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Cooper-Standard Holdings Inc  (NYSE:CPS)
Q3 2018 Earnings Conference Call
Nov. 02, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Cooper-Standard Third Quarter 2018 Earnings Conference Call. During the presentation all participants will be in listen-only mode. Following company's prepared comments, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded and the webcast will be available on the Cooper-Standard website for replay later today.

I would now like to turn the call over to Roger Hendriksen, Director of Investor Relations.

Roger Hendriksen -- Director, Investor Relations

Thanks, Chelsea and good morning everyone. Thank you for spending some time with us today. 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.

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. Our actual results may differ materially from our current expectations as described in these forward-looking statements. For more information on our forward-looking statements and risk factors, we ask that you refer to slide three of this presentation and the company's statements included in its periodic filings with the Securities and Exchange Commission.

With that said, I'll turn the call over to Jeff Edwards.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Okay. Thanks, Roger, and good morning everyone. I'd like to begin on slide five, with a few key data points from the third quarter. Sales in the quarter were $862 million. The solid top line result was driven by strength in North America, offset by weaker-than-expected market conditions in China and Europe, and continuing customer price pressures experienced during the quarter.

Adjusted EBITDA for the quarter was $70 million, that was lower than last year and below original expectations. Unfavorable volume and mix, price reductions and higher material costs in the quarter more than offset the cost savings that we generated through our lean initiatives and improved operating efficiencies.

Cost reductions related to improved operating efficiency were $10 million for the quarter, bringing our year-to-date total to more than $57 million. We expect to achieve approximately $90 million for the full year, which will be a significant accomplishment given the very dynamic global market conditions we're experiencing. We're also on pace for a record 200 new product launches for 2018, and we expect more than 250 launches next year.

During the quarter, we successfully executed 51 launches, bringing the year-to-date total to 144. Our global team continues to do an outstanding job of servicing our customers with near flawless launches and timely delivery of new products and technologies, even given customer production changes. Our employees commitment to providing the highest quality products and services continues to be recognized by our customers with new business awards.

During the third quarter, our net new business was $92 million. This brings our total net new business awards to $376 million in 2018 and keeps us on a record pace for new business wins overall.

We received contract awards related to our innovation products totaling $98 million in annualized sales during the quarter. Our product in material science innovations are continuing to drive increased demands throughout our business, as well as creating opportunities outside the automotive industry.

Finally, we're very pleased that our material science innovations have been recognized as an Automotive News PACE Award Finalist for our proprietary AI compound development software. This is the second consecutive year we've received this great honor.

While geopolitics and uncertain trade relations have disrupted key automotive markets and have driven material costs higher around the world, our team continues to manage the elements of our business that we can control. We're being proactive to adapt our operations as necessary to improve future results and we believe our long-term strategy for value creation remains on track.

Now, I'd like to turn the call over to John for a more detailed discussion of our financial results. Following his presentation, I'll come back to cover a few topics related to our strategy for profitable growth, diversification and our outlook for the remainder of the year.

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Thanks, Jeff and good morning everyone. In the next few slides, I will provide some detail on our financial results for the third quarter and first nine months of the year, and also comment on our liquidity, balance sheet profile and capital structure.

On slide seven, we show a summary of our results for the third quarter and first nine months of 2018 with comparisons to the prior year. Third quarter sales were $861.7 million, down 0.8% versus the third quarter of 2017. The year-over-year change was driven by unfavorable volume and mix in Europe, driven in part by the implementation of the new emissions testing protocol as well as softness in the premium segment, lower customer demands in China, unfavorable foreign exchange and customer price reductions. These were partially offset by favorable volume and mix in North America as well as recent acquisitions.

Gross profit for the third quarter was $119.7 million compared to $150.8 million in the same period a year ago. Our ongoing cost reduction efforts were more than offset by the weaker volume and mix in Europe and Asia, general inflationary pressures, customer price reductions and higher material costs. We saw significant commodity cost inflation on certain raw materials in the quarter. Tariffs, the threat of tariffs and the uncertain status of trading relationships between the U.S. and its significant trading partners are having both direct and indirect impact. Despite our ongoing supply chain optimization efforts materials had a negative impact of approximately $13 million on us in the third quarter.

Adjusted EBITDA for the third quarter was $69.6 million or 8.1% of sale, compared to $96 million or 11.1% of sales in the third quarter of 2017. The impact of lower gross profit was only partially offset by reductions in SGA&E expense which was 9.5% of sales in the third quarter versus 10.1% of sales in the same period last year.

Related to income tax in the quarter, our effective tax rate for the three months ended September 30, was a benefit, primarily driven by discrete items related to last year's US tax reform, including adjustments to our transition tax calculation, which was reduced by approximately $4 million and true-ups to deferred taxes, which increased the benefit by an additional $3 million.

