Adient plc

Welcome to the Adiant fourth quarter financial results conference call. Your lines have been placed on a listen-only mode until the question and answer session. At that time, if you'd like to ask a question, you may press star one. Today's conference is being recorded. If you have any objections, you may disconnect at this time. And 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 Adiant's results for the fourth quarter and full year 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 Q4 and full-year financial results. In addition, Jerome will provide you with the company's initial outlook for fiscal 2024, 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 GAAP basis, we'll 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. Thanks to our investors, prospective investors, and analysts joining the call this morning as we review our fourth quarter and full-year results for fiscal 2023. Turning to slide four, let me begin with a few comments related to the quarter and a few about Adiant's full-year successes, starting with the numbers. You can see Adiant financial performance as highlighted by certain key financial metrics in the box on the right-hand side of the slide. Adiant finished the year strong, delivered improved year-over-year earnings growth in Q4 fiscal 23, underpinned by the relentless focus on execution, operational excellence, and better-than-expected production volumes versus internal expectations at the beginning of the quarter, and despite labor-related work stoppages at certain customers. ADAN's fourth quarter results continued to build on positive momentum established earlier this year. For the most recent quarter, revenue, which totaled $3.7 billion, was up $79 million compared to last year's fourth quarter. Adjusted EBITDA totaled $235 million, up $8 million year-over-year. And finally, Adiant ended the quarter with a strong cash balance and total liquidity of $1.1 billion and $2.0 billion, respectively. Given the uncertainty surrounding the timing and magnitude of the loss production due to the strike-related work stoppages, Adiant executed actions to preserve cash and liquidity as we progressed through the quarter. For the full year, Adiant delivered on its commitment to increase earnings margin and free cash flow versus fiscal 22. Jerome will expand on the full year 2023 fiscal year results in just a moment. Ad ant successes in 2023 extended beyond our strong financial performance. A few examples include the team's execution of day-to-day processes that enable world-class launch execution, continuous operational improvements, and thoughtful cost reductions. 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 that provide value add to our Adiant stakeholders every day, whether that's our customers, suppliers, or employees. A variety of customers and automotive industry awards reinforce Adiant's commitment to excellence. The company and its employees were recognized with approximately 60 awards in fiscal 23. Highlights include GM Supplier of the Year Award, J.D. Power Award for receipt satisfaction, and many more, as you can see. I mention these awards as proof points that the team is operating at very high levels across the company. The accomplishments in fiscal 23, both financial and operational, are even more impressive considering the challenging external headwinds that impacted the industry and add-in. including labor inflation and availability, the strengthening dollar, and a still fragile supply chain. The company's unwavering focus on our strategy enabled us to successfully navigate these challenges and position Adiant for future success. Speaking of challenges, in turning to slide five, I wanted to provide a quick update on how the UAW strike here in North America and its impact on Adiant. To begin with, we look at production disruptions through two lenses, the near-term impact and the potential longer-term negative effects the strike could have on the industry. Near-term, the strike has impacted adding just-in-time operations as well as our component plants. With the strike beginning late in our fiscal year, the negative impact was limited in fiscal 23. Call it around $30 million in sales and under $5 million in EBITDA. As the strike extended and began to impact other edient facilities, including JIT and other component plants, the impact increased. We're encouraged. Progress has been made over the past week to 10 days to settle the strike. That said, given the timing, edient's new fiscal year, the work stoppage is through October and early November. have undoubtedly had a bigger impact on fiscal 24 compared to the limited impact on ADEON's fiscal 23 results. Through early November, we estimate the impact on our 2024 sales in EBITDA have been approximately 125 million and 25 million, respectively. Jerome will have additional commentary related to the impact of the strikes on fiscal 24 with his prepared remarks. As you would expect, the company moved quickly to lessen the negative impact. We've listed a few of the actions on the right-hand side of the slide. I won't read through the list other than to point out the company went into cash conservation mode and reduced or eliminated non-discretionary spending early in Q4. Given the duration of the strike, we are concerned about lingering downstream impacts to the industry, especially related to supply chain and its ability to run production at rate when called upon. The financial health of lower tier suppliers and labor availability are just a few. In addition, risks or repercussions related to the increased labor costs at D3, such as the typical playbook to extract value from the supply base, the ability to maintain existing and future product plans, and the ability to complete against lower-cost manufacturers, especially Chinese manufacturers that not only have a lower cost base, but new products that are extremely well-contented and desired by consumers. No doubt, concerning on many levels, that said, and yet similar to prior external headwinds, has and will continue to execute actions to lessen the impact of these negative pressures. Turning to slide six, you've