Q3 2021 Adient PLC Earnings Call

Welcome and thank you all for standing by at this time I would like to inform all participants that your lines have been placed on a listen only mode until the question and answer session of today's call.

Today's call is also being recorded if anyone does have any objections you may disconnect at this time.

I would now like to turn the call over to Mr. Mark Oswald. Thank you you may begin.

Thank you Sue good morning, and thank you for joining us as we review adient results for the third 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.

This morning, I'm joined by Doug del Grosso, Adient, as President and Chief Executive Officer, Jeff The file our executive Vice President and Chief Financial Officer from <unk>.

The AUM doorway executive Vice President and head of America seating.

On today's call Doug will provide an update on the business followed by Jeff who will review, our Q3 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 discuss.

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 2 of the presentation for our complete safe Harbor statements.

America is due to COVID-19.

Although revenue increased year over year. This year's top line was also impacted by significant headwind specifically the numerous production stoppages at our customers do do semiconductor supply disruptions.

Adjusted EBITDA for the quarter total of $118 million and has pointed out on the slide. This included just over $50 million in premiums and temporary operating inefficiencies again, primarily driven by chip shortages and unplanned production stoppages.

Adient June 30th cash balance totaled $1 billion of.

Point out that the cash balance does not include about $270 million held in other assets as of deposit related to certain assets adient is acquiring from the <unk> joint venture as.

As part of our China strategic transformation.

In addition about $190 million of cash was used during the quarter to repay of portion of the company's debt.

Finally speaking of debt adience growth and debt debt total just over 3.7 billion of 2.7 billion respectively.

Approximately $180 million of principal of debt prepayment occurred during Q3.

Jeff will provide additional color on any of the financial results, including our capital structure in just a few minutes.

Achieving the results just discuss was hard fought especially considering the near perfect storm of temporary headwinds.

That impacted the industry in adient. These included supply chain disruptions, an unplanned production stoppages increased freight costs significant increases in commodity prices and.

And continued costs associated with COVID-19, just the name of a few.

Rather than dwell on the negatives the team looked ahead and began to implement actions to help lessen the impact.

On the right hand side of the slide we've highlighted certain of those proactive measures actions taken included pulling ahead preventive maintenance reallocating resources between plants implementing involuntary voluntary layoffs at our plants in the U S and Canada force vacations for impacted salary team members.

And keeping very tight controls on discretionary spending including travel.

Which is essentially limited to launch activities in hiring.

The list shown is not exhaustive, but should provide you an idea of how the company continues to drive the business forward essentially executing on actions that are within our control.

Turning the slide 5 let me shift gears slightly and spend a few minutes discussing the current operating environment.

Is the factor shown on the slide Ah really dominating the influence in the business near term as evidenced in our Q3 results.

First despite the many negative headlines started number of positive influence impact in the industry, including consumer demand, which remains extremely strong vehicle inventories.

Where chet near or historic levels, and will continue to drive strong production for several quarters as manufacturers looked to rebuild inventory.

Vehicle mix, which remains strongest manufacturers continue to protect production of their most profitable trucks and Suvs.

And finally, COVID-19 treatments and vaccines are generally driving the reopening of many economies. We continue to watch closely of certain variants such as the Delta variant.

Could result in disruptions along the way.

That said and focusing on the headwinds column there are a number of headwinds, which we view as temporary that are masking are limiting the full benefit the positive influence just discussed.

They include ongoing supply chain semiconductor shortages, which continue to result in production downtime at our customers.

As seen with our Q2 and Q3 results. These unplanned production stoppages are leading the premiums and the operating inefficiencies across our network.

That said for fiscal 2021, we estimate supply chain disruptions and resulting loss of production operating efficiencies premium <unk> et cetera will have a net impact on the top line of about $1.1 billion, an adjusted EBITDA by approximately $300 million.

I wish I could tell you this will be limited to 2021. Unfortunately is shown in our call up box on the side of right. The visibility of our customer's production schedules has not improved complete the course of the past few months.

Gushing and commentary from our customers suggests improving the confides of chips and production schedules in the coming weeks and months. Unfortunately, we continue to experience very short notice production downtime.

Likely this trend will continue through the rest of our fiscal year and even into 2022.

Also having a significant impact on the business is mentioned in our Q2 earnings call.

Continues to be escalating steel and chemical prices.

As noted on the slides steel prices in the America are up approximately 3 times versus the beginning of the year.

And although adient has certain mechanisms and pass through agreements with our customer they were never intended to cover movements of this magnitude for this long of duration.

4.2021 of we estimate the net impact the about $80 million consistent with what we shared in a queue to call.

Although these items appear to be temporary in nature and should lessen over time, they are placing a significant amount of strain on the near term business.

Question remains when will these pressures subside.

Our best guess is the supply chain disruption and increased commodity costs will likely persist as we enter 2022.

