Adient plc

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. Adiant completed its tender offer during the quarter for over $700 million of voluntary principal on debt repayment. And lastly, as highlighted at the bottom of the slide, the company continues to deliver on its commitment to provide product and process excellence to our customers as evidenced by numerous customer and industry awards, including GM Supplier of the Year for 2021, Hyundai Kia Quality Excellence Award, and three awards from Toyota, including Superior Value Analysis Achievement Award, Excellent Quality Award for Addient Metals, and a Supplier Diversity Award The Diversity Award is especially pleasing as Adiant's DE&I efforts continue to mature and drive our business forward. I mention these awards not as bragging points, but as proof points that despite the challenging operating environment, the company is focused and continues to operate at a very high level. Slide five, let me expand on what we're seeing with regards to the current operating environment. In the middle of the slide, we've highlighted several of the headwinds that the industry and Adian continue to face. The list should look very familiar, as many of these external 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 disruptions, which continue to impact production at our customers. Unfortunately, the supply chain disruptions expand beyond semiconductors and bled over to other components. Similar to our commentary on Q1, these unplanned production stoppages are leading to premiums and operating inefficiencies across the network. Q2 fiscal 2022, we estimated that supply chain disruptions resulting lost production, operating inefficiencies, premium freight, et cetera, had a net impact on the top line of about 790 million and adjusted EBITDA by approximately 140 million. For the full year, we expect production stoppages resulting from supply chain disruptions and temporary operating inefficiencies to continue. Unfortunately, with no signs of stabilization on the horizon, expectations for significantly improved results in the second half of our fiscal year have greatly reduced. With regard to material economics, Addion is having success at limiting the negative impact this year through successful commercial negotiations, which I'll discuss further in just a minute, and timing of our steel buy contracts, which were put in place earlier this year. For the quarter, Antient's net commodity headwinds totaled about $20 million. This result was better than expected, aided by additional recoveries over and above our contractual agreements. Based on real recent steel price movements, contractual agreements in place both for our steel buy as well as for our customers' recoveries based on escalators, pass-throughs in place, we currently forecast a commodity headwind of less than $15 million versus previously forecasted $95 million. Although we're seeing good results here, other inflationary pressures such as rising energy costs and ocean freight continue to escalate. Turning to slide six, We've illustrated a few examples how navigating through these certain of these commodity inflationary pressures and mitigating the overall risk to adding it. For example, the company's efforts to reduce risk with price movements in steel. The team is very focused on increasing the percentage of contracts with our customers that contain escalators, pass-through, and their associated recoveries. In addition, we're having success at shortening the time lag in recouping the costs. For example, if you look back a year ago, the percentage of contracts that had formal agreements across Addium was about 70 percent, with an approximate lag of two quarters. Today, we're north of 70 percent. In fact, in the Americas, we're probably closer to 85 percent. Not only is the overall percentage increasing, but the recoveries associated with the agreements are increasing. With regard to foam chemicals, we continue to tweak the contract as appropriate. That said, the contracts in place generally are more efficient versus the risk mitigation that is in effect for adding steel exposure. In addition to commodities, there's been widely discussed in the past such as steel and foam chemicals. The team is also implementing actions to address inflationary pressure impacting the input costs such as ocean freight, and utilities. To sum it up, we've successfully executed actions to reduce steel and chemical headwinds. We're now working through actions to reduce and mitigate other inflationary pressures such as ocean freight and utilities as shown on the slide. In fact, on the ocean freight front, we've been able to whittle down the impact by about $10 million this year, and we're not finished. It's essential we continue to progress through these efforts to mitigate the impact inflation is having on the business. As you know, Addion's business model is based on being a value-added supplier. Containing inflationary risk is not currently priced into the model. We're making progress on this front and will continue to work hard to further lessen Addion's exposure. Turning to slide seven, let me provide a few comments related to the narrative for the fiscal year 2022. and how it continues to evolve. As a reminder, as Adiant entered fiscal 2022, we expected a number of positive and negative influence to drive our overall results. On a plus side, volumes were expected to increase as the year progressed, driven by an improved supply chain, less restrictions from COVID, et cetera. Adiant will continue to progress its back-to-basics strategy, driving further improvements to our operation This, along with our focused customer and profitability actions, would continue to narrow the margin gap to our peers. And from a balance sheet perspective, the company would continue to prioritize debt pay down. Largely offsetting these positive influences were elevated input costs, primarily commodities, freight, and energy, risk around labor availability and cost, lower equity