Adient plc

And thank you for standing by for the 80th first quarter fiscal 2022 conference call. At this time, all participants are in a listen only mode. After the presentation, we will conduct the question and answer session. To ask a question, please press star and then one. This call is being recorded. If you have any objections, you may disconnect at this point. Now I will turn the meeting over to your host, Mark Oswald. You may begin.

Thank you, Operator. Good morning, and thank you for joining us as we review Adiant's results for the first quarter fiscal year 2022. 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, Jeff Stafile, our Executive Vice President and Chief Financial Officer, and Jerome Dorlak, Adiant's 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 Q1 results in Outlook for the remainder of the year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug, Jeff, and Jerome, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I 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 GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments. I'll now turn the call over to Doug. Doug?

Great. Thanks, Mark. Good morning. Thank you to our investors, prospective investors, and analysts joining the call this morning as we review our first quarter results for fiscal 2022. Turning to slide four, let me begin with a few comments related to the quarter. As we anticipated heading into the quarter, the ongoing supply chain disruptions related to semiconductors and the resulting customer production stoppages combined with elevated commodity prices continue to impact Etienne's first quarter. As the quarter progressed, it was encouraging to see signs of stabilization emerge for certain of these headwinds, specifically the softening of steel prices and the less volatile call-offs from our customer production schedules. Despite the green shoots that began to appear, the overall narrative has not changed. We continue to operate in a very challenging environment. This is evident when looking at Adiant's first quarter EBITDA results, which contained approximately $185 million of temporary operating efficiencies and commodity headwinds. Adiant's key financial metrics for the quarter can be seen on the right-hand side of the slide. Revenue for the quarter, which totaled $3.5 billion, $500 million compared to last year's first quarter adjusted for portfolio actions executed in 2021. As a reminder, the supply chain disruptions that have resulted in significant downtime at our customers began in late Q2 of 2021 and did not impact last year's Q1 results. Adjusted EBITDA for the quarter totaled $146 million. and as pointed out on the slide, included approximately $185 million in lost volume temporary operating inefficiencies and premiums. Again, primarily driven by chip shortages and unplanned production stoppages. At the end of December 31st, cash balance totaled just under $2.1 billion and included approximately $625 million in net proceeds collected as the final payment associated with Adyen's strategic transaction in China, which closed at the end of our 2021 fiscal year. Despite the continued difficult operating environment, Adyen continues to execute actions within its control to position the company for sustained success. These actions include, but are not limited to, the team's intense focus on launch execution, cost operational improvement, and customer profitability management. Continued progress on transforming the company's balance sheet. As called out on the slide, Etience recently launched 800 million in debt tenders offers targeting any and all of the company's 9% U.S. dollar secured notes with 600 million outstanding and up to 177 million euros, about 200 million U.S. dollars of our 3.5% euro unsecured notes. And finally, we recently issued our 2021 Sustainability Report, highlighting EDIEN's increased commitment to operating the business in an environmentally friendly manner. I'll cover this in greater detail in just a few minutes, but first, in turning to slide five, let me expand on what we're seeing with regard to the current operating environment. In the middle of the slide, We've highlighted several of the headwinds the industry and Adiant continue to face. The list should look very familiar as many of these macro headwinds surfaced at the end of our second quarter last year and have continued into fiscal 2022. The most significant influences include ongoing supply chain and semiconductor shortages, which continue to impact production at our customers. Similar to the second half of 2021, These unplanned production stoppages are leading to premiums and operating inefficiencies across the network. For Q1 fiscal 2022, we estimate that supply chain disruptions resulting lost production, operating inefficiencies, premium rate, et cetera, had a net impact on the top line of $680 million and adjusted EBITDA by approximately $185 million. The $185 million EBITDA headwinds for the most recent quarter is modestly better compared to what we saw in Q4 fiscal 21. As mentioned earlier, we're cautiously optimistic that the supply chain disruptions related to the semiconductors are beginning to stabilize. As the first quarter of 2022 progressed, customer call-offs and short-notice production stoppages lessened. That said, by no means are we out of the woods. The operating environment remains very challenging, especially considering the spike in COVID cases, elevated freight costs, and labor uncertainty. Those specific headwinds have not improved. For the full year, we continue to expect production stoppages resulting from supply chain disruptions and temporary operating inefficiencies will look very similar to fiscal 2021. specifically impacting Addient's top line by just under $2 billion and adjusted EBITDA by approximately $400 million. With regard to the material economics, a modest dip in steel prices during Q1 suggested stabilization and hopefully further improvement may be realized as 2022 progresses. For the quarter, Addient's net commodity headwinds totaled $3 million. This result was better than expected, aided by additional recoveries over and above our contractual agreements. Also important to point out, our European operations had locked in pricing for 2021 calendar year. As the negotiated contracts for 2022 kick in during our fiscal second quarter, we're expecting to see more significant impact on your results for that region. Based on the recent steel price movements, the upcoming pricing in Europe combined with the contractual escalators and negotiated commercial terms above contractual obligations