Adient plc

Welcome to Addion's first quarter fiscal year 2023 earnings call. At this time, all participants are in listen-only mode until the question and answer session. If you would like to ask a question over the phone, please dial star 1. 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 Addion's results for Q1 fiscal 23. The press release and presentation slides for our call today have been posted to the investor section of our website at adiant.com. This morning, I'm joined by Doug DelGrosso, Adiant's President and Chief Executive Officer, and Jerome Dorlak, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business, followed by Jerome, who will review our Q1 financial results and outlook for the remainder of fiscal 23. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jerome, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to slide two of the presentation for our complete safe harbor statement. In addition to the financial results presented on a gap 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. Doug?

Great. Thanks, Mark. Good morning. Thank you to our investors, prospective investors, and analysts joining the call this morning as we review our first quarter results for fiscal 2023. Turning to slide four, let me begin with a few comments related to the quarter. As expected, heading into fiscal 2023, the overall operating environment appears to be trending in a positive direction. However, I'd still characterize the environment in Q1 as choppy, with certain external influences trending favorably and other influences appearing stubbornly persistent, placing downward pressure on the industry. With regard to the positives, It was encouraging to see softening steel, energy, and freight costs. FX movements also trended favorably. While these metrics signaled we're moving in the right direction, other challenges, such as the resurgence of COVID-19 in China, elevated labor costs, tight labor availability, and tightening central bank monetary policies continue to cloud the outlook. Visibility remains murky. That said, on balance, the many puts and takes resulted in a quarter generally in line with our internal expectations. Adding into 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 $219 million compared to last year's first quarter. Adjusted EBITDA for the quarter totaled $212 million, up $66 million. Addient ended the quarter with a strong cash balance and total liquidity of $900 million and $1.9 billion, respectively. In addition to Q1 fiscal 23 improved year-on-year financial results, Addient continues to execute actions within its control to position the company for sustained financial success. These actions include, but are not limited to, the team's intense focus on launch execution, cost and operational improvement, and customer profitability management, winning new business across the various regions, customers, and platforms, which, over time, are expected to strengthen our leading market position, not to mention support improved margins and earnings. The team is also executing actions to provide value-add to add-in stakeholders every day. whether that's our customers, suppliers, or employees. These efforts have been validated repeatedly with numerous industry and customer recognition awards, including most recently Automotive News Champion of Diversity Award, Top Employer 2023 certification by the Top Employer Institute for , and recognition in China from FAWVW for our quality performance. Finally, Adiant continues to make progress at building a sustainable future. The details of our many ongoing ESG initiatives as well as our fiscal year 2022 accomplishments are included in the company's recently published sustainability report. Turning to slide five and commenting further on the topic, the 2022 sustainability report highlights, among other things, how Adiant is Reducing its Scope 1 and Scope 2 absolute greenhouse gas emissions, which, as shown on the lower right-hand side of the slide, are down 25 percent compared with our baseline year for fiscal 2019. Implementing innovative seed solutions, including materials and processes in our metals, plastic, foam, trim, and complete seed products that promote a circular economy and helps Addiance customers meet their ESG goals. Enforcing policies and practices that protect human rights in accordance with the UN Global Compact, and encouraging our suppliers to adopt similar business practices. And advancing diversity, equity, and inclusion through employee training opportunities, inclusive hiring, and employment development processes, and employee-led business resource groups. In fact, recognizing a diverse and inclusive workforce environment has been part of Etient for years. For more than two decades, the company has been involved in successful, diverse joint ventures with Detroit-based Bridgewater Interiors. We are particularly proud that this forward-thinking, unique joint venture has stood the test of time and continues to grow and remains a viable venture for our customers. One additional milestone to mention during Q1 fiscal year 23, the science-based target initiatives validated Adiant's near-term greenhouse gas emissions reduction targets, affirming Adiant has established a clear pathway to achieving its emission reduction goals. We realize reaching the company's full potential cannot be achieved without firmly integrating sustainability into our core Adiant operation in order to become the foremost sustainable automotive supplier. We've included a link to the full report. Please take a few minutes to see the progress we've made in our sustainability journey and the