Adient plc

Welcome to Addian's third quarter earnings call. At this time, all participants are in a listen-only mode until the question and answer session of today's conference. If you would like to ask a question, please dial star 1. 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 call over to your host, Mark Oswald. Thank you.

Thank you, Danielle. Good morning and thank you for joining us as we review Adiant's results for the third quarter of fiscal year 2022. The press releases 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 Stifile, our Executive Vice President and Chief Financial Officer, and 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 Q3 financial results and 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 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 GAAP basis, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix or 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 third quarter results for fiscal 2022. Turning to slide four, let me begin with a few comments related to the quarter. Continuing the trend experienced throughout 2022, numerous external factors including supply chain disruptions and resulting operating inefficiencies, COVID lockdowns, increased freight, labor availability, to name a few, continue to influence the industry in Adiant's near-term results. Despite encouraging signs some of the negative factors began to moderate towards the end of the quarter, such as widespread COVID lockdowns in China, the headwinds had a significant impact on Adiant's third quarter results. Specifically, Adiant's EBITDA Results for Q3 contained approximately $175 million of loss volume and temporary operating inefficiencies. This included approximately $10 million of temporary savings. At the end, 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, was up about $60 million compared to last year's third quarter adjusted for portfolio actions executed in 2021 adjusted EBITDA for the quarter totaled 143 million dollars as pointed out on the slide including 175 million in lost volume temporary operating inefficiencies and premiums again primarily driven by unplanned production stoppages at our customers audience June 30th cash balance totaled just under 900 million dollars total liquidity was about $1.7 billion. I'll point out that this cash and liquidity position, which includes the impact of fully repaying our European Investment Bank Loan during the quarter, is a proof point the company is successfully balancing its commitment to strengthen our balance sheet while maintaining ample liquidity to navigate through the challenging operating environment. Despite the continued difficult operating environment, adding continuous to execute actions within its control to position the company for sustained success. These actions include but not limited to the team's execution of its day-to-day process with an intense focus on launch execution, cost operational improvement, and customer profitability management. In addition, we continue to execute actions to mitigate prolonged supply chain disruption and rising input costs, which include structural cost reduction, collaborating with our customers to reduce material costs, and opportunistically using alternative ports to reduce ocean freight costs. And lastly, as highlighted at the bottom of the slide, the company continues to successfully deliver product and process excellence to our customer, as evidenced by numerous customer and industry awards, including Chang An Ford's 2021 Excellence Supplier Award, the WBENC's Top Corporation Resiliency Award, WeConnect 2022 Top Global Supplier Diversity and Inclusion Award for adding its work in Mexico, sourcing to women business enterprise, and multiple GM Supplier Quality Excellence Awards. I mention these awards as proof points that despite the challenging operating environment, the team is focused and continues to operate at very high levels. 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 in Addion continues to face. This list should look familiar, as many of these external headwinds surfaced at the end of our second quarter last year, and they have continued into fiscal 2022. The most significant influences include The widespread COVID lockdowns in China, which had a significant impact during the quarter, especially in April and May. Ongoing supply chain disruptions that continue to impact at our customers. Similar to what we experienced last quarter, these disruptions were the result of semiconductor and other component availability. Unplanned production stoppages continue to lead to premiums and operating inefficiencies across our network. For Q3 fiscal 2022, we estimate supply chain disruptions and lockdowns in China resulting in lost production, operating inefficiencies, and other inflationary pressures such as freight and utilities had a net impact on the top line of about 600 million and adjusted EBITDA of approximately 175 million. For fiscal 2022, year-to-date through June, we estimate significantly lower production temporary operating inefficiencies and inflationary pressures have impacted our top line and adjusted EBITDA by $2.1 billion and $530 million, respectively. For the remainder of the fiscal year, we continue to expect unplanned production stoppages and temporary operating inefficiencies to continue. but at a much lower level as our customers continue to make progress improving their operating patterns. With regard to progress foreseen, the team routinely looks at a metric we call start of the month, end of the month. It's simply a stat that illustrates how many units the customer planned to run at the beginning of the month versus what was actually produced at the end of the month. Six months ago, in general, customers were producing about 75% of what they planned, Today we're seeing that percentage near 80%. Again, not ideal, but moving in the right direction. We expect this will continue to improve in the coming quarters, giving us confidence that the temporary inefficiencies should be less of a headwind. With regard to certain commodities, such as steel and chemicals, Etienne is having success at limiting the negative impact this year through successful commercial negotiations. Based on recent steel prices movements and contractual agreements in place, both for our steel buy as well as our customers for recoveries based on escalators, pass-throughs in place, we continue to forecast a commodity headwind of less than $10 million for the full year. Although we're seeing good results here, other inflationary pressures such as rising energy costs