currently forecast a commodity headwinds of about 95 million versus the previous forecast of 125 million. Although moving in the right direction, this remains a pretty stiff challenge for the year. Taking a step back and looking at the overall operating environment, we're encouraged to see green shoots of stabilization for certain of the headwinds. However, the overall narrative has not materially changed, and we're in the midst of a pretty tough operating landscape. As mentioned on prior calls, we're not sitting back waiting for the tide to turn. The team continues to implement actions designed to help mitigate the negative impact of the headwinds. Actions include but are not limited to focusing on operational excellence, driving down SG&A costs, executing both temporary and permanent actions, partnering with our customers to drive innovation and add value to receipt solutions that meet the needs today and tomorrow, and continuing the transformation of the balance sheet. Simply put, we're executing actions within our control to position Add-In for long-term success. Speaking of success and looking to the future, let's turn to slide six. We realize reaching the company's full potential cannot be achieved without firmly integrating sustainability into the core of Adiant's operations to continue to evolve and become foremost sustainable automotive supplier. Adiant's commitment to operating its business in an environmentally responsible manner was recently outlined in the publication of our 2021 sustainability report. Our goal is not only to drive environmental change by lessening the impact that business has on the planet, but also to focus on social and economic change that benefits everyone. At AIT, we'll continue to meet, collaborate with, and participate with organizations around the globe concerning our responsibility and commitment to these efforts. In 2021, commitments include, but are not limited to, The United Nations Global Compact, where Adiant has reaffirmed its corporate responsibility to place human rights, labor, and the environment and anti-contruption considerations at the top of our business mindset. The Science-Based Target Initiative, where Adiant has committed to setting ambitious emission reduction targets to help limit global warming to 1.5 degrees Celsius. The Carbon Disclosure Project, where Adyen reports the company's environmental performance to customers and shareholders. We've included a link to the full report. Please take a few minutes to learn how Adyen is incorporating these policies into our day-to-day operations. Turning to slide seven and eight, now let's take a look at our business wins and launch performance. As you can see, slide seven is our typical new business slide highlighting a few of Adyen's recent wins. The programs highlighted represent a good mix of incumbent wins and new platform wins, especially in the EV space. With regard to incumbent wins, we've highlighted the RAM 1500 Complete Seat business, which is the largest platform by revenue in fiscal 2021. We're excited to continue our partnership with Stellantis in the coming years. An example of all new wins include the all-new Future Crossover EV at Ford. It's worth mentioning EV program wins are accelerating with the new entrants, manufacturers, and legacy OEMs. Addion's reputation as a value-added supplier that collaborates with its customers to drive innovation, reduce costs and complexity, and improve the overall performance for the end-user experience continue to underpin our success with new business awards. Also of note is our recent business wins. include a good mix of JIT, foam, trim, and metals business. As our new book of business continues to launch, we expect to balance in, balance out platforms to further enable margin expansion. Flipping to slide eight, as we typically do, we've highlighted several critical launches that are complete, in process, or scheduled to begin in the near term. I'm happy to report the launch is currently underway. been progressing smoothly. The launches and platforms shown not only impact eddience just-in-time facilities, but also span across our network of foam trim and metals facilities. The team continues to focus on process discipline around launch readiness, has driven a very high level of performance, especially considering the launch load and complexity of launches that are planned for the year. In addition to the number of launches and complexity, the disruption of production schedules continue to present another layer of challenges to the team successfully managing through, again, a testament to the discipline we've instilled around the process. We have no intention of letting up. Before turning the call over to Jeff and turning to slide nine, let me conclude with a few summary comments. As mentioned earlier in my presentation, prepared remarks, and as you know, the macro environment remains very challenging for the industry in Addion. That said, when stepping back and looking to the future, we continue to be optimistic. Reasons for that optimism include, first, the underlying fundamentals of the industry remain solid. Consumer demand is very strong. In fact, this is the only time in my career I can recall the industry being impacted by supply constraints versus demand. Inventories are at historic lows, a good setup for production in the coming years. The mix of vehicles being produced remains robust. And finally, there are a lot of new and innovative products being launched over the next several years. Second, in addition to the underlying fundamentals of the industry, ADDIAN continues to move forward, executing actions we believe will position us to take full advantage of the industry recovery. Our back-to-basics mindset is fully integrated in the business, which enables us to be laser-focused on operational life. Our new business wins continue at a very high level, focusing on profitable growth. It has not impeded our ability to secure future business. As this business launches, it will continue to improve earnings and cash flow. And finally, the transformation of Addiance Balance Sheet remains solidly on track. as the industry recovers and earnings and cash flow improve, that the transformed balance sheet should enable enhancements to our capital allocation strategy. Bottom line, we see significant opportunity for value creation for our shareholders in the coming years. With that, I'll turn the call over to Jeff, and let him take us through Etienne's first quarter 2022 financial performance and provide additional detail on what to expect as we move through 2022.