heard us mention on several occasions that Adian's focus strategy is a key enabler to our success at driving the business forward and navigating through external challenges. The key tenets of the strategy are laid out on the left-hand side of the slide. As a reminder, the top four tenets has helped drive strong business and financial performance in both fiscal 2022 and 23. At the bottom of the slide, you'll see a fifth tenant embracing and leveraging a shift in industry dynamics. When looking ahead, we feel it's imperative that Adiant adapt to the evolving auto industry, an industry that is being influenced by a number of factors, including the pricing and affordability of EVs versus traditional ICE platforms, which is clearly impacting the pace of EV adoption here in North America. In fact, as you're aware, certain traditional manufacturers have recently announced various retiming of EV launches to align with demand. Radiance processes, which focus on acid reuse and flexibility, enable the company to meet the EV or ICE production requirements. In other regions, namely China, the industry is being reshaped by the growth and influence of the Chinese domestic auto manufacturers. In addition, access to technology and innovation is taking place through global partnerships versus in-house capabilities. The one constant, the importance of being cost competitive. Recognizing these shifts resulted in us fine-tuning the company strategy going forward to ensure that we have the right vision to create additional value to Adiant stakeholders. Speaking of value creation and turning to slide seven, One exciting trend that has begun to emerge, especially in China, is added content within seating. Presently, China is bringing a vehicle concept to the market that is very different from traditional auto manufacturers with a focus on electronics, functionality, ADAS, and interior configurations around creature comfort. Adiant's zero-gravity seat, built to balance the ultimate in comfort by keeping safety in mind, is an example of the kind of innovation that these new players are generating. Longer term, as advanced driver assistance systems and comfort features become more prevalent, and as seating solutions intersect with passive safety systems, seating content is expected to outpace vehicle production as OEMs adopt this innovative new interior configuration and features. Although green shoots of this added content are primarily in China, Today, we're optimistic that the trend will cascade into other regions. Important to note, Adiant's ability to provide innovative solutions for our customers in China with speed and world-class execution are critical to our past and future business wins with this customer group. Turning to slides eight and nine, now let's take a look at our launch performance and new business wins. As you can see, slides eight highlight a few of EDIAN's in-process and upcoming launches, and it continues to execute at a high level on launch performance. The programs highlighted represent a good mix of wins across EV powertrains and ICE powertrains and are diversified across a number of segments, including SUVs, luxury, mass market, and contain a high level of vertical integration across complete seat, foam, trim, and metals. I'd also like to point out that these launches include a number of innovative technologies that are being well received by our customers, including our zero-gravity seat, which increases ergonomic comfort and body pressure distribution, and Chang'an's E12 in China. As you can see at the bottom of the slide, we've provided some commentary on what you can expect for fiscal 2024 with respect to volume and complexity of launches. Generally speaking, volume and complexity are up in the Americas, Europe, and Asia, outside of China versus last year. Despite that fact, I'm confident we'll maintain our focus on process discipline across launch readiness, driving similar results or better versus 2023. Flipping to slide nine, the strong operational execution and launch performance as well as innovation I just talked about are foundational for new business wins. A few program awards are highlighted on the slide, and it's noteworthy that these programs include a high level of vertical integration of both bone, trim, and metal components, as well as the JIT business. We continue to secure our replacement business. We're winning our fair share of new business, leveraging our existing footprint. And we're having success winning business while navigating the difficult macro conditions and related commercial discussions. Before handing the call over to Jerome with slide 10, let me conclude with a few comments related to our initial thoughts on 2024. To begin, Addion's focused strategy continues to drive the business forward. Our fiscal 2023 financial and operational results, in addition to our year-to-date results, provide positive proof points. The team delivered many accomplishments last year that were hard fought, especially considering the external operating environment. Although we're confident that positive momentum will continue into 2024, we're also aware the new year will likely bring a unique set of challenges and obstacles to navigate. The few that most of you have commented on include temporary production disruptions that are nearing resolution, concerns related to supply chain and the ability to run at rate, restart of production in the Americas, the impact of FX movements, stubbornly high interest rates that are likely to be in place through the midterm, and uncertainties around consumer demand. Similar to prior years, Adiant has and will continue to develop and execute contingency plans to help mitigate and lessen any potential impact. I'm confident combining our resolve with an unwavering commitment to the company's Focus strategy, we will continue to drive the business forward in 2024, further positioning Adiant for sustained success, ultimately driving increased value to all of our stakeholders. With that, I'll turn the call over to Jerome to take us through Adiant's fourth quarter and full year 2023 financial performance and outlook for 2024.

