Adient plc

Welcome to the Audience Second Quarter Financial Results Conference Call. Your nights have been placed on a listen-only mode until the question and answer session. At that time, if you would like to ask a question, you may press star 1. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I'll turn the call over to Mark Oswald. Sir, you may begin.

Thank you, Shirley. Good morning, and thank you for joining us as we review audience results for the second quarter of fiscal 2023. 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 Q2 financial results and outlook for the remainder of our fiscal year. 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. The 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 of 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 second quarter financial results for fiscal 2023. Turning to slide four, let me begin with a few comments related to the quarter. First and foremost, Adiant's operational execution, positive commercial momentum, and an extreme focus on containing costs continue to drive the business forward. Adiant's second quarter results, which provide Very positive proof points of these actions can be characterized as very solid, building on the positive momentum established earlier this year. The company's key financial metrics for the quarter can be seen on the right-hand side of the slide. Revenue for the quarter, which totaled $3.9 billion, was up $406 million compared to last year's second quarter. Adjusted EBITDA for the quarter totaled $215 million, up $56 million. In addition, Antietam ended the quarter with a strong cash balance and total liquidity of $826 million and $1.8 billion, respectively. Speaking of cash, the strong cash balance reflects the impact of certain opportunistic strategic transactions executed during a quarter, namely the use of $30 million to repurchase just under 760,000 shares of the company's common stock, kicking off our previously announced enhanced capital allocation plan, and the use of $100 million, combined with proceeds from 1 billion new U.S. senior notes issuances, to pay down about 750 million of euro notes due 2024 and prepay $350 million of Addion's term loan fee. Jerome will review the additional commentary on these actions during his financial review. This is no doubt a very good start to the year as we reach the halfway point. Although we're closely monitoring certain external headwinds such as a soft auto demand in China and increased deal prices in the Americas, We expect the positive momentum to continue into the second half of 2023 based on the current environment. I will talk about the environment as we see it in greater detail in just a minute. In addition to Q2 fiscal year 23 solid and improved fiscal on-year financial results, Addiant continues to execute actions within its control and position the company for sustained success. These actions include, but are not limited to, teams' intense focus on launch execution, cost and operational improvement, and customer profitability management. Winning new business across various regions, customers and platforms are expected over time 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 Adiant 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 GM Supplier of the Year, Renault Korea Motors Supplier of the Year, and seven J.D. Power Awards for seat satisfaction for Adiant China, among other customer recognitions. Finally, Adiant continues to make progress at advancing its commitment to build a sustainable future. We recently highlighted our sustainable product offerings as part of our goals to drive environmental, social, and economic change. Jerome had the opportunity to meet with several investors to share with them certain of Adiant's sustainable seat solutions. We've highlighted a few on slide five. On the slide, you'll see product offerings that are currently in the marketplace or being developed for future discussions with our customers. It's important to point out that Adiant's innovative solutions span across our portfolio and touch each of the company's core components, such as foam products, which not only drive comfort, but also take urethanes out of the vehicle, eliminating volatile organic compounds. The innovative soft seat back panel, which helps lightweight the vehicle and frees up room for the occupant. Adiant's ultra-thin technology, when combined with the soft back panel, delivers occupant room plus room for underside of the vehicle. This allows for more packaging of batteries. On average, this award-winning technology frees up 40 to 60 millimeters packaging space for batteries, enabling our customers' flexibility to increase battery size up to 10%, thus allowing for more BEV range. On the structure side of the business, Etienne has partnered with H2 Green Steel. In fact, we're in the launch phase with one of our customers to incorporate this low-carbon steel. And finally, leather alternatives. As virtually all OEMs, working to reduce or eliminate leather content to improve sustainability, increase quality, and reduce costs. Solutions include plant-based and recycled alternatives, to name a few. The solutions and benefits just mentioned go beyond sustainability. Mass reduction, lightweighting offer OEMs greater range in BEVs. Cost savings by eliminating certain leather materials in favor of less expensive alternatives. and VAVE cost-optimized solutions, which bring sustainability and cost efficiency together. Bottom line, Edient's sustainable product solutions provide a significant environmental benefit with cost efficiency in mind. Turning to slide six and seven, now let's take a look at our business wins and lost performance. As you can see in the slide, Six highlights a few of Etienne's recent wins. Etienne continues to successfully navigate and balance the current operating environment and related commercial discussions while winning new and replacement business. The programs highlighted represent a good mix of wins across the EV powertrain and ICE powertrains and are diversified across a number of segments, including SUVs, luxury, and