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spk01: Welcome to the Adiant fourth quarter earnings call. All lines have been placed in listen-only mode. If you would like to ask a question over the phone, 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 conference over to your host, Mark Oswald. Thank you.
spk02: Thank you, Danielle. Good morning and thank you for joining us as we review Adiant's results for the fourth quarter of fiscal year 2022. The press release and presentation slides for our call today have been posted to the Investors section of our website at adiant.com. This morning, I'm joined by Doug DelGrosso, Adiant's President and Chief Executive Officer, and Jeff Stafile, our Executive Vice President and Chief Financial Officer, and Jerome Dorlak, Executive Vice President of the Americas and recently announced incoming CFO. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q4 and full year financial results, and provide our outlook for fiscal 2023. 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 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 for our full earnings release. This concludes my comments. I'll now turn the call over to Doug.
spk03: Great. Thanks, Mark. Good morning. Thank you to our investors, prospective investors, and analysts joining the call this morning as we review our fourth quarter and full year 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, a number of external factors, including supply chain disruptions and the resulting operating inefficiencies, increased energy costs and labor availability, to name a few, continue to influence the industry in Adiant's near-term results. On a positive note, at where we exited fiscal 2022 versus a few quarters ago, we're seeing the operating environment trending in the right direction. Commodity costs are softening, ocean freight costs are trending lower, and our customers are continuing to make modest improvements with regard to their operating patterns. While these metrics signal we're moving in the right direction, our challenges, such as uncertainty with regard to consumer demand, energy costs, and availability, and labor inflation, which is running extremely hot in a number of European countries, such as Hungary, Poland, the Czech Republic, remind us it's too early to declare victory. Clearly, a different set of challenges will need to be managed in 2023. More on that in just a minute. For the quarter, Adiant's EBITDA results contained approximately $65 million of loss volume and temporary operating inefficiencies, including less than $10 million of temporary savings. This is sequentially better versus Q3 and in line with our expectations heading into the quarter. 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 $3.7 billion, was up about $700 million compared to last year's fourth quarter adjusted for portfolio actions executed in 2021. Adjusted EBITDA for the quarter totaled $227 million, including approximately $65 million of loss volume, temporary operating efficiencies, and premiums. Again, primarily driven by unplanned production stoppages at our customers. At September 30th, cash balance totaled $947 million. Total liquidity was about $1.8 billion. The cash and liquidity position, which includes the impact of repaying the remaining stub of our 9% senior first lien notes due in 2025, is a good proof point that the company is successfully balancing its commitment to strengthen our balance sheet while maintaining ample liquidity to navigate through the challenging operating environment. For full disclosure, and as called out on the slide, we estimate that external headwinds, such as loss volume, temporary operating inefficiencies, and rising input costs negatively impacted Eddie's fiscal year 2022 revenue and adjusted EBITDA by $2.2 billion and approximately $600 million, respectively. Despite these headwinds, Adiant 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 execution of its day-to-day process with an intense focus on launch execution costs and operational improvement and the customer profitability management. In addition, we continue to execute actions to mitigate prolonged supply chain disruption, rising input costs, which include structural cost reductions, collaborating with our customers to reduce material costs, and newly adopted measures to lessen the impact of rising energy prices and European labor inflation. We expect these additional self-help initiatives combined with an improving operating environment will support earnings margin and free cash flow growth in fiscal 2023 compared to fiscal 2022. Jeff will provide greater detail on Addion's 2023 planning assumptions and guidance in just a few minutes. Lastly, but certainly not least, and as highlighted at the bottom of the slide, Addion's strong operational performance significantly transformed balance sheet and confidence in achieving our mid- and long-term plan led the Board of Directors to approve a $600 million share repurchase program. Obviously, great news and a proof point, our strategy is creating value for add-in stakeholders. Turning to slide five, just a few comments on our strategy and how it continues to drive business forward. Add-in strategy to create value for our stakeholders, which includes our investors, customers, and employees, is fairly simple and can be broken down into four key components. First, we are a pure play in automotive seating, no distractions. Our leadership position provides global reach and scale. We provide solutions to legacy customers as well as new entrants. Our vertical integration enables us to provide complete seed solutions supported by our component-based business, including foam, trim, and metals. And Adiant's in-house capabilities allow the company to effectively take products from research and design to engineering and manufacturing. Our back-to-basic mindset has and will continue to drive operation and financial improvements. Our intense focus on launch management, execution, and quality has further solidified our supplier of choice status. Our efforts to reduce costs, enabling earnings and margin growth, is firmly on track. In fact, these efforts produce adding a free cash break-even to about 80 million units annually versus 90 million units a few years back. I'd also like to point out that Adian's efforts to transform its balance sheet are progressing extremely well with just under $2 billion of debt repayment since Q4 of fiscal 2020. In addition to seeing improvements in our financial results, we have strength in our leading position in a number of other ways, including winning new business and encompassed business. But the business wins in fiscal 2022 include a great mix of EB, ICE platforms, and increased vertical integration across various legacy customers, and new entrants. We don't expect to see this level of business winds declining anytime soon as we continue to partner with our customers to develop seat solutions for the future, including offering them sustainable solutions. Speaking of sustainable