Adient plc

Welcome to Adiant's 2021 earnings call. I would like to inform all participants that your lines have been placed on a listen-only mode until the question and answer session of today's call. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mark Oswald. Thank you. You may begin.

Thank you, Amanda. Good morning and thank you for joining us as we review Adiant's results for the first quarter of fiscal year 2021. The press release and presentation slides for our call today have been posted to the investor section of our website at adiant.com. This morning, I'm joined by Doug DelGrosso, Adiant's President and Chief Executive Officer, and Jeff Stafile, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q1 financial results in Outlook for the remainder of our fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to slide two of the presentation for our complete safe harbor statement. In addition to financial results presented on a GAAP basis, we'll 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 first quarter results for fiscal 2021. I want to take a moment to wish or hope you and your families are staying safe and healthy at this very challenging time for all of us. Let me get started. Let's turn to slide four and begin with a few comments related to our first quarter, specifically adding a strong start to the fiscal year. Remaining laser focused on our priorities combined with relatively robust vehicle production continued to drive improved business performance in the most recent quarter. Q1's adjusted EBITDA of $378 million was up 81 million, or just under 30% year-on-year. Important to remember last year's results included earnings from our interiors, fabrics, and Mercaro businesses, which we divested post-Q1 2020. Adjusting for those businesses, this year's first quarter EBITDA was up $110 million year on year. Equally impressive with respect to the absolute level of earnings was Adiant's adjusted EBITDA margin performance of 9.8% or 7.4% excluding equity income. That's a very strong proof point that Adiant can achieve margins equal to, if not better, to our nearest competitor. No doubt a strong result, but even more impressive when you consider Add-In's consolidated revenue was down about 2 percent during the same period. Add-In's specific launches and impact of portfolio adjustments executed in fiscal year 20 were the primary drivers of lower sales. Also shown on the left-hand side of the slide are Add-In's strong Q1 ending cash balances and total liquidity, which were approximately approximately $1.8 billion and $2.8 billion, respectively. As you can see, Adiant's Q1 financial metrics point to a strong start to the year, and we believe lays a solid path to Adiant achieving its fiscal 21 commitments. On the right-hand side of the slide, we've highlighted a few items that will give you further confidence in the team. These show that in addition to delivering strong quarterly financial results, we are also focused on the future to ensure sustained long-term success. That success will be driven in large part by Adiant's ability to provide world-class products and services to our customers. As mentioned on previous call, Adiant is striving to become the supplier of choice for our customers. During the quarter, progress toward that goal was validated through a number of external awards. Hyundai-Kia selected Adiant as one of their Supplier of the Year 2020 honorees for delivering several flawless launches, excellent quality, and supply chain management. Adiant's new floating seat, pictured on the right-hand side of the slide, won a bronze medal at the prestigious CLEPA Innovation Awards ceremony. I'd also point out that Adiant supplied seats for the winners of the 2021 North American Utility and Truck of the Year, the Ford Smoky and the Ford F-150. In China, Daimler presented our BJA joint venture with the Loyal Companion Award, essentially recognizing Adiant for being a reliable supplier for Beijing Daimler for the past 20 years. We are among three suppliers who received the award from Daimler. who just delivered its 3 millionth car in the market. And in Thailand, Daimler also presented us with Supplier Performance Excellence Award, the only seat supplier for this award. Again, I mentioned this recognition only to provide proof points that our team continues to execute on many fronts, spanning across operations, products, and customer relationships. When properly executed, we believe These focus areas will continue to drive value for all of Addy and stakeholders. Speaking of driving value, we understand that a commitment to positive environmental, social, and governance-related business practice strengthens our company, increases our connection with our shareholders, and helps us better serve our customers and the communities in which we operate. Adiant's commitment to operate its business in an environmentally responsible manner was recently outlined in the publication of the company's 2020 Sustainability Report. As you can see on slide five, Adiant's 2020 Sustainability Report outlines the company's key policies and actions regarding environmental responsibility, people and communities, governance and compliance, and more. Our aim is to ensure that Adiant manages risk in these areas and achieves our environmental, social, and governance goals. We've included a link to the full report. Please take a few minutes to learn how Adiant's incorporating these policies into our day-to-day operations. Turning to slide six, let me provide a few comments on Adiant's recent business wins. On slide six, you'll see a few of our new business wins, which shows that Our continued focus on capital allocation and return on capital when targeting new and incumbent businesses has not limited our ability to secure new business. We've recently highlighted a number of recent program wins here, including the all-new EV program with GM, the Peugeot 3008 and 5008, both new programs for Adyen, and in China, we secured the Lincoln Nautilus program. Not shown, but very important to our portfolio business, the team secured the incumbent GM Traverse and Enclave crossovers, as well as the GMC Acadia crossover, which is non-incumbent to Add-In. Also, it should be noted that our recent business awards include a good mix combination of jet, foam, trim, and metals business. As our new book of business continues to launch, we expect to balance in and balance out platforms to further enable margin expansion. One last point on new business wins, specifically sourcing of the new business. Fiscal 2021 is shaping up to be a higher than normal year for quoting and sourcing new and incumbent business. We expect the outcome to be favorable for adding, which will strengthen the business in the out years. The uncertainty for the remainder of fiscal year 21 is the impact that customer productivity demands on nomination fees required to secure the business. This is not unusual, however, it's worth mentioning considering the volume of sourcing is elevated this year. Flipping to slide seven, we've highlighted several critical launches that are in the process of scheduled to begin in the near term. I'm happy to report the launches currently underway, including the F-150, are progressing well. The second F-150 manufacturing location in Riverside, Missouri, is well underway and progressing up the launch curve as planned. The launches and platforms show not only impact eddience JIT facilities, but also span across our network of foam, trim, and metal facilities. The entire team is performing at a high level as evidenced by our current performance. As mentioned on prior calls, the team has made significant improvements in our launch management over the past several quarters. A strong focus on discipline around launch readiness is underpinning Adian's successful performance. I might add, we have no intention of letting up on this activity. Turning to slide eight, let me conclude my comments with an update on various macro factors we're managing through and are expected to impact the industry and add in in the coming quarters. The list should look very familiar, as many of these factors were highlighted as we entered fiscal year 21. On the positive side, continued monetary stimulus is expected to result in positive economic growth. And the economic growth is forecasted to accelerate later in the year as the number of individuals who are vaccinated against COVID-19 virus increases. All of this is very good news and supportive of the industry. That said, there's several factors we're managing through that are tempering our expectations. They include supply chain disruptions, primarily related to semiconductor shortages, which are resulting in near-term production downtime across the industry impacting Adiance customers. We continue to monitor the situation at this time. It's too early to know if lost production in Q1 or Q2 will be made up before the end of Adiance fiscal year. Putting the temporary production disruptions aside, the current level of global production appears to be supported by improving consumer demand and the rebuild of inventory. Moving on, commodity costs, specifically steel and chemicals, have continued to escalate versus our original estimates. The teams are working hard to help mitigate these increasing costs. Important to remember, even though escalators and agreements are in place to help recover these costs, the agreements do not cover 100 percent of the increase. In addition, the time and method for true-ups vary by customer, resulting in a time lag as to when Adiant begins to receive recoveries. Jeff will provide additional detail on the topic in just a few minutes. A few other items noted on the slide include labor shortages and premium freight in all regions and an elevated launch cadence in the Americas. As mentioned earlier, Adiant's launch performance has improved significantly, and we feel well-positioned ahead of the launches. That said, we're very aware of the hard that lies ahead. We're not taking the current or upcoming launches for granted. To sum it up, our strong start in 2021 provides a solid path to achieving our fiscal 21 commitments. The path appears to contain a few speed bumps, but rest assured the team is working hard to navigate around them. I'm confident EDIM will manage through these obstacles as much as we did in 2020. And with that, I'll turn the call over to Jeff to take us through Addion's first quarter 2021 financial performance and what to expect as we move through the rest of fiscal 2021.