Net income for the third quarter was $32.2 million versus $24.6 million in the third quarter of 2017. On an adjusted basis, net income was $19.1 million or $1.05 per diluted share.

Looking now at the first nine months of the year. Sales were $2.8 billion, up 2.9% over the first nine months of 2017. The increase was driven by improved volume and mix in North America and favorable foreign exchange, partially offset by customer price reductions. Gross profit for the first nine months was $441.9 million compared to $493 million in the same period of 2017. The change was driven primarily by customer price reduction, weaker volume and mix in China and Europe, and higher material costs, partially offset by improvements in operating efficiency.

Adjusted EBITDA for the first nine months was $300.1 million or 10.9% of sales. This represents a decrease of 110 basis points year-over-year as lower gross profit more than offset reductions in SGA&E expense. Year-to-date, we've reduced SGA&E by more than $21 million as we have proactively moved to take out costs and improve efficiencies. As a percent of sales, it is down to 8.7% compared to 9.7% a year ago.

Adjusted net income in the first nine months of the year was $133.2 million, down 8% compared to the same period last year. On a per share basis, adjusted net income in the first nine months of the year was $7.26 a share, a decrease of 5% versus last year. The year-to-date effective tax rate is 13%, a 14 percentage point drop from a year ago, driven primarily by the reduced US statutory rate and the discrete items mentioned earlier.

From a CapEx perspective, our spending in the third quarter was higher than last year, due mostly to the timing of certain projects and the ramp up of new program launches. Through the first nine months of the year, our CapEx was $160.1 million or 5.8% of sale, in line with our full year guidance. As a reminder our CapEx forecast for 2018 includes funds for facility expansion and advance of a major Fortrex program launch next year and increased investments in IT and innovation.

Moving now to slide eight. The charts on slide eight, quantify the significant drivers of the year-over-year change in our adjusted EBITDA for the third quarter and first nine months. In the quarter, we achieved $10 million in cost savings through lean initiatives and improved operating efficiencies. We also achieved $10 million of savings in our SGA&E expense as a result of investments in improved systems and automation, reduced headcount and lower net compensation related to costs. These cost savings were more than offset by the negative impacts of $25 million from weaker volume and mix net of price reductions and $13 million in higher net material costs.

For the first nine months, we achieved $57 million in cost savings through improved operating efficiency and an additional $23 million in savings in SGA&E. These savings were more than offset by the negative impacts of $75 million of unfavorable volume and mix and higher material costs of $29 million.

Now looking at the change in adjusted EBITDA margin in terms of company-specific performance and the market driven factors. From this perspective improvements in our performance resulted in positive contribution to margins of 20 basis points in the quarter and 120 basis points in the first nine months respectively. However, market factors negatively impacted margins by 320 basis points and 230 basis points in the quarter and first nine months respectively.

Moving to slide nine. We continue to maintain a strong balance sheet and credit profile. We ended the third quarter with $282 million of cash on hand. This reflects our investment of $99 million in acquisitions so far this year, $44 million of share repurchases that we've funded from cash from operations and the increased CapEx levels as I mentioned earlier. Our total debt at the end of September was $764 million and net debt was $482 million. This compares to net debt of $382 million at the same time last year. With cash on hand and an undrawn revolver, we maintain solid liquidity of $480 million as of September 2018.

Our gross debt to trailing 12 months adjusted EBITDA at the end of the third quarter was 1.8 times, the same as at the end of September 2017. On a net basis, our leverage ratio is currently just 1.1 times, while our interest coverage ratio improved to 10.8 times.

Finally, a few thoughts on cash flow and capital structure. Free cash flow for the third quarter was an outflow of $73.7 million compared to positive free cash flow of $1.1 million in the third quarter of last year. The variance is driven by our operating results, a $15 million discretionary U.S. pension contribution and increased capital investment to support new launches and innovation, partially offset by the benefits from our European factory program and cash proceeds from a land sale in Europe. As is typical in our industry, we expect cash flow will be strongest in the fourth quarter and we expect to be solidly cash flow positive for the full year. When combined with our strong balance sheet and credit profile, we expect that our liquidity will adequately support our strategic plans and priorities. Our approach to capital allocation remains consistent with investment and profitable growth, whether organic or through strategic acquisition being the top priority. We will look to opportunistically repurchase shares at our cash balance and anticipated cash requirements permit, as we believe our shares represent a compelling investment opportunity.

Now let me turn the call back over to Jeff.

Okay. Thanks, Jon, for the -- next few minutes, we want to focus on the progress we've made in executing our profitable growth strategy and our longer term plans to create increasing value.

So let's move to slide 11. We've announced an agreement to sell our Anti-Vibration system business to Continental AG. Our strategic vision is to be number one or number two in all product lines. Given the scale of this business in relation to its competitors in the market, we cannot realistically expect to grow it into a top global player. We believe that this decision will enable this business to grow to its full potential. The sale of our AVS business when completed will free up capital and management resources that we can reinvest in our core product lines where we have a greater competitive position and better growth potential.