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. I'll focus my commentary on the adjusted results, which exclude special items that we view as either one time in nature or otherwise skew important trends in underlying performance. For the quarter, the biggest driver of the difference between our reported and adjusted results relate to a non-cash valuation allowance release, pension mark to market, restructuring and impairment costs, and purchasing accounting amortization. Details of all adjustments for the quarter and the full year are in the appendix of the presentation. High level for the quarter, sales were approximately $3.7 billion, up 2% compared to our fourth quarter results last year. Improving vehicle production in the Americas combined with positive impact of currency movements were the primary driver of the year-over-year increase. Adjusted EBITDA for the quarter was $235 million, up $8 million year on year. The increase is primarily attributed to the benefits associated with improved business performance and higher volume and mix. These benefits were partially offset by the adverse impact of net commodities driven by recovery timing, primarily in the Americas. I'll expand on these key drivers in a minute. Finally, at the bottom line, Addian reported an adjusted net income of $48 million, or 51 cents a share. Slide 13 provides a similar high-level summary of Addian's full-year financial metrics. For the year, sales were $15.4 billion, up 9% compared to fiscal 2022. Improved volume and mix across all three regions was the primary driver of the year-over-year increase. Adjusted EBITDA was $938 million, up $263 million year-on-year. The increase is primarily attributed to benefits associated with improved business performance and higher volumes partially offset by increased net commodities. Just a reminder, the $938 million includes $30 million of insurance recoveries that are considered one time in nature and therefore should be backed out of the run rate going forward. At the bottom line for fiscal 2023, EDIT reported net income of $205 million or $2.15 per share. Moving on, let's break down our fourth quarter results in more detail. I'll cover the next few slides rather quickly as 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 14, we reported consolidated sales of approximately $3.7 billion, an increase of $79 million compared with Q4 FY22. The primary drivers of the year-over-year increase included the positive impact of currency movements between the two periods of $49 million and the positive contribution from improved volumes and pricing of $30 million. Focusing on the table on the right-hand side of the slide, Adyen's consolidated sales across the regions were impacted by adverse customer mix in the quarter, which we view as temporary, as well as the negative impact of non-reoccurrence of material econ recoveries in FY22. For the full year, Adyen's overall sales outpaced production by about 300 basis points when adjusting for FX. Asia demonstrated strong growth over market, outpacing production gains by two times. No surprise, this was led by China, where consolidated sales were up 8% versus production in the region, which was up approximately 2%. America's end of the year generally in line with production. NMEA was modestly lower, driven by our planned exit of certain low profit platforms. As Doug mentioned earlier, given the favorable trends that we're seeing in China related to added seeding content, we'd expect growth over market to continue as we look to the future. With regard to Adyen's unconsolidated seeding revenue, year-over-year results were up about 3% adjusted for FX. Increased production volume at our unconsolidated joint ventures, primarily in China, supported this increase. Moving to slide 15, 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 $235 million in the current quarter versus 227 million reported a year ago. Primary drivers of the year-on-year comparison are detailed on the page. Positive influences include $9 million associated with improved business performance. The business performance bucket includes items such as improved material margin and lower year-over-year input costs, freight, for example. In addition, volume and mix and increased equity income benefited the quarter by $7 million and $5 million, respectively. Partially offsetting these positive influences was a net commodity headwind of $12 million within the Americas, primarily driven by the timing of contractual true-ups. Similar to past quarters, we've provided the detail of our segment performance in the slides in the appendix of the presentation. Let me now shift to our cash liquidity and capital structure on slide 16 and 17. Starting with cash on slide 16, I'll focus on the full year results as the longer timeframe helps smooth some of the volatility in working capital movements. Free cash flow, defined as operating cash flow, less capex, was $415 million. This compares to $47 million in fiscal 2022. Key drivers impacting the comparison include the higher level of consolidated earnings driven by improved volumes and better overall operating environment, lower interest paid driven by the reduced level of debt, and the deferral of interest related to the March 2023 debt refinancing, and typical month-to-month working capital movements. I'd also point out As seen in the middle of the chart, timing and temporary compensation-related benefits provided a significant positive benefit to the year-over-year comparison. Given the nature of the drivers within this line item, such as the day of the week the quarter closes, year-over-year bonus accruals, and the impact of compensation-related changes between the two periods, the net impact tends to smooth over the long term, very similar to working capital. In fact, the benefits experienced in 2023 are largely expected to reverse in 2024. More on Adiant's fiscal 2024 expectations in just a few moments. These benefits were partially offset by the timing of tooling recoveries, VAT deferral payments, and increased engineering in support of customer launch activities. One last point, Adiant continues to utilize various factoring programs as a low-cost source of liquidity. At September 30, 2023, we had $170 million of factored receivables versus $269 million at the end of fiscal 2022. Flipping to slide 17, as noted on the right-hand side of the slide, we ended the year with about $2 billion in total liquidity comprised of cash on hand of $1.1 billion and roughly $900 million of undrawn capacity under Addion's revolving line of credit. The elevated level of cash reflects the company's cash conservation efforts executed during the quarter to ensure Addion's balance sheet remains strong and flexible given the uncertainty related to the timing and duration of the work stoppages at certain of our customers as a result of the UAW negotiations. Recent news related to the tentative agreements at our customers should enable the company to resume its balanced capital allocation plan. As a reminder for the year, shares repurchased and cash deployed total approximately $1.8 million and $65 million, respectively. And as a reminder, during the March 2023 debt tender, $100 million of cash on hand was used towards voluntary debt repayment. Looking forward, cash available for future returns and share repurchases will be based not only on fiscal 2024 free cash flow, but also inclusive of the cash from the balance sheet, considering we ended FY23 with an