Q2 2022 Adient PLC Earnings Call
Thank you for standing by and welcome to today's conference all lines will be in a listen only mode for todays presentation until the question and answer session. If at that time, you would like to ask your question. Please press star one on your telephone keypad. The call is being recorded if you have any objections you may disconnect. At this time I would now introduce your comp.
Mr. Mark Oswald Sir you may begin.
Thank you Catherine good morning, and thank you for joining us as we review <unk> results for the second quarter of fiscal year 2020 to.
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, Adience, President and Chief Executive Officer, just to file our executive Vice President and Chief Financial Officer, and Jerome <unk> 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 Q2 financial results and outlook 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 There are a few items I'd like to cover first today's conference call will include forward looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties I would caution you that our actual results could differ materially from these forward looking statements made on the call.
Please refer to slide two of our presentation for our complete safe Harbor 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.
My comments I will turn the call over to Doug Doug.
Thanks, Mark Good morning, Thank you to our investors prospective investors and analysts joining the call. This morning, as we review our second quarter results for fiscal 2022.
Turning to slide four let me begin with few comments related to the quarter Kantar.
Continuing the trend established during the second half of fiscal 2021.
<unk> external factors, including supply chain disruptions and resulting operating inefficiencies.
Elevated commodity prices and increased freight to name a few continue to influence the industry and adient near term results.
As the quarter progressed pressures intensified.
Merrily, resulting from the conflict in the Ukraine, and the widespread Covid Lockdowns in China.
Unfortunately, unlike commentary provided in the first quarter call signs of stabilization for the industry did not advance.
In fact, they took a step back bottom line the operating environment remains very challenging.
This is evident when looking at adient second quarter, EBITDA results, which contained approximately $160 million of loss volume.
Temporary operating inefficiencies and elevated commodity prices.
The $160 million contains approximately $10 million of temporary savings.
Eddie its 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.
It's about $440 million compared to last year's second quarter adjusted for portfolio actions executed in 2021.
Adjusted EBITDA for the quarter totaled $159 million and as pointed out on the slide included approximately $160 million in loss volume temporary operating inefficiencies in premiums.
Again, primarily driven from the chip shortage and unplanned production stoppages.
Adient March 31 cash balance totaled approximately $1 1 billion total liquidity was about $1 9 billion.
We're very much focused on managing our cash and liquidity given the difficult operating environment the industry is facing.
Despite the continued difficult operating environment Adient 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.
Adient completed its tender offer during the quarter for over $700 million of voluntary principal on debt repayment.
And lastly, as highlighted at the bottom of the slide the company continues to deliver on its commitment to provide product and process excellence to our customers as evidenced by numerous customer and industry awards, including GM supplier of the year for 2021, and Ikea quality Excellent Award and.
Three awards from Toyota, including Superior value Analysis Achievement Award excellent quality award for Adient metals.
And our supplier diversity award.
The diversity award is especially pleasing as adient D. Eni efforts continued to mature and drive our business forward.
I mentioned these awards not as bragging points, but as proof points that despite the challenging operating environment.
The company is focus and continues to operate at a very high level.
Slide five let me expand on what we're seeing with regards to the current operating environment.
In the middle of the slide we've highlighted several of the headwinds that the industry and adient continue to face the lists should look very familiar as many of these external headwinds surfaced at the end of our second quarter last year and has continued into fiscal 2022.
The most significant influences include ongoing supply chain disruptions, which continue to impact production at our customers.
Unfortunately, the supply chain disruptions expand beyond semiconductors in blood over to other components.
Similar to our commentary in Q1. These unplanned production stoppages are leading to premiums and operating inefficiencies across the network.
Q2 fiscal 2022 we estimated that supply chain disruptions, resulting loss production operating inefficiencies premium freight et cetera had a net impact on the top line of about $790 million and adjusted EBITDA by approximately $140 million.
For the full year, we expect production stoppages, resulting from slot supply chain disruptions and temporary operating inefficiencies to continue.
Unfortunately, with no signs of stabilization on the horizon expectations for significantly improved results in the second half of our fiscal year of greatly reduce.
With regard to material economics, adient is having success at Liberty and the negative impact this year through successful commercial negotiations.
I will discuss further in just a minute and timing of our steel by contracts, which were put in place earlier this year.
For the quarter and into net commodity headwinds totaled about $20 million. This result was better than expected aided by additional recoveries over and above our contractual agreements.
Based on real.
Recent steel price movements contractual agreements in place.
Both for our steel buy as well as for our customers recoveries based on escalators pass throughs in place. We currently forecast a commodity headwinds of less than $15 million.
<unk> previously forecasted $95 billion.
Although we're seeing good result here other inflationary pressures such as rising energy costs in Ocean freight continued to escalate.
Turning to slide six we have illustrated a few examples how navigating through these certain of these commodity inflationary pressures and mitigating the overall risk to adient.
For example, the company's efforts to reduce risk with price movements in steel.
