Adient Q2 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

There are 10 speakers on the call.

Operator

Welcome to the Audient Second Quarter Financial Results Conference Call. Your lines have been placed on a listen only mode until the question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I now turn the call over to Mark Oswald.

Operator

Sir, you may begin.

Speaker 1

Thank you, Shirley. Good morning and thank you for joining us as we review Adient's results for the Q2 of fiscal 2023. The press release and presentation slides for our call today have been a question and answer session to the Investors section of our website at adient.com. This morning, I'm joined by Doug DelGrosso, Adient's President and Chief Executive Officer a question and Jerome Dorlak, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business, a question and answer session.

Speaker 1

Before I turn the call over to Doug and Jerome, there are a few items I'd like

Speaker 2

to cover.

Speaker 1

First, today's conference call will include forward a forward looking statements. The statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward looking statements made on the call. Please refer to Slide 2 of the presentation a question and answer session. In addition to the financial results presented on a GAAP basis, we will be discussing non GAAP a question and answer session that we believe is useful in evaluating the company's operating performance.

Speaker 1

Reconciliations for these non GAAP measures to the closest GAAP equivalent a question and answer session. This concludes my comments. I'll now turn the call over to Doug. Doug?

Speaker 3

Great. Thanks, Mark. Good morning. Thank you to our investors, prospective investors and analysts joining the call this morning a question and answer session as we review our Q2 financial results for fiscal 2023. Turning to Slide 4, let me begin with a few comments related to the quarter.

Speaker 3

1st and foremost, Adient's operational execution, positive commercial momentum and an extreme focus on containing costs continue to drive the business forward. Adient's 2nd quarter results, which provide very positive proof points of these actions can be characterized as Very solid, building on the positive momentum established earlier this year. The company's Key financial metrics for the quarter can be seen on the right hand side of the slide. Revenue for the quarter, which totaled $3,900,000,000 was up a question and answer session. At that time, if you would like to ask a question and answer session.

Speaker 3

A question and answer session. In addition, Adient ended the quarter with a strong cash balance a question and answer session. And total liquidity of $826,000,000 $1,800,000,000 respectively. Speaking of cash, the strong cash balance reflects the impact of certain opportunistic strategic transactions executed during a question and answer session. Namely, the use of $30,000,000 to repurchase just under a question and answer session.

Speaker 4

At that time, if you would like to ask a question and answer session,

Speaker 3

at that time, if you would

Speaker 4

like to ask a question and answer session, please press star 760,000 shares

Speaker 3

of the company's common stock kicking off our previously announced enhanced capital allocation plan a question and answer session. And the use of $100,000,000 combined with proceeds from $1,000,000,000 new U. S. Senior notes issuances to pay down about $750,000,000 of euro notes due 2024 and prepay $350,000,000 of Adient's term loan B. Jerome will review the additional commentary on these actions during his financial review.

Speaker 3

This is no doubt a very good start to the year as we reach the halfway point. Although we're question and answer session. Certainly monitoring certain external headwinds such as a soft auto demand in China and increased deal prices in the Americas. We expect the positive momentum to continue into the second half of twenty twenty three based on the current environment. I will talk about the environment as we see it in greater detail in just a minute.

Speaker 3

A question. In addition to Q2 fiscal year 'twenty three solid and improved fiscal on year financial results, Adient continues to execute a question and answer session. These actions include, a question and answer session. At that time, if you would like to ask a question and are not limited to

Speaker 4

team's intense focus on launch

Speaker 3

execution, costs and operational improvement and customer profitability management, a question. Winning new business across various regions, customers and platforms are expected over time to strengthen our leading market position, not to mention a question and answer session. The team is also executing actions to provide value add to Adient stakeholders recognition awards, including most recently GM Supplier of the Year, Renault Korea Motors Supplier of the Year and 7 JD Power Awards for seat a satisfaction for Adient China among other customer recognition. Finally, Adient continues to make progress a question and answer session. At advancing its commitment to build a sustainable future.

Speaker 3

We recently highlighted our sustainable product offerings as part of our goals a question and answer session. Jerome had the opportunity to meet with several investors to a question and answer session. We've highlighted a few on Slide 5. A question and answer session.

Speaker 4

On the slide, you'll

Speaker 3

see product offerings that are currently in the marketplace are being developed for future discussions with our customers. A question. It's important to point out that Adient's innovative solutions span across our portfolio and touch each of the company's core components such as a question and answer session. At that time, if you would like to ask a question

Speaker 4

and answer session, which not only

Speaker 3

drive comfort, but also take urethanes out of the vehicle, eliminating volatile organic compounds. The innovative soft seatback panel, which helps lightweight the vehicle and frees up room for the occupant. Adient's ultra thin technology, when combined with the soft back panel, delivers occupant room plus room for This allows for more packaging of batteries. On average, this award winning technology frees up 40 to 60 millimeters a Packaging space for batteries, enabling our customers' flexibility to increase battery size up to 10%, thus allowing for more bev range. On the structure side of the business, Adient has partnered with H2 Green Steel.

Speaker 3

In fact, we're in the launch phase a question and answer session with one of our customers to incorporate this low carbon steel. And finally, Leather Alternatives has virtually all OEMs a question. Working to reduce or eliminate leather content to improve sustainability, increase quality and reduce costs. Solutions include a question and answer session. The solutions and benefits just mentioned go beyond sustainability, mass reduction, light weighting a question for OEMs greater range in BEVs, cost savings by eliminating certain leather materials in favor of less expensive alternatives a question and answer session.