Thanks, Doug. Good morning, everyone. Let me echo Doug's earlier comments, and I hope everyone is safe and well. I'll start my comments on slide 10. Adhering to our typical format, the page is formatted with our reported results on the left. and our adjusted results on the right of the page. We will focus our commentary on the adjusted results, which exclude special items that we view as either one-time in nature or otherwise skew important trends and underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to restructuring cost and purchase accounting amortization. Details of these adjustments are in the appendix of the presentation. Sales were $3.8 billion, down about 2% year-over-year, which, as Doug noted, was driven by portfolio adjustments executed in fiscal 20, which impacted the year-over-year comparison by about $70 million. In addition, Adiant-specific launches, such as the F-150, also contributed to the year-over-year decline. Adjusted EBITDA for the quarter was $378 million, up $81 million, or just under 30% year-on-year. more than explained by improved business performance and lower SG&A cost, partially offset by a decrease in equity income. Speaking of equity income, which is included in our adjusted EBITDA result, Q1 fiscal 20 included $17 million of income related to our JV that we sold earlier last year. Therefore, under an apples-to-apples comparison, Adiant's seeding equity income was up year-over-year. I'll detail the drivers with an equity income in just a minute. Finally, adjusted net income and EPS were up significantly year over year at $162 million and $1.71 per share, respectively. Now let's break down first quarter results in more detail, starting with revenue on slide 11. We reported consolidated sales of $3.8 billion, a decrease of $88 million compared to the same period a year ago. The key drivers of the year over year comparison included just over $70 million of lower sales attributed to portfolio adjustments executed in fiscal 20, namely the divestitures of our fabrics and Recaro businesses. In addition to the divestitures, volume and pricing contributed to just over $80 million of revenue decline. The biggest drivers included lower volumes in the Americas, primarily the result of Adiant-specific launches such as the F-150, and to a lesser degree, Tesla's decision to insource complete seat production. For markets outside of China and Asia, adiance sales were impacted by export reductions in Thailand and Japan. A positive impact of currency movements between the two periods of about $67 million partially offset the impact of the divestitures in lower volume. In China, adiance sales were strong and outperformed vehicle production in the region. Adiant's favorable customer and platform mix continues to drive growth over market. With regard to Adiant's unconsolidated seeding revenue, year-over-year results were up approximately 11%, excluding FX. In China, driven primarily through our strategic JV network, sales were up 13% year-over-year, excluding FX. The sales outperformance versus the market is attributable to Adiant's strong mix of business, specifically our exposure to luxury and Japanese OEMs. Moving to slide 12, 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 operations, such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was $378 million in the current quarter, versus $297 million last year. The key drivers of the increase included improved business performance, which consisted of normal course, commercial settlements, lower labor and overhead, freight, and ops waste. Regarding the commercial settlements, these settlements, as discussed in the past, tend to be lumpy in nature between quarters. Settlements are common towards the end of the calendar year as our customers close out their fiscal year. Settlements tend to be pretty consistent from one year to the next, but the timing is not uniform throughout any given year. I'd also say that we saw an elevated number this quarter, and thus expect slightly elevated number in 2021 as a result. Call it about $20 to $30 million. We would say this elevated portion is not expected to repeat. It's also worth mentioning that our commercial accrual balance is slightly up year over year, again suggesting that our charges to and releases from the accrual tend to remain in balance over the course of a year. SG&A was another strong contributor in the quarter across all regions, driven by increased efficiencies and the positive benefits associated with the divestitures of fabrics and recaro. Partially offsetting the positive factors just noted was about $37 million of headwinds, primarily associated with lower equity income of $21 million lower volume, and a mix of $9 million, and the impact of FX, call that about $7 million. With regard to the biggest driver, equity income, as mentioned just a minute ago, the year-over-year comparison was impacted by the absence of interiors equity income, resulting from the Wi-Fi divestiture of about $17 million. In addition, equity income contained approximately $15 million of headwinds including a $10 million tax refund recognized in Q1 fiscal 20 that did not repeat this year. These headwinds were partially offset by the positive contributions of volume and efficiencies this year, totaling about $12 million. I'd like to point out that our adjusted EBITDA margin, excluding equity income, increased by 260 basis points year over year to 7.4%. Even adjusting for the one-time commercial items I noted, and normalizing the commercial settlements noted earlier, we would estimate our margin excluding equity income would be between 6 and 6.5 percent, and thus showing nice improvement over recent quarters. These results provide a solid proof point that Adiant's core operations are benefiting from the numerous turnaround actions executed to date, and more important, demonstrates the earnings power of Adiant and its ability to achieve peer-like margins are better. Speaking of the turnaround, we're also encouraged to see continued progress at Adyen's SS&M business. For the quarter, Americas and EMEA metal manufacturing combined improved by about $40 million compared to last