The team is very focused on increasing the percentage of contracts with our customers that contained escalators pass through and their associated recoveries.
In addition, we are having success at shortening the time lag and recouping the costs were.
For example, if you look back a year ago, the percentage of contracts that had formal agreements across adient was about 70%.
With an approximate leg of two quarters today, we're north of 70% in fact in the Americas, we're probably closer to 85%.
Not only is the overall percentage, increasing but the recoveries associated with the agreements are increasing.
With regard to foam chemicals, we continue to tweak the contract as appropriate that said the contracts in place generally are more efficient versus the risk mitigation that has an effect for adient steel exposure.
In addition to the commodities.
There has been widely discussed in the past such as steel and foam chemicals. The team is also implementing actions to address inflationary pressure impacting the input costs, such as ocean freight and utilities.
To sum it up we've successfully executed actions to reduce steel and chemical headwinds. We're now working through actions to Ruth's and mitigate other inflationary pressures such as ocean freight and utilities as shown on the slide.
Impact on the Ocean freight front, we've been able to whittle down the impact by about $10 million. This year and we're not finished.
It's essential we continue to progress through these efforts to mitigate the impact inflation is having on the business.
As you know adient business models based on being a value added supplier <unk>.
Containing inflationary risk is not currently priced into the model, we're making progress on this front and we'll continue to work hard to further lessen adience exposure.
Turning to.
<unk> seven let me provide a few comments related to the narrative for the fiscal year 2022, and how it continues to evolve.
As a reminder.
Adient entered fiscal 2022, we expected a number of positive or negative influence to drive our overall results.
On a plus side volumes were expected to increase as the year progressed, driven by an improved supply chain less restrictions from COVID-19 et cetera.
We continue to progress it's back to basics strategy driving further improvements to our operation. This along with our focused customer and profitability actions would continue to narrow the margin gap to our peers.
And from a balance sheet perspective, the company would continue to prioritize debt paydown.
Largely offsetting these positive influences were elevated input costs, primarily commodities freight and energy.
Risk around labor availability and cost lower equity income and a modest increase to engineering and launch costs.
When mixed together, we expected results somewhat lower versus our pro forma 2021 results.
With sequential improvement as adient progress through the year.
What's the same and what's different today.
No change to items within Adience control, we remain focused on executing the company's strategy operationally financially and strategically.
When stripping out customer shutdowns and the impact of certain customers not running at rate, we're performing at a very high level.
What has changed is the intensity of the external headwinds primarily driven by the Ukraine conflict and widespread Covid lockdowns in China.
Again, unlike last quarter visibility is unclear at the present time as to when these pressures might subside or lessen it is clear the expectations of significant improvements taking place in the second half of our fiscal year have diminished.
Although.
Temporary headwinds, resulting from supply chain disruptions are expected to eventually reverse certain of the inflationary pressures are likely to persist.
Requiring further commercial <unk> operational improvements to overcome the impact of margins in fiscal year 'twenty three and beyond.
Jeff will provide commentary on what we're seeing today, including which costs are transient versus sticky.
With his prepared remarks.
As you would expect we continue to make appropriate adjustments to our operations to ensure we capitalize on the positive and mitigate the negatives.
Shifting gears and turning to slides eight and nine let's take a look at our business wins and launch performance.
As you can see slide eight is our typical new business slide highlighting a few of Adience recent wins.
The programs highlighted represent a good mix of the incumbent wins.
All new platforms and multiple conquest wins.
Also noted as a degree of vertical integration from a number of these wins one such example, we've illustrated on the slide is the replacement business for Toyotas Camry.
In the Americas, which contains metals phone trim and yet.
As our new book of business continues to launch we expect the balance in balance out platforms to further enable margin expansion.
Flipping to slide nine as we typically do we've highlighted several critical launches that earn.
<unk> in process or scheduled to begin in the near term.
I'm happy to report that the launch is currently underway are progressing smoothly, we're particularly excited with the F 150 lightning launch and the Americas.
Program consistent with other launches is meaning quality delivery and financial expectations.
The launches and platform shown not only impact adience jet facilities, but also span across a network of our foam trim and metal facilities. The team continues to focus on.
On process discipline around launch readiness and has driven a very high.
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 in complexity the disruptions to production schedules continue to present another layer of challenges.
The team is successfully managing through again, a testament to the discipline, we've instilled in our process.
We have no intention of Blooding up.
Flipping to slide 10 in addition to winning business and executing successful launches.
Sure vital to Adience future success, one other area I would like to highlight which is equally important to the company's success are the companys efforts related to ESG.
These efforts were on full display a few weeks back several adience employees celebrated earth day across various regions.
A few of the projects that were celebrated are highlighted on the slide.
Exciting to see the level of engagement.
And excitement of our employees as we share a common goal of bettering our processes and operating our business in an environmentally responsible manner.
Before turning the call over to Jeff and turning to Slide 11, Let me conclude with a few summary comments.