elevated level of cash. Addiance debt and net debt position at year end totaled about $2.5 billion and $1.4 billion, respectively. One important point to call out, the strong financial performance achieved during 2023, combined with our focus on deleveraging, has driven our net leverage ratio on a trailing 12-month basis to 1.5 times, within our target range of 1.5 to 2 times. This is no doubt a very good result. With that, let's flip to slides 19, 20, and 21 and review our outlook for fiscal 2024. Starting on slide 19, as Doug noted earlier, Adiant enters 2024 from a position of strength. We successfully navigated through a challenging 2023 and drove the business forward as evidenced by the operational and financial accomplishments just discussed. That said, 2024 began with a new set of obstacles that the team is presently navigating. The guidance provided today is based on the current operating environment. On the right-hand side of the slide, we've laid out our planning assumptions for production and FX compared with FY23. The foundation of our FY24 plan is generally aligned with October's S&P estimates. To the far right of the chart, we've highlighted our expected sales performance by region. When adjusting for FX, we expect our sales to be slightly favorable to the industry in North America, in line with the market in Europe, and significantly better versus the market in China. China's outperformance is primarily attributed to the roll-on of various new business and Adyen's favorable customer mix. In the lower right-hand corner, we've provided our FX assumptions, which as many of you have commented on in your recent reports, is expected to be a significant headwind year-on-year. In fact, based on our current assumptions, we estimate the year-on-year impact 2023 to 2024 for Addian's top line in EBITDA to be about $180 million and $60 million, respectively. Outside of production and FX, other factors that are on our radar include labor availability and cost, elevated interest rates, which are forecast to remain higher for longer, consumer demand, and geopolitical concerns. With that said, taking these factors into consideration and based on current market conditions, we expect to deliver earnings and margin growth in 24 versus 23. Let's flip to slide 20 and review key influences on an 80-inch FY24 revenue in EBITDA excluding the impact of the UAW strike which has already had an impact on the company's 2024 performance. First, on revenue. High-level volume and mix are expected to drive a year-over-year increase in sales, call it about 2%, which is generally in line with S&P's October forecast. From an FX standpoint, based on assumptions outlined on slide 19, it is expected to partially offset the benefit of higher volumes, call it an approximate $180 million headwind. The Chinese RMB is expected to be a substantial driver of the headwind and the Euro to a lesser degree. In total, Adiant's 2024 plan for revenue excluding the impact of the UAW work stoppages at our customers was expected to land between $15.6 and $15.7 billion. Based on the environment today, we estimate the strike-related disruptions and production stoppages at our customers through November 3rd negatively impacted Addion's top line by approximately $125 million. Although it's realistic to assume certain of the lost production will be made up, it's premature to quantify at this time. As you would expect, the company will provide updates as fiscal year 24 progresses with regard to the strike-related volume recovery. The bridge for EBITDA has a few more components. First, the positive influences, which include the benefits of improved business performance, volume, and to a lesser extent, a $10 million benefit from net material economics. On the topic of net material economics, some of you might question the magnitude of the material econ benefit. Let me remind you of several factors that can influence that. First is the timing of recoveries. Second is the fact that commercial negotiations are often settled as a basket of goods and cannot always be directly linked to specific items. And third, the company has yet to finalize its 2024 steel contracts in Europe. The important takeaway is that Adiant continues to be successful with its commercial negotiations to mitigate inflationary pressures. Moving on to the headwinds. FX, which is expected to pressure earnings by approximately $60 million, or 30 basis points, FY24 versus FY23. The $60 million headwind includes a translational impact of about $20 million. Although the Mexican peso is driving the majority of the transactional headwind, various currencies within Europe, such as the Polish zloty, are also contributing to the pressure. Equity income is about $20 million lower than FY24 versus last year. The primary driver is an additional pricing agreement revision between Kuyper's JV partners, which reduces equity income but improves Adian's consolidated EBITDA primarily in the Americas. And finally, minor footprint actions in Europe and further fine-tuning of the company's operations will impact the year-over-year comparison. In total, Addion's 2024 plan for EBITDA excluding the impact of UAW work stoppages at our customers was expected to land north of $1 billion. Based on the environment today, we estimate the strike-related disruptions and production stoppages at our customers through November 3rd negatively impacted Addion's adjusted EBITDA by approximately $25 million. Consistent with my comments related to sales, although it's realistic to assume certain of the lost production and earnings will be made up, it's premature to quantify. We'll provide updates as fiscal year 24 progresses with regard to strike-related recoveries. Turning to slide 21, we've provided our fiscal 2024 guidance for all of the for all of Adiant's key financial metrics, including the impact of the strike-related production stoppages through November 3rd. Having just covered revenue and adjusted EBITDA and equity income, I'll begin with interest expense. For fiscal year 24, we forecast interest expense to be about $185 million, given our expected debt and cash balances. Cash interest is expected to be slightly higher, call it $195 million, resulting from the deferral of the March 2023 refinancing. Given expectations for improved profitability year over year, cash taxes are forecasted to be $105 million. For modeling purposes, you can assume between $115 to $125 million of adjusted tax expense. CapEx is expected to trend back to a more normalized level, call it approximately $310 million. Again, 2023 was depressed given the delay of certain launches at our customers. And finally, free cash flow is projected to be approximately $300 million. Key drivers impacting the year-over-year comparison include the higher level of cash interest, CapEx returning to a more normalized level, and the modest increase in cash taxes. Also, as mentioned in my 2023 cash commentary earlier, the timing benefits recognized in fiscal 23 related to certain accrued compensation are expected to reverse. Adjusting for fiscal 2023's outperformance or smoothing FY23, FY24 should provide a clearer view of Addian's run rate cash generation. With that, let's move on to the Q&A portion of the call.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please unmute your line and press star 1. You will be prompted to record your name. 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 Colin Langan with Wells Fargo. You may ask your question.

