Q4 2022 Adient PLC Earnings Call

Welcome to the fourth quarter earnings call all lines have been placed in listen only mode. If you would like to ask a question over the phone. Please dial Darwin I would like to inform all parties that today's conference is being recorded if you have any objections. You may disconnect. At this time I would now like to turn the conference over to your host Mark Oswald. Thank you.

Thank you Danielle good morning, and thank you for joining us as we review <unk> results for the fourth 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, Adient, President and Chief Executive Officer, and Jeff is to file our executive Vice President and Chief Financial Officer, and Jerome <unk> Executive Vice President of the Americas, and recently announced incoming CFO on today's call Doug will provide an update on the business followed by Jeff who will review our Q4 <unk>.

Full year financial results and provide our outlook for fiscal 2023. After our prepared remarks, we will open the call to your questions.

Before I turn the call over to Doug and Jeff There are a few items I'd like to cover first today's conference call will include forward looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties I would caution you that our actual results could differ materially from these forward looking statements made on the call.

Please refer to slide two of the presentation for our complete Safe Harbor statement.

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

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.

And analysts joining the call. This morning, as we review our fourth quarter and full year results for fiscal 2022.

Turning to slide four let me begin with a few comments related to the quarter.

Continuing the trend experienced throughout 2022, a number of external factors, including supply chain disruptions and the resulting operating inefficiencies and increased.

Increased energy costs and labor availability to name a few continue to influence the industry and adient near term results.

On a positive note.

At where we exited fiscal 2022 versus a few quarters ago, we're seeing the operating environment trending in the right direction commodity costs are softening ocean freight costs are trending lower and our customers are continuing to make modest improvements with regard to their operating patterns.

While these metrics signal, we're moving in the right direction, our challenges such as uncertainty with regard to consumer demand energy costs, and availability and labor inflation, which is running extremely hot.

Number of European countries, such as Hungary, Poland, The Czech Republic remind us it's too early to declare victory.

Clearly a different set of challenges will need to be managed in 2023 more on that in just a minute.

For the quarter Adient EBITDA results contained approximately $65 million of loss volume in temporary operating inefficiencies include.

Including less than $10 million of temporary savings.

This is sequentially better versus Q3 and in line with our expectations heading into the quarter adient.

<unk> key financial metrics for the quarter can be seen on the right hand side of the slide revenue for the quarter, which totaled $3 $7 billion was up about $700 million compared to last year's fourth quarter adjusted for portfolio actions executed in 2021.

Adjusted EBITDA for the quarter totaled $227 million, including approximately $65 million to lost volume temporary operating inefficiencies in premiums again, primarily driven by unplanned production stoppages at our customers.

Adient September 30th cash balance totaled $947 million total liquidity was about $1 8 billion.

Cash and liquidity position, which includes the impact of repaying the remaining stub of our 9% senior.

Senior first lien notes due in 2025 is a good proof point that the company has successfully balancing its commitment to strengthen our balance sheet, while maintaining ample liquidity to navigate through the challenging operating environment.

For full disclosure and is called out on this slide we estimate that external headwinds such as loss volume temporary operating inefficiencies and rising input costs negatively impacted adience fiscal year, 2022 revenue and adjusted EBITDA by $2 2 billion and approximately.

$600 million respectively.

Despite these headwinds adient continues to execute actions within its control to position the company for sustained success.

These actions include but are not limited to the teams execution of its day to day process with an intense focus on launch execution cost and operational improvement in the customer profitability management.

In addition, we continue to execute actions to mitigate prolonged supply chain disruption rising input costs, which include structural cost reductions collaborating with our customers to reduce material costs.

And newly adopted measures to lessen the impact of rising energy prices and European labor inflation.

We expect these additional self help initiatives combined with an improving operating environment will support earnings margin and free cash flow growth in fiscal 2023 compared to fiscal 2022.

Jeff will provide greater detail Adience 2023 planning assumptions and guidance in just a few minutes.

Yes.

Lastly, but certainly not lease and as highlighted at the bottom of the slide adient strong operational performance significantly transformed balance sheet and confidence in achieving our mid and long term plan led the board of directors to approve a $600 million share repurchase program.

Okay, Great news and a proof point, our strategy is creating value for adient stakeholders.

Turning to slide five just a few comments on our strategy and how it continues to drive the business forward.

Adient strategy to create value for our stakeholders, which includes our investors customers and employees is fairly simple it can be broken down into four key components.

First we are a pure play in automotive seating no distractions, our leadership position provides global reach and scale, we provide solutions to legacy customers as well as new entrants are vertical integration enables us to provide complete seat solutions supported by a component based business, including poem trim and metals.

And adient in house capabilities to allow the company to effectively take products from research and design to engineering and manufacturing.

Our back to basic mindset has and will continue to drive operational and financial improvements our intense focus on launch management execution and quality has further solidified our supplier of choice status, our efforts to reduce costs, enabling earnings and margin growth is firmly on track.