income, and a modest increase to engineering and launch costs. When mixed together, we expected results somewhat lower versus our pro forma 2021 results with sequential improvement as Edient progressed through the year. What's the same and what's different today? There's been no change to items within Edient's control. We remain focused on executing the company strategy operationally, financially, and strategically. When stripping out customer shutdowns and the impact of certain customers not running at rate, we're performing at a very high level. What has changed is the intensity of the external headwinds, primarily driven by the Ukraine conflict and widespread COVID lockdowns in China. Again, unlike last quarter, visibility is unclear at the present time as to when these pressures might subside or lessen. it is clear the expectations of significant improvements taking place in the second half of our fiscal year have diminished. Although certain temporary headwinds resulting from supply chain disruptions are expected to eventually reverse, certain of the inflationary pressures are likely to persist, requiring further commercial and or operational improvements to overcome the impact of margins in fiscal year 23 and beyond. Jeff will provide commentary on what we're seeing today, including which costs are transient versus sticky, with his prepared remarks. As you would expect, we continue to make appropriate adjustments to our operations to ensure we capitalize on the positives and mitigate the negatives. Shifting gears and turning to slides eight and nine, let's take a look at our business wins and launch performance. As you can see, slide eight is our typical new business slide, highlighting a few of Adyen's recent wins. The programs highlighted represent a good mix of incumbent wins, all new platforms, and multiple conquest wins. Also noted is a degree of vertical integration from a number of these wins. One such example we've illustrated on the slide is the replacement business for Toyota's Camry in the Americas, which contains metals, foam, trim, and jet. As our new book of business continues to launch, we expect the balance-in, balance-out platforms to further enable margin expansion. Flipping to slide nine, as we typically do, we've highlighted several critical launches that aren't complete in process or scheduled to begin in the near term. I'm happy to report that the launches currently underway are progressing smoothly. We're particularly excited with the F-150 Lightning launch in the Americas. program consistent with other launches is meeting quality delivery and financial expectations. The launches and platforms shown not only impact EDIENT's JIT facilities, but also span across a network of our foam, trim, and metal facilities. The team continues to focus on process discipline around launch readiness and 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 disruptions to production schedules continue to present another layer of challenges the team is successfully managing through. Again, a testament to the discipline we've instilled in our process. We have no intention of letting up. Flipping to slide 10, in addition to winning business and executing successful launches, which are vital to Adiant's future success, one other area I'd like to highlight, which is equally important to the company's success, are the company's efforts related to ESG. These efforts were on full display a few weeks back as several Adiant's employees celebrated Earth Day across various regions. A few of the projects that were celebrated are highlighted on the slide. It's exciting to see the level of engagement and excitement of our employees as we share a common goal of bettering our processes and operating our business in an environmentally responsible manner. Before turning the call over to Jeff and turning to slide 11, let me conclude with a few summary comments. As mentioned in my prepared remarks, and as you know, the operating environment remains very challenging for the industry and Adiant. That said, we remain continue to execute actions within our control to position the company for success, including advancing our back-to-basics strategy, implementing actions to process to reduce inflationary costs, and continuing efforts to transform the balance sheet. As certain of the external pressures less than overtime, Adiant expects to be well-positioned to take advantage of an industry recovery. It's not all doom and gloom. Several industry metrics remain supportive. For example, the industry remains supply-constrained. Demand continues to be robust. Vehicle production levels are near all-time lows, a good setup for production in coming years. There are a lot of new innovative products scheduled to be launched in the coming years. These factors, combined with the benefits expected from continued Adiant-specific actions executed from our operations and customer profitability perspective, give us reason to be excited about the future. We see significant opportunity for value creation for our shareholders in the coming years. With that, I'll turn the call over to Jeff to take us through Adiant's second 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 turn to slide 13 and jump right into Adyen's Q2 financial results. 