More importantly, it gives us the opportunity to accelerate the growth of our Advanced Technology Group business. Our AVS unit is a great business with a lot of outstanding people, who serve our customers at the highest level. I want to personally thank them for their many significant contributions and wish them well as they transition to the new ownership.

Moving to slide 12. As announced yesterday, our acquisition of Hutchings Automotive Products is an example of our type of strategic acquisitions that we are targeting. It's a relatively small company that offers strategic advantages while solidifying our leading market position in our fuel and brake delivery and FTS product lines. It provides a competitive manufacturing base, expands our product and technology portfolios and improves our position with some key customers.

We anticipate a quick integration into the Cooper-Standard family and a smooth transition to the Cooper-Standard Operating System, which will allow us to realize significant cost synergies. These two transactions combined with the previously announced LS Mtron and manufacturing acquisitions, demonstrate how we're executing our strategy. We continue to fill out our product lines and strengthen our global market position within our core businesses, while the sale of non-core assets provides additional capital to fund future strategic expansion.

Moving to slide 13. Also consistent with our strategy, we are very pleased to announce, we've signed a second license agreement for the use of Fortrex technology outside of the automotive industry. This new agreement is with a major North American material compounding company with an extensive sales force and customer base. They have the potential to sell Fortrex into numerous new markets for a broad range of new applications. Under this agreement, we will generate revenue and profit for royalty income based on the licensees, sale of Fortrex products to its customers. We believe this agreement is further a validation of the value of Fortrex material science, and an important step toward our strategic goal to diversify our company. Interest from other potential licensees remains strong and we hope to be able to announce more license agreements in the near future.

Turning to slide 14. Even as we continue the successful execution of our strategy for profitable growth and diversification, our near-term outlook will be challenging. We believe the headwinds for unfavorable volume and mix in China and Europe, that we experienced during the third quarter will persist at least through the end of the year. We also expect increasing material cost will continue to be a factor in Q4 and possibly into next year. As a result, we have adjusted our guidance for the full year 2018 as you see on slide 14.

As I said at the beginning of the call, the current headwinds do not change our longer term plans and objectives. These remain on track and our innovations continue to create opportunities in both our core automotive business and our Advanced Technology Group. In addition, with our strong balance sheet, we're well positioned to take advantage of the additional acquisition opportunities that may come up. Our long-term outlook is positive. We have an outstanding global team of employees that are committed to serving our customers and creating value. We want to thank them for their continued engagement. I also want to thank our customers for their continuing support and trust. So this concludes our prepared remarks.

We'll now open the phone lines for Q&A.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from John Murphy with Bank of America. Please proceed.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. This is Aileen Smith on for John.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Hey, Aileen.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

First question on the divestiture of the AVS business. You noted in the slide deck, it's a little over $300 million in revenue and apologies if I missed this. Can you provide any detail on the margin profile of that business. Is it above or below corporate average margin?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Hey, Aileen, this is Jon. Yes, the revenue is around the $300 million mark. And we typically don't go through disclosing specific margin profiles or different product lines. But we call this one in line with the overall average margin profile of the business.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

Okay, great. That's helpful. And if I'm calculating the implications of your revised full year 2018 outlook for 4Q, I get a 4Q revenue year-over-year decline in the range of 2% to 7% which is a notable deceleration from the pace you've been running at year-to-date. Can you provide any color around some of the puts and takes within that outlook and what it might take to get to the higher end or the lower end of that range. Is it just an assumption for continued deterioration across major markets?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

It really is Aileen. It's Jon again. The big headline there is the continued softness in the China market that we continue to see, as well as the European softness both from WLPT (ph) emissions standards changes, as well as that premium segment softening that I referred to earlier. I'll remind you that the full year, we're still going to be on pace for about 2% of overall cost reductions in the greater business. So you'll see that can decline year-over-year as well. I'm sorry, price decline year-over-year.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

Okay. And on the raw material side of things, is the shift over to Fortrex and ArmorHose and other material science innovations in any way exacerbating your raw material cost pressure? Is this sourcing for some of those raw materials in those products different from your traditional products?

Jeffrey Edwards -- Chairman and Chief Executive Officer

Aileen, this is Jeff. Actually it's a benefit as we continued to transition our business from EPDM and TPV to Fortrex. Carbon black, is one of the most volatile ingredients at least from a market price pressure that we deal with and Fortrex, doesn't have carbon black in it. So it's actually a benefit as we move forward to hopefully proliferate the different markets with our Fortrex product. And again I'm talking, primarily the sealing business with that comment.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

Great. That's very helpful. And last question, I realize it's early to provide any official outlook for 2019, but obviously there's a lot of skepticism around IHS production forecast right now, and it's still appears your 2018 volume of assumptions are based of IHS. As you think about 2019 and what has happened with schedules from IHS and other sources so far this year, are you approaching 2019 and thinking about capital allocation and forecast in the same way to be based on IHS? Or are you potentially approaching it a bit more conservatively?

