Q3 2023 Adient PLC Earnings Call
Welcome to the audience third quarter financial results Conference call participants are in a listen only mode until the question and answer session.
<unk> recorded if you have any objections you may disconnect at this time I will now turn the call over to Mark Oswald Sir you may begin.
Thank you Christie good morning, and thank you for joining us cause review audience results for the third quarter fiscal 2023.
Press release and presentation slides for a call today have been posted to the investors section of our website at <unk> Dot com.
This morning, I'm joined by Doug Delgrosso, Adience, President and Chief Executive Officer, and Jerome door left our executive Vice President and Chief Financial Officer.
Today's called Doug will provide an update of the business followed by Jerome who will review our tier three financial results and outlook for the remainder of the year.
After our prepared remarks, we will open the called 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.
I would caution you that are actual results could differ materially from these forward looking statements made on the call. Please refer to fly to the presentation for a complete safe Harbor statements in.
In addition to financial results presented on a <unk> 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 gas equivalent can be found in the appendix of our full earnings releases. 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.
An analyst joining the call. This morning, as we review our third quarter results for fiscal 2023.
Turning to slide or let me begin with a few comments related to the quarter.
You can see Ediets financial performance is highlighted by certain key financial metrics in the box on the right hand side of the slide.
Delivered strong and improved you over your earnings growth in Q3 fiscal twenty-three.
Under pin.
Let let's focus on execution operational excellence and better than expected production volumes.
Versus internal expectations at the beginning of the quarter.
Adience third quarter continued to build on a positive momentum establish earlier this year.
For the most recent quarter revenue, which totaled $4.1 billion was up 570 million compared to third quarter last year.
Adjusted EBITDA totaled $276 million up 103 33 million year over year.
<unk> point out a non reoccurring insurance settlement related to prior period operational losses provided an approximate 20 million dollar benefit to the quarter.
And finally adient ended the quarter with a strong cash balance.
In total liquidity $908 million and $1.9 billion respectively.
Heading it's Q3 financial performance combined with its healthy balance sheet enabled the company to return 37 million.
Dollars to its shareholders in the third quarter be share repurchases.
Year to date through June chair repurchased in cash deployed totaled $1.8 million and 65 million respectively.
Leaving roughly 535 million available for future repurchases b of the current authorization.
In addition to delivering strong financial performance the company continues to execute actions.
To position itself.
For sustained success a few of these actions include the teams intense focus on launch execution operational improvement and cost control.
Think of this as overall business performance, which continues to trend in a positive direction.
When a new business across various regions customers and platform is expected overtime to strengthen our leading market position not to mention <unk>.
Support improved margins in earnings.
The team also continues to Brian provide value add to Eddie and shareholders everyday.
Whether it's to our customers suppliers or employees.
These efforts have been validated repeatedly with numerous industry in customer recognition awards.
Including most recently.
Supplier Excellence award from jail, our suppliers sustainability award from Honda and multiple awards from Toyota.
Higher Diversity Award Best supplier performance Award for our South American operations, and Toyota Special recognition quality award for Georgetown plant.
Looking at the Big picture for the quarter.
I was well through the first nine months of the year, which encompasses Adience financial performance operational excellence business wins provide you a glimpse at the strength strengthening marketing position.
And the earnings power the company going forward.
That's why we're excited about the future turning to slide five a key ingredient the company's current and future success impulse Adience operations in China.
The past quarter, Jerome and James took the opportunity to meet with several investors and potential investors in Shanghai to provide an update on Adience China business.
Which we continue to see as a growth engine for the company.
No doubt there's been a lot of headlines reminding everyone that the environment in China has become trickier to navigate given certain geopolitical risks and growing rebalancing.
However, expanding new consumption industrial upgrading and the speed of innovation presents new opportunities and growth for the market that shouldn't be ignored.
Already and we continue add leading market position.
And a rep recipe for success is deeply rooted in underpinned.
Bye.
Optimal nationwide footprint strong in house engineering capability in depth understanding of China, and what's required for a successful seating business.
And a highly recognized organization led my very capable and experienced management team.
The structure of the team enables heavy and to be agile and operate at the same speed as our Chinese customers.
Applying this recipe for success positions us well.
Capture future growth in the market.
Just a few steps for consideration.
Adding in China has achieved more than 4.6 billion of new business bookings based on program lifetimes in physical twenty-three.
We forecast Adience volume growth over the next five years to exceed market growth by two X.
We've been awarded business from approximately 10, new customer since fiscal 22.
And speaking of customers, we expect our current mix of customers to be about 60 per cent local China manufacturers within the next five years, that's up from 40% today.