solutions, on the far right of the slide, you'll see Addion's commitment to creating a sustainable future is a key element of our strategy. ADEON is committed to positive environmental, social, and governance-related business practices during fiscal 2022. We concluded to increase that commitment with several announced initiatives and projects. In fact, as pointed out on the press release this morning, during the most recent quarter, we published our detailed deforestation policy, human rights policy statement, and DE&I commitment statement. In addition, ADEON and H2 Green Steel signed an agreement with Swedish steelmaker to supply the company fossil-free steel with a low carbon footprint. We're excited to advance our ESG journey and realize our commitments and actions will create a better environment for everyone. Bottom line, this focused strategy is working and driving value for all Edian stakeholders. Advancing to slide six, I'm pleased to announce the enhancement to Edian's capital allocation plan. As you're aware, the company's capital allocation plan has prioritized deleveraging with just under $2 billion of debt paid down since Q4 in fiscal 2020. We are solidly on track in progressing towards a target leverage threshold of 1.5 to 2.9 net debt to adjusted EBITDA. In fact, our fiscal 23 plan suggests our net leverage will settle in that range. Given the significant progress made on transforming the balance sheet and our confidence in Addion's near and long-term outlook, the company's board of directors have approved a $600 million share repurchase program. Addion expects to take a measured approach to the timing and the amount of the buybacks to be executed, obviously driven by cash needs and market conditions. The enhanced capital allocation plan is expected to balance future free cash flow between internal growth projects, share repurchase, and potential opportunistic inorganic growth opportunities. Moving to slide seven and eight, let's take a quick look at our business wins and launch performance. As you can see on slide seven, a few of Addiant's recent new business wins. Addiant continues to successfully navigate the challenges operating environment and related commercial discussions while winning new and replacement business. The programs highlighted represent a good mix across powertrains, ice, and various levels of EVs, customers, both new, entrance, and legacy, as well as deepening levels of vertical integration, including complete seat, foam, trim, and metals. It's worth noting that we retained more than 99% of replacement business awarded in fiscal 2022, proof the value of our customers see us delivering. One of the programs we've highlighted is the recent awarded Toyota RAV4 in the Americas. We were awarded the replacement jet foam trim business, as well as adding front and rear structures, a testament to our customers' recognition of our strong execution and our ability to win medals business where it makes sense. And lastly, I'll point out that nearly half of the business awards to Adiant in fiscal 22 What was related to EV platforms, customers continue to value our expertise in execution as they develop and launch future platforms. Flipping to slide eight, the team continues to focus on process discipline around launch readiness and has driven a high level of performance, especially considering the launch load and complexity of launches that were planned for the year. In addition to the number of launches and complexity, the disruptions to production schedules present additional challenges that the team successfully managed through. Again, a testament to the discipline we've instilled around the process. As you can see at the bottom of the slide, we've provided some commentary on what you can expect for fiscal 2023 with respect to volume and complexity of launches. Generally speaking, volume is down in the Americas, Europe, and Asia, excluding China. China is expected to face an uptick in launches versus last year. Although complexity is up slightly in the Americas and China, I'm confident we'll maintain our focus on process discipline around launch readiness, driving similar results or better than 2022. Flipping to slide nine. The significant program wins and quality launches just discussed are a few examples of the company's accomplishments achieved this past year. We're also pleased with our success at further transforming the balance sheet, which is under $1 million of debt repayment. Our continued focus on reducing costs, which has enabled Add-In to lower its break-even free cash flow to about 80 million units. and our increased commitments to ESG initiatives in 2022. These accomplishments were hard fought, especially considering the challenging backdrop in an internal operating environment. As we look ahead, fiscal 2023 will likely bring a unique set of challenges and obstacles to be navigated. Few that most of you have commented on include the strong dollar and the impact of FX movements, rising interest rates, uncertainties around customer demand, and probably the biggest risk or unknown is European energy, specifically cost and availability. Similar to prior obstacles such as COVID, supply chain disruptions, rising input costs, EDIEN has developed and will continue to refine a risk assessment, including contingency plans to help mitigate and lessen any potential impact. We've listed a few actions on the slide, which include recuperation using heat recovery from production processes where appropriate, increased safety stock on products that require gas for their manufacturer, simple actions such as our operating facilities at lower temperatures, and in certain circumstances, the installation of local gas tanks and electric boilers. Again, these are examples intended to demonstrate Addion is not sitting idly by, but is actively navigating the environment to ensure we're positioning the company for long-term success. Before turning the call over to Jeff and turning to slide 10, let me conclude with a few reasons why we're optimistic with regard to the future. First, Addion's operations are performing extremely well outside of the temporary operating inefficiencies. We're focused on executing our strategy, which enabled the company to drive the business forward last year despite challenging operating conditions. Because of that, we enter fiscal 2023 from a position of strength. Though we expect the operating environment to improve in 2023 compared to 2022, there are several obstacles we'll need to overcome. But the team is ready for the challenge, and our track record suggests we're more than capable. We are confident successful execution of our strategy will continue to create value for all Addiant stakeholders, our investors, customers, and employees. Our announced Enhanced Capital Allocation Plan demonstrates this confidence. With that, I'll turn the call over to Jeff to take us through Addiant's fourth quarter and full year 2022 fiscal performance and provide our initial thoughts on what to expect in fiscal 23.