Jeff will dig deeper into the impact the rising commodity prices.

Having an idiot and his prepared remarks.

Turning to slide 6 shifting back to the theme of executing actions within our control. Let me provide a few comments related to adience long term objectives.

First we are on track with our strategic transformation in China. This includes among other agreements the termination the way.

Joint venture and the acquisition of an additional 50% equity in.

Interest in situ way of a yes.

Resulting in us owning 75% interest in <unk> in 100% equity interest in the way Fas 1 thing.

I hope to share news of the completion of the agreements and the not so distant future. As a reminder, adient is expecting cash proceeds of about $1.4 billion after tax.

With the first tranche of proceeds collected at the closing and the remaining proceeds collected prior to the 20th 21 calendar here.

The completed transaction will enable adient to drive our strategy in China independently.

Which is expected to result in a variety of benefits, including capturing growth and profitable and expanding segments improving the integration of the companies China operations.

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

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

Essentially of position umpire with and among the top 3 the seats.

Seat suppliers in the market.

Based on our estimates this equates to a market share of just under 20%.

Equally exciting and as part enabled by the China transformation.

The work underway to transform adient capital structure.

As mentioned earlier during Qt, we paid down the final $160 million in principle of the company, 7% first lien notes.

The total so far in fiscal 21, the company has prepaid approximately $840 million in debt when combining the 7 per cent pay down the premium payments made to the European investment Bank loan.

I'd also remind you of the company made of 100 million of voluntary debt prepayments at the end of the fiscal 2020, bringing our total voluntary debt pay down to $940 million.

Since the beginning of the capital structure transformation in queue for fiscal year 20.

[noise] Adient capital structure has a lot of flexibility and call ability remaining.

We expect to continue our deleveraging efforts on completion of the China transaction.

And collection of the related proceeds.

Whether it's the longer term strategies, just discuss with the day to day initiatives, such as improving our plant operations and flawlessly executing non launches.

Adient is executing actions within our control the.

Despite the macro headwinds that are temporarily impacting the industry.

The continued pushed improve the business as head of positive impact on our relationships with customers as well.

We've seen adient customers recognize value added product and process initiatives.

At the bottom of the slide we've included a few of awards Adient recently received including the Lantus Best supplier of Competitiveness Award to Yoda Superior supplier Diversity Award.

Gm's excellent and the on time Shipping award and finally, the outstanding quality launch performance award from Nissan.

I mentioned this recognition only to provide proof points that the teen continues to execute on many fronts continually looking for ways to drive the business forward.

Turning the slide 7.

Let me provide a few comments and adient business wins, and how we are strengthening our leading market position.

What hopefully has been clear that we reported our key wins over the last several quarters.

Is the fact that adding continues to focus on capital allocation return on capital when targeting new or incumbent business. When it's not limited our ability to secure new business.

A year to date when rate per both targeted new business and targeted encompass business is tracking in line with our expectations.

We've highlighted a number of recent program wins here, including the number of key replacement wins, this past quarter, including Toyota Tacoma, Mercedes a class Mercedes GLA.

And the Nissan Patrol. In addition to these replacement winds Adient also secured new SUV program with Xiaopeng in China, and the new E. B C U V platform at Honda.

It should be noted that of recent wins.

Awards include a good mix combination of jet from trim and metals business.

Is there a new book of business continues to launch we expect the balance and balance out platforms to further enable margin expansion.

Turning the slide 8 as we typically do we've highlighted several critical launches debt.

A complete in process of scheduled to begin in the near term.

Happy to report we're heading in the the final few months of the fiscal year and the team continues to focus on process discipline.

Around launch readiness and is driven of very high level of performance.

Especially considering the lunch load and the complexity of launches that were planned for this year.

In addition to the number of launches in complexity the disruption to production schedules percentage another layer of challenges to the team.

Successfully managed through though.

Again, a testament to the discipline around our processes.

We have no intention of letting up and look forward to finishing the year strong.

With the launches that are in process and scheduled the began entering fiscal 2022.

Before turning the call over to Jeff flipping the slide 9 let me just conclude my remarks with a few comments about adience guiding principles. These principles are intended to drive adient forward, while focusing on what's most important the key drivers.

Customer quality people community and financial discipline guide and inform our business strategy in our culture.

As pointed out today remaining focused on these drivers enable the team to drive of the business forward, even while operating in the challenging environment currently facing.

And the all I'm proud of of what we can talk of some excited about what lies ahead.

And with that I'll turn the call over to Josh to take us through Adience third quarter of 2021 financial performance and provide a little bit more color on what's expected as we wrap up 2021.

Thanks, Doug <unk> good morning, everyone.

And before jumping into the financial results, which to a certain extent provide less of insight into the ongoing operations, giving the given the abnormal operating environments in both Q3 of last year and this year, let me spend a few minutes discussing commodity inflation spit.