Jeffrey Edwards -- Chairman and Chief Executive Officer

Aileen this is Jeff. As we do each year, we don't take IHS and blindly enter it into the database. We use our own intelligence, market intelligence from our teams around the world. And then we take a look at the IHS numbers and ultimately put together our business plan. They don't vary a whole lot, but we just don't plug those in, if we have information that we would think would be appropriate to adjust them.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

Great. That's very helpful. That's it from my end. Thanks for the questions.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Okay, Aileen.

Operator

Thank you. Our next question comes from Matt Koranda with Roth Capital. Please go ahead.

Matthew Koranda -- Roth Capital Partners -- Analyst

Hi guys, good morning.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Hey Matt.

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Hey Matt.

Matthew Koranda -- Roth Capital Partners -- Analyst

Just wondered, in Q3 if I look at sort of segment profitability as it looks like the decrementals in Europe and Asia were pretty significant in the quarter. Was there anything unique about the way that releases came in during the quarter that sort of made it harder to tailor down costs? Just any help there in terms of the cadence during the quarter?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Yes, Matt, it wasn't so much the releases necessary coming in different than what we thought. It's just, if you remember where -- we've got a very flexible cost base already, we're 25% fixed and 75% variable. So the business does a good job reacting. It's just that the really significant shift in the releases that we're asked for in the European market and the overall D3 and global OEM drop-offs that were pretty persistent in China, really stressed the business. And so that is the big driver in both of those markets, when you're thinking about segment profit. It's driving most of that decline.

Matthew Koranda -- Roth Capital Partners -- Analyst

Okay, got it. And then when I think about sort of the midpoint of your EBITDA guide as it pertains to Q4, I think it suggested about $30 million needs to come out, my estimates at least. How much of that outlook I guess is due to certain incremental softness in Europe and Asia versus intensifying commodity headwinds. Can you help us just disentangle those two items?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Sure, Matt, it's Jon again. When we talked last, we saw full-year commodity pressure of $49 million or so, that as worsened a bit. So the Q4 run rate already had a significant pressure built into it. We do see the rising commodity prices is hampering our ability to go back and get lean savings from our suppliers. So that is causing a challenge for us as we look forward into Q4.

For the full year, if I think about it, we're going to give up over 1.4% of sales to commodity inflation, that's kind of in a long run of our traditional pricing environment and we're getting it on the input side as well. So if you think about Q4's revenue, it really is mainly driven and exacerbated by the markets in Europe and in Asia, and the continued price downs that's what I talked about earlier the 2% on average for the full year.

Matthew Koranda -- Roth Capital Partners -- Analyst

Got it.

Jeffrey Edwards -- Chairman and Chief Executive Officer

This is Jeff, Matt, let me add to that. I think the other thing that keep in mind with both Europe and Asia in addition to the -- what we would call the overall softening. We've had some specific mix issues that have really hit us probably differently than maybe others and that particularly is the case in Europe. And maybe to a little lesser extent in China, but also there are probably three different vehicles in Europe and probably maybe even more than that in China that we happen to have a lot of content on that those volumes were not anywhere close to what we were originally projecting when we built the plan for the year.

Matthew Koranda -- Roth Capital Partners -- Analyst

Okay. And then I know you mentioned earlier carbon black as sort of the poster child of one of your more volatile, I guess cost inputs, but anything else to call out specifically on the commodity front that's causing pressure?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Yes, Matt, it's Jon. Let me break it down a little bit by the major commodity buckets. I referenced about $50 million of gross commodity pressures breaking down by metals, oil and chemicals and other. Metals is actually about 47% of that overall commodity inflation, oil and chemicals which carbon black would be part of it is another 43%. So you're left with all the other puts and takes about 10% increases overall year-over-year.

And then specific, if I look at Q3, we had about $13 million of commodity pressure, $6 million of that was steel and aluminum here in North America. EPDM rubber was $3 million of that and carbon black was another $2.5 million. So really aligned with the overall percentages that I gave you earlier. Those are the big drivers, the steel, EPDM and carbon black.

Matthew Koranda -- Roth Capital Partners -- Analyst

Okay. That's helpful. Last one from me and then I'll jump back in queue guys. Just as presently (ph) Asia, I guess, as we kind of exit the year here and think about the choppiness in that market. Any thoughts on sort of footprint actions there in 2019 and beyond, and how easy is it to take out fixed costs in that region relative to other operating regions for you guys like North America and Europe?

