Q2 2025 Adient PLC Earnings Call
Speaker Change: Welcome and thank you for standing by. At this time, all participants are in a listenly mode. During the question and succession, please press star one on your phone.
Speaker Change: Today's conference is being recorded, if you have any objections, you may disconnect at this time. I will now turn the meeting over to Michael Heifler. Thank you, sir. You may begin.
Michael Heifler: Thank you, Denise. Good morning, everyone and thank you for joining us.
Michael Heifler: The press release and presentation slides for our call today have been posted to the Investor section of our website at adient.com.
Speaker Change: This morning, I'm joined by Jerome Dorlack, Adient's President and Chief Executive Officer, and Mark Oswald, our Executive Vice President and Chief Financial Officer.
Michael Heifler: On today's call, Jerome will provide an update on the business.
Mark Oswald: Mark will then review our Q2 financial results and our outlook for the second half of our fiscal year.
Speaker Change: After our prepared remarks, we will open the call to your questions.
Speaker Change: Before I turn the call over to Jerome and Mark, there are a few items I'd like to cover.
First, today's conference call will include forward-looking statements.
Speaker Change: These statements are based on the environment as we see it today and therefore involve
Speaker Change: I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to slide two of the presentation for our complete safe harbor statement.
Speaker Change: In addition to the financial results presented on a gap basis
Speaker Change: We will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.
Speaker Change: Reconciliation for these non-GAF measures to the closest gap equivalent can be found in the appendix of our full earnings release.
Jerome Dorlack: and with that, it's my pleasure to turn the call over to Jerome.
Jerome Dorlack: Thanks, Mike. Good morning, everyone, and thank you for joining us today.
Jerome Dorlack: We will review our strong second quarter results, share our perspectives.
Jerome Dorlack: An analysis on tariffs and explain how we are addressing the situation through leveraging our global footprint and working with our customers to add value.
Jerome Dorlack: High-level, the Adient Business Model is strong and resilient, and her team has built positive momentum going into the second half of fiscal 2025.
Jerome Dorlack: I will walk you through these topics in more detail and then turn it over to Mark to review the Q2 financials and dynamics for the balance of the year.
Turning out to slide four.
Jerome Dorlack: In America, as we outperformed industry volumes and saw strong year-over-year margin improvement, as we drove additional efficiencies and had favorable comparisons,
with last year's Heavy Launch Calendar. [inaudible]
Jerome Dorlack: As a result, we were able to improve total company adjusted EBITDA margins by 40 basis points. We achieved 233 million of adjusted EBITDA.
Jerome Dorlack: importantly, Q2 results underscore the Adient team's deep commitment to operational excellence and solid execution and demonstrate the resilience of our operating model during times of volume pressure and macro volatility.
Jerome Dorlack: In fact, looking at our Q2 performance over a three-year period, our EBITDA results have improved by 18 million, and our margins have expanded 90 basis points on 300 million of lower sales.
Jerome Dorlack: The lower customer volumes have played a significant role. We have also made a conscious decision to focus on more profitable business.
Jerome Dorlack: and to invest in innovation, automation, modularity, and other efficiency measures. This strategy is paying off with a stronger, more profitable business that is well positioned to take advantage of future volume improvements.
Jerome Dorlack: Re-cash following Q2 with in line with internal expectations, reflecting normal seasonality and timing differences between Q1 and Q2.
Jerome Dorlack: Importantly, we ended the quarter with a strong cash balance of $754 million and $1.6 billion of liquidity.
Jerome Dorlack: The company's ongoing operational excellence combined with innovative seat solutions are hoping us win significant new business across all regions.
Jerome Dorlack: I'll walk you through some of our new business wins and a few slides.
Jerome Dorlack: External validation of the value we provide and how we operate the business speaks volumes, and I'm proud that our team continues to win broad-based customer and industry recognition. We are focused on delivering best-in-class quality, value, and service to our customers.
Jerome Dorlack: Notably, we have earned our fourth consecutive GM Supplier of the Year award with GM recognizing our transparency and clear communications.
Jerome Dorlack: We also want the excellent VA Achievement Award from Toyota Motor North America for excellence in optimizing value by improving performance and reducing costs.
I and I motor group awarded Adient the Best Supplier Award for ESG Management.
Jerome Dorlack: Also, Adient, China, 111 JD Powers, Seat Quality Awards.
Jerome Dorlack: Mark will get into our outlook in more detail in a few minutes.
Jerome Dorlack: Given our positive momentum in mitigating actions, we are taking around tariffs. We are reinterrating our fiscal year 25 guidance for revenue and adjusted EBITDA, excluding potential tariff-related volume impacts.
That said, let's discuss the tariff landscape.
Exposure, Ender Action Plan. Beginning on slide 5.
Jerome Dorlack: Terrace rules and values continue to be fluid. But based on our current interpretation,
Jerome Dorlack: Adient has multiple degrees of freedom to mitigate impacts through resource and components, engaging with customers to find lower cost alternatives, and where there is no alternative negotiating
Jerome Dorlack: We are targeting 100% cost offsets or recoveries with all customers.
Jerome Dorlack: As we begin to look at our exposure, appreciate that we do not ship complete seats into the U.S. that would fall under an X1.
Jerome Dorlack: Our exposure rises from parts such as recliners, seat transmissions, headrests, electrical components, etc.
Jerome Dorlack: Importantly, nearly 95% of Adians' parts produced in Mexico and Canada and shipped to the U.S. are U.S. MCA compliant, and nearly all of those parts are not listed in NX1 and therefore are not subject to those tariffs.
Jerome Dorlack: Adient's key advantage is our unmatched global footprint, which provides us enormous value for our customers in these circumstances, as we were able to quickly resource parts from different locations to significantly reduce tariff exposure.