Speaker 3

A follow-up. Bottom line, Adient's sustainable product solutions provide a significant environmental benefit with cost efficiency in mind. A question and answer session. Turning to Slide 67. Now let's take a look at our business wins and lots performance.

Speaker 3

As you can see in the Slide 6 a few of Adient's recent wins. Adient continues to successfully navigate and balance the current operating environment and related commercial discussions a question and answer session. The programs highlighted represent a good mix of wins across the EV powertrain and ICE powertrains and are diversified across a number of segments, including SUVs, luxury and mass market, a question and contain a high level of vertical integration across complete seats, foam, trim and metals. On the right hand side of the slide, I listed a few observations from recent trip to Shanghai. Despite the negative headlines associated with the China market today, the visit was a good reminder a question, please.

Speaker 3

Without reading each of the points, a few that stood out to me include a question. China remains the world's largest auto market. I don't see that changing. China OEMs are expanding their share significantly across all price segments. A question.

Speaker 3

In addition, exports out of China are growing with that growth expected to continue. Adient's leading capabilities and strong market presence underpin our current and future success. We're seeing that today, especially when looking at our wins, a question, please. Which we're on track to achieve our fiscal year 'twenty three sourcing target of more than $1,000,000,000 across a question. China NEB startups and global manufacturers, including significant amount of NEBs.

Speaker 3

A question. This is expected to strengthen our leading position as we continue to grow in the market. Flipping to slide 7, a question. As we typically do, we've highlighted several critical launches that are complete in process or scheduled to begin in the near term. A question.

Speaker 3

I'm happy to report that the launches currently underway are progressing in line with our expectations. A question. The launches and platform show not only impact Etient's jet facilities, but span across our network into our foam, trim and metal facilities. A question. The team continues to focus on process discipline around launch readiness, has driven a very high level of a performance, especially considering the launch load and complexity of launches that are planned for the year.

Speaker 3

A question and answer session. Before handing the call over to Jerome and turning to Slide 8, Let me conclude with a few comments related to the current environment and what we expect heading into the second half of our fiscal year. To begin, As expected, heading into 2023, the overall operating environment through Q2 has improved versus last year.

Speaker 4

A question.

Speaker 3

I'd characterize the improvement to be fairly modest, driven by small quarter on quarter tailwinds concentrated in a few areas such as softening freight costs, a question. Better operating patterns at our customers, driven by easing supply chain constraints as opposed to across the board improvements. A question. In fact, a number of persistent external influences and risks exist that continue to place downward pressure on the industry a question and answer session. At that time, if you would like to ask a question and answer session, increased labor, rising steel prices in North America are a few examples.

Speaker 3

A question and answer session.

Speaker 5

With that as a

Speaker 3

backdrop and based on what we know today, the left hand side of the slide highlights certain key a question and answer session. Improvement in our customers' production schedules. Influences that we believe will be fairly neutral H2

Speaker 4

a question and answer session.

Speaker 3

Our next question comes from the line of Matthew McElroy from Citigroup.

Speaker 4

Please go ahead. Our next question comes from the line of Matthew McElroy from Citigroup. Please go ahead. Our first question comes

Speaker 3

from the line of Matthew McElroy from Citigroup. Please go ahead. Our first question comes from the line of Matthew McElroy from Citigroup. Please go ahead. A question.

Speaker 3

By modestly lower production in the rest of the world. Energy, freight and labor economics a question and answer session. Are presently forecasted to run fairly in line with the levels experienced to date in 2023, continued commercial settlements a question and answer session. And finally, Adient's balance in, balance out is also expected a question. To be generally consistent with H1 results as our prior year business wins are launched fairly consistently across a question.

Speaker 3

Lastly, at the bottom of the slide, you can see rising steel costs in North America And concerns over consumer demand, especially in China are the biggest worry beats heading in the back half of the year. The team remains focused and is executing actions to manage through these obstacles. On the right hand side of the slide, just a few comments a question and answer session. At that time, if you would like to ask a question and answer session. At that time, if you would like to ask a question and answer session, a question and answer session.

Speaker 3

As you would expect, we'll continue to monitor potential softening of consumer demand, primarily driven by rising interest rates, Which ultimately impacts affordability. That said, our customers have not signaled through their production forecast a question In China, auto demand remains soft despite unprecedented price cuts. A question. The soft demand combined with rising inventory heightens concern for downward revisions to production schedules in the coming month. A question.

Speaker 3

Given this environment, the team is aggressively flexing our variable costs, reducing fixed costs, cutting non essential travel and a question

Speaker 4

and answer session.

Speaker 3

For Europe, despite Q2 production modestly outperforming expectations heading into The outlook for the region remains bleak, lacking positive catalysts for near term and longer term.

Speaker 4

A question.

Speaker 3

In fact, S and P is forecasting a significant reduction in Europe's production in Adient's second half of twenty twenty three. Given these low expectations and as we mentioned on the last earnings call, the team the Adient team continues to develop and a question and answer session. Flipping to Slides 910, which a question. I will not comment on in great detail. The slides are fairly straightforward.