Specifically, what we're seeing today, how it's impacting the business and steps the company has taken to lessen the impact, especially as it relates to the out years first on slide 11, we've provided the chart illustrating price movements and expected price movements for hot rolled steel of North America as you can see despite repeating forecast the price.

Will fall prices of continue to increase while forecast for price decreases continued to be pushed out for.

For Adient. This has resulted in more than of 3 times increase in the cost over the last 12 months for steel assuming prices remain constant the impact on orange cost for steel and chemicals would be approximately $650 million.

Higher in 2000 or more of 2022, then price is paid in 2020.

The $650 million is based on current market conditions, such as hot rolled steel prices in excess of $1800.

At the current market conditions hold and we do nothing commercially to pass through this increase to our customers beyond our current commercial agreements net commodity price headwind for physical twenty-two would be approximately $200 million versus 2021. However, as you would expect we're taking aggressive actions to mitigate the.

Impact, which I'll discuss further on slide 12 and for that reason, it's premature for us to know how much of this headwind will be realized in 2022.

Spoken at length on prior calls with regard to Adience recovery mechanisms that are in place to recover material cost changes as a reminder, or pass through agreements differ by customers in 2 key attributes.

Lag in percentage of contractual recovery for lag certain customers are nearly immediate others such as our Japanese headquartered customers tend to be true it up on an annual basis or essentially of 5 quarter lag. This results in an average lag for adient of a little more than 2 quarters for the.

Of actual peace some customers have 100 per cent pass through with lag.

While others might have only of 60 per cent contractual pass through these pastors of generally been effective despite the lag and protecting the company over the cycle as commodity prices of fluctuated. The mechanisms tend to work best against minor short duration price movements. They are not designed for the extreme increases impact in the business today.

Turning slide 12 on.

On the left hand side of the slide we've provided of Nellis Illustrative example of how movements in commodity prices impact the audience financial results.

In general as you would expect adient financial results are negatively impacted as prices rise, but positively impacted as prices decline important to point out price is through the cycle of generally reverted to the mean.

Has the material cost goes up the revenue change the true up from the customer will lag, resulting in reduced EBITDA only when the cost goes down and when revenue change.

Dan lags, while we were cover of the loss of profits and vice versa, Adient generally crap recaptures approximately 70 per cent of commodity inflation through automatic mechanisms, while the remaining 30% must be negotiated through hard fought for all of the sleeves type of negotiations.

You'll also see on the chart. We've included a pair of guidelines, which we view as normal movements in commodity prices over of cycle call it somewhere around 15% plus or minus as discussed in the prior slide adience mechanisms in place today combined with manual commercial negotiations have enabled the company to recapture yearly or.

All cost increases over time in this environment. Unfortunately, this is not the environment, where each day and is the reason the company is executing aggressive actions in an attempt to mitigate the impact of rising commodity cost. These include but are not limited to renegotiating commercial commercial agreements with our customers to reduce time-lag the.

Skated with true ups.

And reducing ideally ideally eliminating adient portion of the pain share agreements recognizing adience position is of value add fire.

And finally, making sure the underlying indices that underpin the true ups are actually aligned with the commodity is being purchased for example, we currently have an agreement in place with 1 customer with the true of is based on the scrap steel index, which is not reflective of the steel being purchased as you might expect the discussions are not 1 size fits all.

We're tailoring the discussions based on the size of the exposure relation ship with the customer et cetera, given adient timing of commodity purchases and continued escalation in steel prices and to a lesser extent chemical prices. It appears commodity prices will remain of headwind entering 2022, that's why it's imperative we move quicker.

The to address this headwind that said the outcomes of these ongoing discussions will ultimately determine the magnitude of the headwind next year and that's why it's premature for us to dimension the risk of at this time.

Speaking of 2022, the team is in process of developing our physical twenty-two plan.

We've discussed 1 of the big unknown commodities. The other driver will be vehicle production as Doug mentioned earlier, our visibility into our customer of production schedule is currently quite low.

We hope as we exit fiscal 2021 and enter physical 22 visibility improves Ah said, especially as it relates to the semi conductor supply chain.

I anticipate sharing our 2022.

Planning assumptions with you as we typically do during our queue for financial results Conference call in early November.

Now, let's move to slide 14, and shift gears to audience Q3 financial results adhere.

Adhering to our typical format. The page is formatted with the reported results from the leftist Anarbor adjusted results in the right hand side of the page, we will focus our commentary on the adjusted results, which excludes special items that we view is either 1 time in nature or otherwise skew important trends in underlying performance.

For the quarter of the biggest drivers of the difference between a reported and adjusted results relate to indirect tax recoveries in Brazil, right off of deferred financing charges, resulting from debt repayment transaction cost restructuring costs and purchase accounting amortization.

1 other significant adjustment important to note relates to a derivative loss of on the on Bang transaction as a reminder of the proceeds associated with the China strategic transformation renegotiated in RMB.

