Adient plc

Welcome, and thank you for standing by. At this time, all participants are in listen-only mode until the question and answer session of today's conference. At that time, you may press star 1 on your phone to ask a question. I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Mark Oswald. Thank you. You may begin.

Thank you, Danielle. Good morning, and thank you for joining us as we review Adiant's results for the fourth 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. Also joining the call today is Jerome Dorlak, Executive Vice President of the Americas. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our fourth quarter financial results and outlook for fiscal 2022. 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 the financial results presented on a gap basis, we will be discussing non-gap information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-gap measures to the closest gap equivalent can be found in the appendix of a referral earnings release. This concludes my comments. I'll now turn the call over to Doug. Doug?

Thanks, Mark. Good morning, and thank you to our investors, prospective investors, and analysts joining the call this morning as we review our fourth quarter results for fiscal 2021 and expectations for fiscal 2022. Turning to slide four, let me begin with a few comments related to our fourth quarter and 2021 fiscal year. Essentially, the fiscal year can be best described as a year of two halves. In the first half of the year, Adant delivered significant year-over-year earnings and margin improvement driven by the company's focus on launch, cost, operational improvements, and customer profitability management. Exiting our second quarter, significant macro pressures, including numerous unplanned production stoppages at our customers, primarily related to petrochemical and semiconductor supply chain disruptions, and rising commodity prices began to impact the industry and Adiant. These headwinds persisted throughout the second half of our fiscal year. Despite the many challenges, the Etient team remained focused on successfully executing items within our control. A few notable examples include the closing of our China strategic transactions and the significant progress made throughout the year on deleveraging our balance sheet. That said, the accomplishments achieved in fiscal 21 were hard fought given the very tough operating environment. On the right-hand side of the slide, you can see that the tough operating environment had a significant impact on our Q4 results. Addion's revenue for the quarter was $2.8 billion, down from $3.6 billion reported in Q4 fiscal year 20. The decrease was driven by the significant reduction in vehicle production year over year, combined with Addion's customer mix particularly in Europe. The lower revenue combined with premiums and temporary operating efficiencies resulted from unplanned production stoppages dropped right to our earnings with adjusted EBITDA declining $169 million year over year to $118 million in Q4 fiscal year 21. Cash was a bright spot, $1.5 billion as of September 30th. The cash balance includes 695 million of proceeds related to the first tranche of proceeds collected from the China transactions. Jeff will provide additional commentary and audience financial results including our cash and capital structure in just a few minutes. Turning to slide five, let me spend a few minutes discussing the current operating environment The factors shown on the slide are significantly dominating and influencing the business near term as evidenced by our Q4 and second half fiscal 21 results. On the left-hand side of the slide, we've listed several of the headwinds we're facing. No surprises here, as many of these macro headwinds surfaced at the end of our second quarter, including ongoing supply chain semiconductor shortages, which continue to result in production downtime at our customers, As seen with our Q3 and Q4 results, these unplanned production stoppages are leading to premiums and operating inefficiencies across our network, which, as you would expect, we're working hard to mitigate. For fiscal 2021, we estimate supply chain disruptions and the resulting loss production, operating inefficiencies, premium freight, et cetera, had a net impact on the top line of about $1.9 billion. and adjusted EBITDA by approximately $450 million. Unfortunately, the supply chain disruptions have not lessened as we've entered our new fiscal year. As shown in the middle column, the visibility of our customers' production schedules has not improved over the course of the past few months. Discussions and commentary from our customers suggest supply chip and production schedules could improve in the coming months. Unfortunately, there is no evidence of this happening at this time. As such, we're continuing to run the business with the assumption that the challenging operating environment will continue. Jeff will discuss our overall fiscal year 22 planning assumptions in his prepared remarks. These include our assumption that global vehicle production remains relatively flat year over year, up modestly in some regions, down in others. As such, it's likely unplanned production stoppages will continue leading to premiums and operating inefficiencies like those experienced in the second half of 2021. In addition to supply chain disruptions and unplanned production stoppages, elevated input costs such as commodity prices, freight and energy costs continue to place downward pressure on the near-term results. As noted on the slide, steel prices in the Americas continue to be approximately three times higher than at the start of the year. As mentioned on our Q3 call, although adding has certain mechanisms and pass-through agreements in place with our customers, they were never intended to cover the movements of this magnitude or generation. For 2021, we estimate the net impact was roughly $70 million, generally consistent with our earlier expectations. If we set aside the macro pressures and look at our core business performance, as highlighted on the far right-hand side of the slide, we're continuing to see an upward trajectory. A few points worth noting. In stabilizing the operations in fiscal year 19, we achieved approximately 500 base points increase in the company's adjusted EBITDA margin. Fortunately, we have about 400 points of headwinds masking the performance, roughly speaking, 50 base points from volume, 40 basis points from net commodities, and 100 basis points associated with temporary operating inefficiencies. The team is very much focused on driving down SG&A costs, executing both temporary and permanent actions, and our operating cost structure, engineering design efficiencies, and cost reduction implementations are all performing well. What has really emerged over the past several quarters driven by inflationary pressures are commercial issues that we're working to address. As mentioned, the macro pressures impacting the business in Add-In are believed to be transitory in nature. Based on this belief, Add-In has executed numerous actions to lessen the impact. In the middle of the slide, you can see examples, which include commercial negotiations with our customers to claw back the increased commodity prices over and above the contractual in place. If you recall, during a Q3 earnings call, we mentioned potential risk fiscal year 22 of about $200 million. Through the recent negotiations, we were able to reduce that exposure to roughly 125 million. From an SG&A perspective, we've executed targeted reductions in our workforce, implemented