Great. Thanks, Doug, and good morning, everyone. Let's jump into Adyen's Q1 results, starting on page 11. Adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side. 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 adjusted results relate to purchase accounting amortization, restructuring, and a derivative loss in the YonFang strategic transaction. Details of all the adjustments for the quarter and the full year are in the appendix of the presentation. I'd also point out that within the appendix, we've included pro forma results for each of the quarters in fiscal 21, adjusting for the numerous portfolio actions executed last year. These pro forma figures attempt to show 2021 on a consistent basis or footprint with this year. We believe these serve as a helpful tool to compare our year-over-year results. High level for the quarter. Sales were $3.5 billion, down about 10% compared to our first quarter results last year, or down about 12% compared to last year's pro forma results. Similar to the past few quarters, the most recent quarter was significantly impacted by lost production primarily related to supply chain disruptions related to semiconductors. Adjusted EBITDA for the quarter was $146 million, down $232 million year-on-year as reported, or down $179 million compared to last year's pro forma results. The decrease is attributed to the significant reduction in volume and mix and numerous temporary operating inefficiencies driven from the challenging operating environment. I'll expand on these key drivers in just a minute. Finally, on the bottom line, Adiant reported an adjusted net loss of $36 million, or a loss of 38 cents per share. Now let's break down our first quarter results in more detail. I'll cover the next few slides rather quickly, as additional detail is contained in the slides. This should ensure we have adequate amount of time set aside for the Q&A portion. Starting with revenue on slide 12, we reported consolidated sales of $3.5 billion. The sales shown include the sales at Adiant's recently acquired CQ and LF businesses, which are now consolidated since closing the strategic transformation in China, as well as other portfolio actions executed in fiscal 21. The $3.5 billion is a decrease of $495 million compared with Q1 2021 pro forma results. The primary driver of the year-over-year decrease was lower volume. call it approximately $485 million, related to the volume and lower commercial recoveries partially offset by roughly $65 million in commodity recoveries. The negative impact of FX movements between the two periods impacted the quarter by just over $70 million. Focusing on the table on the right-hand side of the slide, you can see our consolidated sales outperform production in each of the major regions. Important to note and as highlighted on the slide, the quarterly year-over-year performance was adjusted to account for the portfolio actions implemented in fiscal 21. Addient's growth over market in each of the regions can be attributed to the company's customer mix. In China, strong production at NIO and Shipping underpinned Addient's performance. In Asia, specifically in Korea and Japan, Addient's customer platforms were less impacted by supply chain disruptions compared with the overall market, and in Europe, Favorable mix and commercial actions drove the outperformance versus the market. With regard to Adiant's unconsolidated seeding revenue, year-over-year results were up about 4% when adjusting for FX and portfolio actions executed in fiscal 21. Adiant's sales growth over market growth was largely driven by outperformance in China, specifically at Adiant's Kuiper JV, which benefited from very strong Tesla sales during the quarter. Moving to slide 13. we 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 $146 million in the current quarter versus $378 million reported a year ago, or $325 million pro forma adjusted for the portfolio actions executed last year. I'll focus my commentary on the drivers between this year's results and the pro forma adjusted results, as we believe that provides a more meaningful comparison to today's business. The primary driver of the decrease are detailed on the page and are consistent with what we expected heading into the quarter. Lower volume and mix, primarily driven by supply chain disruptions at our customers, impacted the year-on-year results by just over $100 million. Adverse business performance, driven by temporary operating inefficiencies resulting from the unplanned production stoppages at our customers and customers not running at rate, increased freight, and lower year-over-year commercial settlements impacted the quarter by about $60 million. Just a reminder, last year's first quarter commercial settlements were abnormally high In fact, last year we called out approximately $30 million of settlements that were not considered ongoing. With regard to my comment about certain of our customers failing to run at rate, this unfavorable trend, which surfaced at the start of the supply chain disruptions last year, not only highlighted the difficulty in forecasting production, it also illustrates why we continue to experience inefficiencies in the operating system, such as excess labor at our facilities. For example, our customers typically forecast their expected production volume three months out. Adiant, in turn, is required to staff to those levels. Unfortunately, the production rates that are ultimately being achieved is on average 20% below those levels, with certain platforms and customers performing better while others are performing worse. It's definitely a challenging environment for everyone to work through. Other headwinds included higher SG&A costs of about $9 million, primarily driven by adverse events in the most recent quarter, such as the flood in Malaysia and a limited number of legal settlements. Equity income was lower by about $5 million, underpinned by lower volumes. Finally, with regard to commodities, the $3 million headwind was favorable versus our initial expectations, aided primarily by better than expected commercial recoveries. I'd also point out that in Europe, we were operating under steel contracts established in early 2021 and then expired at the end of December. We expect pricing in Europe to step up beginning in our second quarter with the execution of the new contracts, which carry pricing above last year's level. Based on the current outlook and considering the improvements in commercial recoveries for Q1, we now expect a full year net commodity headwind of $95 million versus our previous guide of $125 million. Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the presentation. High level for the Americas, adverse business performance driven by temporary operating inefficiencies, lower commercial settlements, and increased freight costs combined with significantly lower volumes drove the year-over-year decrease in earnings. The negative factors just mentioned were partially offset by better launch performance, tooling, and improved SG&A. In EMEA, the negative impact of lower volume, temporary operating inefficiencies, and increased freight costs were partially offset by favorable commercial settlements and improved SG&A performance. Meanwhile, in Asia, a slightly different story unfolded as volumes were up year on year. Unfortunately, the positive impact of the higher volumes were generally offset by increased freight costs, launch costs, and higher SG&A costs. The SG&A costs are largely viewed as event-driven, as costs are primarily related to the flooding in Malaysia. One final point for Asia. Specifically in China, there was a long-standing pricing dispute settled in Adiant's favor. Call it just short of $10 million that should not be modeled in our normalized run rate going forward. Let me now shift to our cash liquidity and capital structure on slides 14 and 15. Starting with cash on slide 14, adjusted free cash flow, defined as operating cash flow less capex, was an outflow of $74 million for the quarter. This compares to a positive $160 million in Q1 2021. The year-on-year decline was primarily driven by lower earnings timing of working capital, the timing and level of commercial settlements and lower equity income, primarily driven by our strategic transformation in China. The negative factors were partially offset by reduced interest payments underpinned by our balance sheet transformation, lower restructuring cost, and lower cap spending. Flipping to slide 15. As noted on the right-hand side of the slide, we ended the quarter with about $3 billion in total liquidity, comprised of cash on hand of about $2.1 billion and approximately $880 million of undrawn capacity under Adiant's revolving line of credit. Also noted, the December 31st cash balance includes approximately $625 million of net proceeds collected as final payment associated with Adiant's strategic transaction in China, which closed in September 2021. Addient's debt and net debt position totaled about $3.7 billion and $1.6 billion respectively at December 31st. As Doug mentioned earlier and noted on the slide, subsequent to the quarter, the company launched an $800 million tender offer targeting any and all of Addient's 9% U.S. secured notes which, as you can see, totaled $600 million at quarter end, and up to 177 million euros of the 3.5% euro unsecured notes, which is about $200 million. The tender process is currently underway, and updates will be provided as appropriate. In addition to the cash outflow expected in Q2 resulting from the debt tenders, I'd also point out, and as highlighted on the slide, In January, Adiant completed its agreement with BOTION to purchase BOTION's 25% equity interest in CQAD&T, bringing Adiant's equity stake to 100%. Total payment to BOTION totaled approximately $200 million for their equity interest, historical dividends, and other items. $15 million of the $200 million was paid in Q1 and reflected in the December cash balance. The balance of the payment call it approximately $185 million, will be paid out and reflected in Addion's fiscal Q2. One last point in the balance sheet. Although we're solidly on track to transform the balance sheet, driven by our voluntary debt pay down, the depressed level of EBITDA expected for fiscal 2022 keeps us outside our leverage target of 1.5 to two times. As such, we will continue to prioritize debt pay down approximately $1 billion of voluntary debt pay down expected in fiscal 2022. And as we progress through the year and hopefully gain better visibility on the operating environment and its impact on add-ins free cash flow, management and the Board will continue to assess enhancements to the company's capital allocation plan. Now moving to slide 16, Let me conclude with a few thoughts on what to expect as we progress through fiscal 2022. As expected, the operating environment in early fiscal 2022 remains challenging, as evidenced by Adian's first quarter results. Despite green shoots of stabilization emerging for the industry, such as modestly softer steel prices and fewer abrupt stoppages of customer production schedules, we expect near-term results to continue to be impacted by temporary operating efficiencies, COVID-related costs, increased freight, labor concerns, and elevated commodity prices. That said, we expect the headwinds to lessen as we progress through the year, particularly in the back half of the year. Based on Addion's first quarter results, expected debt pay down and current market conditions we currently forecast Revenue of about $14.8 billion, which is consistent with our earlier forecast. Although third-party production forecasts are modestly better versus the assumptions we used at the start of our fiscal year, FX movements are offsetting the benefit of higher production. For adjusted EBITDA, we continue to expect fiscal 22 will be modestly lower versus our fiscal 21 pro forma results of about $810 million. The challenging operating environment Specifically, the ongoing supply chain disruptions, limited visibility of customer production schedules, and labor concerns continue to prevent us from providing a more specific forecast at this time. Equity income, which is included in our adjusted EBITDA, is now forecast to be approximately $90 million. This is up slightly versus the $80 million to $90 million guide provided last quarter and reflects Q1's strong performance. Moving on, interest expense is still expected at about $150 million and includes the assumption of $1 billion of principal debt prepayments in 2022. No change in our cash tax assumptions of around $80 million. Our book taxes are expected to be slightly higher, call it about $100 million at this time. $20 to $25 million per quarter is a good run rate assumption. As mentioned on our last call, during fiscal 2022, we might see our adjusted effective tax rate higher than normal and fluctuations among quarters due to the valuation allowances and 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 an ongoing basis. So cash taxes on add-ins operations should remain relatively low even as profits increase. And finally, capital expenditures are forecast to be about $300 to $325 million. As you can see at the bottom of the slide, given the backdrop of the current operating environment and consistent with the commentary related to an adjusted EBITDA forecast, Providing a specific full-year estimate for free cash flow with reasonable certainty is not possible at this time. With that, I'll hand it over to Jerome to comment on items that could significantly impact the operations, both positively and negatively, and change the narrative for 2022. Thank you, Jeff.