Speaker 3

We've illustrated why additional restructuring is necessary a question and just as important Adient's response. Two key takeaways on the slide. A question. A number of external factors, including lower expectations for vehicle production in Europe combined with industry specific trends, a question and answer session. It's imperative that a question and answer session.

Speaker 3

Although restructuring can be expensive, Adient is committed to be good stewards a question and answer session. In fact, Slide 10 is a recent example of how the company implemented an effective, a cost efficient restructuring of our board facility in the Czech Republic. With that, I'll turn the call over to Jerome to take a question and answer session. At that time, if you would like to ask a question and answer session, I'd like to turn

Speaker 4

the call

Speaker 3

over to Adient's Q2 2023 financial performance and provide our thoughts on what to expect for the remainder of fiscal 'twenty 3.

Speaker 2

Thanks, Doug. Let's jump into the financials on Slide 12. Adhering to our typical format, the page is formatted with our reported results on the left a question and answer session. And our adjusted results on the right side. We will focus our commentary on the adjusted results, which exclude special items a question and answer session.

Speaker 2

Details of all adjustments for the quarter are in the appendix of the presentation. High level for the quarter, sales were approximately $3,900,000,000 up 12% compared to our 2nd quarter results last year. A question. Improving vehicle production in the Americas, Europe and Asia, excluding China, were the primary driver of the year over year increase. A question and answer session.

Speaker 2

Adjusted EBITDA for the quarter was $215,000,000 up $56,000,000 year on year. The increase is primarily attributed a question and answer session. These benefits were partially offset by the impact of increased business operating costs and the negative impact of currency movements between the two periods. A question. I'll expand on these key drivers in a minute.

Speaker 2

Finally, at the bottom line, adding reported an adjusted net income of $3,000,000 a question or $0.32 per share. Let's break down our 2nd quarter results in more detail. I'll cover the next few slides rather quickly as a question and

Speaker 4

answer session. The detail for the results are

Speaker 2

included on the slides and this should ensure we have an adequate amount of time set aside for the Q and A portion of the call. Starting with revenue on Slide 13, we reported consolidated sales of approximately $3,900,000,000 an increase of $406,000,000 compared with a question and answer session. The primary driver of the year over year increase was higher volume and pricing, call it $519,000,000 a question. The negative impact of FX movements between the two periods impacted the quarter by $113,000,000 Focusing on the table, on the right hand side of the slide, Adient's consolidated sales for each of Adient's major regions a question. Was generally in line with production except in Asia where the company strongly outperformed.

Speaker 2

Americas a question and answer session. At that time, if you would like to ask a question and EMEA performed in line with the broader market as customer production schedules and production volumes continue to make modest improvements through the quarter. In China, Adient's strong customer mix underpinned significant outperformance versus the industry production in the region. A question. GAC, Daimler and Hyundai led the charge.

Speaker 2

This outperformance is consistent with our Q1 results and expectations a question and answer session.

Speaker 4

At that time, if you would like

Speaker 2

to ask a question and answer session. As the benefit from new program launches are taking hold. In Asia, outside of China, Adient benefited from programs that a question and answer session. At that time, if you would like to ask a question and answer session. And are now running at rate and the launch of recently won Conquest Business in Japan.

Speaker 4

A question.

Speaker 2

With regards to Adient's unconsolidated seating revenue, year over year results were down about 5% adjusted for FX. A In China, where a large majority of Adient's unconsolidated sales are derived, the year over year decline is attributed to lower production a question at the company's unconsolidated joint ventures, partially offset by improved volume in sales at our unconsolidated joint ventures in the Americas and EMEA. Moving to Slide 14, we've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. A question and answer session.

Speaker 4

The bucket labeled corporate

Speaker 2

represents central costs that are not allocated back to the operation, such as executive office, Communications, Corporate Finance and Legal. Big picture adjusted EBITDA was a question and answer session. At that time, if you would like to ask a question and answer session, it's $215,000,000 in the current quarter versus $159,000,000 reported a year ago. The primary drivers of the year a question. Increased volume and mix, improved business performance also benefited the quarter by 29,000,000 Looking deeper within that bucket, the biggest positive driver was improved net material margin of $56,000,000 In addition, lower freight costs provided a $5,000,000 benefit.

Speaker 2

Partial offsets within business performance were utility and wage inflation, a question, which negatively impacted the quarter by $29,000,000 and increased launch costs driven by the quarter's heavy launch load a question and answer session. Weighed on the comparison by $3,000,000 It is important to note that certain of the inflationary pressures such as elevated labor and utility costs a question and answer session. Are being partially offset by the improved net material margin resulting from commercial discussions with our customers. Other factors that weighed on the quarter included a net $39,000,000 headwind from commodities, driven primarily by the timing a question and answer session. And the non recurring favorable inventory revaluation in FY 'twenty two due to higher commodity costs.

Speaker 2

A

Speaker 4

question and answer session. FX weighed on the quarter by $5,000,000

Speaker 2

SG and A performance, which was adversely impacted by the non recurrence of certain compensation a question and answer session. At that time, if you would like to ask a question and answer session, as well as the timing of engineering spend to support the quarter's launch load, call it 9,000,000 And finally, dollars 4,000,000 of lower equity income. Important to note, Adient's Q2 question, please go ahead. School 2023 EBITDA contained non reoccurring net benefits totaling about $8,000,000 that should be removed from our ongoing run rate. A question.