Adient executed of hedge to protect our cash proceeds movements between the U S D and C. N Y resulted in a non cash loss.

Details of these adjustments or in the appendix of the presentation.

For the quarter sales were 3.2 billion up significantly compared to our third quarter results last year, where much of our production across Europe and America was shut down due to COVID-19, although up year over year adient sales in the most recent quarter were significantly impacted by lost production, primarily driven by supply chain just.

<unk> related to semiconductors.

Adjusted EBITDA for the quarter was 118 million of $240 million a year on year more than explained by an increase in volume and mix. Unfortunately the benefits.

From increased volume or significantly offset by numerous temporary operating inefficiencies, which by the way mast business performance improvements made to the core ongoing operations.

For example of the approximate $600 million in lost sales and or America's operation. We received notification of the reduction less than 3 days in advance while we received more than 7 days notice and less than 20% of the time.

This is obviously a difficult environment to run of jet operation.

In addition, rising commodity cost and.

And lower equity income also had a negative impact in the quarter I'll explain the expand on these key drivers in just a minute.

Finally at the bottom the.

The bottom line Adient reported the net loss of $50 million or of loss of 53 cents per share the.

Now, let's breakdown, our third quarter results in more detail starting with revenue on slide 15, we reported consolidated sales of $3.2 billion, an increase of $1.6 billion compared to the same period of year ago.

Primary driver of the year over year increase was.

Was attributed higher volume and mix call at $1.5 billion and 2 of much lesser extent the positive impact of currency movements between the 2 periods of about $68 million portfolio of adjustments executed in fiscal 20 provided of very minor offset to the benefits of volume of FX call at about $16 million.

Focusing on the table in the right hand side of the slide you can see Arkansas, the dated sales failed to keep up with production and both of the Americas in EMEA. The primary driver was adience customer mix, which was heavily weighted to major manufacturers that were significantly impacted by the semiconductor shortages. These customers included Ford Diane.

<unk>, the Lantus Reno and VW looking at the various third party production forecast. It's estimated adient portion of the last Q3 production volume was about 30% and 45% in the Americas and EMEA, respectively of course, we view this as a temporary as temporary.

And it should reverse as the supply chain stabilizes.

With regard to audience unconsolidated seeding revenue year over year results were up approximately 4% adjusting for FX and executed portfolio changes.

Significant year over year increases were recorded in both America's in EMEA again, largely driven by the fact that these operations, where all the shuttered in Q3 of last year, and China I'm kind of unconsolidated sales were relatively in line with industry production. Despite an approximate 7% decline it why Faye us Sim.

Lord of what we saw with our consolidated results sales at Y Fas were heavily impacted by the place supply chain disruptions of their customers.

Moving to slide 16, we've.

We've provided the bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket label. The corporate represent central cost that are not allocated back to the operation touches Executive office Communications corporate finance legal and marketing Big picture adjusted EBITDA was $118 million.

In the current quarter versus the loss of $122 million last year.

Primary driver of the increases detailed detailed on the page, but effectively compares to very suboptimal quarters last year was obviously overwhelmed by Covid related shutdowns. While this quarter was materially impacted by external factors outside of Adience control such as the semiconductor shortage and the storm in Texas earlier this year.

And it's related fallout impact to the chemical supply and cost.

The name of just a couple of of the factors. Therefore, it I do not plan to go into depth Indepth discussion on this page, but we've outlined the movements year over year in detail for your information.

And that said to give comfort or some proof of points on adience turnaround in the last couple of years, Let me give some statistics comparing Q3.21 to Q3.2019 or the last Q3 period without significant externally generated shock to our business compared to.

Of that 2019 Q3, our admin expense was approximately 20 million lower this past quarter will launch expense ops waste in premium freight. We're also better by $30 million. We also realized approximately $70 million of improvements in other operating metrics, but these were unfortunately.

More than offset by approximately $125 million due to lower volume 30 million in net commodities $15 million and FX 30 million and inefficiencies from chemical in semiconductor explorer.

Supply chain issues, among others clearly the operating environment has been challenging and mashed many of these performance improvements.

1 area of worth mentioning in the Q3.2021 versus Q3.2020 comparison is the decline in equity income of roughly $24 million. The year over year decline was primarily related to performance and material economics at Y Fas and to a lesser extent the divestiture of.

S J a joint venture.

And the and given all of the moving pieces. The team worked hard to lessen the impact of the temporary headwinds to deliver the 244 million dollar a year over your improvement.

To ensure enough time is allocated to the Q&A portion of the call. We've provided are detailed segment performance slides of the appendix of the presentation high level improved volume and mix.

Benefited each of the regions ongoing business performance continue the trend in a positive direction. However in America and EMEA temporary operating inefficiencies, resulting from unplanned production stoppages masked the overall improvement.

