Q1 2023 Adient PLC Earnings Call
Well go Daddy and first quarter of fiscal year 2023 earnings call. At this time all participants are in listen only mode until the question and answer session. If you'd like to ask a question over the phone. Please dial star One 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 my God, Bob Thank you.
Thank you Danielle good morning, and thank you for joining us as we review <unk> results for Q1 fiscal 'twenty three 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, President and Chief Executive Officer, and Jerome <unk>, Our executive Vice President and Chief Financial Officer.
On today's call Doug will provide an update on the business followed by Jerome who will review, our Q1 financial results and outlook for the remainder of fiscal 2003.
After our prepared remarks, we will open the call to your questions.
Before I turn the call over to Doug and Jerome there are a few items I'd like to cover first today's conference call will include forward looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties.
I would caution you that our actual results could differ materially from these forward looking statements made on the call.
Please refer to slide two of the presentation for our complete safe Harbor statements.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments I will now turn the call over.
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 first quarter results for fiscal 2023.
Turning to slide four let me begin with a few comments related to the quarter.
As expected heading into fiscal 2023, the overall operating environment appears to be trending in a positive direction.
However, I would still characterize the environment in Q1 is choppy.
But certain external influences trending favorably and other influences, appearing stubbornly persistent placing downward pressure on the industry.
With regard to the positives it was encouraging to see softening steel energy and freight costs.
FX movements also trended favorably while these metrics signalled were moving in the right direction other challenges.
The resurgence of COVID-19 in China elevated labor costs tight labor availability and tightening central bank monetary policies continue to cloud the outlook.
Visibility remains murky.
That said unbalanced that many puts and takes resulted in the quarter generally in line with our internal expectations.
Adient and 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 $219 million.
Compared to last year's first quarter.
Adjusted EBITDA for the quarter totaled $212 million up $66 million.
Eddie It ended the quarter with a strong cash balance.
And total liquidity of $900 million and $1 9 billion respectively.
Okay.
In addition to Q1 fiscal 'twenty three improved year on year financial results Adient continues to execute actions within its control.
To position the company for sustained financial success.
These actions include but are not limited to the team's intense focus on launch execution cost and operational improvement and customer profitability management.
Winning new business across the various regions customers and platforms, which overtime are expected to strengthen our leading market position not to mention support improved margins and earnings.
<unk> is also executing actions to provide value add to adient stakeholders every day.
That's our customers suppliers, who are employees. These efforts have been validated repeatedly with numerous industry and customer recognition awards, including most recently.
Automotive news champion of diversity Award.
Employer 2023 certification by the top employer Institute for EMEA.
EMEA.
And recognition in China from <unk> VW for our quality performance.
Okay.
Finally, adding continues to make progress at building a sustainable future. The details of our many ongoing ESG initiatives as well as our fiscal year 2022 accomplishments are included in the company's recently published sustainability report.
Turning to slide five in commenting further on the topic.
The 2022 sustainability report highlights among other things how adient is.
Reducing its scope, one and scope two absolute greenhouse gas emissions, which is shown on the lower right hand side of the slide are down 25% compared with our baseline year for fiscal 2019.
Implementing innovative seat solutions, including materials and processes in our metals plastic foam trim and complete seed products that promote circular economy and helps adience customers meet their ESG goals.
Enforcing policies and practices that protect human rights in accordance with the UN global compact and encouraging our suppliers to adopt similar business practices.
And advancing diversity equity and inclusion through employee training opportunities inclusive hiring.
And employment development processes.
An employee led business resource groups.
In fact, recognizing a diverse and inclusive workforce.
Environment has been part of Eddy it for years.
For more than two decades as a company has been involved in successful.
Diverse joint ventures, with Detroit based Bridgewater interiors.
Particularly proud that this forward thinking unique joint venture has stood the test of time.
And continues to grow and remains viable venture for our customers.
One additional milestone dimension during Q1 fiscal year 'twenty three the science based target initiatives validated ediets near term greenhouse gas emissions reduction targets.
Affirming adient has established a clear pathway to achieving its emission reduction goals.
We realised reaching the company's full potential cannot be achieved without firmly integrating sustainability into our core audience operation in order to become.
The foremost sustainable automotive supplier.
We've included a link to the full report please take a few minutes to see the progress we've made in our sustainability journey and the commitments, we intend to deliver in the future.
Turning to slide six and seven now, let's take a look at the business wins and launch performance as you can see slide six highlights a few adient recent wins.
It continues to successfully navigate the choppy operating environment and related commercial discussions why winning new and replacement business.
The programs highlighted represent a good mix of wins across.
<unk> and various levels of EV powertrains, new entrants and legacy customers as well as deepening levels of vertical integration.