a salary reduction and stock replacement program at our executive level, and made other temporary benefit actions such as delaying merit increases in the 401 match in the U.S. To help lessen the impact of rising freight costs, the team is implementing changes to our pack density and optimizing our freight footprint based on open capacity. We've also experienced an acceleration in VAB efforts with our customers. Again, these are a few examples to illustrate Addiance is not standing still. It's important to remember from a historical view, our business has had little inflation. Customers have effectively priced on a value add. That said, the level of cost increases from multiple angles that we are experiencing today is unprecedented and requires either quick market correction or a change in customer pricing. If it's determined that the inflationary pressures are sticky, not transitory in nature, Alternative customer commercial solutions need to be negotiated. Switching gears and focusing on those actions within our control, let me provide a few comments on how the team continues to drive the business forward. First on slide seven, you can see that we're executing day in and day out. It starts with the back to basics mindset, improving every aspect of the business, as mentioned just a few minutes ago, the core business has seen significant improvements since 2019. Stripping out the temporary operating inefficiencies, the business is running well on many fronts, such as launch execution, lower ops waste, increased utilization, and reuse of capital, to name a few. EDIEN's Q1 and Q2 results this past year highlighted this improvement. We're also working hard to ensure the long-term outlook is bright by securing new and incumbent profitable business wins. We've done this at a very steady pace, and as we've mentioned on our calls throughout the year, this includes a very healthy portion of EV wins, which will continue to strengthen our leading market position. As noted on the slide, over 20% of the wins in fiscal year 21 relate to EV platforms. Program wins are a testament to the much improved relationship with our customers that we've nurtured over the past two to three years. Aided by the company's ES3 initiatives, ability to provide award-winning seed solutions, including innovative solutions for EV platforms, Adiant is quickly becoming the supplier of choice. In addition to blockading and tackling operationally and commercially, Adiant recognizes the company's full potential cannot be achieved unless we commit to positive environmental, social, and governance related business practices. During fiscal year 21, the company increased its commitment to ESG efforts with the adoption of science-based targets and KPIs. Details to be provided in the 2021 sustainability report due in January of 2022. Outside of the day today and turning to slide eight, we've made great progress in fiscal year 21 with regard to long-term strategic actions. September 30th, we announced the closing of our strategic transformation in China. The completed transaction enabled Etion to drive our strategy in China independently, which is expected to result in a variety of benefits, including capturing growth in profitable and expanding segments, improving the integration of the company's China operations, and allowing for more certain value realization relative to status quo, where cash and value are generated from dividends at entities, not in eddience control. We expect to remain a leader in the China market, essentially a position on par with and among the top three complete seed suppliers in the market. Based on our estimates, this equates to a market share of just under 20%. At closing, Etient received its first tranche of proceeds totaling $695 million. Not only do they, does the completed transactions in China allow us to chart our future in the country independently, but they also enable the company to accelerate its balance sheet transformation, which we view as another key accomplishment in 2021. During the 2021 fiscal year, the company executed approximately $840 million in voluntary debt paydown with the proceeds from China in the bank. We will further progress on deleveraging in fiscal 2022. Etient will continue to prioritize its capital allocations toward debt paydown until the company reaches its targeted leverage threshold of 1.5 times to 2 times net debt the EBITDA. Bottom line, we're executing and delivering on items within our control. Turning the slides nine and 10, let me make a few comments related to our business wins and launch performance to ensure enough time is allocated to Jeff and our expectations related to fiscal year 2022. I'll be brief with regard to these slides. As you can see, slide nine is our typical new business win slide highlighted A few of Adiant's recent wins. Bottom line for the quarter just completed similar to what we've disclosed throughout the year. The company has had good success in capturing new, conquests, and incumbent business. The win rates for fiscal 2021 were strong and in line with internal expectations. I already mentioned EV wins accounted for approximately 20% of our business booked in 21. A very good outcome as growth in this area will continue to strengthen our leading position. I'd also point out we're pleased with our seating solutions are delivering world-class products to our customers as evidenced by a number of recent J.D. Power awards for Adiant seats in the Ram F-150 and Mustang Mach-E. Flipping to slide 10, as we typically do, we've highlighted several critical launches that are complete, in process, or scheduled to begin in the near term. The company continues to focus on process discipline around launch readiness and has driven a high level of performance, especially considering the launch load and complexity of launches that were planned for the year. In addition to the number of launches and complexity, the disruptions to production schedules presented another layer of challenges the team successfully managed through. Again, a testament to the discipline we've instilled around the process. As you can see at the bottom of the slide, we provided some color on what you can expect from fiscal 2022 with respect to the volume and complexity of launches. Generally speaking, volume is up. This is primarily driven by launches that were delayed from 21 to 22. Complexity is mixed up slightly in the Americas and in China, relatively flat in Europe and Asia, excluding China. I'm confident we'll maintain our focus on process discipline around launch readiness, driving results similar or better versus 2021. Before turning the call over to Jeff and turning to slide 11, let me conclude with a few summary comments. As discussed and highlighted with this presentation, Adyen is executing many actions to provide the company for sustained long-term success. Advancing our back to basic strategy continues to be a key enabler going forward. We'll continue to drive the business forward despite the near term macro headwinds. No doubt the operating environment in 2022 will be difficult given the persistent challenges impacting the industry. That said, we'll continue to manage through the difficulties executing actions along the way to lessen their impact. The underlying fundamental of the industry remains strong. Once the near-term temporary headwinds abate, Etienne will be in well position to capitalize on the recovery. With that, I'll turn the call over to Jeff to take us through Etienne's fourth quarter 21 financial performance and provide additional detail on what they expect in the coming year.

