Q4 2021 Adient PLC Earnings Call

Welcome and thank you for standing by at this time, all participants are in listen only mode until the question and answer session of today's conference at that time, you May Press Star one on your phone to ask a question I would like to inform all parties that today's conference is being recorded if you have any objections you may disconnect. At this time I would now like to.

Turn the conference over to your host Mark Oswald. Thank you you may begin.

Thank you Danielle good morning, and thank you for joining us as we review <unk> results for the fourth 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, <unk>, President and Chief Executive Officer, and Jeff is to file our executive Vice President and Chief Financial Officer also joining the call today is Jerome doorway executive Vice President of the Americas.

On today's call Doug will provide an update on the business followed by Jeff who will review, our fourth quarter financial results and outlook for fiscal 2022.

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 the presentation for our complete Safe Harbor statement.

In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance reconciliations for these non-GAAP measures is the closest GAAP equivalent can be found in the appendix of our earnings release.

This concludes my comments I'll now turn the call over to Doug Doug.

Thanks, Mark good morning, and thank you to our investors prospective investors and analysts joining the call. This morning.

As we review our fourth quarter results for fiscal 2021 and expectations for fiscal 2022.

Turning to slide four let me begin with a few comments related to our fourth quarter and 2021 fiscal year.

Essentially the fiscal year can be best described as a year of two halves in the first half of the year, adding it delivered significant year over year earnings and margin improvement driven by the company's focus on launch cost operational improvements and customer profitability management.

Exiting our second quarter significant macro pressures, including numerous unplanned production stoppages at our customers.

Primarily related to petrochemical and semiconductor supply chain disruptions.

And rising commodity prices began to impact the industry and adient.

These headwinds persisted throughout the second half of our fiscal year.

Despite the many challenges the adient team remains focused on successfully executing items within our control.

A few notable examples include the closing.

For our China strategic transactions and the significant progress made throughout the year and deleveraging our balance sheet.

That said the accomplishments achieved in fiscal 'twenty, one where heart, but given the very tough operating environment.

On the right hand side of the slide you can see that the tough operating environment had a significant impact on our Q4 results.

<unk> revenue for the quarter was $2 8 billion down from $3 6 billion reported in Q4 fiscal year 'twenty.

The decrease was driven by the significant reduction in vehicle production year over year combined with adient customer.

<unk>, particularly in Europe.

The lower revenue combined with premiums and temporary operating inefficiencies resulted from unplanned production stoppages dropped right to our earnings with adjusted EBITDA declining $169 million year over year to $118 million in Q4 fiscal year 'twenty one.

Cash was a bright spot one 5 billion as of September 30 at the cash balance includes $695 million of proceeds related to the first tranche of proceeds collected from the China transactions.

Jeff will provide additional commentary on Adience financial results, including our cash and capital structure in just a few minutes.

Turning to slide five let me spend a few minutes discussing the current operating environment.

The factors shown on the slide are significantly dominating and influencing the business near term as evidenced by our Q4 and second half fiscal 'twenty one results.

On the left hand side of this slide we've listed several of the headwinds we're facing no.

Surprises here as many of these macro headwinds surfaced at the end of our second quarter, including <unk>.

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

As seen with our Q3 and Q4 results. These unplanned production stoppages are leading to premiums and operating inefficiencies across our network, which as you would expect we're working hard to mitigate.

For fiscal 2021, we estimate supply chain disruptions and the resulting loss production operating inefficiencies premium freight et cetera had a net impact on the top line of about $1 9 billion.

And adjusted EBITDA by approximately $450 million.

Unfortunately, the supply chain disruptions have not lessen as we've entered our new fiscal year.

As shown in the middle column, the visibility of our customers production schedules is not improved over the course of the past few months.

Discussions and commentary from our customers suggest supply chip and production schedules could improve in the coming months.

Unfortunately, there is no evidence of this happening.

At this time.

As such we're continuing to run the business with the assumption that the challenging operating environment will continue.

Jeff will discuss our overall fiscal year 'twenty two planning assumptions in his prepared remarks.

These include our assumption that global vehicle production remains relatively flat year over year up modestly Lee and some regions down in others.

As such it's likely unplanned production stoppages will continue leading to premiums and operating inefficiencies like those experienced in the second half of 2021.

In addition to supply chain disruptions and unplanned production stoppages elevated input costs, such as commodity prices freight and energy costs continued to place downward pressure.

On the near term results as noted on the slide steel prices in the Americas continued to be approximately three times higher than.

Then at the start of the year.

As mentioned on our Q3 call.

Although adient has certain mechanisms and pass through agreements in place with our customers. They were never intended to cover the movements of this magnitude or duration.

For 2021, we estimate the net impact was roughly $70 million.

Generally consistent with our earlier expectations.

If we set aside the macro pressures and look at our core business performance as highlighted on the far right hand side of the slide.

We're continuing to see an upward trajectory.

A few points worth, noting and stabilizing the operations in fiscal year 19.

We achieved approximately 500 basis points increase in the company's adjusted EBITDA margin.

Fortunately, we have about 400 points of headwinds masking the performance roughly speaking 250 basis points from volume 40 basis points from net commodities had a 100 basis points associated with temporary operating inefficiencies.