Speaker 2

The benefit was largely associated with an insurance settlement. A similar size settlement was included in last year's results, which is why the year over year comparison a question and answer session. Stripping out the non reoccurring insurance benefit, all in all, Adient's second quarter was very much in line with our internal a question and answer session. Similar to past quarters, we provided a detailed segment performance slides in the appendix of the presentation. High level, a question.

Speaker 2

For the Americas, several positive factors drove the year on year increase and included improved volume and mix, a question and answer session. A question and answer session. At that time, if you would like to ask a

Speaker 4

question and answer session, the restructured

Speaker 2

pricing agreement at our Kuiper joint venture. Other positives within business performance included a. Although the team made progress on labor and overhead efficiencies, this was more than offset by the negative impact of increased labor costs. Also partially offsetting the benefits in the quarter was the non recurrence of certain compensated certain compensation related austerity measures a question and answer session. Launch costs were also elevated driven by the timing of launches.

Speaker 2

A question. Outside of volume and business performance, FX and commodities were a slight benefit, whereas SG and A costs weighed on the quarter. A question. In EMEA, the year over year comparison was influenced by several factors such as improved volume and mix, a improved launch and ops waste. Partial offsets within business performance were the negative impact of increased labor and utility cost a question and answer session.

Speaker 2

Outside of volume and business performance, the year over year comparison was adversely impacted a question and answer session. Our first question comes from the line of David. Hi, good morning, everyone. I'm very pleased with the progress we made in the quarter a question and answer session. In Asia, the year over year improvement was driven by the benefit of higher volumes and mix, primarily related to the improved production in the region outside of China, improved business performance with improved material net margin a question

Speaker 4

and answer session. JVs in

Speaker 2

China and our restructured shareholder agreement impacting our Kuiper joint venture, FX and a a temporary increase in SG and A costs to support our growth initiatives. Let me now shift to our cash, a question and answer session. Starting with cash on Slide 15, a focus on year to date results as the longer timeframe helps smooth some of the volatility in working capital movements. Free cash flow as defined by operating cash flow less CapEx was $53,000,000 This compares to an outflow of 102,000,000 a question and answer session. Key drivers impacting the comparison include the higher level of consolidated earnings driven by a.

Speaker 2

Improved volumes in a modestly better operating environment, timing of commercial settlements, a question and answer session. Lower interest paid driven by the reduced level of debt between the two periods and a lower level of accrued compensation. These benefits were partially offset by typical month to month working capital movements, the timing of tooling recoveries and VAT a few key deferrals and payments. One last point to call out on the slide, Adient continues to utilize various factoring programs a question and answer session. At March 31, 2023, we had $206,000,000 of factor a question and answer session.

Speaker 2

At that time, if you would like to ask a question and answer session. At the end of Q1 FY2023 $269,000,000 a question at September 30, 2022. Flipping to Slide 16. As noted on the right hand side of the slide, we ended the quarter with about $1,800,000,000 total liquidity comprised of cash on hand a question and answer session. At that time, if you would like to ask a question and answer session.

Speaker 2

$826,000,000 $973,000,000 of undrawn capacity under Adient's revolving line of credit, a question. A very good outcome and even more impressive when you consider the quarter ending cash balance reflects the impact of a few strategic actions recently executed, Specifically, the execution of our enhanced capital allocation plan, which resulted in the company using about $30,000,000 of cash a question and answer session. To repurchase just under 760,000 shares of Adient common stock. Of that, I note approximately 48,000 shares a question and answer session. With a cash outlay of just under $2,000,000 settled in early April after the quarter closed.

Speaker 2

A question. That's why the cash statement will show $28,000,000 related to repurchases and not the full $30,000,000 a question and answer session. And second, dollars 100,000,000 of the cash used in conjunction with the proceeds from a $500,000,000 secured note issuance and $500,000,000 of a question and answer session. At that time, if you would like to ask a question and answer session to refinance a large portion of the company's 3.5 percent euro notes that were set to go current in August of this year a question and prepay $350,000,000 of our term loan B, which had a cost at the time of 8 plus percent. Speaking of debt, Adient's net debt position totaled about $2,500,000,000 $1,700,000,000 respectively at March 31, 2023.

Speaker 2

The refinancing extended a question and answer session. At that time, if you would like to ask a question and

Speaker 4

answer session. At that time, if you would like to ask a question,

Speaker 2

please press the average tenor of Adient's debt portfolio to approximately 5 years versus 3.5 years prior to the actions. A question. The actions implemented during the quarter demonstrate Adient's commitment to maintaining a strong balance sheet, while executing actions to enhance our capital allocation plan. With that, let's flip to Slide 17 and review our outlook for the remainder of fiscal 2023. A question.

Speaker 2

Slide 17. As Doug mentioned, through the 1st 2 quarters of 2023, Adient is off to a solid start, a question. On track to achieve its 2023 plan. That said, we are not sitting idle. The second half of twenty twenty three a question.

Speaker 2

We'll no doubt have its share of obstacles that need to be navigated, such as soft demand in China and elevated steel prices in North America, which a question On the plus side, we continue to expect the overall operating environment to continue to progress a question in a positive direction, albeit at a modest pace. With that as the backdrop based on Adient's results a question and answer session. At that time, if you would like to ask a question and answer session. Through March and current market conditions, including revised production forecast and FX assumptions for the year, we currently forecast the following: Adient's consolidated sales to land at about $15,000,000,000 which is equal to our previous guide. For adjusted EBITDA, we continue to forecast approximately $850,000,000 including equity income of about $70,000,000 The implied albeit modest improvement in Adient's a question.

