Q4 2023 Adient PLC Earnings Call
Welcome to the Adient fourth quarter financial results Conference call.
Definitely some in listen only mode until the question and answer session at that time, if you'd like to ask a question you May Press Star. One today's conference is being recorded if you have any objections you may disconnect at this time.
I'll now turn the call over to Mark Oswald Sir you may begin.
Thank you Shirley good morning, and thank you for joining us as we review <unk> results for the fourth quarter and full year fiscal 2023.
Our press release and presentation slides for our call today have been posted to the investors section of our website at adient Dot com.
This morning, I'm joined by Doug del Grosso, Adient, President and Chief Executive Officer, and 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 Q4 and full year financial results and.
In addition, Jerome will provide you with the company's initial outlook for fiscal 2024.
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.
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.
We caution you that our actual results could differ materially from these forward looking statements made on the call. Please refer to slide two of the presentation for our complete Safe Harbor statement.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments I'll now turn the call over to Doug Doug.
Great. Thanks, Mark good morning, Thanks to our investors prospective investors and analysts joining the call. This morning as we review.
Our fourth quarter and full year results for fiscal 2023.
Turning to slide four let me begin with few comments related to the quarter and a few about adience full year successes, starting with the numbers.
You can see adient financial performance as highlighted by certain key financial metrics in the box on the right hand side of the slide adient.
<unk> finished the year strong delivered improved year over year earnings growth in Q4 fiscal 'twenty three.
<unk> by the relentless focus on execution operational excellence and better than expected production volumes versus internal expectations at the beginning of the quarter.
And despite labor related work stoppages at certain customers.
Okay.
Heading into the fourth quarter results continued to build positive momentum established.
Established earlier this year.
For the most recent quarter revenue, which totaled $3 $7 billion was up $79 million compared to last year's fourth quarter, adjusted EBITDA totaled $235 million up $8 million year over year.
And finally adient ended the quarter with a strong cash balance and total liquidity of $1 1 billion and two point.
<unk> billion dollars respectively.
Given the uncertainty surrounding the timing and magnitude of the loss production due to the strike related work stoppages adient executed actions to preserve cash and liquidity as we progressed through the quarter.
For the full year adient delivered on its commitment to increase earnings margins and free cash flow versus <unk>.
Fiscal 'twenty two.
Jerome will expand on the full year 2023 fiscal year results in just a moment.
Adient successes in 2023 extended beyond our strong financial performance.
Examples include the teams execution of day to day processes that enable world class launch execution continuous operational improvements.
Full cost reductions, winning new business across various regions customers and platforms are expected over time to strengthen our leading market position.
Not to mention support improved margins and earnings.
The team is also executing actions that provide value add tour adient stakeholders every day.
That's our customers suppliers or employees.
A variety of customers in automotive industry awards reinforce adience commitment to excellence.
The company and its employees were recognized with approximately 60 awards in fiscal 'twenty three.
Highlights include GM supplier of the year Award J D Power award for seat satisfaction and many more as you can see.
I mentioned these awards as proof points that the team is operating at very high levels across the company.
The accomplishments in fiscal 'twenty, three both financial and operational are even more impressive considering the challenging external headwinds that impacted the industry and adient.
<unk> labor inflation and availability the strengthening dollar and is still fragile supply chain.
The Companys unwavering focus on our strategy enabled us to successfully navigate these challenges and position <unk> for future success.
Speaking of challenges and turning to slide five I wanted to provide a quick update on how the UAW strike here in North America.
And its impact on adient.
To begin with.
We look at production disruptions through two lenses, the near term impact and the potential longer term negative effects the strike could have on.
On the industry.
Near term the strike has impacted adience just in time operations.
As well as our component plants.
With the strike beginning late in our fiscal year the negative impact was limited in fiscal 'twenty three call it around $30 million in sales and under $5 million in.
And EBITDA.
As the strike extended and began to impact other adient facilities, including jet and other component plants impact increase.
We're encouraged.
Progress has been made over the past week to 10 days.
Which is settled the strike that said given the timing adience new fiscal year. The work stoppages through October and early November have undoubtedly had a bigger impact on fiscal 'twenty four compared to the limited impact and Eddie in fiscal 'twenty three results.
Through early November we estimate the impact on our 2020 for sales and EBITDA have been approximately $125 million and $25 million respectively.
Jerome will have additional commentary related to the impact of the strikes in fiscal 'twenty four.
<unk> remarks.
As you would expect the company moved quickly to lessen the negative impact.
Listed a few of the actions on the right hand side of the slide I won't read through the less other than to point out the company went into cash conservation mode.
And reduced or eliminated non discretionary spending early in Q4.
Given the duration of the strike we.
We are concerned about lingering downstream impacts to the industry, especially related to supply chain and its ability to run production at rate when called upon.
The financial health of lower tier suppliers, and labor availability or just a few.
