Q1 2022 Adient PLC Earnings Call
Welcome and thank you for standing by for the <unk> first quarter fiscal 2022 conference call. At this time all participants are in a listen only mode.
After the presentation, we will conduct a question and answer session.
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Now I will turn the meeting over to your host Mark Oswald you may begin.
Thank you operator, good morning, and thank you for joining us as we review <unk> results for the first quarter fiscal year 2020 to the.
Our press release and presentation slides for our call today have been posted to the Investor section of our website at Adient dotcom.
This morning, I'm joined by Doug Del Grosso, Adient, President and Chief Executive Officer, Jeff <unk>, Our executive Vice President and Chief Financial Officer, and Jerome door lag Adient executive Vice President of the Americas.
Today's call Doug will provide an update on the business followed by Jeff who will review our Q1 results.
Look for the remainder of the year. After our prepared remarks, we will open the call to your questions before I turn the call over to Doug and Jeff and Jerome 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.
Yes.
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 statements.
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 to the closest GAAP equivalent can be found in the appendix of our full earnings release. This.
This concludes my comments I'll now turn the call over to Doug Doug.
Great. Thanks, Mark Good morning, Thank you to our investors prospective investors.
And analysts joining the call. This morning, as we review our first quarter results for fiscal 2022.
Turning to slide four let me begin with few comments related to the quarter as we anticipated heading into the quarter the ongoing supply chain disruptions related to semiconductors.
And the resulting customer production stoppages combined with elevated commodity prices continue to impact <unk> first quarter.
As the quarter progressed, it was encouraging to see signs of stabilization emerge for certain of these headwinds.
Specifically, the softening of steel prices in the less volatile to call us or our customer production schedules.
Like the Green shoots that began to appear in the overall narrative has not changed we continue to operate in a very challenging environment.
This is evident when looking at adient first quarter EBITDA results, which contains approximately $185 million of temporary operating efficiencies and commodity headwinds.
Adience key financial metrics for the quarter can be seen on the right hand side of the slide revenue for the quarter, which totaled $3 $5 billion was about $500 million compared to last year's first quarter adjusted for portfolio actions executed in 2021.
As a reminder, the supply chain disruptions that have resulted in significant downtime at our customers began in late Q2 of 2021 and did not impact last year's Q1 results.
Adjusted EBITDA for the quarter totaled $146 million.
And as pointed out on the slide included approximately $185 million in lost volume temporary operating inefficiencies in premiums again, primarily driven by chip shortages.
Unplanned production stoppages.
Eddie ends December 31 cash balance totaled just under $2 1 billion and included approximately 625 million in net proceeds collected as the pie.
It'll payment associated with adient strategic transaction in China, which closed at the end of our 2021 fiscal year.
Despite the continued difficult operating environment and it continues to execute actions within its control to position the company for sustained success.
These actions include but are not limited to the team's intense focus on launch execution cost operational improvement.
And customer profitability management.
Continued progress on transforming the company's balance sheet as called out on the slide Adience recently launched $800 million in debt tenders.
<unk> targeting any and all of the company's 9%.
U S. Dollar secured notes was $600 million outstanding and up to 177 million.
So about $200 million of our three 5% euro unsecured notes.
And finally, we recently issued our 2021 sustainability report highlighting adience increased commitment to operating the business in an environmentally friendly manner I'll cover this in greater detail in just a few minutes, but first.
And turning to slide five let me expand on what we're seeing with regard to the current operating environment.
In the middle of the slide we've highlighted several of the headwinds the industry and adient continue to face.
The list should look very familiar as many of these macro headwinds surfaced at the end of our second quarter last year and have continued into fiscal 2022. The most significant influences include.
Ongoing supply chain and semi conductor shortages, which continue to impact production at our customers.
Similar to the second half of 'twenty 'twenty. One these unplanned production stoppages are leading to premiums and operating inefficiencies across the network.
For Q1 fiscal 2022, we estimate the supply chain disruptions, resulting loss production operating inefficiencies premium freight et cetera had a net impact on the top line of $680 million and adjusted EBITDA by approximately $185 million.
The $185 million EBITDA headwinds for the most recent quarter is modestly better compared to what we saw in Q4 fiscal 'twenty one.
As mentioned earlier, we're cautiously optimistic that the supply chain disruptions related to the semiconductors are beginning to stabilize.
As the first quarter of 2022 progress customer call ups and short notice production stoppages lesson.
Okay.
That said by no means are we out of the woods the operating environment remains very challenging.
Especially considering the spike in Covid cases elevated freight costs and labor uncertainty.
Those specific headwinds have not improved.
For the full year, we continue to expect production stoppages, resulting from supply chain disruptions and temporary operating inefficiencies will look very similar to fiscal 2021.
Specifically impacting adding its top line by just under $2 billion and adjusted EBITDA by approximately $400 million.
With regard to the material economics.
<unk> dip in steel prices during Q1 suggested stabilization and hopefully further improvement maybe realize as 2022 progresses.
For the quarter Adient, net commodity headwinds totaled $3 million.