commitments we intend to deliver in the future. Turning to slide six and seven, let's take a look at the business wins and launch performance. As you can see, slide six highlights a few recent wins. and it continues to successfully navigate the choppy operating environment and related commercial discussions while winning new and replacement business. The programs highlighted represent a good mix of wins across ICE and various levels of EV powertrains, new entrants, and legacy customers, as well as deepening levels of vertical integration including complete seat, foam trim, and metals. One of the programs highlighted is the recently awarded Toyota RAV4 replacement business in China. Also worth noting, NIO's new Alps vehicle platform was awarded to Adiant, strengthening the company's position with the growing Chinese domestic OEMs. Alps is NIO's latest sub-brand, marking an entrance into the mass market outside of the premium luxury space. One final highlight to mention, as noted in the call-out box to the right, Addient is pleased to have provided complete seat or components to all three 2023 North American Car and Truck of the Year winners, Acura Integra, Ford F-150 Lightning, and Kia EV6. Flipping to slide 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 that launches currently underway are progressing in line with our expectations. The launches and platforms shown not only impact Etion's just-in-time facilities, but span across our network of foam, trim, and metals facilities. The team continues to focus on process discipline around launch readiness has driven a very high level of performance, especially considering the launch load and complexity of launches that are planned for the year. We have no intention of letting up. Before turning the call over to Jerome and turning to slide eight, let me continue with a few comments related to the current environment and how it's evolved over the past few months. If you recall, entering fiscal year 23, Adiant expected the overall operating environment to improve in 23 versus 22. That expectation has not changed based on what's transpired in our first quarter. That said, certain of the underlying assumptions around variance influences that were expected to have a significant impact in ADDIAN's 23 results have shifted. As you can see on the slide, we laid out certain positive and negative influence that we navigated entering the year. Any of the positives include Many of the positive influence remain intact, such as adding self-help initiatives, the benefits from the balance in, balance out of new programs, the impact of supply chain disruptions, which are still placing downward pressure on the industry, but trending in the right direction. Commercial settlements with our customers, which encompass a variety of transactional items, including recovery of inflationary costs, continue to be successfully negotiated. I would note that as certain inflationary pressures soften, the absolute level of recoveries needed to achieve our 23 earnings commitment will be reduced, which is good news. Think of that as de-risking our plan. Lastly, although we continue to forecast a year-on-year tailwind from increased vehicle production, the magnitude of benefits have moderated given the recent revisions to production forecasts. In China, for example, S&P recently lowered the forecast by approximately 500,000 units in the March quarter versus their December forecast. Given Adiant's September 30th fiscal end, the expected recovery, which is largely recalendarized into December quarter, will benefit our fiscal year 24, not fiscal year 23. On the right-hand side of the slide, just a few comments that we are seeing. and expecting from the three key markets. In the Americas, we continue to monitor potential softening of consumer demand, primarily driven by rising interest rates, which ultimately impacts affordability. That said, our customers have not signaled through their production forecast to us that this is the case. We believe inventory rebuild combined with a likely increase in sales initiatives should support the current vehicle build assumptions for the remainder of fiscal 23. In China, we're monitoring return to work absenteeism post-Lunar New Year's, given the potential resurgence of COVID. At this time, absentee remains very low. Most of our facilities now have either low single-digit of cases or no cases at all, and we're managing them as normal absenteeism. Although vehicle production was revised down in our fiscal second quarter, as I just mentioned, we believe solid economic growth in the absence of COVID restrictions will support improved production beginning in the back half of the year. For Europe, the outlook remains bleak. lacking positive catalysts for the near-term and long-term. In fact, based on S&P forecast, vehicle production is not expected to return to pre-COVID levels in the foreseeable future. With that as a backdrop, the team is working on plans to improve the company's operating and financial performance in the region, assuming production remains at these depressed levels. Actions will be broad-based, encompassing our operations above plant costs, future capital spending, et cetera. I'll provide additional details as the plan takes shape. Bottom line, we're focusing on executing our strategy, which we're confident will drive earnings, margin, and cash flow growth in 23 and beyond. With that, I'll turn the call over to Jerome to take us through Addion's first quarter 2023 financial performance and provide our current thoughts on what to expect as we progress through the remainder of fiscal 23. Thanks, Doug.