In addition risks or repercussions related to the increased labor costs at <unk>, such as the typical playbook to extract value from the supply base, the ability to maintain existing and future product plans and the ability to complete.
Again, lower cost manufacturers, especially Chinese manufacturers, not only have a lower cost base, but new products that are extremely well contented and desired by consumers.
No doubt concerning at many levels that said, adding it similar to prior external headwinds.
Has and will continue to execute actions to lessen the impact of these negative pressures.
Turning to slide six you've heard US mentioned in several locations set adience focused strategy as a key enabler to our success at driving the business forward and navigating through external challenges.
The key tenants of the strategy are laid out on the left hand side of the slide as a reminder, the top four tenants has helped drive strong business and financial performance.
Both fiscal 2022 and 'twenty three.
The bottom of the slide you'll see a fifth tenant embracing and leveraging a shifting industry dynamics.
But looking ahead, we feel it's imperative that adient adapt to the evolving auto industry.
An industry that is being influenced by a number of factors including.
The pricing and the affordability of bvs versus traditional ice platforms.
Which is clearly impacting the pace of EV adoption here in North America.
In fact, as Youre aware certain traditional manufacturers have recently announced various re timing of even be launches to align with demand.
Adient processes, which focus on acid Rhys Hughes and flexibility enabled the company to meet the EV or ice production requirements.
In other regions, namely China, the industry is being reshaped by the growth and influence of the Chinese domestic auto manufacturers.
In addition access to technology and innovation is taking place through global partnerships versus in house capabilities.
The one constant the importance of being cost competitive.
Recognizing these shifts resulted in us fine tuning the company strategy going forward to ensure that we have the right vision to create additional value to adient stakeholders.
Speaking of value creation, and turning to slide seven.
One exciting trend that has begun to emerge, especially in China is added content within ceilings.
Presently China is bringing a vehicle concept to the market is very different.
From traditional auto manufacturers with a focus on electronics functionality Adas the interior configuration surround creature comfort.
Adient zero gravity seat built to balance the ultimate and comfort by keeping safety in mind is an example of the kind of innovation that these new players are generated.
Longer term as advanced driver assistant systems, and comfort features become more prevalent.
And as seeding solutions intersect with passive safety systems ceding content is expected to outpace vehicle production as Oems adopt this innovative new interior configuration and features.
Although green shoots of this added content, primarily in China today, we're optimistic that the trend will cascade into other regions.
Important to note, adding <unk> ability to provide innovative solutions for our customers in China with speed and World class execution are critical to our Paas and future business wins with this customer group.
Turning to slides eight and nine now let's take a look at our launch performance and new business wins.
As you can see sites eight highlights a few of adient and process and upcoming launches.
And it continues to execute at a high level on launch performance.
The programs highlighted represent a good mix of wins across EV, powertrains, and ice powertrains and our diversified across a number of segments, including Suvs luxury mass market.
And contain a high level of vertical integration across complete seat foam trim and metals.
I'd also like to point out that these launches include a number of innovative technologies that are being well received by our customers, including their zero gravity seat, which increases ergonomic comfort and body pressure distribution in Shanghai <unk> E <unk> in China.
As you can see at the bottom of the slide we have provided some commentary on what you can expect for fiscal 2024 with respect to volume and complexity of launches.
Generally speaking volume and complexity are up in the Americas, Europe and Asia.
Outside of China versus last year despite.
Despite that fact, I'm confident we will maintain our focus.
And process discipline across launch readiness.
Diving similar results or better versus 2023.
Flipping to slide nine the strong operational execution and launch performance as well as.
Innovation I just talked about are foundational 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 both phone trim and metal components as well as the jet business we.
We continue to scour our replacement business, we are winning our fair share of new business leveraging our existing footprint.
And we're having success winning business, while navigating the difficult macro conditions and related commercial discussions.
Before handing the call over to Jerome with Slide 10, let me conclude with a few comments related to our initial thoughts on 2024.
To begin Adience focused strategy continues to drive the business forward, our fiscal 2023 financial and operational results. In addition to our year to date results provide positive proof points.
The team delivered many accomplishments last year that were hard fought especially considering the external operating environment.
Although we are confident that positive momentum will continue into 2024 were also aware the new year will likely bring a unique set of challenges and obstacles to navigate.
But the view that most of you have commented on include temporary production disruptions that are nearing resolution concerns related to supply chain and the ability to run at rate restarted production in the Americas the impact of FX movements.
Stubbornly high interest rates that are likely to be in place through the mid term.
And uncertain the surround consumer demand.
Similar to prior years Adient has and will continue to develop and execute contingency plans to help mitigate and lessen any potential impact.
I'm confident combining our resolve with an unwavering commitment to the company's focused strategy. We will continue to drive the business forward in 2024.
Further positioning adient for sustained success ultimately driving increased value to all of our stakeholders.