This result was better than expected aided by additional recoveries over and above our contractual agreements.
Also important to point out.
European operations had locked in pricing for 2021 calendar year.
As the negotiated contracts for 2020 to kick in during our fiscal second quarter, we're expecting to see more significant impact on Europe year results for that region.
Yeah.
Based on the recent steel price movements.
Coming pricing in Europe , combined with the contractual escalators and negotiated commercial terms.
<unk> contractual obligations.
We currently forecast of commodity headwinds of about $95 million versus the previous forecast of $125 million.
Although moving in the right direction. This remains a pretty stiff challenge for the year.
Taking a step back and looking at the overall operating environment. We're encouraged to see green shoots of stabilization for certain of the headwinds. However, the overall narrative has not materially changed and we're in the midst of a pretty tough operating landscape.
As mentioned on prior calls, we're not sitting back waiting for the tide to turn the team continues to implement actions designed to help mitigate the negative impact of the headwinds actions include but are not limited to focusing on operational excellence driving down SG&A costs.
<unk>, both temporary and permanent actions partnering with our customers to drive innovation and add value to your seat solutions that meet the needs today and tomorrow and continuing the transformation of the balance sheet.
Simply put we're executing actions within our control to position adient for long term success.
Speaking of success and looking to the future, let's turn to slide six we realize reaching the company's full potential cannot be achieved without firmly integrating sustainability into the core of adience operations to continue to evolve and become foremost sustainable automotive supplier.
Eddie its commitment to operating its business in an environmentally responsible manner was recently outlined in the publication of our 2021 sustainability report.
Our goal is not only to drive environmental change by lessening the impact of the business has on the planet, but also the focus on social and economic change that benefits everyone.
Adient will continue to meet collaborate with them.
Despite with organizations around the globe concerning our responsibility and commitment to these efforts.
In 2021 commitments include but are not limited to.
The United Nations Global compact Adient has reaffirmed its corporate responsibility to place human rights labor and the environment and in a construction considerations at the top of our business mindset.
The science based target initiative, where adient has committed to setting ambitious emission reduction targets to help limit global warming to one five degrees Celsius.
The carbon disclosure project, where adient reports, the company's environmental performance to customers and shareholders.
We've included a link to the full report please take a few minutes to learn how adient is incorporating these policies into our day to day operations.
Turning to slide seven and eight now let's take a look at our business wins and launch performance as you can see slide seven is our typical new business slide highlighting a few of Adience recent wins.
The programs highlighted represent a good mix of the incumbent wins and new platform wins, especially in the EV space.
With regard to incumbent wins, we've highlighted the ramp 1500 complete seat business, which is the largest platform by revenue in fiscal 2021.
We're excited to continue our partnership with still Lantus in the coming years.
An example of all new wins include the all new future crossover EV at Ford.
Towards mentioning.
EV program wins are accelerating with the new entrant manufacturers and legacy Oems Adience reputation as a value added supplier that collaborates with this customers to drive innovation reduce costs and complexity and improve the overall performance for the end user experience continues to underpin our success with new business Awards.
<unk>.
Also of note is our recent business wins.
Include a good mix of jet foam trim and metals business.
As our new book of business continues to launch we expect the balance and balance our platforms to further enable margin expansion.
Flipping to slide eight as we typically do we've highlighted several critical launches.
That are complete in process, we're scheduled to begin in the near term.
I'm happy to report the launch is currently underway.
Then progressing smoothly.
The launches and platform shows not only impact Adience just in time facilities, but also span across our network of phone trim and metals facilities.
The team continues to focus on process discipline around launch readiness.
Has driven a very high level of performance.
Especially considering the launch load and complexity of launches that are planned for the year.
In addition to the number of launches and complexity.
The disruption of production schedules continue to present another layer of challenges to the team successful Lee managing through.
In a testament.
Two the discipline, we've instilled a route in the process.
We have no intention of letting up.
Before turning the call over to Jeff and turning to slide nine let me conclude with a few summary comments has mentioned earlier in my prepared remarks, and as you know the macro environment remains very challenging for the industry and adient.
That said when stepping back and looking to the future we continue to be optimistic.
Reasons for that optimism include first the underlying fundamentals of the industry remained solid consumer demand is very strong. In fact this is the only time in my career I can recall the industry being impacted by supply constraints versus demand.
Inventories.
Or at historic lows, a good setup for production in the coming years.
The mix of vehicles being produced remains robust and finally, there are a lot of new and innovative products being launched over the next several years.
Second in addition to the underlying fundamentals of the industry Adient continues to move forward executing actions, we believe will position us take full advantage of the industry recovery.
Our back to basics mindset is fully integrated.
In the business, which enables us to be laser focused on operational excellence.
Our new business wins continue at a very high level focusing on profitable growth has.
It has not impeded our ability to secure future business.
As this business launches.
It will continue.
<unk> to improve earnings and cash flow and finally, the transformation of adient balance sheet remained solidly on track.
As the industry recovers in earnings and cash flow improved.