mass market. and contain a high level of vertical integration across complete seats, foam trim, and metals. On the right-hand side of the slide, I listed a few observations from recent trip to Shanghai. Despite the negative headlines associated with the China market today, the visit was a good reminder that the long-term outlook remains bright. Without reading each of the points, a few that stood out to me include China remains the world's largest auto market. I don't see that changing. China OEMs are expanding their share significantly across all price segments. In addition, exports out of China are growing. With that growth expected to continue. At its leading capabilities and strong market presence underpin our current and future success. We're seeing that today, especially when looking at our wins. which we're on track to achieve our fiscal year 23 sourcing target of more than $1 billion across China NEB startups and global manufacturers, including significant amount of NEBs. This is expected to strengthen our leading position as we continue to grow in the market. Flipping aside seven, as we typically do, we've highlighted several critical launches that are complete, in process, or scheduled to begin in the near term. I'm happy to report that the launches currently underway are progressing in line with our expectations. The launches and platforms shown not only impact Eddy and Sujit facilities, but span across our network into our foam, trim, and metal 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. And we have no intention of letting up. Before handing the call over to Jerome and turning to slide eight, let me conclude with a few comments related to the current environment and what we expect heading into the second half of our fiscal year. To begin, as expected, heading into 2023, the overall operating environment through Q2 has improved versus last year. I'd characterize the improvement to be fairly modest, driven by small quarter-on-quarter tailwinds concentrated in a few areas, such as softening freight costs or better operating patterns at our customers, driven by easing supply chain constraints as opposed to across-the-board improvements. In fact, a number of persistent external influences and risks exist that continue to place downward pressure on the industry and Adian's near-term results. Increased labor, rising steel prices in North America are a few examples. But that is a backdrop, and based on what we know today, the left-hand side of the slide highlights certain key influences and how we expect those influences to impact Adian's H2 results versus our first half. On the plus side, we will continue to execute actions that are within our control such as self-help initiatives and benefits associated with stability and improvement in our customers' production schedules. Influences that we believe will be fairly neutral H2 to H1 include vehicle production, where expected improvements in North America are forecast to be largely offset by modestly lower production in the rest of the world. Energy, freight, and labor economics are presently forecasted to run fairly in line with the levels experienced to date in 2023. Continued commercial settlements to help offset rising input costs with our customers. And finally, adding its balance in, balance out is also expected to be generally consistent with H1 results as our prior year business wins are launched fairly consistently across the year. Lastly, at the bottom of the slide, You can see rising steel costs in North America and concerns over consumer demand, especially in China, are the biggest worry beads heading in the back half of the year. The team remains focused and is executing actions to manage through these obstacles. On the right-hand side of the slide, just a few comments on what we're seeing and expecting from our three key markets for the Americas. I view the market as fairly stable, improving customer run rates and modestly higher production driven by continued inventory build is expected to provide a slight tailwind as we progress through 2023. As you would expect, we'll 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. In China, auto demand remains soft despite unprecedented price cuts. The soft demand combined with rising inventory heightens concern for downward revisions to production schedules in the coming month. Given this environment, the team is aggressively flexing our variable costs, reducing fixed costs, cutting nonessential travel and expenditures, and driving further efficiencies into the business. For Europe, despite Q2 production modestly outperforming expectations heading into the quarter, the outlook for the region remains bleak, lacking positive catalysts for near-term and longer-term. In fact, S&P is forecasting a significant reduction in Europe's production in Adiant's second half of 2023. Given these low expectations, and as we mentioned on the last earnings call, the team The Adiant team continues to develop and execute actions designed to improve the company's profitability in the region. Flipping the slides 9 and 10, which I will not comment on in great detail as the slides are fairly straightforward, we've illustrated why additional restructuring is necessary in just as important Adiant's response. Two key takeaways on the slide. A number of external factors, including lower expectations for vehicle production in Europe combined with industry-specific trends, such as a trend towards digital design validation, are reshaping the auto sector. It's imperative that current and future business practices are aligned with these changes. Although restructuring can be expensive, Etienne is committed to be good stewards of capital when developing and executing necessary actions. In fact, slide 10 is a recent example of how the company implemented an effective, cost-efficient restructuring of our board facility in the Czech Republic. With that, I'll turn the call over to Jerome to take us through Etienne's second quarter 2023 financial performance and provide our thoughts on what to expect for the remainder of fiscal 23.