Oh, great. Thanks for taking my questions. Doug, any comment on why, you know, leaving, you know, by the end of the year, it seems like you guys have been making pretty phenomenal progress on sort of your multi-year plan. Why not sort of stay it out until you fully close the margin gap to the targets you've been talking about?

Sure. Thanks for the question, Colin. As you would imagine, there's certainly personal reasons I won't discuss on the call, but from a professional perspective, I've been here five years. You know, the focus over those five years was really to, you know, get the company back to basics, focus on operational excellence, change the culture around that. I think, you know, we've successfully done that. We've spent time on the call today talking about the dynamics and the shifting dynamics and where we need to go in the future from a technology perspective and shifting customer perspective. And I just felt at this time it was a good exit point for me. My operational background got the culture on the execution side back and with the team that transitions, we can really focus on how we shift from a technology and customer perspective. I just think, generally speaking, five years is a good timeline for a CEO. And, you know, in refocusing on our energies on where we move in the future, we'll be well served under Jerome's leadership.

Oh, got it. Well, congrats, Jerome. Maybe we'll just switch to the guidance. I think in the past you've talked about 100 basis points of margin performance per year over the next three years. I think you outperformed last year. What is offsetting? Is that all just the FX kind of washing out some of that performance that you have executed in the pipeline? It's kind of keeping the year-over-year margin expansion a bit more muted?

Yeah, so I think your commentary in terms of if you look at 23, we executed around about 130 basis points of margin expansion. If you look at 24, net of FX, it's around that kind of 70 basis points. So over the two years, it's still combined 200 basis points, and it's really the FX piece of it on the transaction side in 24 that's muting really kind of that performance piece of it, and especially the Mexican peso piece. The teams are aggressively working with the customers and working to claw that back. There are going to be very difficult discussions that we'll work through and work to pursue, but it is an unwelcome development on our path at the moment.

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

Good morning, everybody. A couple questions. I first want to say congrats, Doug, on your retirement. You've done a lot at this company and in your career, and I wish you the best in your next adventure.

Appreciate it, Rod. Thanks.

I wanted to ask you just firstly, on this FX impact specifically, it was a million dollars on your EBITDA in the fourth quarter, and just looking back, and the Zloty, the RMB, and especially the Peso looked like they were pretty significant headwinds all year. Can you maybe just elaborate a little bit on what's driving the acceleration of the $60 million?