As you just heard from Doug and Jeff, the operating environment remains challenging despite early signs of stabilization for certain headwinds. the team remains focused on launch execution and operational excellence. In fact, when stripping out customer shutdowns and impact of certain customers not running at rate, we're performing at a very high level. That said, being able to run at rate, reduce excess labor, eliminate many of the inefficiencies, will ultimately be achieved when production stabilizes in a meaningful way. On slide 17, we've identified a number of positive and negative influences that have the potential to improve or further disrupt the operations, and I'll walk through a couple of those. On the positive influences side, given the current execution of the operation, Adiant will see benefits as our customers demonstrate the ability to run at rate consistently. In addition, if the labor market were to demonstrate stabilization, particularly in the U.S., this would present additional tailwind for the operation. On the negative influences, We are carefully watching our customers and how they intend to ramp. If they continue to run as they have in Q1 via a stop and start nature, this will present additional challenges to our operation. This leads to trapped labor and limited paths for recovery. The issue can be worked out in the longer term, but does present a short-term headwind. We're keeping a close eye on these factors, and if necessary, we'll make the appropriate adjustments to our operations to ensure we capitalize on the positive and mitigate the negatives. With that, I'll turn it over to the operator to move to the Q&A portion of the call.

Operator, if we could have our first question, please.

Thank you. Our first question comes from Rod Lash, Wolf Research. Your line is now open.

Good morning, everybody. A couple things, if you can just clarify for us. It sounds like the $30 million settlement that you called out and then that $10 million China price settlement were separate items. So I just wanted to confirm that cumulatively that was $40 million or whether that was one item of $30. And was this in your original guidance? And can you confirm that that's separate from what you're describing as – I guess, a better commodity outlook, the $125 million declining to $95 million. These are all kind of separate and discrete moving parts.

Yeah, they are all separate and discrete, Rod. On the $30 million settlement, that actually related to 2021. So that's really just a comparison point. We called out last year when we talked about our Q1 performance that we had about $30 million of unusually high commercial recoveries. which we said don't count on a continuing basis. As it relates to the $10 million, that was this year, and we called out. We had sort of an unusual settlement. Unusual is something that wouldn't necessarily reoccur, so we wanted to call that out when you think of our $146 million that we had in EBITDA. There's obviously a lot of negative things, those key events we talked about, But separately, there's this $10 million or approximately $10 million in China that we wouldn't want you to include as you model forward earnings out. It was something we were planning to do this year. So it was embedded into our numbers, which I think was your question. And again, that is all separate and distinct to the commodity impacts we talked about.

Great. Thank you. And then just secondly, Doug, you You mentioned the balance in, balance out of contracts as being margin accretive. Can you maybe give us a little bit more color on that and how we should think about the roll on and roll off going forward? And any update on just discussions with your customers? I think you'd originally said that there's like 30% of your commodity exposure is subject to negotiation. So if commodities stay at current levels, what would be a reasonable expectation as we think out and maybe even to next year on what you should be able to recover that you've been absorbing?

Sure. So first, I guess right on your question of new business, I think it's consistent with what we've been communicating all along that we had this three-pronged approach to getting margins back to a level that is consistent with our peer, kind of the adjusted EBITDA north of 8%. So we stabilized from an execution standpoint. We were able to reprice where we could reprice, and then the last piece of it was bringing on new business where we couldn't reprice a contract reach some sort of commercial settlement. And so what we're trying to communicate is we're consistent with that original plan that we had. We're on track to close that margin gap, as we've been discussing for quite some time now. Associated with that is all the instability we have in the market right now that delays some of that, but fundamentally, You know, we feel, you know, our business is on track towards that objective. With regard to commodities, one's a bit difficult to project, but I would say we've made good progress there on reopening discussions where we could to, you know, get resolution on just some extraordinarily high material economic increases. I would just say that, you know, that levels out over, you know, really about a 12-month period where, you know, the way our contracts work, even without extraordinary measures, you know, we get that recovery built back into our business in one form or another.