Great. Thanks, Doug. Good morning, everyone. Let's jump into Etienne's Q4 financial results on slide 13. Adhering to our typical format, the page is formatted with our reported results in the left, and our adjusted results in the right-hand side of the page. 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. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to a gain in the sale of our unconsolidated, partially owned affiliate YFAS, and an associated derivative loss in the forward contract used to lock in the exchange rate on the transaction proceeds. Other adjustments related to pension mark-to-market adjustments, purchase accounting amortization, restructuring, and transaction cost. Details of all the adjustments for the quarter and the full year are in the appendix of the presentation. High level for the quarter, sales were $2.8 billion, down about 23% compared to our fourth quarter results last year. The most recent quarter was specifically impacted by lost production, primarily driven by supply chain disruptions related to semiconductors. Adjusted EBITDA for the quarter was $118 million, down $169 million year-on-year, a decrease in volume and mix, numerous temporary operating inefficiencies driven from the challenging operating environment drove the decrease. I'll expand on these key drivers in just a minute. Finally, at the bottom line, Adiant reported an adjusted net loss of $23 million, or a loss of 24 cents per share. Note that our GAAP net income was $950 million, driven by the completion of the China transaction. Slide 14 provides a similar high-level summary of Adiant's full-year key financial metrics. As Doug mentioned earlier, the full-year results can be best summarized as a tale of two halves, Strong first half performance with significant year-over-year earnings and margin improvements. Add in second half, results were significantly impacted by the overall macro environment, customer production disruptions, and rising commodity prices. For the year, sales were $13.7 billion, up 8% compared to last year. Adjusted EBITDA was $917 million last year. up $244 million compared with the COVID impacted results in fiscal 2020. You can see we noted the EBITDA margin excluding equity income, commodity headwinds, and temporary operating inefficiencies would have been greater than 6%, even with an abnormally low sales level. We see this as clear evidence that the company continues to execute well on items within its control. And at the bottom line, net income of $199 million compared to a net loss of $4 million in 2020. Within the outlook section of this presentation, we've provided a full-year revenue and adjusted EBITDA walk from the reported results to a Performa 2021 view. The Performa view essentially accounts for all of the portfolio adjustments made throughout the year and should help with the walk to our 2022 expectations. More on this in a minute. Now let's break down our fourth quarter results in more detail. I'll cover the next few slides rather quickly, as detail for the results are included on the slides, and this should ensure we have an adequate amount of time set aside to review Adyen's expectations for 2022. Starting with revenue on slide 15, we reported consolidated sales of $2.8 billion, a decrease of $826 million compared to the same period a year ago. The primary driver of the year-over-year decrease was due to lower volume, call it just over $800 million. Portfolio adjustments impacted the quarter by about $35 million. These negative headwinds were partially offset by approximately $17 million due to FX movements. Focusing on the table on the right-hand side of the slide, you can see our consolidated sales generally kept pace with production in both Americas and EMEA. In Asia, Adyen experienced outperformance versus the market, driven by our customer and content mix, specifically in Japan and Thailand. In China, the underperformance was driven primarily by certain of our customers, such as Daimler, that were more heavily impacted by semiconductor shortages. Of course, we view this as temporary and should reverse as supply chain stabilization. With regard to Adyen's unconsolidated seeding revenue, year-over-year results were down about 10% adjusting for FX and executed portfolio changes. The performance was better than the market in China, primarily driven by positive mix at YFAS. Moving to slide 16, we've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation such as executive office, communications, corporate finance, and legal. Big picture, adjusted EBITDA was $118 million in the current quarter versus $287 million last year. The primary drivers of the decrease are detailed on the page. Simply put, the quarter was down over 20% in volume, but the impact was exacerbated by numerous abrupt and last-minute adjustments to production schedules at our customers. which continued to drive inefficiencies in our operations. In addition, similar to our third quarter, elevated commodity prices also pressured earnings. The significant headwinds were partially offset by improved core business performance, such as lower launch cost, ops waste, and improved net material margin. SG&A was favorable year over year by $41 million, primarily driven by adjustments to performance-based compensation and the net impact of accrual true-ups. In summary, SG&A for the year is representative of our spend, but our Q4 level is lower than we'd expect on an ongoing basis. I do not plan to go into a detailed discussion of this page, but we've outlined the movements year over year in detail for your information. Important to note, although the macro pressures, which are largely out of adjunct control, significantly impacted our Q4 and second half results, The team is not sitting idle. We're continuing to execute actions to improve our business performance and reduce our cost base. Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the presentation. High level for Americas and EMEA. Improved ongoing business performance and lower SG&A costs were more than offset by the impact of lower volume, the negative impact of temporary operating inefficiencies, and elevated commodity costs. In Asia, the benefits of slightly higher volumes, lower SG&A, and improved business performance modestly outweighed the negative impact of temporary operating inefficiencies and the negative impact of portfolio adjustments. Let me now shift to our cash, liquidity, and capital structure on slides 17 and 18. Starting with cash on slide 17, I'll focus on full-year results as the longer timeframe helps smooth some of the volatility in working capital movements. Adjusted free cash flow, defined as operating cash flow, less capex, was breakeven for the year. This compares to a cash outflow of about $80 million in 2020. The year-on-year improvement was partially driven by higher earnings, increased dividends from our China operations, underpinned by the agreements related to our strategic transformation, and lower capital expenditures. These benefits were partially offset by an increase in restructuring, nearly $300 million increase in inventory balances, and an increase in VAT payments, and finally, the timing of commercial settlement activities. The VAT payments, as mentioned throughout 2021, are larger than normal in 21 and relate to government-approved delays out of 2020 due to COVID accommodations. Just a few comments related specifically to 2021. Restructuring was elevated at approximately $150 million. We'd expect that trend to trend back to closer to $100 million or perhaps inside of that in the coming years. Inventory trended higher as we secured commodities and other components to prevent disruptions to our customers, bought extra supply due to pending increases in commodity prices, and overall experienced higher commodity prices than a year ago. And finally, capital expenditures were lower than expected, as customer launches were pushed from fiscal 21 to 22, and the team continues to find ways to increase our capital utilization. Flipping to slide 18. As noted on the right-hand side of the slide, we ended the quarter with about $2.8 billion of total liquidity, comprised of cash on hand of about $1.5 billion, and approximately $740 million of undrawn capacity under Adiant's revolving line of credit. Also noted, the September 30th cash balance includes approximately $695 million in proceeds from the China transaction. Final after-tax proceeds of about $625 million are expected prior to calendar year-end. Etienne's debt and net debt position totaled $3.7 billion and $2.2 billion, respectively, at September 30th. As Doug mentioned earlier, significant progress was made throughout the year to transform the company's capital structure. Since September 2020, we repaid approximately $100 million of the four and seven-eighths unsecured notes, fully repaid the $800 million 7% first lien notes, and repaid approximately $40 million of our EIB loan. In addition, we opportunistically amended and extended our term loan. Given our cash balance and the additional proceeds from the China transaction that are expected prior to year-end, we expect to continue our deleveraging efforts as we progress through fiscal 2022. Clearly, the transformation of Addie's balance sheet is solidly on track. With that, let's flip to slide 20 through 23 and review our outlook for fiscal 2022. To begin with, The persistent macro headwinds, primarily supply chain disruptions and inflationary pressures on such things as commodities, freight, energy, et cetera, are expected to have a significant impact on the industry and add-ins in fiscal 22. On the right-hand side of slide 20, we've laid out our planning assumptions for production and FX compared with fiscal 21. The foundation of our fiscal 21 plan is generally aligned with the October IHS estimates with limited overlays for known customer release schedules. As you know, the current operating environment is very fluid. Visibility into the production is cloudy at best. Supply chain disruptions and resulting production stoppages could result in significantly different outcomes. To emphasize the point, many of our customers continue to project volume far in excess of IHS volumes that we're using thus requiring us to staff our operations with more headcount than what is implied by our projections. This creates a higher-than-normal decremental margin impact if the IHS volumes turn out to be correct. As Doug mentioned earlier, our current expectations assume global vehicle productions will be about flat for Adiant's fiscal year, up in Americas and EMEA, and down in Asia. The production forecast is expected to result in a mixed headwind in fiscal 22, given that our higher margin business in Asia is down or projected to be down. I'd also point out that in Europe, despite overall production trending higher, Adiant's sales are forecast to be modestly lower, as we expect the impact of the microchip shortage to disproportionately impact our business, similar to what we experienced in 2021. Now I'll review how these assumptions impact our 22 outlook, beginning with sales on slide 21. At the top of the slide, we've included a bridge that walks our fiscal 2021 sales of $13.7 billion to our pro forma 2021 sales of $14.3 billion. The pro forma sales reflect the impact of portfolio adjustments executed throughout the year. Over the last two years, we have done a fair amount of portfolio rearrangement as part of our back-to-basics strategy. Some of the changes were quite big, while others were relatively small. In addition, some of the moves are very recent, so we pulled together a pro forma view of 2021 to help you understand the total impact. As you can see, the China strategic transaction adds roughly $870 million to our consolidated sales. Small divestitures in China of a leftover piece of our fabrics business and some entities obtained through the Futurist acquisition reduced performance sales by approximately $120 million. Note that these small divestitures represented businesses where we had not won nor did we expect to win replacement business and thus had fairly immaterial proceeds. We recently sold our interest in a metals operation in Turkey to an unconsolidated JV we have in the same country. This will impact our consolidated sales by about $100 million. Other minor footprint actions across EMEA and Americas total about $50 million and primarily related to small plant closures for business that was running off. Bottom line, if these transactions had happened at the beginning of fiscal 21, Adian's consolidated sales would have been about $14.3 billion versus the $13.7 billion reported. Now walking the $14.3 billion to our forecast for fiscal 22. Volume, net new business, the impact of commercial and commodity recoveries, and FX are expected to provide tailwinds, but partially offsetting the positive influences are customer pricing headwinds. In the end, based on the current environment and positive and negative influences, we're forecasting fiscal 22 consolidated sales of about $14.8 billion. Turning to slide 22, we've also included a high-level bridge illustrating our expectations for adjusted EBITDA. Similar to sales, we've provided a performer walk at the top. Key drivers include the impact of the China strategic transaction, which benefits consolidated EBITDA by about $90 million and reduces equity income by roughly $155 million. This impact to equity income is slightly higher versus our original estimate due to better-than-expected performance at YFAS in the fourth quarter. The other China transactions, namely the leftover piece of our fabrics business, some entities obtained through the Futurist acquisition, and the impact