With that I'll turn the call over to Jerome to take us through <unk> fourth quarter and full year 2000.
2023 financial performance and outlook for 2024.
Thanks, Doug.
Let's jump into the financials on slide 12.
Hearing to our typical format the.
The pages formatted with our reported results on the left and our adjusted results on the right side.
I'll focus my commentary on the adjusted results, which exclude special items that we view as either onetime in nature or otherwise skew important trends in underlying performance.
For the quarter the biggest driver of the difference between our reported and adjusted results relate to a noncash valuation allowance release.
Pension mark to market restructuring and impairment costs and purchasing accounting amortization.
Details of all adjustments for the quarter and the full year are in the appendix of the presentation.
High level for the quarter sales were approximately $3 7 billion up 2% compared to our fourth quarter results last year.
Proving vehicle production in the Americas combined with positive impact of currency movements were the primary driver of the year over year increase.
Adjusted EBITDA for the quarter was $235 million.
Up 8 million year on year.
The increase is primarily attributed to the benefits associated with improved business performance and higher volume and mix.
These benefits were partially offset.
By the adverse impact of net commodities driven by recovery timing primarily in the Americas.
Ill expand on these key drivers in a minute.
Finally at the bottom line and it reported an adjusted net income of $48 million or <unk> 51, a share.
Slide 13 provides a similar high level summary of adient and full year financial metrics for.
For the year sales were $15 4 billion up 9% compared to fiscal 2022.
Adjusted EBITDA was $938 million up $263 million year on year.
The increase was primarily attributed to benefits associated with improved business performance and higher volumes, partially offset by increased net commodities.
As a reminder, the $938 million includes $30 million of insurance recoveries that are considered onetime in nature, and therefore should be backed out of the run rate going forward.
At the bottom line for fiscal 2023, and it reported net income of $205 million or two two or $2 15 per share.
Yes.
Moving on let's break down our fourth 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 an adequate amount of time set aside for the Q&A portion of the call.
Starting with revenue on slide 14.
We reported consolidated sales of approximately $3 7 billion.
An increase of $79 million compared with Q4 FY 'twenty two.
Primary drivers of the year over year increase including the positive impact of currency movements between the two periods of $49 million and the positive contribution from improved volumes and pricing of $30 million.
Focusing on the table on the right hand side of the slide Adient consolidated sales across the regions were impacted by adverse customer mix in the quarter, which we view as temporary as well as the negative impact of non reoccurring <unk> of <unk>.
Econ recoveries in FY 'twenty two.
For the full year Adience overall sales outpaced production by about 300 basis points when adjusting for FX.
Asia demonstrated strong growth over market outpacing production gains by two times.
No surprise. This was led by China, where consolidated sales were up 8% versus production in the region, which was up approximately 2%.
Americas ended the year generally in line with production and EMEA was modestly lower driven by our planned exit of certain low profit platforms.
As Doug mentioned earlier, given the favorable trends that we're seeing in China related to Eddie added CBS content, we'd expect growth over market to continue as we look to the future.
With regard to add against unconsolidated seating revenue year over year results were up about 3% adjusted for FX.
Increased production volume at our unconsolidated joint ventures, primarily in China supported this increase.
Moving to slide 15, we've provided a bridge of adjusted EBITDA to show the performance of our segments between periods.
The bucket labeled corporate represents central costs that are not allocated back to the operation such as executive office.
Communications corporate finance and legal.
Big picture adjusted EBITDA was $235 million in the current quarter versus 227 million reported a year ago.
Primary drivers of the year on year comparison are detailed on the page.
Positive influences include $9 million.
Associated with improved business performance the business performance bucket includes items, such as improved material margin and lower year over year input costs freight for example.
In addition, volume and mix and increased equity income benefited the quarter by $7 million and 5 million respectively.
Partially offsetting these positive influences was a net commodity headwind of $12 million within the Americas, primarily driven by the timing of contractual true ups.
Similar to past quarters, we've provided the detail of our segment performance in the slides in the appendix of the presentation.
Let me now shift to our cash liquidity and capital structure on.
On slide 16 and 17.
Starting with cash on slide 16, I'll focus on the full year results as the longer timeframe helps smooth some of the volatility and working capital movements.
Free cash flow defined as operating cash flow less capex was $415 million.
This compares to $47 million in fiscal 2022.
Key drivers impacting the comparison include the higher level of consolidated earnings driven by improved volumes and better overall operating environment.
Lower interest paid driven by the reduced level of debt and the deferral of interest related to the March 2023 debt refinancing.
And typical month to month working capital movements.
I'd also point out as seen in the middle of the chart timing and temporary compensation related benefits provided a significant positive benefit to the year over year comparison.
Given the nature of the drivers within this line item such as the day of the week the quarter close this year over year bonus.
Accruals and the impact of compensation related changes between the two period.