So just to clarify, Doug, like between, like last year you had $70 million and now you've got another $95 million, that's what you think over a 12-month period you'd be able to recover that? And secondly, do you have a number on just these legacy contracts that you're kind of waiting to replace or expire? What's the magnitude of the drag from that that we can be looking forward to replacing?

Yeah, so relative to material economics, you know, I would say that's a fairly good estimate of the 95 taking maybe another 12 months to fully resolve, but that's really a function of where commodities move and what we negotiate. And we're in the midst of negotiations as we speak on steel contracts on a go-forward basis. With regard to the drag on closing the gap on the contracts, I don't – you know, we We've never really specified a number. We've specified a timeframe, and that timeframe's always been in the 2025-ish timeframe that we resolve all elements of, I'll say, the commercial recovery replacement business execution side of what we intend to do with the business to close that margin gap.

Thank you.

Yep, thank you. Thanks, Ron.

Our next question comes from Emmanuel Rosner. Deutsch, your line is now open.

Hey, good morning. Two questions, if I may. The first one is on your slide five and the very helpful regular update on some of these supply chain disruptions. So I think in your comments, Jeff, you were saying that on the full year basis, you would see some of these impacts from supply chain disruption, COVID-19, freight costs, labor, all that stuff, fairly consistent with the level that was seen in 2021, which was $400 million impact on EBITDA. Am I correct to understand this as saying that means it's not an incremental headwind? It's just basically not a tailwind or headwind, just stable versus last year? Yeah, it's pretty stable. So that's great. And so if that's the case, what sort of environment or conditions will it take for you to start chipping at some of these inefficiencies? Is it a volume recovery? I guess what can we do?

Yeah, good question, Emmanuel. I'd point you to slide 17 in what Jerome walked through a bit, where we talk about the influences that could change the narrative, and it's those items on the far left-hand side of the page. We talked about it. I mentioned it in my comments, but right now we get releases from our customers three months beforehand, and those are usually pretty good, and we have to stack to them. One of the challenges of being a just-in-time supplier is we have to match our customer's run rate, we have you know our customers essentially have missed that by a little over 20 on average and it's not uniform by customer by any means but that's the average that means we have too many people uh and it means we have less volume going through which is bad to begin with but we run with a lot of inefficiencies so that's something that really has to change uh we talked about you know labor and we talked about the stabilization of labor we've seen you know last month especially With Omicron going as rampant through the world as it did, it was causing huge absenteeism at our facilities, which created challenges for production. And it wasn't just our facilities, it was the whole automotive chain. That needs to find stabilization. The inflation impact that we've all read about, experienced in our own lives are definitely hitting our business significantly. We talked about steel and, you know, foam chemical prices, but labor is, you know, a piece here. Global freight cost is a huge issue for us. We've done a lot to try to mitigate that, and we're working to mitigate all these points, but those are all the things that we're fighting here. So while some things have gotten better, other things have, you know, maybe gotten, you know, a little bit worse, you know, such as some of the labor and freight issues, and that's what's creating this to be a very difficult environment to project in. But as those things unwind themselves, and we would expect they will over time, we see a big opportunity to improve the earnings from what we just experienced.

Can you quantify again how much of it is volume related? So if I were to assume that in your fiscal 2023, industry volume will stop normalizing, volatility of production schedule will be more predictable. how much of the $400 million would you be able to get versus the piece that's more inflation-related where there may be sort of like fewer levers to get that back?

Yeah, we would expect the volume piece to be about $300-ish. And the inefficiency to be a tick over $100 at this point, or $125 or something like that.

Okay, that's super helpful. And then my second question is, would you be able to give sort of like a, high level puts and takes in your 2022 guidance. So essentially some sort of walk, because it seems like at the very least you've quantified a better commodities outlook than what you had before, you know, by the tune of $30 million. I think the equity income is playing out maybe sort of like zero to $10 million better, but obviously your outlook is unchanged. And I understand there's a lot of sort of like uncertainty. So Any way to sort of like frame the year-over-year walk?