Including.
Complete seat from trim and metals.
One of the programs highlighted is the recently awarded Toyota Rep for replacement business in China.
Also worth noting nios, new helps vehicle platform was awarded to adient strengthening the company's position with the growing Chinese domestic Oems.
Helps us meals latest sub brand marketing and then.
Entrants into the mass market outside of the premium luxury space.
One final highlight to mention as noted in the callout box to the right Adient is pleased to provide a complete seat or components to all through 2023, North American car and truck of the year winners.
Integra Ford F 150 lightning.
And Keith <unk> six.
Flipping to slide seven as we typically do we've highlighted several critical launches that are complete in process or scheduled to begin in the near term.
I'm happy to report that launches currently underway are progressing in line with our expectations.
The launches and platform shown not only impact the audience just in time facilities, but span across our network of film tram and metals facilities.
The team continues to focus on <unk>.
<unk> discipline around launch readiness has driven a very high level of performance, especially considering the launch load and complexity of launches that are planned for the year.
We have no intention of letting up.
Before turning the call over to Jerome and turning to slide eight let me continue with few comments related to the current environment.
And how it's evolved over the past few months.
If you recall entering fiscal year 'twenty three adient expected the overall operating environment to improve in 'twenty three versus 22.
That expectation has not changed based on what's transpired in our first quarter that said.
Certain of the underlying assumptions around variance influences that were expected to have a significant impact.
And adient twenty-three results have shifted.
As you can see on the slide we laid out certain positive or negative influence.
That we navigated entering the year on.
Any other positives include.
Many of the positive influence remain intact, such as adient self help initiatives the benefits from the balance and balance out of new programs the impact of supply chain disruptions.
Which are still placing downward pressure on the industry, but trending in the right direction.
<unk> settlements with our customers, which encompass a variety of transactional items.
Including recovery of inflationary costs continued to be successfully negotiated.
I would note that as certain inflationary pressures soften the absolute level of recoveries needed to achieve our 23 earnings commitment.
Will be reduced which is good news.
Think of that as Derisking. Our plan lastly, although we continue to forecast a year on year, a tailwind from increased vehicle production the.
The magnitude of benefits have moderated given the recent revisions to production forecast.
In China for example, S&P recently lowered the forecast by approximately 500000 units.
In the March quarter versus third December forecast.
Given adient September 30th fiscal and the expected recovery, which is largely recalled rise into December quarter will benefit our fiscal year 'twenty four not in fiscal year 'twenty three.
On the right hand side of the slide just a few comments that we're seeing.
And expecting from the three key markets in the Americas, We continue to monitor potential softening of consumer demand, primarily driven by rising interest rates, which ultimately impacts affordability.
That said our customers have not signaled.
Through their production forecast to us that this is the case, we believe inventory rebuild combined with the likely increase in sales initiatives should support the current vehicle build assumptions for the remainder of fiscal 'twenty three.
In China, we're monitoring returned to work absenteeism post lunar new year is given the potential resurgence of Covid.
Yes.
At this time at <unk> remains very low most of our facilities now have either.
Low single digit of cases or no cases at all and we're managing them as normal absenteeism.
Although vehicle production was revised down in our fiscal second quarter as I. Just mentioned, we believe solid economic growth and the absence of Covid restrictions will support improved production beginning in the back half of the year.
For Europe , the outlook remains bleak.
Lacking positive catalysts for the near term and long term in fact based on S&P forecast vehicle production is not expected to return to pre COVID-19 levels in the foreseeable future.
With that as a backdrop. The team is working on plans to improve the company's operating and financial performance in the region assuming production remains at these depressed levels.
Actions will be broad based encompassing our operations above plant costs future capital spending et cetera.
I'll provide additional details as the plan take shape.
Bottom line, we're focusing on executing our strategy.
Which we're confident will drive earnings margin and cash flow growth in 'twenty three and beyond.
With that I'll turn the call over to Jerome to take us through <unk> first quarter 2023 financial performance and provide our current thoughts on what to expect because we progressed through the remainder of fiscal 'twenty three.
Thanks, Doug, let's jump into the financials on slide 10.
Hearing 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 and underlying performance for.
For the quarter the biggest drivers of the difference between our reported results.
And our adjusted results relate to purchasing accounting amortization restructuring and impairment costs and a pension mark to market as we settled certain pension plans in the Americas segment and recorded a curtailment settlement loss.
Details of the adjustment for the quarter or in the appendix of the presentation.
High level for the quarter sales were approximately $3 7 billion up about 6% compared to our first quarter results last year.
Improving vehicle production in the Americas combined with favorable customer mix in China were the primary drivers of the year over year increase.