of Adiant selling its 50% equity interest in its SJA joint venture, which was announced concurrently with the China strategic transaction, will impact EBITDA in total by about $15 million. The EMEA... JV deconsolidation will decrease consolidated EBITDA by $20 million, partially offset by an increase in equity income of about $5 million. Proceeds related to this transaction will total about $50 million, $40 million of which was collected on October 1st. The $50 million in total proceeds reflect the unique challenges to this operation relating to winning and launching the replacement business in Turkey. The footprint actions in EMEA and Americas primarily represent several small operations that were closed due to expiring contracts, for example, the Tesla business in California that we have discussed in the past. With all the puts and takes, Addion's fiscal 21 adjusted EBITDA would have been roughly $810 million adjusting for the portfolio changes versus the $917 million reported. By quarter, the $810 million would be calendarized as follows. approximately $320 million in Q1, $290 million in Q2, $125 million in Q3, and $75 million in Q4. Now walking $810 million to our forecast for fiscal 22, starting with positives. Volume, although muted given the production expectations in Asia, is expected to have a year-over-year benefit. Temporary compensation actions, such as suspending the company's 401k match in the U.S., our EBAN salary reduction and RSU replacement program, and other similar actions. Similarly, our back-to-basics strategy is expected to drive further operational and cost improvements. And finally, commercial profitability actions and the impact of FX will provide much-needed tailwinds. Unfortunately, offsetting these benefits are several headwinds, such as significantly elevated commodity cost net of recoveries, which are forecast to be approximately $125 million hit year on year. We assume commodity prices will remain at their current levels. If prices drop, and depending when the drop occurs, this could translate into upside within our forecast. This compares favorably to the previous estimate of $200 million impact we discussed on our last call, as our team has developed mitigation strategies to offset some of the impact. In addition, higher freight and energy costs are expected to pressure earnings. While we are actively pursuing and implementing mitigation plans, we've seen costs for freight lanes increase seven to ten times over the last year. Mix will contribute to the downward pressure as higher margin regions such as China and Southeast Asia are expected to experience lower volumes. Lower equity income compared to our pro forma adjusted results driven by outperformance in fiscal 21 and the impact of net commodity costs at our unconsolidated joint ventures. Engineering and launch costs are forecast to be higher in fiscal 22 versus 21. Certain of this increase is attributed to various programs being pushed from 21 into 22 as fiscal 21 experienced an unusually low level of spend. Finally, certain of the benefits recognized in fiscal 21 are not expected to repeat in 2022. One such example is the roughly $30 million of commercial settlements we called out in Q1 fiscal 21 that we considered one time in nature. Bottom line, when sifting through the puts and takes at this moment, we expect the headwinds to modestly outweigh the tailwinds for 2022 and to be somewhere less and for 2022 to be somewhere less than our pro forma 2021 results. Given the volatility around inflation inputs, the challenges around securing labor, especially given the uncertainties around the impact the vaccine mandate will have, and other challenges we've discussed, providing more specific guidance on full year fiscal 22 adjusted EBITDA with reasonable certainty is not possible at this time. That said, we will continue to provide regular updates to the market as clarity hopefully returns. It's also reasonable to apply the same impact to fiscal 2022 as summarized on slide five of this presentation. The shortfall in our expected revenues due to supply constraints appears approximately consistent year over year, as do our inefficiencies. Meanwhile, the commodity headwinds have increased a further $125 million. One final point on our fiscal 2022 EBITDA forecast, we'd expect our first quarter results to be the low-water mark for the year. In fact, Q1 EBITDA is currently expected to settle at or modestly higher versus the quarter just completed after adjusting for our footprint changes. Two key reasons. First, we will experience a step-up in our negotiated steel prices, which took effect October 1st. Second, we benefited from several true-ups, as mentioned earlier, to our year-end accruals in Fiscal 21's fourth quarter, such as our incentive compensation and medical accruals, effectively meaning that we had over-accrued in earlier quarters and trued them up to actual results in Q4. We largely expect these factors to offset the benefit of slightly higher revenues in our first quarter. Now that we've covered our Fiscal 22 expectations for sales and adjusted EBITDA, let me quickly comment on expectations for a few key financial metrics on slide 23. Starting with equity income, based on our assumptions of production in China, the portfolio actions implemented in fiscal 21, and FX rates, we'd expect equity income to land around $80 to $90 million. Interest expense of about $150 million includes an assumption of a further $1 billion of principal debt prepayments in 2022. Cash taxes in fiscal 22 are expected to be around $80 million. Our book cash taxes are expected to be slightly higher, call it about 100 million at this time. During fiscal 22, we might see our adjusted effective tax rate higher than normal and fluctuations amongst quarters due to valuation allowances in our geographic mix of income. That said, 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 add-ins operations should remain relatively low, even as profits increase. Capital expenditures are forecast to be about $300 to $325 million. Just a few comments regarding the forecast as it's elevated versus the 2021 spend. First, the majority of spend supports customer launch plans and the timing of those launches. Fiscal 2021 spend was unusually low, under 2% of sales as certain launches were pushed into fiscal 2022. Slight uptick year-over-year is driven by the consolidation of CQ, AD&T, and the Lanfeng entities as part of the China transaction, call it around $15 million or so. As you can see at the bottom of the slide, given the backdrop of the current operating environment, providing specific full-year estimates for adjusted EBITDA, equity income, and free cash flow with reasonable certainty is not possible at this time. Let's move on to the question and answer portion of the call. Operator, first question, please.