In fact, these efforts to produce adience free cash breakeven to about 80 million units annually versus 90 million units a few years back.

I'd also like to point out that adient efforts to transform its balance sheet are progressing extremely well with just under $2 billion of debt repayments since Q4 of fiscal 2020.

In addition to seeing improvements in our financial results, we have strengthened our leading position in a number of other ways, including winning new business and encompass business.

But the business wins in fiscal 2022 include a great mix of EV ice platforms and increased vertical integration.

Integration across various legacy customers and new entrants.

We don't expect to see this level of business wins declining anytime soon.

As we continue to partner with our customers to develop solutions for the future including <unk>.

<unk> them sustainable solutions.

Speaking of sustainable solutions on the far right at the slide Youll see adience commitment to creating a sustainable future is key element of our strategy.

Adient is committed to positive environmental social and governance related business practices during fiscal 2022, we concluded.

To increase that commitment with several announce initiatives and projects in fact as pointed out on the press release. This morning. During the most recent quarter, we published our detailed four station policy humans right policy statement and D. Eni commitment statement.

In addition, adient and H two green steel signed an agreement.

The steel maker to supply the company fossil free steel with a low carbon footprint.

We're excited to advance our ESG journey and realize our commitments and actions will create a better environment for everyone.

Bottom line. This focused strategy is working and driving value for all adient stakeholders.

Advancing to slide six I'm pleased to announce an enhancement to adient capital allocation plan.

As you are aware of the company's capital allocation plan has prioritized deleveraging.

With just under $2 billion of debt paid down since Q4 and fiscal 2020.

We are solidly on track and progressing towards a target leverage threshold of one five to two point in time.

Net debt to adjusted EBITDA.

In fact, our fiscal 'twenty three plans suggest.

Our net leverage will settle in that range.

Given the significant progress made transforming the balance sheet.

And our confidence in <unk> near and long term outlook. The company's board of directors have approved a $600 million share repurchase program.

Adient expects to take a measured approach to the timing and the amount of the buybacks to be executed, obviously driven by cash needs and market conditions.

Enhanced capital allocation plan is expected to balance future free cash flow between internal growth projects share repurchase and potential opportunistic inorganic growth opportunities.

Moving to slide seven and eight let's take a quick look at our business wins and launch performance as you can see on slide seven.

Few of Adient, and recent new business wins Adient continues to successfully navigate the challenges operating environment and related commercial discussions, we're winning new and replacement business.

Programs highlighted represent a good mix across powertrains ice in various levels of evs customers, both new entrants and legacy as well as deepening levels of vertical integration, including complete seat combed trim and metals.

It's worth noting that we retained more than 99% of replacement business awarded in fiscal 2022.

The value of our customers see us delivery.

What are the programs we've highlighted as recent awarded Toyota Rav four in the Americas, We were awarded the replacement jet chrome trim business as well as adding front and rear structures of.

A testament to our customers' recognition of our strong execution and our ability to win metals business, where it makes sense.

And lastly, I'll point out that nearly half of the business awards to adient in fiscal 'twenty two.

It was related to EV platforms customers continue to value, our expertise and execution as a developer and.

And launch future platforms.

Flipping to slide eight the team continues to focus on process discipline around launch readiness.

And that has driven a high level of performance, especially considering the launch load and complexity of launches that were planned for the year.

In addition to the number of launches in complexity the disruptions to production schedules presented additional challenges that the team.

<unk> successfully manage through.

Again, a testament to the discipline, we've instilled around the process.

As you can see at the bottom of the slide we have provided some commentary on what can expect for fiscal 2023.

With respect to volume and complexity of launches.

Generally speaking volume is down in the Americas, Europe , and Asia, Excluding China, China is expected to face an uptick in launches versus last year.

Although complexity is up slightly in the Americas, and China I'm confident we will maintain our focus on.

On process discipline around launch readiness.

Driving similar results or better than 2022.

Flipping to slide nine.

The significant program wins and quality launches just discussed are few examples of the company's accomplishments.

Achieved this past year.

Yes.

We're also pleased with our success at further transforming the balance sheet.

With just under $1 billion of debt repayment.

Our continued focus on reducing costs, which has enabled adient to lower its breakeven free cash flow to about 80 million units and our increased commitments to ESG initiatives in 2022.

Okay.

These accomplishments were hard fought.

Especially considering the challenging backdrop and internal operating environment.

As we look ahead fiscal 2023 will likely bring.

A unique set of challenges and obstacles to be navigated.

View that most of you have commented on include the strong dollar and the impact of FX movements rising interest rates uncertainties around customer demand.

Probably the biggest risk or unknown as European energy, specifically costs and availability.

Similar to prior obstacles, such as Covid supply chain disruptions rising input costs Adient has developed and we will continue to refine our risk assessment.

<unk> contingency plans to help mitigate unless it any potential impact.

We've listed a few actions on the slide which include.

Recuperation using heat recovery from production processes, where appropriate increased safety stock on products that require gas for their manufacturer simple actions such as our operating facilities at lower temperatures.

