Q2 2021 Adient PLC Earnings Call

This segment comes from.

And thank you for standing by all participants will be able to listen only until the question and answer portion of today's conference at that time, you May Press Star one on your phone to ask a question. Today's conference is being recorded if you have any objections you may disconnect. At this time I would now like to turn the call over to you Mr. Mark Oswald head of Investor.

Relations, Sir you may begin.

Thank you Julie good morning, and thank you for joining us as we review adient results for the second quarter of fiscal year 2021, the press release and presentation slides for our call today have been posted to the investors section of our website at adient Dot com.

As usual this morning, I'm joined by Doug del Grosso, Adient, President and Chief Executive Officer, and Jeff <unk>, Our executive Vice President and Chief Financial Officer on today's call, Doug will provide an update on the business.

Followed by Jeff, who will review, our Q2 financial results and outlook for the remainder of the fiscal year. After our prepared remarks, we will open the call to your questions before I turn the call over to Doug and Jeff There are a few items I'd like to cover.

First today's conference call will include forward looking statements. These 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 two of our presentation for our complete Safe Harbor statement.

Okay.

Focusing on the left hand side of the slide Adience queue to adjusted EBITDA of $303 million was up 92 million or 44% year on year.

If you recall last year's results included the negative impact of significantly lower production in China, which impacted adience equity income.

Production stoppages across Europe, and the Americas, We're just beginning towards the end of March is COVID-19 started them back to your industry in those markets.

Adient, adjusted EBITDA margin performance of 7.9% or 6.5%, excluding equity income, what's up 190, and 80 basis points, respectively vs queue too.

Of last year.

I point this out as a proof point that the company continues to close the margin GAAP with our nearest competitor.

Just one more point on Ediets adjusted EBITDA the performance in queue too much like Q1 of this year was aided by the facing of our commercial settlements, which for fiscal year 21.

Is heavily weighted towards the first half.

Jeff and I will have additional color on have one and have to.

Influence in just a minute.

Adience queue to ending in cash balance in total liquidity, where approximately 984 million on 1.9 billion respectively.

Cash balance was impacted by approximately $700 million of cash used during the quarter to voluntarily pay down a portion of the companies that.

Specifically $700 million was used to successfully tender $640 million in aggregate principal of the companies, 7% senior notes.

Subsequent to the quarter adient exercise in early redemption option of 80 million in principle on the 7% notes sleep in a small stub of 80 million of seven per cent notes outstanding, which we expect to take out relatively soon.

Lastly, keeping with capital structure theme.

Adient amended extended and Upsized its term loans b.

No doubt. These actions are good first steps in transforming the company's capital structure, Jeff we'll have more on the topic in just a few minutes.

<unk> on expanding segments.

Improving the integration of the company's China operations and.

And allowing for more certain value realization relative to the status quo, where cash and value are generated from dividends had entities not in adient control.

As mentioned in March we expect to remain a leader in China market.

Sections of what the China business looks like will include annual sales of about $4 $5 billion, including both consolidated non consolidated sales.

We have nine major entities with extensive customer and geographic coverage.

Our complete in house engineering capabilities will be second to none supported by three global Tech centers.

With more than 800 engineers.

Okay.

This is expected to result in adient being on par with and among the top three complete seats players on the market, which based on our estimates equates to a market share of just under 20%.

We're excited about the opportunities that lie ahead for adient and the China market.

Equally exciting is the transformation that is underway with adient capital structure.

<unk> on legacy manufacturers.

The simple answer is yes.

Adient acceleration of that wins.

And the production assumptions associated with the platform suggested our future market share will be.

Commensurate with Adience current leading market position.

Let me share a few steps that gives us reason to be optimistic.

Enemy Ah Adient is presently the market leader with approximately 50% share of complete seat that market.

We expect the wins to continue giving us confidence that will retain or leadership position over the next few years.

In China legacy Oem's, and new entrants with wins with Oem's like Xiaopeng and Neil are expected to drive a steady increase in adience market share at the complete seat Bev market over the next several years outpacing Bev sales growth over the same period.