Let's jump into the financials on slide 10. 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 results and our adjusted results relate to purchasing accounting amortization, restructuring and impairment costs, and a pension mark to market as we settled certain pension plans in the America segment and recorded a curtailment settlement loss. Details of the adjustment for the quarter are in the appendix of the presentation. High level for the quarter, sales were approximately 3.7 billion, up about 6% compared to our first quarter results last year. Improving vehicle production in the Americas combined with favorable customer mix in China were the primary drivers of the year-over-year increase. Adjusted EBITDA for the quarter was $212 million, up $66 million year-on-year. The increase is primarily attributed to the benefits associated with higher volume and mix, improved business performance, and commercial recoveries. These benefits were partially offset by the impact of increased business operating costs and the negative impact of currency movements between the two periods. I'll expand on these key drivers in just a minute. Finally, at the bottom line, ADAINT reported an adjusted net income of $33 million, or 34 cents per share. Let's break down the first quarter results in more detail. I'll cover the next few slides rather quickly as the detail for the results are included on the slides, and this should ensure we have adequate amount of time set aside for the Q&A portion of the call. Starting with revenue on slide 11, we reported consolidated sales of approximately $3.7 billion, an increase of $219 million compared with Q1 FY22. The primary driver of the year-over-year increase was higher volume and pricing, call it $430 million, including about $15 million of higher commodity recoveries. The negative impact of FX movement between the two periods impacted the quarter by $211 million. Focusing on the table on the right-hand side of the slide, Etienne's consolidated sales for the Americas and China significantly outpaced production. America's growth over market was primarily driven by outperformance on key platforms that were launching in last year's first quarter, such as the Nissan Pathfinder, Infiniti QX60, and Toyota Tundra, plus the benefit of increased commercial recoveries. In China, Etient's strong customer mix supported our growth over market, specifically our business with Beijing Benz, GAMC, and Niel. In Asia, outside of China, the story is similar to the Americas, where last year's volumes were depressed due to program launches and our customer mix was disproportionately impacted by chip shortages. Europe's modest underperformance was in line with internal expectations, primarily reflecting our decision a few years back to walk away from certain unprofitable business in the region. With regards to Adyen's unconsolidated seeding revenue, year-over-year results were down about 9% adjusted for FX. In China, where a large majority of Adiant's unconsolidated sales are derived, the resurgence of COVID had a significant impact to certain of our customers' production schedules, namely FAW and FVW. Partially offsetting the lower unconsolidated sales in China was improved volume and sales at our unconsolidated JVs in the Americas and EMEAF. Moving to slide 12, 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 operations such as executive office, communications, corporate finance, and legal. Big picture adjusted EBITDA was $212 million in the current quarter versus $146 million reported a year ago. 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 $59 million associated with increased volume and mix. Improved business performance also benefited the quarter by $24 million. Looking deeper within that bucket, the biggest positive driver was improved net material margin of $59 million. In addition, improved launch, ops waste, and tooling performance provided a $5 million benefit. Partial offsets within business performance were utility and wage inflation, which negatively impacted the quarter by $27 million. Freight was also a headwind, call it $13 million. Outside of business performance, Adyen's SG&A costs were $11 million lower year on year. primarily driven by the temporary compensation-related savings and one-time benefits associated with minor asset sales, specifically certain minor footprint changes. The compensation-related savings should not be included in the forward run rate, as certain benefits, such as the 401 match in the Americas, were reinstated in January of 2023. Headwinds impacting the year-on-year comparison included Higher net commodity prices, call it $18 million, the majority of which impacted our EMEA segment. The negative impact of currency movement between the two periods, call it $7 million. Although we expect FX to be a headwind for the quarter and full year, recent currency movement suggests FX will have less of a negative impact on Adiant's 2023 result versus our expectations at the beginning of the fiscal year. I'll have additional commentary on what to expect for the remainder of the year in just a few minutes. And finally, given the lower volume in sales at our unconsolidated JVs, and to a lesser extent, adding its restructured pricing agreement announced last quarter within our Kuiper JV, equity income was lower year over year by $3 million. All in all, a quarter very much in line with our internal expectations driven from the continued strong execution and performance of our global team. Similar to past quarters, we've provided a detailed segment performance slide 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 driven by increased net material margin, which was aided by commercial recoveries and, to a lesser extent, the restructured pricing agreement at our Kuiper JV. Other movements within business performance included the benefits associated with launch, ops waste and tooling performance, not to mention a slight tailwind related to improving operating environment, which resulted in lower inefficiencies versus a year ago. Increased freight was a partial offset to these business performance benefits. Lower SG&A costs, primarily driven by compensation-related savings, also contributed to the year-on-year improvement. In EMEA, the year-over-year comparison was influenced by several factors, such as improved SG&A performance, which included the one-time benefit of minor real estate asset sales, increased equity income resulting