Bottom line, we believe our formula a recipe for success positions us well to capture future growth in the market.
<unk> had a chance to review the presentation I encourage you to take a look it's available for download on the investors section of our website.
Turning to slide six and seven now, let's take a look at business wins and launch performance as you can see slight six highlights a few.
Indians in process in upcoming launches heading continues to execute at a high level of launch performance the.
The programs highlighted represent a good mix of wins across E. B powertrains, an ice powered trained.
And are diversified across a number of segments, including Suvs luxury in mass market.
And contain a high level of vertical integration across complete sea foam trim and metals.
I'd also like to point out. These launches include a number of Adience innovative technologies that are being well received by our customers.
Including.
<unk>, new trim styling sustainable synthetic leather and various safety and comfort features and Mitsubishi <unk>.
Are zero gravity seat.
Which increases ergonomic comfort and body pressure distributions and Xiaopeng M. P V.
And our proprietary for way headrest.
F a w's home G.
H S five.
Looking to slide seven the strong operational execution and launch performance as.
As well as innovation I I, just talked about are the foundations for new business wins.
A few program awards are highlighted on the slide and it is noteworthy that these programs include a high level of vertical integration of foam trim and metals components as well as jet business.
We continue to scare a replacement beds business, we're winning our fair share of new business and leveraging our existing footprint.
And we're having success winning business, while navigating the difficult macro conditions and related.
Commercial discussions.
Before the handing the call over to Jerome.
Let's look at slide eight let me continue with few comments related to our progress in 2023, an initial thoughts on 2024.
To begin Adience focused strategy continues to drive the business forward.
Our most recent financial and operational results in addition to our year over year.
Results provide a positive proof point <unk>.
Despite a number of unplanned obstacles and challenges that surfaced in 2023 idiots focused strategy enabled the team to navigate through these external speed bumps and further position the company for 16 success.
Although we are solidly on track to deliver.
120, twenty-three commitments, both operational and financial we're not resting on our laurels when working hard to finish the year strong.
Imperative, we enter 2024 from a position of strength to be.
2024. The team is currently developing the company's plan, including <unk> key planning assumptions.
That will support the plan such as global production forecast effects et cetera.
Although it's premature to comment on specifics, we do expect Adience positive business performance and momentum to continue into the new year inane.
Enabling further earnings margin and free cash flow growth M returns to our shareholders.
Similar to prior years the team will continue to develop next year's plan in the coming months with the intent of sharing those details with you when we report our queue for in full year 2023 results in November .
With that I'll turn the call over to Jerome to take you through Adience third quarter of 2023 financial performance and outlook for the remainder of the year.
Thanks, Doug, let's jump into the financials on slide 10 adhering to our typical format. The pages formatted with a reported results on the left and.
And are adjusted results on the right side.
I'll focus my commentary on the adjusted results, which excludes special items that we view is either one time in nature or otherwise skew important trends and underlying performance.
For the quarter the biggest drivers of the difference between a reported and adjusted results relate to restructuring and impairment costs and purchasing accounting amortization.
Details of all adjustments for the quarter or in the appendix or the presentation.
High level for the quarter sales were approximately 4.1 billion up 16% compared to our third quarter results last year.
Improving vehicle production in the Americas, Europe , and Asia, Excluding China was the primary driver of the year over year increase.
Justin EBITDA for the quarter was $276 million up 133 million year over year.
The increase is primarily attributed to the benefits associated with higher volume and mix.
Improve business performance, which included a 20 million non reoccurring insurance settlement related to prior period operational losses and.
And higher equity income.
These benefits were partially offset by the adverse impact of net commodities driven by recovery timing primarily enemy Alex.
I'll expand on these key drivers in a minute.
Finally at the bottom line Adient reported and adjusted net income of $93 million or 98 cents per share.
Let's breakdown, our third 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 for the time for the Q&A portion of the call.
Starting with revenue on slide 11.
We reported consolidated sales of approximately 4.1 billion.
An increase of 570 million compared with Q3 F Y 22.
The primary drivers of the year over year increase were higher volumes and pricing call. It just under $600 million the.
The negative impact of F X movements between the two periods impacted the quarter by $26 million.
Focusing on the table on the right of the slide Adience consolidated sales for each of the major regions demonstrated strong year over year gains.
The Americans generally performed in line with the broader market when adjusting for certain non reoccurring material econ recoveries.
Last year.
And may have demonstrated outperformance versus the overall market aided by favorable customer and program mix.
And both China and Asia outside of China significantly outpaced the overall market driven by adding strong customer mix and new programs that launched in late F. Y 22, and early F. Y 23, then or now running at rate.