spk05: Thanks, Doug, and good morning, everyone. Let's start on page 12. Before jumping into the financial results, I'd like to point out that Adyen's most recent quarter and future financial results, specifically equity income and consolidated income, will be impacted by a change to the shareholders agreement at Adyen's Kuiper joint venture. This change should be considered further fine-tuning of our China operations. If you recall, over the past few years, Adyen has transformed its China operations in several facets, the most significant being the monetization of several joint ventures which enabled Adiant to drive its strategy independently, capture growth and profitable and expanding segments, integrate best practices across the market, and finally provide for more certain value realization. While integrating and growing our 100% owned CQADNT entity, the team has also continued to improve and optimize our global capability and metals and mechanisms through our Kuiper joint venture, formerly named AYM. The 50-50 joint venture with Yanfeng provides Adiant with access to world-class mechanisms and enables Adiant to reduce our own investment in this area. To further strengthen the value of our Kuiper interest, Adiant recently restructured our shareholders' agreement with our partner, the key outcome being a reduction in prices charged by Kuiper to Adiant and Yanfeng. Addient's reduced equity income is expected to be approximately offset by higher consolidated income. We saw this result in Addient's Q4, which I'll cover in just a minute. Addient has agreed that Kuiper will expand its operations to include Mexico, resulting in expected annualized savings to Addient, plus an additional working capital pickup. And finally, the restructured relationship is also expected to save Adiant significant future capital spending in its mechanisms platforms. With that as a backdrop, let's jump into the financial results on slide 13. 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 our adjusted results relate to a Brazilian tax recovery, pension mark-to-market, purchase accounting amortization, and restructuring and impairment cost. Details of all the adjustments for the quarter and the 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 approximately $3.7 billion. up about 32% compared to our fourth quarter results last year, or about 24% compared to last year's pro forma results. Improving vehicle production in each of the major regions was the primary driver of the year-over-year increase. Adjusted EBITDA for the quarter was $227 million, up $109 million on year-on-year reported or $157 million compared to last year's pro forma results. The increase is primarily attributed to benefits associated with higher volume and mix, improved business performance, and commercial recoveries. These benefits were partially offset by the impact of increased freight and utilities, higher commodity costs, and the negative impact of currency movements. I'll expand on these key drivers in just a minute. Finally, at the bottom line, Addient reported an adjusted net income of $51 million, or 53 cents per share. On slide 14, we provide a similar high-level summary of Addient's full-year financial metrics. For the year, sales were $14.1 billion, up 3% compared to fiscal 2021, or down about 1% compared to last year's performer results. The negative impact of FX movements weighed on the comparison by approximately $570 million and more than offset the modest year-over-year increase in vehicle production. Adjusted EBITDA was $675 million, down $242 million year-on-year as reported, or down about $135 million compared to last year's pro forma results. External headwinds that weighed on the year-on-year comparison which we discussed in great detail throughout the year, included increased input costs, such as freight and utilities, temporary operating inefficiencies relating to supply chain disruptions, the impact of negative mix, FX movements, and to a lesser extent, lower equity income. As Doug pointed out earlier, we estimate that external headwinds, such as lost volume, temporary operating inefficiencies, and rising input costs, negatively impacted Adiant's fiscal 22 revenue and adjusted EBITDA by $2.2 billion and $600 million, respectively. At the bottom line for fiscal 22, Adiant reported net income of $11 million, or 11 cents per share. Moving on, let's break down our fourth quarter results in more detail. I'll cover the next few slides rather quickly, as detail for the results are included on the slides, This should ensure we have a proper amount of time for Q&A. Starting with revenue on slide 15, we reported consolidated sales of approximately $3.7 billion. The sales shown include 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 $3.7 billion is an increase of $700 million compared with Q4 fiscal 21 pro forma results. The primary driver of the year-over-year increase was higher volume and pricing, call it just under $900 million relating to volume and pricing, including about $72 million of higher commodity recoveries. The negative impact of FX movements between the two periods impacted the quarter by about $197 million. Focusing on the table on the right-hand side of the slide, Adiant's consolidated sales for the Americas and EMEA generally outpaced production. That said, when stripping out the impact of commercial recoveries, results were generally in line with regional production. In Asia, excluding China, Adiant outpaced the market This was primarily driven by Korea, where Adiant benefited from improved mix, new business wins, and strong exports. In China, Adiant was adversely impacted by negative customer mix, as certain of Adiant's customers were more adversely impacted by supply chain disruptions and or lockdowns versus certain other local Chinese manufacturers that significantly outperformed the market, such as BYD and Cherry, that have little or no Adiant content. We view this as temporary and will balance out as supply chains continue to improve. 