And in certain circumstances, the installation of local gas tanks and electric boilers.

Again. These are examples intended to demonstrate adient is not sitting idly by.

But as actively navigating the environment to ensure we're positioning the company for long term success.

Before turning the call over to Jeff and turning to Slide 10, Let me conclude with few reasons why we're optimistic with regard to future.

First adient operations are performing extremely well outside of the temporary operating inefficiencies.

We're focused on executing our strategy, which has enabled the company to drive the business forward last year.

Challenging operating conditions.

Because of that we enter fiscal 2023 from a position of strength, although we expect the operating environment to improve in 2023 compared to 2022, there are several obstacles will need to overcome.

But the team is ready for the challenge and our track record suggests we're more than capable.

We are confident successful execution of our strategy will continue to create value for all adient stakeholders, our investors customers and employees.

Our announced enhanced capital allocation plan demonstrates the confidence.

With that I'll turn the call over to Jeff take us through adding its fourth quarter and full year 2000 Teu.

Fiscal performance and provide our initial thoughts on what to expect in fiscal 'twenty three.

Thanks, Doug and good morning, everyone, let's start on page 12.

Before jumping into the financial results I'd like to point out that adient. This most recent quarter and future financial results.

Specifically equity income and consolidated income will be impacted by a change to the shareholders' agreement at Adient Kuiper joint venture. This change should be considered further fine tuning of our China operations. If you recall over the past few years Adient has transformed its China operations in several facets the most significant being the monitor monitor.

<unk> have several joint ventures, which enabled adient to drive it strategy independently capture growth in profitable and expanding segments.

Great best practices around across the market and finally provide for more certain value realization.

While integrating and growing our 100% owned CQ AT&T entity. The team has also continued to improve and optimize our global capability in metals and mechanisms through our paper joint venture, formerly named a Y M. The 50 50 joint venture with Jaan Fang provides adient with access to world class mechanisms and in <unk>.

<unk> adient to reduce our own investment in this area to.

To further strengthen the value of our bark hyper interest adient recently restructured our shareholders agreement with our partner the key outcome being.

A reduction in prices charged by hyper to adient and Jan Fountain Adience reduced equity income is expected to be approximately offset by higher consolidated income saw this result in audience Q4 <unk>.

I will cover in just a minute.

<unk> has agreed that hyper will expand its operations to include Mexico, resulting in expected annualized savings to adient, plus an additional working capital pickup.

And finally, the restructured relationship is also expected to save adient significant future capital spending and its mechanisms platforms.

With that as a backdrop, let's jump into the financial results on slide 13.

Adhering to our typical format the pages formatted with our reported results on 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.

For the quarter the biggest drivers of the difference between our reported and our adjusted results relate to a Brazilian tax recovery pension mark to market purchase accounting amortization and restructuring and impairment cost details of all the adjustments for the quarter and the full year are in the appendix of the presentation.

I'd also point out similar to last quarter within the appendix. We've included pro forma results for each of the quarters in fiscal 'twenty, one adjusting for the numerous portfolio ex portfolio actions executed last year.

We believe these pro forma adjustments provide helpful comparisons between the current year and the prior year results by adjusting the prior year to be on a consistent basis with the current one.

High level for the quarter sales were approximately $3 7 billion up about 32% compared to our fourth quarter results last year or about 24% compared to last year's pro forma results.

Improving vehicle production in each of the major regions.

<unk> was the primary driver of the year over year increase.

Adjusted EBITDA for the quarter was $227 million up $109 million on year on year reported or $157 million compared to last year's pro forma results. The increase is primarily attributed to benefits associated with higher volume and mix.

Improved business performance and commercial recoveries. These.

These benefits were partially offset by the impact of increased freight and utilities.

Commodity cost and the negative impact of currency movements I'll expand on these key drivers in just a minute.

Finally at the bottom line Adient reported an adjusted net income of $51 million or <unk> 53 per share.

On slide 14.

We provide a similar high level summary of adient and full year financial metrics.

For the year sales were $14 $1 billion up 3% compared to fiscal 2021.

Or down about 1% compared to last year's pro forma results the negative impact of FX movements weighed on the comparison by approximately $570 million and more than offset the modest year over year increase in vehicle production.

Adjusted EBITDA was $675 million down $242 million year on year as well.

As reported or down about $135 million compared to last year's pro forma results.

External headwinds that weighed on the year on year comparison, which we discussed in great deal detail throughout the year included increased input cost such as freight and utilities temporary operating inefficiencies relating to supply chain disruptions the impact of negative mix FX movements and to a lesser extent lower.

Equity income at.

As Doug pointed out earlier, we estimate that external headwinds.

Such as lost volume temporary operating inefficiencies and rising input costs negatively impacted audience fiscal 'twenty, two revenue and adjusted EBITDA by $2 $2 billion and $600 million respectively.

At the bottom line for fiscal 'twenty to Adient reported net income of $11 million or <unk> 11 per share.