Yeah, I guess I'd frame it like this. Because of the challenges here, and we have a hard time predicting forward. I think yesterday afternoon I saw a bunch of reports where production was going out from our customers like this weekend, next week, and forward into next month. for a variety of issues with the customers, but mostly supply chain related. All that makes this a really difficult environment. So when we sat together and gave you our guidance for the year, we didn't feel comfortable providing the specific ranges that we normally would. This is normally a pretty predictable industry, but when our customers are having 20 plus percent variances to their production schedule, it makes it very difficult for us especially with the just-in-time nature, because we just can't go and build inventory. If people cancel shifts, we end up just having people sitting around, and we're still paying them, and we're still going through all that. So what we did here, we're three months into the year. We're still seeing all that uncertainty. We hear a lot of potential positive comments that maybe the forward production will start to improve, but we haven't seen it yet. And we're cautious when we put our numbers out. So yes, we had some benefits of around 30ish or so on the commodity side. We've seen a little bit of improvement on the equity income side and starting to feel more stable around that. We're probably a little less certain around labor and some of those pieces. So all those just gave us a balance here that only three months into the year it didn't make sense to try to sharpen the forecast for this year, but obviously we're doing everything we can to continue to improve it, and we'd certainly expect that if the market continues, you know, on some of these positive influences that we articulated on slide 17, that we would be able to show better results. It's just a little too premature right now and a little too uncertain for us to give much more concrete definition than that right now.

I understand. Thank you.

Yep. Thanks, Emmanuel.

Our next question comes from Colin Langan, Wells Fargo. Your line is now open.

Oh, thanks for taking my question. Just to follow up, sorry to ask sort of again, but I think your original guidance for Q1 was it would be flat or slightly higher than Q4, and it seems to be 70 million-ish higher. And then you mentioned the steel and JV slightly better. Should we think about there's something different You know, I think you mentioned labor, but anything that's materially worse or is just more conservative and why not changing the guidance outlook? Is there something maybe that?

I mean, I'll start and I'll let Jeff comment. I think it's more just the uncertainty of what we're seeing out there. And as Jeff mentioned, I mean, even as late as yesterday, we saw some fairly significant announcements from some of our customers, albeit they short-term on disruptions to production schedules. And so, although our performance in Q1 exceeded our original guidance, as Jeff said, we just took a step back in preparation for this call and said, it's just too early in the year to change that guidance. There are some positive things that are developing, but The environment we're operating in is extremely fragile. I would say the biggest factor that concerns us is just the impact of COVID and how disruptive it can be to our customers' ability to operate. And then that's further compounded by the semiconductor still being disruptive. as well, and there's not a lot of clarity from our customers, though there's certainly positive comments being made by them. But we still know they're running on allocation, and disruption in supply chain can occur at any time, and so we just said we'll continue with the guide we have right now. There's positive and negative things that could develop. And as the year plays out, we'll be more specific.

Okay. No, that makes sense. Can you clarify, I'm not sure if I'm misunderstanding the slides, that there's like a 3 million headwind in commodities for Q1. That seems quite low, particularly with the 95 for the full year. So I think you mentioned Europe ticking up, I guess, through the rest of the year. Any other factors, or am I not reading the slide right?

You're reading it right, Colin, and a couple of things that hit us. I guess one is of the original 125, about 75, just under 75% of it related to Europe. We had set kind of the perfect timing of when we put in steel contracts last year in Europe, and they expired on December 31st. So it wasn't until January where we started to experience the higher price in our European region, which is where we have a lot of metal. You'll know we have our mechanism platforms in our facilities in Europe, so that impact is pretty significant. We're doing things to try to mitigate everything down, but it was always sort of a balance or back three-quarter weighted, and we'll see how that all plays out. We're obviously still trying to work that number down, but it's heavily European-influenced.

Okay. All right. Thanks for taking my question.

Yep. Thanks, Colin.

Next up, we have John Murphy, Bank of America. Your line is now open.

Good morning, guys. Just a first question. I mean, obviously, you know, schedule stabilization, you know, is most important here. But once we get beyond that, we think about an actual recovery process. in volume. There's a lot of discussion from the automakers that that will be somewhat negative for mix. So I'm just curious, once we get through this period of volatility, as you think about what's more important to the business from this starting point, is volume or mix more important to you? It seems like it might be volume, but just trying to understand.

Yeah, it's volume. It's volume.

Okay, gotcha. So there's no concern about what might be negative mix that's being indicated by automakers as things recover. That's not a – Be dwarfed by volume.

Yeah.

Be dwarfed by volume. Okay, perfect. That's what I thought. Second, you know, when you think about these three-month schedules that you're being given, you know, how fast are things changing? I mean, you're giving schedules three months out, but are they changing on a daily basis? And, you know, how short are the changes that you're getting? I mean, you're basically being called like, hey, tomorrow we're just not taking seats. Sorry, you made them. I mean, just trying to understand how this volatility is really playing out.

Yeah. Good morning, John. So it's Jerome. Yeah, I mean, we get notified within the day. And so I won't go into customer specifics, but, you know, even last week we were notified on a large platform. They ran out of a supply chain part from China. We had our people there. And at 930, we had to send them home. We brought them in our second shift. and they didn't restart and we had to send our people home again. And that's all labor that we have to pay for and there's no immediate means for recovery, we have to work it out. And the other part of that I would say is, Jeff gave you kind of the three month figure that says from three months to what they actually build, there's about a 20% deviation. If you then say, what does the one month deviation look like? So just from what they tell me on October 1st, I'm gonna build for the month of October, there's anywhere from a 10 to 15% deviation. And so you try and manage that within, as Jeff said, a JIT environment where you've got, you know, I have demand to be able to build that because I can't shut my customer down. But then when they don't pull, I'm stuck with that trapped labor. And that's really been the significant challenge that we saw in Q1. And we see that, you know, even continuing into Q2, just with the uncertainty that's out there, whether it's labor or chips or other supply chain influences.

