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.