Thanks, Doug. Let's jump into the financials on slide 12. 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 adjusted results relate to restructuring and impairment costs, purchasing accounting amortization, and costs associated with our recent debt refinancing. Details of all adjustments for the quarter are in the appendix of the presentation. High level for the quarter, sales were approximately 3.9 billion, up 12% compared to our second quarter results last year. Improving vehicle production in the Americas, Europe, and Asia, excluding China, were the primary driver of the year-over-year increase. Adjusted EBITDA for the quarter was $215 million, up $56 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 a minute. Finally, at the bottom line, adding reported and adjusted net income of $3 million or 32 cents per share. Let's break down our second 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 an adequate amount of time set aside for the Q&A portion of the call. Starting with revenue on slide 13, we reported consolidated sales of approximately 3.9 billion. an increase of $406 million compared with Q2 FY22. The primary driver of the year-over-year increase was higher volume and pricing, call it $519 million. The negative impact of FX movements between the two periods impacted the quarter by $113 million. Focusing on the table on the right-hand side of the slide, Addyan's consolidated sales for each of Addyan's major regions was generally in line with production, except in Asia, where the company strongly outperformed. Americas and EMEA performed in line with the broader market as customer production schedules and production volumes continued to make modest improvements through the quarter. In China, Adiant's strong customer mix underpinned significant outperformance versus the industry production in the region. GAC, Daimler, and Hyundai led the charge. This outperformance is consistent with our Q1 results and expectations heading into the year as the benefit from new program launches are taking hold. In Asia outside of China, Adiant benefited from programs that launched last year and are now running at rate in the launch of recently won Conquest business in Japan. With regards to Adiant's unconsolidated seeding revenue, year-over-year results were down about 5% adjusted for FX. In China, where a large majority of Adiant's unconsolidated sales are derived, the year-over-year decline is attributed to lower production at the company's unconsolidated joint ventures, partially offset by improved volume in sales at our unconsolidated joint ventures in the Americas and EMEA. Moving to slide 14, we've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate finance, and legal. Big picture adjusted EBITDA was $215 million in the current quarter versus $159 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 include $84 million associated with increased volume and mix. Improved business performance also benefited the quarter by $29 million. Looking deeper within that bucket, the biggest positive driver was improved net material margin of $56 million. In addition, lower freight costs provided a $5 million benefit. Partial offsets within business performance were utility and wage inflation. which negatively impacted the quarter by $29 million, and increased launch costs driven by the quarter's heavy launch load weighed on the comparison by 3 million. It is important to note that certain of the inflationary pressures, such as elevated labor and utility costs, are being partially offset by the improved net material margin resulting from commercial discussions with our customers. Other factors that weighed on the quarter included a net $39 million headwind from commodities driven primarily by the timing of recoveries and a non-recurring favorable inventory revaluation in FY22 due to higher commodity costs. FX weighed on the quarter by $5 million. SG&A performance, which was adversely impacted by the non-recurrence of certain compensation-related austerity measures taken in FY22, as well as the timing of engineering spend to support the quarter's launch load, call it $9 million. And finally, $4 million of lower equity income. Important to note, Addion's Q2 fiscal 2023 EBITDA contained non-recurring net benefits totaling about $8 million. That should be removed from our ongoing run rate. The benefit was largely associated with an insurance settlement. A similar size settlement was included in last year's results, which is why the year-over-year comparison is not impacted. Stripping out the non-recurring insurance benefit, all in all, Addient's second quarter was very much in line with our internal expectations. Similar to past quarters, we 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 joint venture. Other positives within business performance included improved freight costs. Although the team made progress on labor and overhead efficiencies, this was more than offset by the negative impact of increased labor costs. Also partially offsetting the benefits in the quarter was the non-reoccurrence of certain compensated certain compensation-related austerity measures in place last year. Launch costs were also elevated, driven by the timing of launches. Outside of volume and business performance, FX and commodities were a slight benefit, whereas SG&A costs weighed on the quarter. In EMEA, the year-over-year comparison was influenced by several factors, such as improved volume and mix, improved business performance driven by increased net material margin, which was aided by commercial recoveries, improved launch and ops waste. Partial offsets within business performance were the negative impact of increased labor and utility costs and increased freight costs. Outside of volume and business performance, the year-over-year comparison was adversely impacted by commodities, primarily by the timing of recoveries and non-recurring favorable inventory valuation and FY22 due to higher commodity costs. In Asia, the year-over-year improvement was driven by the benefit of higher volumes and mix primarily related to the improved production in the region outside of China. Improved business performance with improved material net margin and lower freight costs leading the way. These benefits