Jerome Dorlack: As you can see in the chart on the upper right hand side, our largest exposure are from goods coming from China and Mexico.
Jerome Dorlack: We believe based on current tariff interpretation, our gross monthly tariff exposure is approximately 12 million, 9 million excluding purchases that are directed by our customers.
Jerome Dorlack: We have already resolved 75% of our gross position and a road map to remaining 25% and are working closely with our customers to close that gap.
Jerome Dorlack: Turning now to slide six. As I mentioned earlier, we are targeting 100% resolution.
Jerome Dorlack: Our objective is to work with all our customers to create value for them and to reduce overall tariff exposure, in addition to providing long-term sustainable solutions.
Jerome Dorlack: Our general view is that historical shocks like the great financial crisis, COVID, supply change shortages, etc. were acute crises.
Jerome Dorlack: that the industry collectively worked through to get back to normal. But tariffs could drive a fundamental reset with definitive winners and losers. We see Adient as a winner through these changes and are looking for opportunities to grow our business.
Speaker Change: I would point you to our strengths including our resourcefulness as scrappy problem solvers, Best in class, Global Manufacturing Footprint,
Speaker Change: Our diversified customer relationships, our joint venture network that allows us to quickly help our customers pivot.
Speaker Change: By leveraging our global footprint, utilizing modularity and adding more value in the US MCA zone, we are significantly lowering our tariff exposure.
Speaker Change: For example, we are assembling a front seat back frame made in Mexico with an imported recliner mechanism, and by adding to that a seat cushion frame produced within the USMCA zone, we are driving a favorable outcome for our customers.
Speaker Change: Some other examples of opportunities we are currently working on with customers include localizing, headrest mechanisms currently coming from China, sourcing those into the US, and resource and recliner mechanisms from China to either Mexico or Germany.
Speaker Change: We're also in a strong position to support complete seats for certain of our Japan and German customers who are localizing production into the US.
In summary, our terrorist exposure appears to be manageable.
Speaker Change: The biggest uncertainty is the magnitude of the tariff impact on volumes.
I'll talk more about that later.
Speaker Change: Next, let me walk you through some of the regional dynamics on slide seven. First, in the Americas, we continue to expand margins and benefit from strong business performance.
Speaker Change: Our Volume Mix performance relative to the industry has been strong as key launches in 2024 are now at full run rate.
Speaker Change: As mentioned earlier, we are focused on navigating tariff dynamics and driving value for our customers. By doing so, we believe we will capitalize on growth opportunities. We were already seeing certain customers on showing production.
Speaker Change: Finally, we are realizing benefits from low margin business rolling off such as certain metal platforms and we expect further margin improvements in the future.
Speaker Change: In a maya, we're gaining momentum and seeing improving business performance, including realization of restructuring benefits.
Speaker Change: The region is winning key programs with European customers as well as developing opportunities with China-based OEMs as they localize.
Speaker Change: With regards to effects, we have seen some headwinds from cross-currency exposures primarily related to the Polish Lodii.
Speaker Change: While production volumes in the quarter were lower, we have seen more stable production schedules overall.
Speaker Change: As we have shared in previous quarters, we have been monitoring the situation closely in the region.
Speaker Change: Given industry headwinds in Europe combined with the decline in our share price, we have determined a triggering event has occurred, and we have recorded a $333 million non-cash goodwill impairment this quarter.
and Asia the team continues to drive strong business performance.
Speaker Change: While we expect near-term pressure on China revenue, we believe this to be temporary as new business with local China OEMs are expected to drive growth.
Speaker Change: Our strong relationships in footprint in China are helping us win more business this year and we expect to capitalize on China OEM growth brought.
Speaker Change: In short, we see strong business performance mitigating near-term volume mix and headwinds as well as macroblends certainty.
Speaker Change: Next, let me turn to new business wins and launches on flight 8.
Speaker Change: We continue to prioritize winning the right business and executing successful launches. Our business awards this quarter demonstrate further growth with China local OEMs and enhancement to our global customer relationships.
Speaker Change: I would like to highlight the new business with F.A.W. Hong Chi H5, which is a complete seat system, as well as the replacement complete seats for the Kia K5 mid-size sedan and the replacement business on the Ram 1500 for metals and foam.
Speaker Change: As you can see on the right hand side of the slide, we are launching on several key platforms around the globe.
Speaker Change: Underpinning our new business wins, is our high level of execution on multiple launches.
Speaker Change: We continue to perform on safety, quality, and on-time delivery metrics for our customers.
Speaker Change: Turning to Slide 9, we are leveraging our emphasis on product innovation and automation to support our customers.
Speaker Change: This is the large enabler of growth with China OEMs globally.
Speaker Change: Our recent expansion of Adians China Technical Center in Chongqing reinforces our leadership in electrification and smartification, driving developments of innovation and automotive
Speaker Change: We're developing cutting-edge automation equipment and processes, utilizing Adient operations around the world, including automated co-bots, AI visual inspection, automated steaming and sewing, and more.
Speaker Change: This is a key differentiator for Adient to support local China OEMs as they expand their footprint outside of China.
Speaker Change: Additionally, Adient's first mechanical massage system was successfully launched with GAC's front-piece new PHEV model M8 during the 2025 Shanghai Auto Show.
Speaker Change: The Mechanical Massage System is a first of its kind, innovative product that more effectively releases occupant fatigue versus traditional pneumatic massage. We have a video embedded in our earnings deck that I would encourage you to watch.
Speaker Change: We believe these investments will strengthen our growth momentum with China-based OEMs and enable business wins beyond China and Southeast Asia and European markets.
Speaker Change: We are also seeing significant VYD and export growth through our Kuiper joint venture today.