As mentioned in my prepared remarks, and as you know the operating environment remains very challenging for the industry and adient.
That said, we remained continued to execute actions within our control to position the company for success.
Including advancing our back to basic strategy implementing actions too.
Process to reduce inflationary costs and continuing efforts to perform the.
Transformed the balance sheet.
As certain of the external pressures lessen over time, adient expects to be well positioned to take advantage of an industry recovery.
It's not all Doom and gloom.
Several industry metrics remained supportive for example.
Intercede remains supply constrained demand continues to be robust vehicle production levels are near all time lows a good setup for production in coming years there.
There are a lot of new innovative products scheduled to be launched in the coming years. These factors combined with the benefits expected from continue adient specific actions executed from our operations and customer profitability perspective.
Give us reason to be excited about the future.
We see significant opportunity for value creation for our shareholders in the coming years.
With that I'll turn the call over to Jeff to take us through Adient second quarter 2022 financial performance and provide additional detail on what to expect as we move through 2022.
Great. Thanks, Doug and good morning, everyone.
Let's turn to slide 13, and jumped right into audience Q2 financial results.
Adhering to our typical format the pages formatted with our reported results in the left and our adjusted results and 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 premiums and deferred financing costs associated with debt repayment.
Restructuring and impairment associated with audience solar facility in Russia.
The facility located located in totally Audi, Russia is very small in fact that operates as a tier two trim supplier to other jet suppliers in Russia, the revenues and EBITDA associated with this operation are de Minimis to audience overall results details.
Details of all the adjustments for the quarter and full year are in the appendix of the presentation.
I'd also point out similar to last quarter 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. We believe these pro forma adjustments provide helpful comparisons between the current year and prior year results by adjusting the prior year.
<unk> to be on a consistent basis for the current one.
High level for the quarter sales were $3 $5 billion down about 8% compared to our second quarter results last year were down about 11% compared to last year's pro forma results similar to the past few quarters. The most recent quarter was significantly impacted by lost production, primarily driven by supply chain.
<unk> adjusted.
Adjusted EBITDA for the quarter was $159 million down $144 million year on year as reported or down $131 million compared to last year's pro forma results. The decrease is attributed to the significant reduction in volume and mix as well as inflationary pressures on freight utilities and <unk>.
Moderate cost I'll expand on these drivers in just a minute.
Finally at the bottom line Adient reported an adjusted net loss of $12 million or a loss of <unk> 13 per share.
Now, let's break down our second quarter results in more detail I'll cover. The next few slides rather quickly as detailed for the results are included on the slides and to ensure we have adequate amount of time set aside for Q&A.
Starting with revenue on Slide 14, we reported consolidated sales of $3 $5 billion.
Revenues included the sales at Adience, CQ and I'll ask ventures, which are now consolidated since closing the strategic transformation in China as well as other portfolio actions executed in fiscal 'twenty one.
$3 $5 billion is a decrease of $444 million compared with Q2 fiscal 'twenty one pro forma results.
Primary drivers.
Driver of the year over year decrease was lower volume call. It approximately $396 million related to volume and lower commercial recoveries, partially offset by roughly $78 million in commodity recoveries the negative impact of FX movements between the two periods impacted the quarter by about $126 million.
<unk>.
Focusing on the table on the right hand side of the slide you can see our consolidated sales were generally in line with production in Americas and EMEA.
In China, Adience customers were impacted by the widespread COVID-19 lockdowns and supply chain issues more severely than the overall market leading to the temporary underperformance versus production in the region.
Just the opposite occurred in Asia outside of China, which outperformed regional production driven by the launch of certain conquest business and customer mix.
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 and FX impacts.
With regard to audience unconsolidated seating revenue year over year results were down about 4% when adjusting for FX and the portfolio actions executed in fiscal 'twenty one similar.
Similar to our consolidated sales in China, Adience unconsolidated sales were impacted by the widespread COVID-19 related lockdowns, which impacted our mix and volumes more than the market average.
Moving to slide 15.
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.
Big picture adjusted EBITDA was $159 million in the current quarter versus $330 excuse me 303 million reported a year ago or 290 million pro forma adjusted for the portfolio actions executed in fiscal 'twenty, one 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 drivers of the decrease are detailed on the page and are consistent to what we expected heading into the quarter.
Lower volume and mix, primarily driven by supply chain disruptions at our customers impacted the year on year results by about $57 million.
Adverse business performance, primarily driven by increased freight call it $28 million lower net material margin of $22 million driven by the timing of commercial settlements.
And negative labor and overhead performance of roughly $18 million, which was driven by off cycle wage increases retention bonuses and increased utilities accounted for roughly $68 million in negative business performance then.
The negative performance, which for the most part is environmentally driven was partially offset by $15 million of improved ops waste launch and tooling performance.
Proof point that the business is running well when stripping out the external factors.
Other headwind included a net increase in commodities call. It just under $20 million lower equity income of approximately 9 million.