Speaker 2

The second half results versus H1, excluding the non reoccurring insurance settlement is driven by a few key influences. A question. 1st, benefits associated with an improving operating environment and production in North America. 2nd, the timing of commercial recoveries a question and answer session. In H2 relative to H1, lastly, continued execution of certain continuous improvement actions that realize full benefit in the latter half of a question and answer session.

Speaker 2

Unfortunately, these benefits are almost fully offset by lower H2 production in Europe and China

Speaker 4

a question

Speaker 2

and answer session. And an increase in certain input costs, including elevated raw material costs in North America, impacting predominantly the company's Q4. Our current question. The forecast for these headwinds is between $10,000,000 $20,000,000 One more item to note before moving on, Given the timing of commercial recoveries in the Americas, which is more tilted towards H1 and the lower production forecast for Europe in Q3 Versus the quarter we just completed, we expect Adient's Q3 EBITDA to settle at or about the same level as the quarter just completed a question around the $200,000,000 mark excluding the benefits associated with the insurance recovery. Moving on, interest expense, given the recent debt refinancing as well as interest rate expectations, a question.

Speaker 2

Is now forecast at $180,000,000 Cash interest, which is also called out, is forecast at $145,000,000 a question and answer session. The lower level of cash interest is primarily driven by the timing of the first interest payment on the new bonds, which is set for October 15, 2023, after the close of Adient's 2023 fiscal year. Cash taxes are now a question and answer session. At that time, if you would like to ask a question and answer

Speaker 4

session, at 95,000,000 versus the

Speaker 2

previous guide of 90,000,000. The modest uptick is a result of the opportunity the company has to dividend a question and answer session. At that

Speaker 6

time, if you would like to

Speaker 2

ask a question and answer session. CapEx largely based on customer launch schedules is forecast at $300,000,000 no change from the February guide. A question. And finally, given our earning expectations combined with the lower level of cash interest, now expected, we forecast free cash flow of approximately $215,000,000 for the year, up from the previous guide of $200,000,000 With that, let's move on to the Q and A portion of the call.

Operator

Our first question comes from Emmanuel Rosner with Deutsche Bank. Your line is open. You may ask your question.

Speaker 7

Thank you so much. First question is on China and I think you're obviously a question. Raising a potential risk of downward revisions to production schedule there based on how demand has been playing out and inventories. A question. Are you seeing any risk in terms of some of your launches there, either Being pushed out or downward revisions.

Speaker 7

I think this year's strong growth of a market that's contemplated in your outlook has a lot to do with a question and answer session. And I'm wondering if the current environment is pushing some automakers to revise some of these projections down.

Speaker 3

A question. Yes. Thanks, Emmanuel. Appreciate the question. Nothing really of material a significance on the launch status.

Speaker 3

Jerome and I were both over in China recently. We had pretty a question. And right now, everything is, for the most part, on schedule. A I think what we're seeing more of is that products that have been in the market for a while, a We're seeing changes in production schedules, kind of consistent with a question. And as we commented on, it feels like the market's waiting to return and with all the Price cut activity with the OEs that's paused the consumer to wait for that to settle out a question and reenter the market.

Speaker 7

Understood. And then as a follow-up, just a question. Hoping to just clarify what is embedded in your 2023 EBITDA outlook for a question. Net commodities and inflation net of performance.

Speaker 2

A In terms of, I guess, Emmanuel, I mean, just trying to get a bit more clarity on this.

Speaker 7

So the in the walk 2022 through 20 a question. How much will commodities be of headwind or tailwind? And how much are you Inflation net of performance to be on a full year basis.

Speaker 2

A Yes, I mean on the full year,

Speaker 1

so Daniel, it's Mark. What we've indicated in the past, right, we didn't give a specific buckets on that bridge. But what we did say is, when I looked at 2022, for example, those results were impacted by, call it, a question, you know, dollars 100,000,000 of what I'd call transitory costs, right? Those were the inefficiencies of production schedules. We're seeing that Actually lessened as we expected as we entered the year.

Speaker 1

So you pick a number, do we think that that's going to be half, probably a pretty good number there, so maybe $50,000,000 versus $100,000,000 On the inflationary cost, we just labeled that as sticky, Right. So that was another $100,000,000 last year that impacted us. We did indicate that because of labor a question. This year that was increasing versus last year. However, we are getting commercial recoveries for that.

Speaker 1

So you're probably net net, right, with the transitory a question and answer session.

Speaker 4

At that time, if you would like to

Speaker 1

ask a question and sticky costs again, you're probably a couple of 100,000,000 what I'd say impacting the year on year impact. But again, we're getting those commercial recoveries from the customers. So it's really more focused on how are we going to exit this year and how is the setup a question for 2024 going to shape based on what commodity prices are expected next year based on the commercial recoveries to date, etcetera. So hopefully that helps.

Speaker 2

A question.

Operator

Thank you. Our next question then comes from John Murphy with Bank of America. A question.