from improved volumes at our unconsolidated JVs, and a modest improvement from volume and mix. More than offsetting these benefits were headwinds related to increased commodity costs and lower business performance. Within business performance, utility and wage inflation combined with increased non-ocean freight weighed on the quarter. Partial offsets included higher net material margins aided by commercial recoveries and benefits associated with improved launch, ops waste, and tooling. In Asia, the benefit of higher volumes and mix that are consolidated entities combined with improved business performance were partially offset by unfavorable FX movements. Equity income was also lower as our unconsolidated JVs were impacted by the broadly reduced volumes in China. Let me now shift to our cash liquidity and capital structure on slides 13 and 14. Starting with cash on slide 13. Adjusted free cash flow, defined as operating cash flow less capex, was an outflow of $17 million. This compares to an outflow of $74 million in last year's first quarter. The year-on-year improvement and positive outcome was hard fought, especially considering the choppy operating environment and normal seasonality pattern of Adyen's cash flow. The primary drivers of the year-on-year improvement included a higher level of consolidated earnings underpinned by improved volumes, and an incrementally improving operating environment coupled with lower levels of cash interest, which was in line with internal expectations given our successful deleveraging efforts. Partial offsets included typical month-to-month working capital movements, the timing and level of commercial settlements and VAT deferrals and payments, and planned increases in engineering spend to support our growth and customer launch activity. One last point is called out on the slide. EDIENT continues to utilize various factoring programs as a low-cost source of liquidity. At December 31, 2022, we had $181 million of factor receivables versus $218 million at last year's first quarter end. Flipping to slide 14, as noted on the right hand of the slide, we ended the quarter with about $1.9 billion in total liquidity, comprised of cash on hand of $901 million and $971 million of undrawn capacity under Addian's revolving line of credit. Addient debt and net debt position totaled about 2.6 billion and 1.7 billion, respectively at December 31st, 2022. The modest increase in gross debt compared with September 30th, 2022 was driven by the recent appreciation of the Euro and its direct impact on Addient's 2024 3.5% Euro notes. Speaking of the 3.5% Euro notes, Although those notes mature in August of 2024, they become current in August of this year. The team continues to monitor the credit markets and will look to refinance those at an appropriate time, obviously driven by market conditions, which have improved in early 2023 compared with late 2022. One last point before moving on, and as noted on the slide, Addient continues to forecast free cash generation of about $200 million in FY 2023, underpinned by the company's solid operational execution and intense focus on cash management and earnings growth. Given our significant deleveraging over the past few years, combined with our expected earnings and cash generation in FY 23, Adiant remains solidly on track to achieve its target leverage ratio of between 1.5 2X net debt to adjusted EBITDA. With that, let's flip to slide 15 and review our outlook for the remainder of fiscal FY23. As Doug mentioned, the overall operating environment remains choppy, with certain external influences trending favorably and other influences appearing stubbornly persistent, placing downward pressure on the industry. We're successfully navigating through the various obstacles and continue to expect the operating environment will be much improved in the latter part of 2023 versus the choppy conditions that exist today. That said, the pacing of the improvement is likely to be more back-end weighted versus the gradual improvement we expected when we gave our original guidance back in November. Changes to vehicle production schedules, predominantly in China, which have been recalendarized out of the current March quarter, is the primary driver. With that as the backdrop, based on Addion's first quarter results and current market conditions, including revised production forecast and FX assumptions for the year, we currently forecast the following. Addion's consolidated sales to land at about 15 billion, up from our prior forecast of 14.7 billion. The increase is primarily driven by revised FX assumptions, in particular the Euro, which is appreciated from about 1.02 in November when we provided our original guide to around 1.08 today. For adjusted EBITDA, we continue to forecast at approximately $850 million. That said, the composition between consolidated earnings and equity income has been revised. Given the lower level of production forecast at certain of our unconsolidated JVs, equity income is revised down to about $70 million versus the November guide of $90 million. That said, Addion's consolidated EBITDA is now forecast to be about $780 million. That would imply an EBITDA margin excluding equity income of about 5.2%, consistent with our earlier guide and a 100 basis point improvement above fiscal 2022. Important to note in the recalendarization of production in China out of the current quarter, and its significant impact on equity income, and to a lesser extent, consolidated results in China given our favorable customer mix, we expect Adyen's Q2 EBITDA to fall short of the 212 Q1 result just announced today, largely driven by the drop in equity income, which is forecast at less than 10 million in Q2 versus the 27 million for the quarter just completed. This would now represent the trough in fiscal 2023 earnings. Moving on, interest expense is still 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, continues to be forecast at about $90 million. CapEx, largely based on customer launch schedules, is forecast at $300 million, no change from the November guide. And finally, our improved earnings combined with our reduced calls for cash, such as the benefits associated with our deleveraging and relatively flat cash taxes, are expected to underpin free cash generation of about $200 million. Again, no change from November. With that, let's move on to the Q&A portion of the call. Operator, can we have our first question?