Jeffrey Edwards -- Chairman and Chief Executive Officer

Yes, Matt, this is Jeff. I think to keep it in perspective, as we sit here today, China's 28 million units or so maybe plus or minus now with the latest. As we fast forward in the middle of the next decade that number is going to be significantly above 30 million units. So when you talk about what are we going to do to flex, it's the largest car market in the world. It's still going to grow. There's going to be incentives coming out here soon that will -- I'm sure in some way shape or form assist the rebound there quicker than what anybody is anticipating.

So in our case, we have and we continue to grow there from basically zero to $600 million. We're going there from $600 million to over $1 billion early next decade. We have all of our facilities in place to support that growth. We're launching our record programs there and that's going to continue. So the part of the challenge we have in the short-term is when we talk about taking some cost out where we can do that to a certain extent that we have 200 launches that we're dealing with this year in total, and next year is more than that. So those launch costs are embedded and they are not necessarily sensitive to short-term volume and mix fluctuations. So we can't be either.

If our customers delay or suspend programs, then that's different. We can take those costs out immediately. But if they don't, then we're still operating it at the same level regardless of what short-term volume and mix happens to occur. So that's pretty much explains what's going on right now, but we still have great face in the China market going forward, the growth rates, our current capacity there makes sense for that market.

To answer your question about taking plants out, we still have a few plants going forward in China that were part of legacy facilities that we will be taking out over the period over the next few years, is my guess, but that's more pruning, if you will, as we get to a projected level of $1 billion plus in revenue in that market. So that's kind of a long answer to your question but there's hopefully a lot in there for you.

Matthew Koranda -- Roth Capital Partners -- Analyst

Got it. That's very helpful, Jeff. Thanks. I'll jump back in queue guys.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Okay.

Operator

Thank you. Our next question comes from Michael Ward with Williams Research. Please go ahead.

Michael Ward -- Williams Research -- Analyst

Thank you. Good morning. Jon a couple of things, on your slide eight, you had the bridge on the EBITDA, and then you were just talking about some of the material issues and you cited $49 million for the year. Is there any reason that commercial negotiations will not recover or at least remedy some of that pressure?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Yes, Mike. We were always approaching our customers to help offset some of this cost and historically we've been successful in getting about 40% to 60% of this back on average. When you hear certain of our major OEMs discuss their own pressures on that business, it is becoming a little bit harder as we look forward to go into their customers and ask for sharing of that, but it doesn't stop us from being proactive in doing so. A certain amount of our commodities are on automatic indexes and so that is helpful for us, but certainly not the majority there. So we are continuing to go back in and then ask for assistance on these rising pressures.

And as mentioned earlier, we're trying to offset some of the increases as well through lean initiatives on the supply base and with everybody kind of in the same boat, the ability to go the other direction is much harder.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Mike, this is Jeff. I'll add the timing factor to your question is always there is a time lag here that you're dealing with. And so in our case, teams are going into the customers really, as we speak and they will continue to do that through the end of the fourth quarter, that's sort of when those discussions happen every year. And then as we get into the first quarter, we know more about what we're up against in terms of how they're going to support us and what's going to be in our lap to manage going forward. So that's how that happens every year and in this year will be the same.

Michael Ward -- Williams Research -- Analyst

And your teams setup with each vehicle manufacturer or is it by region?

Jeffrey Edwards -- Chairman and Chief Executive Officer

No, we have global leads identified for each one of our customers and --

Michael Ward -- Williams Research -- Analyst

So they are in contact. So your customers are aware of some of these pressures you're facing.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Yeah, of course. The customers are aware, not only from us but from the entire industry.

Michael Ward -- Williams Research -- Analyst

Okay. And then go back to page eight. There is a part of the chart, you have volume and mix, and it had a headwind in the second quarter and headwind in the third quarter about equal amount, and now you mentioned in Europe some of the testing issues caused a problem. Now, was that a temporary thing where they just couldn't ship the components and is that how your revenue over there was recorded, when it's -- or is when it leaves the plant. And when you look at those testings, I'm not sure how the testing issue works? Is it not considered leaving the plant until it goes through the testing procedure, and is that something that will be made up in Q4 and then also in Q1?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Yeah, Mike, it's Jon. We recognize revenue upon shipment to the customer. So once it actually leaves the plant --

Michael Ward -- Williams Research -- Analyst

Your plant or leaves the customers' plant or your plant?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Our plant.

Michael Ward -- Williams Research -- Analyst

Okay.

Jonathan Banas -- Executive Vice President and Chief Financial Officer

So when you're thinking about the emission standards impacting us, it's actually the customers, not even having releases.

Michael Ward -- Williams Research -- Analyst

Okay, so they can't produce any vehicles. So they are stuck. Okay.

Jonathan Banas -- Executive Vice President and Chief Financial Officer

They delay launch either launches on certain new platforms due to WOPT or just slow production down in others, because they don't want to build up a big inventory of these vehicles that might not be saleable once the emission standards are implemented. So we think this is a specific issue is a short-term one because those standards and be in place by December 31 of this year. So we'll see how that transpires as we exit the year.