Adjusted EBITDA for the quarter was $212 million up $66 million year on year. The increase is primarily attributed to the benefits associated with higher volume and mix.
<unk> business performance and commercial recoveries. Please.
These benefits were partially offset by the impact of increased business operating costs and the negative impact of currency movements between the two periods I'll expand on these key drivers in just a minute.
Finally at the bottom line.
<unk> reported an adjusted net income of $33 million or <unk> 34 per share.
Let's break down our first quarter results in more detail I'll cover the next few slides rather quickly as the detail for the results are included on the slides and this should ensure we have adequate amount of time set aside for the Q&A portion of the call.
<unk> with revenue on Slide 11, we reported consolidated sales of approximately $3 7 billion, an increase of $219 million compared with Q1 FY 'twenty two.
The primary driver of the year over year increase was higher volume and pricing call it $430 million, including about $15 million of higher commodity recoveries the negative impact of FX movement between the two periods impacted the quarter by $211 million.
Focusing on the table on the right hand side of the slide Adience consolidated sales for the Americas, and China significantly outpaced production <unk>.
Americas growth over market was primarily driven by outperformance on key platforms that we're launching in last year's first quarter, such as the Nissan Pathfinder.
Infinity, <unk> 60, and Toyota tundra.
Plus the benefit of increased commercial recoveries.
And China, Adient strong customer mix that supported our growth over market.
Specifically, our business with Beijing Benz G E M C and Neil.
In Asia outside of China. The story is similar to the Americas, where last year's volumes were depressed due to program launches and our customer mix was disproportionately impacted by chip shortages euro.
Europe's modest underperformance was in line with eternal internal expectations, primarily reflecting our decision a few years back to walk away from certain unprofitable business in the region.
With regards to Adience unconsolidated seating revenue year over year results were down about 9% adjusted for FX.
In China, where a large majority of Adience unconsolidated sales are derived the resurgence of Covid had a significant impact to certain of our customers' production schedules name.
Namely S a W and VW.
Partially offsetting the lower unconsolidated sales in China was improved volume in sales at our unconsolidated unconsolidated jv's.
In the Americas and EMEA.
Moving to slide 12.
We've provided a bridge of adjusted EBITDA to show the performance of our segments between periods.
Bucket labeled corporate represents central costs that are not allocated back to the operation such as executive Office Communications corporate finance and legal.
Big picture adjusted EBITDA was $212 million in the current quarter versus 106 versus 146 million reported a year ago.
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 $59 million associated with increased volume and mix.
Improved business performance also benefited the quarter by $24 million looking.
Looking deeper within that bucket. The biggest positive driver was improved net material margin of $59 million.
In addition, improved launch ops waste and tooling performance provided a $5 million benefit.
Partial offsets within business performance, where utility and wage inflation, which negatively impacted the quarter by $27 million freight was also a headwind call it $13 million.
Outside of business performance Adient, SG&A costs were $11 million lower year on year, primarily driven by the temporary compensation related savings and one time benefits associated with minor asset sales, specifically certain minor footprint changes.
The compensation related savings should not be included in the forward run rate as certain benefits such as the 401K match in the Americas were reinstated in January of 2023.
Headwinds impacting the year on year comparison included higher net commodity prices call. It 18 million the majority of which impacted our EMEA segment.
The negative impact of currency movements between the two periods call it $7 million.
Although we expect FX to be a headwind for the quarter and full year recent currency movements suggest FX will have less of a negative impact on adding into 2023 result versus our expectations at the beginning of the fiscal year.
I'll have additional commentary on what to expect for the remainder of the year in just a few minutes.
And finally, given the lower volume in sales at our unconsolidated jv's and to a lesser extent adience restructured pricing agreement announced last quarter within our <unk> JV equity income was lower year over year by $3 million.
All in all a quarter very much in line with our with our internal expectations driven from the continued strong execution and performance of our global team.
Similar to past quarters, we've provided a 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.
Improved volume and mix.
Improved business performance driven by increased net material margin, which was aided by commercial recoveries and to a lesser extent the restructured pricing agreement entered paper JV.
Other movements within business performance included the benefits associated with launch ops waste and tooling performance not to mention a slight tailwind related to improving operating environment, which resulted in lower inefficiencies for cedar ago.
Increased freight was a partial offset to these business performance benefits.
SG&A costs, primarily driven by compensation related savings also contributed to the year on year improvement.
In EMEA the year over year comparison was influenced by several factors such as improved SG&A performance, which included the onetime benefit of minor real estate asset sales.
Increased equity income, resulting from improved volumes at our unconsolidated jv's.
And a modest improvement from volume and mix.