Team is very much focused on driving down SG&A costs executing both temporary and permanent actions.

And our operating cost structure engineering design efficiencies and cost reduction implementations are all performing well.

But it's really emerged over the past several quarters driven by inflationary pressures our commercial issues that we're working to address.

As mentioned the macro pressures impacting the business in adient.

Believed to be transitory in nature based on this belief adient is executed numerous actions to lessen the impact in the middle of the slide you can see examples which include commercial negotiations with our customers to claw back the increased commodity prices over and above the contractual agreements in place.

If you recall during our Q2 Q3 earnings call, we mentioned potential risk fiscal year 'twenty, two about $200 million.

Through the recent negotiations, we were able to reduce that exposure to roughly $125 million.

From an SG&A perspective, we've executed targeted reductions in our workforce.

<unk> implemented a salary reduction and stock replacement program at our executive level.

And made other temporary benefit actions such as delaying merit increases and the 401K match in the U S.

To help lessen the impact of rising freight costs. The team is implementing changes to our pack density and optimizing our freight footprint.

Based on open capacity.

We've also experienced an acceleration in VIP efforts with our customers.

Again. These are a few examples to illustrate adient is not standing still.

Important to remember from a historical view.

Our business has had little inflation customers have effectively priced on a value add.

That said the level of cost increases from multiple angles that where you are experiencing today is unprecedented and require either quick market correction or a change in customer pricing.

If it's determined that the inflationary pressures are sticky.

Not transitory in nature alternative customer commercial solutions need to be negotiated.

Switching gears and focusing on those actions within our control let me provide a few comments on how the team continues to drive the business forward.

First on slide seven.

You can see that we're executing shooting day in and day out it starts with the back to basics mindset, improving every aspect of the business as mentioned just a few minutes ago. The core business has seen significant improvement since 2019.

Stripping out the temporary operating inefficiencies the business is running well on many fronts such as launch execution lower ops waste increased utilization and reuse of capital to name a few.

Eddie into Q1, and Q2 results this past year highlighted this improvement.

We're also working hard to ensure the long term outlook is bright by securing new and incumbent profitable business wins.

We've done this at a very steady pace and as we've mentioned.

On our calls throughout the year. This includes a very healthy portion of BB wins.

Which will continue to strengthen our leading market position as.

As noted on the slide over 20% of the wins in fiscal year 'twenty, one relate to EV platforms.

Program wins are a testament to the much improved relationship with our customers that we've nurtured over the past two to three years aided by the company's Es three initiatives.

Ability to provide award winning seat solutions.

Including innovated innovative solutions for EV platforms, Adient is quickly becoming the supplier of choice.

In addition to blocking and tackling operationally and commercially adient recognizes the company's full potential cannot be achieved unless we commit to positive environmental social and governance related business practices.

During fiscal year 'twenty, one the company increased its commitment to ESG efforts with the adoption of science based targets and Kpis.

Details to be provided in the 2021 sustainability report due in January of 2022.

Outside of the day today and turning to slide eight we've made great progress in fiscal year 'twenty, one with regard to long term strategic actions.

September 30th we announced the closing of our strategic transformation in China the.

The completed transaction enabled 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 Companys China operations.

And allowing for more certain value realization relative to the status quo would.

Where cash and value are generated from dividends had entities not in Adience control.

We expect to remain a leader in the China market.

Essentially a position on power with and among the top three complete seat suppliers in the market.

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

At closing Adient received its first tranche of proceeds totaling $695 million.

Not only do they does the completed transactions in China allow us to chart, our future in the country independently.

But they also enabled the company to accelerate its balance sheet transformation, which we view as another key accomplishment in 2021.

During the 2021 fiscal year, the company executed approximately $840 million and voluntary debt pay down with the proceeds from the China and the bank. We will further progress on deleveraging in fiscal 2022.

Adient will continue to prioritize its capital allocations toward debt paydown in the till the company reaches its targeted leverage threshold of one five times at two times net debt to EBITDA.

Bottom line, we're executing and delivering on items within our control.

Turning to slides nine and 10, let me make a few comments related to our business wins and launch performance to ensure enough time is allocated to Jeff and our expectations related to fiscal year 2022.

I'll be brief with regard to the slides.

As you can see slide nine is our typical new business wins slide highlighted.

Few of Adience recent wins bottom line for the quarter just completed similar to what we've disclosed throughout the year. The company has had good success in capturing new conquest, an incumbent business.

The win rates for fiscal 2021 were strong and in line with internal expectations.

I already mentioned EV wins accounted for approximately 20% of our business booked in 'twenty one.

Good outcome as growth in this area will continue to strengthen our leading position.

I'd also point out we're pleased with our seating solutions are delivering world class products to our customers as evidenced by a number of recent J D Power awards for adient seat and the ramp at 150 and Mustang Mach E.

Flipping to slide 10.

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

The company continues to focus on process discipline discipline it rounds launch readiness.

And has driven a high level of performance, especially considering the launch load and complexity of launches.

That were planned for the year.

In addition to the number of launches in complexity the disruptions to production schedules presented another layer of challenges. The team successfully managed through again, a testament to the discipline, we've instilled around the process.