Thank you. As we move to the question and answer session, if you'd like to ask a question over the phone, please dial star 1, unmute your phone, and record your name and company name when prompted. Your name is just required so we can introduce your question. If you need to cancel your question for any reason, you can dial star 2. Our first question today comes from Rod Lash. Your line is now open.

Good morning, everybody. I'd like to just maybe hear a little bit more about how you would characterize the bridge from what you're suggesting you'll experience in fiscal 22 to a more trend-like environment. So you're talking about 79 million units of global production. If normal, it's more like 90 million. That looks like it's 13%. or so, maybe $1.8 billion, $1.9 billion of revenue, I'm thinking, and maybe you can just comment on how that would convert. And then in the second half of the year, you had $118 million of inefficiency. I can't remember what it was in the first half, but that and $195 million of commodities that you're saying you're absorbing in 2021 and 2022. Can you maybe just give us some color on how those kinds of things might get recovered? Yeah, great question, Rod. And as we look through when IHS cut back 2022 production and we started to see that the impact that we were seeing in 2021 would carry over, we spent a lot of time thinking through what 2023 and what the market will look like as we get to the other side of this. But breaking that down, and I did reference back to page five of the presentation at the end of my remarks there a second ago, The 2021 impact to revenue, we had estimated about $1.9 billion. We have a pretty similar, maybe even a tick higher of what we think has come out of our 2022 build or production, given the macro issues that we're facing. So, you know, call it about $2 billion in sales. You know, I think from a contribution or flow through on that, you're talking you know, 15-plus percent, so call it 300 million-ish, perhaps change. And we also had, similar to last year, we expect similar to 2021 to have a pretty similar level of inefficiencies. I mentioned we're having to overstaff a lot of our operations. The production environment has been nothing short of, you know, I was going to say awful, but there's probably several other words to use to characterize it. So all those inefficiencies are effectively, we think, duplicating themselves in fiscal 22. And then you mentioned the commodity headwind. So as you start to look forward, we do see a significantly, you know, higher volume picture, which should have great flow-through impacts for us. We'd see in an environment where we weren't having that to not have those inefficiencies flowing through. And, you know, the commodity situation we didn't, you know, expect to continue to get better either through commercial negotiations or the time period of our lags and cost recovery mechanisms with our customers to catch it. Okay. So it sounds like you do believe that ultimately the full impact of these two years of commodities and inefficiencies get recovered. Just wanted to clarify that because you also mentioned freight and energy and a number of other things that are kind of influencing your views on the outlook?