Speaking of Neil I'm pleased to report Adience joint venture CQ Adient was recently awarded the Neil quality premium partner Award for 2021.

A great accomplishment and another proof point of Adience ability to provide quality products and services to all of our customers both new one legacy.

In North America, where adoption of beds has lagged other markets.

Indian as well positioned given a recent accelerating wins.

In fact, if I look over the next several years, we expect a complete of sales to grow appreciably vs. Our current Bev sales.

Adient expected pace of growth park seats, the Bud sales growth rate over the same period.

Turning to slide seven.

As we typically do we've highlighted several critical launches that are complete and process were scheduled to begin in the near term.

I'm happy to report at the Midway point in this fiscal year. The teams continued focus on process discipline around launch readiness is underpinning adient successful performance.

In addition to the Ford F 150 launch.

Which is in the rearview mirror the teen there's also completed successful launches the Volkswagen Eighty-three, Mercedes B class and F. A W. VW golf E a.

We're pleased with our continued success, especially considering the heavy launch low, particularly in North America and many temporary production disruptions that took place during the quarter.

We have no intention of letting up and look to finish the year strong with the launches that are in process.

And scheduled to begin in the third and fourth quarter.

<unk> further adient.

For sustained long term success driving additional value to our stakeholders.

Of course, this is the auto industry and we're going to be.

Be speed bumps along the way it's important we stay focused and manage through the headwinds much like we did last year through the first two quarters of 2021.

Rest assured the team is working hard to navigate them.

Team is working hard not only to deliver on our fiscal year 'twenty, one commitments, but also to position the company for sustained success.

First half results provide a solid pathway to achieving our goals.

Before turning the call over to Jeff Let me conclude my remarks with few comments around the major influences that drove adient first half performance and more importantly, what we're expecting for the second half of our fiscal year.

On slide nine you can see the overlap of the two circles improve business performance, including launch performance lower ops waste.

And lower normal course, SG&A costs drove improved profitability in each one.

We'd expect the trend of ongoing business improvement to continue in the second half of fiscal 2021.

As mentioned earlier on the call a portion of the improved business performance has been partially offset by temporary operating inefficiencies, resulting from unplanned production stoppages Ed.

Adverse weather and COVID-19.

These influences had a significant impact on adient second quarter results and are expected to influence our third quarter results as well.

Looking at the far left circle.

We've highlighted influences that provide a significant benefit to our first half results.

But due to timing or changing macro conditions are not expected to have the same impact on.

On our second half results. These include <unk>.

Commercial settlements.

Excluding the approximate 25 million in one time settlements called out.

On our Q1 earnings call the absolute size of settlements expected in fiscal year 'twenty one our.

A similar compared to past performance however, the phasing.

Of commercial settlements this year are heavily weighted towards half one.

This is especially true in Europe, and driven by a number of factors, including timing of LTA payments timing of recoveries and lower volumes in fiscal 2020, which drove settlements and accrual true ups in early 2021.

Strong volume and temporary COVID-19 savings supported our H. One result, however, as we look at age two.

Volume is expected to be down versus H, one and temporary savings from COVID-19 actions will be much smaller.

Two other H one influence is expected to shift as the year progresses include.

Equity income.

Strong in half one however have two results will be negatively impacted.

By the expected decline in volume and divestiture of our S. J a joint venture.

And adient engineering spend which is expected to be greater in half two versus half one.

The shift our heavy concentration in half two is largely driven by previous program delays.

In addition to the changes expected.

Two the major H one influences. We also expect increased commodity prices and increased freight costs to have a much more significant impact on our second half results.

With that I'll turn the call over to Jeff to take us through Adient second quarter, 2021 financial performance and to provide a little bit more color on what to expect as we move through the second half of fiscal 2021.

Great. Thanks, Doug Good morning, everyone on.

I'll start on slide 11.

And adhering to our typical format the.

The pages formatted with our reported results on the left and our adjusted results in the right hand side of the page, we will focus our commentary on the adjusted results, which exclude special items that we view as either onetime in nature or otherwise skew important trends in the underlying performance for the quarter the biggest dry.