With regard to Adience unconsolidated seating revenue.
Year over year results were up about 5% adjusted for effects.
Increased production volume at or unconsolidated joint ventures, primarily in China supported this increase.
Moving to slide 12, we provided a bridge of adjusted EBITDA to show the performance of our segments between periods.
The bucket labeled corporate represents central cost center not allocated back to the operation such as Executive Office Communications corporate finance and legal.
Big picture adjusted EBITDA was $276 million from the current quarter versus $143 million reported a year ago.
The primary drivers of the year on year comparison are detailed on the page.
Positive influences include $96 million associated with increased volume and mix.
Improve business <unk> improve business performance also benefited the quarter by 82 million the.
The business performance bucket consists of ongoing operation efficiencies.
Lower year over your input costs such as freight.
20 million dollar non-recurring insurance settlement related to prior period operational losses, which should be backed out of Adience normalized 2023 earnings on a go forward basis.
And a slight uptick in SG&A, primarily reflecting.
The non repeat of austerity measures taken last year and certain costs supporting adience future growth and innovation.
Other factors that influence the year on year comparison included a higher level of equity income driven by the improved volumes at Adience unconsolidated joint ventures, primarily in China.
Which more than offset the impact of the company's restructured pricing agreement within archive for joint venture.
A commodity headwind to $55 million largely driven by the timing of contractual troops.
And a modest FX headwind call at $1 million.
I point out that Adience Q3 results came in better than internal expectations as we began the quarter.
The outperformance was largely driven by better than expected production volumes.
And the benefit of our very strong business performance.
Within business performance results can be quite lumpy between quarters as the timing of anticipated settlements.
Lower spending driven by customer launch delays.
An unexpected non-recurring items to name a few can have significant impact on performance quarter to quarter.
This is essentially when it happened and Adience, most recent quarter backing out the non-recurring insurance settlement.
Q3, not only benefited from better than expected volume, but also certain factors time for Q4 that were ultimately executed in Q3.
Obviously, the shifts expectations for Q4, however, full your results are not adversely impacted since adience better than expected Q3 performance blows through and support Sir increased guidance for 2023.
More on that in a few minutes.
Similar to pass quarters. We've provided are detailed segment performance in the appendix of the presentation high level for the Americas here on your increase was primarily driven by improved volume in business performance.
I'll note that business performance within the Americans regions benefited by about $4 million due to the non reoccurring insurance settlements.
Primarily offsetting these benefits was an increase in net commodities primarily related to the timing of certain contractual troops.
F X movements between the two periods.
And a man of the positive year over year increase was driven by improve volume business performance and benefits associated with an F X movements between the period.
A man's portion of the insurance benefits, which included which is included in the business performance bucket totaled roughly $16 million, partially offsetting these benefits was a 49 million dollar headwind related to commodities, primarily driven by the timing of certain contractual troops in a favorable non reoccurring influence.
And F y 22.
And Asia the year over year improvement was driven by the benefit of higher volumes mix and increased equity income.
FX movements between the two periods and costs to support Adience growth in the region, where modest offsets.
Let me know shift to our cash liquidity and capital structure on slides 13 and 14.
Starting with cash on slide 13, I'll focus on your to date results as the longer timeframe helps smooth some of the volatility in working capital movements.
Free cash flow defined as operating cash flow less capex was $196 million. This compares to an outflow of $132 million for the same period last year.
Key drivers impacting the comparison include the higher level of consolidated earnings driven by improve volumes and a modestly better operating environment lower interest paid driven by the reduced level of that between the two periods in the lower level of accrued compensation primarily timing related.
These benefits were partially offset by the timing of two and recoveries V. A T deferrals payments.
And the non repeat of a V. A T refund received in last year's third quarter and typical work and typical month to month working capital movements.
One last point any it continues to utilize various factoring programs.
As low cost is a low cost source of liquidity.
At June 30th 2023, we had $150 million are factored receivables versus $206 million at the end of Q2 F Y twenty-three and 269 million at September 30th 2022.
Flipping to slide 14.
As noted on the right hand.
Side of the slide ended the quarter with about $1.9 billion total liquidity comprised of cash on hand of $908 million and roughly $1 billion of undrawn capacity under Adience revolving line of credit.
During the quarter the company used approximately $37 million of cash towards share repurchases 1.9 million of which settled and closed in early April and was disclosed during our queue two earnings call.
Year to date through June share repurchases in cash deployed total approximately $1.8 million and $65 million respectively.
At quarter end, Adience debt and net debt position totaled about $2.5 billion and $1.6 billion respectively.
