Adient plc

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.

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.

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.