More than offsetting these benefits were headwinds related to increased commodity costs.
And lower business performance within business performance utility and wage inflation combined with non combined with increased non ocean freight weighed on the quarter partial offsets included higher net material margin aided by commercial recoveries and benefits associated with improved launch ops waste.
And tooling.
In Asia, the benefit of higher volumes and mix that are consolidated entities combined with improved business performance.
Were partially offset by unfavorable FX movements.
Equity income was also lower.
And as our unconsolidated jv's were impacted by the broadly reduced volumes in China.
Let me now shift to our cash liquidity and capital structure on slides 13 and 14.
Starting with cash on slide 13, adjusted free cash flow defined as operating cash flow less capex was an outflow of $17 million. This compares to an outflow of 74 million in last year's first quarter.
The year on year improvement and positive outcome was hard fought especially considering the choppy operating environment and normal seasonality pattern of adient.
Our cash flow.
The primary drivers of the year on year improvement included.
A higher level of consolidated earnings underpinned by improved volumes and in incrementally improving operating environment, coupled with lower levels of cash interest, which was in line with internal expectations, given our successful deleveraging efforts.
Partial offsets included.
In typical month to month working capital movements.
Timing and level of commercial settlements and deferrals and payments.
And planned increases in engineering spend to support our growth and continued launch activity.
One last point is called out on the slide Adient continues to utilize various factoring programs as a low cost source of liquidity.
At December 31, 2022, we had $181 million of factored receivables.
$218 million at last year's first quarter and.
Flipping to slide 14 as noted on the right hand of the slide we ended the quarter with about $1 9 billion and total liquidity comprised of cash on hand of $901 million and $971 million of undrawn capacity under <unk>.
<unk> revolving line of credit.
Adient debt and net debt position totaled about $2 6 billion and $1 7 billion, respectively. At December 31 2022.
The modest increase in gross debt compared with September 30th 2022 was driven by the recent appreciation of the euro and its direct impact on adding into 2020, 435% Euro notes speaking of the three 5% Euro notes, although those notes mature in August of 2024.
To become current in August of this year. The team continues to monitor the credit markets and we will look to refinance.
Refinance those at an appropriate time.
Obviously, driven by market conditions, which have improved in early 2023 compared with late 2022.
One last point before moving on and as noted on the slide Adient continues to forecast free cash generation of about $200 million in FY 2023.
Underpinned by the Companys solid operational execution and intense focus on cash management and earnings growth.
Given our significant deleveraging over the past few years combined with our expected earnings and cash generation in FY2023 adient remains solidly on track to achieve its target leverage ratio of between one and a half to two <unk> net debt to adjusted EBITDA.
With that let's flip to slide 15, and review our outlook for the remainder of fiscal <unk> on slide 23.
As Doug mentioned, the overall operating environment remains choppy with certain external influences trending favorably and other influences appearing stubbornly persistent placing downward pressure on the industry.
We are successfully navigating through the various obstacles.
And continue to expect the operating environment will be much improved in the latter part of 2023 versus the choppy conditions that exist today.
That said the pacing of the improvement is likely to be more back end weighted versus the gradual improvement we expected. When we gave you our original guidance back in November .
Changes to vehicle production schedules predominantly in China, which had been re calendar rise out of the current March quarter is the primary driver.
With that as a backdrop based on adient first quarter results and current market conditions, including revised production forecast and FX assumptions for the year. We currently forecast the following.
<unk> consolidated sales to land at about $15 billion up from our prior forecast of $14 7 billion.
The increase was primarily driven by revised FX assumptions in particular the euro.
Which is appreciated from about one point or two in November when we provided our original guide to around 1.0 wait today.
For adjusted EBITDA, we continue to forecast that approximately $850 million that said the composition between consolidated earnings and equity income has been revised.
Given the lower level of production forecast at certain of our unconsolidated jv's.
Equity income is revised down to about $70 million versus the November guide of $90 million.
That said Adience consolidated EBITDA is now forecast to be about $780 million.
That would imply an EBITDA margin excluding equity income of about five 2% consistent with our earlier guide and a 100 basis point improvement above fiscal 2022.
Important to note given the re calendar as Asian of production in China out of the current quarter and its significant impact on equity income and to a lesser extent consolidated results in China, given our favorable customer mix, we expect adient Q2, EBITDA to fall short of the 212 Q1 <unk>.
Recent just announced today.
Largely driven by the drop in equity income, which is forecast at less than $10 million in Q2 versus the $27 million for the quarter just completed.
This would now represent the trough in fiscal 2023 earnings.
Moving on interest expense is still 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 continues to be forecast at about $90 million.