Moving on let's break down our fourth quarter results in more detail I'll cover. The next few slides rather quickly as detail for the results are included on the slides.

This should ensure we have proper amount of time for Q&A.

Starting with revenue on Slide 15, we reported consolidated sales of approximately $3 $7 billion. The sales shown includes sales at adient, CQ and Lf ventures, which are now consolidated since since closing the strategic transformation in China as well as other portfolio actions.

<unk> and fiscal 'twenty, one the $3 $7 billion is an increase of $700 million compared with Q4 fiscal 'twenty one pro forma results.

The primary driver of the year over year increase was higher volume and pricing call. It just under $900 million relating to volume and pricing, including about $72 million of higher commodity recoveries the negative impact of the impact of FX movements between the two periods impacted the quarter by about one.

Hundred and $97 million.

Focusing on the table on the right hand side of the slide Adient as consolidated sales for the Americas and EMEA generally outpaced production that said when stripping out the impact of commercial recoveries results were generally in line with regional production.

In Asia, excluding China, eight adient outpaced the market. This was primarily driven by Korea, where adient benefited from improved mix and new business wins and strong exports in China Adient was adversely impacted by negative customer mix as certain of <unk> customers or more adversely impacted by supply.

Hi chain disruptions and are lockdowns versus certain other local Chinese manufacturers that significantly outperformed the market such as BYD and Sherry that have little or no adient content.

We view this as temporary and will balance out as supply chain.

Supply chain has continued to improve.

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 adient unconsolidated seating revenue year over year results were up significantly compared with last year's production constrained results when comparing to the overall.

China market, where a large majority of Adience unconsolidated sales are derived our performance modestly outpaced industry production.

Moving to slide 16, we've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation such as executive Office Communications, corporate finance and legal big.

Big picture adjusted EBITDA was $227 million in the current quarter versus $118 million reported a year ago or $70 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 todays business.

The primary drivers of the year on year comparison are detailed on the page and are consistent with what we expected heading into the quarter.

Positive influences included approximately $118 million associated with increased volume and mix improved business performance also benefited the quarter by $85 million looking deeper within that bucket. The positive driver was improved net material margin of $62 million of which we'd call.

That about $15 million related to the restructured pricing agreement within our paper joint venture I'll note that this benefit related to the three quarters of retroactive to the start of the calendar year, so call it approximately $5 million per quarter.

Labor and overhead performance improve by about $29 million as operating inefficiencies lessened and launch ops waste and tooling provided an approximate $8 million benefit.

Unfortunately, but as expected certain negative factors muted the positive impact to business performance, specifically about $14 million of increased freight cost.

Other headwinds as noted on the slide include an increase in SG&A cost of about $32 million, which is primarily driven by performance related compensation and increased engineering spend note that incentive compensation for the full year is slightly down versus 2021, but in Q4. It is a headwind.

Since we decreased the reserve in Q4 of last year, while we increased it this past quarter. Additionally.

Additionally, higher net commodity prices of about $9 million and the negative impact of currency movements call it $6 million impacted the quarter.

Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the presentation high level for the Americas. Several positive factors drove the year on year increase and included improved volume and mix improved business performance that was driven by increased net material margin.

As pointed out was aided by the restructured pricing agreement at the <unk>, JV, which primarily impacted the Americas launch ops waste and tooling performance combined with improved labor and overhead also benefited business performance.

Increased freight and SG&A costs, primarily driven by performance related compensation and increased engineering spend partially offset these benefits.

In EMEA the year over year improvement was driven by several factors such as improved business performance, which was underpinned by commercial recoveries favorable launch ops waste and improved labor and overhead resulting from improved customer production rates. In addition, volume and mix also contributed to the year on year improvement.

Partially offsetting these benefits were headwinds related to increased commodity cost increased utility costs, the unfavorable impact of FX movements.

And increased SG&A costs, primarily associated with performance related compensation.

In Asia, the benefits of higher volumes and mix were partially offset by unfavorable FX movements and lower equity income, which was expected given the restructured shareholder agreement impacting archived for joint venture as noted previously this reduction was almost completely offset by higher consolidated income.

Let me now shift to our cash liquidity and capital structure on slide 17, and 18, starting with cash on slide 17, I'll focus on the full year results as the longer timeframe help smooth some of the volatility and working capital movements.

Adjusted free cash flow defined as operating cash flow less capex was $47 million.

This compares to a breakeven result last year.

The year on year improvement and positive outcome was hard fought especially considering the challenging operating environment. Despite the lower level of consolidated earnings driven by persistent supply chain issues that our customers and lower cash dividends, which were expected as a result of our strategic sales our transformation in China numerous positive.

Factors, many within adient control more than offset these headwinds they included a significantly reduced the level of restructuring, which had been elevated over the past few years as accurate as adient executed its right sizing efforts within our metals business reduced interest driven by our focused deleveraging efforts, which as mentioned earlier.

Include about $1 $9 billion of debt prepayments since quarter four of 2020, and the timing of commercial settlements and VA deferrals in payments.