Rivers or the difference between our reported and our adjusted results relate to a gain on the sale related to the SGA a divestiture.

<unk> cost.

<unk> related adjustments, specifically, the premium paid to repurchase debt and write off the deferred financing charges on.

Our restructuring costs and purchase accounting amortization details of these adjustments are in the appendix day presentation.

Just one more comment before jumping into the results you'll notice the company continued and will continue to report why Fas earnings and equity income until the transaction closes as we legally still own a $49, 99% interest. If you recall, we had stopped recording Wi Fi equity income last year.

When we announced the sale because we were in an impairment position, which required us to effectively impair our investment based on the recoverable amount via the sales price.

We're in a much different situation with Wi Fi as transaction.

For the quarter.

<unk> were $3 8 billion up about nine 9% year over year, which were in line with internal expectations and primarily driven by improved volume across the regions portfolio adjustments executed in fiscal 'twenty, which impacted the year over year comparison by about $32 million was a partial offset.

Adjusted EBITDA for the quarter was $303 million up $92 million or 44% year on year more than explained by an increase in equity income volume and mix and improved business performance. The improvement in business performance was achieved despite numerous temporary operating inefficiencies stemming from some.

Ply chain shortages adverse weather in North America, and ongoing COVID-19 related influences more on that in just a minute.

Finally, adjusted net income and EPS were up significantly year over year at $110 million and $1 15, respectively.

Now, let's move down our second quarter results in more detail starting with revenue on slide 12.

We reported consolidated sales of $3 8 billion, an increase of $308 million compared to the same period a year ago key drivers of the year over year increase included a $219 million benefit related to higher volumes and the positive impact of currency movements between the two periods of about 121.

<unk> million dollars positive benefits of volume and FX were partially offset by just over $30 million of headwinds related to portfolio adjustments executed in fiscal 'twenty, namely the divestiture of our fabrics business.

As you can see from the table on the right hand side of the slide Adient consolidated sales achieved growth over market in Americas, EMEA, and China, primarily driven by strong product mix and adient customer composition.

Adient sales in Korea faced some temporary headwinds driven by customer launches and model changeovers with regard to adient unconsolidated seating revenue year over year results were up approximately 70% excluding FX.

In China, where the majority of our unconsolidated seating entities exist unconsolidated sales were up 87% year over year, excluding FX adient sales outperformance versus the market. It's attributable to adient strong mix of business, specifically, our exposure to luxury and Japanese OEM.

Yes.

As a reminder, Q2 production in China last year was significantly impacted by production stoppages, resulting from COVID-19.

Moving to slide 13, we've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation such as executive Office Communications, corporate finance legal and marketing.

Picture adjusted EBITDA was $303 million in the current quarter versus $211 million last year.

Key drivers of the increase included an increase in equity income of $43 million. The improved equity income was driven by higher volume and strong vehicle mix in China. If you call last year's Q2 production in China was significantly impacted by COVID-19 production stoppages.

Increased volume and strong mix were also present across Americas, and Europe in total volume and mix benefited the quarter by approximately $33 million year on year in.

In addition, improved business business performance, which consisted of normal course commercial settlements lower launch and ops waste and lower labor and overhead drove a $24 million net benefit to the most recent quarter.

Important to note the business performance bucket contained several temporary operating inefficiencies that in effect masked the ongoing.

On a true ongoing operating performance of the company.

The temporary inefficiencies, which included ops waste and labor and overhead inefficiencies and increased premium freight to name a few we're primarily driven by supply chain disruptions and unplanned production stoppages related to the semiconductor shortages petrochemical disruptions and to a lesser extent COVID-19.

In total approximately $40 million of inefficiencies were recognized in Q2 fiscal 2021.

We expect certain of these temporary headwinds to continue into the second half of the year more on that in a few minutes on.

Outside of the temporary operating inefficiencies net commodity increases impacted the quarter by about $8 million and other employee compensation measures impacted the SG&A bucket by approximately $25 million in the end given all of the moving pieces. The team worked hard to lessen the impact of the temporary headwind.

