest payments and support our ongoing operations.
That concludes my prepared comments. So let me turn it back over to Jeff.
Thanks, Jon. And to wrap up our discussion this morning, I want to share a few thoughts regarding our near-term and longer-term outlook and why I remain extremely optimistic about our opportunities ahead. Moving to Slide 13. One reason I'm optimistic is our culture of innovation and our success in bringing new technologies to market. In 2023, we were awarded $176 million in new business associated with our innovation products. We believe the reason is clear. We're adding value for our customers through new product innovations that solve technical challenges and help them achieve their sustainability objectives. Our digital tools and technologies are helping us bring new ideas and solutions into the market faster than ever before, and we're pushing to even go faster. Not necessarily because our customers demand that we be faster, but because our technological advancements enable them to be faster. More than ever, our innovations, digital tools and technical capabilities are driving opportunities and extending our competitive advantage. As always, we want to thank our customers for their continued trust and support.
Turning to Slide 14. One of the innovations we have recently introduced is the integrated coolant manifold. We have already sold this technology to a major customer for application on a significant electric vehicle platform. But it is adaptable to all types of vehicle: ICE, hybrid or battery electric. The use of the manifold provides an elegant but simplified fluid delivery configuration that reduces assembly connections, helps stabilize fluid pressures and allows for enhanced airflow to optimize thermal management. This technology can be paired with our new eCoFlow technology to drive even further efficiencies within the thermal management system. And while these technologies solve problems and reduce costs for our customers, they create increased content per vehicle and growth opportunity for Cooper-Standard.
Turning to Slide 15. In our sealing business, a rapidly growing innovation is our FlushSeal technology. FlushSeal offers enhanced vehicle aesthetics and improved aerodynamics with only minor changes to the traditional door architecture. The technology was recognized as a finalist in the Society of Plastics Engineers Automotive Innovation Awards last year. But more importantly than industry awards are the customer program awards. We've already received contract awards for this technology on 9 customer programs, with more on the way. These program awards with a variety of new and well-established OEMs around the globe.
Turning to Slide 16. We're pleased to recently announce that we had expanded our Fortrex license agreement in the footwear industry and to finally be able to disclose that our partner in that agreement is Nike. As we disclosed in that announcement, the expanded agreement grants Nike a limited exclusivity for the use of Fortrex in the footwear industry. It also allows Nike to develop their own proprietary extensions of Fortrex technology for potential use in additional product lines and applications.
The volume-based financial terms of the agreement remain in place. So as Nike expands their use of Fortrex, it creates upside financial opportunity for Cooper-Standard. We believe this expanded agreement is further validation of the significant potential opportunities that our Fortrex technology offers. Of course, we're also continuing our own development of new versions of Fortrex for automotive applications, including MicroDense Fortrex and ED65 Fortrex that offer lower weight, improved compression set, increased design flexibility and advantaged carbon footprints. Our enhanced Fortrex automotive portfolio will be rolling out to the markets this year and next year, which will be key to capturing additional sales and market share in automotive sealing.
Turning to Slide 17. In 2023, our Industrial and Specialty Group made significant progress in optimizing that business and setting the stage for accelerated profitable growth. This business, like many others, faced several challenges in the aftermath of the pandemic. Supply chains were disrupted, tight labor markets led to high employee turnover and reduced productivity in our plant. And market demand for industrial products, frankly, was weak. The ISG team has done a great job in resolving these issues, and they are now in the process of executing a new advanced marketing strategy to leverage digital marketing techniques to regain and expand market share. Key markets in focus are the high-growth industrial segments of heating, ventilation and air conditioning, major appliances, agricultural and construction.
In addition, ISG is leveraging all of the best manufacturing practices and digital tools that have been developed and deployed to optimize our automotive operations. With these operational improvements in place, we expect ISG to achieve an average growth rate in excess of over 20% in the next 3 years and deliver adjusted EBITDA margins well in excess of 10% over that same period.
Turning to Slide 18. The successful turnaround of ISG is part of our continuing focus on controlling costs and optimizing our operations globally. We've made excellent progress in reducing fixed costs, which we expect to leverage to drive increasing profitability as global production volumes continue to ramp up. We're maintaining our commitment to fix unprofitable businesses and concentrate company resources in the areas that provide the greatest opportunities for future growth and improved cash flow. In some cases, the best opportunity for improving cash flow may be through exiting a business. As we have done in the past, that remains an option as well.