The net impact tends to smooth over the long term very similar to working capital in.
In fact, the benefits experienced in 2023 are largely expected to reverse in 2024.
More on Adient fiscal 2024 expectations in just a few moments.
These benefits were partially offset by the timing of tooling recoveries the deferral.
Payments and.
And increased engineering in support of customer launch activities.
One last point any.
Adient continues to utilize various factoring programs as a low cost source of liquidity at.
At September 32023, we had $170 million of factored receivables versus $269 million at the end of fiscal 2022.
Flipping to slide 17 as noted on the right hand side of the slide we ended the year with about $2 billion in total liquidity comprised of cash on hand of $1 1 billion and roughly $900 million of undrawn capacity under <unk> revolving line of credit.
The elevated level of cash reflects the company's cash conservation efforts executed during the quarter to ensure adient balance sheet remains strong and flexible given the uncertainty related to the timing and duration of the work stoppages at certain of our customers as a result of the UAW negotiations.
Recent news related to the tentative agreements at our customers should enable the company to resume its balanced capital allocation plan.
As a reminder, for the year shares repurchased and cash deployed totaled approximately $1 8 million and 65 million respectively.
And as a reminder, during the March 2023 debt tender $100 million of cash on hand was used towards voluntary debt repayments.
Looking forward cash available for future returns and share repurchases will be based not only on fiscal 2020 for free cash flow, but also inclusive of the cash from the balance sheet. Considering we ended FY2023 with an elevated level of cash.
Adient debt and net debt position at year end totaled about $2 5 billion and $1 4 billion respectively.
One important point to call out the strong financial performance achieved during 2023 combined with our focus on deleveraging has driven our net leverage ratio on a trailing 12 month basis to 1.5 times within our target range of one five to two times. This is no doubt a very good result.
With that let's flip to slide 19, 2020, one and review our outlook for fiscal 2024.
Starting on slide 19, as Doug noted earlier adient enters 2024 from a position of strength.
We successfully navigated through a challenging 2023 and drove the business forward as evidenced by the operational and financial accomplishments just discussed.
That said 2024 began with a new set of obstacles that the team is presently navigating.
The guidance provided today is based on the current operating environment.
On the right hand side of this slide we've laid out our planning assumptions for production and FX compared with FY2023.
The foundation of our FY 'twenty four plan is general generally aligned with Octobers S&P estimates.
To the far right of the chart, we've highlighted our expected sales performance by region.
When adjusting for FX, we expect our sales to be slightly favorable to the industry in North America.
In line with the market in Europe, and significantly better for the market in China.
China's outperformance is primarily attributed to the roll on of various new business and adient favorable customer mix.
In the lower right hand corner, we've provided our FX assumptions, which as many of you have commented on it in your recent reports is expected to be a significant headwind year on year.
In fact based on our current assumptions, we estimate the year on year impact 2023 to 2024 for adient topline and EBITDA to be about $180 million and $60 million respectively.
Outside of production and FX other factors that are on our radar include labor availability and cost elevated.
Elevated interest rates, which are forecast to remain higher for longer.
Consumer demand and geopolitical concerns.
With that said, taking these factors into consideration and based on current market conditions, we expect to deliver earnings and margin growth in 24 versus 23.
High level volume and mix are expected to drive a year over year increase in sales.
At about 2%, which is generally in line with S&P's October forecast.
From an FX standpoint based on assumptions outlined on slide 19.
It is expected to partially offset the benefit of higher volumes call. It an approximate $180 million headwind. The Chinese RMB is expected to be a substantial driver of the headwind in the euro to a lesser degree.
In total adding into 2024 planned for revenue excluding the impact of the UAW work stoppages at our customers was expected to land between $15 six and $15 $7 billion based on the environment today, we estimate the strike related.
Disruptions and production stoppages and our customers through November 3rd negatively impacted adient topline by approximately $125 million.
Although it's realistic to assume certain of the lost production will be made up.
It's premature to quantify at this time.
As you would expect the company will provide updates as fiscal year 'twenty four progresses with regard to the strike related volume recovery.
The bridge for EBITDA has a few more components first the positive influences, which include the benefits of improved business performance volume and to a lesser extent, a $10 million benefit from net material economics.
On the topic of net material economics. Some of you might question the magnitude of the material E. Com benefit let me remind you of several factors that can influence that first is the timing of recoveries second is the fact that the commercial negotiations or Austin settled as a basket of goods and cannot always be directly linked to specific items and <unk>.
The company has yet to finalize its 2020 for steel contracts in Europe.
The important takeaway is that adient continues to be successful with its commercial negotiations to mitigate inflationary pressures.
Moving on to the headwinds.
FX, which is expected to pressure earnings by approximately $60 million or 30 basis points FY 'twenty four versus FY2023.
The 60 million dollar headwind includes a translational impact of about $20 million.