Capex largely based on customer launch schedules is forecast at 300 million no change from the November guide.
And finally, our improved earnings combined with a reduced calls for cash such as the benefits associated with our deleveraging and relatively flat cash taxes.
Our expected to underpin free cash generation of about $200 million again, no change from November .
With that let's move on to the Q&A portion of the call operator can we have our first question.
Thank you as we begin the question and answer session. If you would like to ask a question over the phone. Please dial star one.
First question today comes from Rod Lache with Wolfe Research. Your line is now open.
Good morning, everybody.
I just maybe wanted to clarify something first your original guidance for 2023 fiscal 'twenty three creative around $180 million of commodity and other headwinds that you had offset that with $50 million to $70 million of recoveries and a little bit over 100 million of.
<unk> it sounds like that 180.
Is that headwind is lower now.
I was hoping you might be able to give us a little bit of color on that and just more broadly.
As some of these headwinds are shifting from commodity to things like labor and energy can you give us some thoughts on how the recovery discussions maybe evolving.
Yeah, maybe I'll take the second part of it first and then we'll go back to the specifics.
I would say broad.
When we change what the issues are labor in an energy versus material. It is a different conversation with our customers. It's it's it's.
I'll say, a recovery that theyre not necessarily accustomed to discussing because we've never had this.
Spike and inflationary pressure in those two areas.
And so it's it's very different than steel economics, which is part of our dialogue.
Even at the inflated levels, we've been experiencing in recent years that sad.
I would say the the discussions are going well.
And and we're making good progress in.
We still have a lot of work to do to get those issues completely resolved.
But we were upfront early with our customers we went in with the tremendous amount of clarity.
On the issues and you know.
With the customer set.
I will say tend to engage and discuss those issues. We've made good progress in.
But as I said, we still got some work to do on some customers are a little bit more stubborn on the issue.
Yeah and then.
Your first question Rod.
You know in terms of the.
What we see.
In terms of cost that are in the system.
You know I'll just talk 'twenty, two what we're seeing in or sorry 23, let's.
Call it.
$200 million of costs that are in them.
Between net econ, another sticky costs that are there and.
And bouncing up.
Yeah $100 million of recoveries I think those recoveries.
You know move between whether it's an E con recovery or a you know another commercial recovery that we see.
Thank.
Ocean freight we see improving we see energy improving I think what you have to be careful of though.
Is.
Ocean freight we.
We see improving maybe back to 'twenty levels, but energy cost isn't getting back beyond 'twenty two levels yet we.
No we don't see it getting back to 21 levels.
And we don't see.
You know things like labor improving you know labor is there labor is not going to trend backwards.
And so to Doug's point, we need to redouble some of our efforts with those recovery discussions with our customers and so while maybe.
Energy softening there is other costs that are coming into the system that we need to go back after from that standpoint.
So it's really a basket of goods discussion with the customer.
Does that help to answer your questions.
That is helpful. Maybe just jerome asking it a little bit of a different way just to help us get a high level view.
Back in 2022, you had given us.
Some color on like that that 675 million of EBITDA reflected.
It was $400 million of volume headwind and 100 million of sticky costs and $100 million of of temporary costs. It sounds like.
You're saying that on the cost side.
That $200 million is being offset by about $100 million in and you still have you will have another $100 million to go as you look out to to 'twenty 'twenty. Four is that is that the right way to interpret that.
Yes, I think that's a fair way to interpret that.
Okay, and just lastly.
The conversion on volume and price just a little bit under 14% is below.
Historical levels is that is there anything.
Matt it's unusual.
Just relative to launches or or anything else because I thought that the the.
The margins on some of these new launches would be higher just given the complexity that you're.
Absorbing.
Yeah, I think I think in a ideal operating environment I think that'd be correct, but we're still far from ideal and so we still have a lot of stop start that's occurring within our our production environment.
Yeah, we're not running at.
You know what I would call.
Optimize the efficiencies because of the the stop start nature I mean, if you look at even China and.
What would have been our Q1 with the Covid impacts that we saw you know and especially in the North and then those.
Trickle down to the south of the country a lot of stop start in Europe with certain of our customers still a lot of disruption and then you know.
Even in the months of October and November December was better but in October November we were still kind of in that low 80 schedule attainment with a lot of our customers.
December was a better month and so still you know its just not a normal operating environment that would allow us to convert.
<unk> flow through at 16, 18% leverage on volume.
Think on top of that.
When you think about it from a mix standpoint, and the impact China's having.
That's that's a bit of a negative for us so as that volume improves that.
Contribution margin should improve as well.
Thank you.
Thank you thanks Robyn.
Our next question comes from Colin Langan with Wells Fargo. Your line is now open.