To deliver the $92 million year over year improvement.

I'll also note at the bottom of the slide metals continues to move in a positive direction as that business was up about $29 million compared to last year's second quarter.

To ensure enough time is allocated to the Q&A portion of the call. We've provided our detailed segment performance slides in the appendix of the presentation on <unk>.

High level improved volume and mix benefited each of the regions.

Ongoing business performance continued to trend in a positive direction, however, temporary operating inefficiencies, resulting from the unplanned production stoppages mask the overall improvement.

SG&A costs continued to trend lower however, the temporary benefits recognized last year did not repeat.

Partially offset this quarter's performance.

This was especially true in the Americas were planned production stoppages inclement weather and premium freight resulted in approximately $30 million of temporary operating inefficiencies SG&A in the region was impacted by about $25 million of headwinds stemming from temporary benefits recognized last year.

In Asia increased equity income, which benefited from improved volume and mix in China was the primary driver of the segment's improved results.

Now, let me shift to our cash liquidity and capital structure on slides 14 and 15.

Starting with cash on slide 14, I'll focus on the year to date results as the longer timeframe helps smoothed some of the volatility in working capital movements adjusted free cash flow defined as operating cash flow less capex was $14 million the $145 million improvement in adjusted EBITDA net of <unk>.

<unk> net of equity and $60 million.

The reduction in cap spending was more than offset by expected increases in restructuring of restructuring of $60 million increase in interest paid of $30 million elevated non income tax related taxes, specifically VA T payments and timing of commercial activity with regard to the VA.

Payments, while some of the year to date outflow will reverse in the second half, we'd expect a larger than normal outflows in fiscal 'twenty, one and 'twenty two related to government approved delays and from.

From 2020 related to COVID-19 accommodations.

As noted on the right hand side of the slide we ended the quarter with approximately $1 9 billion total liquidity comprised of cash on hand of about $984 million and approximately $945 million of undrawn capacity under adient revolving line of credit.

Cash used during the quarter to voluntary paydown debt totaled about $700 million speaking of debt and flipping to slide 15.

In addition to showing our debt and net debt position, which totaled just under $3 7 billion and approximately $2 7 billion respectively at March 31.

We've also provided a snapshot of adient capital structure.

As noted on slide efforts to transform the balance sheet again in earnest during Q2 and subsequent to quarter end actions included the successful completion of a tender offer for $640 million in aggregate principal of the companies 7% <unk>.

Senior first lien notes due in 2026, which occurred in March.

Subsequent to the quarter end and sticking with the 7% notes the company exercised an early redemption option on.

On $80 million in principal of the notes, leaving a small $80 million stub outstanding at the end of April.

Our second early redemption option of the remaining $80 million of principal is expected to be exercised and completed relatively soon which will fully take out the 7% notes.

Also following the quarter end the company successfully amended and extended its term loan B. The amendment among other changes extends the maturity date of the loans outstanding to April eight 2028 reduces the interest rate to LIBOR, plus 350 versus LIBOR plus 425 on.

On our previous term loan.

And establishes incremental term loans in aggregate principal of $214 million.

Adient is solidly on track to make a transformational change in its capital structure as we progressed through 2021.

Moving to slide 16, let me spend a few minutes expanding on doug's comments around the major influences that drove adient first half performance and importantly, what we're expecting for the second half of our fiscal year <unk>.

Specifically, how these influences Doug spoke to on slide nine impact adjusted EBITDA in the second half of the year.

On the left hand side of the slide you can see our actual first half results with consolidated EBITDA of $534 million in equity income of $147 million, which combined totaled $681 million.

Based on the midpoint of our 'twenty, one fiscal 'twenty, one adjusted EBITDA guidance, which remains at between 1.0 and $1 1 billion. The implied second half adjusted EBITDA with total about $370 million comprised of consolidated adjusted EBITDA of about $285 million.

And equity income of about $85 million.

Okay.

The table to the right highlights key factors that are expected to influence full year earnings and compares the expected impact on adjusted EBITDA in the second half versus the first half of the year.