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 and FX impacts. With regard to Adyen's unconsolidated seeding revenue, year-over-year results were up significantly compared with last year's production-constrained results. When comparing to the overall China market, where a large majority of Adiant's unconsolidated sales are derived, our performance modestly outpaced industry production. Moving to slide 16, 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 $227 million in the current quarter versus $118 million reported a year ago, or $70 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 year-on-year comparison are detailed on the page and are consistent with what we expected heading into the quarter. Positive influences included approximately $118 million associated with increased volume and mix. Improved business performance also benefited the quarter by $85 million. Looking deeper within that bucket, the positive driver was improved net material margin of $62 million, of which we've called out about $15 million related to the restructured pricing agreement within our Kuiper joint venture. I'll note that this benefit related to the three quarters retroactive to the start of the calendar year, so call it approximately $5 million per quarter. Labor and overhead performance improved by about $29 million as operating inefficiencies lessened, and launch, ops, waste, and tooling provided an approximate $8 million benefit. Unfortunately, but as expected, certain negative factors muted the positive impact to business performance, specifically about $14 million of increased freight cost. Other headwinds, as noted on the slide, include an increase in SG&A cost of about $32 million, which is primarily driven by performance-related compensation and increased engineering spend. Note that incentive compensation for the full year is slightly down versus 2021, But in Q4, it is a headwind since we decreased the reserve in Q4 of last year while we increased it this past quarter. Additionally, higher net commodity prices of about $9 million and the negative impact of currency movements, call it $6 million, impacted the quarter. Similar to past quarters, we provided our detailed segment performance slides in the appendix of the presentation. High level for the Americas. Several positive factors drove the year-on-year increase and included improved volume and mix, improved business performance that was driven by increased net material margin, which, as pointed out, was aided by the restructured pricing agreement at the Kuiper JV, which primarily impacted the Americas. Launch, ops waste, and tooling performance, combined with improved labor and overhead, also benefited business performance. Increased freight and SG&A costs, primarily driven by performance-related compensation and increased engineering spend, partially offset these benefits. In EMEA, the year-over-year improvement was driven by several factors, such as improved business performance, which was underpinned by commercial recoveries, favorable launch and ops waste, and improved labor and overhead, resulting from improved customer production rates. In addition, volume and mix also contributed to the year-on-year improvement. Partially offsetting these benefits were headwinds related to increased commodity costs, increased utility costs, the unfavorable impact of FX movements, and increased SG&A costs, primarily associated with performance-related compensation. In Asia, the benefits of higher volumes and mix were partially offset by unfavorable FX movements and lower equity income, which was expected given the restructured shareholder agreement impacting our Kuiper joint venture. As noted previously, this reduction was almost completely offset by higher consolidated income. Let me now shift to our cash, liquidity, and capital structure on slide 17 and 18. Starting with cash on slide 17, I'll focus on the full year results as the longer timeframe helps smooth some of the volatility in working capital movements. Adjusted free cash flow, defined as operating cash flow, less capex was $47 million. This compares to a break-even result last year. The year-on-year improvement and positive outcome was hard fought, especially considering the challenging operating environment. Despite the lower level of consolidated earnings driven by persistent supply chain issues at our customers and lower cash dividends, which were expected as a result of our strategic sales transformation in China, numerous positive factors, many with an adding control, more than offset these headwinds. They included a significantly reduced level of restructuring, which had been elevated over the past few years as Adyen executed its right-sizing efforts within our metals business, reduced interest driven by our focused deleveraging efforts, which, as mentioned earlier, include about $1.9 billion of debt prepayments since quarter four of 2020, and the timing of commercial settlements and VAT deferrals and payments. Additionally, a lower level of capital spending, which, as you know, is largely driven by our customer launch schedules. During fiscal 22, Adiant's cap spending was below our normalized spend as certain launches were pushed into the future. In addition, the team continues to focus on reuse of capital where appropriate. This mindset continues to drive cap spending lower. One last point, and it's called out on the slide, Adiant continues to utilize various factoring programs as a low-cost source of liquidity. As of September 30, 2022, we had $269 million of factored receivables versus $126 million in last year's Q4. The increase is primarily attributed to improved sales in the quarter. Note that despite the higher level of factoring, total trade working capital is still an approximate $20 million outflow for the year and reflects the higher volume of sales activity in Q4-22 versus Q4-21. Flipping to slide 18, as noted on the right-hand side of the slide, we ended the year with about $1.8 billion of total liquidity, comprised