One important point to call out the strong financial performance achieved over the past several quarters.
Bind with our focus on deleveraging has driven our net leverage ratio on a trailing 12 month basis to 1.75.
Within our target range of 1.5 to 2.0. This is no doubt a very good result.
In summary, adient strong cash and liquidity position provides flexibility and agility, which as you know will be essential to navigate through the potential production disruptions that may occur in late Q for FY 2003.
Turning to slide 15.
Adience F Y twenty-three guidance has been updated to reflect our year to date results through June and current market conditions include.
Including revise production assumptions and current ethics rates with that as the backdrop. We currently forecast Adience consolidated sales to land at about $15 4 billion.
Which reflects higher production volumes across North America Europe and.
In China versus the April S&P forecast used in our previous Sky Ridge.
Justin EBITDA, we are now forecasting about $920 million for the full year.
This increases driven by continued strong business performance and the positive impact of increased production volumes.
The 920 million includes equity income of about $80 million.
Also important to remind you that $30 million of the $920 million.
Is related to non-recurring items, specifically the insurance recoveries from Q2, and Q3 that should be removed from your ongoing run rates.
Just a point or two on the implied Q for results first important to remind important to remember as I discussed earlier and putting aside the non-recurring insurance settlement Q3 benefited from better than expected volume and also certain activities and costs.
Time for Q4 that were alternately executed in Q3.
Moving into Q4, we continue to expect positive business performance. However, on a sequential basis compared to the quarter. Just completed volumes are projected to be significantly lower across North America, Europe and China.
Not only will this lower level of volume negatively impact our consolidated EBITDA, but it will also impact our equity income, which will likely be about 10 million lower in Q4 versus Q3.
Due to the Lumpiness that exists between quarters best to take second half of 2023.
<unk> and individuals quarter.
When comparing H, one and H two on a consolidated basis adjusted for the non reoccurring insurance recoveries Adience guidance implies a sequential 50 basis point improvement.
Moving on interest expense, given the company's debt and cash possession position is still expected to be about 180 million.
Cash interest, which is also called out is forecast at $145 million the lower level of cash interest is primarily driven by the timing of the first interest payment on the new bonds, which is set for October 15th 2023. After the close of Adience 2023 fiscal year.
Cash taxes are expected at $95 million or P&L tax expense continues to trend just north of $100 million for modeling purposes call it $110 million for FY twenty-three.
Capex largely based on customer launch schedules is now forecast to come in just under $300 million.
Slight tick down from our May God.
And finally, given a revised earning expectations combined with our revised Capex forecast, we now expect free cash flow of $275 million for the year up from the previous guide of $215 million.
With that let's move on to the Q&A portion of our call operator can we have our first question.
Thank you.
If you would like to ask a question. Please press star one.
<unk> your phone and state your name and company.
Again star one to ask a question Star Q drag your question.
Our first question comes from Rod Lash as Wolf Research Your line is open.
Good morning, everybody.
We just wanted to first ask about the.
The positives and negatives fitness inflation recovery in the quarter, you talked about $600 billion of of positive price and $55 billion of of commodity in package is that commodity impact kind of a net.
Number.
And I wasn't exactly clear on why the performance, which slow as we look out just physical Q4.
If if that was largely just a timing thing.
Yeah. So right on the first question regarding the commodity impacting a net yes, the commodity impact as a net position.
As you've noted and then with respect to your second question on why the business performance.
With low you know as we go into Q4 I.
I wouldn't look at it as necessarily.
A.
Q3 to queue for I'd really look at it as H one over H two.
Again, just due to the lumpiness of how.
How you know how the seating business runs in the timing of certain actions and our ability to execute the actions. So if you look at our H one verse R H too.
You know, we actually have an incremental 50 million of business performance moving from H, one to H two.
And that's really how I would think about how this business operates in.
And it it's just the timing of when we can execute.
Those actions and those business performance recoveries. So it's not really a Q3 Q for as much as it is H one to H, two and the acceleration of unwinding, those sticky costs and those labor.
Recoveries and things along those lines and.
In addition to that if you look at volume, especially in the European front.
There's a big drop off in volume and as you know this business runs much better when we have volume or plants around much better as we have volume it's easier to execute C. I M.
It's easier to push through those types of Ci projects and Ci activities and there is a volume drop off especially in Europe in our queue for.
Okay, just to clarify that you're you're talking about that's 55 million is being largely.
Timing related so where are you, suggesting that the that basically you you the recovery honest as it would be something you'd get in the upcoming fiscal year.