were partially offset by lower equity resulting from lower volumes that are unconsolidated JVs in China, and our restructured shareholder agreement impacting our Kuiper joint venture, FX, and a temporary increase in SG&A costs to support our growth initiatives. Let me now shift to our cash, liquidity, and capital structure on slides 15 and 16. Starting with cash on slide 15, I'll focus on year-to-date results as the longer timeframe helps smooth some of the volatility in working capital movements. Free cash flow, as defined by operating cash flow less capex, was $53 million. This compares to an outflow of $102 million for the same period last year. Key drivers impacting the comparison include the higher level of consolidated earnings driven by improved volumes and a modestly better operating environment, timing of commercial settlements, lower interest paid driven by the reduced level of debt between the two periods, and a lower level of accrued compensation. These benefits were partially offset by typical month-to-month working capital movements, the timing of tooling recoveries and VAT deferrals and payments. One last point to call out on the slide Addient continues to utilize various factoring programs as a low-cost source of liquidity. At March 31, 2023, we had $206 million of factored receivables versus $181 million at the end of Q1 FY23 and $269 million at September 30, 2022. Flipping to slide 16. As noted on the right-hand side of the slide, we ended the quarter with about $1.8 billion total liquidity comprised of cash on hand of $826 million and $973 million of undrawn capacity under Addion's revolving line of credit. A very good outcome and even more impressive when you consider the quarter-ending cash balance reflects the impact of a few strategic actions recently executed. Specifically, the execution of our enhanced capital allocation plan, which resulted in the company using about $30 million of cash to repurchase just under 760,000 shares of Adiant common stock. Of that, I know approximately 48,000 shares with a cash outlay of just under $2 million settled in early April after the quarter closed. That's why the cash statement will show 28 million related to repurchases and not the full 30 million. And second, 100 million of the cash used in conjunction with the proceeds from a 500 million secured note issuance and 500 million of unsecured note issuance to refinance a large portion of the company's 3.5% Euro notes that were set to go current in August of this year and prepay 350 million of our term loan B, which had a cost at the time of 8 plus percent. Speaking of debt, Addian's net debt position totaled about $2.5 billion and $1.7 billion, respectively, at March 31, 2023. The refinancing extended the average tenor of Addian's debt portfolio to approximately five years versus three and a half years prior to the actions. The actions implemented during the quarter demonstrate Addian's commitment to maintaining a strong balance sheet while executing actions to enhance our capital allocation plan. With that, let's flip to slide 17 and review our outlook for the remainder of fiscal 2023. Slide 17. As Doug mentioned, through the first two quarters of 2023, Addion is off to a solid start, on track to achieve its 2023 plan. That said, we are not sitting idle. The second half of 2023 will no doubt have its share of obstacles that need to be navigated, such as soft demand in China and elevated steel prices in North America, which we've discussed earlier. On the plus side, we continue to expect the overall operating environment to continue to progress in a positive direction, albeit at a modest pace. With that as the backdrop, based on Addion's results through March and current market conditions, including revised production forecasts and FX assumptions for the year, we currently forecast the following. Addient's consolidated sales to land at about $15 billion, which is equal to our previous guide. For adjusted EBITDA, we continue to forecast approximately $850 million, including equity income of about $70 million. The implied, albeit modest, improvement in Addient's second-half results versus H1 excluding the non-recurring insurance settlement is driven by a few key influences. First, benefits associated with an improving operating environment and production in North America. Second, the timing of commercial recoveries in H2 relative to H1. Lastly, continued execution of certain continuous improvement actions that realize full benefit in the latter half of the fiscal year. Unfortunately, these benefits are almost fully offset by lower H2 production in Europe and China and an increase in certain input costs, including elevated raw material costs in North America, impacting predominantly the company's fourth quarter. Our current forecast for these headwinds is between $10 and $20 million. One more item to note before moving on, given the timing of commercial recoveries in the towards H1 and the lower production forecast for Europe in Q3 versus the quarter we just completed, we expect adding into Q3 EBITDA to settle at or about the same level as the quarter just completed, around the 200 million mark, excluding the benefits associated with the insurance recovery. Moving on, interest expense. Given the recent debt refinancing as well as interest rate expectations, is now forecast at $180 million. Cash interest, which is also called out, is forecast at $145 million. The lower level of cash interest is primarily driven by the timing of the first interest payment on the new bonds, which is set for October 15, 2023, after the close of Addian's 2023 fiscal year. Cash taxes are now expected at $95 million versus the previous guide of $90 million. The modest uptick is a result of the opportunity the company has to dividend certain monies out of Asia. CapEx, largely based on customer launch schedules, is forecast at $300 million, no change from the February guide. And finally, given our earning expectations combined with the lower level of cash interest now expected, we forecast free cash flow of approximately $215 million for the year, up from the previous guide of $200 million. With that, let's move on to the Q&A portion of the call. Operator, can we have our first question?