Speaker 8

Good morning, guys. I just wanted to ask a question on mix, maybe sort of short term and long term. I mean, if you look at Slide 14, you guys are highlighting a positive $84,000,000 from volume and mix in the quarter. I'm just curious if you can give us a breakdown between what is volume and what is mix. A question.

Speaker 8

But more broadly, how much have you benefited from what has been very strong mix in the industry? And is there significant risk as a question as we step forward later this year into the coming years when mix maybe deteriorates to some degree, at least from an automaker level? A question. And then second, kind of along the line to that, on Slide 5, you highlighted all this great product on sort of the ESG, but then on weight savings, real stuff, not just a Even marketing stuff, really improvements in your product, are you able to get paid more for

Speaker 7

those seats that

Speaker 2

Yes. So thanks for the question, John. With respect to the first one on volume and mix, I mean, a When we think of volume and mix, for us what really matters and we've said this in the past is the volume piece of it. So the mix a question. We're not really sensitive to if it's an F-one hundred and fifty base or an F-one hundred and fifty fully loaded King Ranch.

Speaker 2

We really care about is getting the volume piece of it. And so as your customer demand shifts and if we see a More entry level vehicles versus higher end vehicles, we're not as sensitive to that aspect of it. For us what really matters is the volume piece of it. And so when we talk about pure volume, that's what we really care about is the volume. A And so as the industry returns and as we see volume coming in, that's what we really need is the volume piece.

Speaker 2

It's not as sensitive a question What is the mix within a platform, whether it's high end or low end? It's really about the volume piece of it. That's what really matters to us. A question. And I think we've been pretty transparent on that in the past.

Speaker 2

It's volume that matters to us. Does that help to answer your first question? A Yes. Yes. What I would say is Go ahead.

Speaker 2

What does matter to us is regional mix. A question. So for as we look at where that volume comes from, from a region standpoint though, we are sensitive to that. And so if you look at a How our different regions print, certainly as Asia comes back and when we get more Asia volume, that is positive regional mix for us. And so that's why we look at the back half of our year and why we've basically said holding the guide as we look at China, we look at Asia a And some of the caution that's out there and we said, okay, looking at that, looking at what could be there, we basically said, okay, a Reason to hold the guide based on that based on maybe regional mix component of it, not necessarily in platform mix, but more regional mix aspect to it.

Speaker 3

If I move to your second question with regard to sustainable products, You almost have to look at each one individually, whether they represent a cost reduction or a cost add. Our focus essentially is to provide a Product solutions to our customers that net are neutral to the current cost structure a question that they have on their bill of material today. So we tend to package them and a Look at it from a vehicle perspective of what the net benefit is and it could be a net benefit for them. That's why a question. With Ultra Thin, we talk about increasing interior, a question.

Speaker 3

I'll say volume within the vehicle that allows it to displace that volume with additional batteries, if that's what the customer ultimately wants. But really, when we look at our sustainable solution, We really walk from a current cost today, we'll add in a variety of products. A question. And our attempt always is to be net neutral. And then a question.

Speaker 3

It really is kind of a buffet style that they can our customers can add and delete what they think brings value to a question The way that they're trying to market and position their overall vehicle. So you really have to take it individually, but collectively, it's a

Speaker 8

And Doug, if I could sneak one other one in here on Slides 910. I mean, it seems like you're signaling that restructuring is really a question. More an ongoing part of the business. I mean, you have some catch up to get your margins off the snuff and into targets. But it also seems like there's a signal that there's a more a Consistent ongoing restructuring effort that needs to go on, what do you think we should think about for expense and cash outlays for the more ongoing a part of this because it just seems like it's going to be part of the industry or part of the business for forever.

Speaker 3

Yes. I think historically, we've always had a Roughly $100,000,000 of restructuring in. We're not trying to signal anything beyond that in a go forward. A question and answer session. Just recently announced an action on the SG and A front to reduce the amount of validation center capacity we had in Europe, for example, because we can do more of it digitally than we've historically had to do physically.

Speaker 3

And we try to really use our footprint to our advantage a question. To move work around to not only to the necessarily to the lowest cost region sometimes, a question and answer session.

Speaker 4

But sometimes we'll move work

Speaker 3

in to offset having to take a heavy restructuring load because we think we've got productivity in that facility That makes it competitive. And then we look at logistics costs associated with that. So we're constantly rebalancing. But the quick answer is, Right now, we're not signaling anything different than the historic way our business has operated.

Speaker 4

A question.

Operator

Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open. You may ask your question.

Speaker 4

A question.

Speaker 6

Good morning, everybody. Mark, I kind of lost you on the 2023 bridge because I think you might have miss spoken on the inflation, but maybe just to simplify things, if we take a step back, I think at the start of the year, you guys expected a a $200,000,000 headwind from material economics and labor and few other things. And you had something like $250,000,000 of expectations for operational performance, recoveries and lower inefficiencies. So it looked like a little bit of a tailwind net net. And I'm just hoping you can maybe just give us a sense of excluding volume, a question.

Speaker 6

Are the positives and negatives now more neutral, because of the steel issue? And Jerome, a question. On the steel, if I recall correctly, you had kind of a similar issue maybe a year ago and you wound up mitigating that with recoveries. Is others any reason why that would change?

Speaker 2

So I'll take both of them a question. If you want me to, Rod. So I think on the 1st year, yes, and Mark's obviously, Nexmake. I mean, Mark's numbers were correct. So I mean, we look at if If you look at that total bucket between material econ, what we call our sticky costs and the commercial recoveries, I mean it'll be a question.