And just on top of that, that's further exacerbated by the fact that you've got labor shortages right now. So we're having to run with fairly high levels of absenteeism pools just to run at the rate of our customers. So it's got a bit of a compounding effect there. And what's true in in the Americas really is true for every region we operate. Obviously, each region is slightly different, but that volatility is existing in every single region that we have. Got it. So it's pretty challenging.

Yeah, it sounds like it. Then just on the EV boom, We're hearing obviously more about that all over the place. As you think about your content on EVs and the impact to your business, is this a net positive just from a content standpoint? I mean, how do you think about that?

I think near term it's not slightly positive, but what I would say are the EVs that are in production today for the most part are using conventional seating systems. As you look further out, and particularly with the new starts that are looking for a combination of EV with a higher level of autonomous driving, that's where we start to see significant content increase. But that's a little bit further out as they transition into those vehicles and they go full architecture change, 100% committed. platforms to EV. Beyond that, we're just seeing, whether it's ICE or EV, content per vehicle in seating has continued to go up simply because they're multifunction vehicles. And so what that brings, higher content as you get into articulating and increasing the number of passengers for vehicles, so that's all positive trend, but I think that's happening somewhat independent whether what the propulsion system is. But we're pretty excited as you start to get a little bit further out and really the new technologies that will come in place and the amount of consumer feature content that'll be driven into future vehicles, we see that as a pretty positive trend.

And just on the – Jeff, just one follow-up on the 9% 2025s. Isn't there a call option on those? I mean, I know that the tender is great to take these things out. They're expensive debt. But isn't there also another option to take out more if you don't get a good response to that tender? I'm just curious when that was. There's something there.

We're just right ahead of it. So if those people, you know, who don't tender, we have the option to call them in mid-April.

Okay. So, I mean – Is the intention to take out the bulk of this?

I mean, what's... Yeah, we don't want those notes. It's a 9% note we issued in the run-in to COVID.

So it's sooner or later those are gone pretty quickly.

Yeah.

Correct. Yeah. Awesome. Thanks so much, guys. All right. Thank you.

Operator, if we could have our last call from Dan Levy.

Yes, Dan Levy, our last call. Your line is now open.

Great. Thank you. I actually wanted to ask first about the top line. You know, you put up pretty good growth over market to square. I think it's like seven points or so. I mean, you talked about you got the RAM win there. You know, as you continue to downsize some of the unprofitable as a tier two business, You know, one would think that your revenue is going to underperform the market. We're just not seeing this. So maybe you can talk about the underlying revenue outperformance, and maybe you could just give us an update on where your market share is trending and seeding today.

Yeah, well, obviously, we did not prepare specifics around that for today's earnings call. But that being said... We see the balance in, balance out of our business by region essentially consistent with our market share positions that we've operated with historically. The one exception I would point out is we did lose a contract in Europe well over a year ago with one very specific customer that we've spoke to in the past, which will drop our European market share, but that, you know, that's something that's, you know, more of an anomaly from a revenue perspective, and we've backfilled a lot of that business. So, when I think about market share, you know, I would say you should expect no major shifts in a negative And then what really is going to be interesting to see what plays out is how fast the new EVs come online and what opportunities that provides us for market share or content gain.

Great. Thanks. And then just a follow-up on capital allocation. Once you're past the debt paydown, once there's maybe a little more visibility on the cash flows, Is the preference for a dividend or share buyback or would you consider both?

Yeah, it's a great question. I mean, as we look at our earnings prospects as we go forward, I think we're, you know, and we push to close the gap with Lear. We think there's, you know, our share price is cheap. So if our share price remains cheap when we get to that point, That certainly would be an attractive thing for us to allocate capital towards. And I guess as it relates to a dividend, you know, I think with as much volatility out there, we've probably been a little cautious on that. But as we, you know, get to the free cash flow levels that we would expect to find and we have a little bit more stability on the operating environment, it's something we'll certainly be discussing and I think would probably be in, you know, some of the plans that we'd put out for you at that time.

Great. Thank you.

Thank you, Dan.

Thank you.

Operator, it looks like we're at the bottom of the hour, so this will conclude the call. For those of you that are on the line that didn't have a chance to answer your questions, please feel free to reach out. Eric and I will be here, and we'll be more than happy to address your questions at that time. Thank you.

Thanks, everyone.

Thank you. That concludes today's conference. You may now disconnect.