Thank you. We will now begin the question and answer session. If you would like to ask a question, please unmute your line, press star 1, and record your name clearly. To withdraw your question, you may press star 2. Again, press star 1 to ask a question. And one moment, please, for our first question. Our first question comes from Emmanuel Rosner with Deutsche Bank. Your line is open. You may ask your question.

Thank you so much. First question is on China, and I think you're obviously, you know, raising a potential risk of downward revisions to production schedule there based on, you know, how demand has been playing out and inventories. Are you seeing any risk in terms of some of your launches there, you know, either being pushed out or downward revisions? I think this year's A strong growth of a market that's contemplated in your outlook has a lot to do with new launches, and I'm wondering if the current environment is pushing some automakers to revise some of these projections down.

Yeah. Thanks, Manuel. Appreciate the question. Nothing really of material significance on the launch status. Jerome and I were both over In China, recently, we had pretty in-depth launch reviews with the team. And right now, everything is, for the most part, on schedule. I think what we're seeing more of is that products that have been in the market for a while, you know, we're seeing changes in production schedules kind of consistent with, you know, the S&P forecast. And as we commented on, It feels like the market's waiting to return, and with all the price cut activity with the OEs, that's paused the consumer to wait for that to settle out and reenter the market.

Understood. And then as a follow-up, just hoping to just clarify what is embedded in your 2023 EBITDA outlook for net commodities and inflation net of performance.

In terms of, I guess, Emmanuel, I'm just trying to get a bit more clarity on this.

In the walk 2022 to 2023, how much will commodities be of headwind or tailwind and And how much are you expecting inflation net of performance to be on a four-year basis?

Yeah, I mean, on a four-year...

Yeah, Daniel, it's Mark. What we've indicated in the past, right, we didn't give specific buckets on that bridge. But what we did say is, you know, when I looked at 2022, for example, those results were impacted by, call it, you know, 100 million of what I'd call transitory costs, right? Those were the inefficiencies of production schedules. We're seeing that actually lessen as we expected, you know, as we entered the year. So, you know, you pick a number. Do we think that that's going to be half probably a pretty good number there, so maybe 50 million versus 100. On the inflationary cost, we just labeled that as sticky, right? So that was another 100 million last year that impacted us. We did indicate that because of labor costs this year, that was increasing versus last year. However, we are getting commercial recoveries for that. So you're probably net-net, right, with the transitory costs and sticky costs again. you're probably a couple hundred million, what I'd say, impacting the year-on-year impact. But, again, we're getting those commercial recoveries from the customers, so it's really more focused on how are we going to exit this year and how is the setup for 2024 going to shape based on what commodity prices are expected next year, based on the commercial recoveries to date, et cetera. So hopefully that helps. Okay.

Thank you. Our next question then comes from John Murphy with Bank of America. Your line is open. You may ask your question.

Good morning, guys. I just wanted to ask on Mix, maybe sort of short-term and long-term. I mean, if you look at slide 14, you guys are highlighting positive 84 million from volume in Mix in the quarter. I'm just curious if you can give us a breakdown between what is volume and what is Mix in Um, you know, but more broadly, you know, how much have you benefited from what has been very strong mix in the industry? And is there significant risk as we step forward later this year into the coming years when, when mix maybe deteriorates to some degree, at least from an automaker level. And then second, kind of along the lines of that, you know, on slide five, you, you highlighted all this great product, um, sort of the ESG, but then on, you know, weight savings, real stuff, not just, um, even marketing stuff, real, really, you know, improvements in your product. are you able to get paid more for those seats that have less weight in them or are more ESG-friendly, or is that just part of the game and part of the product improvement over time that's needed?