Speaker Change: We continue to win business with domestic and China OEMs, which represent approximately three quarters of our new book of business in China.
and finally moving to our key takeaways on slide 10.
Speaker Change: The Adient Team achieved strong Q2 results, and we were seeing positive momentum, so there is significant certainty around volumes in H2 due to tariff policies, which I will speak
Speaker Change: Terrace Headwinds appear manageable, and we have a comprehensive action plan to mitigate those headwinds with more than 75% already achieved.
Speaker Change: We are executing plans to drive value to our customers and capitalize on opportunities.
We remain committed to driving higher levels of business performance.
Speaker Change: To mitigate those headwinds, an Adient has a solid track record of successfully managing
Speaker Change: and has a strong balance sheet and liquidity with no near term debt maturities.
Speaker Change: We intend to capitalize on opportunities arising from changing industry dynamics.
Mark Oswald: Now I'd like to turn it over to Mark to take you through our financials and our own book.
Thanks, Jerome. Let's jump into the financials on slide 12.
Mark Oswald: Adhearing to our typical format, the page shows our reported results on the left side and our adjusted results on the right side. We will focus our commentary on the adjusted results, which excludes special items that we view as either one time in nature or otherwise skew important trends in underlying performance.
Mark Oswald: One item to note, as Jerome mentioned earlier, was a trigger event which occurred during the quarter, which required a quantitative impairment analysis.
Mark Oswald: Primarily due to the significant decline in the market value of adiant shares resulting from uncertainties surrounding vehicle production volumes amongst other factors.
Mark Oswald: As a result of the quantitative assessment, a $333 million non-cash goodwill impairment was recorded in the AMIA reporting unit.
Mark Oswald: details of all adjustments for the court are included in the appendix of the presentation.
Mark Oswald: Moving on, high level for the quarter. Adjusted EBITDA for the quarter was $233 million, up 3% year on year.
Mark Oswald: We expanded EBITDA margins 40 basis points year over year to 6.5%. This improvement reflected outstanding business performance in the quarter, despite $139 million decrease in revenue from lower customer volumes in FX versus a year ago.
Speaker Change: As Jerome mentioned, we continued to demonstrate the resilience of the Adient Operating Model and ability to mitigate external pressures.
Speaker Change: Worth noting that our underlying equity income remains quite strong, particularly in our Asia-Pacific
Speaker Change: Despite this quarter's results being negatively impacted by $6 million from the same period a year ago, due to the restructured pricing agreement with an Adient's type of joint venture. Adient reported adjusted net income to $58 million or $69 per share.
Speaker Change: I'll cover the next few slides rather quickly, since details for the results are included on the slides. They should ensure we have adequate time for Q&A.
Speaker Change: Starting with Revenue on Slide 13, we reported consolidated sales of approximately $3.6 billion, the decrease of $139 million compared with Q2 fiscal year 24.
Speaker Change: The primary driver of the year-on-year decrease was lower volumes of 90 million, resulting from lower customer production. The FX was also a $49 million headwind in the quarter.
Speaker Change: focusing on the right-hand side of this slide, Adient's consolidated sales were higher in America and lower in Amia and Asia year-on-year.
Speaker Change: In the Americas, higher sales versus industry were driven by favorable comparisons with a year ago, when many of our key customer programs were launching at low volumes, such as GM's, large three-row crossover in the Toyota Tacoma.
Speaker Change: In Europe , we were negatively impacted by overall weaker market demand. Sales were in line with the market.
Speaker Change: In our APAC region, sales in China underperformed industry production primarily due to lower volumes from our traditional luxury OEM customers, including Volvo and GAC.
Speaker Change: We continue to outperform the industry in Asia outside of China due to new customer launches which occurred in the second half of 2024 which are now reaching full run rate volumes.
Speaker Change: Regarding Adient's unconsolidated seating revenue, year on your results were down 6% adjusted
Speaker Change: Revenue North America is lower due to a joint venture rationalization which was partially offset by growth in Europe of our Denise joint venture in Turkey.
Speaker Change: Sales in China were up year on year mainly due to growth with BYD and exports to our Kuiper Joint Venture as well as increased sales within the CFAA Joint Venture.
Speaker Change: Moving to slide 14, we provided a bridge of adjusted EBITDA to show the performance of our segments between periods.
Speaker Change: Adjusted EBITDA was up 3% at $233 million. The primary driver of the year-on-year comparison are detailed on the page.
Speaker Change: The improved business performance was partially offset by volume and mix, which was a $6 million headwind driven by lower customer vehicle production in Amia and the Asia region, specifically in China.
Speaker Change: The FX was a $10 million headwind mostly from transactional impacts in Amia and America.
Speaker Change: And finally, we incurred a neck commodity headwind of $15 million in Q2 primarily driven by the timing of recoveries.
Speaker Change: As in past quarters, we've provided our detailed segment performance slides in the appendix of the presentation.
Speaker Change: High-level, for the Americas, improved business performance of 15 million and Q2 was primarily driven by favorable commercial actions, lower input costs, and lower launch costs.
Speaker Change: tariffs were a $9 million headwind during the quarter, which we expect to mostly recover in the second half of 2025.
Speaker Change: 9 recurrence of certain discretionary compensation measures which occurred in fiscal year 24 adversely impacted the year on your comparison.
Speaker Change: Vyman Mix was a tailwind of 13 million, benefiting from a stronger production of high content programs during the quarter, consistent to what we saw in Q1 of this year.
Speaker Change: Production Track is expected as we entered the quarter. Notably, we did not see any meaningful overtime or additional issues added by our customers in our products that would point to the pull forward of production.