year's first quarter. The team is working extremely hard to improve the profitability and the free cash flow of that business. Despite the strong first quarter results, I would caution certain of the factors that benefited Q1's earnings and margins should not be calendarized or extrapolated to the full year. For example, the timing of normal course commercial settlements and equity income favor Q1 and our first half results and are not expected to have the same impact on future quarters this year. In addition, it is unlikely the extremely rich mix of production experienced in Q1 will be sustainable. And finally, as Doug noted, we see certain headwinds on the horizon such as supply chain disruptions and rising commodity prices that are expected to have a greater impact on our results as we progress through the year. On our Q4 call last year, we noted that we expected between 40 and 50 million of commodity headwinds in 2021, but that number has been increasing, and today we'd estimate the impact to be closer to $80 million. or $90 to $100 million if you add increases related to freight. Essentially, none of this headwind was experienced in Q1, and the vast majority will be seen in Q3 and Q4. More on that in the outlook discussion. To ensure enough time is allocated to the Q&A portion of the call, we've provided our detailed segment performance slides in the appendix of the presentation. Improved business performance, including normal course commercial settlements, positive operating performance, which includes lower freight, ops waste, and labor and overhead, and lower SG&A costs, partially offset by the impact of rising commodity prices, is the primary takeaway from Americas and EMEA regions. In Asia, the reduction in EBITDA is explained by the sale of our interest in Wi-Fi, the non-recurrence of certain benefits recognized in last year's Q1 that did not repeat this year, such as the $10 million tax refund, which was partially offset by improved performance in China and volume-related weakness elsewhere in Asia. Let me now shift to our cash, liquidity, and capital structures on slide 13 and 14. Starting with cash on slide 13, for the quarter, adjusted free cash flow defined as operating cash flow less capex was $160 million for the current quarter versus $148 million in Q1 fiscal 20. The year-on-year increase was the result of a combination of several factors, the most significant being the $81 million improvement in adjusted EBITDA, an improvement in trade working capital, and lower cap spending. Partially offsetting these positive drivers was an expected increase in restructuring, higher interest paid, elevated non-income related taxes, specifically VAT payments and some commercial activity. With regard to VAT payments, we'd expect these to be neutral over time due to the timing of certain payments. We're expecting a negative result this year and reversing in fiscal 22. As noted on the right-hand side of the slide, we ended the quarter with approximately $2.8 billion in total liquidity comprised of cash on hand of about $1.8 billion and approximately $1 billion of undrawn capacity under Adiant's revolving line of credit. No doubt a very strong cash and liquidity position that we believe should provide protection against near-term macro uncertainties and enable significant debt reduction as the company progresses through fiscal 21. Speaking of debt and flipping to slide 14, in addition to showing our debt and net debt position, which totaled just under 4.4 billion and approximately 2.5 billion, respectively, at December 31st. We've also provided a snapshot of Adiant's capital structure. Just a few comments here. We believe Adiant's capital structure provides us with flexibility to weather near-term macro uncertainties, such as COVID or supply chain-related production stoppages, and provides ample flexibility to voluntarily pay down debt. As you are aware, we began our voluntary debt paydown during the fourth quarter with $103.5 million in principal paydown of Adiant's 10-year 4.875% unsecured senior notes. With the exception of a small repayment on our EIB loan, in part triggered by Q4's voluntary debt paydown, Adiant hit the pause button on voluntary debt repayments in Q1 as the uptick in COVID cases and supply chain disruptions clouded the near-term production outlook. We'll look to reinitiate our debt paydown initiatives in the near term as uncertainties just mentioned lessen, which we hope is not too far away. As mentioned on past calls, over time we'd expect to have zero outstanding balance in the revolver and run with a cash balance somewhere in the $500 million to $600 million range, which points to a significant opportunity for debt paydown in 2021. Moving on to slide 15, but sticking with the overall debt theme, We included a trend chart for Adiant's net leverage going back to our spin date. As you can see, at the time we became an independent company, our net leverage was just under 2.0 times. Unfortunately, operational issues, which were well documented throughout 2018 and 19, drove an increase in leverage. That increase was exacerbated with the impact of COVID, specifically by the stoppage of vehicle production across EMEA and Americas. which resulted in a significant drop in EBITDA during our Q3. After peaking in the middle of calendar year 2020, we've seen a steady decline in our leverage ratio. The biggest drivers of the decline include the successful continuation of Adyen's turnaround plan, which is leading to a significant EBITDA improvement and better cash generation, the lessening of COVID on vehicle production, and proceeds related to certain non-core divestitures that took place in fiscal 20. We'd expect the positive trend to continue as improved business performance continues to drive earnings and cash flow growth. Moving to slide 16, let me conclude with a few thoughts on what to expect as we progress through fiscal 21. While we would definitely characterize our Q1 as a good quarter that demonstrates the momentum of our turnaround efforts, I know many of you may be tempted to take our Q1 results and multiply by four to get a revised full year estimate. I