Michael Ward -- Williams Research -- Analyst

And is that one customer in particular that you're being affected by?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

No, no. It's kind of across the board for --

Michael Ward -- Williams Research -- Analyst

There are couple of them. Okay. And in China, you're hit was greater than the overall market hit in China. So that suggests that you had greater content on some of the vehicle manufacturers that were hit harder than the overall market. Is that a fair assumption?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

It is. It is Mike, and when you think about our revenue profile there, keep in mind that about 90% of our China revenues are with the global OEMs in the D3. If you look down the --

Michael Ward -- Williams Research -- Analyst

Then if your falling price, you are deep trouble there. But they were hit really hard.

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Good observation.

Michael Ward -- Williams Research -- Analyst

Now, Jeff on page 13. Just one last one as you talked about some of these things -- I just want to make sure I understand how this is working with Fortrex in particular, with these -- this North American material compounder. So you have an agreement with them, you will sell the commodity to them to the pellets and then they'll sell the commodities to the various industries. And then you'll also receive licensing revenue. Is that the way it works.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Yeah. The contract Mike is for them to use our Fortrex material science. We've licensed that to them for a fee, and they will use that material science, working with our chemists of course for individual formulations for their customer base. Contractually we've agreed to certain lane ways for growth that they're able to target, and certainly lane ways for growth that they are not able to target. You can imagine because certain lane ways are our resins and other lane ways are theirs where they bring that market expertise and market opportunity to us. So certainly a win for both companies. But when we have the opportunity to do now, finally, since we have this deal done is really expand Fortrex across many, many markets outside of the automotive industry, and we're extremely excited about that. This is a huge deal. One that we've been working on for quite a while and we're very, very pleased that we have the deal done. And probably more importantly, that we've built a relationship here that's going to stand the test of time.

Michael Ward -- Williams Research -- Analyst

And you see major North American material compound or is it one of the top two or three, is it like one of the leaders?

Jeffrey Edwards -- Chairman and Chief Executive Officer

It's major.

Michael Ward -- Williams Research -- Analyst

Okay. And now, -- so for example, they sell their materials currently to whatever the marine industry. And so that might be one that you said we're not interested. But if you're interested in footwear, they would not sell that material for that could be you alone being the material provider?

Jeffrey Edwards -- Chairman and Chief Executive Officer

That would be an example

Michael Ward -- Williams Research -- Analyst

An example, right. All right. Super. Congrats on that.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Thank you.

Michael Ward -- Williams Research -- Analyst

When will we start seeing significant revenue as we look out in '19, '20. Is that about right?

Jeffrey Edwards -- Chairman and Chief Executive Officer

Yeah, we agree with that.

Michael Ward -- Williams Research -- Analyst

Thanks very much.

Jeffrey Edwards -- Chairman and Chief Executive Officer

You're welcome.

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Thanks, Mike.

Operator

Thank you. Our next question comes from David Tamberrino with Goldman Sachs. Please go ahead.

David Tamberrino -- Goldman Sachs. -- Analyst

Thanks. On this Anti-Vibration sale, what's the expected timing on closure?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Hey David, it's Jon. We expect to close that by June of next year or no later than. So in the first half.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay. And following on Mike's comments with Fortrex licensing agreements. Can you provide us a little bit of color as to what you've kept for yourselves in terms of markets that you'd like to go after versus what markets this unnamed compounders really looking you sell into. And what kind of got across the finish line and comfortable with the product knowing that they're going to have an opportunity to get into a similar large industrial applications or potentially consumer applications whatever they are (ph).

Jeffrey Edwards -- Chairman and Chief Executive Officer

Sure. David, this is Jeff. As we've been pretty clear in the past, I think we've even giving you some color in today's presentation on the markets that they were interested in. Those are the markets that we're still interested in, and those are the markets that we maintain our focus. And not to say that there aren't opportunities even within each of those that we may shift over to a compounder like this, there probably are. The list is extremely expensive and certainly too extensive for me to go in here -- to go through it today, but as we put together the guidance for '19, we certainly will be given you all a lot more visibility around what that deal is and what the markets are that we're going after specifically. And then what are the markets that there our partners going to go after. So we will provide you that, I'm not going do it today.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay. Understood. And Jon, you mentioned a couple of times, and I think I heard the full year update. But did you mention what price downs were in 3Q '18 because I didn't necessarily see it within the walk in the slide deck?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Yeah, we don't typically put it in the headlines, David, but it was about 1.5% or so for the quarter. So that keeps the full year on track for about 2% of sales force.