Speaker Change: Commodities were $9 million headwind driven by the timing of recoveries. Specifically, lower absolute costs in 25 resulted in less recoveries in Q2 of this year versus Q2 2024.
Speaker Change: In Amia, year-over-year results were influenced by lower volume mix, which negatively impacted the quarter by 9 million.
Speaker Change: FX was a $7 million headwind primarily driven by transactional exposure from the Polish Floody, and commodities were a $6 million headwind due to the timing of recoveries.
Speaker Change: Business performance accelerated to $16 million in Q2, partially offsetting the headwinds and was driven by better net material margin in operating performance, including the benefits of restructuring actions.
Speaker Change: As we have previously outlined, we are taking significant steps to adjust our costs in Europe and our studying opportunities pull forward some rationalization actions in a prudent manner.
Speaker Change: In Amia, we continue to focus on driving additional operating efficiencies, restructuring, and executing our plan, which includes the roll-off of lower-performing metals business in the start of production of Better Margin, New Business.
which we believe will inflect positively in 2026.
Speaker Change: Moving on in Asia, our results were generally flat year-on-year with positive business performance being offset by lower volumes and max.
Speaker Change: In summary, the company continues to drive improved business performance across all regions which we expect to continue in the second half of 2025.
Speaker Change: Let me now shift to our cash liquidity and capital structures on slides 15 and 16.
Speaker Change: Starting with cash on slide 15, for the quarter free cash flow defined as operating cash flow so West CapEx was an outflow of $90 million.
Speaker Change: As your old mentioned earlier, this was in line with our expectations and reflects timing and normal first half seasonality as we typically have first half outflows in our cash generative in the second half of the year.
Speaker Change: H1 Cash Performance is consistent year over year after considering restructuring cash costs, particularly in Europe .
In Q2, we incurred $33 million of cash restructuring.
Speaker Change: During the quarter, we also spent 8 million in consulting fees associated with strategic planning related to optimizing our business portfolio as we continue to consider actions to create shareholder value.
Speaker Change: I would note that while these fees are included and are cashful, they're excluded from our adjusted EBITDA.
Speaker Change: We continue to expect solid pre-cash conversion in fiscal 2025.
Speaker Change: One last point, and called out on the slide, Adient continues to utilize various factoring programs as a low-cost source of liquidity.
Speaker Change: at March 31st, 2025, we had $170 million of factor receivables consistent with last year's second quarter.
Speaker Change: Flipping to slide 16 is noted on the right-hand side of the slide, Adient continues to proactively manage its step maturity profile with no near-term maturities.
Speaker Change: We successfully refinanced $795 million senior unsecured notes due to 2026 during the quarter issuing new notes with a 2033 maturity.
Speaker Change: Therefore, extending our average maturity profile from four years to just over six years.
Speaker Change: Adient is committed to being good stewards of capital while maintaining a strong balance sheet, ensuring efficient allocation of resources and ample liquidity.
Speaker Change: Turning to our balance sheet, Adient's debt and net debt position totaled about $2.4 billion and $1.6 billion respectively at March 31st, 2025.
Speaker Change: The company's not leverage at March 31st was 1.9 times within our targeted range of 1.5 to 2 times.
Speaker Change: Total liquidity for the company was about 1.6 billion at March 31st comprised of $754 million of cash on hand in 843 million of undrunked capacity under Adians revolving line of credit.
Speaker Change: Moving to slide 17. Let's review our first half performance and expectations for the second half of this
In the first half, we exhibited Strong Momentum, [inaudible]
with only 5% Decoral Murder Emergence.
Speaker Change: While market volumes have been lower, we saw more stability than last year, which helped us from an efficiency standpoint.
Speaker Change: I would note that the onset of tariffs we incurred $9 million of gross expense which we expect to mostly recover in H2 of this year.
Speaker Change: The takeaway for Adient's first half is strong business performance, significantly offset ongoing volume headwinds resulting in solid results in line with internal expectations.
Speaker Change: Looking into the second half of this year, while the impact of tariffs on market volumes remains uncertain, the company is committed to strong business performance in a solid momentum.
Speaker Change: Absent significant impacts from tariffs. We would expect H2 performance to be similar to H1. Assuming no significant incremental step down in global volumes, we expect volume headwinds to be manageable and mitigated by ongoing business performance and efficiencies.
Speaker Change: We respect tariff expenses to be offset by actions we are taking with our customers.
Speaker Change: In finally, with regard to our 2025 Outlook on slide 18,
Speaker Change: Given our strong momentum, going into the second half of the year, we are reaffirming our previous fiscal year 2025 revenue and adjusted EBITDA outlook.
Speaker Change: While we see some upside to our adjusted EBITDA in the second half of this year, it may be offset by timing of tariff-related customer recoveries.
Speaker Change: Year over year, volume headwinds are being offset by ongoing business performance and efficiencies. We expect this business performance to continue to mitigate macro headwinds in offset, decremental margins and lower volumes.
Speaker Change: Our interest expense is now expected to be slightly higher, call it $190 million, versus the previous forecast of $185 million, due to the recent refinancing and maturity expansion of our senior, unsecured notes.
Speaker Change: as well as some uncertainty around timing of customer recoveries at your end, leading us to adjust our free cash flow forecast to a range of between $150 million and $170 million from our previous guide of $180 million.
Speaker Change: To sum it up, based on Adient's solid performance throughout the first half of 2025, the company is well-positioned to whether the macro challenges in the team continues to execute at a very high level.
Speaker Change: We remain focused on managing the business controls, such as delivering excellent results for our customers, lowering costs, and generating free cash flow for the owners of our business, while maintaining a strong and flexible balance sheet. With that, I'll turn it back to Jerome for a few additional comments. Thanks, Mark.