Oh, great. Thanks for taking my questions just.
So just to follow up on the I just want to make sure I got the key drivers you're holding full year guidance, but it sounds like sticky costs are up around 20 million JV incomes down $20 million and that's offset by 40 million and higher recoveries than you were expecting any other factors, we should be thinking about.
From that changed from last quarter.
No I mean I.
Okay.
And I think that's.
Probably fair fee standpoint column.
<unk>.
I think the biggest driver is really.
You know looking at.
Kind of the equity.
Income piece of it.
And what's happening in China with the equity income and then the re calendar renovation of the.
Of the volume portion of it.
As part of a larger piece of that.
Okay.
And you bring up China. So one of the surprises I think in the quarter. If your Asia margins are actually extremely good or anything unusual going on in this quarter. That's not sustained cause you know actually I thought the lockdowns.
In Q calendar.
Calendar Q4, would've actually kind of mess with the margins in that segment.
And yet they seem to hold on pretty well yeah. No. There were certain one time commercial settlements in the quarter.
Our <unk> and <unk>.
Our own internal operations that will not repeat and that's really what drove the.
The margin within the quarter within our China operation that in top of Asia is China, and all of our other Asian business, which has not been impacted by Covid.
It's not on a year over year basis.
<unk> been disrupted like it was a year.
A year ago last.
On the plus side of launches roll in.
Roll off has been favorable and that albeit on a smaller revenue base.
That's helped offset some of the China impact.
Got it and just lastly, you mentioned in.
And the comments about potential more Europe restructuring actions would that be reflected in our current guidance or if you take additional actions to save costs that would be sort of upside to the outlook.
Yeah, it would be incremental to the current guidance and so we're in the midst of that right now.
If you look back two three years ago, we took on a fairly significant amount of them, but I think it was some $200 million of restructuring.
Anticipating a revenue level in the region, that's really not recovered to that level. So as we kind of recalibrate and reset.
We're trying to.
SaaS, whether there's additional actions that need to be taken.
There'll be more to come on that if we decide that's the direction we want to move it.
Got it alright, thanks for taking my questions.
Thank you.
Our next question comes from the line of John Murphy with Bank of America. Your line is now open.
Good morning, guys.
I just wanted to follow up on on the volatility and schedules that rod Rod touched on I think you guys were getting to a little bit give me even at the beginning of this year in January it sounds like there are fits and starts and volatility are already.
It doesn't seem like it's something that's going to ease anytime soon.
How should we think about what the actual cost of that volatility was meeting you guys were kind of talking about sort of flow through being depressed at 14% on volume and mix.
Maybe it should be closer to 18% as if that four points on flow through kind of the way to think about or is there a dollar number in the quarter and for FY 2022, you can give us. So we can think about how to walk off what's something might be more normal.
Yeah, I think that 400 basis points seems a little high to me.
I think we'd have to circle back if we're really going to pinpoint a number for you on that I would.
Suggest though that we do see volume.
Improving.
Rob just a stop start standpoint, I think it depends on where your baseline is that you want to measure that from but.
The schedules were seeing from our customer are far stronger there is far less disruptions.
That we've experienced a I'll say.
A year ago nine months ago.
You know there was a time that we were building to about 70% of what the customer was.
Releasing to us on a.
On a regular basis and I think that the numbers are much higher now.
Above 85%.
Yes, I mean, if you think about kind of.
<unk> as we go throughout the year.
You know kind of quarter over quarter.
Put it in.
You know what we expect from improvement it certainly isn't anything like 400 base.
Basis points.
We think about kind of the March as we go forward, we've always said it's.
You know 100 from 100 basis points from volume 100 basis points from the kind of performance.
And then 100 basis points of.
What I'd call kind of.
Balance and balance out our management of our key programs. So in that 100 basis points of.
What I would call performance is where you'd see some of this premium and inefficiency coming out.
And so it's not 400 it would be in that.
100 basis points bucket a subset of it.
Okay, Alright, that's helpful. And then just a second I mean I know this is kind of a morbid.
Weird question, but it does sound like you're through the worst of the Covid wave in your plants, we've heard that from another other suppliers in any industry. So as we go forward I mean, obviously there is economic concerns in China, but as far as the Covid disruption do you think you are clear the worst of it at the moment on the REO.
<unk>.
I think that would be a bit optimistic.
Just based on the fact that we've just returned from lunar new year.
You know all the early indications are positive we were very concerned whether we were going to get the return to work that.
We had planned for a worst case it was far better employee sinter plants appear to be healthy.
So there is some indication that perhaps.
The virus is kind of burn through if you will and we're board dealing with natural immunities.