The phasing of commercial settlements for the reasons discussed is expected to be the biggest factor or the lower earnings in the second half versus the first half call. It between 125 on $150 million again absolute full year levels are in line with prior results, excluding the $25 million of one offs noted in Q1.

Fiscal 'twenty, one is significantly skewed to the first half.

Rising commodity prices as mentioned on previous calls are much more significant and age to call. It between 50 and $75 million timing.

Temporary factors, just discussed or having a significant impact on fiscal 21.

In fact, if you adjust for approximately $85 million, a commodities $40 million, an event inefficiency and $35 million a volume impact the back half of 21 would be around $160 million better compared to the back half of fiscal 2019, which.

Which demonstrates the improved business performance of the company.

With that let's flip to slide 17, and review our complete outlook for physical 21.

Starting with revenue or guidance has not changed we continue to expect consolidated revenue trend between $14 $6 billion and $15.0 billion looking at the second half production as mentioned earlier, we continue to assume second half physical 21 global production will decline.

Compared with the first half a physical 21 production.

In addition risks of production downtime, resulting from supply chain disruptions remained elevated especially in the near term.

We just walk through the drivers of adjusted EBITDA, which we are forecasting to range between 1.0 and $1.1 billion move.

Moving on to equity income, which is included in on our adjusted EBITDA is now forecast to be around $230 million for the year.

<unk> $20 million reduction from previous previous forecast provided back in February reflects the divestiture of R. S. J, a joint venture and lower volumes due to the semiconductor shortages.

Interest expense based on a recent debt pay down.

Mmm.

Term loans <unk> amendment unexpected cash balance is now forecast to be approximately $215 million with $250 million of actual cash interest spend.

This forecast does not include the positive impact that would materialize with future voluntary debt pay down.

Adient free cash flow in a normal year would have been in the 180 million to $280 million range.

With that let's move to the question and answer portion of the call. Operator first question. Please.

Thank you if you would like to ask a question. Please press star one and you will be prompted to record. Your first on your last name. Please on mute your phone from recording your name and to withdraw your question Press Star two our first question comes from John Murphy with Bank of America. Your line is open.

Hi, Good morning, guys and thanks for all the detail it's it's incredibly helpful.

First question is did you look at slide 16 business improvements of $35 2 million on second half of the year versus the first half.

That's pretty good momentum it's continuing.

How much more do you think there is to go there I mean or are you looking at that as we're getting back to.

Normal.

Margins on on seating is that the way, we should think about that or is there any way to sort of delineate.

What you're going after on all cost saves there, particularly in light of this stepped up restructuring spend this year, you just mentioned GAAP of $200 million.

Yes, they are.

Good question, John and thanks for the comments.

The goal still remains the same to you.

<unk> or eliminate the GAAP, we've had to our closest competitor from a margin standpoint. So we look at that business improvement as a continual proportion of that some of that factory floor driven some of it's better.

Better commercial success.

More vertical.

Integration of our business.

Attaching to better programs et cetera of having some of the old programs that were somewhat challenging roll off there is a lot of components on that at all kind of falls in that business improvement but.

Bridging that margin GAAP is key.

Yes, if I would just add to it.

Yeah.

It's a historic issue, we always face in the business, we have to look at the expectations that our customers have from.

Annualized productivity and inflation.

The basis is.

That we have enough internal activity that more than offsets that.

I think I would add is I think this has been a.

The theme of a few of our clients, but it's even more focus now there is an absolute renewed interest in our customers.

Finding ways to drive cost reduction in their product.

And that's more than just the normal <unk>.

Activity.

I can't think of a single customer that we have right now thats not.

At a at an executive level.

<unk> engaged with us to find ways to drive cost out of the product.

So I see that as incremental pathway for us too.

Support that.

Improvement in our financial performance.

Okay.

Sort of a dumb guy's rule of thumb is typically sort of an 18 to 24 months.

Payback on rationalization of restructuring spend.