Thank you. As we begin the question and answer session, if you would like to ask a question over the phone, please dial star 1. Our first question today comes from Rod Lash with Wolf Research. Your line is now open.

Good morning, everybody. I just maybe wanted to clarify something first. Your original guidance for 2023 fiscal 23 included around 180 million of commodity and other headwinds and you had offset that with 50 to 70 million of recoveries and a little bit over 100 million of performance it sounds like that 180 is that headwind is lower now uh was hoping you might be able to give us a little bit of color on that and just more broadly um As some of these headwinds are shifting from commodity to things like labor and energy, can you give us some thoughts on how the recovery discussions may be evolving?

Maybe I'll take the second part of it first, and then we'll go back to the specifics. I would say broad-based. when we change what the issues are, labor and energy versus material, it is a different conversation with our customers. It's, I'll say, a recovery that they're not necessarily accustomed to discussing because we've never had this spike in inflationary pressure in those two areas. And so it's very different than steel economics, which is part of our dialogue, even at the inflated levels we've been experiencing in the recent years. That said, I would say the discussions are going well, and we're making good progress, and we still have a lot of work to do to get those issues completely resolved. You know, we were upfront early with our customers. We went in with a tremendous amount of clarity on the issues. And, you know, with the customers that, I'll say, tend to engage and discuss those issues, we've made good progress. But as I said, we still have some work to do, and some customers are a little bit more stubborn on the issue.

Yeah, and then to your first question, Rod, In terms of what we see in terms of costs that are in the system, I'll just talk 22, what we're seeing in, or sorry, 23. Let's call it 200 million of costs that are in between net econ and other sticky costs that are there and bouncing up. 100 million of recoveries, I think those recoveries move between whether it's an econ recovery or another commercial recovery that we see. I think ocean freight we see improving. We see energy improving. I think what you have to be careful of, though, is ocean freight we see improving maybe back to 20 levels, but energy cost isn't getting back beyond 22 levels yet. We don't see it getting back to 21 levels. And we don't see things like labor improving. Labor is there. Labor is not going to trend backwards. And so to Doug's point, we need to redouble some of our efforts with those recovery discussions with our customers. And so while maybe energy softening, there's other costs that are coming into the system that we need to go back after from that standpoint. So it's really a basket of goods discussion with the customer. Does that help to answer your question?

That is helpful. Maybe just Jerome asking it a little bit of a different way just to help us get a high level view. Back in 2022 you had given us some color on, like that $675 million of EBITDA reflected, it was $400 million of volume, headwind, and $100 million of sticky costs, and $100 million of temporary costs. It sounds like you're saying that on the cost side, that $200 million is being offset by about $100 million, and you will have another $100 million to go as you look out to... to 2024. Is that, is that the right way to interpret that?

Yeah, I think that's a fair way to interpret that.

Okay. And, and just lastly, um, the conversion on volume and price just a little bit under 14%, uh, is below, uh, historical levels. Is that, is there anything that it's unusual, um, is relative to launches or, or anything else? Because I thought that the, um, the margins on some of these new launches would be higher just given the complexity that you're absorbing.

Yeah, I think in an ideal operating environment, I think that'd be correct, but we're still far from ideal, and so we still have a lot of stop-start that's occurring within our production environment. We're not running at what I would call optimized efficiencies because of the the stop-start nature. I mean, if you look at even China in what would have been our Q1 with the COVID impacts that we saw, especially in the north, and then those trickle down to the south of the country, a lot of stop-start. In Europe, with certain of our customers, still a lot of disruption. And then even in the months of October and November, December was better, but in October of November, we were still kind of in that low 80 schedule attainment with a lot of our customers. December was a better month. And so still, you know, it's just not a normal operating environment that would allow us to convert and, you know, flow through at 16, 18% leverage on volume like we normally see.

I think on top of that, when you think about it from a mix standpoint and the impact China's having, that's a bit of a negative for us. So as that volume improves, that contribution margin should improve as well.

Thank you.

Thank you.