That the transformed balance sheet should enable enhancements to our capital allocation strategy.
Bottom line, we see significant opportunities for value creation for our shareholders in the coming years.
With that I'll turn the call over to Jeff, let us take us through <unk> first quarter 2022 financial performance and provide additional detail on.
On what to expect as we move through 2022.
Great. Thanks, Doug and good morning, everyone, let's jump into audience Q1 results starting on page 11.
Adhering to our typical format the pages formatted with our reported results in the left and our adjusted results on the right side, 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 adjusted results relate to purchase accounting amortization restructuring and a derivative loss and neon Fang strategic transaction details of all the adjustments for the quarter and the full year are in the appendix of the presentation I'd also point out.
But within the appendix we have included pro forma results for each of the quarters in fiscal 'twenty, one adjusting for the numerous portfolio actions executed last year. These pro forma figures attempt to show 2021 on a consistent basis, where footprint with this year.
We believe these serve as a helpful tool to compare our year over year results.
High level for the quarter sales.
Sales were $3 5 billion down about 10% compared to our first quarter results last year or down about 12% compared to last year's pro forma results.
To the past few quarters. The most recent quarter was significantly impacted by lost production primarily related to supply chain disruptions related to semiconductors adjusted.
Adjusted EBITDA for the quarter was $146 million down $232 million year on year as reported or down $179 million compared to last year's pro forma results. The decrease is attributed to the significant reduction in volume and mix and numerous temporary operating inefficiencies.
Given from the challenging operating environment I'll expand on these key drivers in just a minute.
Finally on the bottom line.
Adient reported an adjusted net loss of $36 million or a loss of 38 cents per share now.
Now, let's break down our first quarter results in more detail I'll cover. The next few slides rather quickly as additional details contained in the slides there should ensure we have adequate amount of time set aside for the Q&A portion.
Starting with revenue on Slide 12, we reported consolidated sales of $3 $5 billion. The sales shown include the sales at Adience recently acquired CQ in our businesses, which are now consolidated since closing the strategic transformation in China as well as other portfolio actions executed in fiscal <unk>.
One the $3 5 billion is a decrease of $495 million compared with Q1 2021 pro forma results. The primary driver of the year over year decrease was lower volume call. It approximately $485 million related to the volume and lower commercial.
Recoveries, partially offset by roughly $65 million in commodity recoveries.
The negative impact of FX movements between the two periods impacted the quarter by just over $70 million.
Focusing on the table on the right hand side of the slide you can see our consolidated sales outperformed production in each of the major regions important to note and as highlighted on the slide the quarterly year over year performance was adjusted to account for the portfolio actions implemented in fiscal 'twenty one.
Adience growth over market in each of the regions can be attributed to the company's customer mix in China strong production at Neo and she Peng underpinned Adience performance in Asia, specifically in Korea, and Japan, Adience customer platforms were less impacted by supply chain disruptions compared with the overall market.
And in Europe favorable mix and commercial actions drove the outperformance versus the market.
With regard to adient unconsolidated seating revenue year over year results were up about 4% when adjusting for FX and portfolio actions executed in fiscal 'twenty one.
Adient sales growth over market growth was largely driven by outperformance in China, specifically at audience paper, JV, which benefited from very strong Tesla sales during the quarter.
Moving to slide 13, we 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 $146 million in the current quarter versus $378 million reported a year ago or $325 million pro forma adjusted for the portfolio actually actions executed last year I'll focus.
My commentary on the drivers between this year's results.
And the pro forma adjusted results as we believe that provides a more meaningful comparison to today's business.
The primary driver of the decrease are detailed on the page and are consistent with what we expected heading into the quarter lower volume and mix, primarily driven by supply chain disruptions that our customers impacted the year on year results by just over $100 million.
Adverse business performance driven by temporary operating inefficiencies, resulting from the unplanned production stoppages at our customers and customers not running at rate increased freight and lower year over year commercial settlements impacted the quarter by about $60 million.
Just a reminder, last year's first quarter commercial settlements were abnormally high in fact last year, we called out approximately $30 million of settlements that were not considered ongoing.
With regard to my comment about certain of our customers failing to run at rate this unfavorable trend, which surfaced at the start of the supply chain disruptions last year not only highlighted the difficulty in forecasting production. It also illustrates why we continue to experience inefficiencies in the operating system, such as excess labor at our facilities.
For example, our customers typically forecast their expected production volume three months out adient and turn is required to staff to those levels. Unfortunately, the production rates that are ultimately being achieved as on average 20% below those levels with certain platforms and customers.
Performing better while others are performing worse.
It's definitely a challenging environment for everyone to work through.
Otherwise headwinds included higher SG&A cost of about $9 million, primarily driven by adverse event advance in the most recent quarter such as the flood in Malaysia, and a limited number of legal settlements.
Equity income was lower by about $5 million underpinned by lower volumes.
Finally, with regard to commodities, the 3 million dollar headwind was favorable versus our initial expectations.