wish it was that easy. We're just one quarter into the year, though, and the team will keep working to keep the momentum going. However, it's important to point out that there are certain add-in specific factors and macro headwinds that give us pause that prevents us from annualizing the strong start to the year. Let's break down the specifics. Starting with revenue, although we are not changing our guidance, we now expect consolidated revenue to trend towards the upper end of the range provided back in November. Call it approximately $15 billion. Currency movements over the past few months is the primary driver. I'd also note that even though the production and mix has remained relatively in line with our assumptions heading into the year, elevated risks of production downtime resulting from supply chain disruptions, the most significant related to semiconductor stoppages or shortages, tempers expectations in the near term. In fact, just yesterday, Ford announced temporary production reductions for the F-150, Adiant's second largest vehicle platform. Ford's announcement comes on the heels of GM's announcement earlier this week, announcing downtime at three of their facilities beginning the week of February 8th. Although receiving advance notice of downtown helps to lessen, but not eliminate, operating efficiencies on our side, The team is also managing through stoppages with little notice, which, as you know, adds cost and inefficiencies at our facilities. Of course, we're working closely with our customers to understand if or when these temporary reductions can be made up. Given Adiant's September fiscal year, our current outlook does not assume production is made up before September 30th. Outside of these near-term supply – near-term temporary disruptions, we continue continue to assume second half fiscal 21 global production will decline compared with the first half of fiscal 21 production, especially in China. This assumption is aligned with our current IHS forecast. Regarding EBITDA, it's early in the year and there are many uncertainties such as commodity inflation, supply chain disruptions leading to production uncertainties, and the incredible uncertainties related to the direction COVID will take us. Given these uncertainties, we continue to forecast adjusted EBITDA in a range between $1 billion and $1.1 billion, as I mentioned previously. Though we're pleased with our – I should say though we're pleased with the strong start to our year. As Doug and I mentioned, macro headwinds, including rising steel and chemical prices, and premium freight will have a much more significant impact on Adiant as we progress through the balance of the year. With regard to rising commodity prices, just a reminder, even though Adiant has a formal recovery mechanism, including indexing agreements, in place for a significant number of our customers, the agreements provide a partial offset to price increases. Let's call it between 70 and 90 percent on average. However, it's important to remind you that a time lag exists until the price adjusts, as our agreements for certain customers provide for relatively quick true-ups or settlements, while other agreements, primarily with our Japanese-based OEMs, are settled on an annual basis. Given our relative overexposure to customers with more infrequent true-ups, a large proportion of the recoveries will occur in fiscal 22. Moving on to equity income, which is included in our adjusted EBITDA continues to track on plan, call it approximately $250 million. As a reminder, and noted on the right-hand side of the slide, we continue to expect equity income will mirror seasonality patterns of China's vehicle production, strongest in Q1, followed by a substantial decline in Adiant's fiscal second quarter, which tends to be impacted by lower production surrounding the Chinese New Year holiday. In fact, we're expecting equity income to be halved in our second quarter compared with our first quarter just completed. Interest expense, based on our expected cash balance and debt, should be approximately $235 million. This forecast does not include the positive impact that would materialize with future voluntary debt pay down. Cash taxes in fiscal 21 are expected to be around $85 million. it's important to remember that we maintain valuable tax attributes, such as net operating loss carry-forwards, and that these tax attributes can be used to offset profits on a going-forward basis, so cash taxes on Addian's operations should remain low even as profits are increasing. To assist with your modeling, although volatile with fluctuations between quarters, as mentioned earlier, we continue to expect Addian's effective tax rate to be around 30% for fiscal 21. We'd expect that rate to fluctuate on a quarterly basis due to the valuation allowances in our geographic mix of income. Capital expenditures are forecasted to range between $320 million and $340 million, essentially in line with our fiscal 20 results. Although we see opportunity to reduce CapEx further in the out years, driven impartially by a smaller SS&M business, the current year expenditures are supporting current launch plans. And finally, one last item for your modeling, We continue to expect free cash flow to range between break-even and $100 million in fiscal 21. As mentioned back in November, there are several one-off factors driving this result for fiscal 21, such as an elevated level of cash restructuring, which is expected to be at $200 million. The elevated spend, which is about two times our normal run rate, is necessary as we execute actions to right-size the business. especially within our European operations, where external and internal production forecasts remain below pre-COVID levels for a number of years. In addition to an elevated restructuring spend, the 2021 free cash flow is negatively impacted by approximately $60 million of tax payments that were deferred from last year into 2021. Stripping out these one-offs, Adiant's free cash flow in a normal year would have been in the 160 to 260 million range. With that, let's move to the Q&A portion of the call. Operator, take the first question.