Thank you very much.
Jerome Dorlack: You know, with that, I wanted to give just a little bit of additional color on the guide and why we handled the guide the way we did.
Jerome Dorlack: You know, first it was really enabled by a strong start to the year, which is driven by our 70,000 associates around the world, our customers and suppliers. So I want to thank them for allowing us to do that.
Jerome Dorlack: Secondly, I think it's important to understand how Adient views the tariffs and how we break that down. And it's really, I'd say, three orders of magnitude or three buckets.
Jerome Dorlack: You know, the first order is the direct impact that we see.
Jerome Dorlack: and I think we've tried to lay out for you today with a level of transparency how that direct impact is flowing through to us, both in terms of...
Jerome Dorlack: You know, where we see it coming in terms of the regions and how it's...
Jerome Dorlack: Managing through Annex I, where we see Annex I exposure, where we have USMCA exposure, the fact that we're 95% covered out.
Jerome Dorlack: Where we see recovery, the fact we're already 75% recovery, we have 25% road map.
and then the fact that we can move through...
Jerome Dorlack: The rest of the year with action plans and drives that recovery.
Jerome Dorlack: The second order, then, being what it means to our customers.
and Howard Customership.
Jerome Dorlack: You know, have to manage that. They've gone through and made their announcements this week, so we won't cover that off. But there is an element whether that be through the 2.5% MSRP discount. We have to see what that means to us. But then in the midterm, as they start to reshore production, you know, we're already engaged with certain Japanese customers in the German OE. . . . . . .
Jerome Dorlack: and there will be, I think, announcements to come. We just don't have anything today that allow Adient to leverage our best-in-class footprint to potentially see some net volume
Jerome Dorlack: and that I think is enabled by, as we talk a lot about, being close to our customers and providing solutions to them.
Jerome Dorlack: And then the third order is what does it mean to the consumer and the macroeconomy and how resilient the consumer is?
Jerome Dorlack: and that, you know, I think because we're a September filer, we already have six months behind us. We're operating on three months of EDI.
and we have some amount of visibility into that, and then you have kind of the last three months after EDI.
Jerome Dorlack: We're running on March S&P right now. Mark already talked about, we've assumed no meaningful change in our volume outlook. And we don't have anything today on EDI that would say there is any meaningful change to come. And I think we've tried to provide visibility into that. I think there's another thing to note. If you think about...
Jerome Dorlack: You know, outside of the US, how dependent are we on export volume? So to give a little color on that on an annualized
basis.
Jerome Dorlack: You know, our European business has somewhere, we'll range it between 350 to 450 million.
Jerome Dorlack: of Export Volume and their annualized sales figures, and our Asia-Pacific business has...
You know, somewhere between 150 to 200 million.
of annualized volume in their business that they're dependent upon.
Jerome Dorlack: So as you think on an annualized basis, you know, how dependent would we be if those experts were cut off? That kind of gives you a little bit of flavor there. But again, we're already six months into our year. And when you put all those factors in you kind of combine them.
That's what's allowed us the confidence to kind of say.
You know, given six months are behind
We've done a good job mitigating tariffs, we're 95%
U-S-M-C-A compliant.
We have this footprint that allows us to quickly-
Jerome Dorlack: Rote, you know, out of China, leveraging our Kuiper JV that has a footprint in Mexico.
or we can use Rock and House and-
Jerome Dorlack: and our footprint in Germany. We can do things with our customers.
or we can drive recovery recovery.
Jerome Dorlack: has given us the confidence to say, you know, here's our guide for the rest of the year. And so just wanted to provide...
Jerome Dorlack: Additional color on that before we turn it over to the Q&A segment of the call. And with that, you know, we'll open it up to Q&A.
Thank you. Please start the Q&A.
Speaker Change: Yes, thank you. If you would like to ask a question, please press star one.
Can you hear me? Can you hear me?
Hey Joe, yes, hey.
Speaker Change: Thanks for all the additional color there. I guess this is one quick one on tariffs.
Speaker Change: The reason, you know, you've made good progress here, right, the resolved, versus the 75% road map 25%.
I'm assuming resolved means.
Speaker Change: you basically have agreements for price recoveries or that's the majority of that. Is the road map portion more what you were talking about about finding some cost offsets or resourcing or are there still some potential price negotiations involved in the road map portion as well?
Speaker Change: Yeah, I'd say it's a mix of both Joe from that standpoint. So there's, you know, still ongoing price negotiations. There are, you know, certain customers have systems that require us to submit documentation given.
Speaker Change: Medusa from that standpoint, so there's things that need to be submitted and negotiated and just need to be rolled through, so it's a mix of both, still resourcing that needs to occur and also negotiations that need to be concluded.
Thank you.
Speaker Change: You know, I think it was, I know there's still some challenges there, but, you know, it looks like there was, it was a pretty good.
Speaker Change: Carter, at least relative to some expectations and with some still some volume headwinds, and I know you called that some business performance. Is there anything unusual in that that sort of drove the quarter a little bit better, especially relative to, you know, maybe quarter over quarter? Yeah.
Speaker Change: Yeah, Joe, good, good question, good observation. I'd say one quarter does not make a trend, right? So I wouldn't take that number and annualize it. I'd say that we are encouraged because we are seeing, you know, obviously business performance term positive over there.
Speaker Change: We're getting the benefits of certain of the restructuring actions we've taken.
Speaker Change: But again, things are lumpy, especially as you think about commercial actions and recoveries with customers. So again, that lumpiness, I wouldn't pin up water that 4% margin that we just printed across, you know, third or fourth quarter, right? So it's going to be some very building as we go through the rest of the year.
Speaker Change: Mark, I think you did mention last year that you thought the first half of this fiscal year would be...