Yeah, and so it really comes down to, Rod, our hedging strategies and how our hedging strategies execute, and that you know, we were in a position where we were able to, you know, protect or smooth the company, and, you know, as a result, our end customers throughout the 23 fiscal year. Obviously, that's temporary. You can't hedge things forever, and so as some of those hedges roll off in 24, we're now exposed to the market movements and the dynamics and the shifts of the peso, and so it's really getting to where the peso settles in at now And that's where you're seeing these movements occurring and you're seeing this big shift or headwind year over year.

Okay. And then also just another maybe housekeeping thing. I'm only seeing, I think you referenced $10 million of reversal on the commodities. You absorbed something like $120 million of commodity headwind this year. Can you talk a little bit about whether that's just conservatism or whether there's something else that's happening there that's changing what you have to absorb versus pass along. And maybe just remind us of that bridge to the 8% from here, from what we saw, I guess, X, that $30 million gain you did like 5-3 in 2023. How do you see that coming through from volume, your performance, and contract rollovers?

Yeah, so I'll take the material question first and then go to the second question after that. So on the material question, you know, if you recall the 100, just call it 120 million, you know, about almost half of that is a inventory reval topic, which is just a true up on the balance sheet of our inventory that we have. And then there was another significant portion of that, less than a third of it, which was really a non-recurring benefit that we had in 22 from a customer settlement that did not repeat in 23 that caused us an issue. And so then the remaining amount that we have to really go and get in our 24 is there's a couple of factors on the material side. One is we have 10 million of benefit, but then also we haven't cut our 24 European steel contracts yet. So we're in the process of working through those. And then the last piece I would say is when we think about recovering some of these material econ deals, it's not always going to be a straight flow through on that net commodity line. It's really a basket of goods discussion with some of our customers where we don't have a perfect recovery mechanism. And I think we've always said we're somewhere between 70% to 80% on steel. And then it's a 12 to 18-month lag on the window. And so we don't have these perfect recovery mechanisms. It's going to be a basket of goods discussion. And I think the way to think about it is if you look at, you know, 22 to 23 and kind of that flow-through margin, you know, we expanded our margins by, you know, call it if our normal flow-through is 16%, we actually expanded by, you know, almost 200 basis points. in spite of all that commodity headwind that came at us, really because we were able to negotiate baskets of goods with our customers in spite of all that commodity headwind. And that's how I'd really think about, you know, those commodities and how they flow through. And then same thing in 24, if you look at kind of the standard volume flow through, we're actually, you know, greatly exceeding kind of a normal 16 or 17% contribution margin on the volume. because we're getting some of those commodities back and other basket of goods is the first piece on the commodity side. And then on the topic of how to think about the progression of the margin, the pathway to an 8% margin target, there's still the other volume piece that we have to get back up to a 90 million run rate within the industry. That's still, call it roughly a third of the piece of the story that we have to get there. We'll end this year now at call it that 6.4, but still about a third to get there. It's no longer 100 basis points, 100 basis points, 100 basis points, but it's about a third of that remaining gap that's out there. The other big piece that's still out there now is really this roll on, roll off of some of these contracts that we have in our network. And we've said you know, a lot of those start to roll off in earnest in the back half of 25 and 26. And we really hit full run rate on that in kind of the 26 timeframe when those roll off. And that's the other, you know, I'd say big chunk. And then whatever remains is the business performance piece of it to make up that gap.

Thank you. Our next question comes from John Murphy with Bank of America. You may ask your question.

Good morning, guys, and congratulations to all of you on sort of a hard-fought next steps in your lives and careers. It's impressive. Just a first question on cash conversion, Jerome. The numbers, obviously, to finish the year were very strong, given the focus on cash conservation. The number for 24 looks pretty good. I'm just curious. Curious, is there any kind of swing factor to the negative in 24 because there was such a strong performance at the end of 23? And how do you think about cash conversion over the mid to long term in the business?

Yeah, I mean, in terms of a swing factor, I think there's a couple of things. One is, if you look at CapEx as an example, you know, CapEx, we ended 23 at call it a 260 million run rate and we'll go into 24 at kind of 310 level. You know, there was a lot of these cash conservation activities that we had in the business really driven by Doug and the team as we knew with the UAW strike, we really had to kind of batten down the hatches and get aggressive from a cash conversion standpoint. So there's that, you know, that element of normalization. We also had from a, you know, a couple of customers actually just ARAP timing. Nothing we did, they actually timed it out a bit differently. So there is a swing in there that occurred. We won't necessarily quantify it, but there is a level of swing. So when you think about long-term cash conversion, I'd look at that number that we have in 24, kind of the 300 on 985 is the long-term cash conversion rate for the business going forward. I don't know, Mark, if there's anything you want to add.