Though the Mexican peso is driving the majority of the transactional headwind various various currencies within Europe, such as the Polish Zloty are also contributing to the pressure.
Equity income is about it's about $20 million lower.
In FY 'twenty four versus last year.
The primary driver is an additional pricing agreement revisions between capers, JV partners, which reduces equity income, but improved adient consolidated EBITDA primarily in the Americas.
And finally.
Minor footprint actions in Europe, and further fine tuning of the company's operations will impact the year over year comparison.
And total Adience 'twenty 'twenty four planned for EBITDA, excluding the impact of the UAW work stoppages at our customers was expected to land north of $1 billion base.
Based on the environment today, we estimate the strike related disruptions and production stoppages at our customers through November 3rd negatively impacted adding its adjusted EBITDA by approximately $25 million.
Consistent with my comments related to sales, although it's realistic to assume certain of the loss production and earnings will be made up.
It's premature to quantify we'll provide updates as fiscal year 'twenty four progresses with regard to strike related recoveries.
Turning to slide 21, we've provided our fiscal 2024 guidance for all of the for all of Adient and key financial metrics, including the impact of the strike related production stoppages through November 3rd.
Having just covered revenue and adjusted EBITDA and equity income I'll begin with interest expense.
For fiscal year 'twenty, four we forecast interest expense to be about $185 million, given our expected debt and cash balances cash interest cash interest is expected to be slightly higher call. It $195 million, resulting from the deferral of the March 2023 refinancing.
Yeah.
Given expectations for improved profitability year over year cash taxes are forecasted to be $105 million for.
For modeling purposes, you can assume between 115 to 125 million of adjusted tax expense.
Capex is expected to trend back to a more normalized level call it approximately $310 million.
Again, 2023 was depressed given the delay of certain launches at our customers.
And finally free cash flow is projected to be approximately $300 million.
Key drivers impacting the year over year comparison.
Include the higher level of cash interest.
Capex returning to a more normalized level and the modest increase in cash taxes.
Also as mentioned in my 2023 cash commentary earlier.
Timing benefits recognized in fiscal 'twenty three related to certain accrued compensation are expected to reverse.
Adjusting for fiscal 2020, threes outperformance or smoothing FY2023 FY 'twenty four should provide a clearer view of adient run rate cash generation.
With that let's move on to the Q&A portion of the call.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please on mute your line and press Star. One you will be prompted to record your name to withdraw. Your question you May Press Star two again press Star one to ask a question and one moment. Please for our first question.
Our first question comes from Colin Langan with Wells Fargo, You May ask your question.
Oh, great. Thanks for taking my questions.
Maybe I'll kick it off.
Doug any color on why you know, leaving you know by the end of the year. It seems like you guys have been making pretty phenomenal progress on sort of your multi year plan.
Why not sort of sticking it out until fully close the margin gap to the targets you've been talking about.
Sure. Thanks.
Thanks for the the.
A question Collyn.
<unk>.
As you would imagine Theres, certainly personal reasons I won't discuss on the call, but from a professional perspective.
I've been here five years.
Our focus over those five years was really too.
You know get the company back to basics spoke to some operational excellence changed the culture around that.
We've successfully done that.
We've spent time on the call today talking about the dynamics and the shifting dynamics.
And where we need to go in the future from a technology.
Perspective, and shifting customer perspective.
And I just felt at this time it was a good exit point for me my operational background.
Got the culture on the execution side back with.
And with the team.
That transitions, we can really focus on how we shift.
From a technology and customer perspective, I, just think generally speaking.
Five years is a good timeline for CEO.
And and <unk> and refocusing on our energies on where we move in the future.
We'll be well served under Charles' leadership.
Oh got it okay.
Congrats on all the van Kratz from maybe it was just switch to the guidance I think in the past you've talked at about 100 basis points of margin performance Oh per year over the next three years.
Thank you outperform last year.
What is offsetting is that all just the FX kind of washing out some of that performance that you have executed in the pipeline that's.
That's kind of keeping that year over year margin expansion a bit more muted.
Yeah, So I.
I think here.
Your commentary in terms of if you look at 'twenty three.
You know we executed around about 130 basis points of margin expansion. If you look at 24 net of FX, it's around that kind of 70 basis points over the two years, it's still a combined 200 basis points and it's really the the FX piece of it on the transaction side in 'twenty for this.
Okay.
Muting.
Really.
That performance piece of it.
And especially the Mexican peso piece and the teams are.
Aggressively working with the customers and working to claw that back.
So theyre going to be very difficult discussions that will work through and worked to pursue.
But it is a sin unwelcome development.
On our on our path at the moment.
Thank you. Our next question comes from Rod Lache with Wolfe Research you May ask your question.
Good morning, everybody a couple of questions and first I want to say congrats Doug on your retirement, you've done a lot at this company and in your career and I wish you the best in your next adventure.
I wanted to ask you just firstly on this FX impact specifically.