Mark Oswald: sort of a bottom-of-the-event for profitability in that region. Is that still the case? So if you know if you average the, you know, the first half is a little bit over three, should we expect it that it improves off that level from here?
Speaker Change: Yeah, I wouldn't say that, Joe, I'd say that, you know, your right 3% was the average over the first half of the year, right? If you just remember last year, I think we did about 3% just over 3%.
Speaker Change: When we came into this year, we said, hey, listen, this year is going to be pretty much similar to that, right? You really don't see that inflection point.
Speaker Change: Until we get into 26, which is when we start to see certain of the Underperforming Metals business roll off. We see the new business roll on, so I'll still frame it up in that piece. Okay, thank you.
Thank you. The next question comes from Emmanuel Rosner with Wolf Research. Your line is open.
Speaker Change: Great, thank you so much. The first question is really around just on the making showing to stand your.
Direct Terrific Sposure.
Speaker Change: So, 95% of what you produced in Mexico and Canada is USMC compliant. So, that stuff would technically have tariffs, but you know, I guess for now, USMCA parts.
Speaker Change: are not being tariffed. And then when you mention the Adient's parts that are not listed in Annex one, even this would relate to in the what geographies.
Speaker Change: So, I think what we've said is roughly 95%, so don't hold us to exactly 95% is of our parts that we import or move across the border from Canada and Mexico into the US or USMCA compliant and so under current.
Undercurrent.
Speaker Change: Policy, that's correct, they're not subject to the 25% tariff rule. If that were to change, then obviously we'd have to deal with the issue. And then Annex I, the way Annex I is scoped out, Annex I basically carves out.
Speaker Change: Those parts, and even if they are USMCA compliant, they are subject to a 25% tariff. However, we don't have any parts that fall under that NX-1 that we produced today.
Speaker Change: and we have very little controlled material that would fall under an X-1. It's almost all directed.
Speaker Change: And so we would be covered up due to the directed nature and the nature of just the way seating is actually constructed from that standpoint.
Speaker Change: It is worth noting though, Emmanuel, that the annexed one tariffs that were supposed to go into effect.
Speaker Change: May 3rd. Actually, I've been delayed as the system is not study at this point.
Speaker Change: Now, I will say the disadvantage of having your components not falling under annex 1 is that then they're subject to the stacking effect of IEPA and the reciprocal tariff, which is why we get hit with the 145%
Speaker Change: Tariff out of China, and that's why China is our largest exposure region at the moment.
Speaker Change: And that's really why we try to provide that visibility into our exposures. And you can see that monthly run rate on the graph of China being our largest exposure region.
Speaker Change: And again, we're not trying to overwhelm you with detail, but I do think it's important to understand that differentiation.
Speaker Change: and to just what is Annex I, what's USMCA, what's IEVA, what's 232 and reciprocal and all of that, so.
Speaker Change: Yeah, no, appreciate all the detail. Then I guess taking a step back in terms of your...
Speaker Change: margin outlook and then where it fits within the longer-term goals and progression. Can you maybe just remind us how much more opportunity there is for some of these cost and efficiency actions and how do you think about it?
Speaker Change: Yeah, so good question, Emmanuel. So, you know, we printed, you know, 6% last year total company. We said there's going to put some takes this year, right? We see America's continuing to improve their margin profile. You know, we just spoke about Europe , you know, for the next year or so, you know, kind of in that, you know, call it 3% which we printed yesterday.
Speaker Change: and then obviously our APAC region continues to print double-digit margins. We expect that to continue.
Speaker Change: When we look at what we're benchmarking and what we're targeting, right? Clearly, we think there's significant opportunity in front of us. We've said in the past, you know, whether or not that's, you know, seven and a half, eight percent, you know, that's typically what people are looking at. That's what we think we could achieve.
Speaker Change: You know, clearly there's a lot that we could do to get there. Some of it's what we spoke about before whether it's restructuring over in Europe , getting the benefits of that. I would caution people that the dollars that we spend over in Europe is not a one per one in terms of, you know, creative to our EBITDA as certain of that just goes against. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Speaker Change: Lower Ballumes in the region. We do have the positive impact of balance and balance out, especially with the lower margin, you know, metals business rolling out over there. We've got new products, new wins that are coming on over there that have higher margins. [inaudible]
Speaker Change: Sonia, add that all up. Do I think that there's a couple hundred basis points of opportunity versus where we were in 2024? Absolutely, and you could see that within our business performance.
Speaker Change: So far in the first half of this year, and so that's really what the team is targeting in Marching towards.
Great. Thank you.
Thank you.
Speaker Change: Thank you. The next question comes from James Picariello from B&P Parabus. Your line is open.
James Piccarello: Yeah, just the implied core sales relative to your market assumptions.
James Piccarello: Yeah, so good question, James. So, for FX, right? Basically, there's been a lot of volatility around FX obviously over the last month, six weeks, etc. So what we did is we looked at our prior outlook and I think, you know, for the year-old, which is, you know, one of the bigger ones for us.
James Piccarello: Clearly, with the Euro trading around that 108 now, there could be some upside, translational upside if we go through and rates hold. We just felt with the volatility around the rates at this point, it was prudent to keep it consistent with our prior guide list.
Okay, that's helpful. And then just
Speaker Change: I think we probably have too many factors to focus on given the environment, but it wasn't too long ago, you know, we were, you know, asking Addy about
Capital Allocation.
Speaker Change: You know, whether it's share bybacks or, you know, participating in some form of industry consolidation. Just wondering, you know, what the mindset is at this point, you know, understanding that I think we all have a lot of macro uncertainty to navigate very near to. [inaudible]
Thanks.
Yes.