55, yes, rod so the the net commodities you're right. There is half I look at it two ways half of it is timing related just in terms of when those contractual true ups occur. So over the course of the next month or two there's typically a two quarter lag right. So what will pick those up as we go through the next couple of.
Quarters and the other piece was related to a favorable settlement last year's results. So obviously that does not pick up is just in nonrecurrence, who are favorable item from last year.
And and just one last one was hoping to ask Doug <unk>.
One of your competitors recently articulated the view that increasing vertical integration of thermal comfort is gonna cut costs for them and.
Ultimately lead to something like 400 basis points of market share in a relatively short period of time and I'm. Just wondering if that in your view signals any change in the competitive dynamics and.
Whether that affects your view on cash returns versus M&A or any kind of strategic changes for the company.
Sure. Thanks for the question right.
I I guess I would start by saying.
Maybe we're we're in agreement with what are some of the competition's doing with regard to cover. It is we do thank you know comfort is going to continue to play.
An important.
Feature in future seating.
And we pointed to some of the work we're doing with Neil in zero gravity and.
Some of the integration of safety systems in a partnership we have with with auto Livan on that particular platform.
What I, what I think about vertical integration.
I think about it it's it's it's tricky.
And sometimes filled with pitfalls.
And.
When I think about vertical integration adient, we we are the most capable supplier four mechanisms and metal.
That particular element of vertical integration hasn't necessarily translated into.
Incremental business performance or market share gains when we in the past tried to leverage that into market share gains quite frankly didn't work out very well.
And the issue with vertical integration is it requires a tremendous amount of engineering and capital investment.
And I think.
Some of that plays against the value, let alone if you're going to pursue it through M&A.
And the cash outlay that you have to put their the restructuring that you have to put in place.
To integrate those.
Operations.
Into the pole so.
You know our approach has been slightly different you know, we we are much more.
Open to partnerships with with altered.
Alternative suppliers.
We've talked in the past and they're continuing develop a relationship with Gen Thurman comfort systems.
Hear more about that in the future, but those are programs were actually working on for.
Awarded business with a number of different customers utilizing.
Some of the technology, we have and then integrating.
The Gen Thurman too.
More of a modular approach.
Similar we work with utterly on safety systems, we work with other companies on sound and seat and these are programs that were.
You know <unk>.
Actually doing application engineering that are targeted to launch in the coming years.
So I.
I don't think there's anything that's particularly.
Daunting out there with what the competition has in front of it I don't think vertical integration.
Necessarily leads to market share Kane, I think about market share <unk>.
We've talked in the past.
Revenue gains with some customers are very very different than revenue gains with other customers and.
I think you know profitability across customers.
Varies quite a bit so we're not really focused on the.
The traditional way of looking at market share gains on revenue, we're really focused on.
Where we can use an existing footprint four vertical integration.
With customers that we have historically been able to get returns on our investment.
And really not go down the rabbit hole of pursuing.
Top line revenue gains.
As a priority in our business.
Okay. Thank you.
Yep.
Thank you.
Next question comes from John Murphy as Bank of America. Your line is open.
Good morning, guys, maybe if he can follow on to that sort of lineup questioning Rogers had in Doug you mean E. On slide five you guys talked about some pretty significant growth in China over the next five years I'm. Just curious who you think you might be taking market share from or is it.
<unk> of some of the in-house operations that are being outsourced from the Chinese auto manufacturers to you I mean, you are radio leading supplier over there and seating. So just curious how you're gonna be able to grow that fast and consolidate that market.
Yeah [laughter], it's a good question I mean.
China is pretty dynamic no need to remind everyone of that market share has been shifting quite a bit.
I think.
Generally what we were trying to communicated in this packages, we see a shift from the traditional.
Western automakers to the domestic Chinese and I think we stated in our you know.
<unk> comments today that represents about 40% of our business, it's moving to 60%.
I really think that's where our market share.
Growth comes from.
Weeps bulk in the past about pursuing Xiaopeng Neo that's just a couple of the domestics that we're looking at.
What gives us confidence that we can grow in that market is really.
The way, we conduct ourselves in the region.
We're.
To a certain degree decentralized we've got the team that knows how to move that China speed.
We've got you know dedicated engineering resources that have demonstrated.
That they can go from.
Award to launch an in 18 months developing products scaling what we have already in the market.
So it's really pulling those levers that give us the confidence but.
You know.
Where we see the growth is by shifting to the domestics and even when we looked as we dissolve there J b one of the reasons that gave us confidence that that was to move.
That made sense to us.
Was it it it naturally allowed some of that to happen does that mean, we're abandoning all of our traditional customers.
No, but we're focused on <unk>.
Certain brands.
That we think.