Turning to Slide 19. To conclude this morning, let me provide a little color on the guidance we published in our press release yesterday afternoon. Our expectations for 2024 are for further margin expansion and more modest top line growth. Current forecasts suggest that global light vehicle production will be similar to last year. With our strong customer mix, new program launches and increasing content per vehicle, we expect our growth to outpace the industry in each of our key markets. We also expect to drive further cost savings through improved operating efficiencies and lean initiatives that will enable us to offset continued inflationary pressures.
To achieve our targets for the year, we need to continue to deliver world-class products and services and successfully negotiate with our customers to renew the small portion of our commercial agreements that don't automatically carry forward from last year. I'm confident that we will. Looking out beyond 2024, we see a lot of positive data points today that suggests significant upside opportunity for the automotive industry overall and for Cooper-Standard specifically in the coming years. Record numbers of new licensed drivers, record high average age of the vehicle fleet in the U.S., light vehicle inventories that despite recent improvements remain well below historical averages all suggest consumer demand for new cars will remain strong and production will have to increase to keep up.
With these supportive dynamics, I'm increasingly confident that we can and will achieve our longer-term targets for profit margins and return on investment. Operator, let's open the lines for questions.
[Operator Instructions] Our first question comes from the line of Kirk Ludtke from Imperial Capital.
Jeff, Jon, Roger, thank you for the call. Maybe on Slide 19, maybe that's the best place to start. So the guidance is essentially flat revenue on flat production. I was wondering if maybe you could elaborate on the -- the $10 million in the bridge volume mix price, are all 3 of those components positive? Is there a -- can you give us any color as to how big each piece is?
Hey Kirk, it's Jon. While it's a small number, there is a lot going on in those -- in that 1 column. The comments that Jeff made prepared-wise is that we're going to be growing in excess of the regional markets in -- with which when we operate. So suffice it to say that our volumes in and of themselves will be positive. And then we continue to have some work to do with enhancing our commercial agreements on a go-forward basis as well. But that also comes back with the traditional contractual environment within which we operate here in the auto space as far as giving money back to our customers each year. So there's some puts and takes when you think about the price area overall. Mix, we're seeing different mix components as far as the types of vehicles being manufactured in each of the regions. That's inherent in the S&P Global kind of a view of the world as well as what our customers are telling us is going to be built in 2024. So you do see some regional differences as well as the type of platform, whether it's SUV, CUV, light-duty trucks. But then there's also a significant component of EV launches that continue to come online and be an important part of the year-over-year story.
Got it. That's helpful. With respect to the production schedule, is it the -- the cadence for 2024, is it the same seasonality? Or do you think it's different this year?
Kirk, it's Jeff. I think it's predicted to be more normal. So I guess that's a slow start in the first quarter and coming on as you go through the year is kind of how I would describe it. Clearly, our light vehicle production units and the guidance that we've used for '24, you can see there are -- continue to be a bit conservative, I guess, is how I would describe it. . But the good news is we have truly reduced our overall cost base, especially our fixed cost, and we are prepared to make significant margin improvements even on those lower volumes. So based on my prepared remarks, you can tell, I'm sure you know that the industry is -- we believe there is significant pent-up demand. We believe that many of the other metrics regarding consumers and their appetite and interest in buying vehicles going forward continues to be positive. So at some point, we expect the volumes to begin to reflect that. But in the meantime, we've chosen to be a bit conservative there ourselves.
Got it. That's helpful. On Slide 13, you mentioned net new business of $176 million. Can you elaborate on that a little bit? And I'm assuming that's a net number. Is -- are your market share stable?
Yes. Just to clarify, Kirk, the $176 million is simply innovation, new innovation sales. We tried to capture that to make the -- the point that sometimes when people talk about innovation, it's going to be the future, right? And our point is that we have been capturing significant new business on innovation sales. We highlighted several of those innovations this year that -- or today that will impact this year's net new business as well as next year's, just to make the point that we have the ability to differentiate ourselves in the market.
So as new programs come out for bid as replacement programs come out for bid, we don't believe we're a me-too supplier. We are offering significant ways for our customers to improve the overall efficiency of their assembly to reduce overall cost and to improve the performance.