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 in underlying performance. For the quarter, the biggest drivers of the difference between our reported and adjusted results relate to purchase accounting amortization, premiums and deferred financing costs associated with debt repayment, restructuring, and an impairment associated with Adyen's sole facility in Russia. The facility, located in Togliatti, Russia, is very small. In fact, it operates as a Tier 2 trim supplier to other JIT suppliers in Russia. The revenues and EBITDA associated with this operation are de minimis to Addion's overall results. Details of all the adjustments for the quarter and full year are in the appendix of the presentation. I'd also point out, similar to last quarter, 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. We believe these pro forma adjustments provide helpful comparisons between the current year and the prior year results by adjusting the prior year to be on a consistent basis with the current one. High level for the quarter, sales were $3.5 billion, down about 8% compared to our second quarter results last year, or down about 11% 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 driven by supply chain disruptions. Adjusted EBITDA for the quarter was $159 million, down 144 million year-on-year as reported, or down $131 million compared to last year's pro forma results. The decrease is attributed to the significant reduction in volume and mix, as well as inflationary pressures on freight, utilities, and commodity costs. I'll expand on these drivers in just a minute. Finally, at the bottom line, Adiant reported an adjusted net loss of $12 million, or a loss of 13 cents per share. Now let's break down our second quarter results in more detail. I'll cover the next few slides rather quickly, as details for the results are included on the slides, and to ensure we have adequate amount of time set aside for Q&A. Starting with revenue on slide 14, we reported consolidated sales of $3.5 billion. Revenues included the sales at Adyen's CQ and LF Ventures, 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 $444 million compared with Q2 fiscal 21 pro forma results. The primary driver of the year-over-year decrease was lower volume, call it approximately $396 million, related to volume and lower commercial recoveries, partially offset by roughly $78 million in commodity recoveries. The negative impact of FX movements between the two periods impacted the quarter by about $126 million. Focusing on the table on the right-hand side of the slide, you can see our consolidated sales were generally in line with production in Americas and EMEA. In China, Adyen's customers were impacted by the widespread COVID lockdowns and supply chain issues more severely than the overall market, leading to the temporary underperformance versus production in the region. Just the opposite occurred in Asia, outside of China, which outperformed regional production, driven by the launch of certain conquest business and customer mix. Important to note, and it's highlighted on the slide, The quarterly year-over-year performance was adjusted to account for the portfolio actions implemented in fiscal 21 and FX impacts. With regard to Adiant's unconsolidated seeding revenue, year-over-year results were down about 4% when adjusting for FX and the portfolio actions executed in fiscal 21. Similar to our consolidated sales in China, Adiant's unconsolidated sales were impacted by the widespread COVID-related lockdowns, which impacted our mix in volumes more than the market average. Moving to slide 15, we've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate, finance, and legal. Big picture, adjusted EBITDA was $159 million in the current quarter versus $303 million reported a year ago, or 290 million pro forma adjusted for the portfolio actions executed in fiscal 21. 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 drivers of the decrease are detailed on the page and are consistent to 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 about $57 million. Adverse business performance, primarily driven by increased freight, call it $28 million, lower net material margin of $22 million, driven by the timing of commercial settlements, and negative labor and overhead performance of roughly $18 million, which was driven by off-cycle wage increases, retention bonuses, and increased utilities, accounted for roughly $68 million in negative business performance. The negative performance, which for the most part is environmentally driven, was partially offset by $15 million of improved ops waste launch and tooling performance, a proof point that the business is running well when stripping out the external factors. Other headwind included a net increase in commodities, call it just under $20 million, lower equity income of approximately $9 million, again driven by the widespread COVID lockdowns in China and the negative impact of FX. Call it $11 million. SG&A performance benefited the quarter by approximately $18 million. Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the presentation. High level for the Americas, increased commodity prices, lower volume, increased freight cost, off-cycle wage increases and retention bonuses weighed on the year-over-year comparison. These negative influences were partially offset by improved launch, ops waste, tooling, performance, and SG&A. And just one more point in the Americas. The year-over-year comparison was impacted by certain non-repeating factors, namely approximately $17 million of cost related to the Texas freeze storm that impacted last year's second quarter, and thankfully did not repeat this year. In addition, our current Q2 of fiscal 22 included approximately $10 million of insurance recoveries from that storm that we included as an offset to the $140 million impact that Doug summarized on page five. In EMEA, the year-over-year pressure is more pronounced than in the Americas for several reasons. As noted above, Americas benefited from a $27 million year-over-year benefit from the 2021 Texas storm. Second, the volume issues in Europe were more pronounced than in Americas, as the volume and mix were over four times greater in Europe than in Americas, and this had a compounding effect of making the operating environment less conducive and efficient. The conflict in Ukraine definitely contributed to this situation. Third, the approximate $35 million increase we expect to incur this year in utilities is nearly all related to Europe, primarily driven by the shock to the market for Russian gas supply. Finally, FX was a hit of approximately $11 million year over year due to the decline in the Euro versus the dollar. In Asia, the widespread COVID lockdowns adversely