As you can see at the bottom of slide.

We provided some color on what you can expect from fiscal 2022 with respect to the volume and complexity of launches.

Generally speaking volume itself.

Primarily driven by launches that were delayed from 'twenty one to 'twenty two the.

Complexity is mix up slightly in the Americas and in China relatively flat in Europe, and Asia, Excluding China.

I'm confident we'll maintain our focus on process discipline and brown launch readiness driving results similar or better versus 2021.

Before turning the call over to Jeff and turning to Slide 11, Let me conclude with a few summary comments as discussed and highlighted with this presentation adient is executing many actions to provide the company for sustained long term success.

Advancing our back to basic strategy continues.

To be a key enabler going forward.

We'll continue to drive the business forward. Despite the near term macro headwinds no doubt the operating environment in 2022 will be difficult given the persistent challenges impacting the industry.

That said, we'll continue to manage through the difficulties executing actions along the way to lessen their impact.

The underlying fundamentals of the industry remains strong once the near term temporary headwinds abate adient will be well positioned to capitalize on the recovery.

With that I'll turn the call over to Jeff to take us through Adient fourth quarter 'twenty, one financial performance and provide additional detail on what to expect in the coming year.

Great. Thanks, Doug Good morning, everyone.

Let's jump into Adience Q4 financial results on slide 13, adhering to our typical format. The pages formatted with our reported results in 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 underlying performance for the quarter. The biggest drivers of the difference between our reported and our adjusted results relate to a gain on the sale of our unconsolidated partially owned affiliate why Fas and an associated derivative loss and the forward contract used to lock in the exchange rate on the transaction proceeds.

Other adjustments related to pension mark to market.

Adjustments purchase accounting amortization.

Restructuring and transaction cost details of all the adjustments for the quarter and the full year are in the appendix of the presentation high level for the quarter sales were $2 $8 billion down about 23% compared to our fourth quarter results last year. The most recent quarter was specifically impacted by loss.

Production, primarily driven by supply chain disruptions related to semiconductors.

Adjusted EBITDA for the quarter was $118 million.

Down $169 million in a year on year on year, a decrease in volume and mix numerous temporary operating inefficiencies driven from the challenging challenging operating environment drove the decrease I'll expand on these key drivers in just a minute.

Finally at the bottom line Adient reported an adjusted net loss of $23 million or a loss of 24 cents per share.

The gap.

Net income was $950 million driven by the completion of the China transaction.

Slide 14 provides a similar high level summary of audience full year key financial metrics as Doug mentioned earlier, the full year results can be best summarized as a tale of two halves strong first half performance with significant year over year earnings and margin improvement Adient second second half results.

Significantly were significantly impacted by the overall macro environment customer production disruptions and rising commodity prices for the year sales were $13 7 billion up 8% compared to last year, adjusted EBITDA was $917 million up $244 million.

With the Covid impacted results in fiscal 2020.

You can see we noted the EBITA margin, excluding equity income commodity headwinds and temporary operating inefficiencies would have been greater than 6%, even with an abnormally low sales level.

We see this as clear evidence that the company continues to execute well on items within its control.

And at the bottom line net income of $199 million compared to a net loss of $4 million in 2020.

Within the outlook section of this presentation, we have provided a full year revenue and adjusted EBITDA walk from the reported results to our pro forma 2021 view the pro forma view of essentially accounts for all of the portfolio adjustments made throughout the year and should help with the walk to our 2022 expectations.

More on this in a minute.

Now, let's break down our fourth quarter results in more detail.

I'll cover the next few slides rather quickly as detail for the results are included on the slides and this should ensure we have an adequate amount of time set aside to review audience expectations for 2022.

Starting with revenue on Slide 15, we reported consolidated sales of $2 $8 billion, a decrease of $826 million compared to the same period a year ago. The.

The primary driver of the year over year decrease was due to lower volume call. It just over $800 million portfolio adjustments impacted the quarter by about $35 million.

These negative headwinds were partially offset by approximately $17 million due to FX movements.

Focus on focusing on the table on the right hand side of the slide you can see our consolidated sales generally kept pace with production in both Americas and EMEA.

And Asia, Adient experienced outperformance versus the market driven by our customer and content mix, specifically in Japan and Thailand.

In China, the underperformance was driven primarily by certain of our customers such as Daimler that were more heavily impacted by semiconductor shortages of course, we view this as a temp is temporary and should reverse supply chain stabilizes.

With regard to audience unconsolidated seating revenue year over year results were down about 10% adjusting for FX and executed portfolio changes the performance was better than the market in China, primarily different by positive mix at Wi Fi us.

Moving to slide 16, 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 and legal.

Big picture adjusted EBITDA was $118 million in the current quarter versus $287 million last year. The primary drivers of the decrease are detailed on page simply put the quarter was down over 20% in volume, but the impact was exacerbated by numerous abrupt and last minute adjustment.

That's to production schedules at our customers, which continued to drive inefficiencies in our operations. In addition, similar to our third quarter elevated commodity prices also pressured earnings.

The significant headwinds were partially offset by improved core business performance, such as lower launch cost ops waste and improved net material margin.