Let me know shipped to our cash liquidity and capital structure on slide 17, and 18 star.

Starting of cash on slide 17, I'll focus on year to date results as the longer timeframe help smooth some of the volatility in working capital movements.

Adjusted free cash flow defined as operating cash flow last capex was $176 million, the $445 million improvement and adjusted EBITDA.

Net of equity $72 million reduction in caps spending and significant improvement in trade working capital was partially offset by an expected increase in restructuring of $57 million Inc.

Increase in interest paid of $36 million elevated income taxes.

Elevated non income related taxes, specifically, the payments and the timing of commercial activity.

With regard to V I T payments, while some of the year to date outflow will continue to reverse as we progress through Q4, we'd expect the larger than normal out of Florida flows in fiscal 21 related to government approved delays out of physical 22020 due to COVID-19 of combinations.

As noted on the right hand side of the page.

We ended the quarter with more than $1.8 billion in total liquidity comprised of cash on hand of about 1 billion and approximately $850 million of undrawn capacity under Adience revolving line of credit.

Also noted in the call of the June 30th cash balance excludes approximately $270 million how old is other assets related to funds on deposit to acquire certain assets of <unk>.

Cash used during the quarter to voluntarily pay down debt totaled about $190 million, which includes both principles and premium principal in premium paid.

Speaking of debt and flipping to slide 18.

In addition to showing our debt of net debt positions, which total just over $3.7 billion and $2.7 billion, respectively of June 30th. We've also provided a snapshot of Adience capital structure.

As you can see the 7% first leaned notes were entirely replay repaid at quarter end as the final of $160 million in principle was paid during the quarter. An addition, $20 million of principle of the European investment Bank loan was also repaid in Q3 it's.

It's clear the transformation of Adience balance sheet is well underway with approximately $940 million of debt prepayment complete going back to Q4 of fiscal 20 the.

The good news is we're not done additional voluntary debt is voluntary pay down debt is expected as we progress through calendar 2021 with proceeds expected to be received from China's from Adience China's transformation.

With that let's flip to slide 19 review our outlook for the remainder of fiscal 21.

Add in fiscal 2021 guidance has been updated to reflect the company's year to date results through June are completed portfolio of transactions executed debt pay down in the current market conditions expectations for consolidated sales have been reduced to between 14.3 and 14.5 billion the significant impact of per.

Production stoppages of our customers, resulting from semiconductor shortages is driving the decline.

The impact of lower than expected sales combined with temporary operating inefficiencies driven by continued unplanned production stoppages elevated commodity cost and increased freight is expected the place downward pressure on adience adjusted EBITDA. Our current forecast is between $925 million and 907.

$85 million.

Moving on to equity income, which is included in our adjusted EBITDA continues to be forecast at about $230 million for the year interest expense based on our debt and cash position is.

Expected to be $215 million, which is consistent earlier expectations cash taxes and fiscal 21 have been revised down modestly call at about $80 million to assist with your modeling, although volatile with fluctuations between quarters and met and as mentioned earlier, we continued expect adience of.

Fact of tax rate to be in the mid 20 per cent range.

Based on our customer launch plans, we expect capital expenditures to total about $310 million for the year and finally, 1 last item for your modeling we now expect free cash flow to be approximately $100 million in fiscal 21, which is in line with their previous range of between 50 and $150 million. The team is.

Worked hard to offset the top line and EBITDA pressures. In addition are.

In addition, our cash restructuring, which was previously previously forecast of $200 million for the year has now been reduced to about $150 million. The total remains elevated compared to our typical spend of around $100 million or less and.

In addition to an elevated restructuring spend the 2021 free cash flow is negatively impacted by approximately $30 million of the payments that were deferred from last year into 2021 stripping out. These 1 offs adience free cash flow guide would of been approximately 100, <unk> $180 million with that.

Let's move to the question of nerves answer portion of the call.

Operators of the Flushing please.

At this time, if anyone would like to ask a question. Please ensure that your phone is a muted press star 1 and record your name clearly when prompted if you would need to withdraw. Your question you May Press Star 2 again to ask a question. Please press star 1.

The first question is from Rod Lash with Wolf Research you May go ahead.

Good morning, everybody.

A couple of things 1 is I was just hoping you can clarify day, the $200 million commodity headwind that you described for next year that that's just the 30% of the.

The 650 I I believe.

Just to confirm is that relative to 2021 or is that relative to 2020.

And because you did it you are absorbing about $80 million. This year and then secondly can you just discuss the nature of the inefficiencies you mentioned on 1 slide 300 million for the year.

Which I think included some revenue impact, but and separately you you've talked about 53 million for the quarter, which may not have included anything I'm not sure. If that's the apples and apples, but basically like should we view. The the 300 million impact is is is the likely tailwind at some point once production normalizes.

Yeah, Rod I'll start on those the.

The first question as it relates to.