But I will never claim to be a colgate expert and if you look at mutations and could there be another.
Waves.
No.
We've all seen that it's a pretty unpredictable virus. So we're taking a lot of precautionary measures.
Talking to the team there.
They are relatively optimistic.
<unk> seems you know back to normal.
Those are all really encouraging signs, but I think we're kind of more on the let's wait and see how this plays over the coming.
Weeks and months before we get over our skis on it yeah. That's that's fair statement.
Lastly, you Doug could you just talk about new business wins, and how theyre going sort of versus history, and how we should think about the book of.
Business building and also just kind of remind us if we're truly through all the less economic contracts from days ago. When we're actually working into more during some of the large majority of the portfolio being more normalized contracts that will go new bid wins and where you are in sort of this weighted sort of average of uneconomic to rework contracts.
<unk>.
Yeah.
We're really you know.
The rework of contracts, it's really kind of building out some of the ugly contracts that we had in place.
And there's there's a tail on that it gets smaller as time goes on.
With regard to new business wins.
Yeah, we feel really very good about where we're at on new business wins, we've we've been able to push back.
On commercial issues and.
And to support that with really outstanding performance.
With our customers.
And such that we can have a thoughtful discussions on where we go in and kind of have a.
You know.
A reasonable expectation on recoveries.
And not at the expense of the backlog.
With regard to the wins.
Not all customers are created equal and the ones.
New business that we want to win with the.
The customer set.
Our near and Dear to US we've been extremely successful with.
And when can we clearly will walk away from business that we think financially it doesn't make sense, even if it's.
Replacement business.
We've done that in the past, we think that's been the smart move for US we will continue to do that in the future.
And then when we look at China I.
I think what's difficult to predict when you start to build your backlog is really what the mix of that business is going to look like in the future with all the new entrants.
We're excited about the wins that we have there.
Hum.
But but we have to be really thoughtful where we invest our capital with those customers as we think that that will be a pretty dynamic market over the course of the next 510 years.
But I feel great about where we're at new business wins, I think we're making the right decisions, we're not trying to measure success solely on market share.
We are really focused on return on invested capital to make sure that the business. We win we will get the recovery.
From an investment standpoint.
Okay, great. Thank you very much.
Thank you.
Our next question comes from Emmanuel Rosner with Deutsche Bank. Your line is now open.
Thank you very much maybe to start picking up from where you just left it off on the business wins. So far this year you have incorporated in guidance something like six points of growth above market, which is impressive but also you know fairly unprecedented.
Can you maybe talk about again, what the drivers are for this and then how do we think about that metric on a go forward basis is some of the traction you're getting on new business sort of able to push a pure gross over market framework on a go forward basis or is it mostly as it was in this year is more of a one off.
Yes in terms of this year Emmanuel.
It's really.
Driving that is.
I'd say two factors one in China, and I think we referenced this on the.
The Q4 call from last year. There are several programs that are rolling on this year.
That it.
I'd say, it's just a schedule or a factor of when those programs are rolling on with them.
Some several select customers, mainly neo xiaopeng and Daimler in that region Mercedes that are significantly benefiting us and it's very positive customer mix for us insight I Wouldn burn build that into your terminal rate and then also within the Americas.
We referenced it on today's call we have the full benefit of the tundra launch we have the F 650 program or the Mustang sorry, that's rolling on and that was a conquest win.
For US and then we have the full benefit of the Sequoia, which is rolling out and which is also a conquest win for us.
And so it's really more of a factor this year the timing of those programs and when they cycle in.
I think.
So I wouldn't build of 6% and I think what we've talked about though what's more important and what we really look at us.
And of the quality of the wins and so what's important when you look at.
You know the Sequoia as an example, let's say full value chain for us. So it's the jet it's the trim its the foam.
In the metals as a full reuse from the Tacoma and the tundra front row.
No. The Mustang is the jet it's the trim.
And it's almost all of the foam on that vehicle programs in China, We're a full service supplier so jet trim foam as the kits. So we're almost design responsible entirely for the neo and the Xiaopeng.
And so when we talk about growth I think some of what you guys have looked at prior where it's at.
At market or at CAGR is what's critical but more important is really full.
Full vertical integration on those platforms. You know every dollar of revenue and we've said this before every dollar of top line revenue is an equal it's really what's underneath that dollar of topline revenue in and do we have the jet for the topline, but then we also have the trim and the foam that's below it.
And that's what we really like to focus on in there.
Great Doug if I don't know if you have anything else to add but does that help to answer your question on that 6% Emmanuel.
Yeah, absolutely that's great.
And then so I think sorry, just get closer I think what you said.
You know somewhere around that 100 to 200 basis points that you've normally used is more appropriate.