David Tamberrino -- Goldman Sachs. -- Analyst

Understand it's a sensitive topic, but what's been driving that, because I think earlier in the year as higher closer to 3% in the first quarter and then I think down around 2% and change in the second quarter and now you're down at 1.5%. I mean what's happened throughout the year that that's started to dissipate for you?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

The earlier part of the year, I don't believe it was that high in the 3% but it was closer to the 2% level for the first couple of quarters. It really is all dependent on whether customers are actually awarding business at that particular time. The timing of those awards is going to come up with potential upfront monies that might be paid out as opposed to the contractual normalized levels. And those are more predictable for us in -- and past conversations. We refer to those as being about 1.4% to 1.7% of sales on the contractual ongoing basis. So it's really about the timing of customer awards that drove that up for this year for us.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Yeah, David, this is Jeff. I think it's very important to note, I think the first half, it was around 2.2%, as we just said 1.5% here in this quarter. We announced early in the year that it would be right around 2% for the year. And so that's no change. And that's important to note. The second thing I would tell you is that going forward in 2019, obviously the price negotiations along with the material economic recovery negotiations are going to be much different. And so we are very, very focused as a business on those negotiations. And so we will begin those discussions in many cases we already have, but we will begin those discussions with every one of our customers in the fourth quarter and we will conclude price negotiations for 2019 in the first quarter, and it will be very different.

David Tamberrino -- Goldman Sachs. -- Analyst

Understood. Within your guidance, was there any incremental cost associated with an impact from China tariffs or is that not going to hit you at all?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

David, that's baked into the full, call it $50 million or so of commodity pressures. So there's a small element there for China tariffs specifically.

David Tamberrino -- Goldman Sachs. -- Analyst

Can you quantify how much that is in the fourth quarter?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

In the fourth quarter that should be, call it under $5 million or so.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay. If I were to annualize that, would that be the correct impact for 2019?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

We're not going to give a view on 2019 yet, but you can extrapolate.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay. And then the last one from us is just net new business awards, I think $92 million in the quarter, it's a little bit down year-over-year and a softer pace sequentially. Is there anything to read into that, or was it just less business being out for bid that you play in this quarter, there were some tough (ph) slip?

Jeffrey Edwards -- Chairman and Chief Executive Officer

No. Don't read anything into it, it's just the ebb and flow of customer decisions and they tend to slip from quarter-to-quarter. So there's nothing -- we didn't lose anything that was important, if that's your question.

David Tamberrino -- Goldman Sachs. -- Analyst

That is. Actually, one last one from me. Have you communicated what the sale price is for AVS?

Jeffrey Edwards -- Chairman and Chief Executive Officer

This is Jeff, David, we haven't. It's fair to say and you've been hanging around us for a long time now, so you know that we don't over-pay and we certainly don't give away. So in the terms of this particular deal, I think that from a shareholder point of view, it's a good deal for employees, for customers, for our suppliers. I think everybody wins on this this sale. But in terms of what we paid for the deals that we've announced here and talked about today and then what we sold AVS for, we represented the shareholders as well.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay, understood. Thanks for taking my questions.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Okay.

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from John Sykes with Nomura. Please go ahead.

John Sykes -- Nomura Holdings, Inc. -- Analyst

Yes, hi. Appreciate it. I guess just tacking on to the last question, what are you going to do with the sale proceeds?

Jeffrey Edwards -- Chairman and Chief Executive Officer

Yes, thanks, John, this is Jeff. Obviously, we have tremendous growth opportunities not only within the core automotive business where frankly there is consolidation that has to take place. Really every major region in the world has opportunity in our space for consolidation. So we want certainly to continue to pursue those opportunities.

Secondly, and then probably, more importantly, even than that, we've announced that we want 25% to 30% of Cooper-Standard revenue to be non-automotive. So those proceeds will give us an opportunity to clearly invest in a significant way to achieve that target that we have out there over the course of the next several years. So those would be the two biggest areas.

John Sykes -- Nomura Holdings, Inc. -- Analyst

So, like you said, maybe just, is that like five years from now where -- because that would be a significant -- in my mind benefit, so you don't have to -- I'm assuming when you say non-automotive, you're kind of looking at like more of a non-cyclical type business, right?

Jeffrey Edwards -- Chairman and Chief Executive Officer

Yes, that's correct, John, I've said in the past that that target while it's a strategic target that hangs out there, we are aggressively pursuing that to achieve at sometime in the 2023, 2025 time period in that area. There's no reason we can't do that, and these proceeds will greatly help expedite that.

John Sykes -- Nomura Holdings, Inc. -- Analyst

Okay. I know you can't say much about 2019, but let me just throw kind of a hypothetical out there, and just really want to see how you guys are going to react. If nothing improves, right, if the tariffs continue, so raw material costs remain kind of escalated. China and Europe continue kind of a slower to weaker trend, let's just say North America down but probably it's not down significantly or dramatically like prior years. What's the game plan? Can you -- you're going to pull back on CapEx, manage the business a little bit more for free cash flow. Obviously your leverage is low. So leverage isn't an issue here. I'm just trying to get a more of a sense operationally what you guys are thinking.