And we don't have to think that we know that because we're booking business today with that calling card. So we're really proud of that. I think as we go forward, our content per vehicle on these future launches will definitely reflect this increased content. So I don't know if that answers your question, but that's kind of the point we were making today.
Okay. That's helpful. And with respect to market share, do you feel like you're stable?
We do.
Got it. And then last question. You mentioned that there may be some addition by subtraction opportunities here in terms of exiting businesses that are consuming cash. Can you give us a sense for what the -- I guess, is it negative EBITDA, what the negative EBITDA was in those businesses last year?
Sure, Kirk. This is Jeff again. I think the best news is that for the first time in our company's history, I think, certainly, I can speak for the last 12 years or so. This is the first time that every 1 of our regions has made a positive EBITDA and cash flow contribution to the company. So I think that shows that the focus we've had on either exiting because we have or fixing because we certainly have and kept them that, that works.
And there's a lot of complexity that goes into that. I mean, certainly, customers have a vote one way or the other. We certainly have a vote one way or the other. And I think we'll just continue to march our way through country by country, product by product, continue to look at the business in several different dimensions to ensure that we're operating at the lowest cost possible for us. At the same time, reflecting the desire of our customers to pay us a fair price for what we're providing.
And that's kind of the approach we've taken. We're very grateful that our customers continue to support us and trust us in our execution is what determines that, right? I mean I'm sure they like us, but the real fact is we execute, and that's why we're winning business. And so I think that will continue. And I don't have a list, to answer your question of businesses that we will -- that we plan on exiting. We clearly continue to look at the evolving markets.
We're looking at the customer makeup of the company going forward and where that growth is going to come from, and we'll make appropriate decisions regarding our footprint based on where those growth opportunities are and make sure that we continue to drive return on invested capital higher. And all of the plans that we have in place today, we'll do that.
[Operator Instructions] Our next question comes from the line of Michael Ward from Freedom Capital.
Good morning, everyone. Jeff, maybe if we can start with Nike and what you have there, limited exclusivity. Could you define that a little bit? And then also, when you say volume-based financial terms, can you provide any definition for that?
Mike, thanks for the question. This is Jeff. The simplest way for me to describe this deal is Nike asked us to put together a deal that would allow them to go faster in developing products across their portfolio, and they felt like they were in a better position to do that faster with the proposed deal that we've agreed to. So we expect them to do that.
We expect that there will be significant growth opportunities for us within the Fortrex portfolio. And when that happens, we get paid more money. And it's really that simple. They're committed to the product. They have launched the product. They plan on taking it across other lines, and this agreement allows them to go faster and hopefully allows them to grow it faster than what we were doing before.
Okay. So you've licensed them the chemistry, correct?
I'm sorry, Mike, you broke up there.
You've licensed the chemistry? You're not sending the material, just the chemistry?
That's correct.
And so right now, I think it's on 2 different sneakers or 2 different shoes. And so are you paid on a per sneaker-type basis? Is that how it goes, how they do it?
We have a royalty stream setup based on their volumes. So as their volume goes up over a period of time, that's how we're paid.
Okay. And straight cash? It's just a straight 100% margin cash flow business?
That's correct. Yes, we've got no investment.
Okay. Okay. Jon, on your Page 10, when you look at the bridge on revenue and EBITDA '22 to '23 and you have the volume and mix, is that where the recoveries are placed? Is it both on the revenue and the EBITDA side?
That's right, Mike. We put them in that volume and mix columns, respectively, in both sales and adjusted EBITDA.
Okay. And so '23 was kind of a lumpy year because you had recoveries coming back from the 1 or 2 years prior. Is that correct?
Yes, that is. The cadence wasn't ratable for sure. If you recall back in Q3, we had some significant agreements reached that were retroactive. So it was a little bit lumpy, but you can appreciate the full year is a more representative view of all those price agreements that were reached to enhance our commercial arrangements.
Okay. And so now those things are reset. So as you go into 2024 with your assumptions, that $10 million number, there's very little to no recoveries? Is -- are recoveries of potential upside in 2024 on EBITDA?