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

Oh, great. Thanks for taking my questions. Just to follow up on that, I just want to make sure I get the key drivers. You're holding full year guidance, but it sounds like sticky costs are up around $20 million, JVN comes down $20 million, and that's offset by $40 million and higher recoveries than you were expecting. Any other factors we should be thinking about from the change from last quarter?

No, I mean, I think that's probably fair from that standpoint, Colin. I think the biggest driver is really you know, looking at kind of the equity income piece of it and what's happening in China with the equity income and then the recalendarization of the volume portion of it is probably the larger piece of that.

Okay. You bring up China. So one of the surprises, I think, in the quarter, if your Asia margins are actually extremely good, anything unusual going on in this quarter that's not sustained? Because actually I thought lockdowns in calendar Q4 would have actually kind of messed with the margins in that segment, and yet they seem to hold on pretty well.

Yeah, no, there were certain one-time commercial settlements in the quarter in our own internal operations that will not repeat, and that's really what drove the the margin within the quarter within our China operation.

That in top of Asia is China and all of our other Asian business, which has not been impacted by COVID, has not done a year-over-year basis, been disrupted like it was a year ago last. We're on the plus side of launches. Roll-in, roll-off has been favorable. And that, albeit on a smaller revenue base, that's helped offset some of the China impact.

Got it. And just lastly, you mentioned in the comments about potential more Europe restructuring actions. Would that be reflected in the current guidance? Or if you take additional actions and save costs, that would be sort of upside to the outlook?

Yeah, it would be... incremental to the current guidance. And so we're in the midst of that right now. If you look back two, three years ago, we took on a fairly significant amount of, I think it was some $200 million of restructuring, anticipating a revenue level in the region that's really not recovered to that level. So as we kind of recalibrate and reset, we're trying to assess whether there's additional actions that need to be taken. There'll be more to come on that if we decide that's the direction we want to move in.

Got it. All right. Thanks for taking my questions.

Thank you.

Our next question comes from the line of John Murphy with Bank of America. Your line is now open.

Good morning, guys. I just wanted to follow up on the volatility in schedules that Rod touched on. I think you guys were getting into a little bit I mean, even at the beginning of this year, in January, it sounds like there's fits and starts in volatility already. It doesn't seem like it's something that's going to ease anytime soon. How should we think about what the actual cost of that volatility was? I mean, you guys were kind of talking about sort of flow through being depressed at 14% on volume and mix. Maybe it should be closer to 18%. Is it that four points on flow through kind of the way to think about it? Or is there a dollar number in the quarter? And for FY 2022, you could give us so we can think about how to walk off what something might be more normal?

Yeah, I think that 400 basis points seems a little high to me. I think we'd have to circle back if we're really going to pinpoint a number for you on that. I would suggest though that we do see volume improving From just a start standpoint, I think it depends on where your baseline is that you want to measure that from. But the schedules we're seeing from our customer are far stronger. There's far less disruptions that we've experienced, I'll say, a year ago, nine months ago. There was a time that we were building to about 70% of what the customer was releasing to us on a regular basis, and I think that number is much higher now, probably above 85 percent.

Yeah, I mean, if you think about kind of sequentially as we go throughout the year, you know, kind of quarter over quarter, to put it in, you know, what we expect from improvement, it certainly isn't anything like 400 basis points. You know, when we think about kind of in March as we go forward, you know, we've always said it's, you know, 100 basis points from volume, 100 basis points from kind of performance, and then 100 basis points of what I call kind of balance in, balance out management of our key programs. So in that 100 basis points of what I'd call performance is where you'd see some of this premium and inefficiency coming out. And so it's not 400, it'd be in that 100 basis points bucket, a subset of it. Okay.

All right, that's helpful. And then just a second, I mean, I know this is kind of a morbid or weird question, but it does sound like you're through the worst of the COVID wave in your plants. We've heard that from other suppliers in the industry. So as we go forward, I mean, obviously there's economic concerns in China, but as far as the COVID disruption, do you think you're clear the worst of it at the moment on the reopening?

I think that would be a bit optimistic, just based on the fact that we've just returned from Lunar New Year. All the early indications are positive. We were very concerned whether we were going to get the return to work that We had planned for a worse case. It was far better. The employees in our plants appear to be healthy. So there's some indication that perhaps, you know, the virus has kind of burned through, if you will. And, you know, we're more dealing with natural immunities. But I will never claim to be a covert expert. And, you know, if you look at mutations and, you know, could there be another wave, we've, you know, You know, we've all seen that it's a pretty unpredictable virus. So, you know, we're taking a lot of precautionary measures, you know, talking to the team there. You know, they're relatively optimistic. You know, life seems, you know, back to normal. Those are all really encouraging signs. But I think we're kind of more on the let's wait and see how this plays over the coming weeks and months before we get over our skis on it.