The material of inflation and the net impact that $200 million was compared to 2021 and you are right 2021 at $80 million in it.

It doesn't exactly I think the computation was about that 30%.

It's sort of a mix of the lag we have and then the timing of the recoveries. So that would be if we just ran through with the mechanical agreements as the stand today as I mentioned, we're working just with the size of the increases those mechanisms.

Don't make sense for.

My supplier like ourselves that essentially is putting value add to materials.

So we're working with our our teams and our customers to to help improve that but that's where it would fall out of no actions were put forward about $200 million in 2021.2 versus 2021.

As it relates to the second part of your question.

On the 300 million about 200 million of it relates to volume.

And you can say the.

The rest of there's the chemical supply chain issues were a bit over 40 ish.

There is some container and freight type of issues, which were north of 25. There are still some COVID-19 related issues that were sort of the balance there to get you up to the <unk>.

Okay, and what is a reasonable kind of aspirational target for recovery of of commodities and if you could just maybe help us a little bit with bridging beyond 2022, I mean, you you'll do 950 of EBITDA this year.

You'll lose about maybe 200 million or so from the the China equity income sale, but you're going to recover.

At least this this hundred million of of inefficiency in and.

I presume the safety million of of commodities and the and your last 10-Q. The there was some disclosure about 5000 remaining headcount reduction which might be $300 million. So just kind of high level. What what are you. What are you sort of inspiring towards as far as margin recoveries, we think beyond beyond the Saint.

You've got the longer term mid 8% margin, but as we think about 20, maybe 2023.

Yeah, no all good questions right and we're in the process of putting a lot of that together, but I'll give you a few crumbs here and we'll obviously worked expand but.

Right now with you know I guess I would start with volume of running at 14, 3 to 14, 5 or so and volume. This year, we think that the depressed level.

As you know.

And timing of chip production coming back is is a bit of uncertain here we.

We expected probably hit the least our first quarter of 2022 still in some fashion if not if not further.

But we would expect the volume to improve we certainly would expect a lot of those inefficiencies to improve if not fully go away.

I'll continue to chip away at the material inflation issues, we'd also get a big benefit if we start to see some reductions of material prices every I highlight the steel forecast everyone. You look at continues to show that the next month or the next couple of months, it's going to start to go down it just hasn't done that yet.

And that's created some of the the challenges for us.

We continue to drive the things that are internally within our control I see nice improvements on our cost structure see nice improvements on our manufacturing efficiencies RCI benefits et cetera. The V. A V E program, we've put in place. So the margin expansion in the benefits we have from the restructuring are.

Still there so it's really going to be a lot of largely dependent upon the success, we have of going after that uhm material inflation.

And the pace of recovery on the underlying market yeah.

The rod dug dugger of so I would just add the relative to material inflation.

I would characterize it is somewhat concentrated the cross.

But.

A small group of customers.

Is just mentioned we've got a wide variety of agreements some are working reasonably well and others are working less well and and that's why we've had the impact.

That we've talked about for this year and.

So as we go after that.

We were approaching it.

Kind of 3 ways what is it can naturally correct itself.

We're not sitting on our hands waiting for that to happen or.

Heavily engaged with the.

Concentrated customer base, where we have those issues.

I would say, it's a customer base that.

I feel pretty confident that.

We can make some.

You know some ground in those discussions I'm not here to data to pick a number of foot. It's.

Its customers that we've got excellent relationships with.

And in our level of patience is.

Is going to be measured to a certain degree of longer term outlook with those customers right now we have not done anything.

I would call you know super aggressive as we deal with this issue.

Because we always have to keep in mind, we want of sustained relationship with these customers in.

Taken into account our backlog of new business opportunities is is on our mine as we engage in those discussions.

Okay. Thank you.

Thanks, a lot of thanks.

And just a brief reminder, if you'd like to ask a question. Please press the star followed by 1 hour.

Our next question is from Brian Johnson with Barclays. You May go ahead.

Yes.

Obviously margins being the topic of the day you know, we how do we get a sense of <unk> in the it's still looks like even if you exclude the 18 million business inefficiencies of stepped down from last quarter's.

You talked about commodity and obviously that will help in America's where you of course of this metal footprint in 1 day.

Okay, I'm winding down, but what has to happen in the what's your level of confidence in getting that segment back to a 7 per cent and then eventually per margins.

Well I'll start.

Obviously, just can comment as well I think when you look at EMEA of what we talked about.

Last quarter was I don't want to say in a bit of an unusually high level of commercial settlements that occurred.

They occur every year so it's it's not.

Completely unusual it was just.

Calendarize of higher level than normal.

I think distorts a little bit of the margin pitcher.

And I would suggest you have to look at me of margin over a longer period than a quarter to quarter because of that phenomenon. We just settle up and a lot of issues and that tends to occur in the queue to yeah.