Yes. I mentioned that there's probably still some work to do around sustainable price in certain of our product areas, certain of our regions. So the team is still working diligently with our customers to make sure we're getting paid properly for the products and services we're providing. So again, some work to do there. But the nature of the industry is always such that contractual LTAs or givebacks are inherent in the POs. And oftentimes, we have to overcome those. So you've got the team going to work on resetting prices but dealing with the contractual overhang as well.
Okay. So right now, there's nothing really significant assumed in your assumptions for 2024?
Well, there's pluses and minuses, Mike. So [indiscernible] like that.
Okay. As you look at -- 1 of the things you...
Just to clarify, Mike, just to clarify, all the deals reached, we've said in the past that what we've been able to reach agreements with our customers on, 70% to 75% of that carries over into next year. So your starting point still having the benefit of those arrangements.
Right. And so to what Jeff was talking about, the big lump comes in this year is -- and you've been saying it for a while now that we see the benefits of the restructuring actions starting to unfold in 2024. We're starting to see that -- that's in your projection there?
Yes, that's correct, Mike. It's Jeff. I think the best way for me to categorize all of that is that I think we have reached a point of normalcy related to the price negotiations with customers that have gone on for, I don't know, 50, 60 years. I don't see this year being an abnormal one like last year, the year before was. So we've reset it. You can see that on our margins. It's very clear. And it would be nice to get more volume. I'll just leave it at that.
And just lastly, on the segment data and that corporate other, you have a big negative in Q4. And for the year, it was more of a negative compared to last few years, actually since 2018, I think. Was there anything in there? Or is it lumpy year-end close? What happened in that data point?
Yes, Mike, we referenced the final year-end accrual true-ups that we always have to do, and one of those is incentive compensation-related matters. The lumpiness you see is -- you have to wait till the end of the year to see how the overall performance is against the commitments that are inherent in those plans. So that is one of the elements that are in that Q4 number. The -- to be fair, that we don't charge out, if you will, all of the corporate costs and overheads. So that always remains down there as a negative line item in the segment perspective.
Okay. Okay. So the last couple of years are more unusual where you had positives on that line?
Unfortunately, when there's positive adjustments, it goes against...
It was the other way. Unfortunately, that's right. Okay. Really appreciate it.
Our next question comes from the line of Ben Briggs from StoneX Financial, Inc.
So I've got a few here. So as I go through your 2024 guidance, if you kind of add those all up at the midpoint, you get to roughly free cash flow breakeven just using an EBITDA minus -- minus the cash costs. Kind of simple analysis. I know that working capital was obviously a tailwind for free cash flow generation this year, especially in the fourth quarter. Can you talk a little bit about what you expect working capital impact to be in fiscal '24?
Yes, Ben, this is Jon. I'll take that one. As you can appreciate, we don't provide direct guidance on free cash flow. But your math is directional. We do see the path towards positive free cash flow overall in 2024. We've made good progress in '23 to improve those working capital areas. Certainly, inventory management and the focus on collection of customer tooling receivables were a couple of big areas.
So there is still some room for improvement in many of those areas. They probably won't be as significant as we saw in 2023, to be frank. But the incremental cash flows will certainly come from the higher cash earnings overall, continued improvements in operating efficiencies in the volume that we're showing you here on the bridge walk across.
Okay. Got it. But should we expect -- I know you don't provide direct working capital guidance. Should we expect to see -- do you think you're at a more normalized inventory number, I guess, right now? Or do you think it should be significantly different at the end of the year?
Not significantly different, but there's certainly continuous improvement in optimization of those. The biggest challenge in the last couple of years was obviously the volatility in production schedules from our customers. So it's really hard to continue to work to whittle those balances down when the releases are changing, so volatility. So as the production environment stabilizes and things get more normalized and consistent, then we can go to work to continue to take that overall inventory balance down.
Okay. Got it. Got it. And then was -- I don't think you already answered this, but have all the -- I know there's some onetime true-ups especially in the third quarter from customers with onetime payments that positively impacted gross margins. It didn't look to me like there were many in the fourth quarter. Is that accurate? And can you just confirm whether or not you guys have received all the onetime true-ups that you're expecting to?
Your supposition is right. There weren't a lot of those onetime retroactive type deals reached in Q4. We said on the last call that around $25 million to $30 million was booked in Q3 that didn't repeat here in Q4. And so once those deals were reached in September, call it, the normal payment terms would have been such that we've received all that money that was booked in Q3 in Q4 already. So as part of the working capital elements that we're able to collect on those receivables that were recorded in Q3.