of cash on hand of $947 million and about $900 million of undrawn capacity under Adiant's revolving line of credit. Adiant's debt and net debt position totaled about $2.6 billion and $1.6 billion, respectively, at September 30, 2022. Also of note, during the quarter, the company repaid the final stub of its 9% senior secured notes. This brought our principal debt repayment for 2022 to about $960 million. No doubt that we've made great progress on our balance sheet. Our net leverage target of between 1.5 and 2 times is solidly within reach, given our outlook for 2023, which I'll cover next. One last point before moving on, and as noted in the slide, Subsequent to the quarter end, the company opportunistically refinanced its ABL revolver. The sizing remained at $1.25 billion. The maturity extended to 2027 with pricing of SOFR plus 150 to 200 basis points. With that, let's flip to slides 20 and 21 and review our outlook for 23. On slide 20, as Doug noted earlier, Adiant enters 2023 from a position of strength. We successfully navigated through a challenging 2022 and drove the business forward as evidenced by the operational and financial accomplishments just discussed. That said, several new obstacles will need to be managed in the coming year. The guidance provided today is based on the current operating environment. On the right-hand side of the slide 20, we've laid out our planning assumptions for production and FX compared with fiscal 22. The foundation of our fiscal 22 plan, I should say the foundation of our fiscal 23 plan, is generally aligned with the October IHS estimates. To the far right of the chart, we've highlighted our expected sales performance by region. When adjusting for FX, we expect our sales to be slightly favorable to the industry in North America, modestly lower in Europe, and significantly better versus the market in China. China's outperformance is primarily attributed to the roll-on of various new business and Adiant's favorable customer mix. In the lower right-hand corner, we've provided our FX assumptions, which, as many of you have commented on in your recent reports, is expected to be a significant headwind year-on-year. In fact, based on our current assumptions, we estimate the year-on-year impact, 22 versus 23, for Adiant's top line and EBITDA is about $750 million and $45 million, respectively. Outside of production and FX, other factors such as commodity prices, labor availability and cost, and freight are expected to impact the industry and Adiant in 2023. The biggest unknown risks today relate to our European business, specifically around energy costs and availability, labor inflation in a number of countries, consumer demand, production, and Adiant's ability to recover increasing input costs from our customers. With that said, Our 2023 plan takes these factors into consideration, and based on current market conditions, we expect to deliver earnings, margin, and free cash flow growth in 2023 compared with 2022. Let's flip to slide 21 and review the expectations and add in the key financial metrics. First, based on October production forecast and the FX rates just discussed, we'd expect Adiant's consolidated sales to land at approximately $14.7 billion. This would represent an approximate 10% increase year-over-year when adjusting for FX. For adjusted EBITDA, we anticipate it will be approximately $850 million. This would translate into an approximate 100 basis point improvement in margin to 5.8%, excluding equity income, which is forecast at $90 million and included an adjusted EBITDA, add-in's margin would be about 5.2% or 100 basis points higher versus the year just completed. Important to note, we expect the calendarization of the $850 million will be at its trough in the first quarter, but steadily improving as 2023 progresses. One explanation is the lumpiness of expected commercial recoveries. For example, we expect to recover the increase in energy costs as we progress through the year. However, it will take time to negotiate, and unfortunately, the costs are impacting us today. With regard to Q1, as a result of rising input costs that we're experiencing today, such as energy, freight, labor, and certain commodities such as steel in Europe, we expect our Q1 EBITDA to land at or slightly below $200 million, even though sales should settle in around the same level of the quarter just completed. call it $3.7 billion. Interest expense is expected at about $160 million, given our expected debt and cash balances, as well as interest rate expectations. Cash taxes, thanks to various tax planning initiatives, are expected at about $90 million. CapEx is expected to trend back to a more normalized level, call it approximately $300 million. Again, 2022 was depressed, given the delay of certain launches at our customers. And finally, our improved earnings combined with our reduced calls for cash, such as the benefits associated with our deleveraging, lower restructuring, and relatively flat cash taxes are expected to underpin free cash generation of about $200 million. As a reminder, and similar to the calendarization of our earnings, Adyen's cash flow typically experiences an outflow in Q1, followed by generally positive quarters thereafter, absent exogenous events such as COVID, et cetera. Circling back to Doug's earlier comments related to our newly approved share repurchase program and our planned measured approach to repurchases, it's unlikely, given the typical calendarization of cash flow, we'd be in the market before Q2 of this year. With that, let's move to the question and answer portion of the call. Operator, first question.
spk01: Thank you. As we begin the question and answer session, if you would like to ask a question over the phone, please press star 1. If you would like to withdraw your question, please press star 2. In the interest of time, we kindly request that you ask one question and one follow-up. Our first question comes from John Murphy, Bank of America. Your line is now open.