King can coexist with the the domestics that are developing their platforms their switch to EV powertrains set going to allow them to continue to have <unk>.
Relevant market share in China.
And then just one other question.
The fourth quarter does look a little bit <unk> I appreciate Jerome the the idea of looking at first half or is the second half and sort of totality, but you did mention something about disruption at the end of the quarter.
In North America, So I'm, assuming you're you're talking about a potential for U a W strike.
At one if not all the D. Three at the same time have you bake anything into your numbers and is that part of the conservatism potentially in the fourth quarter or I would take conservatism you might not but but it just seems like that might be part of the equation as well.
No. So there's nothing in our guide around any type of a.
U a W action and.
Would just.
Kind of frame it up in terms of.
You know when the contract expires versus when our fiscal year ends there's about 10 working days that are in there.
Yep, and given and of the unpredictability around you know.
How that that strike could play out.
And how it could kind of phase in and out.
There wasn't there are just too many scenarios for us to look at to maybe frame it up for your benefit if all D. Three where to go down it's somewhere between $80 million to $100 million a week of revenue.
For us.
You know, what I would remind us versus our Pierre <unk>.
<unk> Pier, that's that's less in terms of revenue impact per week really because of our leading diversification in the region, we have more exposure to Toyota more exposure to Honda.
And some of the non NAFTA suppliers, so we're less impacted by.
That type of U a W action, which benefits us.
That's why the revenue per week is less but that's kind of how you should think think about that in terms of revenue per week, if all D three where to go down.
But there's nothing in our guide from that standpoint.
Incredibly helpful. Thank you so much.
Thank you. Our next question comes from the menu I'll Rosner at Deutsche Bank. Your line is open.
Oh, Thank you so much good morning.
One follow up on the on the China discussion.
With this kind of essentially volume growth. So a market outperformance expect to you know.
The midterm or even longer does that change at all the framework.
For the company's overall gross above market profile I know that this year. For example, it's it's pretty strong, but you said that pays driven by.
Particularly strong Chinese gross but this is not necessarily or pick a new framework going forward. This China grows seems to be.
Pretty sustainable so that does that change your course of the market profile overall.
I mean I <unk>.
Think about it more in terms of.
We're seeing a consistent trend on content growth content growth comes from a number of sources.
Comes from.
Market segmentation.
Be it.
Focused on Suvs, So, there's typically more cartoon and Suvs and the traditional passing your car we tend to focus on premium brands premium brands tend to have more content.
Per vehicle.
And.
Think what you're seeing particularly in China.
With the domestic Chinese.
Is there, adding a fair amount of content.
As a look too.
Enhance.
Their product, we talk a lot about ev's, but what we're also seeing with domestics is a focus on ada's related features.
And so.
When we talk about zero gravity seating and some of the other things that they're doing that's driving a fair amount of content.
So you know again at a fairly high macro level, that's how we're seeing the business.
Transitioning and and.
And I think I guess, you could say that that should be a reflection beyond just China as.
As we think other automakers are going to look for seating systems to provide some level of diversification.
From the competition.
Exactly as your growth civil markets.
Above what would have been a typical 1% to 3% Cup of profile or is that still the right framework.
Yeah, No I think I think it does.
At this point, we've not come out and said what we think that shift is from an available market, but you.
You should expect in the near future.
We're going to better define that.
It's moved pretty quickly.
We've all talked about the Shanghai moment, when all of the Automaker's went out to China saw what the domestics, we're doing a big part of that was in.
Interior systems and seeding system Sullivan went back kind of retrenched Recalibrated and we're seeing.
As they look at.
The revised product plans, a significant amount of content being added in the seating systems.
So.
When we come out.
In November talk about our twenty-four plan.
And our outlook beyond that will will be a bit more specific and how we think about content per vehicle, where the market's trendy.
Thank you and then the second question is on margin.
Could you. Please put back in contracts. This year is expected performance or updated balcony.
Mmm compared to wear your longer term margin goals and the unfortunate thing is how much more remind us how much more margin extension you see in terms of opportunity and what will the main drivers fee again.
Yes, and and thank you for the question Ah Ah manual I mean.
We continue to say we think this business is you.
Capable of achieving.
And that call at 8% to 8.5% range.
This year the implied guide would have us in that <unk>.
Five 9% range, so there's still a gap to be closed there.
And the three we call them kind of a three buckets of where that margin.
Closure comes from the.
The first one being the volume step up you know getting the industry back to kind of that L. V. B P build of.
And that 90 million range.
<unk>, that's a call at one third of the bucket there are still a number of.
What I would call sticky costs that are.