Again, driven by the widespread Covid lockdowns in China, and the negative impact of FX call it $11 million.
SG&A performance benefited the quarter by approximately $18 million.
Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the presentation.
High level for the Americas increased commodity prices lower volume increased freight cost off cycle wage increases in retention bonuses weighed on the year over year comparison. These negative influences were partially offset by improved launch ops waste tooling performance and <unk>.
<unk> and.
And just one more point in the Americas the year over year comparison was impacted by certain non repeating factors, namely approximately $17 million of costs related to the Texas free storm that impacted last year's second quarter and thankfully did not repeat this year.
In addition, our current fiscal quarter current Q2 of fiscal 'twenty. Two included approximately $10 million of insurance recoveries from that storm that we included as an offset to the $140 million impact Doug summarized on page five.
In EMEA the year over year pressure is more pronounced in the Americas for several reasons.
As noted above Americas benefited from a $27 million year over year benefit from the 2021, Texas storm.
The volume issues in Europe were more pronounced in the Americas as the volume and mix were over four times greater in Europe than Americas, and this had a compounding effect of making the operating environment less conducive inefficient.
Conflict in Ukraine definitely contributed to this situation.
Third the approximate $35 million increase we expect to incur this year and utilities is nearly all related to Europe , primarily driven by the shock to the market for Russian gas supply.
Finally, FX was a hit of approximately $11 million year over year due to the decline in the euro versus the dollar.
In Asia the.
The widespread COVID-19 lockdowns adversely impacted volumes in equity income in addition freight increase.
Increased freight labor cost in commodities added to the downward pressure. These headwinds were partially offset by improved net material margin and improved SG&A efficiencies.
Let me now shift to our cash liquidity and capital structure on slide 16 and 17.
Starting with cash on slide 16, I will focus on the year to date results as the longer timeframe helps smooth some of the volatility in working capital movements.
Free cash flow defined as operating cash flow less capex was an outflow of $102 million. This compares to an outflow of about $14 million for the same period last year.
Key drivers impacting the comparison include.
The lower level of consolidated earnings and typical month to month working capital movements, which resulted in close to a $330 million headwind versus last year.
Partially offsetting these negative influences were over $200 million of positive variances, including lower restructuring cost as we trend to what we see as a more normalized rate than what we've seen in than we spent in recent years, a lower level of interest paid driven by our balance sheet transformation and finally, the timing of <unk>.
Settlements in VA deferrals in payments.
Flipping to slide 17.
As noted on the right hand side of the slide we ended the quarter with about $1 $9 billion of total liquidity comprised of cash on hand of about $1 1 billion and just under $820 million of Undrawn capacity under Adience revolving line of credit.
Adient debt and net debt position totaled about $2 9 billion and $1 8 billion, respectively at March 31.
As Doug mentioned earlier and noted on the slide during the quarter. The company continued to advance its capital structure transformation by completing two tender offers just over $500 million of principal of audience, 9% Senior first lien notes due 2025 and $200 million.
Of adient, three 5% unsecured euro notes due 2024 were taken out in the quarter.
I'll also point out that in the not so distant future, we expect to repay the European investment bank loan, which matures at the end of May.
Although we are solidly on track and committed to transforming the balance sheet driven by our voluntary debt Paydown. The company is also very much focused on production protecting our cash and liquidity.
Our commitment to drive our net leverage down to between one five and 2.0 times has not changed but that said, we will be prudent in the timing and execution of additional voluntary pay down given the challenging operating environment.
If it is a balanced approach.
Moving to slides 18, and 19, let me conclude with a few thoughts on what to expect as we progress through fiscal 'twenty, two and why we continue to be optimistic as we look to the future.
First on slide 18.
Based on the audience results through March and the current market conditions. We currently forecast revenue of about $14 2 billion versus our previous guidance of $14 8 billion. The decrease is primarily attributed to the change in production that is now forecasted versus prior expectations stemming from the conflict in Ukraine.
Continued supply disruptions and the widespread Covid lockdowns in China and Europe . For example production is now forecasted to be down about 10% compared to our expectations in January .
In North America forecast versus expectations back in January had been revised lower by about between 2% and 3%.
For adjusted EBITDA, given our revised expectations for revenue, we now expect fiscal 'twenty, two will be significantly lower call it greater than $100 million lower versus our fiscal 'twenty. One pro forma results of about $810 million. Obviously, there are a lot of moving pieces, both positive and negative.
For example on the positive side, we're seeing continued improvement in audience core operations, including the launch execution ops waste and a lower than expected material economics headwind, which Doug mentioned is now expected to land $15 million or less for the year. This outcome was hard fought and as a result of a variety.
City of efforts, including commercial settlements above contractual obligations and renegotiated contracts that include reduced time lags for true ups and reduced pain share for adient on commodity price changes.
Unfortunately in addition to the lower volumes.