SG&A was favorable year over year by $41 million, primarily driven by adjustments to performance based compensation and the net impact of accrual true ups in summary, SG&A for the year is representative of our spend but our Q4 level is lower than we'd expect on an ongoing basis.

I do not plan to go into a detailed discussion of this page we've outlined the movements year over year in detail for your information.

Important to note, although the macro pressures, which are largely out of audience control significantly impacted our Q4 and second half results. The team is not sitting idle, we're continuing to execute actions to improve our business performance and reduced or reduce our cost base.

Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the prices station.

High level for Americas and EMEA.

Improved ongoing business performance and lower SG&A cost were more than offset by the impact of lower volume the negative impact of temporary operating inefficiencies and elevated commodity cost in Asia, the benefits of slightly higher volumes, lower SG&A and improved business performance modestly outweighed the negative.

Pact of temporary operating inefficiencies and the negative impact of portfolio adjustments.

Let me now shift to our cash liquidity and capital structure on slide 17 and 18.

Starting with cash on slide 17, I will focus on full year results.

As the longer time frame helps smooth some of the volatility in working capital movements adjusted free cash flow defined as operating cash flow less capex was breakeven for the year. This compares to a cash outflow of about $80 million in 2020.

The year on year improvement was partially driven by higher earnings increased dividends from our China operations underpinned by the agreements related to our strategic transformation and lower capital expenditures. These benefits were offset were partially offset by an increase in restructuring nearly $300 million increase in inventory.

Balances and an increase in VA T payments and finally, the timing of commercial settlement activities. The V. A T payments as mentioned throughout 2021 are larger than normal in 'twenty, one and relate to government approved delays out of 2020 due to COVID-19 accommodations.

Just a few comments related specifically to 2021 restructuring was elevated at approximately $150 million, we'd expect that trend to trend back to a closer to $100 million of perhaps inside of that in the coming years.

Inventory trended higher as we secured commodities and other components to prevent disruptions to our customers bought extra supply due to pending increases in commodity prices and overall experienced higher commodity prices than a year ago and.

And finally capital expenditures were lower than expected as customer launches were pushed from fiscal 'twenty, one to 'twenty two and the team continues to find ways to increase our capital utilization.

Flipping to slide 18.

As noted on the right hand side of the slide we ended the quarter with about $2 $8 billion of total liquidity comprised of cash on hand of about $1 5 billion and approximately $740 million of undrawn capacity under Adience revolving line of credit.

Also noted the September 30th cash balance includes approximately $695 million in proceeds from the China transaction final after tax proceeds of about 100 or 625 million are expected prior to calendar year end.

Adient debt and net debt position totaled $3 7 billion and $2 2 billion, respectively. At September 30th as Doug mentioned earlier significant progress was made throughout the year transformed the company's capital structure.

Since September 2020, we repaid approximately $100 million of the four and seven eighths unsecured notes.

<unk> fully repaid the 800 million, 7% first lien notes and repaid approximately $40 million of our EIB loan and in Additionally. In addition, we opportunistically amended and extended our term loan.

Given our cash balance and the additional proceeds from the China transaction that our expected prior to year end, we expect to continue our deleveraging efforts as we progress through fiscal 2022.

Clear the transformation of <unk> balance sheet is solidly on track.

With that let's flip to slide 'twenty through 'twenty, three and review our outlook for fiscal 'twenty two.

To begin with the persistent macro headwinds primarily supply chain disruptions and inflationary pressures on such things as commodities freight energy et cetera are expected to have a significant impact on the industry and adient in fiscal 'twenty two.

On the right hand side of slide 20, we've laid out our planning assumptions for production and FX compared with fiscal 'twenty one found.

The foundation of our fiscal 'twenty. One plan is generally aligned with the October IHS estimates with limited overlays for known customer release schedules. As you know the current operating environment is very fluid visibility into the production is cloudy at best supply chain disruptions and resulting production stoppages.

Could result in significantly different outcomes to emphasize the point many of our customers continued to project volume foreign excess of IHS volumes that we're using.

Thus requiring us to staff our operations with four head count than what is implied by our projections. This creates a higher than normal decremental margin impact.

If the if the IHS volumes turned out to be correct.

As Doug mentioned earlier, our current expectations assumed global vehicle productions will be about flat for audience fiscal year up in Americas, and EMEA and down in Asia.

Yes.

The production forecast is expected to result in a mix headwind in fiscal 'twenty, two given that our higher margin business in Asia is down are projected to be down.

I'd also point out that in Europe. Despite overall production trending higher adient sales are forecast to be modestly lower as we expect the impact of the microchip shortage to disproportionately impact our business similar to what we experienced in 2021.

Now I'll review, our us how these assumptions impact our 'twenty two outlook beginning with sales on slide 21.

At the top of the slide we have included a bridge that walks our fiscal 2021 sales of $13 7 billion to our pro forma 2021 sales of $14 3 billion. The pro forma sales reflect the impact of portfolio adjustments executed throughout the year.

Over the last two years, we've done a fair amount of portfolio rearrangement as part of our back to basic strategy.

Some of the changes were quite big while others were relatively small in addition, some of the moves are very recent so we pulled together a pro forma view of 2021 to help you understand the total impact.