In you know built into the system commodity recoveries labor economics recoveries.
It is largely come back now so it's not so much much of an issue, but still a bit to be had there that's the other bucket.
That middle bucket and then the other last bucket as in which you're talking we've been very vocal about this the rohloff of some of the legacy contracts that occurs in the 25 and 26 timeframe, especially in the metals business that still left out there.
That needs to drop off and then that really allows us to kind of get the last third of that.
And.
We've talked about that we've.
We've kind of shown that roadmap, we've displayed that that graphic pretty visually in terms of the timing of when we think that happens and how we think we get there the.
The other thing I would say is.
And we've been pretty vocal about this is whether we settle in at eight or eight and a half. It's also the amount of cash that we generate along the pathway to get there.
If you look at.
This year will even able to do with cash generation and then as we move forward the calls for cash in this business remain very <unk>.
Steady along the way we will be in Canada Capex range that we're at today somewhere between sub 300 to 330 that calls for restructuring will remain.
Very steady our you know our tax cash taxes and that call at 95 two 110.
Range and then our interest expense and we have a very stable that stack with the nearest maturities now coming in 26.
And so the cash tax or sorry, our cash interest also remains very steady says we build EBITDA a lot of that then drops down into cash flow of free cash flow, which they can we can then managed through whether it's in yeah.
Share buybacks or other types of actions that we want it takes so it's not just about margin expansion. It's also about as we look at how we manage than the free cash flow that this business can really generate so.
I think it's just important to remind everyone. Yes, it's about EBITDA expansion, but it's also about the free cash flow that this business can generate along the pathway.
Alright, thank you.
Thank you again, if you would like to ask a question. Please press star one please I need your phone.
Name and company clearly our next question comes from Colin Laingian as Wells Fargo. Your line is open.
Oh, great. Thanks for taking my questions Uhm any update on some of the big puts and takes in the air cause I I thought the initial guidance was for about 70 million in commodity and I think alrighty you have over 155 per quarter.
Sticky costs still trending at 150.
I'm trying to understand how we should be thinking about those sort of drivers in here.
Yeah. So I mean commodities now will be north of 100.
Probably closer calendar, the 135, and if you recall yeah I think the initial guide was around 100, but then we also talk last quarter about some of the steel.
The acceleration that we saw in the Americas with some of the recent lipsett, we had we had seen there.
So we had bump that up up a bit. So I think we're we're north of that 100 number.
On a net basis.
And then you know with respect to the sticky cost figure that's out there.
We've seen the sticky costs come down really is a function of as we've been able to go out and work on some of the business performance end of things.
And I think.
You know rather than give a precise figure on the sticky cause we.
We really look at it as kind of a total business performance type of number because it's.
As we've worked in our plans to really offset.
I'll give an example European labor with more Ci.
You know what we look at is how our operations performing and how his total business performance.
Trending in the business and so if you look at.
Total business performance now, we're up and call it the 163 million.
Number for.
That's what our guide would imply.
And that's really offsetting all the sticky costs that are in the business all of the.
Labour inflation and everything that's coming in so I'd really not so much think of it as sticky costs as much as it is we've got $160 million a positive business performance, that's coming in offsetting everything like energy labor.
Customer pricing everything that goes with it said, that's more high would kind of frame it up now.
Got it and should we think about that 135 and come out her greater than 135 and commodity.
That's sort of your cost or.
Is there still opportunity to have to get some of that back from your customers.
Yeah, I would think about the 135 is.
The way our customer contracts or setup, there's always going to be kind of a rolling effective with them and.
So this year based on the timing of when those recoveries come in.
And the timing of when our contracts are set with with our suppliers, there's going to be a lag effect associated with it.
Less kind of the FY twenty-two reversal that mark talked about that non-recurring that then hits. This this year.
We'll see as we set the 24 plan that Doug talked about earlier than that planning process. You know we would start to see some of that then reverse out just based on the timing and efficiency of those customer contracts along with our supplier contracts.
Generally I think we've said this before about somewhere between 70% to 80%.
Recovered, especially on the steel side and.
And it would say over long term and a relatively stable market, it's 100%. It just takes.
Longer because of the way.
Their legs or.
Or new business rolls on or we ultimately find some offsetting commercial settlement on it.
Got it and just lastly, your margins were quite high I think that's a record high for at least from what I could see even adjusting for the insurance recovery is that level sustainable was there a structural change that has occurred in that region.
We should be thinking about.
Well.
A reminder of a couple of things we've been you know in in.
In prior years, we focus a lot of restructuring in Europe to bring.
Bring down our breakeven point.
But the biggest.
You know.