Added primarily by better than expected commercial recoveries I'd also point out that in Europe , we were operating under steel contracts established in early 2021, and then expired at the end of December we expect pricing in Europe to step up beginning in our second quarter with the execution of the new contracts, which carry pricing.
Above last year's level.
But based on the current outlook and considering the improvements in commercial recoveries for Q1, we now expect a full year net commodity headwind of $95 million versus our previous guide of 125 million.
Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the presentation high level for the Americas adverse business performance driven by temporary operating inefficiencies lower commercial settlements and increased freight costs combined with significantly lower volumes.
<unk> drove the year over year decrease in earnings.
The negative factors, just mentioned were partially offset by better launch performance tooling and improved SG&A.
In EMEA.
The negative impact of lower volume temporary operating inefficiencies and increased freight costs were partially offset by favorable commercial settlements and improved SG&A performance.
Meanwhile, in Asia, a slightly different story unfolded as volumes were up year on year. Unfortunately, the positive impact of the higher volumes were generally offset by increased freight cost launch cost and higher SG&A cost. The SG&A costs are largely viewed as event driven as costs are primarily related to the flooding in Malaysia.
Uh huh.
One final point for Asia, specifically in China, There was a long standing pricing dispute settled in Adience favor call. It just short of $10 million that should not be modeled in our normalized run rate going forward.
Let me now shift to our cash liquidity and capital structure on slides 14 and 15.
Starting with cash on slide 14.
Adjusted free cash flow defined as operating cash flow less capex was an outflow of $74 million for the quarter.
This compares to a positive $160 million in Q1 2021.
The year on year decline was primarily driven by lower earnings timing of working capital the timing and level of commercial settlements and equity and lower equity income primarily driven by our strategic transformation in China.
The negative factors were partially offset by reduced interest payments under underpinned by our balance sheet transformation lower restructuring cost and lower cap spending.
Yeah.
Flipping to slide 15 as noted on the right hand side of the slide we ended the quarter with about $3 billion in total liquidity comprised of cash on hand of about $2 1 billion and approximately $880 million of undrawn capacity under Adience revolving line of credit.
Also noted the December 31 cash balance includes approximately $625 million of net proceeds collected as final payment associated with adient strategic transaction in China, which closed in September 2021.
Adient debt and net debt position totaled about $3 7 billion and $1 6 billion, respectively at December 31.
As Doug mentioned earlier and noted on slide substitute subsequent to the quarter. The company launched an $800 million tender offer targeting any and all of Adience, 9% U S secured notes, which as you can see a totaled $600 million at quarter end and up to 177 million.
Dollars euros of the three 5% Euro unsecured notes, which is about $200 million. The tender processes currently underway and updates will be provided as appropriate.
In addition to the cash outflow expected in Q2, resulting from the debt tenders I'd also point out and as highlighted on the slide in January Adient completed its agreement with motion to purchase <unk>, 25% equity interest in CQ, AT&T, bringing adience equity stake to 100.
Percent.
Total payment devotion totaled approximately $200 million for their equity interest historical dividends and other items $15 million of the 200 was paid in Q1 and reflected in the December cash balance the balance of the payment.
Call it approximately $185 million will be paid out in reflected in Adience fiscal Q2.
One last point to the balance sheet, although we're solidly on track to transform the balance sheet driven by our voluntary debt paydown. The depressed level of EBITDA expected for fiscal 2022 keeps us outside of our leverage target of one five to two times.
As such we will continue to prioritize debt paydown with approximately $1 billion of voluntary debt paydown expected in fiscal 2022.
And.
As we progressed through the year and hopefully gain better visibility on the operating environment and its impact on adient as free cash flow.
Management and the board will continue to assess enhancements to the company's capital allocation plan.
Now moving to slide 16, let me conclude with a few thoughts on what to expect as we progress through fiscal 2022.
As expected the operating environment in early fiscal 2022 remains challenging as evidenced by audience first quarter results.
Despite green shoots of stabilization emerging for the industry, such as modestly softer steel prices and fewer abrupt stoppages of customer production schedules. We expect near term results to continue to be impacted by temporary operating inefficiencies COVID-19 related cost increased freight labor concerns.
And elevated commodity prices.
That said, we expect the headwinds to lessen as we progress through the year, particularly in the back half of the year.
Based on the audience first quarter results expected debt Paydown in current market conditions, we currently forecast.
Revenue of about $14 8 billion, which is consistent with our earlier forecast, although third party production forecast are modestly better versus the assumptions. We used at the start of our fiscal year FX movements are offsetting the benefit of higher production.
For adjusted EBITDA, We continue to expect fiscal 'twenty, two will be modestly lower versus our fiscal 'twenty, one pro forma results of about $810 million the challenging operating environment, specifically the ongoing supply chain disruptions limited visibility of customer production schedules.
And labor concerns continued to prevent us from providing a more specific forecast at this time.
Equity income, which is included in our adjusted EBITDA is now forecast to be approximately $90 million. This is slightly this is up slightly versus the $80 million to $90 million guide provided last quarter and reflects Q1's strong performance.