Yeah, the only other thing I'd say, John, when I think about longer-term cash conversion, right, our calls for cash going forward are pretty stable, right? So if you just think about what the drivers for cash is going to be, it's going to be EBITDA growth, right? Because I know what my interest is going to be. I know my restructuring is down to a normalized level. My cash taxes, right, thanks to our, you know, plumbing that we've set up, you know, is very favorable. So really, with the calls for cash stabilized, I'd really look at EBITDA growth and use that as a proxy for where you see free cash flow going in the forward.

That's very helpful. And then just a second question. You guys snuck this in in one of your slides that in China, you're going to swing. I mean, you have a leading position in China already, but from 40% Chinese domestic mix in China to 60%. But you didn't give a time frame on when that was going to happen. Just wondering if you can maybe talk to that, and then also if you've got a handle on at this point and where this will go over time, the mix of your vehicles that stay in-country versus those that get exported, because obviously China swung to a major export hub in a way over the last two years. So as you're increasing that mix to the Chinese domestics, That might be helpful in the market, but might even be more helpful on the export basis. I don't know if you can give us some color on that.

Yes. So, first of all, appreciate your comments on the leadership transition. With regard to that mix of customer change, we're anticipating that's going to happen over, you know, definitely in our five-year planning period, probably along, you know, the three-year timeline. And we're fairly confident in that because when you look three years out, the bookings are, if not done, are clearly visible. And we view that with a high level of confidence. With regard to the amount of vehicles China is exporting right now, as you know, those are lower level vehicles. And have not necessarily been on our radar. You know, our focus certainly has been on the Chinese domestics, certainly the ones that are growing or outgrowing the market. You know, we're still focused on the luxury segment, you know, and still paying attention to our traditional customer base, though we clearly see the mix changing. You know, I don't think it's crystal clear what's going to play out over the course of the next five years. Certainly there's indications that Europe's going to put up some level of resistance that's probably going to drive domestic Chinese, and they've already signaled that, to reshore in the European market in Eastern Europe. But if If it continues to be an export market and those vehicles shift into the higher end vehicles, we think we're well positioned there. If they move and reshore into the European market, we think our infrastructure capability there in Europe, particularly in Eastern Europe, puts us in a pretty good position. So we're pretty confident the way that is going to play out. As you know, it's, like I said, it's not crystal clear how that's all going to come together. But we do understand, you know, the competitive advantages that the Chinese have. And, you know, that's a compelling case for them to continue to grow market share.

Thank you. And if a question comes from Emmanuel Rosner with Deutsche Bank, you may ask your question.

Thank you very much. So I appreciate your assessment of the shift in industry dynamics that is now taking place. And I wanted to hone in a little bit on electric vehicles in particular. So as you mentioned in the slides and in the prepared remarks, there's a little bit of a push out of some of these launches or reduction of some of the near-term EV volumes, especially in North America. Can you comment to what extent, if any, This is impacting your business. This is impacting your backlog. Does it have an impact on your gross over market in the near term? And specifically, and maybe second part of this question, when I look at the gross over market, you know, guided for 2024, which seems to be about a point, maybe a little bit below average when it seems like you were heading in an above average type of direction. I'm wondering if EV push out is a factor within that.

Yeah, I mean, what's happening on the EV front, as you correctly point out, is primarily a North America-related issue. I think maybe to a lesser degree a European issue. But if you look at where the penetration's at right now, it's not really having a huge impact on us as a company when we look at our, you know, backlog and outlook. You know, characteristics, know what happens with our customers if they pull back on one they extend you know the you know a nice platform to offset that um so we you know still see relatively stable level of production in china we're not seeing any pullback i think we've got eight significant launches um scheduled for china this fiscal year, no indication at all that our customers are pulling back on those launches. So I'd characterize it as a North America issue, and I'd just look at EV penetration rates as they exist today, being relatively small, not hugely disruptive to how we look at our outlook in the region.

And I guess the second part of the question around this year's gross over market, about one point, you've been running it one and a half on average for the last three years. I think your comment in the last earnings poll suggested that with this success in China, maybe you could run a little bit above average. This seems to be maybe a little bit less than planned. So can you maybe just discuss the factors in that?

Well, I think one is, I mean, One is there's a significant FX weight because of the RMB and our China growth. So the growth is still significantly there in China, but you're seeing a really big FX impact on that. Just a comment, and then two, if you look at what we said last call versus this call, or even for the last year, I think it's really we've said our Europe market will kind of grow at or even slightly below because of planned exits in Europe. That's still holding. North America's kind of at market. That's still really where it's running at. And China's significantly outpacing. And we still expect China to significantly outpace. So there's no, I really don't see any change from that standpoint, Emmanuel, if you would.