impacted volumes in equity income. In addition, increased freight labor costs, and commodities added to the downward pressure. These headwinds were partially offset by improved net material margin and improved SG&A efficiencies. Let me now shift to our cash, liquidity, and capital structure on slides 16 and 17. Starting with cash on slide 16, I'll focus on the year-to-date 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 an outflow of $102 million. This compares to an outflow of about $14 million for the same period last year. Key drivers impacting the comparison include the lower level of consolidated earnings and typical month-to-month working capital movements, which resulted in close to a $330 million headwind versus last year. Partially offsetting these negative influences were over $200 million of positive variances, including lower restructuring costs, as we trend to what we see as a more normalized rate than what we've spent in recent years. A lower level of interest paid, driven by our balance sheet transformation. And finally, the timing of commercial settlements and VAT deferrals and payments. Flipping to slide 17. As noted on the right-hand side of the slide, we ended the quarter with about $1.9 billion of total liquidity comprised of cash on hand of about $1.1 billion and just under $820 million of undrawn capacity under Adyen's revolving line of credit. Adyen's debt and net debt position totaled about $2.9 billion and $1.8 billion respectively at March 31st. As Doug mentioned earlier and noted on the slide, During the quarter, the company continued to advance its capital structure transformation by completing its two tender offers. Just over $500 million of principal of Adiant's 9% senior first lien notes due 2025 and 200 million of Adiant's 3.5% unsecured euro notes due 2024 were taken out in the quarter. I'll also point out that in the not so distant future, we expect to repay the European Investment Bank loan, which matures at the end of May. Although we're solidly on track and committed to transforming the balance sheet, driven by our voluntary debt pay down, the company is also very much focused on protecting our cash and liquidity. Our commitment to drive our net leverage down to between 1.5 and 2.0 times has not changed, but that said, we will be prudent in the timing and execution of additional voluntary pay down given the challenging operating environment. Think of it as a balanced approach. Moving to slides 18 and 19, let me conclude with a few thoughts on what to expect as we progress through fiscal 22 and why we continue to be optimistic as we look to the future. First, on slide 18, based on audience results through March and the current market conditions, we currently forecast Revenue of about 14.2 billion versus our previous guidance of 14.8 billion. The decrease is primarily attributed to the change in production that is now forecasted versus prior expectations stemming from the conflict in Ukraine, continued supply disruptions, and the widespread COVID lockdowns in China. In Europe, for example, production is now forecasted to be down about 10% compared to our expectations in January. In North America, Forecast versus expectations back in January have been revised lower by about between 2 and 3 percent. For adjusted EBITDA, given our revised expectations for revenue, we now expect fiscal 22 will be significantly lower, call it greater than $100 million lower, versus our fiscal 21 pro forma results of about $810 million. Obviously, there are a lot of moving pieces, both positive and negative, For example, on the positive side, we're seeing continued improvement in Adiant's core operations, including launch execution, ops waste, and a lower-than-expected material economics headwind, which Doug mentioned is now expected to land $15 million or less for the year. This outcome was hard-fought and is the result of a variety of efforts, including commercial settlements above contractual obligations and renegotiated contracts that include reduced time lags for true ops, and reduced pain share for adiant on commodity price changes. Unfortunately, in addition to the lower volumes and associated inefficiencies, and despite the progress we've made on material economics front, other inflationary pressures have intensified, such as freight, utility, and off-cycle labor economics. The challenging operating environment, specifically the ongoing supply chain disruptions, the expanded COVID lockdowns in China, limited Visibility on customer production schedules and increased inflationary pressures prevent us from providing a more specific forecast for adjusted EBITDA at this time. Equity income, which is included in our adjusted EBITDA, is now forecast to be $75 million. This is down versus the $90 million guide provided last quarter and reflects the challenging operating environment in China. Moving on. Interest expense is expected at about $160 million, up slightly from our previous guide of $150 million. No change in our cash tax assumption of around $80 million. Our book taxes are expected to be slightly higher, call it about $100 million at this time. Approximately $25 million per quarter is a good run rate assumption. As mentioned on our last call, 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 an ongoing, on a forward-going basis. So cash taxes on add-ins operations should remain relatively low when our profits increase. And finally, capital expenditures are forecast to be about $300 million to $325 million. As you know, the majority of our cap spend is related to program launches at our customers. We'll continue to align our spending with their launch plans and adjust as appropriate as we progress through the balance of the year. 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 adjusted EBITDA forecast, Providing a specific full year estimate for free cash flow with reasonable certainty is not possible at this time. And with that, let me turn the presentation back over to Doug to cover slide 19.