Moving on.
Interest expense is still expected at about $150 million and includes the assumption of $1 billion of principal debt prepayments in 2022.
No change in our cash tax assumptions of around $80 million. Our book taxes are expected to be slightly higher call. It about $100 million at this time.
$20 million to $25 million per quarter is a good run rate assumption.
As mentioning honor as mentioned on our last call during fiscal 2022, we might see our adjusted effective tax rate higher than normal and fluctuations among quarters due to the valuation allowances and our geographic mix of income.
That said, it's important to remember that we maintained valuable tax attributes such as net operating loss carryforwards and that these tax attributes can be used to offset profits on an ongoing base.
Basis, so cash taxes on <unk> operations should remain relatively low even as profits increase and finally capital expenditures are forecast to be about $300 million to $325 million.
As you can see at the bottom of the slide given the backdrop of the current operating environment and consistent with the commerce commentary related to the to an adjusted EBITDA forecast, providing a specific full year estimate for free cash flow with reasonable certainty is not possible at this time.
With that I'll hand, it over to Jerome to comment on items that could significantly impact the operations, both positively and negatively and change the narrative for 2022.
Thank you Jeff as you just heard from Doug and Jeff the operating environment remains challenging despite early signs of stabilization for certain headwinds. The team remains focused on launch execution and operational excellence in fact, when stripping out customer shutdowns and impact of certain customers not running it right where.
Performing at a very high level.
That said being able to run at rate reduce excess labor eliminate many of the inefficiencies will ultimately be achieved when production stabilizes in a meaningful way.
On slide 17, we have identified a number of positive and negative influences that have the potential to improve or further disrupt the operations and I'll walk through a couple of those.
On the positive influences side.
Given the current execution of the operation Adient will see benefits as our customers demonstrates the ability to run at rate consistently.
In addition, if the labor market were to demonstrate stabilization, particularly in the U S. This would present additional tailwind for the operation.
On the negative influences, we are carefully watching our customers and how they intend to ramp.
If they continue to run as they have in Q1, the stop and start nature. This will present additional challenges to our operation. This leads to trap labor and limited passed for recovery. The issue can be worked out in the longer term, but it does present, a short term headwind.
We're keeping a close eye on these factors and if necessary, we'll make the appropriate adjustments to our operations to ensure we capitalize on the positive and mitigate the negatives.
With that I'll turn it over to the operator to move to the Q&A portion of the call.
Operator, if we could have our first question. Please.
Thank you our first question comes from Rob.
Rod Lache Wolfe Research your line is now open.
Good morning, everybody.
A couple of things if you can just clarify for us it sounds like the $30 million settlement that you called out and then that $10 million, China price settlement or were separate items. So I just wanted to confirm that cumulatively that was $40 million.
Or whether that was one item of 30 and was this in your original guidance.
And can you confirm that that's separate from what you're.
Describing is.
I guess, a better commodity outlook that is the $125 million declining to $95 million, but these are all kind of separate and discrete moving parts.
Yes, they are all separate and discrete rod on the 30 million settlement that actually related to 2021. So that's really just a comparison point, we called out last year. When we talked about our Q1 performance that we had about $30 million of unusually high commercial recoveries, which we said.
Don't count on a continuing basis.
As it relates to the 10 million that was this year.
And we called out we had sort of an unusual settlement.
But unusual it's something that when it.
Necessarily read occur. So we wanted to call that out when you think of our $146 million that we had an EBITDA. There's obviously a lot of negative things those key events, we talked about but separately. There is this $10 million or approximately $10 million in China.
We wouldn't want you to include as you model.
Forward earnings out.
It was it was something we were planning to do this year. So it was embedded into our numbers, which I think was your question and again that is all separate and distinct to the commodity impacts we talked about.
Great. Thank you and then just secondly, Doug you.
You you you you mentioned the balance in balance out of contract.
Being margin accretive can you maybe give us a little bit more color on that and how we should think about.
The roll on and roll off going forward and any update on just discussing discussions with your customers. I think you had originally said that it was like 30% of your commodity exposure is subject to.
Negotiation.
So if commodities stay at current levels, what would be a reasonable expectation as we think out and maybe even to next year on what what you should be able to recover that you've been absorbing.
Sure So first.
I guess right on your question.
New business.
I think it's consistent with what we've been communicating all along that we had this.
Three pronged approach to getting.
Margins back to a level that is consistent with our peers that kind of the adjusted EBITDA, that's north of 8% so.
Now we've stabilized.
Are from an execution standpoint, we were able to re price, where we could re price and then the last piece of it was.
Bringing on new business, where we couldnt reprice, a contractor reach some sort of commercial settlement.
And so what we are.
Trying to communicate is.
We're consistent with with that original plan that we had and we're on track to to close at margin gap as we've been.
<unk> been discussing for.
Quite some time now.
Associated with that is all the instability, we are in the market right now that delays some of that but fundamentally we feel.
Our business is on track towards that objective.
With regard to.
Commodities.