As you can see the China strategic transaction adds roughly $870 million to our consolidated sales.

All divestitures in China of a leftover piece of our fabrics business and some entities obtained through the future its acquisition reduced pro forma sales by approximately $120 million note that these small divestitures represented businesses, where we had not won nor did we expect to win replacement business and thus.

It's fairly immaterial proceeds we recently sold our interest in our metals operation in Turkey to an unconsolidated JV. We have in the same country. This will impact our consolidated sales by about $100 million.

Other minor footprint actions across EMEA, and Americas total about $50 million and primarily related to small plant closures for business that was running off.

Bottom line, if these transactions that happened at the beginning of fiscal 'twenty, one adience consolidated sales would've been up about $14 $3 billion versus $13 7 billion reported.

Now walking the $14 $3 billion to our forecast for fiscal 'twenty to.

Volume net new business, the impact of commercial and commodity recoveries and FX are expected to provide tailwind, but partially offsetting the positive influences our customer pricing headwinds.

And based on the current environment and the positive and negative influences were forecasting fiscal 'twenty two consolidated sales of about $14 8 billion.

Turning to slide 22, we've also included a high level bridge illustrating our expectations for adjusted EBITDA.

Similar to sales we've provided a pro forma walk at the top.

Key drivers include the impact of the trying to China's strategic transaction, which benefits consolidated EBITDA by about $90 million and reduces equity income by roughly $155 million. This impact to equity income slightly higher versus our original estimate due to better than expected performance at <unk>.

Fas in the fourth quarter.

The other China transactions, namely the leftover piece of our fabrics business. The amenities obtained through the <unk> acquisition and the impact of adient selling its 50% equity interest and it's S. J, a joint venture, which was announced concurrently with the China strategic transaction will impact EBITDA in total by about <unk>.

<unk> million dollars.

The EMEA.

<unk> deconsolidation will decrease consolidated EBITDA by $20 million, partially offset by an increase in equity income of about $5 million.

Proceeds related to this transaction will total about $50 million $40 million of which was collected on October 1st.

$50 million in total proceeds reflect the unique challenges to this operation relating to winning in launching the replacement business in Turkey.

Footprint actions in EMEA and Americas, primarily represents several small operations that were closed due to expiring contracts for example, the Tesla Tesla business in California that we have discussed in the past.

With all the puts and takes Adience fiscal 'twenty, one adjusted EBITDA would have been roughly $810 million adjusting for the portfolio changes versus the $917 million reported.

By quarter, the $810 million would be calendar is as follows approximately $320 million in Q1 $290 million in Q2 $125 million in Q3 and $75 million in Q4.

Now walking the $810 billion to our forecast for fiscal 'twenty two.

Starting with the positives.

Volume alone, although muted given the production expectations in Asia is expected to have a year over year benefit temporary.

Compensation actions, such as suspending the company's 401k match in the U S. R E band salary reduction and RSC replacement program and other similar actions.

Similarly, our back to basics strategy is expected to drive further operational and cost improvements and finally commercial profitability actions and the impact of FX will provide much needed tailwind.

Unfortunately, offsetting these benefits are several headwinds such as significantly elevated commodity cost net of recoveries, which are forecast to be approximately $125 million hit year on year.

We assume commodity prices will remain at their current levels, if prices drop and depending when the drop occurs this could translate into up upside within our forecast. This compares favorably to the previous estimate of $200 million impact we discussed on our last call as our team has developed mitigation strategies to offset some.

The impact.

In addition, higher freight and energy costs are expected to pressure earnings while we were actively pursuing and implementing mitigation plans. We've seen cost for freight lanes increased seven 7% to 10 times over the last year mix will contribute to the downward pressure as higher margin regions, such as China and south.

East Asia are expected to experience lower volumes.

Lower equity income compared to our pro forma adjusted results driven by outperformance in fiscal 'twenty, one and the impact of net commodity cost at our unconsolidated joint ventures.

Engineering and launch costs are forecast to be higher in fiscal 'twenty two versus 21 certain of this increase is attributed to various programs being pushed from 'twenty one into 'twenty two as fiscal 'twenty, one experienced an unusually low level of spend.

Finally, certain of the benefits recognized in fiscal 'twenty, one are not expected to repeat in 2022. One. Such example is the roughly $30 million of commercial settlements, we called out in Q1 fiscal 'twenty, one we considered onetime in nature.

Bottom line when sifting through the puts and takes at this moment, we expect the headwinds to modestly outweigh the tailwind for.

For 2022 to be somewhere less and for 2022 to be somewhere less than our pro forma 2021 results.

Given the volatility around inflation inputs the challenges around securing labor, especially given the uncertainties around the impact the vaccine mandate will have and other challenges we've discussed providing more specific guidance on full year fiscal 'twenty to adjusted EBITDA with reasonable certainty is not possible.

At this time that said, we will continue to provide regular updates to the market as clarity hopefully returns.

It's also reasonable to apply the same impact to fiscal 2022 is summarized on slide five of this presentation.

The shortfall in our expected revenues due to supply constraints appears approximately consistent year over year as do our inefficiencies. Meanwhile, the commodity headwinds have increased a further $125 million.