It was $1 million on your EBITDA in the fourth quarter and.
I was just looking back and there's lots of D.
RMB in and especially the peso looked like they were pretty significant headwinds all year, maybe just elaborate a little bit on what's driving the acceleration of that $60 million.
Yeah. So it really comes down to right are our hedging strategies.
And how how our hedging strategies executing that.
You know we were in a position where we were able to you know.
For Tac door smooth.
The company and as a result, there and customers throughout the 23 fiscal year. Obviously, that's temporary you cant hedge things forever and so some of those hedges roll off in 'twenty four we're now exposed to the market movements in the the dynamics and the shifts of the peso and so it's really getting toward the peso settles in it now.
And that's why you're seeing these movements.
Occurring and you're seeing this big shift or headwinds year over year.
Okay.
And then also just another maybe.
A housekeeping thing I'm only seeing I think you referenced $10 million of reversal.
You absorb something like $120 million of commodity headwind. This year can you talk a little bit about what.
Whether that's just conservatism or.
Or whether there's something else that's happening there that's changing what you have to absorb versus pass along and maybe just remind us of that bridge to the 8% from here from what we saw.
I guess ex the at $30 million gain you did like five three in 2023.
How do you see that coming through from volume.
Performance and.
Contract rollovers.
Yeah. So I'll take the material question first and then go to the <unk>.
Second question after that on the material question.
If you recall the 100 just call it $120 million.
You know about.
Most half of that is a inventory re val topic, which is just.
A true up on the balance sheet of our inventory that we have and then there was another.
Significant portion of that less.
Less than a third of it which was really a non reoccurring benefit that we had in 'twenty two from a customer settlement that did not repeat in 'twenty, three and that caused us a.
An issue and so then the remaining amount that we have to really go and get and our 24 is theres a couple of factors on the material side one is.
We have 10 million of benefit, but then also we havent cut our 24 European steel contracts yet so we're in the process of working through those.
And then the last piece I would say is.
You know when we think about recovering some of these material econ deals, it's not always going to be a straight.
Flow through on that net commodity line, it's really a a basket of goods discussion with some of our customers.
Where we don't have a perfect recovery mechanism and I think we've always said it's.
Somewhere between 70% to 80% on steel.
And then it's a 12 to 18 month lag on the window.
So we don't have these perfect recovery mechanisms, it's going to be a basket of goods discussion.
I think the way to think about it is if you look at you know 22 to 'twenty, three and kind of that flow through margin, we expanded our margins by you.
You know call it.
If our normal flow through was 16%, we actually expanded by almost 200 basis points. In spite of all that commodity headwind that came at us really because we were able to negotiate baskets of goods with our customers in spite of all that commodity headwind and.
That's how I'd really think about.
You know those commodities and how they flow through and then same thing in 24, if you look at kind of the standard volume flow through we're actually.
Greatly exceeding kind of a normal 16 or 17% contribution margin on the volume because we're getting some of those commodities back in other basket of goods is the first piece on the commodity side.
And then on the.
The you know the topic of.
How to think about the progression of the margin.
The pathway to an 8% margin target.
You know theres still the the other volume piece that we have to get back up to a 90 million run rate.
Within the industry.
Yeah, that's still.
Call it roughly a third of the piece of the story that we have to get there.
We will end this year now at call at that 6.4, but still about a third to get there. It's no longer a 100 basis points 100 basis points 100 basis points, but it's about a third of that remaining.
GAAP that's out there.
The other big piece, that's still out there now is really this roll on roll off of some of these contracts that we have in our network.
And we said you know a lot of those start to roll off in earnest in the back half of 'twenty five and 'twenty six.
And we really hit full run rate on that and kind of the 2006 timeframe when those roll off.
And that's the other.
A big chunk and then whatever remains as the business performance piece of it to make up that gap.
Thank you. Our next question comes from John Murphy with Bank of America, You May ask your question.
Good morning, guys and Congratulates congratulations to all of you on sort of a hard fought next steps in your lives and careers. That's it's impressive.
Just a first question.
On cash conversion Jerome.
The you know the numbers. Obviously you finished the year were very strong given the focus on cash conservation I'm, giving a number for 'twenty four it looks it looks pretty good.
I'm curious is there any kind of swing factor to the negative in in 24, because it was such a strong performance in the end of 'twenty three and how do you think about cash conversion over the mid to long term in the business.
Yeah, I mean in terms of a swing factor I think there's a couple of things. One is if you look at Capex. As an example, you know capex we ended <unk>.
'twenty three at.
Call. It a 260 million run rate and we will go into 'twenty four it kind of a 310 level.
Yeah, there was a lot of these cash conservation.
Conservation activities that we had in the business really driven by.
Doug and the team as we knew with the UAW strike, we really had to kind of batten down the hatches and get aggressive from a cash conversion standpoint. So there's that you know that element of normalization.