Okay. Got it. So not much to expect from that going forward. And then finally, when should we expect the Nike partnership to be moving the EBITDA needle? I know that you'd spoken a few quarters ago that it was probably not going to make a major impact in the immediate term, but I wanted to see if there is maybe any positive news there that we should expect some tailwinds from that in the next couple of years.
Yes, Ben, right now, we'll just leave it as a TBD. Jeff described the arrangement that Nike has, and they want to move fast. So we'll monitor and see how progress, and we'll be able to report those once they start cranking it up.
Okay. All right. I appreciate the time to take questions. Thanks very much.
Our next question comes from the line of Brian DiRubbio from Baird.
A few questions for me. Just maybe starting off with CapEx spending. You used to spend more on CapEx as a percent of sales in prior years. How should we think about that CapEx to sales number today? Is it -- do you consider sort of underspending a little bit? Or do you think that's the new run rate for you going forward?
This is Jeff. As I think we mentioned in the last call, that 3% to 3.5%, some years, if there's a lot of launches, you could get up closer to 4%. But I would say this is closer to the new normal, to answer your question.
Okay. That's helpful. And then just on working capital. I know you're not guiding there, but I'm sort of monitoring a bunch of commodities. I see still costs up pretty significantly over the last couple of months, rubber costs up pretty significantly. I guess, 2 parts to that: a, should we expect that a little bit of a build in working capital; b, does it make sense for the company to make an investment in some of these products, the concern as prices could go higher; and c -- I apologize for the multipart, but how are your contracts now structured so you can get compensated for those higher costs? What's the lag in that?
Yes. Brian, I'll take the second one first. We've said in the past that we're reaching a point where most of our commodity buys are -- we've got the index agreements with our customers to recover. And that was also in around the 70% ballpark. So as costs go up, then we were able to pass along that requisite amount. The rest of it, we can negotiate as the economic -- economics change, but that's just a general go forward. And typically, those resets are either a quarterly or a 6-month basis that we go back in. Many of them are automatic. The PO just adjusts with those indices updates. So that's kind of how we're viewing the world.
As far as the commodities that we're exposed to or that we're buying, we don't see a significant increase in costs in 2024, at least from the data points that we're using. Could even be a slight tailwind. And -- but the good news is there it's much more stable than it's been in the past couple of years. So not seeing a significant change in the overall commodity exposure front that would cause us to do anything differently in our business.
Got it. And would you -- so given that you -- no plans to make any investments in inventory at this point?
No.
Got it. And just a final question for me. Obviously, cash flow was good, but you're picking a good portion of your interest. As those picks roll off, I know the ones in the first lien does at this year, how are you thinking about sort of the balance sheet and liquidity? And I guess, to put it another way, is an equity raise on the table at any point?
Yes. Brian, I said in my prepared remarks that we think the cash flow generation and our continuous improvement activities to further rightsize the business optimize our financial strength here going forward is going to be adequate from a debt service standpoint. You'll see actually today when we file our 10-K later on, we've elected a straight pay on the third lien notes for the June coupon period. So we're confident that cash flows will continue to be strong, and we're able to make that decision 6 months in advance. So as far as going forward into '25 or '26, I'm not going to talk about any strategic road map that we're thinking about because a lot can change and a lot of execution needs to happen between now and then. But to your point, the first and third lien non-call provisions come off Q1 of next year. So there could be opportunities there if the interest rate environment is positive. We continue to execute and have successive cash flow generation patterns in front of us. So we'll see. There's a lot to happen between now and then. But we're already thinking ahead to what it means for us going forward as the business continues to execute and grow profitably.
Our next question comes from the line of Zohair Azmi from Beach Point Capital.
Just a few questions for me. First, has there been any impact to the business from the supply chain disruptions with what's going on in the Red Sea?
This is Jeff. I think the supply chain issues that we were talking about the last couple of years have essentially been resolved. Does that mean in this industry that's extremely complex related to the supply chain that there aren't still some things that crop up? I suppose the answer to that is there are. But I would say they've reached a point now where we could say that we've normalized our operations, right? We don't have the type of headwinds that we're dealing with.