One final point on our fiscal 'twenty, two EBITDA forecast, we would expect our first quarter results to be the low watermark for the year. In fact Q1 EBITDA is currently expected to settle at or modestly higher versus the quarter just completed after adjusting for our footprint changes.

Two key reasons first we will experience a step up in our negotiated steel prices, which took effect October one.

Second we benefited from several true ups as mentioned earlier to our year end accruals in fiscal 'twenty one's fourth quarter, such as our incentive compensation and medical accruals effect effectively meeting that we had over accrued in earlier quarters and true them up to actual results in Q4.

We largely expect these factors to offset the benefit of slightly higher revenues in our first quarter.

Now that we've covered our fiscal 'twenty two expectations for sales and adjusted EBITDA. Let me quickly comment on expectations for a few key financial metrics on slide 23, starting with equity income.

Based on our assumptions of production in China, the portfolio actions implemented in fiscal 'twenty, one and FX rates, we would expect equity income to land around $80 million to $90 million interest expense of about $150 million includes an assumption of a further $1 billion principal debt.

Prepayments in 2022.

Cash taxes in fiscal 'twenty, two are expected to be around $80 million, our book cash taxes.

Are expected to be slightly higher call. It about 100 million at this time.

During fiscal 'twenty, two we might see our adjusted effective tax rate higher than normal and fluctuations amongst quarters.

Due to valuation allowances and our geographic mix of income that said, it's important to remember that we maintain valuable tax attributes such as net operating loss carryforwards and that these tax attributes can be used to offset profits on an on on a going forward basis. So cash taxes on <unk> operations should remain relatively.

<unk> low even as profit increase profits increase.

Capital expenditures are forecast to be about $300 million to $325 million just a few comments regarding the forecast as it is elevated versus the 2021 spend first the majority of spend supports customer launch plans and the timing of those launches.

Fiscal 2021 spend was unusually low under 2% of sales as certain launches were pushed into fiscal 2022.

A slight uptick year over year is driven by the consolidation of CQ AT&T and the long Fong entities as part of the trade in China transaction call it around $15 million or so.

As you can see at the bottom of the slide given the backdrop of the current operating environment, providing specific full year estimates for adjusted EBITDA equity income.

And free cash flow with reasonable certainty is not possible at this time with that let's move on to the question and answer portion of the call.

Operator first question please.

Thank you as we move to the question and answer session, if you'd like to ask a question over the phone. Please dial star one on mute your phone and record your name and company name when prompted.

Just required that we can introduce to your question. If you need to cancel your question Ronny, leaving you can dial star to our first question today comes from Rod Lache. Your line is now open.

Good morning, everybody.

<unk>.

I'd like to just maybe hear a little bit more about how you would characterize the bridge from what you're suggesting you'll.

Youll experience in fiscal 'twenty, two to more trend like environment. So you're.

Youre talking about.

79 million units of global production, if normal is more like 90 million that that looks like it's 13% or so maybe a 1 billion 8 billion nine of revenue I'm thinking.

Maybe you can just comment on how that would convert and then.

In the second half of the year, you had a $118 million of inefficiency I can't remember what it was in the first half, but that in the $195 million of commodities that you're saying, you're you're absorbing in 'twenty, one and 2022.

Can you maybe just give us some color on how that those kinds of things might get recovered.

Yeah, Great question, Rod and it's as we look through.

When IHS cut back 2022 production and we started to see that the impact of that we were seeing in 2021 would carryover. We've spent a lot of time thinking through what 2023 and.

What the market will look like as we get to the other side of this but breaking that down and I did reference back to page five of the presentation at the end of my remarks, there a second ago.

The 2021 impact to revenue, we had estimated about $1 $9 billion, we have a pretty similar maybe even a tick higher.

What we think is come out of our 2020 to build our production given the macro issues that we're facing so call it about $2 billion in sales.

<unk>.

From a contribution or flow through on that you're talking 15 plus percent so call it 300 million ish.

Perhaps change and we also had similar to last year, we expect similar to 2021 to have a pretty.

Similar level of inefficiencies I mentioned, we're having to Overstaff a lot of our operations.

That production environment has been nothing short of a.

What I can say awful, but there's probably several other words to use to characterize it.

So all of those inefficiencies are effectively we think duplicating themselves in fiscal 'twenty. Two and then you mentioned the commodity headwind. So as you start to look forward, we do see a significantly higher volume picture, which should have great flow through impacts for us we'd see in an environment, where we weren't having that to not have those inefficiencies.

GNC is flowing through and.

The commodity situation, we do expect.

To continue to get better either through commercial negotiations or the time period of our lags in cost recovery mechanisms with our customers to catch it.

Okay.

So it sounds like you do believe that ultimately the full impact of these two years of commodities and in inefficiencies get recovered.

Wanted to clarify that because you you also mentioned.

Trade in energy and in a number of other things that are kind of.

Influencing the your views on the outlook.

Yeah, I would rather I would say from a commodity standpoint, they ultimately get recovered its a question of how long that takes right now.

Kind of using extraordinary measures from a commercial negotiation because the mechanisms we have in place fall short but overtime.

As commodities stabilize or go down those mechanisms will.