Additionally, a lower level of capital spending, which as you know is largely driven by our customer launch schedules during fiscal 'twenty to adient cap spending was below our normalized spend as certain launches were pushed into the future. In addition, the team continues to focus on reuse of capital where appropriate this mindset.

Continues to drive cap spending lower.

One last point and is called out on the slide Adient continues to utilize various factoring programs as a low cost source of liquidity as at September 30th 2022, we had $269 million of factored receivables versus $126 million in last year's Q4. The increase is primarily attribute.

Attributed to improved sales in the quarter note that despite the higher level of factoring total trade working capital is still an approximate $20 million outflow for the year and reflects the higher volume of sales activity in Q4, 'twenty two versus Q4 'twenty one.

Flipping to slide 18 as.

As noted on the right hand side of the slide.

We ended the year with about $1 $8 billion of total liquidity comprised of cash on hand of $947 million and about $900 million of undrawn capacity under our audience revolving line of credit adient debt and net debt position totaled about $2 6 billion and $1 6 billion respectively.

At September 30th 2022.

Also of note during the quarter the company repaid the final Stubhub, it's 9% senior secured notes as brought our principal debt repayment for 2022 to about $960 million no doubt that we've made great progress on our balance sheet, our net leverage target of between one five and two times is solidly within reach.

Given our outlook for 2023, which I'll cover next.

One last point before moving on and as noted on the slide subsequent to the quarter end the company Opportunistically refinanced its ABL revolver. The sizing remained at $1 5 billion. The maturity extended to 2027 with pricing of Sofa, plus $1 50 to 200 basis points with that.

Let's flip to slide 2020, one and review our outlook for 'twenty three.

On slide 20.

As Doug noted earlier adient enters 2023 from a position of strength, we successfully navigated through a challenging 2022 and drove the business forward as evidenced by the operational and financial accomplishments just discussed that said several new obstacles will need to be managed in the coming year.

The guidance provided today is based on the current operating environment.

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

The foundation of our fiscal 'twenty two plan.

I should say the foundation of our fiscal 'twenty three plan is generally aligned with the October IHS estimates.

To the far right of the chart, we have highlighted our expected sales performance by region.

Adjusting for FX, we expect our sales to be slightly favorable to the industry in North America.

Modestly lower in Europe , and significantly better versus the market in China. China's outperformance is primarily attributed to the roll on of various new business and adding on some favorable customer mix.

In the lower right hand corner, we provided our FX assumptions, which as many of you have commented on in your recent reports is expected to be a significant headwind year on year. In fact based on our current assumptions, we estimate the year on year impact 22 versus <unk> 23 for adient topline and EBITDA is about <unk>.

$750 million and $45 million respectively.

Outside of production and FX other factors, such as commodity prices labor availability and cost and freight are expected to impact the industry and adient and 2023.

Biggest unknown risks today relate to our European business, specifically around energy cost and availability labor inflation and a number of countries consumer demand production and adience ability to recover increasing input costs from our customers with that said our 2023 plan takes these factors into.

Consideration and based on current market conditions, we expect to deliver earnings margin and free cash flow growth.

In 2023 compared with 2022.

Flip to slide 21, and review the expectations and <unk> key financial metrics.

First based on October production forecast and the FX rates just discussed we would expect Adience consolidated sales to land at approximately $14 $7 billion. This would represent an approximate 10% increase year over year when adjusting for FX.

For adjusted EBITDA, we anticipate it will be approximately $850 million. This would translate into an approximate 100 basis point improvement in margin to five 8% excluding equity income, which is forecast at $90 million and included in adjusted EBITDA Adience margin would be.

About five 2% or 100 basis points higher versus the current versus the year just completed.

Important to note, we expect the calendar <unk> of $850 million will be at its trough in the first quarter, but steadily improving as 2023 progresses well.

One explanation is the lumpiness of expected commercial recoveries. For example, we expect to recover the increase in energy cost as we progressed through the year. However, it will take time to negotiate and unfortunately, the cost or impact impacting us today.

With regard to Q1 as a result of rising input costs that are that we're experiencing today, such as energy freight labor and certain commodities such as steel in Europe , We expect our Q1 EBITDA to land at or slightly below $200 million, even though sales should settle in around the same level of the quarter just completed.

Call It $3 7 billion.

Interest expense is expected at about $160 million, given our expected debt and cash balances as well as interest rate expectations.

Cash taxes, thanks to various tax planning initiatives are expected at about $90 million Capex is expected to trend back to a more normalized level call. It approximately $300 million again in 2022 was depressed given the delay of certain launches at our customers and finally, our improved earnings combined.

With our reduced calls for cash such as the benefits associated with our deleveraging lower restructuring and relatively flat cash taxes are expected to underpin free cash generation of about $200 million.

As a reminder, and similar to the calendar organization of our earnings Adience cash flow typically experiences an outflow in Q1, followed followed by generally positive quarters thereafter.

Absent exogenous events such as Covid.

Et cetera.