I was a bit difficult to project, but I would say we've made good progress there on reopening discussions where we could too.
Two.
Get a resolution on just some extraordinarily high.
Material.
Economic increases.
I would just say that you know.
That levels out over you know really about a 12 month period, where the way our contracts work.
Even without extraordinary measures.
We get that recovery built back into our business in one form or another.
So just to clarify Doug like between like last year, you had 70 million and now you've got another 95 million. So that's what you think.
Over a 12 month period, you you you'd be able to recover that and and secondly, do you have a number on just these legacy contracts that you're kind of waiting to replace or expire like what what's the magnitude of the drag from from that that we can be looking forward to replacing.
Yes so.
Relative to material economics, I would say that's a fairly good.
Our estimate of the 95, taking maybe another 12 months to fully resolved, but thats really a function of.
Where commodities move in and what we negotiate and we're in the midst of negotiations.
As we speak on steel contracts on a go forward basis.
With regard to the drag on closing the gap.
On the.
Contracts.
We've never really specified a number we've specified a time frame.
In that time frame, so as you know.
And in the 2025 ish.
Time frame that we resolve all elements of.
I'll say the commercial recovery replacement business.
Execution side of what we intend to do with the business to close that margin gap.
Thank you.
Yes. Thank you thanks Ron.
Yeah.
Yeah.
Our next question comes from Emmanuel Rosner Deutsche Your line is now open.
Hey, good morning.
Two questions if I may.
First one is on your slide five and the very helpful regular update on some of these.
Supply chain disruption so I think in your comments you were saying.
On a full year basis, you would see some of these impacts from supply chain disruption.
COVID-19 freight costs labor, all that stuff fairly consistent with.
The levels that we've seen in 2021, which was $400 million impact on EBITDA.
And my question is centers, saying that means it's not an incremental headwind, it's just basically another tailwind.
Stable versus last year, and yes, it's pretty stable Acacia.
So that's great and so if that's the case, what what sort of environments or conditions will it take for you to start shipping some of these inefficiencies what is it.
Recovery is it.
Yes.
What can we actually yeah.
Good question Emmanuel I'd point, you to slide 17, and what Jerome walked through a bit.
We talk about the influences that could change the narrative and it's those items on the <unk>.
Left hand side of the page, we talked about it I mentioned it in my comments, but right now our.
We get releases from our customers three months before.
<unk>.
There are.
Three months beforehand.
And those are usually pretty good and we have to staff two of them one of the challenges of being a just in time suppliers, we have to match our customers run rate.
We have you know our customers essentially have missed that by a little over 20% on average and it's not uniform by customer by any means but that's the average.
That means we have too many people and it means we have less volume going through which is bad to begin with but we run with a lot of inefficiencies. So that's something that really has to change.
We talked about.
Labor and he talked about the stabilization of labor we have seen.
Last month, especially with omicron going as you know.
Ramp it through the the World is it did it was causing huge absenteeism at our facilities, which.
Created challenges for production and it wasn't just our facility as it was the whole automotive chain that needs to find stabilization the inflation impacts that we've all read about experienced in our own lives are definitely hitting our business, we talked about steel and foam chemical prices, but labor is a.
A piece here.
Global freight cost is a huge issue for us.
And we've done a lot to try to mitigate that and we're working to mitigate all of these points, but those are all the things that we're fighting here so while some things have gotten better.
Other things have maybe gotten a little bit worse, such as some of the labor and freight issues.
And that's what's creating this to be a very difficult environment to projected but as those things unwind themselves and we would expect they will over time, we see a big opportunity to improve the earnings from what we just experienced.
Can you quantify how much of it is volume related so if I were to assume that in your fiscal 2023 volume while industry volume was stopped normalizing volatility of production schedule will be more predictable.
Much of the $4 million would you be able to get versus the piece, that's more inflation related where it may be sure.
Fewer levers to yeah, we would expect the volume piece to be about 300 ish.
And and you know and they inefficient to be a tick over 100 at this point or 125 something like that.
Okay. That's super helpful. And then my second question is.
Would you be able to give you sort of account.
High level puts and takes in your 2022.
So essentially some sort of work.
Because it seems like.
At the very least you quantified a better commodities outlook and what you had before.
$30 million I think the equity income is playing out maybe sure.
Yes.
But obviously your.
Your outlook is unchanged and I understand as well if I can.
And any way to sort of like.
Frames spreadsheets that the year over year walk.
Yeah, I guess I'd frame. It like this is you know we.
Because of the challenges here and we have a hard time.
Predicting forward, we just have I think yesterday afternoon, I saw a bunch of rip.
Ports, where production was going out from our customers like this weekend and next week.
And forward into into next month for a variety of issues with the customers, but mostly supply chain related.
All of that.
Makes this a really difficult environment, so when we sat together.
And gave you our guidance for the year, we didn't feel comfortable providing the specific ranges that we normally would you know this is normally a pretty predictable industry, but when our customers are having 20 plus percent variances to their production schedule. It makes it very difficult for us.