Is that the kind of thing that we should think the if you're spending $200 million. This year that that flows in at some reasonable level close to that by the end of two years or is that is that maybe too aggressive.

It's about the right path for the portion of our restructuring that was efficiency aligned you'll notice you'll remember that we said about a third of what we're putting out there I was just responding to capacity.

Lower volume expectations in Europe.

It doesn't have any payback on that unfortunately.

But about two thirds of it should have been.

Rough dynamics of what gains at an interest sort of depends by region and people, but that's a good.

Rule of thumb.

Got it and in a number of places in the presentation you kind of have these these walks of factors I think.

And particularly if you look at 19 with.

You know the Americas volume and mix was a small positive but it just seems like we're hearing from other other companies, particularly the automakers themselves. It makes was incredibly strong.

In the quarter. So just curious why you may not be seeing that or is that still on the come and you know if we think about first half versus second half.

What kind of benefit or headwind would mix create for you just because theres a lot of a lot of focus on these higher end vehicles I've got to imagine you got more content on them.

Surprised it makes might not be stronger for you.

Yeah.

It's a little bit of a mix because.

No pun intended.

Just a lot of disruption in.

On our high end vehicles.

Two.

On the Ford F 150, as being one of those vehicles that.

Think distorting that picture.

Bit for us.

And I would say what we're confident is once the chip shortage issues.

Get resolved.

We do believe there'll be a favorable mix for us and we've always said.

We've got a pure compared a really favorable mix.

We think we're very relevant we think.

Jet delivery a seat systems, it's still.

Financially viable option for our customers, we think our expertise in the product.

Particularly with new starts who just don't have that technical competency you know, where we can provide them on array of seating products from luxury vehicles too.

You know low N a b segment, if if cost is.

You know of the of the focus of their brand strategy.

So it.

You know we completely.

Disagree with the concept I think the other point, we we'd suggest is.

Once everyone Scott E vs. In the market you know the fact that it's just an E V isn't going to differentiate them everyone's going to have similar products. It's similar range.

And and some of the things that will attract buyers.

To a vehicle will be the functionality of the interior system and and that function drives content and our technical capability there we.

We think you know provide solutions for our customer. That's you know so I'd point to someone like Neil Who's done some really creative things in their seeding system.

You know right now we're essentially the exclusive supplier to them they picked us because of our technical capability to help them with that.

And you know I see that free plane cross brought our customer group.

Okay, great. Thank you very much guys.

Thanks [laughter].

Our next question comes from James pick Robert with keeping catalog package on line is all day.

Hey come on guys.

Uhm, Yeah as to think about the guide and helpful. Detail you provide in terms of the second half price first have split. It can you just confirm your what what the commercial settlements figure wasn't a corner. It seems like there's probably 100 million plus just wanted to confirm that and you. Just originally you know cross your segments.

Where does this have the greatest impact.

Yeah, it's probably Europe would be the greatest impact in the quarter, where.

What.

Uhm that amount for any given year for us is pretty similar as we said.

And it's it's a reasonable size amount.

So maybe $300 million give or take on on average year is probably pretty.

Reasonable for Us and just you can see by that chart started the amount the stack from the first half vs. The second half with Europe being probably the big portion of activity.

Activity on the second quarter.

Okay, well that that's helpful. And then <unk> with an equity income, it's 20 million lower now is that mainly or exclusively driven by the SG&A J V sale and it has the company already completed that Divesture and then as we consider the the broader J V transformation right to the 1.4 <unk>.

<unk> and net proceeds coming in any color on the timing, there and and maybe you know where the company's net leverage heads for next year Alright, you raise your free cash flow for physical 21, we get through this year's noise into what hopefully as a cleaner recovery next year, you know what what could be an achievable.

Net leverage Rage, you know on on a profile pro forma basis as we sit on your next year at the end of next year. Thanks, Yeah.

Try to unpack a little bit about the the S. J a transaction, which is part of what we announced on the 12th of March I did complete at the end of the quarter and.

Portion of the reason, we brought our equity income down and you can see is about half attributable to that and half of it is attributable to lower volume expectations, primarily driven by a really driven by chips I can say we've seen.