Thank you. We will now begin our question and answer session. If you'd like to ask a question, please press star 1. Please unmute your phone and record your name slowly and clearly when prompted. Your name is required to introduce your question. Again, that's star 1 if you'd like to ask a question. Our first question comes from John Murphy with Bank of America. Your line is open.

Good morning, guys. This is Aileen Smith on for John. Going back to that normalized adjusted EBITDA margin of 6% to 6.5% that you commented on for the first quarter, running the math on your outlook, we get to an EBITDA margin that's in the high 6% to low 7% range for 2020. Can you talk about the cadence of the margin that you anticipate for 2021 with some of the headwinds you noted, like chip shortages and raw mass? And on a normalized basis, should we be thinking about sequential improvement in margins through the first half of the year versus second half, as you've been able to demonstrate in the past? Or are there some factors at work that we should be thinking about through the cadence of the year as we use that 6% to 6.5% as a starting point?

Yeah, that's a great question, Eileen. I will say it's a tough year to forecast and some of these things which are just changing every day, primarily the production schedules relating to chip shortages, are difficult to predict. And commodity headwind is certainly going to have a negative impact on our margin. But what we tried to highlight in the six to six and a half percent, what I did, you know, what we did there is we said, you know, we had about 20 to 20, you know, let's say $25 million of one-time commercial benefits we did, which we took out of that, you know, number when calculating that. And then we took out, we had more than, let's say, 25% of our normal year's commercial settlements occur in the first quarter. So call that another $25 million. So we kind of backed out that $50 million in calculating it. Some of the other quarters are going to be underrepresented on commercial recoveries because we did more in the first quarter. So I'd say you're going to see some bumpiness on our margin because of those few factors, the chip shortages, the commodity inflation, and then the timing of these commercial settlements. But I will say as we look at it, we continue to see the fundamentals of the business improve. So there's going to be some noise probably in the bottom line margin, but fundamentally here, we've been seeing improvements in performance that we do expect to continue to trend well, but do expect some noise in the quarter to quarter margins.

Okay, that's helpful. And second question, following up on the raw materials commentary. Can you provide us with an estimate of what this was in the quarter? I wasn't able to follow it in the bridge and specifically how you expect it to increase in magnitude for the remainder of the year. And then can you just remind us how this gets shared with the automakers via pass-throughs and escalators and if you have any hedging or other vehicles or mechanisms that you use to offset that?