Speaker Change: So again, nothing has changed from our perspective just in terms of how we view capital allocation, right? We're going to take a measure approach, clearly, you know, we're going to continue to invest in the business. Certain of that capital is going to have to be allocated.
Speaker Change: towards restructuring Europe . We've been very transparent about that. You know, clearly we generate free cashflow, so we said that we'll return value to our shareholders through sharey purchases.
Speaker Change: Obviously, when we think about sherry purchases, we've set all along that we'd look at a couple of elements to see whether or not make sense. We'd look at the overall macros, to see whether or not we had clarity and certainty there.
Speaker Change: Clearly, this past quarter, right, there was a lot of uncertainty with vehicle builds, what could happen to vehicle builds in the future, and we also said that we'd look at, you know, Adian's test generation, right, and so as I indicated in my prepared remarks.
Speaker Change: You know, our cash typically comes in the second half of the year. And so again, as we go through the second half of this year, I think we'll look at the overall macros. We'll see whether or not there's any more clarity just in terms of vehicle demand production.
Speaker Change: We'll look at our cast generation and then we'll make the determination in terms of timing of repurchases and the magnitude of repurchases.
Speaker Change: But overall, nothing has changed with our philosophy when it comes to capital allocation. Yeah, and just to follow on Mark's comments, I think.
Speaker Change: You want it as a pertains capital allocation and with the additional color given just on how
What I call platform mix and regional mix stacks up, that allows us greater clarity.
Speaker Change: When it comes to that capital allocation, just given our lesser dependency on export volume out of Europe and Asia.
R. U.S. M.C.A. Compliance.
Speaker Change: The large amount of directed content we have, less than some of our dependency on customer recoveries. If we can reach a trade settlement with China, it helps us add certainty in some of those capital allocation decisions we have to make.
Hopefully that answers your question, James.
Yeah, much appreciated. Thank you.
Yeah, thank you for the questions.
Speaker Change: Thank you. The next question comes from Colin Langan with Wells Fargo. Your line is open.
Colin Langan: Oh, great. Thanks for taking my questions. Just a follow-up on that. There was about a month ago, media reports that you were considering acquiring ZF Life Tech Business, or at least a better, I mean, I don't know what you could comment on that, you know, any comment on that would be welcome, but
Colin Langan: You know, just in general, do you think something like that, a passive safety does have strategic overlap? Would you be at this point, given the market uncertainty, willing to buy it, to do a larger deal? Any color there?
Colin Langan: Yes, I mean, so we can't comment, obviously, on ongoing M&A transactions.
Yeah.
Colin Langan: In terms of this strategic overlap between seating and safety, a large amount of safety content were responsible for integrating today into our products, and certainly the trends between the two we see migrating together in the future.
Thank you.
You know, that said...
Colin Langan: We have to see how the market develops, and our main goal is to add value for our shareholders and for our customers, and that's what we're singularly focused on from that standpoint. And that's how we view any potential acquisition as through that lens, the that add value for our shareholders and the that add value for our customers, and that's how we look at things.
Godot.
Colin Langan: And just circling back on the terrace, and I was a little surprised by the comment on Annex 1.
Colin Langan: I mean, what does that mean for your parts? I think the slide says that you pay 145% on China.
Speaker Change: If you're not an annex one, what kind of tariff are you then looking at for parts coming out of Mexico and why would a supplier like you not fit in to the qualification?
Colin Langan: So this is really some of the detail that I think
It's lost if...
If you just read some of the high-level...
Colin Langan: Summaries, and I'm not, you know, Colin, I'm not implying that, you know, the homework isn't being done. I just think it's some of the reports by some of the consulting firms necessarily aren't at the level of detail they need to be.
Colin Langan: which means that you're not subject to the Annex I tariff then. So complete seats as an example are Annex I, you know, they're covered off in Annex I, but we don't actually ship complete seats across the border. As you know, our business model is we have our gits close to our customers. So, you know, we don't actually ship complete seats across the border. We built seats.
Colin Langan: You know, if we're shipping seats to I'll take as an example Toyota and Kentucky we should we build our seats, you know by Toyota and Kentucky.
Colin Langan: and we're not shipping seats out of Mexico to Toyota and Kentucky. And so as a result, you know, we're not shipping parts that are on annex one.
Colin Langan: I'll, you know, some of the components that we may procure are an annex one, but they're largely directed from that standpoint, so we would get 100% recovery due to the directed nature of them.
Colin Langan: and what that means, then, is that recliners as an example, the parts in the seat structure are not on an X1, and those parts come from China, and if you're not on an X1, you're then subject to the stacking effect.
Colin Langan: which means you get hit with the IEPA tariff, which is a Sentinel tariff, and you get hit with a reciprocal tariff, which is 125% tariff.
Colin Langan: or the 120 over that stacks up. So then you're hit with immediately 145% tariff.
Colin Langan: and that's why China is our largest exposure because, as you know, we have our joint venture with Kuiper and a couple of legacy parts there. And so, you know, prior to all of these tariffs being laid in, we had about somewhere between just roughly a $60 million buy out of China.
Colin Langan: If you think about our America's business, our America's business procures about $5 billion worth of stuff.
Colin Langan: I mean, $60 million on a $5 billion buy, it's not significant, but when you put a 145 percent tariff on it, it becomes an issue that the America's team needs to deal with, and they're dealing with it in a very effective manner.
Colin Langan: But it becomes a number that needs to be dealt with from that standpoint.
Colin Langan: and that's, you know, the nuance between Annex I, not Annex I, and then the stacking effect of IEPA with the reciprocal tariff.
Colin Langan: and you really need to go PHS code by AHS code.