The challenges of ship availability, bringing down production schedules globally on.

And China's not.

Not immune to that either so that's what's reflected in our guidance.

As it relates to the timing of the transaction for the Ymcas.

Deal, we announced on the 12th we're still looking really at the right at the end of our fiscal year are current view is around September 30th now that could move a little bit, but we do expect it to be completed within calendar 2021.

As it relates to the leverage and sort of our expectations of leverage we did give a range of 1.5 to two as a target.

We do really see ourselves getting there and it could be on the better side of that is a lot of it really depends on what the earnings or the operating environment looks like in 2021.

As you've heard US talk about we think the things that are within our control continue to improve.

But if you know.

Production is up as high as we're ihs's predicting it right now it could be a good year and it could help sort of amplify some of that deleveraging impact.

But we see ourselves sort of in that range and potentially better depending on the operating environment.

Thanks.

Yep.

Got it.

Our next question comes from Brian Johnson with Barclays. Your line is open.

Yes. Thanks, so in terms of your commodity recovery and timing on that I'm thinking steel residence slash foam.

Yeah is there anything else, we should be looking at an increased by the way if you have a good bloomberg.

<unk> for a foam surrogate would you look at that might be helpful. And two is this the kind of thing you know I used to have a normalized cadence.

Getting good recoveries in Fisk.

Physical fourth quarter, and then giving bad recoveries, the other direction and physical one too that didn't seasonality, which might've been a hallmark of the J C. I <unk> is is that out the door. So I guess two questions are kind of one you know what are the key commodity two timing and then three how does it affect the quarters.

Yeah, So maybe at a high level start and then Chuck can be a bit more specific as far as the categories stealing and.

Foam chemicals are certainly is the most significant for us.

And then when you look at recovery.

You literally have to go region by region and customer by customer Uhm.

Uhm, but I would say all all commodities are recoverable over an extended period of time.

Many of our customers I would say our traditional customers.

Have index agreements in place and allows recovery to happen on a <unk>.

Quarterly basis.

Stretching two six month timeframe and the rest.

Falls under an annual calculation.

And then we have some customers that tend to mix things together they they look at that.

Basket of.

Of issues, including commodities and then we negotiate those on an annual basis and it takes into account.

Oh other inflationary elements.

But but if you extend the bookends long enough.

We thank you get full recovery at least that's what we would project at this stage.

No drove a few yeah November specifics that's right you know I wouldn't say, there's so much of a seasonality impact to it as you mentioned you know if there.

Japanese customers tend to do it once a year around there.

Fiscal year ends at the end of March.

Some of our customers do it.

Every six months some of them do it as you said every quarter. So it it does vary but we tend to look at it over a three year time horizon is Doug said, we generally see that kind of coming back.

To us so next year, we do see as I've mentioned as a tailwind for us Brian.

Brian You also mentioned.

I couldn't absolutely help you on a bloomburg terminal, but we do look at the ISIS index for phone comical so look at TDI MDI and polyol ranges.

Ranges by region.

And crude prices again.

For hot rolled in cold rolled steel, we would look at those as well.

Okay. A follow up question, yeah, just a bit of a broader one so when you came in and it'll be three years. This fall asleep dog.

You you had a book a business that the prior C. O had put out <unk> had done and what was generally perceived in the industry as a bid to win bill.

Build the book and wait and see what happens on the billing said, we've talked about that at like you know how do we think about what's left of the under price under engineering estimate that book that you Kmart.

And how much is just a matter of.

Having two three years left in some of the younger programs that might have started when you were sharp before and in fact I used to do a lot working insurance uhm the poorly underwritten business just rolls off.

Yeah.

I would say the vast majority of what was.

Underprice or I think more.

Importantly was was stagnated in price recovery that we would normally get because we were struggling.

More of the operational performance side, we just couldn't engage with the customer I would say that's largely behind us if I were to quantify it.

You know I think you're.

It's in the 80% range meal, maybe 20% are some programs that we just can't touch.

Because.