Great. Thanks, Jeff. Throughout our call this morning, Jeff and I have highlighted numerous factors that continue to impact the near-term results for the industry and Adiant, many of which are external in nature, as you know, in a bleak, or cloudy outlook for 2022. When digging deeper and isolating the influences into different buckets, we remain optimistic brighter days lie ahead. First and foremost, Adiant's foundation is strong and continues to strengthen. The team continues to progress our back-to-basics strategy, leading to improvements to our core operations. This is evident when looking at metrics such as ops waste, launch performance, et cetera. Let me share a few facts and figures. In 2019, Adiant's operations were experiencing many inefficiencies. In total, ops waste was an approximate $220 million headwind. Significant progress was made in 2020, 2021, despite the challenging operating environment. Further improvement is expected this year. In fact, if we annualize fiscal year 2022 year-to-date results, Adiant's ops waste versus fiscal year 19 levels have approximately halved. With regard to launch performance, similar story. Adiant's back-to-basics mindset and focus on process-enabled sequential improvements in the company's launch metrics As we progress through 2020, 2021, and again this year, this is especially significant given the challenging operating environment, which experienced COVID interruptions, part shortages, customer downtimes, et cetera. Not to mention the increased complex program launches, such as the F-150, Infinity QX60, to name a few that occurred during the period. Adiant's solid launch execution is a key enabler for us winning new conquests in incumbent business, which, speaking of incumbent business, Adiant's win rate stands at 98% so far this year. We're clearly winning the business we set out to win. We remain focused on cost. The company's cost structure continues to be streamlined. We're a much more efficient company today than we were two, three years ago. And finally, our balance sheet transformation is solidly on track. With regard to headwinds, we view them in two different buckets, both of which we're working hard to mitigate and offset. First, let's call them transitory, include items such as supply chain disruptions, which you know have resulted in significant volume reductions, operating inefficiencies. Unfavorable mix is China volumes come under pressure, which as you know, is a higher margin business for Addiant. And lastly, the elevated commodity costs we're facing. Altogether, these headwinds are forecasted to place approximately $470 million of downward pressure on Addiant's results in fiscal 2022. Through self-help initiatives and improvements in overall external conditions, we expect a large majority of these pressures to reverse over time. For example, as supply chains stabilize, expect customers running at rate, production volumes turning higher, and adding operating inefficiencies decreasing. Other costs have intensified as of late and are being viewed as a bit more sticky. These headwinds, which include but are not limited to increased freight, utility, and labor inflation, are forecasted to add an additional $125 million of headwind on the business this year. The team is executing self-help initiatives and working with our customers through ongoing commercial negotiations to lessen the impact on a go-forward basis. When looking into the future, we believe the actions that have and are being implemented will position Adyen to capitalize on industry recovery, ultimately creating value for our shareholders. Regarding margins, we remain committed to eliminating the margin gap versus our peer group. Solving the transitory and sticky costs on this page will not be easy. We're guaranteed. We will get us over 90% of the way there, though. That said, this is not all that we're doing as we continue to transform our portfolio by launching higher margin business and continuing to improve our innovation and execution capabilities. While COVID and supply chain crisis, Ukraine, et cetera, have delayed us In reaching our goal, we remain confident, committed to the mission. With that, let's move to the Q&A portion of the call. Operator, can we have our first question, please?