Colin Langan: Scott, and then for your parts coming out of Mexico is the IEPN, the Section 232 are pretty similar, is it the same tariff anyway or is it actually higher because of some of the stacking?
Colin Langan: No, they've largely removed the stacking effect now. There was sitting, last week, they got rid of the stacking effects. Our parts coming out of Mexico now would just largely be 232 from that standpoint.
What given are U.S.M.C.A. compliance? We're generally...
Colin Langan: Free and clear of that now, which is why USMT is so critical.
Speaker Change: Okay, so your annex one is mostly China, that's where you're seeing the impact.
Nine Annex One, yes.
Jonathan. All right. Well, thank you very much.
Thank you.
Dan Levy: Thank you. The next question comes from Dan Levy with Barclays. Your line is open.
Dan Levy: Hi, good morning. Thanks for taking the questions. I just want to follow up on that and I think you made some references on this.
Tried to tear up, you are in incurring.
James Picariello,
You know,
How easily can you?
McRotations, is it just, you know,
These mechanisms from recliners, headrests, you know, what's the...
Speaker Change: What's the sourcing opportunity elsewhere? And then do you have a sense of how your competitors stack up on this? Is this something that?
Dan Levy: Others are incurring as far as importing these different mechanisms from China.
Speaker Change: I mean, I would say if you break down our spend...
You know, from China.
Here's about...
For better or worse, 40 part numbers.
Speaker Change: that make up about 80% of that exposure, and of those 40 part numbers...
Speaker Change: 20 of them. We have tangible plans that we're working through at the moment.
Yeah, the other 20.
Speaker Change: We will drive customer recovery or we have customer recovery on.
Speaker Change: and the timeline to deal with those 20 that we're moving is a, you know, call it a 6-2-9-month window, maybe it prolongates to a year, and in the interim, they'll be customer recovery agreements.
Speaker Change: and then some of those actually die out in the September timeframe as some programs expire. So there's a bleed-down window just naturally as some programs die off.
in terms of-
Speaker Change: Other customers? I can't really comment on that. I don't know what their exposure is. You know, some of them may have...
Speaker Change: Comfort System, some of them may have wire harnesses, some of them may have tubes, I just don't know.
Okay. Thank you.
The second question is on restructuring.
Speaker Change: and I just wanted to ask if you could provide an update on-
Speaker Change: The European Restructuring Sound, like you're getting some benefits, I think.
Speaker Change: Some time ago you had said, you know, you're talking about net savings [inaudible]
Speaker Change: 50 million a year. Is that still intact? And I think you're referencing here the opportunity to accelerate some of the restructuring. Maybe you could give us a sense of
Speaker Change: How much deeper you can go you're willing to go because clearly it seems like you know there is more opportunity on the European front.
Speaker Change: Yeah, Daniel, I'll start and then, you could jump in if needed. You know, do we think there's an opportunity to accelerate? We're looking at it from a very...
Speaker Change: Prudent Manor. Dan, we want to make sure we recognize that there is a cost of those our dollars that we're spending over their right and so we have to spend it in a prudent manner.
Speaker Change: If there's an opportunity for us to pull something head, if we think that it's going to give us benefit, right within a couple of your payback.
Speaker Change: You know, we're going to take a look at that and do that. At this time, there's nothing to announce. We've indicated, you know, obviously what the restructuring charge that we took last year was we've indicated.
Speaker Change: You know cash restructuring this year is going to be north of you know 100 million most of that is in Europe it could be slightly higher now that we're looking at accelerating certain of that so does it go up to like 125 this year possibly but we'll continue to look at that as we go through the back half of this year
Speaker Change: And again, I just remind you of the comments I made earlier is...
Speaker Change: You know, even though we take a charge, right, you know, roughly about a third of that would be accretive to our EBITDA going forward. The other half, you know, two thirds is really just holding Serb with the lost volume over there, right? So...
Speaker Change: So that's really the way that we're looking at Europe right now in terms of restructuring dollars. Yeah, I think Mark, that's him.
Mark Oswald: a very good summary. I mean, there's just, I think you just have to constantly...
Look at Europe from the lens of
You know, used to fill 20 million vehicles, actually, was a, you know, an exporter. Now, if you'd [inaudible]
Mark Oswald: 14.8, 15 million next year is importing vehicles. There's going to be just some amount of restructuring and we have to put into that business that's just there to hold serve. It's just the reality of that business from that standpoint.
Great. Thank you.
Edison Yu: Thank you. The next question comes from Edison U with Deutsche Bank. Your line is open.
Edison Yu: Hey, good morning. Thanks for having me. I just wanted to check two things real quick. One on the China local OEMix. I know you're you're targeting 60% existing fiscal 27. Did you disclose what it is for for the current quarter?
Edison Yu: Yeah, we didn't break it out. It's important for the current quarter. We can get back to you, but literally we were like, you know, college around 40, 60 at the end of last year, you know, overall it doesn't move by, you know, several basis points from quarter to quarter, so I'd say that we're still in that, you know, college, you know, 40, 45 split local versus four. Thank you.
Okay.
Speaker Change: and just a certain quick certification on the, I guess, on the walk.
Edison Yu: There was, I think he said there was 9 million tariffs in the quarter.
Edison Yu: Is that basically just one month or is that a full representative, a full quarter impact and I was getting recovered later but I just want to check if that's the full impact or is it actually going to be increased?
Edison Yu: Well, that was full impact for Q2 as we indicated on the slides our gross exposure now on a monthly basis is 12 million.
Okay, thank you.
Thank you. Thank you.
Speaker Change: Okay, Denise, I think we're going to close the call at this point.
All right. Thank you.
Speaker Change: Well, I want to thank everyone for joining us and appreciate your interest in Adient.
Thank you. Thank you. Thanks, everyone.