And associated inefficiencies and despite the progress we've made on material economics front other inflationary pressures have intensified such as freight utility and off cycle labor economics, the challenging operating environment, specifically the ongoing supply chain disruptions the expanded COVID-19 lockdowns in China.
Limited visibility on customer production schedules and increased inflationary pressures prevent us from providing a more specific forecasts for adjusted EBITDA at this time.
Equity income, which is now which is included in our adjusted EBITDA is now forecasted to be $75 million. This is down versus the $90 million guide provided last quarter and reflects the challenging operating environment in China.
Moving on.
Interest expense is expected at about $160 million up slightly from our previous guide of $150 million no change in our cash tax assumption of around $80 million. Our book taxes are expected to be slightly higher call. It about 100 million at this time approximately $25 million per quarter is a good run rate.
Options.
As mentioned on our last call during fiscal 'twenty, two we might see our adjusted effective tax rate higher than normal and fluctuations amongst quarters due to valuation allowances in 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 on a forward going basis, so cash taxes on adient operations should remain relatively low when our profits increase.
And finally capital expenditures are forecast to be about 300 million to $325 million as you know the majority of our cap spend is related to program launches at our customers. We will continue to align our spending with our launch plans and adjust as appropriate as we as we progress through the balance of the year as you can see at the bottom of the slide given the backdrop.
But the current operating environment and consistent with the commentary related to adjusted EBITDA forecast, providing a specific full year estimate for free cash flow with reasonable certainty is not possible at this time.
And with that let me turn the presentation back over to Doug to cover slide 19.
Great. Thanks, Jeff.
Throughout our call. This morning, Jeff and I have highlighted numerous factors that continue to impact our near term results for the industry and adient.
Many of which are external in nature, and as you know paint a bleak or cloudy outlook for 2022.
When digging deeper in isolating the influences into different buckets, we remain optimistic brighter days lie ahead.
First and foremost Adience Foundation is strong and continues to strengthen.
The team continues to progress our back to basics strategy, leading to improvements to our core operations.
This is evident when looking at metrics such as ups waste launch performance et cetera.
Let me share a few facts and figures.
In 2019, Adience operations, we're experiencing many inefficiencies in total ops ways.
<unk>, an approximate $220 million headwind.
Significant progress was made in 'twenty 'twenty 2021, despite the challenging operating environment.
Further improvement is expected this year in fact, if we annualize fiscal year 2020.
Two year to date results adient ops waste versus fiscal year 19 levels have approximately half.
With regard to launch performance similar story at inspect basics mindset and focus on process enabled sequential improvements in the company's launch metrics as we progressed through 2000 22021 and again this year.
This is <unk>.
Especially significant given the challenging operating environment.
Which experienced COVID-19 interruption part shortages customer downtime et cetera, not to mentioned increased complex program launches such as the F 150.
Infinity <unk> 60 to name a few that occurred during the period.
Adient solid launch execution is a key enabler for us winning new conquest, an incumbent business.
Which speaking of incumbent business Adience win rate stands at 98% so far this year.
We're clearly winning the business, we set out to win.
We remain focus on costs the company's cost structure continues to be streamlined we're much more efficient company today than we were two or three years ago.
And finally, our balance sheet transformation is solidly on track.
With regard to headwinds we view them in two different buckets, both of which were working hard to mitigate and offset.
The first let's call them transitory include items, such as supply chain disruptions, which you know have resulted in significant volume reductions operating inefficiencies unfavorable mix as China volumes come under pressure, which as you know has a higher margin business for adient and lastly, the elevated <unk>.
<unk> costs, we're facing.
Altogether. These headwinds are forecasted to place approximately $470 million of downward pressure on <unk> results in fiscal 2022.
Through self help initiatives and improvements in overall external conditions, we expect a large majority of these pressures to reverse over time.
For example, a supply chain stabilized.
Expect customers running at rate production volumes, turning higher in adient operating inefficiencies decreasing.
Other costs have been intensified as of late.
They're being viewed as a bit more sticky these headwinds which include but are not limited to increased freight utility and labor inflation are forecasted to add an additional $125 million of headwind on the business. This year.
The team is executing self help initiatives and working with our customers through ongoing commercial negotiations to lessen the impact on a go forward basis.
When looking into the future. We believe the actions that have and are being implemented will position adient to capitalize on industry recovery ultimately creating value for our shareholders.
Regarding margins, we remain committed to eliminating the margin gap versus our peer group.
Solving the transitory and sticky costs on this page.
We will not be easy we're guaranteed.
We will get us over 90% of the way there though.
That said.
This is not all that we're doing as we continue to transform our portfolio by launching higher merchant business and continuing to brew, our innovation and execution capabilities.
While COVID-19 and supply chain crisis, Ukraine et cetera have delayed us in reaching our goal we remain confident committed to the mission.
With that let's move to the Q&A portion of the call operator can we have our first question. Please.
And once again, if you would like to ask your question. Please press star one on your telephone keypad only record your first and last name. The first question is coming from John Murphy Bank of America. Your line is open.