Thank you. Our next question comes from Joe Spatz with UBS. You may ask your questions.

Thanks, and my congratulations to the three of you on the call as well. Maybe just to pick up there, if North America or if America is roughly flat, Europe could be down, you have growth in China, and then we think about some of the detailed EBITDA impacts you talked about, the transaction impact in America, some of these footprint actions in in Europe and China, maybe just help us understand by region where you still have greater room to drive that business performance and maybe a little bit of a color by the regions because it does seem like, at least from a top line perspective and with some of the cost issues you talked about, it almost seems like most of that margin performance has to come out of Asia, unless we're thinking about that incorrectly.

Yeah, I'll start out, and then Jerome and Mark can make additional comments. I think first and foremost, what I would point to in Americas and in EMEA is it's still been a very volatile volume market. And as we pointed to in the past, every time volume stabilizes, that means the overall environment is relatively stable. So we get the benefit of volume. But what we get added to that is business performance, because we can really drive productivity in our plants and get incremental variable margin out of the business. So when we think about on a go-forward basis, if we can see some stabilization in volume in those two regions, there's added benefit there. With regard to China, I would characterize that as a market that's clearly developing faster than the other markets relative to our product segment. If we just look at the content per vehicle that's being driven in China right now, it's fairly significant to the point where historically it's operated at a lower level of content per vehicle. And as we go out a few years in our planning horizon, we're seeing with EV adoption and the way Chinese automakers are contenting their vehicle from an interior standpoint, we see significant content add. And then if we look at this whole concept of vertical integration as kind of a final piece and the way we've really targeted our new business wins, we're getting a much better vertical integration profile on our business. Definitely in the Americas, it is really the way China continues, Asia continues to operate. and even true, albeit maybe to a lesser degree, in Europe. And as we look at that improved vertical integration, that's historically been just a better profitability profile on our business. And again, just a reminder, that vertical integration doesn't necessarily mean that we're going to produce all that material because that, as I think about our business, One of the things we're staying true to is kind of the fundamentals of this business can operate with relatively low margins, but if we're good asset managers, we can generate a lot of cash. So we're looking, you know, it's vertical integration in terms of our ability to control the supply chain. So when we kind of look at it from those different parameters, if you will, you know, I think we're pretty optimistic that Stabilization helps us the way our new business comes on and what we're not winning from supply chain control and then just what's happening in China with the amount of content being driven into vehicles. We think that's particularly positive. So we should see performance improvements out of all three regions and not just being dependent on Asia to continue to drive the the profitability in the business.

Thank you. And our last question comes from James Piccarello with BNB Paribas. You may ask your question.

Hi. Good morning, everyone. And congrats, Doug, on the news. Just two housekeeping ones. Regarding the equity income, I'll look at the $20 million year-over-year downside. Can you just quantify what portion of that attributes to the Kuiper JV rate? My apologies if I had missed that. And does that benefit the America segment?

Yeah, I mean, we didn't provide the breakdown between how much of that's the Kuiper JV versus how much of it is other JVs within the region. Yeah, at this time, I don't think we will provide the breakdown. of it, I'd say, yeah, as we get further on in the year and we see how the equity income starts to flow in, we'll start to provide the breakdown. But it will benefit the Americas is how to think of it. Yes.

Okay. Understood. And then on the footprint actions, in that one slide with all the detail packed around the guide, Is the net EBITDA in fact 20 million positive or negative to the S424 bridge?

Yeah, so it's a negative 20 million. And the largest one on that 20, the vast majority of it, was in 2023 we had the opportunity to really go through and deconsolidate one of our operations in China. It was a unique opportunity. Looking forward, we had the ability to harvest some cash out of it. It had a de minimis return going forward. So we took advantage of that. It has a, you know, obviously a year-over-year impact on EBITDA for us. But from a cash standpoint, it was the right thing to do. But it does present a year-over-year headwind for us from an EBITDA, consolidated EBITDA standpoint.

Is there an associated revenue impact as well since you're deconsolidating it or no? No.

Yes, there's an associated revenue impact, but it's more than made up by the increasing sales that we see from our other operations in China.

Great. And surely it looks like we're at the bottom of the hour, so with that, we'll move to conclude the call. If there's anybody that has additional questions, please feel free to reach out throughout the day. Thank you.

Thank you. This does conclude today's call. We thank you for your participation. At this time, you may disconnect your line.