Ultimately address the issue we're trying to bridge that gap in the near near term.

<unk> energy and <unk>.

Ocean freight.

Are the most.

Emerging issues that are having an impact.

Ocean freight we think Theres a lot of self help we can put in place, but that takes a little bit of time.

As we look at alternative manufacturing locations.

And as we mentioned in the call. We can even change pack density some of that ultimately may result in a commercial negotiation because we don't.

Expect to bear that burden, if if ocean freight rates don't come back down.

As you know extraordinarily high right now.

Energy I think is really a new emerging issue that we have in Europe that.

Where we're getting our arms around and assessing what that full impact is going to be that's probably less of a commercial issue for us.

And.

Whether it.

Yeah.

Transitory or not is difficult to predict.

At this time, but it's a relatively smaller issue in comparison to the other two.

Our next question comes from John Murphy with Bank of America. Your line is now open.

Good morning, everyone. This is aileen Smith on for John.

I understand why it's tough to give our formal outlook on adjusted EBITDA and free cash flow into next year, but I wanted to ask a question around free cash flow and whether it's possible to provide maybe a directional read in the same way you gave for adjusted EBITDA or perhaps the way to think about free cash flow conversion from EBITDA into next year.

I'm, just trying to get a sense of whether on an operational basis. You think you could be free cash flow generative next year outside of some of the cash tailwind youll get for strategic actions.

Yes, so just on a free cash flow basis.

What I would expect is for a negative free cash flow in the first half of the year.

Primarily with the working capital movements of wood volume sinks pretty heavily for US you know you can go back to the COVID-19 timeframe. When we were shut down a year of them half ago or so.

And see what that did from a working capital standpoint, it was negative but it worked back through the system.

Our expectation right now is that while we would have a first half negative it would.

Hum.

Come back in.

<unk>.

Breakeven ish, maybe a little better maybe a little worse just depending on.

Where the overall environment since next year, but I would.

And a couple other I guess key points you mentioned in there we would expect restructuring to be down interest down interest expense to be down capex slightly up.

From an overall year standpoint about cash taxes are about neutral I think Europe.

Okay. That's helpful. A big volatility is just going to come from working capital.

Yes understood.

And then I wanted to follow up on one of the headwinds that was cited on the EBIT walk about the non repeat of various commercial settlements is that solely just the one time benefit from renegotiating contracts with your customers that obviously doesn't repeat or should we read into that as you're getting into the eighth or ninth inning of sorts on those discussions with your customers and the settlement should naturally.

[noise] abate going forward, but the offsetting factors that you've got more economic contracts in the business and in the consolidated numbers now just trying to make sure there isn't.

Anything nefarious to read into there with the commercial settlement.

I think the way you want to think about them is particularly in our business is when you have a tremendous amount of volatility.

Sure.

As we did in 19 and 20 because of Covid.

And.

Really extraordinary material economics.

We.

We sometimes settled those commercial negotiations and they're delayed and theres retro pieces and Thats why.

Sure.

They occur typically in in a quarter when we go through that reconciliation.

It will.

Will that repeat itself.

Based on what I, just said you could argue that it.

It might because when we have major disruptions in the flow of the business. It takes a while to resolve those issues and they usually get settled out of period.

That's how I'd think about it yes.

Just one other point to that specific point that I made in my comments.

We had called out at the end of first quarter last year.

About $30 million of settlements that were really out of period, where we had finally reached that settlement with the with the customer.

And we called that out a year ago. If you look back and said part of the reason I think we did something close to $380 million in the first quarter of last year, and we said about $30 million of it relates to some.

It really out of period items that while a lot of this stuff just it kind of mixes with the overall period year to year or quarter to quarter profitability that $30 million was somewhat unique and special for the year and didn't want you to have added into your pro forma numbers going forward.

Okay, Great. That's really helpful. Thanks for taking the question.

Our next question comes from Emmanuel Rosner. Your line is now open.

Oh, Thank you very much.

First question is.

Around your revenue expectation for fiscal 'twenty, two so I'm looking at.

Right.

And we show you sales forecasts.

This IHS would you be able to give us a sense of where you feel there is some.

While industry production could shake out better than IHS, and maybe a sense of your backlog.

How much net new business do you think is the benefit is embedded in your base case.

So relative to IHS.

Sure.

Like we said in our in our prepared comments the Crystal ball is pretty cloudy.

Just recently came out with the best case worst case scenario.

And if you factor in those numbers you can see that there is.

Would have a considerable.

Impact.

Right now it's.

Two things I'd point to one it's really unclear what our customers' capacity has to run.

Because they are still on allocation with semiconductors.

And their outlook is pretty near term.

What that.

<unk>.

Capacity looks like.

The.

The reason that is a problem for us because.

We run just in time plant so our customers have not pulled back on releases.

So they are releasing.

Is forcing us to as Jeff mentioned too.

Run at full rate and then we're getting very short notice on when.

They are not they had the ability to run at that rate. So.

When I think about revenue those are the really the factors.

Make it very difficult for us to predict so.

You can look at IHS best case worst case that might give you some insight.

But I don't think Theres really anyone out there right now that has great visibility.

On what the volume could be.