Yeah, so thanks for the question, John. With respect to the first one on volume and mix, when we think of volume and mix, for us what really matters, and we've said this in the past, is the volume piece of it. So the mix... We're not really sensitive to if it's an F-150 base or an F-150 fully loaded King Ranch. What we really care about is getting the volume piece of it. As customer demand shifts and if we see more entry-level vehicles versus higher-end vehicles, we're not as sensitive to that aspect of it. For us, what really matters is the volume piece of it. When we talk about Pure volume that's what we really care about is the volume and so the industry returns and as we see volume coming in That's what we really need is the volume piece. It's not as sensitive to what is the mix within a platform? Whether it's high-end or low-end. It's really about the volume piece of it. That's what really matters to us And I think we've been pretty transparent on that in the past. It's it's volume that matters to us Does that help to answer your first question? Yes. Yep What I would say is what does matter to us is regional mix. As we look at where that volume comes from from a region standpoint, though, we are sensitive to that. If you look at how our different regions print, certainly as Asia comes back and when we get more Asia volume, that is positive regional mix for us. That's why we look at the back half of our year and why we've basically said holding the guide is we look at China, we look at Asia, and some of the caution that's out there, and we've said, okay, looking at that, looking at what could be there, we've basically said, okay, reason to hold the guide based on that, based on maybe a regional mix component of it, not necessarily in-platform mix, but more regional mix aspect to it.

If I move to your second question with regard to sustainable products, You almost have to look at each one individually, whether they represent a cost reduction or a cost add. Our focus, essentially, is to provide product solutions to our customers that are neutral to the current cost structure that they have on their bill of material today. We tend to package them. and look at it from a vehicle perspective of what the next benefit is, and it could be a net benefit for them. And that's why, you know, with Ultrathin, we talk about, you know, increasing interior, I'll say volume within, you know, the vehicle that allows it to displace that volume with, you know, additional batteries if that's what the customer ultimately wants. But really, when we look at our sustainable solution, we really walk from a current cost today, we'll add in a variety of products, and our attempt always is to be net neutral. And then it really is kind of a buffet style that they can our customers can add and delete what they think brings value to the way that they're trying to market position their overall vehicle. So you really have to take it individually, but collectively it's intended to be neutral.

And Doug, if I could sneak one other one in here on slides nine and 10. I mean, it seems like you're signaling that restructuring is really more an ongoing part of the business. I mean, you have some catch up to get your margins off the snuff and into targets. But it also seems like there's a signal that there's a more consistent ongoing restructuring effort that needs to go on. What do you think we should think about for expense and cash outlays for the more ongoing part of this? Because it just seems like it's going to be part of the industry or part of the business for forever.

Yeah, I think historically we've always had roughly $100 million of restructuring in. We're not trying to signal anything beyond that in a go-forward scenario. But we're taking actions as we see appropriate. We just recently announced an action on the SG&A front to reduce the amount of validation center capacity we had in Europe, for example, because we can do more of it digitally than we've historically had to do physically. And we try to really use our footprint to our advantage you know, to move work around to not only to the, necessarily to the lowest cost region sometimes, but sometimes we'll move work in to offset having to take a heavy restructuring load because we think we've got productivity in that facility that makes it competitive. And then we look at logistics. costs associated with that. So we're constantly rebalancing, but the quick answer is right now we're not signaling anything different than the historic way our business is operated.

Thank you. Our next question comes from Rod Lash with Wolf Research. Your line is open. You may ask your question.

Good morning, everybody. Mark, I kind of lost you on the 2023 bridge, because I think you might have misspoken on the inflation. But maybe just to simplify things, if we take a step back, I think at the start of the year, you guys expected a $200 million headwind from material economics and labor and a few other things. And you had something like $250 million of expectations for operational performance, recoveries, and lower inefficiencies. So it looked like a little bit of a tailwind net-net. And I'm just hoping you can maybe just give us a sense of, excluding volume, are the positives and negatives now more neutral because of the steel issue? And Jerome, on the steel, if I recall correctly, you had kind of a similar issue maybe a year ago and you wound up mitigating that with recoveries. Is there any reason why that would change?