Yeah, I would say from a commodity standpoint, they ultimately get recovered. It's a question of how long that takes. Right now, we're kind of using extraordinary measures from a commercial negotiation because the mechanisms we have in place fall short. But over time, as commodities stabilize or go down, those mechanisms will ultimately address the issue. We're trying to bridge that gap in the near term. Energy and ocean freight are the most emerging issues that are having an impact on ocean freight. We think there's a lot of self-help we can put in place, but that takes a little bit of time as we look at alternative manufacturing locations. And as we mentioned in the call, we can even change pack density. Some of that ultimately may result in a commercial negotiation because we don't expect to bear that burden if ocean freight rates don't come back down. And they're, as you know, extraordinarily high right now. Energy, I think, is really a new emerging issue that we have in Europe that we're getting our arms around and assessing what that full impact is going to be. That's probably less of a commercial issue for us. And whether it's transitory or not is difficult to predict at this time, but it's a relatively smaller issue in comparison to the other two.

Our next question comes from John Murphy with Bank of America. Your line is now open.

Good morning, everyone. This is Aileen Smith. I'm for John. I understand why it's tough to give a formal outlook on adjusted EBITDA and free cash flow into next year, but I want to ask a question around free cash flow and whether it's possible to provide maybe a directional read in the same way you gave for adjusted EBITDA or perhaps a way to think about free cash flow conversion from EBITDA into next year. Just trying to get a sense of whether on an operational basis you think you could be free cash flow generative next year outside of some of the cash trailings you'll get for strategic actions.

Yeah, so just on a free cash flow basis, I mean, what I would expect is for a negative free cash flow in the first half of the year, primarily with the working capital movements of when volume sinks pretty heavily for us, you know, you can go back to the COVID-19 timeframe when we were shut down a year and a half ago or so and see what that did from a working capital standpoint. It was negative, but it worked back through the system. Our expectation right now is that, you know, while we have a first half negative, it would come back and, you know, I don't think it's a break even-ish, maybe a little better, maybe a little worse, just depending on, you know, where the overall environment sits next year. And a couple other, I guess, key points you mentioned in there. We would expect restructuring to be down, interest expense to be down, CapEx slightly up from an overall year standpoint. Taxes are about neutral, I think, zero.

Okay, that's helpful.

The big volatility is just going to come from working capital.

Yep, understood. And then I wanted to follow up on one of the headwinds that was cited on the EBITDA walk about the non-repeat of various commercial settlements. Is that solely just the one-time benefit from renegotiating contracts with your customers that obviously doesn't repeat, or should we read into that as you're getting into the eighth or ninth inning of sorts on those discussions with your customers? And so settlements should naturally abate going forward, but the offsetting factor is that you've got more economic contracts in the business and the consolidated numbers now. Just trying to make sure there isn't anything nefarious to read into there with the commercial settlements.

I think the way you want to think about them is, particularly in our business, is when you have a tremendous amount of volatility, as we did in 19 and 20 because of COVID, and really extraordinary material economics. we sometimes settle those commercial negotiations and they're delayed and there's retro pieces and that's why they occur typically in a quarter when we go through that reconciliation. Will that repeat itself? Based on what I just said, you could argue that it might because when we have major disruptions in the flow of the business, it takes a while to resolve those issues. And they usually get settled out of period. That's how I think about it.

Yeah. And just one other point to that specific point that I made in my comments. We had called out at the end of first quarter last year, about $30 million of settlements that were really out of period where we had finally reached that settlement with the customer. And we called that out a year ago, if you look back, and said, you know, part of the reason I think we did something close to $380 million in the first quarter of last year, and we said about $30 million of it relates to some really out-of-period items that, while a lot of this stuff just kind of mixes with the overall period year-to-year or quarter-to-quarter profitability, that $30 million was somewhat unique and special for the year and didn't want you to add it into your performance numbers going forward.

Okay, great. That's really helpful. Thanks for taking the question.

Yep. Our next question comes from Emmanuel Rosner. Your line is now open.

Thank you very much. First question is around your revenue expectation for fiscal 22. So I'm looking at slide 20, and we show you sales forecasts versus IHF. Would you be able to give us a sense of – where you feel there's the industry production could check out better than in an IHS, and maybe a sense of your backlog, how much in that new business do you think is the benefit embedded in your base case?

So, relative to IHS, you know, like we said in our prepared comments, the crystal ball is pretty cloudy. IHS just recently came out with a best-case, worst-case scenario. And if you factor in those numbers, you can see that there's a – would have a considerable, you know, impact. You know, right now, it's two things I'd point to. One, it's really unclear what our customers' capacity is to run because they're still on allocation with semiconductors. And their outlook is pretty near-term on, you know, what that capacity looks like. The reason that is a problem for us is because, you know, we run just-in-time plans. So our customers have not pulled back on releases. So they're releasing, which is forcing us to, as Jeff mentioned, to run at full rate. And then we're getting very short notice on whether or not they have the ability to run at that rate. So when I think about revenue, those are really the factors that, you know, make it very difficult for us to predict. So you can look at IHS, best case, worst case, that might give you some insight. But I don't think there's really anyone out there right now that has great visibility on on what the volume could be and how it unfolds. And if we continue to have this disruption that we've had in the second half of the year, that's a very different outcome than just reduced volume because of the way we have to run our jet plants.