spk09: Good morning, guys. And Jeff, congratulations on moving to a slightly more complex situation. You seem like a glutton for complexity. And Jerome, congrats on taking over here. You'll have to deal with us more. Just quickly on the 2023 outlook, in the context of your statements on 2022, Jeff, you kind of alluded to this disruption in the industry costing you about $2.2 billion on the revenue line and $600 million at the EBITDA line for 2022. I mean, how much of that do you think is you're not going to repeat going forward, or maybe even beyond 2023 is the kind of stuff that, you know, will disappear as things normalize. I mean, how do you, you know, what part of that is kind of one time based on the volatility and what, you know, what is kind of normal course? Because those are big numbers.
spk05: Yeah, they are big numbers. I think, you know, we would expect to recover the volume, and the volume is, you know, roughly two-thirds of the $600 million. Okay. Call it $400 million. We would expect to, you know, get back to $90-ish million or 90 million vehicles, give or take. As it relates, the other 200 were made up of what we call the operating inefficiencies, call it about 100, and about 100 of inflationary-type cost, energy and freight, et cetera. The temporary operating inefficiencies, we've already started to see some improvements there as supply chains have increased. become a little better, I would say, certainly not to full level, but we've seen a little bit of green shoots in there, and we would expect that to continue to improve. As it relates to some of the what we call sticky costs, some of this, if inflation taps down and negotiating with our customers, you know, commercial contracts that make sense for this space, where if we're going to have That type of inflation in our type of business model, some of that's going to have to be covered by the customer. We've had great progress on that, but that one will probably take, you know, hopefully within 2023, but there is some sort of a time period, at least of a few quarters. And what you really need is some sort of calming of the inflationary waters here. If it gets back to more normalized rates, I think you're going to see us have that money come back in the system as well.
spk09: Okay, and then just a follow-up, and Doug, this may be more for you. I mean, as you look at this, I mean, the operating or EBIT margin for next year over 23, you know, is implied sort of mid-3% range. I know you're kind of making improvements, but, you know, could you remind us where you think that can ultimately go and how fast or what the sort of the market conditions are going to be to get to sort of that ultimate target?
spk03: Sure, John. So getting back to, you know, kind of that 300 basis point, you know, we still haven't walked away from our commitment to get the business adjusted to EBITDA in the 8% range. So when we look at, you know, where we need to walk from this year, I'll say out over, you know, the course of the next few years, what's most important is volume coming back, Jeff. alluded to it in his comments on the walk to 23. You know, we need to get back to a 90 million bill that brings, you know, quite a bit of EBITDA back. That's the biggest piece of it. The other two pieces he touched on as well. When we made that commitment, it was in the 2019 timeframe. There's been a lot of inflationary pressure on the business. We need to ultimately get that back. You could say that's, I don't know if I'd go as far to say that's a third, but it's 20% of the way. And then it's just driving continued performance, and maybe that's another 20% piece of the equation. The last piece is FX. That doesn't really close the return on sales gap, but it certainly adds to EBITDA. So those are the pieces. And You know, I think about it more in when does the market get back to some level of normal behavior that drives volume. And I think either we commercially address the other pieces or the market corrects themselves.
spk09: Doug, I'm sorry, just to follow up. So you're basically saying 90 million units normalized market plus inflation and forex kind of normalized. That would get you to that 8%. mid 8% EBITDA margin, but is that the kind of thing you could do in the next one to two years if things normalize, which is tough to believe, but as far as the normalization, or is there still micro specific actions that you're taking internally that would need to be taken to get you there, meaning that that would sort of be maybe two to three years out that if things normalize and those actions are taken, you get to that point. I'm just trying to understand market conditions and time.
spk03: Yeah, that's a fair question. No, I think it's, you know, it's realistic to see it happen in two years if the market normalizes. Our business is performing extremely well right now. We've addressed a lot of the issues that, you know, plagued the business not that long ago. So I think that's a realistic timeframe to consider. I think the only disclaimer I'd put on that, but I don't, I'm not really trying to disclaim it, is this business is about execution, you know, every single day. So we, you know, we have to continue to perform the way we've been performing. I'm confident that the team's in place to do that. So, you know, that's my expectation is that, you know, that's something that happens over the course of the next couple of years.
spk05: Okay. And one thing to think about that, John, is if you, the last moment of really kind of relatively normal operating environment we had was the first half of our fiscal 21 and we were north of seven percent margin uh since that time i would you know argue we've still can brought down a bunch of our cash uh expenses and we have also uh experienced positive roll-in, roll-out of business. So when we look at, let's say, the 22 versus 23 equation across each region, we've seen improvements in the business coming in versus the business going away. That's going to be a portion of this as well. But we need some operating environment that's a bit more normalized like we had in that first half of the 21. Cool.
spk09: Thank you very much, guys. I appreciate it. Thank you.
spk01: Our next question comes from Rod Lash with Wolf Research. Your line is now open.