Circling back to Doug's earlier comments related to our newly approved share repurchase program and our planned measured approach to repurchases. It's unlikely given the typical calendar <unk> of cash flow we'd be in the mark we'd be in the market before Q2 of this year.

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

Thank you Ed we'll begin the question and answer session, if you'd like to ask a question over the phone. Please press star one if you would like to withdraw your question. Please press star two and the interest of time, we kindly request that you ask one question and one follow up our first question comes from John Murphy Bank of America. Your line is now open.

Good morning, guys and Jeff Congratulations on moving to a slightly more complex situation you seem like a glutton for complexity and Jerome Nebraska was taken over here, you'll have to deal with us more.

Just just quickly.

On the 2023 outlook.

The context of your statements on 2022, you mean, Jeff you kind of alluded to this disruption in the industry caution you about $2 2 billion on the revenue line and $600 million at the EBITDA line.

Through 2022, I mean, how much of that do you think is.

You're not going to repeat going forward or maybe even beyond 2023 is the kind of stuff that will disappear as things normalize.

How do you what part of that is kind of one time based on volatility in what.

What is kind of normal course could.

Those big number yeah.

They are big numbers I think we would expect to recover the volume and the volume is <unk>.

Roughly two thirds of the 600 million call.

Call It 400.

We would expect.

Get back to 90 ish million or 90 million vehicles give or take as it relates to the other 200 are made up of what we call. The operating inefficiencies call. It about 100 and about 100 of inflationary type cost energy.

Freight et cetera.

The temporary operating inefficiencies, we've already started to see some improvements there.

As supply chain.

Become a little better I would say certainly not too full.

Full level, but we've seen a little bit of green shoots in there and we would expect that to continue to improve as it relates to some of the what we call sticky cost.

Some of this.

If inflation tap taps down and <unk>.

Negotiating with our customers commercial contracts that makes sense for this space, where if we're going to have that type of inflation.

Our type of business model some of that is going to have to be covered by the customer we've had great progress on that but that one.

It will probably take.

Hopefully within 2023, but there is some sort of a time period at least of a few quarters.

And what you really need is some sort of calming of the inflationary waters here. If it gets back to more normalized rates I think youre going to see us have that money come back in the system as well.

Okay, and then just a follow up.

And Doug just maybe more for you I mean, if you look at this I mean, the operating or EBIT margin for for next year of 'twenty. Three is implies sort of mid 3% range I know, you've kind of making improvements, but can you remind us where you think that can ultimately go and how fast or what the sort of the market conditions are going to be to get to sort of that <unk>.

Ultimate target.

Sure John .

So getting back to.

Kind of that 300 basis point, we still haven't.

Locked away from our commitment to get the business adjusted EBITDA in the 8% range.

So when we look at.

Where we need to walk from this year.

I will say out over.

The course of the next few years, what whats most important is volume coming back Jeff alluded to it in his comments on the walk to 'twenty three.

We need to get back to a $90 million build that brings quite a bit of EBITDA back that's the biggest.

Piece of it the other two pieces he touched on as well.

When we made that commitment.

The 2019 timeframe there spent a lot of inflationary pressure on the business, we need to ultimately get that back.

You could say that's I don't know if I'd go as far to say Thats, a third but it's 20% of the way.

And then it's just driving continued performance and maybe that's another 20% piece of the equation.

The last piece is FX that doesn't really closed.

The return on sales gap, but it certainly adds to EBITDA. So those are the pieces.

You know I think about it more and when when does the market get back to some level of normal behavior.

It drives volume and I think either we commercially address the other pieces are we.

Or for the market corrects them themselves. So Doug I'm, sorry, just a follow up so you're basically saying 90 million units normalized market plus inflation of Forex kind of normalize that would get you to that 8% mid.

Mid 8% EBITDA margin, but like is that the kind of thing you could do in the next one to two years, if things normalize which is tough to believe but.

As far as the normalization or is there still micro specific actions that we're taking internally that we would need to be taken to get you there, meaning that that would sort of be maybe three year two to three years out that if things normalize and those actions are taking you get to that point Im just trying understand market conditions <unk>.

Fair question.

Thank you.

It's realistic to see it happen in two years, if the market normalizes or.

Our business is performing extremely well right now.

We've addressed a lot of the issues that plagued the business not that long ago.

So I think that's a realistic timeframe to consider.

I think the only disclaimer I'd put on that but I don't I'm not really trying to disclaim. It is this business is about execution every single day. So we.

We have to continue to perform the way we've been performing I am confident that the teams in place to do that.

So.

That's my expectation is that.

That happens over the course of the next couple of years.

And one thing to think about that John is if you're the last moment of really kind of relatively normal operating environment. We had was the first half of our fiscal 'twenty, one and we were north of 7% margin.

Since that time I would argue we still can.

Brought down a bunch of our cash.

Fences and we have also.

<unk> experienced positive ROI.