I fully agree with you. I'm just trying to better understand what's embedded in your base case scenario for next year because you do have a – sort of like revenue directional outlook. So, anyway, if you tell us within that, you know, how much net new business you're expecting, because obviously two of the positive influences are volume and net new business. And I'm just trying to understand in your base case what is in there.

We do have a bit more coming in than we have going out, Emmanuel, and that's, you know, referenced with the You know, the market being relatively flat and we're coming in with, you know, we'll say 400 basis points better than the market. And that's just driven by, you know, good mix and some good, you know, vehicles coming online versus those that are coming off. So that side's positive. I will say, though, just back to the question. Every one of our customers would like to produce more than they are right now, and they're all telling us they're going to produce more than IHS is effectively saying. So where could we have benefits? It's going to really depend on the complexities of the supply chain to get there and labor markets to be able to produce. If you go into a dealer right now – I was in one last weekend, and there were zero new cars on the lot inside – There's, you know, a desire to make them. It's just going to be a question. And that becomes really difficult to predict because the complexity of the overall supply chain is enormous. And, you know, any particular part can shut the vehicle down. So that's what we're managing right now. But I do think there's upside. It's just very difficult to pinpoint where. But it should be noted there's probably some element of downside, too, if you have Doug mentioned the IHS pessimistic and optimistic cases, and there's a pretty wide range for 2022. Thank you.

Thank you. Our final question comes from Colin Langan with Wells Fargo. Your line is now open.

Oh, great. Thanks for taking my question. Just to follow up, again, on this, you know, walk from 21 EBITDA to 2022, I mean, you call out some of the big buckets of commodity, 125 commercial settlement of about $30 million. But you also, at the beginning of the presentation, talk about $450 million of inefficiencies. So I guess, you know, one, is any of that sort of inefficiencies in the plan for sort of slightly down next year, or is that all just assumed to be over a year out? And of the other – any framing of the other buckets of mix, launch, and engineering, how big are those? Maybe I'm underestimating how big those are in terms of headwinds.

Yeah, just on the topic of the premiums, you know, the 450 we called out on page five of the presentation, that had – it was a mix of the contribution loss on the loss of volume and the inefficiencies. So if you use the $2 billion roughly and you use 15%, you can think roughly $300 of it is lost contribution margin and $150 of it is inefficiencies and premiums that we've incurred. When we look at 2022, the makeup and constitution of those premiums are going to be different, but they're pretty similar year over year. We don't have the Texas storm. Well, hopefully we don't have the Texas storm in 2022, but we have pretty similar – we'll say semiconductor impact, and we're also seeing higher freight and some of those pieces, which essentially give the total for the year pretty similar level. As it relates to, you know, some of the other pieces here, I'd say those are – you know, that particular equation we just talked about is what's dramatically driving the numbers and makes the outcome of the overall EBITDA extremely volatile and difficult to forecast. You know, there's definitely a little bit of engineering, you know, call it 20-ish or so, you know, maybe a little higher additional engineering that we would expect. The mix, you can kind of calculate probably on your own. Just think of you have several basis or, you know, several hundred basis points higher contribution margin in maybe even like 50% higher contribution margin in Asia region than you do in the rest of the globe. So with China being down in the IHS numbers by 4%, that definitely plays a bit of an impact on mix.

The only thing I would add to that is the reason why we didn't give specifics on each one of those buckets is, you know, Many of those issues are in negotiations with our customers, and it takes time to sort those out. And what the ultimate impact will be, the net impact is still unresolved right now. So more to come on that, and we'll continue to chip away and look to mitigate some of those impacts.

I guess my second question, just to be clear, the commodity headwinds, you got it down pretty impressive improvement from 200 to 125. Is there any more opportunity? And maybe you were just alluding to that. And you also, on one of the slides, talked about alternative commercial solutions with customers. Is that looking for concessions beyond the traditional commodities? Again, I'm trying to get any more color what you're referring to there.

Yeah, so I would say there's more opportunity, whether it's going to come in our customers making adjustments in the way they compensate us for commodities. Or I always go back to, you know, we have a basket of goods and commercial issues that we can negotiate around. It's the nature of the business that we're in. Slightly unique just because we have such a complex module that there's so many moving parts that are impacting costs, both negative and positive. You know, we're working our way through that, you know, our customers have expectations for productivity next year, that we have to put on the table and negotiate against the backdrop of rising commodity costs. So all that's in discussion right now. And it's just too early to really peg though, I would say, and to your point, we are you know, you know, pleased modestly pleased with the progress we made to date on material economics. But a lot of work ahead of us on that front.

That looks like we're at the bottom of the hour. So that will conclude the call for today. As usual, I will be available throughout the day today tomorrow for additional post earnings call. So feel free to call, and we'll be more than happy to address your questions at that point. But thank you. Thanks, everyone. Thank you.

That concludes today's conference. Thank you all for participating. You may disconnect at this time.