We also had from you.
A couple of customers actually just a R E <unk> timing.
Nothing we did they actually timed it out a bit differently. So there is a you know a swing in there that occurred.
We won't necessarily quantify it but there is a level of swing. So when you think about long term cash conversion I'd look at that.
That number that we have in 'twenty for kind of the 300 on 985 as a long term cash conversion rate for the business going.
Mark if there's anything you want to the only other thing I'd say, John when I think about longer term cash conversion rate our calls for our cash going forward are pretty stable right. So if you just think about what the drivers for cash is going to be it's going to be EBITDA growth right. Because I know what my interest is going to be a noemi restructurings down to a normalized level my cash taxes.
Right things to our plumbing that we've set up is very favorable so really with the call for cash stabilized I'd really look at that EBITDA growth and use that as a proxy for where you see free cash flow going forward.
That's very helpful. And then just a second question you guys about casino one of your slides that you know.
In China, you're going to swing I mean, you have a leading position in China already bought from 40% Chinese domestic.
<unk> in China to 60%, but.
But you didn't give us a timeframe on when that was going to happen I was wondering if you can maybe talk to that and then also if you've got a handle on.
At this point and where this will go over time.
The mix of your vehicles that stay in country.
As those they get export it because obviously, it's China's swung to a major export hub in a way over the last two years.
So as youre, increasing net debt that makes to the Chinese domestics that might be helpful in market, but might even be more helpful. On the export basis I don't know if you can give us some color on that.
Yes, so first of all I appreciate your comments on the.
Chip transition.
With regard to that that mix of customer change, we're anticipating that.
Going to happen over definitely in our five year planning period, probably along it.
Three year timeline.
And we're fairly confident in that because when you look three years out.
The bookings are.
If not done.
You know clearly visible.
We view that with high level of confidence.
<unk>.
With regard to the amount of vehicles, China is exporting right now.
As you know those are lower level vehicles.
And.
Have not necessarily been on our radar.
Our focus certainly has been on the.
Chinese domestics certainly the ones that are growing.
Are outgrowing the market, we're still focused on the luxury segment.
And still paying attention to our traditional customer base, though we clearly see.
The mix changing.
Yeah.
That Europe's going to put up some level of resistance, that's probably going to drive domestic Chinese and they've already signaled that.
But.
If if it continues to be an export market and those vehicles shift into the higher end vehicles, we think we're well positioned there.
If they move.
<unk>.
So what we're we're pretty confident the way that is going to play out.
But as you know.
It's like I say, it's not crystal clear, how how that's all going to come together, but we do understand.
The competitive advantages that the Chinese have and that's.
That's a compelling case for them to continue to grow market share.
Yeah.
Thank you. Our next question comes from Emmanuel Rosner with Deutsche Bank, You May ask your question.
Thank you very much. So I appreciate your assessments of is shifting industry dynamics.
Now taking place and I wanted to hone in a little bit on the electric vehicles in particular as you mentioned in the slides and in the prepared remarks, there's a little bit of vault and a push out of some of these launches are a reduction of some of the near term volumes, especially in North America can you comment to what extent if any this is <unk>.
Pac thing.
Your business this isn't bad.
Your backlog how does it have an impact on your gross over market in the near term and specifically maybe your second part of his question.
When I look at the growth of the market you know guidance for 'twenty, 'twenty, four which should be about a point, maybe a little bit below average when it seemed like you were having in the above average type of direction.
I'm wondering if you'd be a push out it is a factor within that.
Yeah, I mean, what's happening on the EV front as you correctly point out is primarily in North America related issue.
To a lesser degree.
A European issue, but if you look at where the penetration is at right now, it's not really having a huge impact.
On us as a company when we look at our backlog and outlook.
Characteristic you know what happens with our customers if they pulled back on one they extend.
The.
A nice platform to offset that.
So we still see relatively stable level of production in China, we're not seeing any pullback I think we've got a significant launches scheduled.
Scheduled for China.
This fiscal year no indication at all that our customers are pulling back on those launches. So I'd characterize it as a north America issue and I, just look at EV penetration rates as they exist today being relatively small not too.
Hugely disruptive.
To how we look at our our outlook in the region.
And I guess the second part of the question around this year's gross of a market. It's about one point you had been running at one and a half.
On average for the last three years.
I think you'll comment on the last earnings call suggested that with this success in China, maybe you could run a little bit above average.
This seems to be maybe a little bit less than planned. So can you maybe just discuss the factors in that.
Well I think one is.
One is there's a significant FX weight.
Because of the RMB in our China growth. So the growth is still significantly there in China, but you're seeing really big FX impact on that.
Just a comment and then too.
If you look at what we said last call versus this call or even for the last year.
I think it's really we've set our Europe market will kind of grow at or even slightly below because of planned exits in Europe. That's still holding North America is kind of at market, that's still really where it's running at and China's significantly outpacing and we still expect China to significantly outpace so theres no.