2.1 Q2.

You know as I think you'd look at the of me a picture.

The assets and M business has been improving I think we continue to hit all of the operating metrics and other portions there. The metal movements are are not helpful for that so margin certainly there and it's the region. That's been I I highlighted on and my comments the <unk>.

Short time frame that we've had to react to call option volume of America's but the Europe situation is very similar and their ability to react to those of us even less.

From a worker standpoint to flex cost space.

So the operating environment has not been helpful for me.

And where were sitting but from an overall metric standpoint, I think we've been pleased on the operating performance with that region. The restructuring that we're continuing to put through there will continue to drive some improvements as well, but we need a much more stable operating environment and ideally.

A quicker.

And better sort of mechanisms to deal with the current commodity inflation of issues.

Okay, Uhm and then secondly, when I heard.

The plants 1 point of plant manager made was actually 1 of your competitors was that there's the J T plant is just the tip of the iceberg, there's the whole supply chain, including free cross docking facility of.

The stream from that so to what extent is you know the the nature of of your supply chain driving premium frayed and can that be part of your recovery.

Sure.

It's.

With the exception of.

I'll say ocean freight, which has had a pretty significant impact on us when we're bringing components in from.

Namely Asia, both in the U S America's.

And Ah EMEA region.

I would say the impact has been.

Relatively small.

At this stage now.

As the mounting pressures continue certainly our suppliers.

Want to come in and talk about it but.

We have not experienced a lot of supply chain in some cases, we've got directed suppliers, who were completely immune from any issue associated with it.

I would characterize the issue the inefficiencies mainly in our internal operations. The fact that we're we've got a fair amount of vertical integration. So it's all inclusive.

Yeah, It hits us hard in the environment, because when the customer shuts down with 1 or 2 days notice.

Have the stop immediately.

In.

In the.

As we go further down to the supply chain, we have the ability to manage the add a little bit more effectively we can build inventories of thank you've seen a little bit of increase inventory as we've moved into this quarter.

So we can offset some of the internet.

Jerome here runs her operations in.

In the Americas regions of anything you want to add to the true yeah.

Doug said within the jet site and Jeff quoted some numbers earlier around 1 to 3 day then.

And that even maybe smaller window that flows down the indoor component plans.

We're at 60%.

Of notification falls into that and it really put the challenge on it yet but it is the slowdown in because of of vertical integration is not such an impact really.

The West Coast.

Specifically, the west coast in the Port delays there.

For parts coming in from Asia has been a real constraint force and we've actively worked to reroute freight away.

Away from the West coast, so bring it in.

Either on the east coast of the us now or bringing it in further north into Canada and moving it down.

I think Brian we've done everything we can to really actively manage those aspects of it to mitigate the impacts further down in the supply change. It has really been the bigger issue for us.

But we have paid a lot of the <unk>.

And dedicated.

Yeah, Yeah, I'd say the biggest issue to us has been on cost freight expenses gone up.

The driver shortages, all kinds of things of and I mentioned of 27 million dollar bump in our overall freight also just with when the chemical supply issues hit US we were.

Sending airplanes of of chemicals.

<unk> to meet customer demand, so afraid of definitely been an issue, but it's been more on the cost side and that's embedded in that $300 million that we put out in the beginning today. It was very much a specific the.

Incident that.

That drove those inefficiencies into the supply base.

But but not really characteristic of 2 overall chip shortage.

Okay.

Okay. Thank you.

Thanks, Brian.

Okay. Thank you.

The next question is from Joe's back with R. B C capital market you May go ahead.

Thanks for the morning, Uhm, you know as as we look through some.

Some of the walks in.

In the back I get the.

Uhm operational impact from from these temporary inefficient inefficiencies <unk>, you're talking about I also noticed.

I guess I can and America's for instance, and I believe in and.

<unk> me as well.

You know the there was a year over your head wind from you know a lot. So I guess you guys of perform better on on launches. This just.

Like a lack of execution on March or just actual like launch costs are higher because you're launching more programs.

Yeah. The good morning, Joe. So this is really around if you take the Americans in particular, it's the volume of launch that's running through the system. So it isn't any efficiency associated with launches just year over year launched load.

And so you know if you look at like P..42, Q1 of the programs were launching in Tennessee, 4 Nissan as an example, that's a full value chain program for us. So we have the just the trim the foam in the medals.

And so it's it's.

Good business. It just it's a significant amount of of launch load coming into the business, but in terms of launch any efficiency.

And success of launch we continue to trend very well from that standpoint, and it's reflected Doug talked a little bit about the other customer awards Nissan was 1 of particular for a recent launch that we had.

And so I would say we have a a a high level of control on our launches is just the launch flow that's coming into the business on the year over year standpoint, and note a year ago in Covid there were no logged on the launch yet.

Yeah that that's I guess, that's what I was sort of getting out and then.