It's strategically not worth pressing the issue or or you know they've got a couple of years left to build out and we were better to leave them alone.

And that's how we always arrived at this time line of.

2024, 2025, when we thought on a consolidate basis we could.

Close the gap.

On a margin perspective, so I mean.

I mean were generally on that time line.

We've made some improvements to achieving that goal.

And we mentioned or Buddy your head on the metal and mechanism business and and that has been largely Moore.

Cost driven then it's been.

<unk>, we had some negotiations early on we settled.

But what we've found in that business is that there was.

A lot more opportunity to drive on the cost side than what we originally anticipated.

So that's why we were able to.

I would say X.

Expedite that improvement in that business segment, uhm over and above what we thought so it's always difficult to have it really break it down if it's price or cost.

And.

And and you.

Very specifically quantify it.

Because many of them are just a combination of the two.

It's driving costs, maybe that the customer needs to approve but us being allowed to retainer.

A certain portion of that so.

I don't know how you want a bucket that whether it's it's price or cost driven that's just.

On.

It's one of the nice things about our business is that there's a lot of opportunity because of the complexity of our module to to drive on the cost side and engaged with our customer.

And commercial negotiations.

Okay. Thank you.

Thanks, very low 'cause Brandon and Julia it looks like we have time for one more question.

Thank you our last question comes from Joe's back with RBC capital markets. Your line is open.

Mm Thanks Uhm.

Maybe just.

A few questions. The first one here is obviously, we've seen a strategy at the automakers on player is partially building. These vehicles and I know seating is generally sort of just in time, but.

Are you <unk> do you believe you're still shipping to these you know partially built vehicles and if so do you have any indication of how much that that may have sort of impacted you relative to final vehicle Assembly.

Yeah I don't.

I don't think it's had a direct impact on us with one maybe on isolated case with Florida on there.

150, where we had to retrofit I think it was some.

20000 vehicles due.

Due to petrochemical shortages.

That is an exception in which we now provided those in those vehicles.

Have been retrofitted.

The partial built shouldn't have had an impact on us at all since we would've.

Been able to recognize that revenue because.

We delivered the product and they and they installed on vehicle, even though they.

Set it on the sideline until they could get semiconductors and.

Okay.

And then just maybe just so I understand that some the commercial settlements uhm like you know <unk> it.

It sounded like it was a sizeable number in the quarter, but and then just trying to understand maybe the accounting when I look at that that's sort of modified casual statement. It looks like it's a 70 million cash outflows. So is there a timing difference between now and you recognize the settlement on when you actually get the cash.

Yeah. So a lot of times, what you're seeing on that portion of it is movement in the accrual in the quarter, but think of it as as I've always kind of sad every month every day, we accrue for some element of customer give back or maybe other issues that are out there with the customer.

<unk>.

And then just in time nature of our business.

Has many commercial tie ins to our customers that agree on shift patterns in the like so if if things vary significantly we might have a claim to a customer on.

But what what you generally saw in the quarter is that there was a number of things that.

We settled out with our customer that went to the essentially to lower our cruel balance during the quarter.

And that's what you see in the cash flow every other period, we expect that accrual will continue to build in other periods and there was just more settlements of commercial activity in the quarter it with some conducive for it.

With the nature of work COVID-19 was sitting in production levels that we closed on a lot of our 2021 productivity agreements with our customers during the quarter.

So so when we think about your free cash flow.

I'm sorry. This is a relatively neutral for the balance you know for the entirety of their yes, we think it's going to be neutral for the entire year, but.

But for the quarter it had the impact.

Okay. Thanks for the clarification.

Yeah.

You got it.

Anything else going on.

Nope. Thanks, Okay, great. Thanks, Joe Thanks, Joan and things for joining the call today. It looks like we're at the bottom of the hour again, if there's any follow up questions. I know, there's a few people that were in the queue that did not have a chance to ask questions. Please feel free to give me a call when they're happy to help you and go through any questions you might have but again thanks for.

Taking time this morning.

Thanks, everyone.

Thank you for your participation participants you may disconnect at this time.