Perfect Yep, Thanks for putting a finer point on this and then second question is on on the cost side. So.
Obviously, if you know some of you know higher aspirations for margins and I wanted to know can you maybe just quantify you know as off sort of the end of 2023, if you achieve your guidance.
What would be leftovers in terms of cost efficiencies, whether it's volume related or efficiencies that you are trying to get out of.
You know out of the operations are what how would you quantify sort of like the bucket of cost opportunity from here.
Yeah, I think it goes back to what John asked earlier, a little bit Emmanuel how we.
The U S. If we look at our long term.
Goal for this business and where we think this business can run it.
Circa 88, 5% it really breaks down to a third a third a third to bridge the gap between where we exit 'twenty, three and where we want to get too with a third of the gap coming from volume, they're getting back to kind of the normalized lvs build level the third of that.
GAAP closure it comes from volume.
A third of it comes from.
Closing out the remaining.
What I would call.
Sticky cost that are left in the business whether that is.
Labor gap closure or ocean freight returning back.
The energy returning back.
The other transient costs in the business over the road freight.
You know if that doesn't come back then it moves into the last third of the bucket, which is then business performance and us going and getting it either through balanced and balance out or just commercial Mike.
And us retrenching that through our commercial negotiations with our customers and it and it really does breakdown when we do our internal target setting to really a third a third a third in between those buckets.
And from there you can say, okay. When does the industry get back to.
Kind of a 90 million build that's when the first third comes back in.
You know if you look at ocean freight and some of the over the road freight.
Where some of the indices are returning to you can kind of then say when the other third comes back and then our balance and balance out being the last third or commercial recoveries.
And I think I asked you last quarter, but I guess.
Some of these buckets you know at least sort of like two out of the three seem to be sort of SME.
Essentially anticipating a progression, but for the industry and for the macro environment, which sorry, if I may or may not happen quickly is there an opportunity for you she's sort of like accelerate this resize the business for a smaller industry or is it just.
Is your longer term views you know more optimistic on the industry and therefore, you should maintain sort of like your structure and your cost base to where it is now.
Well that's.
I think when would I think about it I look at two of the regions and I think we're.
<unk> relatively comfortable or confident in our cost structure that exists today.
So I think of Asia and the Americas.
And so we kind of risk profile that we don't believe there's further actions.
The one area as we indicated to us what the recovery looks like in Europe , and whether thats going to dictate that we accelerate actions in that.
Region too.
Change our breakeven profile, there and the corresponding cost associated with doing that and that's what we're in the midst of assessing right now.
I think what we've also demonstrated that is that as <unk>.
Some of the you know the the non volume related cost persist.
I think we've demonstrated that we know how to go in and settle that with our customers in a relatively short period of time so either.
Neither.
The costs dissipate.
To a certain degree what we've been experiencing with energy costs in Europe , which means we don't have to go and recover that so resolves itself or where it remains in place then.
Then the conversation changes with the customer and that these are structural costs that were originally envisioned in our business and they have to be.
Addressed.
Perfect. Thank you.
Thank you.
Our final question comes from Adam Jonas with Morgan Stanley . Your line is now open.
Good morning, everyone, having silverberg on behalf of Adam Jonas.
Looking at the supply disruption being seen at the OE customers outside of Covid or are there any.
Key issues you're customers are highlighting.
I think the one issue that they continue to highlight to US is there is some residual.
Electronics more semiconductor related that impact them and then the probably the.
Biggest issue is supply chain labor.
And that's.
That's everywhere for different reasons.
In China I think.
That's a bit of the concern on the recovery. There is as you go through the supply chain will labor be an issue there.
As workers return to work.
Similarly in Europe .
You know as we.
Kind of recalibrate labor costs there.
And labor availability, particularly in eastern Europe .
That can be disruptive to the supply chain.
As well as in the U S.
So.
Uh huh.
Semiconductors.
Clearly there is there has that improved.
Level of performance there are labor is still a bit of a wildcard and it's just how it manifests itself within the supply chain and in not only the tier one but tier two and tier three.
Thanks for that obviously you guys are a step removed from the semi issue but is there.
Any color you can provide on whether the oes are saying its a specific type of semiconductor that short or whether it's.
Across the board. Thank you.
Is it more of the feedback we get it it's across the board and no sooner that they think they have one issue solved that another issue arises that they didn't quite complete.
Completely comprehend.
Great. Thanks, Evan and Danielle it looks like we're finally hours. So this will conclude the call today. If you have additional questions or follow up questions, Eric and I will be available just feel free to reach out and we'll talk soon thanks again for participating.
That concludes today's conference. Thank you all for your participation you may disconnect at this time.