Speaker 2

Net net this year about call it $100,000,000 headwind for us when you look at everything all in offsetting with commercial recoveries. A question. So that I don't think that's really changed from anything we've said previously. A question. What's new in that equation now is I think some of the steel that's coming in, which goes to the second part of your question.

Speaker 2

A question. The steel that we've seen recently in North America, in particular, where it's gone from and we talked to I in particular talked about this a question. A month ago, Mountain New York, it's gone from 6.50 a ton up to 1200 a ton.

Speaker 4

A question. And just when it accelerates at that pace and the lag

Speaker 2

in our indices, we eventually get it back. It just takes a question and answer session. And that presents that kind of $10,000,000 to $20,000,000 hurdle a question that we now have to look to overcome. So to your question, will we be able to overcome that this year? A question.

Speaker 2

Yes. I don't see how we can overcome that 10 to 20. I mean, it's a question. I mean, I wouldn't say anything is impossible, but we went to work really heavily in 2021 to restructure those customer agreements to get to what was a lot of what I would call naked exposure on our customer agreements. We had very significant lags.

Speaker 2

A question. We brought those in from a year to something more in the 6 month range. We went from 50% exposure to 80% coverage. And a question. I think we are where we are now.

Speaker 2

It's just now we're going to have to let those contracts work themselves through the system. And that's going to that is going to drag into 2024. I think a question. The only thing that would really help us to mitigate that is if we see the indices now take a rapid correction between now and when we have a question

Speaker 6

and answer session. Okay. And just secondly, on the a European comments you made in I think peripherally China. What's the typical a payback on European restructuring that you typically see and when you think about to the extent that some of the production commentary This is driven by exports from China. Do you see yourselves as sufficiently hedged with enough exposure within China to the exporters or do you still have to kind of take into account some negatives there.

Speaker 3

Yes. With regard to payback, typically, a question. The payback on European restructuring is a 2 year time frame. That's on average. Now certainly, the example we Included in the deck was, we can be a bit smarter about how we handle that.

Speaker 3

That's a far better a question and answer session. When we can bring business back into the organization to refill a plant that otherwise a question. This was scheduled to go dormant. With regard a question. China exports into the European market, what that ultimately means to us, I think it's a little bit more complex than a Just the direct math, if those imports increase, certainly, we hope we can benefit from that In our Asia business, with that revenue and the returns on the revenue, even if it's consequential to Europe.

Speaker 3

But I think what we're seeing in Europe is we're able a question. To balance our manufacturing footprint to mitigate a lot of the cost associated with it, a question. Where it's a direct impact to us is if we have a JIT facility and our customer closes one of their assembly plants.

Speaker 7

That's

Speaker 3

in the case of Moore, we were able to do it, but that's not always going to be the case. A question. So I think we're essentially saying we have to wait and see how that plays out over time. A question. We're putting together certainly strategies to address best case, worst case scenarios.

Speaker 3

A question. Historically, the markets run at $17,000,000 It's $14 ish million now. A question and answer session. If that doesn't recover, what does that ultimately mean to us? But I think at this stage, it's too early to quantify and a question and answer session.

Operator

Thank you. Our next question comes from Colin Langan with Wells Fargo. Your line is open. You may ask your question.

Speaker 5

A. Thanks for taking my question. Just to follow-up on that, this is the Q2, you've talked about the potential need to restructure in Europe. I mean, a How should we think about this? Are you going to be taking small steps that would be incremental that sort of aren't going to be highlighted?

Speaker 5

A question or you're kind of contemplating a larger sort of scale plan that we should be kind of looking out for over the next year or 2?

Speaker 3

A question. Yes, you should think about it in small steps and incremental, not a large scale restructuring of our business there. We took a lot of steps, a question. I would say, even pre COVID, but certainly during COVID, to bring down our breakeven a question. Close to the levels that we're operating at right now.

Speaker 3

So we think we're pretty well positioned. Now if there's something that's currently not forecasted that a question and answer session. That's a different story, but right now, think about it incremental And not large scale restructuring.

Speaker 2

Yes. And just as a to support that, a question. Colin, an example is we just announced our tech center in Keizerslauten. That's now public. It was a Yes, it's just a it's like an incremental step as Doug talked about.

Speaker 2

We go to virtual validation that makes some of that redundant and we had to take an action there. And It's those type of incremental steps as we move along the path in Europe, not large scale activity.

Speaker 5

A Okay. All right. Got it. And then not to circle back on steel again, but you did highlight, it's fairly small numbers, but costs are up a $10,000,000 to $20,000,000 unlikely to kind of get help this year. Guidance is held.

Speaker 5

So what is the sort of, a question. I guess, slight positive offset that enables you to hold guidance if the commodity costs are up a bit.

Speaker 2

A question. Yes, I mean, I think there's some volume. I mean, you saw the Q2 volume versus what we had previously seen. Also Q2 EBITDA versus where we had previously thought of coming in at. So yes, volume we expect to flow through also some underlying performance within the business as well helping to offset it.

Speaker 2

The team continues to obviously pedal Extremely hard is some of the underlying activities that are there helping to offset that action or that headwind, I would say.

Speaker 3

A question. And back to the mix discussion, certainly volume in Asia is welcome volume from a mix perspective that we think a question, might be able to offset that steel issue.