Especially with the just in time nature, because we just can't go and build inventory if we <unk>.
Cancel shifts we ended up just having people sitting around.
And we're still paying them and we're still going through all of that so.
But what we did here we're three months into the year, we're still seeing all that uncertainty. We we hear a lot of it you know potential positive comments that may be the forward production, we will start to improve but we haven't seen it yet.
And we're cautious when we put our numbers out so yes, we had some benefits of around 30 ish or so on on the commodity side, we've seen a little bit of improvement on the.
The equity income side, and starting to feel more stable around that.
Probably a little less certain around labor and some of those pieces.
So all of those just gave us a balance here that only three months into the year it didn't make sense to try to.
Sharpen the forecast for this year, but obviously, we're doing everything we can to continue to improve it and we'd certainly expect that if the market continues on some of these positive influences that we articulated on slide 17 that we would be able to show better results.
It's just a little too premature right now and a little too uncertain for us to give much more concrete death.
Definition than that right now.
Jonathan Thank you.
Yeah. Thanks Emmanuel.
Okay.
Our next question comes from Colin Langan Wells Fargo. Your line is now open.
Oh, Thanks for taking my question.
Just a follow up sorry to ask sort of again, but I think your original guidance for Q1 was it would be flat or slightly higher than Q4, and it seems to be a $70 million of shire.
And then you mentioned the steel and the JV slightly better.
Should we think about there theres something you know.
I think you mentioned labor, but anything thats materially worse, or it's just more conservatism and why or why not changing the guidance outlook is there something maybe that.
Yes.
Just a comment.
I think it's it's more just the uncertainty of what we're seeing out there and as Jeff mentioned I mean, even as late as yesterday, we saw some fairly significant announcements from some of our customer Obi They short term disruptions to production schedules.
So although.
Our performance in Q1.
<unk> exceeded our original guidance.
As Jeff said, we just took a step back in preparation for this call and said.
It's just too early in the year to change that guidance. There are some positive things that are developing.
But.
The environment, we're operating in is extremely fragile.
Whether it's.
So I would say the biggest factor that concerns US is just you know the impact of Covid and how.
Disruptive that can be to our customers' ability to operate and then that's further compounded.
Bye.
Semiconductor is still being disruptive.
As well and there's not a lot of clarity from our customers, though there are certainly positive comments being made by them but.
We still know they're running on the allocation and disruption.
Disruption in <unk>.
Supply chain can occur at any time and so we just said we will.
We will continue with the guide we have right now through.
Positive or negative things that could develop and as the year plays out we'll be more specific.
Okay, no that makes sense.
Could you clarify I'm not sure if I'm misreading understanding the slides there was like a 3 million headwind in commodities for Q1 that seems quite low, particularly with the 95 for the full year. So I think you mentioned Europe ticking up I guess through the rest of the year any other factors it seems that or am I.
Not reading this slide right.
You're reading it right column and a couple of things that hit US I guess, one as of the original 125 about 75, just under 75% of it related to Europe . We enjoyed we had set kind of the perfect timing of when we put in steel contracts last year.
In Europe , and they expired on December 31.
So just it wasn't until.
On January where we started to experience the higher price.
In our European region, which is where we have a lot of metal you'll know that we have.
A lot of our mechanisms platforms.
Facilities in Europe , so that impact is pretty significant.
We're doing things to try to mitigate everything down, but it was always sort of a balance or back three quarter weighted.
And we'll see how that all plays out we're obviously still trying to work that number down but it's heavily European influenced.
Okay, alright, thanks for taking my questions.
Thanks, Tom.
Yeah.
Next we have John Murphy Bank of America. Your line is now open.
Good morning, guys.
First question I mean, obviously schedule stabilization.
Most important here, but once we get beyond that we think about natural recovery.
In volume, there's a lot of discussion from the automakers that that will be somewhat negative four four mix. So I'm just curious once we get through this period of volatility as you think about what's more important to the business from the starting point.
It's volume or mix more important to you it seems like it might be buying but just trying to understand.
Yeah, No it's volume it's fine.
Oh, Okay, Gotcha, I see Theres no concern about what might be negative mix, that's being indicated by by automakers as things recover that that's not worked by volume.
Yeah.
Okay perfect. That's why you saw second.
What do you think about these three months schedules that you're being given.
How fast are things changing I mean, you've given scheduled three months out but are they changing on a daily basis and you know how short or are the changes that you're getting I mean, you're basically getting called like Hey, Tomorrow. We're just not taking seats are you made them I mean, just trying to understand how this volatility is really playing out.
Yeah, Good morning, Joseph Jerome.
I mean, we get notified within the day and so I won't go into customer specifics, but you know.
Even last week, we were notified on a large platform.
They ran out of a supply chain part from China, We had our people there.
And at 930, we had to send them home, we brought that in our second shift and they didn't restart and we had to send our people home again and Thats all labor that we have to pay for and there's no.
Mediate means for recovery, we have to work it out.
And the other part of that I would say is just give you kind of the three month figure that says.
From three months to what they actually build.