And for that reason, our costs have never been lower or more competitive. Our operation from an execution point of view is world-class. The price recovery negotiations that we just went through with our customers have really restored the margin foundation that the company needs in order to create and generate the type of cash going forward that's required. We have index agreements now that are in place that ensure that the inflation roller coaster that created some pretty big challenges for us is behind us.
Innovation is strong. We've talked about that. We're just waiting for a volume uplift. And when that happens, the company has never been positioned better to generate the type of free cash flow that we require going forward. So probably the reason why our customers have been so supportive.
And Jon here, specific to the Red Sea issue, we don't move a lot of inventory through the Suez Canal. While you've probably read about some of the European customers or European OEMs being impacted by their supply chains, we have not seen a material impact at all from the Red Sea issue.
Right. And then would you mind sort of helping us understand the step-up in manufacturing and purchasing efficiencies this year from $56 million in 2023 to the guided $80 million? What's happening there?
Yes. The pipelines, if you will, Zohair, that the team is looking towards is really the sequential year-over-year improvements in their overall manufacturing operations in our purchasing area. So there's continued opportunities our team sees on the purchasing side as we work towards a strategic supply base. We commonized the supply base for economies of scale, work with a handful of strategic suppliers instead of spreading the purchases out. You get more bang for your buck that way. So there's still a pipeline of opportunities that we're continuing to see and some exciting things going on as far as how we analyze how we buy product. Similar on the manufacturing side, it's more of a year-over-year number about how we continue to get more efficient, lean out the operations from -- whether it's a product flow or a manufacturing flow standpoint, reductions in scrap opportunities, reductions in freight costs and the like, all kind of weigh into that. So many, many areas to attack and drive the continuous improvement that you see on the page.
So to break it down a little bit for you discretely, it's probably about 60-40 of that $80 million that you think about manufacturing versus the purchasing lean opportunities.
Right. And then last 1 for me. How should we think about timing and path to get to the double-digit margin target you guys have previously highlighted?
Yes, this is Jeff. I think if you project out 2 years with our current plans, that's kind of what we have -- what we've been saying and what we've circled certainly could be helped getting there faster if we get volume. But given the current projection from our customers as well as the people that forecast volume in the industry, it would take a couple more years of what we've seen as growth within the industry to have that line of sight. So that's the answer I'd give you, and we're hopeful that it's much faster if we get the volume that we believe is pent up and available.
All right. To clarify, so do you think that getting to 10% margins is a couple of years out, or you'll have visibility into it in a couple of years?
As I said, I think we'll be there in 2 years.
Okay. And is that largely driven by volume? Or are there other major components here?
No, I think it's delivered by volume a bit. It's delivered by the content per vehicle related to the innovation sales that we've been talking about. It's delivered by launching business that has better margins than the business that it would replace going forward. It's driven by being profitable in all regions in all products that we're working our way to, as we talked about at the end of this year, we're there.
That's continuing to improve upon those margins customer by customer, country by country, product by product. And we have a pretty good line of sight there. And it's not cost reducing ourselves to prosperity. It's really launching a lot of the new business that will have higher content, higher margins because of innovation and other things that we've done with our fixed costs.
And then last one for me. How are you guys thinking about addressing your capital structure as the non-call period for your debt roll off?
Yes. Zohair, this is Jon. I kind of alluded to it in my response to Brian. The non-call comes off in Q1 of next year. So we're already looking to understand the market a little bit better, see what the interest rate environment does look like. But for us, in particular, right now, it's all about execution and delivering on guidance, and our commitments here really centers around us continuing to generate positive free cash flow and stabilize the business and take advantage of the market growth that's ahead that Jeff just described for you. So no plans to announce here for you, but we're already contemplating it's 11 months away that non-call provisions comes off. So we'll see how the year progresses and have some more specific as things go on. But suffice it to say, we do see opportunities ahead as the business grows profitably to bring down our overall debt service costs and go forward a little bit stronger portfolio.
It appears that there are no more questions. I would now like to turn the call back over to Roger Hendriksen.
Okay. Thanks, everybody, for your participation this morning for the good questions. If there is anybody out there that didn't get a chance to ask their questions, please feel free to reach out to me directly, and we'll arrange to have those questions answered. Again, thanks for your participation this morning. This will conclude our call.
Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.