spk06: Good morning, everybody. I was hoping to just get a little bit more insight into the drivers of that earnings bridge for 2023. So you're talking about $175 million of EBITDA growth, looks like about 10% organic growth. At a 15% margin, that billion forward at about 210. And it looks like you would subtract maybe $50 million from FX and equity income. so the pencil's up to like 160, I guess I just don't see the benefit from eliminating some of the temporary or sticky costs. And if you could just help us understand what's happening behind that.
spk05: Yeah, let me try to work through a few of these for you. You know, on the first side, you have the pull-through on volume is somewhere, let's call it 220-ish. Joe, about $45 million in FX coming against that. You have, you know, econ is, and econ for us, it's a complicated mix because you're always taking the time where we've set prices for steel. And when I say econ, I'm just talking steel and chemicals. When you look at the prices we set with our supply base, which is a couple times a year, versus the myriad of algorithms we have with each of our customers on recovery, We've done a lot to improve that, but the timing of all that still has an impact. And the biggest impact for us in 2023 is going to be Europe. As maybe demand is down, but since energy prices are so much higher, it's caused increases in steel pricing and chemical pricing. And so we have, you know, between that negative econ and some of the commercial items that we'd call inflationary in, you know, context, there is going to be, you know, somewhere in that $150 million, $130 million, $40 million that we've assumed between those two items that is going to go backwards for us. And outside of that, we have a little bit of investment in Asia and from a growth standpoint in engineering, call it $30 or $40 million. And then we're seeing improvements in the business elsewhere, which is offsetting all those and, you know, driving performance. And this is mostly from balance in, balance out of new programs. The China footprint, for instance, is very attractive for us. You see that in the sales number. China should deliver pretty well for us in 2023. A little bit higher equity income as well. We'll balance that out to the 850. And we'll continue to work on, you know, between the commodity piece and some of those inflationary pieces. I would say the team is focused and we'll try to do better than those numbers. But that's what's embedded in that 850 guide.
spk06: Okay. So it sounds like by the end of next year, you'll actually have $250 million of sticky costs that will be worked on beyond that. So that's helpful. Can you just clarify just two other things? When you're talking about complexity of launches, maybe you could just explain just from an external standpoint what that means for us as we're looking at vendors. And then this Kuiper shift in North America, are you replacing internal operations, or what are you replacing by bringing Kuiper into here? Are they just taking over something in Mexico? No.
spk04: Hey, Rod, it's Jerome. So I can cover both of those. So the first one on, when we talk about complexity of launches, what we look at is a couple factors. The first one being how much vertical integration is there. So, you know, if we're only doing, say, the JIT portion of it or the just-in-time portion of it, that's, say, one level of complexity versus if we have the jit piece of it, the trim piece of it, the foam piece of it, and then a first-row metal, a second-row metal, a third-row metal, then that's a higher level of complexity. And then if you take that and you say we're shipping them to multiple sites, so if we're doing shipping to plant A and plant B, then that's a whole other level of complexity. And so when we look at it, that's kind of how we look at the complexity associated with it. And then what's the time from we're awarded until the time we go into production? And so we kind of look at that. And then kind of the last factor is how many different variants are there? So is it, you know, on one end of the extreme, call it one trim code with one type of metals? So is it just a very simple, call it manual front seat? Or is there 30 trim codes and you've got a, manual, and then a four-way power and eight-way power with, you know, a massage and heat and everything else that goes with it. And so that's how we kind of grade our complexity when we look at launch complexity. Does that answer your first question around how we rate complexity of programs?
spk06: Yeah, I guess I'm just trying to understand financially. So we're looking at consolidated numbers. Are you suggesting that because of all the moving parts, the incremental margins on your backlog are not as good as they normally are initially, or are they more ultimately because of the vertical integration?
spk04: No, it's actually more vertical integration is better for us from that standpoint. Yeah. Yes.
spk03: Yeah. I would just add the other piece to that is just the pricing discipline we, you know, installed a number of years ago. And, And the customers that we focus on. So to us, not all customers are equal, so we're very deliberate in who we pursue. And vertical integration is an important part of that. That's why we point to the Toyota program as an example. And then, again, just executing on the commercial discipline side of it.
spk04: Yeah, because with all that complexity comes change orders and the discipline around the change orders and the ability to manage and drive margin. And then your second question around Mexico. So what Mexico allowed us to do with Kuiper is basically offset our own capital investment. So by them coming to Mexico, it was localization. So we were able to onshore production back into this region and then basically eliminate some of our own planned capital investment that would have otherwise been placed in the region. That was the benefit of, I think, what Jeff called some fine-tuning around that JV. Okay. Thank you. Thank you. Thank you.
spk01: Our next question comes from Emmanuel Rosner with Deutsche Bank. Your line is now open.
spk08: Thank you very much. Two questions, please. The first one is around the outlook for growth above market. I think you're rightfully pointed. It looks like six points into next year. Can you maybe break this down for us in terms of driving factors? So market share gains, backlog, you know, versus vehicle customer mix. I guess what gives you confidence in this level of outgrowth?