I'm, sorry, sorry, if I missed this a little bit of of busy morning, but is there sort of any more refined Thai.

Timing update on on all of the China transactions when that can close and when we can sort of see that.

The new balance sheet yeah.

Yeah no the the.

The good news is no no expected changes at this point.

We're still on target, we think too close the transaction in September by the end of September and just from the and the proceeds dynamic is still the same as we outlined on March 12th when we announced the transaction so roughly half the dollars come in on that date and then the rest is paid by the.

End of December.

And we'd still expect that timeline December of 21, Yeah correct. Yes. This december okay. Okay. Thank you very much.

Yep. Thanks, Joe.

Okay. Thank you at this time there are no further questions. As a reminder, if you would like to ask a question. Please press the star followed by 1.

1 moment, please to see if we have any further questions.

Our next question is from Dan Levy with Credit Suisse. You May go ahead.

Hi, good morning, Thank you uhm.

<unk> if I if I missed this earlier, but I I think you mentioned in your slide slides about the commercial with negotiations, there's a little the little bit of roll up your sleeves. So maybe.

Maybe you could give us a sense of.

Of how the dynamics work on the commercial negotiations given the higher input cost what's the typical timing of when you might be able to recover that and then maybe you could just give us the latest on you know how that would come up with is typical of the covers which I think you said it's like.

300 million of in a in a typical year. So just trying to size out what the the commercial the probably as could be and then what's left on the <unk> lower hanging from which I think you've said, it's mostly exhausted.

Yeah, So I'll start it up.

Backrow level day on the struggle growth so and then.

Obviously, Jeff and Jerome can provide some additional details.

So.

It first started out we signalled commodity.

Economics inflation was going to be an issue.

During our queue to call. So the Susan anything that we didn't see coming.

What what's been challenging is what we felt the impact was going to be.

Versus what it is now has been continually changing.

And that's the 1 slide we have in the dark that just shows every every.

Preceding months forecast is at a higher level of for an extended period of time.

That said, we've got in front of every single 1 of our customers.

This is not then I'll say of traditional discussion that we've had we've gone to extremely high levels of our customer explaining.

The great amount of transparency the impact that it has.

Relative to each 1 of the recovery mechanisms and.

And why this is such an issue for us not only in fiscal year 21, but.

Inflationary costs continue continue into the 22 and it needs to be addressed.

As I mentioned, it's it's concentrated across a few customers.

In some cases, we of mechanisms that are in place that.

The better manage the situation.

The issue that they have is.

These mechanisms are historic mechanisms that have been in place for quite some time in most cases.

In the in the change these is.

As of.

Pretty fundamental change.

For our customers to.

To enact it's not like a specific commercial issue.

They felt that they've got the.

The mechanism in place and it's just this.

Really erratic.

Situation, we have right now that's causing it not to work.

But they understand it.

I think what I feel good about his with those customers their customers that.

We're pretty well positioned with I think we've got outstanding relationships with and I think the I appreciate the value we bring.

It it's.

The only reason I would say I'm reluctant to put a time on it is it's still a pretty.

Fluid situation.

Uhm.

And and as commodity costs continue to increase it's hard to.

To really peg what the final impact is going to be and put some brackets around it so.

We'll be working on it true this quarter will of better visibility of where we're at as we go to Q4, and we are talking about or twenty-two outlook.

But.

But you know it's it's.

It's going to it's more than of an issue that will take a quarter to resolve.

But.

I'm fairly confident that overtime.

We will be able to work the so with the customer base, where we have the most significant problems with.

Great and then does it for the follow up I I know that once your transaction on the Chinese side closer to the pro forma leverage is going to be.

Far below the tip of I think the 1 and a half the 2 ex range choose typically flagged.

What would be the timing on potentially pursuing other capital allocation options. Once you get below that target leverage or could there be a period, where you're a bit more conservative on the capital allocation side, given you know some of the supply chain issues that were saying.

Yeah, Great question I think as we finished this year and will come to you guys with their guard for the expectations for 2022, and we will give you a better definition around.

Where we see things, but the.

To your point, the more volatile of the market.

The more you know.

Guess on certain things are the more we'd.

We'd probably delay of little bit or under those situations I can see is delaying a little bit but now at the same time, we do think the.

The the big element here and what we've earmarked a lot of that cash for us to leverage that is our primary.

Path forward here, but you're right I think we have a real good path to get under those metrics that we've outlined in the past and will start to outline what the intentions are in capital allocation here, we don't expect to the disruption in the market to continue indefinitely for sure.

Great. Thank you.

Thanks, Dan Great. Thank you and it looks like we're at the bottom of the hour. So again, if there's anybody that has additional questions. Please feel free to reach out to me I'll be available for the phone call. Operator. Thank you very much. This concludes the conference call for today.

Thanks, everyone.

Thank you for participating in today's conference. This concludes today's conference and you may disconnect at this time.