And how it.

Unfolds and if we continue to have this disruption that we've had in the second half of the year.

That's a very different outcome than just reduce volume.

Because of the way we have to run our jet plants.

No I absolutely agree with you I, just just trying to better understand what's embedded in your base case scenario for next year, because you do have.

Sort of like revenue directional outlook, so any way to tell us.

Within that.

How much net new business, you're expecting because obviously.

Two of the positive influences, our volume and net new business.

I'm just trying to understand in your base case, what is in there.

But we do have a bit more coming in than we have going out Emmanuel and that's referenced with the.

The market being relatively flat and we're coming in with will say 400 basis points.

Better.

Then the market and that's just driven by.

Good mix and some good.

Vehicles coming online versus those that are coming off so thats positive I will say, though just back to the question every one of our customers would like to produce more than they are right now and they're all telling us that are going to produce more than IHS is effectively saying so.

So where could we have benefits, it's going to really depend on the complexities of the supply chain to get there and.

And labor markets.

To be able to produce if you go into a dealer right now I was in one last weekend and there were zero new cars on the lot inside.

Bob.

There is a desire to make them, it's just going to be a question and it's and that becomes really difficult to predict because the complexity of the overall supply chain.

Is enormous.

Any particular part can shut the vehicle down so that's what we're managing right now, but I do think there is upside it's just very difficult to pinpoint where.

But it should be noted theres, probably some element of downside too if you Doug mentioned the IHS.

Domestic and optimistic cases, and Theres, a pretty wide range for 2022.

Okay.

Thank you. Our final question comes from Colin Langan with Wells Fargo. Your line is now open.

Oh, great. Thanks for taking my question.

Just to follow up on this.

A walk from 'twenty, one EBITDA to 22.

You called out some of the big buckets of commodity 125 commercial settlement of about $30 million.

But you also at the beginning of the presentation talk about $450 million of inefficiencies. So I guess you know one.

Is any saving is any of that sort of inefficiencies in the plan for sort of slightly down next year or is that all just assumed to be over a year out.

And of the other any framing of the other buckets of Mitch mix launch and engineering, how how big are those maybe I'm underestimating, how big those are in terms of headwinds.

Yeah, just on the topic of the premiums the $4 50, we called out on page five of the presentation.

It had.

It was a mix of the contribution loss on the loss of volume and the inefficiencies.

If he is the $2 billion roughly and you use 15% you can think roughly 300 division is lost contribution margin and 150 of it is the inefficiencies in premiums that we've incurred when we look at 2022. The makeup and constitution of those premiums are going to be different but they are pretty similar.

Year over year.

We don't have the Texas storm will hopefully we don't have the Texas storm in 2022.

We have a pretty similar.

We'll say semiconductor impact and we're also seeing higher freight and some of those pieces, which essentially.

Essentially give the total for the year pretty similar level.

Level as it relates to.

So some of the other pieces here I'd say those are.

That particular equation, we just talked about is whats dramatic.

Dramatically driving the numbers and makes the outcome of the overall EBITDA extremely volatile and difficult to forecast.

Definitely a little bit of engineering.

Call It 20 ish or so.

Maybe a little higher.

Additional engineering that we would expect the mix you can kind of calculate probably on your own just think of it.

Have several basis are several hundred basis points higher contribution margin and maybe Mike.

<unk>, 50% higher contribution.

Margin in Asia region than you do in the rest of the globe, So with China being down in the IHS numbers by 4%.

That definitely plays a bit of an impact on mix.

The only thing I would add to that is.

And the reason why we did.

Give specifics on each one of those buckets as.

Many of those issues are in negotiations with our customers and it takes time to sort those out and what the ultimate impact will be the net impact is still.

Unresolved right now so.

More to come on that.

And we'll continue to chip away and.

Look to mitigate some of those.

<unk>.

I guess my my second question just to be clear the commodity headwinds you got it down pretty impressive improvement from 200 to 125 is there any more opportunity than maybe you were just alluding to that and you also on one of the slides talked about alternative commercial solutions with customers is that.

Looking for concessions beyond the traditional commodities again is trying to get any more color, what you're referring to there yet so I would say theres more opportunity, whether it's going to come in our customers, making adjustments in the way they compensate us.

For commodities or I always go back to <unk>.

A basket of goods of commercial issues that we can.

Negotiate around it's.

The nature of of the business that we're in.

Slightly unique just because we have such a complex module.

That there's so many moving parts that are.

Impacting costs, both negative and positive.

We're working our way through that our customers have expectations for productivity next year that.

That we have to put on the table and negotiate against the backdrop of rising commodity costs. So all that's.

In discussion right now and it's just.

Too early to.

To really peg, though I would say to your point.

We are.

You know.

Pleased modestly pleased with the progress we've made to date.

Material economics.

But a lot of work ahead of us on that front.

Got it thanks very much I had it looks like we're at the bottom of the hour. So that will conclude the call for today as usual I'll be available throughout the day today Tomorrow for additional post earnings call, So feel free to call and be more than happy to address your questions at that point, but thank you. Thanks.

Thanks, everyone. Thank you.

That concludes today's conference. Thank you all for participating you may disconnect at this time.