Speaker 5

And if steel holds the current levels in North America, a question. Any sense of how big of a headwind that is for 2024? It sounds like I think you mentioned 80% now is a question and answer session. I guess would that even be a big issue at all? How should we think about that?

Speaker 2

I mean in the long run, a It's not. It's really the timing associated with when it would flow through, right? So it's if you think about a question. When it would hold, I haven't run the models count, so I don't want to speculate it. Certainly in the back half of our 'twenty four fiscal year, it wouldn't be a significant issue.

Speaker 2

There Some carry over into our Q1 and we'd start to see the recoveries kicking in, in the 34 a

Speaker 3

question. Yes. The one thing I would add to it is, a question. We and it's a little bit of the nature of

Speaker 4

the Seating

Speaker 3

business. You can't always look at these issues in isolation because within our commercial agreements with our customers, you've got their expectations on productivity. We've got our internal expectations from our supply opportunities for us to engage, I'll say, offset anything that is, I'll say outside of the scope of our normal commercial agreements. So when we see No real significant spikes in inflationary pressures on commodities. We fully expect over time we recover that and may hit us in a quarter, but it's probably a quarter until the recoveries took place.

Operator

Thank you. Our next question comes from James Picariello with BNP Paribas.

Speaker 9

A question. Jim, to start off, what was the sequential guidance commentary on the 3rd quarter EBITDA, fiscal 3rd quarter EBITDA?

Speaker 2

A Yes. You're referring to Q3?

Speaker 9

Yes.

Speaker 2

Yes. So around 200,000,000

Speaker 6

a question on an EBITDA

Speaker 2

standpoint. Right.

Speaker 9

And just from an if I look at APAC a question mark in conservatism embedded within that a question mark and conservatism embedded within that view.

Speaker 2

A question. So we essentially follow IHS. So if you look at what IHS says for Asia ex China,

Speaker 4

a question.

Speaker 2

I mean, it has volumes actually sequentially going down in Q3. What would our Q3 and Q4 fiscal year? And within China, it would say sequentially better Q3, Q4, but not versus Q1. So really back half a question. In China, in particular, is lower versus first half, our fiscal year first half versus our fiscal year second half Using IHS volume.

Speaker 2

So really sequentially, actually lower second half, first first half. And that's again coming back to a The $850,000,000 guide, why we've said looking at that along with Europe volume sequentially lower first a question for second half, why we've guided to that 850 number?

Speaker 9

Yes. But on a consolidated basis now, a question. China is almost half of the APAC region, right, in terms of

Speaker 4

just regional mix?

Speaker 6

A question.

Speaker 4

Yes. All

Speaker 2

right. Yes.

Speaker 9

Yes. Please. Do you want to follow-up on that, Ben?

Speaker 2

No, no. It was just reinforcing a point, China sequentially first half for second half, following IHS is down on volume in our fiscal year

Speaker 4

a question. Because it really

Speaker 2

re timed that volume into Q4 calendar year, which falls into our Q1 a 2024 fiscal year.

Speaker 9

Yes. Okay. No, for the quarter though, IHS has a Almost 800,000 improvement, 800,000 unit improvement for China. But I could follow-up with Mark and he could tell me that a But I'm confused. Higher level question on Thermal Comfort a question.

Speaker 9

And Adient's positioning and how you view the competitive landscape within this particular vertical, who you're aligned with from a supply chain perspective, is it or could it be an advantage As a Tier 1 supplier to have more of this content vertically integrated in house, just curious if you could share a perspective a question. Just given the latest M and A efforts by your primary competitor.

Speaker 3

Sure. A question. At a very high level, I would say, having that capability It's a question in my mind how you define the capability and the competency. We think we're capable and competent, Although we don't necessarily need to be completely vertically integrated on it. A question.

Speaker 3

From an M and A perspective, I'm not here to a I'll just give you our opinion. I don't know that from an M and A perspective, it's necessarily the way to go because you bring in a lot of integration risk associated with it. What we're finding is, in some cases, our customers directing it. A question. So that limits the growth, I would say, a Because there's independents that are out there and our customers tend to balance that.

Speaker 3

2, I would say the independents, a question. We've got pretty good engagement with them on how we can partner and develop products collectively a question and bring those to automakers who want an integrated solution. So we think we're competitive from that perspective.

Speaker 4

A question.

Speaker 3

And then what we're doing in China specifically is our own a organic development, sometimes in partnership with small Chinese suppliers, but sometimes independently on our own, a question Which is not going down the M and A, I'll say, route to bring that.

Speaker 2

A question. So to

Speaker 3

me, I always look at it like a lot of aspects of our business. You don't need to be vertically integrated. Too much vertical a Integration sometimes has a negative effect. Do we have the competency? Do we know how to work with partners and bring a a solution together for our customer, I feel pretty good about where we're at there.

Speaker 3

We certainly understand what the other guys are doing. We understand the motivation associated with it. A question. We're fine with our approach that we're taking on it.

Speaker 1

Great. And Shirley, it looks like we're at the bottom of the hour. So this will conclude the call today. A question and

Speaker 9

answer session. If there is any

Speaker 1

follow-up questions, please do not hesitate to reach out to myself or Eric this afternoon and we'll be more than happy to assist. Thank you.

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Earnings Conference Call
Adient Q2 2023
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