Hi, good morning, guys.
The change.
Changing guidance seems like it's a little bit more in line with the.
The market pressures that we're seeing from other.
Suppliers and teams a little bit more.
Realistic and not not too optimistic.
I'm just curious.
Doug and Jeff.
You think about this is there something different in.
In your business versus other suppliers I mean, it might be calendar timing.
Fourth quarter calendar fourth quarter is not in this in this guidance, where there might be some significant increase there is there any any kind of fundamental difference.
You think that Youre seeing and once again I think your outlook is a little bit more rational than others that might be a little bit too optimistic.
Yeah.
A point to to me one of the obvious differences Jon appreciate the question is the fact.
Most of our revenue is just in time revenue and <unk>.
Certainly the labor inefficiencies have been a big burden for us, particularly because our customers continue to release us.
At higher volume levels.
They ultimately produce which.
Hits us with a fairly significant amount of trapped labor.
So that's.
I would.
Uniquely.
<unk> outlined that.
Is something that's different than.
If you are not building sequentially. You can build ahead you can shut down you can store and inventory, we have very little ability to do that.
Even even in our jet plants most of them are building life and can store a few hours of inventory and then we have to shut down.
<unk>.
I would point to that certainly.
Good portion of our businesses in Europe , and as Jeff pointed out the Ukraine conflict has been a significant drag on a year over year basis.
Chop with a yes, no I think especially that first point that Doug mentioned, our just in time nature.
And really volatile.
Call off schedules from our customers is why we haven't I think been reluctant to give a specific guide a specific range because it moves so quickly and can move so quickly is as those production schedules change really daily.
As far as maybe one other thing to point out which isn't necessarily different than others, but we do have a lot of equity income coming in from.
From from China.
You saw a little bit of an impact in Q2, we saw.
Our Q fiscal Q2.
You saw a lot of the north shut down through a lot of March solar they think of the FAA W. Volkswagen business up there.
How was significantly affected the Beijing Olympics hit we have a lot of business in Beijing area servicing Daimler and Hyundai.
So it was a bit of an impact in Q2, but I would expect it to be a bigger impact in Q3.
As a lot of their shutdowns extended into really today and sort of not expecting normalized operations to continue for a little bit that's going to have some supply chain impacts not just in China, but through other regions is not just directly through our supply chain, but we expect through some of our customers. So all of that makes it a little bit.
Claudia a little bit uncertain, and we tried to build that into the commentary we provided you.
Okay, and then maybe just a follow up on this I mean are you.
We're hearing from automakers their willingness to potentially store and take inventory from certain suppliers.
So I mean, I guess that dovetails with what you're saying about your business being jet and others being able to maybe run in store.
Is that.
That's basically what you're talking about or no run in store for US yes, it really doesn't work in the others.
There's no real way is the way we sequence into their facilities they can't store anything.
If they stop their production, we got to call off our shift effectively.
The next question is coming from Rod Lache Wolfe Research your line is open.
Good morning, everybody.
Good.
Good morning.
The target of eliminating the margin gap versus competitors.
Unfortunately for us has become a little bit more ambiguous since.
Everybody's margins are moving around.
But I was hoping you might be able to just dive into this.
Slide 19, a little bit more for us just so that we can we can square it with where your.
What you're ultimately targeting.
If we look at the 475 of transitory costs.
Is it still around 300 million from volume and 150 from inefficiencies I thought that that the net commodity if I include cumulatively.
A lot more in may.
Maybe just in addition to that if you can spend a little bit of time, just talking about the timeline for the remaining $125 million of of sticky stuff just because theres no.
There's been no mechanism for passing along utilities are labor and that kind of thing.
Yes.
I'm going to have Jeff walk through the detail on that but just for clarification purposes. When we talk margin gap to our peers its not a sliding scale.
When we think of it.
We've always said, we wanted to get to that north of seven and a half a percent is kind of how I think of what that margin gap is the fact that we see depressed earnings doesn't mean, we've recalibrated what that margin gap looks like but that said I'll, let Jeff walk through some of the detail around yes, let me help.
Unpack it a little bit rod and feel free to ask if I don't hit everything you need but.
For the year I was just maybe take a look at 2022.
Just using a $700 million roundabout number.
Subtracting off equity income.
Here at roughly.
That would be $6 20, $512014 2 billion, so four 4% or so if you look through the transitory and sticky cost and you sort of add.
Add those back end within the transitory and I'll break that down a little bit more in a second.
You have about $2 $2 billion of what we think is lost volume.
So the 14 two in sales comes up to something around $16 4 billion and $6 25 kind of find its way up closer to about $1 2 billion. So you're north of seven in a quarter or so percent if were able to recapture those and there's some work to be done, but we've made a lot of headway on it.
Then I guess, what's important to realize there is that's not where we're stopping there are still parts of our we turn a little less than 20% of our portfolio every year as old business runs out new business runs on.