Yeah, that's a fair statement. Lastly, Doug, can you just talk about new business wins, you know, and how they're going sort of, you know, versus history and how we should think about the book, you know, business building, and also just kind of remind us if we're truly through all the less economic contracts from, you know, days ago and we're actually working into more, you know, sort of the large majority of the portfolio being more normalized contracts. So, you know, new biz wins and where we are sort of is weighted. sort of average of uneconomic to rework contracts?

Yeah. We're really, you know, on the rework of contracts, it's really kind of building out of some of the ugly contracts that we had in place. And there's a tail on that. It gets smaller as time goes on. With regard to new business wins, you know, we feel very good about where we're at on new business wins. We've, you know, we've been able to push back on commercial issues and support that with really outstanding performance with our customers and such that we can have thoughtful discussions on where we go and kind of have a reasonable expectation on recoveries and not at the expense of the backlog. With regard to the wins, not all customers are created equal, and the ones, you know, new business that we want to win with, you know, the customers that are near and dear to us, we've been extremely successful with. And, again, we, you know, clearly will walk away from business that we think financially doesn't make sense, even if it's replacement business. We've done that in the past. We think that's been the smart move for us. We'll continue to do that in the future. And then when we look at China, I think what's difficult to predict when you start to build your backlog is really what the mix of that business is going to look like in the future with all the new entrants. We're excited about the wins that we have there. But we have to be really thoughtful where we invest our capital. with those customers as, you know, we think that that will be a pretty dynamic market over the course of the next five, 10 years. But I feel great about where we're at. New business wins. I think we're making the right decisions. We're not trying to measure success solely on market share. We are really focused on return on invested capital to make sure that the business we win, we will get the recovery from an investment standpoint.

Great. Thank you very much. Thank you.

Our next question comes from Emmanuel Rosner with Deutsche Bank. Your line is now open.

Thank you very much. Maybe to start picking up from where you just left it off on the business wind. So for this year, you have incorporated in guidance something like six points of growth above market, which is impressive but also fairly unprecedented. Can you really talk about, again, what the drivers are for this? And then how do you think about that metric on the go-forward basis? Is some of the traction in getting a new business sort of able to push up your growth of a market framework on a go-forward basis? Or is it mostly as it was and this year is more of a one-off?

Yes. In terms of this year, Emmanuel, what's really driving that is – I'd say two factors, one in China, and I think we referenced this on the Q4 call from last year. There's several programs that are rolling on this year that I'd say it's just a schedule or a factor of when those programs are rolling on with some several select customers, mainly NIO, Xiaopeng, and Daimler in that region, Mercedes. that are significantly benefiting us. And it's a very positive customer mix for us. And so I wouldn't build that into your terminal rate. And then also within the Americas, we referenced it on today's call, we have the full benefit of the Tundra launch. We have the S650 program, or the Mustang, sorry, that's rolling on. That was a conquest win for us. And then we have the full benefit of the Sequoia, which is rolling on, which is also a conquest win for us. And so it's really more of a factor this year, the timing of those programs and when they cycle in. I think, so I wouldn't build the 6% in. I think what we've talked about, though, what's more important, what we really look at is kind of the quality of the wins. And so what's important when you look at, you know, the Sequoia as an example, it's a full value chain for us. So it's the JIT, it's the trim, it's the foam. And the metals is a full reuse from the Tacoma and the Tundra front row. The Mustang is the JIT. It's the trim. And it's almost all of the foam on that vehicle. The programs in China, we're a full service supplier. So JIT, trim, foam, and the kit. So we're almost design responsible entirely for the NIO and the Xiaopeng. And so when we talk about growth, I think some of what you guys have looked at prior, where it's You know, it's at market or at CAGR is what's critical, but more important is really full vertical integration on those platforms. You know, every dollar of revenue, and we've said this before, every dollar of top line revenue is an equal. It's really what's underneath that dollar of top line revenue. And do we have the JIT for the top line, but then do we also have the trim and the foam that's below it? And that's what we really like to focus on in there. Doug, I don't know if you have anything else to add, but does that help to answer your question on that 6%, Emmanuel?

Yeah, absolutely. That's great. Sorry, just to close that.