Yeah. So on the first question, There's about $5 million, give or take, in the first quarter of commodities. So we've called out about 80 now. So there's about 75 million in the balance of the year. I'd say most of that is going to be Q3 and Q4. What we've also seen is freight. The freight issues kind of multiply a bit. You've seen a shortage of containers, primarily from Asia, but that impacts a number of our regions. has increased, you know, freight, and it's also required us to do some other forms where we, you know, every once in a while we unfortunately have to fly things because of some of the, you know, challenges on the freight side. I'd say really none of that hit in the first quarter, and that's $10 to $20 million, you know, that we're factoring in for the year. As you asked about the recovery mechanisms, it depends on the customer. Some of our customers are immediate, but, you know, other ones, you know, and so there's immediate recovery and, you know, we have an index. And I would say what you've seen with steel is you've seen an unprecedented, you know, jump in steel prices. And we tend to, you know, the way we model this is we tend to lock in for a quarter or two. But then as, you know, the year rolls, we have to, where we've seen these big increases, we have to start to pay a higher price. And our customers, in some cases where they're immediate, we're able to, you know, grab that disconnect quickly. Other ones where we have a year lag, which is pretty much all of our Japanese customers, which is significant for us, will take time. And that's why we don't see 70%, 90% of the increases being recovered in fiscal 21. We see some of those things being pushed to 22. So they should be favorable for us if the prices maintain stability in 22, but that recovery on those particular customers will happen later. Yeah.

And I think the other point I would add to it is that's myopically around just the way our agreements work, the contractual agreements that we have in place. Right now, we're experiencing really unprecedented, particularly in steel levels of buy, and it's difficult to see when that will mitigate. You know, what we lump into the discussion with our customers is, you know, how we think about annualized productivity in the midst of this environment, in the midst of chip shortage. And as these issues all kind of converge at the same time, you know, we're in discussions with them and, you know, are there other avenues that we can go down to mitigate some of the impact? So you have this, you know, basket of goods kind of approach that you have to take into account. It's too early to really tell what's happening. I guess the point I was trying to make is even if we have a year lag, that doesn't necessarily mean that, you know, that's what we're willing to accept in an environment we're operating in right now.

Great. That's very helpful, caller.

Just to clarify something you said before, which you didn't – You had mentioned our 2020, you know, progression of ROS. When I was talking to 6 to 6.5, that excluded equity income. So I don't know if that was in your calculation, but that is an improvement. We haven't seen that level of margin, even with those adjustments I put forward in any of the quarters in 2020. So this is a – even after making those adjustments would be an improvement over what we've seen.

Okay, fantastic. That's very helpful. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from Rod Lash with Wolf Research. Your line is open.

Hi, everybody.

Can you hear me? Yeah.

Hi, Rod. Good morning. You know, I was hoping you could talk about the targets that for cost and business improvement that you're sort of looking out for over the next 12 months and how that could contribute upside beyond the $1 to $1.1 billion EBITDA that you're looking at for this year. I think you've previously talked about $200 million of restructuring with a two-year payback, so presumably that's about $100 million in And I think you said that SS&M would go from EBITDA break-even to cash break-even, which was another 100. I'm not sure if that's double counting. And then presumably you have non-recurrence of the semiconductor shutdowns and COVID containment costs, so kind of high level. If we kind of fast forward, hopefully a year from now things are looking better and the world is kind of normalizing and you've got your – some of the things you've accomplished? I mean, what are some of those big items that we should be looking out for?

Well, I'll start. The one that you didn't hit on, Rod, which has been part of our overall plan and lags a little bit in whether it occurs and evolves over time is the roll-on and roll-off of businesses and what we've always commented on. We haven't necessarily put a specific target on it, but we But we said the last element, in addition to what you mentioned, would be just getting rid of the bad business that we couldn't drive, you know, the efficiencies, whether they're labor and overhead or, you know, probably more importantly, material to sell ratios. And we just had to have those roll off. So, you know, that's really the buckets that we, you know, we look to draw from.

But nothing's changed around our target, Rod, of really eliminating that gap we have to our peer margin.

Right. So if we think about going from six to six and a half towards closer to eight and a half, can you just maybe characterize the big buckets that you've got that you're kind of targeting? How large are each of these components, whether it's restructuring or, you know, getting out of some of the weaker contracts that you've got?