spk05: Emmanuel, we... You know, one of the nice things about our business is we have the ability to trace in really every vehicle that's being produced into our plan by region. And, you know, so as we go through that, the balance in balance out is the is a big piece of it, you know, say, in China, where we've seen some nice new volume launching. So I'd say that's the big jump in Asia. In the Americas, I'd say that's probably also the big driver here as we see the vehicles coming in and the volumes associated with them versus as vehicles are coming out. There's a couple hundred million or so of addition there. As I look at, you know, I'd say there's a few areas where we have a bit of mixed impact as well just with some of our vehicles, but I'd say Overall, we're pretty comfortable with those numbers, but it's just driven by probably good awards that we were able to secure and are launching here in 23.
spk08: Okay. And just to clarify, because I'm not familiar with balance and balance outs.
spk05: Oh, sorry. It's a word we use, but it's essentially the programs that are coming and being launched in 2023 are coming of, you know, kind of full year annualized impact in 2023 versus those programs that have, um, gone out of production or going out of production. Okay.
spk08: So new, new net, new business launches, basically.
spk05: Correct.
spk08: Correct. Okay. Great. Um, then second question looks like both in terms of, uh, margin improvement into 2023, but then also towards the midterm target. Um, volume industry volume normalization seems to be playing sort of like a fairly larger or oversized driver of this. And I think you mentioned a few times the 90 million in a unit sort of like level. Now, you know, when I look at even IHS, they probably don't have 90 million to like 2025. And that doesn't even assume any sort of like, you know, pronounced impact from, you know, massive consumer pressure or recession or anything like that over the next few years. So, Would there be a – assuming, I guess, volume doesn't – industry volume doesn't normalize towards 90 million units in a smooth way over the next, you know, couple of years or so, would it make sense to sort of, like, right-size the business for lower, you know, normalized type of volume? Or is your conviction very high that 90 million is, like, where, you know, add-in should be sized for?
spk03: Yeah, fair question. So – I would say what we've really been focused on is not really sizing our business to 90 million. We're sizing our business for the foreseeable business that's planned in front of us. And again, if you just look at the actions we've been taking over the last couple of years, we've not waited for the market to return. We've not waited for COVID and supply chains to to, you know, to size back. So, we're always looking at ways to pull overhead costs out of our business that's better aligned with how we foresee the market. Again, for modeling purposes, you know, in the way we use IHS, you know, that's our plan as we lay it out today. You know, if the market dries up and consumers stop buying vehicles, we'll take the corresponding actions to adjust to that market environment. So that's just the way we operate the business, you know, I'll say almost on a daily basis. So there would be actions, you know, would be further cost reductions on the SG&A side, likely. And if programs go out of production earlier than expected, there may be some restructuring charged. But again, we're building a model based on our best information that we have in front of us.
spk08: Yeah, understood. Thank you. You're welcome.
spk01: Our final question comes from Joseph Spack with RBC. Your line is now open.
spk07: Thank you. And, Jeff, also to echo earlier sentiment, congrats and congrats to the rest of the team. I guess maybe just to pick up on that last comment, I think earlier in the year you had mentioned you'd be aiming for something like close to $100 million in cash restructuring this year, which would have been down a lot, but it was only $57 million, if I'm reading this correctly. So was something delayed there? And maybe, Jeff, like what's embedded in your 23 free cash flow guidance for cash restructuring?
spk05: Yeah, it's kind of more of the same on that number. We always leave a little bit of – Probably a cushion in there when we guide because you never know exactly as you go through the year. But we've been, you know, I think we've been very prudent about how we deal with restructuring. We are also really aggressive in 2020 to take out a lot of costs. So most of what we see as far as cash restructuring is stuff that we've already announced. But, you know, especially in Europe, it takes a couple of few years for some of those actions to fully spend their way through. So I'd say, you know, it's a fairly conservative guide that we usually provide, and we try to manage it down from there. Okay, so pretty flat year over year then? Yeah, I'd say flat, you know, within, you know, 10 or, you know, 15 million plus or minus from that number.
spk07: Okay. And then maybe just to follow on to Emmanuel's question on the 6% growth over market, you listed a bunch of factors there which were helpful. Just to be clear, is there no assumption for continued recoveries in that growth over market?
spk05: So what we call commercial recoveries sort of add to our sales. It's pretty modest. It's $50 million, $60 million of additional recoveries versus what we achieved in 2022, which is embedded in that plan, which is pretty small. Okay.
spk07: So that probably helps bridge the gap a little bit. A little bit higher, but not much higher. Okay. All right. Thanks so much, everyone. Yeah. Thanks, Joe. Great.
spk02: Thanks, Operator. It looks like we're at the bottom of the hour here, so with that, that concludes the call. If there's anybody else on the call that did not have questions answered, please feel free to reach out to myself or Eric throughout the day. We'd be more than happy to help. Again, thanks for participating this morning. Thanks, everyone.
spk01: That concludes today's conference. Thank you all for your participation. You may disconnect at this time.
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