That we can attribute the performance is volume and it's volume comes through and and some of the.
Cost structural change we've made in the business, we should expect that business to perform as.
I'll say the overall macros in that.
Region moderate <unk> energy Labour inflation.
Commodities.
We continue to be optimistic that we can get good performance at our our European.
Operations so.
We don't feel that's an anomaly by any measure.
Insurance recovery aside.
Oh, alright, thanks for taking my questions.
Thank you.
Thank you. Our next question comes from James pick and roll out as B M. P. <unk>. Your line is open.
Hi, good morning, guys.
Good morning.
So you just to kind of unpack the fiscal third quarter here I thought you guys were expecting us up part of the the quarterly color on the guidance was sequentially slat versus the two Q, excluding the two cues 8 million dollar one time settlement benefit.
So.
What what what were the surprise features you know I.
I know, the 22 or $20 million or so insurance settlement, but what else.
You really you know, it's driving the the upside to the to the quarter I think it was mentioned that there was some pull forward in performance.
Efficiency benefits I think.
That would be really helpful. Thank you.
Yeah. So I think it's really two factors one is volume so I mean volume came in stronger in the quarter then.
We certainly expected it to.
Really across Europe , the Americans and our Asia segment, so it kind of across the field volume came and better and when volume comes in.
That allows this business to convert much better and so you know what goes hand in hand with that then is.
When the volume comes in the business performance comes in much stronger.
And so really we saw kind of this multiplication effect in the quarter.
The volume came and stronger the business performance. Then also came in a much stronger within.
Really all three regions, especially in our European operation.
And that that was really what drove the quarter much stronger than we had expected when we gave the guidance and.
When we had the call.
Last time together.
Got it and just one follow up then the $30 million for the full year and one time benefit called out and they got it is that now fully realized or is there any remaining benefit and to the fourth quarter. Thanks.
Yeah.
For that obviously that was something that we've been working on so I'd say, that's good pur for the full year now we're not expecting anything else at this point.
Thanks.
Thank you.
Question comes from.
Barclays. Your line is open.
Hi, good morning, Thanks for taking the questions.
You think he'd noted in the past that balance and balance out.
Is an opportunity and I think one of the earlier question that you were talking about sort of the.
Replacing some of the.
Structures mechanisms contract and the 25 26 time pre maybe you can give us.
Flavor, how much balance and balance out benefited you.
And the most recent quarter and really just give us a flavor for how much one way there is on.
Balance and balance out, which you know you'll get this bennett, that's regardless of Mac.
Yeah. It's.
I mean, we could probably just fill it down and give you some idea that number on a quarterly basis, but that's typically not how we look at balance and balance out we tend to look at it on an annual basis and.
And then within that.
It's even difficult to look at the book hands, we have on on a fiscal year because.
When programs come in they go through lunch cycles, and they have to hit the level of stable production.
Fully realize.
The benefit of of the business on top of that when we talked about balance and balance out in the.
Reduce.
Revenue from metals and mechanisms you should also be looking that is.
A much improved.
Way of generating cash because we're not.
Investing at the same level, we historically have and or metal and mechanisms business and what we're really trying to leverage the existing <unk>.
Capacity that we have in place.
That business, and we talked a little bit about vertical integration.
Can be a bit of a pitfall if you try to bring too much of that business on with engineering and capital investment.
Great. Thank you and then.
As a as a follow up.
I noted that you're now in line on your leverage target.
You know some share buybacks not so much in the last quarter.
$10 million so.
And what are the gating factors on on the pace of share buybacks, what's gonna determine.
Whether you accelerate <unk>.
Buybacks.
Yeah, how how.
Is it just the pace at free cash flow generation that will determine <unk>.
Temperature by that.
Yeah, I think at the highest level, what we've always sad as we looked for some level of stability in the market.
And you know.
Whether it's you know historically bad.
Supply chain disruption you know as as always.
It's the market that's.
And walking that fine line between you know.
Our view of.
<unk> of the company relative to existing share price and a projection of stability in the market I think when we think about the end of this year, we think about the U a W strike as a reason to maybe give us pause.
And and hang on for me a bit more cash until we have a better idea of.
Of what the impact will be two or.
Fiscal year 2004, specifically, our first quarter.
So.
So that's that's just generally at a at a very high level the approach.
If you guys want to make any specific comments beyond that.
Okay.
And Christy it looks like we're at the bottom of the hour. So this will conclude the conference call for today. If anybody has any additional follow up questions. Please feel free to reach out and be able to help you with those as we go through the day. Thank you.
This does conclude today's conference. Thank you for your participation you may disconnect at this time. Thank you.