Somewhere around that 100 to 200 basis points that you've normally used is more appropriate.

Perfect, yeah. Thanks for putting a final point on this. And then second question is on the cost side. So Obviously, you have some higher aspirations for margins. And I wanted to know, can you maybe just quantify, as of sort of the end of 2023, if you achieve your guidance, what would be leftovers in terms of costs and efficiencies, whether it's volume related or efficiencies that you're trying to get out of the operations? how would you quantify sort of like the bucket of cost opportunity from here?

Yeah, I think it goes back to what John asked earlier a little bit, Emmanuel, how we view it. You know, if we look at our long-term goal for this business and where we think this business can run at, you know, circa 8, 8.5%, it really breaks down to a third, a third, a third to bridge the gap between where we exit 23% and where we want to get to with a third of the gap coming from volume. So getting back to kind of the normalized LVS build level. So a third of that gap closure comes from volume. A third of it comes from closing out the remaining what I would call sticky costs that are left in the business, whether that is labor, gap closure or ocean freight returning back, the energy returning back, the other transient costs in the business over the road freight. If that doesn't come back, then it moves into the last third of the bucket, which is then business performance and us going and getting it, either through balance in, balance out, or just commercial might and us retrenching that through our commercial negotiations with our customers. And it really does break down when we do our internal target setting to really a third, a third, a third in between those buckets. And from there you can say, okay, when does the industry get back to kind of a 90 million build? That's when the first third comes back. And if you look at ocean freight and some of the over-the-road freight, where some of the indices are returning to, you can kind of then say when the other third comes back and then our balance in balance out being the last third or commercial recoveries.

And I think I asked you that last quarter, but I guess some of these markets, you know, at least sort of like two out of the three seem to be sort of essentially anticipating a progression for the industry and for the macro environment, which sort of like may or may not happen quickly. Is there an opportunity for you to accelerate this, resize the business for a smaller industry, or is your longer-term views more optimistic on the industry, and therefore you should maintain your structure and your cost base the way it is now?

I think when I think about it, I look at two of the regions, and I think we're relatively relatively comfortable or competent in our cost structure exists today. So I think of Asia and the Americas. And so we kind of risk profile that we don't believe there's further actions. The one areas we indicated is what the recovery looks like in Europe and whether that's going to dictate that we accelerate actions in that region to you know, change our breakeven profile there and the corresponding cost associated with doing that, and that's what we're in the midst of assessing right now. I think what we've also demonstrated is that as some of the, you know, the non-volume-related costs persist, I think we've demonstrated that we know how to go and settle that with our customers in a relatively short period of time. So either, you know, the cost dissipates, you know, to a certain degree, what we've been experiencing with energy costs in Europe, which means we don't have to go and recover that, so it resolves itself, or where it remains in place, then the conversation changes with the customer in that These are structural costs that weren't originally envisioned in our business, and they have to be addressed.

Perfect. Thank you. Thank you.

Our final question comes from Adam Jonas with Morgan Stanley. Your line is now open. I'll take that question.

Good morning, everyone. Evan Sullivanberg on behalf of Adam Jonas. Looking at the supply disruption being seen at the OE customers outside of COVID, are there any key issues your customers are highlighting?

I think the one issue that they continue to highlight to us is there's some, you know, residual electronics or semiconductor related that impact them. And then probably the biggest issue is supply chain labor. And that's everywhere for different reasons. In China, I think that's a bit of the concern on the recovery there is as you go through the supply chain, will labor be an issue there as workers return to work? Similarly in Europe, as we kind of recalibrate labor costs there and labor availability, particularly in Eastern Europe, that can be disruptive to the supply chain as well as in the U.S. So semiconductors, clearly there's an improved level of performance there. Labor is still a bit of a wild card, and it's just how it manifests itself within the supply chain in not only the Tier 1, but Tier 2 and Tier 3.

Thanks for that. Obviously, you guys are a step removed from the semi issue, but is there any color you can provide on whether the OEs are saying it's a specific type of semiconductor that's short or whether it's across the board? Thank you.

It depends. More of the feedback we get, it's across the board. And no sooner that they think they have one issue solved that another issue arises that they didn't quite completely comprehend.

Great. Thanks, Evan. And Danielle, it looks like we're at the bottom of the hour, so this will conclude the call today. If you have additional questions or need follow-up questions, Eric and I will be available. Just feel free to reach out, and we'll talk soon. Thanks again for participating.

That concludes today's conference. Thank you all for your participation. You may disconnect at this time.