I can take both of them if you want me to, Rod. I think on the first one, yeah, and Mark's numbers were correct. If you look at that total bucket between material econ and are what we call our sticky costs and the commercial recoveries. I mean, it'll be net this year about, call it $100 million headwind for us when you look at everything all in, offsetting with commercial recoveries. So I don't think that's really changed from anything we've said previously. What's new in that equation now is I think some of the steel that's coming in which goes to the second part of your question, the steel that we've seen recently in North America in particular where it's gone from, and I in particular talked about this a month ago out in New York, it's gone from 650 a ton up to 1200 a ton, and just when it accelerates at that pace and the lag in our indices, we eventually get it back, it just takes time for it to cycle back through our system. And that presents that kind of 10 to 20 million hurdle that we now have to look to overcome. So to your question, will we be able to overcome that this year? I don't see how we can overcome that 10 to 20. I mean, I wouldn't say anything's impossible, but we went to work really heavily in 21 to restructure those customer agreements to get to what was a lot of what I would call naked exposure on our customer agreements. We had very significant lags. We brought those in from a year to something more in the six-month range. We went from 50% exposure to 80% coverage. And I think we are where we are now. It's just now we're going to have to let those contracts work themselves through the system. And that is going to drag into 24. I think the only thing that would really help us to mitigate that is, if we see the indices now take a rapid correction between now and when we have to strike some of our updated steel contracts.

Okay. And just secondly, on the European comments you made and I think peripherally China, what's the typical payback on European restructuring that you typically see? And when you think about to the extent that some of the production commentary is driven by exports from China. Do you see yourselves as sufficiently hedged with enough exposure within China to the exporters, or do you still have to kind of take into account some negatives there?

Yeah, with regard to payback, typically the payback on European restructuring is is a two-year timeframe. That's on average. Certainly, the example we included in the DAC was we can be a bit smarter about how we handle that. That's a far better payback when we can bring business back into the organization to refill a plant that otherwise was scheduled to go dormant. With regard to China exports into the European market and what that ultimately means to us, I think it's a little bit more complex than just the direct math. If those imports increase, certainly we hope we can benefit from that in our Asia business with that revenue and the returns on the revenue, even if it's consequential to Europe. But I think what we're seeing in Europe is we're able to balance our manufacturing footprint to mitigate a lot of the cost associated with it. Where it's a direct impact to us is if we have a JIT facility and our customer closes one of their assembly plants In the case of Moore, we were able to do it, but that's not always going to be the case. I think we're essentially saying we have to wait and see how that plays out over time. We're putting together, certainly, strategies to address best-case, worst-case scenarios You know, historically, the market's run at $17 million. It's, you know, $14-ish million now. You know, if that doesn't recover, what does that ultimately mean to us? But I think, you know, at this stage, it's too early to quantify and, you know, bake into our extended year outlook. Okay.

Thank you. Our next question comes from Colin Langdon with Wells Fargo. Your line is open. You may ask your question.

Thanks for taking my question. Just to follow up on that, this is the second quarter. You talked about the potential need to restructure in Europe. How should we think about this? Are you going to be taking small steps that would be incremental that sort of aren't going to be highlighted? or you're kind of contemplating a larger sort of scale plan that we should be kind of looking out for over the next year or two?

Yeah, you should think about it in small steps and incremental, not a large-scale restructuring of our business there. We took a lot of steps, I would say, you know, even pre-COVID, but certainly during COVID, you know, to bring down our breakeven numbers you know, close to, you know, the levels that we're operating at right now. So, you know, we think we're pretty well positioned. Now, if there's, you know, something that's currently not forecasted that impacts the region, you know, that's a different story. But right now, think about it incremental and not large-scale restructuring.

To support that, Colin, an example is we just announced our tech center in Kaiserslautern. That's now public. It's like an incremental step, as Doug talked about. We go to virtual validation. That makes some of that redundant, and we had to take an action there. It's those type of incremental steps as we move along the path in Europe, not large-scale activity.

Okay. All right. Got it. And then not to circle back on steel again, but you did highlight, it's fairly small numbers, but costs are up 10 to 20 million, unlikely to kind of get help this year. Guidance is held. So what is the sort of, you know, I guess slight positive offset that enables you to hold guidance if the commodity costs are up a bit?

Yeah, I mean, I think there's, You know, some volume. I mean, you saw the Q2 volume versus what we had previously seen. Also Q2 EBITDA versus where we had previously thought it coming in at. So, yeah, volume we expect to flow through. Also some, you know, underlying performance within the business as well, helping to offset it. The team continues to, you know, obviously pedal extremely hard is some of the underlying performance. activities that are there helping to offset that action or that headwind, I would say.

And back to the mixed discussion, certainly volume in Asia is welcome volume from a mixed perspective that we think might be able to offset that steel issue.