I really don't see any any change from a from that standpoint, Emmanuel if you would.
Thank you. Our next question comes from Joe Spak with UBS you May ask your question.
Uh Huh my congrats too.
A review on the call as well.
And maybe just to pick up there.
We you know.
If it's North America, or if Americas is roughly flat Europe could be down growth in China and then we think about the you know some of the detailed.
EBITDA impacts you talked about right the transaction impact on Americas. Some of these footprint actions in Europe and China.
Maybe you can just help us.
Understand by region, where you still have.
Greater room to drive that business performance because.
And maybe a little bit of a color about by the regions because it does seem like at least from a topline perspective and with some of the cost issues you talked about it almost seems like most of that.
Margin performance has to come out of Asia, unless we're thinking about that incorrectly.
Yeah.
Start out now and CRO.
Trauma market.
You know make additional comments.
I think first and foremost what I would.
Two in Americas and in EMEA.
Is it still been a very volatile volume market and as we pointed to in the Paas Everytime volume stabilizes.
That means.
The overall environment is relatively stable.
So we get the benefit of volume, but what we get.
Added to that is our business performance because we can really.
Drive productivity in our plants and kit incremental.
Variable margin.
Out of the business so you.
When we think about on a go forward basis, if we did see some stabilization in volume in those two regions there's added benefit there.
With regard to China.
You know I would characterize that as a market that's key.
Clearly developing faster than the other markets relative to our product segment if.
If we just look at the content per vehicle, that's being driven in China right now it's fairly significant to the point, where historically, it's operated at a lower level of content per vehicle and as we go out.
You know a few years in our planning horizon, we're seeing with.
EV adoption and the way Chinese automakers are content in their vehicle per minute Terrier standpoint, we see significant content had.
And then if we look at this whole concept of vertical integration.
As kind of a final piece and the way, we've really targeted our new business wins we're.
We're getting a much better vertical integration profile on our business.
Definitely in the Americas.
It is really the way China continues Asia continues to operate.
Albeit maybe to a lesser degree in Europe.
And as we look at.
That improved vertical integration, that's historically been just a better.
Profitability profile on our business.
And again, just a reminder, that vertical integration doesn't necessarily mean that.
We're.
Going to produce all that material because that as I think about our business.
The things, we're staying true to as kind of the fundamentals of this business can operate with relatively low margins.
But if we're good asset managers, we can generate a lot of cash so we looking.
You know its vertical integration in terms of our ability to control the supply chain. So when we kind of look at it from those.
Different parameters, if you will I think we're pretty optimistic that.
Stabilization helps us the way our new business comes on and what we're not winning.
From a supply chain control and then just what's happening in China with the amount of content being driven into vehicles. So we think that's.
Particularly positive so we should see performance improvements out of all three regions and not just being dependent on.
On Asia to continue to.
Drive the.
The profitability of the business.
Thank you and our last question comes from James Picariello with Bnb Parable you May ask your question.
Hey, good morning, everyone.
Congrats Doug on that on the news.
Just two two housekeeping ones.
Regarding the equity income outlook, the 20% to $20 million year over year downside can you just quantify what portion of that attributes to the Kuiper JV repricing I apologies if I missed that and then does that benefit the Americas segment.
Yeah, I mean, we didn't provide the the <unk>.
Breakdown between how much of that the call it the Kuiper JV.
JV versus how much of it is other jv's within the region.
Yes.
Yeah at this time I don't think we.
Yeah, I would just as we get further on in the year and we see how the equity income starts to flow in.
Start to provide the breakdown but.
It will benefit the Americas, just how to think of it yes.
Okay understood and then on the footprint actions.
And that that one slide with all the detail.
Yep packed around the guide is the net EBITDA impact 20 million positive or negative to the 20.
Yeah, So it's a negative $20 million in the and the largest the largest one on that 20 the vast majority.
Geordie a it was in 2023 we had the opportunity to really go through and deconsolidation one of our operations in China.
Our unique opportunity I'm looking forward, we have the ability to harvest some cash out of it it had a de minimis return going forward.
So we took advantage of that that has a yeah, obviously, a net year over year impact on EBITDA for us.
But from a cash standpoint, it was the right thing to do.
But it does present a year over year headwind for us from a <unk>.
And EBITDA.
Consolidated EBITDA standpoint so.
Is there is there an associated revenue impact is as well since your D consolidating it or no.
Yeah, it's yes, there the associated revenue impact, but its more than made up by the increasing sales that we see from our other operations in China.
Great and surely it looks like we're at the bottom of the hour. So with that we'll move to conclude the call. If theres anybody that has additional questions. Please feel free to reach out throughout the day. Thank you.
Thank you. This does conclude today's call. We thank you for your participation at this time you may disconnect your lines.