Have been focused heavily.
And I'd say increasingly on.
Margin in new business launch in.
Finding attractive new business to fill our facilities.
We would expect opportunities as we continue to execute on that order book and deliver that to provide additional margin expansion. So thats a little bit of a roadmap. It's all been a little delayed in challenged with the <unk> operating environment, but that the components of it hasnt really changed.
Just as a little bit of a breakdown for you on the transitory cost bucket that $4 75, I mentioned about $2 $2 billion in.
Lost sales I think of that about $375 million ish million or so of lost EBITDA profits.
Between Covid and supply chain issues from semiconductors, or Ukraine, or so it's about $100 million. There are several things that offset and the remaining we mentioned through here that we had some insurance proceeds this year.
We deduct to that off the $4 75.
There were some temporary savings we've achieved this year as we've tried to do some.
We will say austerity measures within the company such as freezing our 401, K and things like that.
Which we've offset in that but overall the two big components to rest offsets is about $100 million and 470 375 of lost volume on the sticky cost youre seeing.
A lot of different things roughly a third of it a little bit more about $50 million. You can say is ocean freight increases in ocean freight utilities and almost exclusively in Europe are driving $35 million.
And then the remaining is a mix of freight and labor all of those things we have been going in.
Trying to manage our cost base better, but as we are generally priced on a value add basis, some of the stuff needs to be recaptured.
And.
And then the customer contracts as well as success in doing that but need to continue.
So.
Just to clarify on on the sticky part of this the 125 are you, saying that you need.
The roll off and roll on of contracts and restructuring to mitigate that or or do you do you anticipate.
Do you anticipate that that.
Gets offset by by.
By price negotiations in any kind of <unk>.
Timeline for four for achieving this.
Yes, so our primary focus is to solve those issues in the near term.
They're tough negotiations with our customers because we just got a recent rounds on material economics.
We're not waiting for.
Things to roll on and roll off in it.
To be built into the future.
Pricing that surge.
It takes time to get done.
Material economics, probably took us almost a full year to get to where we're at today.
And.
Although we want them to be done sooner.
To give you a reasonable timeline I'd say, that's about a 12 month.
Cycle and it assumes that there is not new issues that.
That appear on the horizon that we have to deal with.
The next question is coming from Brian Johnson of Barclays. Your line is open.
Hi team this is Jason <unk> on for Brian .
Maybe just kind of a somewhat housekeeping question first just.
Around the what is now a $15 million exposure.
Exposure from raw mats for the full year I mean, it seems I think the first two quarters were even higher than that so it implies that there may be a tailwind in the back half of the year.
Did I get that right and then if there is a tailwind in the back half of the year does that tailwind assuming spot prices stay where they are right now.
We enter 2023 and I guess, maybe just the detail there would be helpful. Is is your limited exposure this year a function of you.
Signing contracts for these items early on in the year and for lower prices, but next year.
New contract is going to be higher prices or maybe a headwind or is it more Oems.
Oems are willing to kind of.
Meet you where the prices are right now and those prices from the Oems are going to continue into next year and you may still be covered.
Yeah at the risk of saying, it's all of the above.
It is kind of all of the above so generally speaking when we look into the future we typically assume that.
Pricing is going to stabilize to where it's at.
We predict so if there is a decline in the market that's generally.
Good news for us the way our contracts are structured.
If if it increases then it's really a function of when we cut our contracts for steel for example, and how that compares to.
Our customer adjustment that we've made some progress.
I'll say closing the gap between them as we pointed out.
That helps mitigate that but.
You really have to be much more specific within assumption and then how does that crank out for us.
Over a course of the year.
Probably wanted to ask maybe just a couple of specifics on it.
In the back half of the year very slight tailwind we had.
If it ends up around a $15 million headwind for the year.
Expect a little bit of tailwind year over year, but just in the kind of single digit character.
The challenge as you look your question about what does it mean for next year is a really good one we tend to lock into our prices on a supply standpoint.
A couple of times, a year and depends on region, but we tended to.
I'm fortunate to have done that before right before the war in Ukraine or conflict in Ukraine initiated.
As prices for steel jumped up.
After that we'll see where those fall through.
So a lot of this is really going to depend on where that steel measure moves.
Probably move into the summer and into the later summer of what it means for next year, we should be able to give you a little bit more guidance on our next phone call, but right now it's pretty cloudy because that market is pretty volatile right now.
Okay, that's helpful and maybe just.
Maybe another kind of high level question somewhat related to that.
You guys are are.
Easter this year had been very protected on material you know steel plus 70% recovery it looks like your phone chemicals or even higher than that so I was wondering if you could.
I'm just kind of comment on.
Of your bill of materials.
How much is.
How much is pass through to the OEM, where either they kind of direct buy it in an era.
On the hook for the price or.
Sourced by you and but has that contractual pass through.
How has that evolved and kind of the quotes youre talking about right now versus.