And if steel holds the current levels in North America, any sense of how big of a headwind that is for 2024? It sounds like, I think you mentioned 80% now is for index, so I guess would that even be a big issue at all? How should we think about that?

In the long run, it's not. It's really the timing associated with when it would flow through. If you think about when it would hold, I haven't run the models count, so I don't want to speculate it. Certainly in the back half of our 24 fiscal year, it wouldn't be a significant issue. There'd be some carryover into our Q1, and we'd start to see the recoveries kicking in into 3 and 4 is how I would think about it.

One thing I would add to it is it's a little bit of the nature of the seeding business. you can't always look at these issues in isolation because within our commercial agreements with our customers, you've got their expectations on productivity. We've got our internal expectations from our supply base on productivity. This is a very transaction-oriented business, so there's always opportunities for us to engage and I'll say offset anything that is I'll say outside of the scope of our normal commercial agreements. So when we see real significant spikes in inflationary pressures on commodities, we fully expect over time we recover that. It may hit us in a quarter, but it's probably a quarter until the recovery's put in place.

Thank you. Our next question comes from James Pecarello with BNB Paribas. Your line is open. You may ask your question.

Hi, guys. Hi. Just a clarification question to start off. What was the sequential guidance commentary on the third quarter EBITDA, fiscal third quarter EBITDA?

Oh, yeah. You're referring to Q3? Yep. Yeah, so around 200 million.

Okay.

From an EBITDA standpoint. Right.

And just from a, you know, if I look at, you know, APAC regions, you do, are you expecting sequential improvement in industry volumes? Or is that a question mark in conservatism embedded within that view?

We essentially follow IHS, so if you look at, you know, what IHS says for Asia X China, I mean, it has volumes actually sequentially going down in Q3, our Q3 and 4 fiscal year. And within China, you know, it would say sequentially better Q3, Q4, but not versus first quarter. So really back half in China in particular is lower versus first half. our fiscal year first half versus our fiscal year second half using IHS volume. So really sequentially, actually lower second half versus first half. And that's, again, coming back to the 850 guide, you know, why we've said looking at, you know, that along with Europe volume, sequentially lower first half versus second half, why we've, you know, guided to that 850 number.

Yeah, but on a consolidated basis now, China is almost half of the APAC region, right, in terms of just regional mix?

Yeah. Yeah, roughly.

All right.

Yeah. Yeah. Please. Do you want to follow up on that?

No, no. It was just reinforcing the point. China sequentially first half versus second half. Following IHS is down on volume in our fiscal year because it really retimed, you know, that volume into Q4 calendar year, which falls into our Q1 2024 fiscal year.

Yeah. Okay. For the quarter, though, IHS has almost 800,000 improvement, 800,000 unit improvement for China. But I could follow up with Mark and he could tell me, that I'm confused. Higher level question on thermal comfort and Adyen's positioning and how you view the competitive landscape within this particular vertical, who you're aligned with from a supply chain perspective, is it, or could it be an advantage as a tier one supplier to have more of this content vertically integrated in-house? I'm just curious if you could share a perspective, just given the latest M&A efforts by your primary competitor.

Sure. You know, at a very high level, I would say having that capability is an advantage. It's a question in my mind how you define the capability and the competency. We think we're capable and competent. although we don't necessarily need to be completely vertically integrated on it. From an M&A perspective, you know, I'm not here to, you know, I'll just give you our opinion. I don't know that from an M&A perspective it's necessarily the way to go because you bring in a lot of integration risk associated with it. You know, what we're finding is in some cases Our customer is directing it. So that limits the growth, I would say, because there's independents that are out there, and our customers tend to balance that. Two, I would say the independents, we've got pretty good engagement with them on how we can partner and develop products collectively. and bring those to automakers who want an integrated solution. So we think we're competitive from that perspective. And then what we're doing in China specifically is our own organic development, sometimes in partnership with small Chinese suppliers, but sometimes independently on our own. which is not going down the M&A route to bring that. So to me, I always look at it like a lot of aspects of our business. You don't need to be vertically integrated. Too much vertical integration sometimes has a negative effect. Do we have the competency? Do we know how to work with partners and bring a solution together for our customer? I feel pretty good about where we're at there. We certainly understand what the other guys are doing. We understand the motivation associated with it. We're fine with our approach that we're taking on it.

Great. And Shirley, it looks like we're at the bottom of the hour, so this will conclude the call today. If there's any follow-up questions, please do not hesitate to reach out to myself or Eric this afternoon, and we'll be happy to assist.

Thank you. Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.