Jeffrey Edwards -- Chairman and Chief Executive Officer

Yes. So, John, what we've already been doing is continue to prune and take costs down every single quarter, every single year. I go back six years and look at every single quarter, every single year, that's what we do. We have teams very focused on the cost side of the business. They are tacking quality cost, delivery every aspect of cost drivers in our plants, every single day and that's how they are paid.

As it relates to the acquisition side of things, I think I've explained what we're doing there. We have a team of people that do our deals, and we don't mix those responsibilities. So we don't get distracted. We have deal people and we have operating people. Just like we have customer people. And so every day the customer people are trying to win business and in this year, they're going to be trying to get recovery on material economics. In addition, protect the great relationships that we have. So there's always a balance that takes place.

As it relates to, I think the underlying part of your question, of course, if there is a significant downward spiral, in other words, if the world catches a cold in the automotive industry, the customers tend to push out programs, delay programs. And then that provides us an opportunity to significantly reduce cost and preserve cash during those times. But that's certainly not what we are forecasting, that's not what our customers are forecasting, but if in fact that happens, then it's not rocket science, it's to how you are able to strip cost quickly and preserve cash quickly.

Then I think I would close on a positive note by saying that the markets going forward both here in North America as it relates to mix around trucks, SUVs, Crossovers are very favorable for us. As we look at China, it's the largest car market today, it's going to be the largest car market 15 years from now, and it's only going to get bigger. And if we are well positioned in that market to take advantage of that growth opportunity. So while we all recognize that we're in a bit of a challenging time here, we're very focused on the cost side yet, we're still cognizant that we have to manage the business for the long term, and we're trying to do both. And hopefully the track record that we have out there gives you guys confidence that we can do that.

John Sykes -- Nomura Holdings, Inc. -- Analyst

Yes. Again you guys haven't done anything crazy in terms of leveraging up the business. So I think you're in good shape if things get worse, which who knows, right, but I'd appreciate that. Thank you.

Jeffrey Edwards -- Chairman and Chief Executive Officer

All right. Okay, John.

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Thanks for the call -- questions John.

Operator

Thank you. Our next question comes from Bob Amenta with JP Morgan Asset Management. Please go ahead. Mr. Amenta, please check your mute button.

Robert Amenta -- J.P. Morgan Asset Management -- Analyst

Yes, sorry. Thanks. One quick question on free cash flow from kind of a fixed income side. I agree leverage is low, but you have said in the past, like a 25% decline in USR (ph) would kind of be free cash flow neutral, which I'm going to ballpark $13 million kind of SAR. You did $70 million and I hesitate to just annualize one quarter but that gets you to give or take $300 million and that kind of is getting close to with CapEx in the low 2%, maybe $25 million of taxes at that level and $40 million of interest. So I'm trying to figure out to reconcile that 70 times for and SAR was running at $17 million here obviously none of the weakness was here, but do you still feel good with that, I mean was that, comment based on the rest of the world's not falling off or just seems like you're getting close to that with a $17 million SAR, if we took this quarter times 4, which I know it's dangerous to do?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Yeah, Bob. But you've got to keep in mind that Q3 is typically one of our significant outflow quarters historically with the European holiday shutdown, with the changeovers in North America, you do see a bleed off of cash in Q3. And Q4 on the other hand is always the largest cash flow in fourth quarter. So I would never propose taking Q3 and trying to annualize that from a -- from an annual run rate perspective.

Robert Amenta -- J.P. Morgan Asset Management -- Analyst

Yeah. I was just doing a more simplistic calculation of EBITDA minus interest CapEx and taxes. So trying to get away from any working capital. I'll clearly with the shutdowns EBITDA maybe right off the bat is too low to annualize but you still feel good I guess about that comment about a -- being free cash flow breakeven with USR in that $13 million-ish range, I guess is my ultimate question?

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Yes, we would.

Robert Amenta -- J.P. Morgan Asset Management -- Analyst

Okay. Thank you.

Operator

Thank you. It appears that there are no more questions. I would now like to turn the call back over to Roger Hendriksen.

Roger Hendriksen -- Director, Investor Relations

Okay. Thanks everybody. We appreciate the engagement in the questions, as always, if there are further questions, I'll be available to respond either this afternoon or in the coming days. Thanks again.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

Duration: 60 minutes

Call participants:

Roger Hendriksen -- Director, Investor Relations

Jeffrey Edwards -- Chairman and Chief Executive Officer

Jonathan Banas -- Executive Vice President and Chief Financial Officer

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

Matthew Koranda -- Roth Capital Partners -- Analyst

Michael Ward -- Williams Research -- Analyst

David Tamberrino -- Goldman Sachs. -- Analyst

John Sykes -- Nomura Holdings, Inc. -- Analyst

Robert Amenta -- J.P. Morgan Asset Management -- Analyst

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