Yeah. So, you know, it's difficult to do in total high level, but some of the big pieces, you know, the seat structures and mechanisms business, you know, we mentioned a $40 million improvement in the quarter. You know, I'd say, and we had put out a target to you guys some time ago to, exit this year at a, you know, free cash flow breakeven, which, you know, compared to a couple of years ago was a 400 million outflow. That's a combination, obviously, of, you know, taking $100 million of CapEx or so out of that business. But it's also, you know, dramatic improvement in the EBITDA. We're in a great progression of that. I'd say there's lots of work to do there. So, you know, that's a couple billion dollar, you know, business plus operation has an opportunity to, you know, lift as we get to where we want to be And I think where we're starting to see some reasonable sights on where we can get it to, a substantial portion of that margin gap that you noted. The combination of what we're seeing across each region as we go into our customers with different strategies around how can we take a bigger piece of their volume, control more of the spend, maybe control the foam and the trim, and take that with the VE efforts and the benchmarking we've been doing, there is significant opportunity for us to take cost out of our customer's product while adding margin to our business. That is taking root. Doug's had and all the regional presidents have been having really in-depth discussions with our customers on how to do that. And a lot of those activities have been implemented. That trend we see will continue to drive and be the other real engine on that growth. As it relates to, you know, the restructuring and some of those, we continue to find deficiencies there as well. You mentioned, you know, the activities we initiated last year in the U.S. and, you know, have been able to take out. The activities that in Europe that are, you know, we'll say about halfway implemented in 2021. So we'll get some additional benefit as we get the full year effect of those in 2022. And we'll continue to lean out the structure. But I'd say there's going to be more emphasis on those first two pieces than the last in that recovery.

Just what I was just going to add to it, Rod, the reason at least I was a little bit hesitant to ask is it's, as we've said before, it's really difficult to bucket these things into and put labels on them, how much is going to be commercial, how much is going to be operational improvement. It encompasses everything Jeff just referenced. It's really working every element of the cost structure that we have and balancing that against the cost drivers, be they inflationary, material economics, and the appetite that our customers have right now for cost reduction. And the one thing I would say that's maybe a little bit different than what historically we've seen, which I think is good news for us, and not that we're changing our outlook or timeline. We've always labeled that timeline to be you know, multi-year and taking us out to 24, 25 to close that gap is an increasing appetite, as Jeff mentioned, our customers have for cost reduction. And they're really asking for ways to not just the traditional VAVE, you know, can you make, you know, a small change. They're asking for fundamental change in the way they design and design and develop and market systems in their vehicles. And that's a huge opportunity, but you can't really call that cost reduction. It's really, you know, recasting how you think you commercially discuss those issues with your customer, the impact that it has on your own operation, and then what kind of sharing that you agree to put in front of them.

Thanks. I just wanted to ask one other question. I'm sure you'd agree one of the most striking things that we've seen here in the industry over the past year is just how much capital is being raised by new entrants. I was wondering if you could just maybe make a comment about how you're looking at it from Adiant's perspective. Are you pursuing business with a dozen new potential customers, or are you taking a somewhat more cautious view on that?

I would say if I were to characterize it, it's much more cautious. And that's not to cast a negative shadow on any particular venture that's out there. I think what we've learned over the last couple of years is, and we've got a ways to go to get our business back on track, is really focus on fundamentals, focus on traditional customers to a certain degree. You know, there are some new OEs that we are participating with. NIO would be a good example. Tesla is another example we continue to pursue. But they've demonstrated, to a certain degree, you know, volume that they can deliver to the market. And again, with our traditional customers coming on board with propulsion changes in their vehicles, there's opportunity for us to pursue that. As some of the new entrants demonstrate the ability, we'll re-examine it. But You know, pursuing, you know, diversifying our customer base and pursuing that is something we stepped away from a couple of years ago, and we don't see that changing right now. It's fairly risky. And there's plenty of opportunity. If you just prioritize, where's there opportunity for us to drive value? You know, we see it in kind of our traditional markets and not necessarily in these new markets right now. Great. Thank you.

Thanks, Rod.

Thank you. Our next question comes from James Piccolario with KeyBank Capital Market. Your line is open.

Hey, good morning, guys. So, you know, really appreciate all the color on the guide and cadence for the year. Can we just walk through the moving pieces, particularly within EBITDA, that leaves the full year guide unchanged? It sounds as though commodities are $35 million worse, another $15 million from premium freight, both of which are back-end weighted. And then on the positive side of the ledger, you have commercial settlements and favorable mix in the first quarter. What did I miss there? Any clarification would be great in terms of what keeps the full year guide unchanged, the puts and takes.

Yeah, James, I'd say the biggest thing that keeps the year unchanged is the difficult of the environment. One, we're very early in the year, but two, you just saw, if you read the Wall Street Journal this morning, a big article on Ford, our second largest platform, went down yesterday in shorter shifts for a while. We've seen that impact on the chip shortage throughout the world. That's significant. COVID still being where it is. So all those things sort of weigh on us, but you grab the pieces, the commodity exposure, freight exposure, the timing of those commercial settlements, the fact that I'd say we had a little bit of an elevated, we call it 20 to 30 million benefit in Q1 that we'd say is not repeatable. So all those things factored in and just with all that decided I wanted to see a little bit more of this year develop before we changed our outlook.

Okay. Got it. That's helpful. And then just on the equity income outlook, you made the comment, you know, second half or the first half 50%, you know, higher than the second half. So it's, you know, kind of a two-thirds. First quarter.

What's that? That was just a quarter reference, not a full half-year reference. We said, so second quarter includes the Chinese New Year, and we said second quarter would be roughly, you know, half the amount of first quarter.