What's kind of your.
Santa Claus historically and.
I guess, what I'm wondering is.
It seems like suppliers are all kind of opening up the black box for the Oems here.
So a lot of the extent that's already been done but.
I was just wondering if you sense any changes to industry margins are industry ROIC.
As a rule as it relates to kind of more <unk>.
Protection on your material and then kind of being valued specifically on the value add that you bring something you guys get cut and sew and whatnot, but if that dynamic perhaps changes any of the margin or ROIC.
Framework for this industry or for you guys specifically, yes.
And maybe just a few high level responses to the to the question. So.
When you think about our bomb.
You should think about 50% is directed and 50% we control of our total material buy.
Good.
Number.
Generally what we would say is when we are vertically integrated.
We think the margin on our business is superior to when it's directed.
The main reason for that is not just.
The integrated.
Margin on the component levels, but.
We think when we control the supply chain better when we have greater control over the supply chain, we manage it more effectively than.
Our customers do when they direct it and as we navigated through this year.
One thing we continually press on with our customers is.
In many cases, if they allow us to make changes to directed suppliers.
We think we can offset a lot of the cost impacts associated.
And with our global footprint.
We constantly find opportunity too.
To reduce costs or or mitigate cost increase with our customers. So we just <unk>.
Generally think it's a better equation is as the seating business has transformed evolved if you will over the last few years, our customers took a lot more control.
Over the bomb.
And I clearly think that.
They're now starting to realize that they don't have quite.
The network.
From a manufacturing footprint.
Available to them too to mitigate some of these costs. So we constantly remind them.
That they should give.
I'll give that to us in some of our customers we pointed out Toyota Camry for example.
<unk> that benefit and.
And sources in that direction with us.
Our last question is coming from Dan Levy of Credit Suisse. Your line is open.
Hi, good morning.
Thanks for taking my questions.
First I know that in the past you've talked about one of the levers you have to to mitigate pressure is the dynamic.
<unk>.
You can go a bit more into the mechanism of how <unk> works right now and.
How significant of an offset.
You have with the C E.
Discussions with customers.
Yes.
It really depends on the customer.
Their willingness to engage and.
Their willingness to share some of the savings.
What we found most recently is it.
It's a far more effective tool these days.
Than historically it has because.
They're looking for ways to mitigate some of the pressures even if contractually they don't feel that they are obligated.
Pressures put upon them that you know.
As we pointed out our.
Our business model our value added business model really didn't comprehend this type of inflationary pressures. So I think theres been a healthy increase in engagement.
Again, we pointed.
I'll go back to Toyota, who recognize that they were.
Sure.
Extremely engaged we use it as an effective tool.
To mitigate a lot of the cost increase.
We're seeing experience there.
We kind of hold them as.
As the.
The best model, but but I would say across the board our customers are.
But far more effectively engaged.
Where we run into some issue and again this is.
Going back to the earlier question about 50% of our bond is control that means 50%.
Barb.
Ideas.
Won't necessarily manifest.
In a cost reduction or cost offset for adient. So we constantly fight that battle with our customers.
But maybe.
Hopefully that's a little bit of color that better helps you understand how we work the equation.
No. That's helpful. Thank you and then just the follow up.
Given the greater macro uncertainty I think it's fair to assume that any additional capital allocation.
The action and the tourists in terms of return return of cash to shareholders.
Pushed out, but maybe you can just give us a sense of what you need to see in terms of.
Yes market conditions too.
Engage the idea.
Cash returned and then maybe where are we in terms of.
Debt pay downs thank.
Thank you.
Yeah. So it's a great question.
Certainty right now, where we see our customers calling off quite a bit.
And the situation in China is and I should say in Europe has certainly.
It made us probably slow down a little bit or take a pause, although we will repay as I mentioned the EIB note this quarter, but as you look forward.
We do think theres going to be.
I think were eventually there's going to be a bounce back there is clearly demand out there, but theres a lot of uncertainty, but as that starts to flow through and we start to see more normalized production schedules from our customers that we can rely on.
And we start having visibility and we start hitting.
Some weeks, maybe a month or two of.
Some normalcy in consistency there I think we can reopen those discussions as we know our earnings will bounce back quickly.
Talked about the impact of what these lost sales were 790 for the quarter within $2 2 billion for the year as those come back in that will really be sort of a pure cash flow.
It comes to us and we can be confident then to start to be.
More aggressive get to our one five to two times target or at least know that were inside of it and start doing.
Some some max actions, especially with our share price, where it is today its something that <unk> talked about a lot and we'll certainly be central focus as the world starts to come into a little bit more order.
Great and Katherine I'm, showing we're at the bottom of the hour. So this will conclude our call for today. If you are still on the line and have not been able to ask your questions. Please feel free to reach out to me I'll be more than happy to accommodate again. Thank you for joining us. This morning. Thanks, everyone.
Yes.
This will conclude today's conference all parties may disconnect at this time.