And rollout of business. So when we look at let's say the 22 versus <unk> 23 equation across each region, we have seen improvements in the business coming in versus the business going away that's going to be a portion of this as well, but we need some operating environment, that's a bit more normalized like we had in that first half of 'twenty one.

Thank you very much guys I appreciate it.

Thank you next question comes from Rod Lache with Wolfe Research. Your line is now open.

Good morning, everybody.

Alright.

Hoping to just get a little bit more insight into the drivers of that earnings bridge for 2023. So.

You're talking about 175 million of EBITDA growth.

It looks like about 10% organic growth.

That 15% margin that billion four would add about <unk> 10.

And it looks like you would subtract maybe $50 million from FX and equity income.

Up to like 160.

I guess I just don't see.

The benefit from Illumina.

Eliminating.

Some of the temporary or sticky costs and you can just help us.

Understand what's behind.

Behind that.

Yeah, let me try to work through a few of these for you.

And the first side.

The pull through on volume is somewhere call. It 200 twentyish.

Joe.

About $45 million and FX coming against that you.

You have.

Hi, he kind of as an.

<unk> for us.

It's a complicated mix because you're always taking the time, where we set prices for steel and when I say econ I'm, just talking steel and chemicals.

When you look at the prices, we sat with our supply base, which is a couple of times a year versus the myriad of algorithms, we have with each of our customers on recovery.

We've done a lot to improve that but there is the timing of all of that still has some impact and the biggest impact for us in 2023 is going to be Europe .

As.

Maybe demand is down but since energy prices or so.

Much higher it's caused increases in steel pricing and chemical pricing.

And so we have.

Between that negative econ, and some of the commercial items that wed call inflationary and.

Context.

There is going to be.

Yes, somewhere in that $150 million $130 $40 million that we've assumed between those two items that are going to go backwards for us.

And outside of that we have a little bit of investment in Asia and from a growth standpoint, and engineering call it $30 million to $40 million and then we're seeing improvements in the business elsewhere, which is offsetting all of those.

Driving driving performance and this is mostly from balance and balance out of new programs. The China footprint. For instance is very attractive for US you see that in the sales number China should deliver pretty well for us in 2023.

Little bit higher equity income as well, we will balance that out to the 850.

And we will continue to work on between the commodity piece and some of those inflationary pieces I would say the team is focused and we will try to do better than those numbers, but that's what's embedded in that <unk> 50 guide.

Okay. So it sounds like by the end of next year, you'll have $250 million of of sticky costs.

We work them beyond that.

That's helpful.

Can you just clarify just two other things when you're talking about complexity of launches maybe you could just explain just external standpoint, what that means for us since we're looking at and and then this hyper shift in North America are you, replacing internal operations or what what's the replacing by.

Bringing hyper into here or are they just taking over something in Mexico.

Yes.

Hey, Rod it's Jerome.

Both of those so the first one on when we talk about complexity of launches what we look at is.

A couple of factors the first one being how much vertical integration is there so.

If we're only doing say that jet portion of it or the just in time portion of it let's say one level of complexity versus if we have the <unk> piece of the trim piece of the phone piece of it and then our first real metal with second row metal a third row metal then that's a a higher level of complexity.

And then if you take that and you say, we're shipping into multiple sites. So if we're doing ship.

Shifting to plant a and plant be then that's a whole another level of complexity.

And so when we look at it that's kind of how we look at the complexity associated with it.

Then what's the time from were awarded until the time, we go into production.

And so we we kind of look at that and then kind of the last factor is how many different variants are there so is it.

On one end of the extreme one trim code with one type of metals. So is it just a very simple.

Manual front seat tours, there 30 trim code then you've got a manual and then a four way power wave power with.

A massage and heat and everything else that goes with it.

So thats, how we kind of grade or complexity, when we look at launch complexity.

Does that answer your first question around how we rate complexity of program.

Guess I'm just trying to understand actually so we're looking at.

Consolidated nurse.

Are you, suggesting that because of all the moving parts the incremental margins on.

On your backlog or not.

<unk> is as good as they normally are initially or are they more ultimately because of the vertical integration.

No. It is actually more vertical integration is better for us from that.

Mhm, Yes, yes, yes, I would just say the other piece to that is just the pricing discipline.

Installed a number of years ago and in the customers that we focus on so.

To us that all customers are equal so we're very deliberate.

And who we pursue.

And.

Our vertical integration is an important part of that that's why we point to the Toyota program for example.

And then.

Again, just executing on the commercial discipline inside of it because it was that with all of that complexity comes change orders and the discipline around the change orders and the ability to manage and drive margin.

And then.

Your second question around Mexico.

With Mexico allowed us to do with paper.

Basically offset our own capital investment so by them coming to Mexico. It was localization.

So we were able to onshore production back into this region and then.

To eliminate some of our own planned capital investments that would have otherwise been placed in the region that was the the benefit of I think what Jeff called.

Some fine tuning around that JV.

Okay.

<unk>.

Thank you.

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

Alright, Thank you very much two questions. Please.

The first one is around the outlook for gross above markets.