Okay. All right. All right. I got that. All right. Just following up on the commodities then. So you're now looking at an $80 million headwind. You mentioned the customer recovery mechanisms likely hit next year. So should we assume – 75% of that $80 million is recovered next year. Just what's the right way to be thinking about that in terms of the recovery?

Thanks. Yeah, and that one depends a lot on where the prices go. So if prices stay steady, you know, we'll eventually recapture the, you know, the difference and we will no longer be running at a deficit because you know, just think of it in any given market. If we're buying, you know, steel at, you know, 100 and our contract with the customer is implied at 100 and just for metrics, and, you know, then steel goes up to, you know, 110, we're still getting only, you know, a cost or a recovery from our customer based on 100. Once the price goes up to 110, we eliminate that difference. All that really happens if price stays steady is that, you know, we essentially stop the bleeding on this. As prices eventually, you know, reduce, then we'll start to get – we'll get recovery because we'll have it work the other direction. Yeah, hopefully that makes sense.

Yeah, and I guess I would add on top of that, in our opinion, it's where you, you know, draw the goal lines. You know, we fully expect we'll always recover material economics at some point. It's just a question of how long it takes. As Jeff mentioned, steel prices go down, then we'll recover it relatively quickly, and it won't take extraordinary means for us to get it. If they don't, then it's a different dialogue with our customer, because we won't sustain it for an extended period of time, even if market rates stay high. whether it's a true up on a new product launch that addresses that, or again, we just broaden the conversation to include other issues to mitigate the impact of it. And that's namely customer product, annualized customer productivity.

Thanks, James. Thanks. Operator, if we can move to the last question.

Thank you. Our last question comes from Brian Johnson with Barclays. Your line is open.

Yeah, two questions, one kind of more housekeeping and the second more strategic organizational. You know, just as we watch the production schedules at Ford kind of, you know, and try to kind of get an accurate gauge on fiscal 2Q, how should we be thinking about the revenue impact of every kind of week of downtime or every unit of downtime, you know, without getting too deep into your actual Ford pricing?

It's hard to do without getting deep into our Ford pricing. The production numbers.

I think you can calculate pretty quickly what our Ford pricing looks like if we gave you that level of detail just because they're so transparent about the number of lost units. So I'd be very reluctant to do that.

Well, I guess that's just, you know, given the slides, you know, we all know how to make slide decks. But, you know, kind of as you put together the slides, as you kind of reviewed them before blasting them this morning, You know, are you confident that the Ford news was fully reflected in your outlook?

Yeah, I think so. I mean, what we know. Now, that doesn't mean that, you know, additional things. Yeah, I would say.

And second question, just kind of following on the theme of the other questionnaires around kind of visualizing the waterfall walk back to industry competitor margins. Yeah, I want to ask maybe a softer question, particularly kind of, As you look now versus where you came in at some of the key organizational challenges, I know moving to a regional thing created accountability, where do you think you stand? You must be looking at red, yellow, green charts endlessly. But just in terms of do you have the right people in the right roles, both facing off in terms of account management, working, partnering with your key OEMs, and at some of the key factories, and key kind of supply chain positions. How has that evolved? What work is there left to do? Is the team basically that you need on the field executing, or are there still gaps you need to fill?

Yeah. And not to be coy, I do not look at red, yellow, and green charts to get an indication of how we're performing. We tend to look at numbers. And, you know, respectfully, I don't That's just a different way that we're driving the business right now. We focus a lot of attention and we talk the business in numbers and drive that deep into our organization so everyone's understanding that we're not managing the KPIs. We're managing to a bottom line level of performance, whether it's EBITDA or EBIT or return on investment or capital or how we're generating cash. Relative to the organization, actually, it's interesting in time we asked that question. We just had a succession plan review with our board last week, and I was pretty happy to report that, you know, although we'll constantly make tweaks in the organization to adjust to the environment, we feel really good about the organization that's in place right now. We're not foreseeing any major changes. We've brought a lot of new talent into the group, and then we've moved, you know, the strong talent that we had here in Addion into the right roles and then changed the way we're compensating them and how we expect to motivate them, and that's, you know, very much connected to the basics of customer satisfaction and then business financial performance. So, yeah, the regional move worked out well for us. There's no perfect organization, but I think breaking the company into some smaller parts that we could manage a little bit easier regionally. You know, I feel fortunate that we did that ahead of COVID because it would have been, even with all the technology, without having the right people on the ground in region, it would have been difficult to manage the business. But, you know, we've got strong leaders in every single region, and then they've all reshuffled their team to some degree. And so, you know, back to the succession plan, as we go layers deep, Compared to where we were maybe a year or two ago, we feel a lot better about that organization.

And just a quick follow-up. Okay.

Thanks, Brian. And unfortunately, we're out of time here. So, you know, for those of you who did not get a chance to ask your questions, I'll be available, you know, for a follow-up. Please just feel free to reach out. This concludes the call for this morning.

Thanks, everyone. Thank you. Take care.

Stay safe.

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