and ocean freight continue to escalate, impacting not only the remainder of 2022, but fiscal 2023 as well. Speaking of next year, the team is in the process of developing our 2023 plan. As part of our plan development, we're tracking a number of factors, both positive and negative, that we expect to influence EDIAN's 2023 results. Jeff will provide a high-level early look at certain of these with his prepared remarks. Moving on to slide six and seven, let's take a look at new business wins and launch performance. As you can see, slide six is our typical new business slide, highlighting a few of Adiant's recent wins. The programs highlighted represent a good mix of wins across powertrains, ICE and EVs, components, foam, trim, metals, and complete seat, and customers' new entrance and legacy. We continue to expect the balance in and balance out of these programs will continue to drive margin improvement. One of the programs we highlighted is the recent win with Toyota in China. The program is worth noting for several reasons. First, the win is a great example of our ability to capture a large degree of vertical integration with jet foam and metals. Second, this is the first time we won based on a Toyota structure. And finally, this demonstrates our ability to secure new metals business where it makes sense, keeping intact our discipline, quoting philosophy underpinned by margin and returns. Flipping aside, seven, 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 launches currently underway are progressing smoothly. With regard to the Toyota Sequoia launch illustrated at the top of the slide, there are several highlights worth mentioning. First, the program is complex and contains a high level of vertical integration, including foam trim and metals. Cost and timing benefited from a large degree of capital reuse, specifically the front row seats are 100% carryover from a different Toyota platform. In addition, The third row Sequoia seats are being built on the second row Tunda JIT lines at our Avanzaar Joint Venture Facility. Again, a good proof point of how Adiant is efficiently deploying capital. The launches and platforms shown not only impact Adiant's JIT facilities, but also span across our network of foam trim metal facilities. The team continues to focus on process discipline around launch readiness, and it has delivered a high level of performance. In addition to the number of launches and complexities, the distribution 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 around our processes. One last comment on launches. I'm sure most of you saw the recently unveiled Blazer EV from Chevrolet. We're excited to be a supplier to that vehicle and can't wait for it to launch in summer of 2023. Flipping to slide eight, in addition to winning businesses 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 is our efforts related to ESG. At Adiant, We approach our operations with a sustainable mindset that drives continuous progress toward our ESG goals. A few examples of how this translates into our day-to-day approach includes, but are not limited to, our sustainability workshops, which is a collaboration with all of our global customers to provide seeding solutions that meet stringent targets for cost, sustainability, and customer satisfaction goals. To date, about two dozen workshops have been completed, generating numerous ideas for implementation. The company also utilizes its carbon footprint tool that shows the link between product engineering manufacturing footprint and CO2 intensity to give granular transparency into seeding systems' CO2 improvement potential. And lastly, the team is very engaged and committed to minimizing add-ins impact on deforestation. Although we do not have a leather business like some of our competitors, seeding surface material, including leather, are directed by our customers. Adyen is very involved in identifying sustainable leather alternatives to educate our customers on ways to decarbonize the end product. Jeff, Jerome, and Mark were at an investor conference in New York during the quarter reviewing these initiatives. We've included a link to the presentation in our earnings materials. The bottom line, through collaboration with our customers and suppliers, Adyen is creating a sustainable future together. Before turning the call over to Jeff and turning to slide 10, let me conclude with a few comments related to frequent questions we've been asked, which is, what is likely to play out with regard to vehicle production and the impact for adding and heading into 2023? Although there are several uncertainties and factors that are expected to influence 2023, which Jeff will cover in a few minutes, With regard to production and its impact on Adiant, one of two scenarios is likely to play out. First, global vehicle production exceeds fiscal 2022, although still below pre-COVID volumes. Under this scenario, in addition to higher volumes, we'd expect our customers to continue to make improvements in their operating patterns. For Adiant, the increased volumes and more stable production environment combined with continued self-help initiatives would likely translate into improved earnings, margin, and free cash flow. Under scenario two, call it relatively flat production compared to fiscal 2022. Possibly driven by a shift from supply-constrained to demand-constrained environment, we'd expect our customers to increase their focus on operating inefficiencies, really out of necessity. As you know, OEM's earnings in 2022 have been driven by pricing and not by efficiencies with their operations. For Adiant, the more stable production environment resulting in lower temporary operating efficiencies combined with continued self-help initiatives would again translate into increased earnings, margin, and free cash flow, though on a moderated level. In both scenarios, actions taken to lower our free cash break-even, as called out on the right hand of the slide, combined with expected improved operating environment in fiscal 2023, should translate into improved earnings and cash flow. Obviously, early days as we develop our plan and sort through numerous inputs and unknowns. However, hopefully this provides you a line of sight which illustrates adding to operations and performing quite well outside the temporary operating inefficiencies and the team is committed to derive further progress. With that, I'll turn the call over to Jeff to take us through Addiant's third quarter 22 financial performance and provide additional detail on what the expense for the balance of the year.