About a 20% deviation. If you then say what is the one month deviation look like so just from what they tell me on October 1st I'm going to build for the month of October there's anywhere from a 10% to 15% deviation and so you try and manage that within as Jeff said, a jet environment, where you've got you know I have demand to be able to build that because I can.
Shut in my customer down, but then when they don't pull I'm stuck with that trapped labor.
And that's really been the the significant challenge that we saw in Q1.
And we see that even continuing into Q2, just with the uncertainty that's out there, whether it's labor or chips or other supply chain influences.
Just on top of that that's further exacerbated by the fact that you've got labor shortages right now so we're having to.
Run with fairly high levels of absentee ism pools, just two.
Run at the rate of our customers so.
So it's got a bit of a compounding effect there.
What's true in in the Americas really is true for every region, we operate obviously.
Each region is slightly different.
But it's that volatility is existing in every single region that we have.
So, it's it's pretty pretty challenging.
Yeah. So it sounds like it then just on the EV boom.
We're hearing obviously more about that all over the place you know as you think about your content on Evs.
And the impact to your business is this a net positive just from from a content standpoint, I mean, how do you think about that.
I think near term it it's net slightly positive, but what I would say are the evs that are in production today.
For the most part are using conventional seating systems.
As you look further out and particularly with the new starts that are looking for.
A combination of EV with a higher level of autonomous driving.
That's where we start to see significant content increase.
But that's a little bit further out as they transition into those vehicles.
Full architecture change, 100% committed platforms to EV.
Yeah.
Beyond that we're just seeing whether its ice or EV content per vehicle in seating has continued to go up.
Simply because they are you know you're multifunction vehicles, and so what that brings higher content as you get into.
Articulating in and increasing the.
Number of passengers for vehicles. So that's a positive trend, but I think that's happening somewhat independent weather.
What the propulsion system is but we're pretty excited as you start to get.
A little bit further out and really.
The new technologies that will come in place.
And the amount of consumer feature content that'll be driven into future vehicles.
We see that as a pretty positive trend.
And just on the just Jeff just wanted to follow up on the 9% 2020 fives isn't there a call option on those tenders great to take these things out they're expensive debt, but isn't there also another option to take out more if you don't get a good response to that tender I'm just curious when that was.
Okay.
We're just right ahead of it so if if those people who don't tender we have the option to call them in mid April .
Okay.
It is the attention to take out the bulk of this I mean, what I mean, what's I mean, where are we.
Don't want those notes.
9% note, we actually you didn't know going into Covid.
So its priority sooner or later, that's gone pretty quickly yeah correct yeah.
Thanks, so much guys.
Right.
Operator, if we could have or last call from Dan Levy.
Yes, Dan Levy, our last call you line is now open.
Great.
Thank you.
I actually wanted to ask first about about the top line.
And you put up a pretty good growth over market. This quarter I think it's like seven points or so.
And you talked about you've got the ramp.
The Ram win there.
You know as you try to downsize some of the unprofitable as the southern tier two business now one would think that your revenue is going to most of the groups are not seeing that so maybe you can talk about the the underlying revenue outperformance.
And maybe you could just give us an update on where your market share is trending in seating today.
Yeah well.
Obviously, we did not prepare specifics around that for today's earnings call, but that being said.
We see the balance in balance out of our business by region.
Essentially.
Consistent with our market share positions.
That we've operated with historically.
The one exception I would point out is we.
We did lose a contract in Europe .
Well over a year ago with one very specific customer that we have.
Look to in the past, which will drop our European market share but that.
You know that that's something that's.
No.
More of an anomaly from.
Of revenue perspective.
We back filled a lot of that business.
So when I think about market share.
I would say you should expect no major shifts.
In a negative.
And then what really is going to be interesting to see what plays out is how how fast the new evs come online.
Opportunities have provides us for market share or content King.
Great. Thanks, and then just a.
A follow up on capital allocation.
Once you're past the debt Paydown. Once there is maybe a little more visibility on the cash flows is the preference for a dividend or share buyback or would you consider both.
Yeah, It's great question I mean, as we look at.
Our earnings prospects as we go forward I think were you know us and we.
Push to.
Closed the gap with Leer, we think there's our share prices is cheap so if our share price remains cheap when we get to that point that certainly would be an attractive thing for us to allocate capital towards.
And.
I guess as it relates to a dividend.
With as much volatility out there, we've we've probably been a little cautious on that but as we get to the free cash flow levels that we would expect to find.
And we have a little bit more stability on the operating environment. It's something we'll certainly be discussing and I think we'd probably be in <unk>.
Some of the plans that we've put out for you at that time.
Okay, great. Thank you.
Thank you Dan. Thank you operator, it looks like we're at the bottom of the hours. So this will conclude the call for those of you that are on the line that we didn't have a chance to answer your questions. Please feel free to reach out to Eric and I will be here.
We'll be more than happy to address your questions at that time. Thank you. Thanks, everyone.
Okay.
Thank you that concludes today's conference you may now disconnect.