You rightfully pointed it looks like six points into.

Into next year can you maybe briefly stone for us in terms of driving factors, so market share gains backlog versus vehicle customer mix I guess.

What gives you confidence in this level of outgrowth.

Emmanuel.

One of the nice things about our business as we have the ability to.

Trace in really every vehicle that's being produced into our plan.

By region.

So as we go through that the balance in balance out as the.

Is a big piece of it saying in China, where we've seen.

Cause some nice new volume launching.

So I'd say, that's the big jump in Asia.

In the Americas.

I'd say, that's probably also the big driver here as we see the vehicles coming in and the volumes associated with them versus those vehicles are coming out theres, a couple of hundred million dollars or so of them.

Addition, there as I look at.

I'd say, there's a few areas, where we have a bit of a mix impact as well just with some of our vehicles, but I'd say overall, we're pretty comfortable with those numbers, but it is just driven by <unk>.

Probably good awards that were that we were able to secure and are launching here in 'twenty three.

Okay, and just to clarify because I'm not familiar with balance and balance out.

Oh, sorry.

Word we use but it's essentially the.

Programs that are coming in being launched in 2023 are coming of.

Kind of full year annualized impact in 2023 versus those programs that have.

Gone out of production are going out of production.

Okay. So net net.

Net new business launches basically correct correct.

Okay.

Great.

And then second question looks like both in terms of margin improvement into 2023, but then also towards the mid term targets.

Volume industry volume normalization seems to be playing sort of like a fairly large oversize driver of this and I think you mentioned a few times the 90 million units reflect level now.

When I look at even the IHS, they probably don't have $90 million in late 2025, and that doesn't even assume any sort of looks like pronounced impact from massive consumer pressure or recession or anything like that over the next few years. So.

Would there be.

Assuming I guess volume dozens in the industry volume doesn't normalized towards nicely and doing it in a smooth way over the next couple years or so.

Would it make sense, we should look like to right size the business for.

Lower normalized.

Normalized type of volume or is your conviction that are high that 19, Milanese, where adient should be size for.

Yeah.

Fair question.

So.

I would say what.

We've really been focused on is not really sizing our business to $90 million, we're sizing our business for the foreseeable.

Business, that's planned in front of us.

And again, if you just look at the actions we've been taking over the last couple of years, we have not waited for the market to return we have not waited for.

Covid.

And supply chains to.

Improve.

The size back so we're always looking at ways to.

To pull.

Overhead cost out of our business, that's better aligned with how we foresee the market.

Again for modeling purposes.

And the way we use IHS.

That's our plan as we lay it out today.

If you know if the market dries up and.

And consumers stop buying vehicles will take the corresponding actions to to adjust to that.

To that market environment.

So that's just the way we operate the business I'll say almost on a daily basis.

So there would be actions actions.

It would be further cost reductions on the SG&A side likely.

And if if programs go out of production earlier than expected there may be some restructuring charge.

But again, we're building a model based on our best information that we have in front of us.

Yes understood. Thank you.

Well.

Our final question comes from Joseph Spak with RBC. Your line is now open.

Thank you and Jeff also Tyco earlier sentiment congrats and congrats Josh the team.

I guess, maybe just to pick off pick up on that on that last comment I think earlier.

In the year, you had mentioned you'd be aiming for something like close to a $100 million in cash restructuring this year, which would have been down a lot, but it was only $57 million if I'm if I'm reading this correctly. So what was something delayed there or and then maybe just like what's embedded.

And in your 23 free cash flow guidance for cash restructuring.

Yeah, it's kind of more of the same on that number we always leave a little bit of.

That will be a cushion in there when we we guide because you never know exactly as you go through the year, but we've been I think we've been very prudent about how we.

Deal with restructuring we are also really aggressive in 2020 and 2020 to take out a lot of cost.

So most of what we see as far as cash restructuring is stuff that we've already announced but especially in Europe . It takes a couple of few years for some of those actions to fully spend their way through.

So I'd say it's.

It's a fairly conservative guide that we usually provide and we try to manage it down from there.

Okay, So pretty flat year over year, then yeah, I'd say flat.

Within 10.

Got it.

$15 million plus or minus from that number okay.

And then maybe just to follow Entre to Emmanuel <unk> question on the 6% growth over market. Just just like you you listed a bunch of factors are which are helpful. Just to be clear is is there no assumption for continued.

Recoveries in that growth over market.

So the what we call commercial recoveries sort of add to to our sales, it's pretty modest it's $50 million to $60 million of additional recoveries versus what we achieved in 2022, which is embedded in that plan, which is pretty small.

Okay. So so that area, so that probably helps a bit higher.

Much higher okay.

Okay, alright, thanks, so much everyone.

Yes, Thanks, you okay great.

Thanks, operator, it looks like we're at the bottom of the hour here. So with that that concludes the call. If there is anybody else on the call that did not have questions answered. Please feel to reach out to myself or Eric throughout the day will be more than happy to help.

Again, thanks for participating this morning, thanks, everyone.

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