Adient plc

Welcome to Addiant's second quarter financial results earning call. I would like to inform all participants that your lines have been placed on a listen-only mode until the question and answer session of today's call. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mike Heifler. Thank you. You may begin.

Thank you, Amanda. Good morning, everyone, and thank you for joining us. The press release and presentation slides for our call today have been posted to the investor section of our website at aviant.com. This morning, I'm joined by Jerome Dorlak, Aviant's President and Chief Executive Officer, and Mark Oswald, our Executive Vice President and Chief Financial Officer. On today's call, Jerome will provide an update on the business, followed by Mark, who will review our Q2 financial results and outlook for the remainder of fiscal 2024. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Jerome and Mark, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to slide two of the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. And with that, it's my pleasure to turn the call over to Jerome. Thanks, Mike.

Good morning, everyone. Thank you for joining as we review our second quarter results, discuss the drivers for our revised full-year outlook, and share insights into the long-term direction of the business and how we plan to create value for our shareholders. Turning to slide four, let me begin with a few comments related to the quarter. I'm proud of the Adiant team for delivering strong results underscored by 60 basis points of margin expansion from a year ago through being nimble, finding incremental efficiencies, and maintaining a laser focus on flawless launch execution. The team was able to overcome a production volume environment that was weaker than ingoing expectations, driven by slower than anticipated ramp of key launches, and softening EV demand in the Americas and EMEA regions. The Americas and EMEA were able to proactively take out costs through austerity measures, reduced freight expense, and carefully controlled launch expense, driving improved business performance in the face of volume challenges. In China, we continue to execute at a best-in-class level operationally, which drives commercial success and new business wins. Turning to Adyen's key financial metrics for the quarter, which are shown on the right-hand side of the slide, revenue for the quarter, which totaled $3.8 billion, was down about 4% compared to last year's second quarter. Adjusted EBITDA for the quarter, which totaled $227 million, was up 6%. At the end of the quarter, with a strong balance sheet with modest leverage of 1.7 times and a strong cash and total liquidity position of $905 million and $1.9 billion, respectively. We've highlighted a number of customer and industry awards received in Q2 as proof points of our strong operational execution and commitment to delivering on time and on target for our customers. And our customers are recognizing us as a supplier of choice as evidenced by two significant honors from GM, the Overdrive and Supplier of the Year Awards, the Supplier of the Year Award from Toyota, and recognition from Hyundai Kia Motor Group at their Global Supplier Day where our customer underscored the pivotal role Adiant plays in sustaining supply chain efficiency, delivering world-class quality, and advancing sustainable practices. J.D. Power recognized our China team with nine initial quality study awards, another proof point that we are operating and executing at best-in-class levels. In addition, as part of our balanced capital allocation policy, We remain committed to returning capital to our shareholders and repurchase $50 million of our shares in the quarter, bringing our total share repurchases year to date to $150 million. Turning to slide five, let me walk through some of the dynamics influencing our first half and the expected second half results versus our original expectations going into the fiscal year. In the first half of the year, Etient delivered very strong results, totaling more than 85 million of year-over-year cumulative performance in the first two quarters. We drove larger than anticipated improvements in operational execution and SG&A through additional compensation-related austerity measures, and our commercial teams were successful in working with our customers to recover inflationary headwinds. Performance improvements were offset Performance improvements offset challenges in production volumes. The company was impacted by weaker program mix, slower than expected launches on key programs, and softer than anticipated EV demand in the Americas and EMEA regions. The net result of these puts and takes was a solid first half in line with internal expectations. As we entered the year, we anticipated improved volumes in the second half as we put the effects of the strike-related production disruptions behind us and moved past the launch phase of some very significant volume programs. Today, we see a production environment that continues to be adversely impacted by negative customer and customer program mix, particularly in EMEA, and the impacts of lower EV demand in the Americas and Europe. These factors are expected to negatively impact earnings contribution. That said, we continue to expect our track record of solid business performance to continue, and we are working hard to execute what we can control to drive performance in the face of volume challenges. As you can see on the right-hand side of the slide, the net effect of these factors, specifically volume and customer mix, are driving a lower FY24 outlook. Mark will cover this in further detail in a few moments. Turning to slide six, let's discuss the dynamics influencing our regions in FY24 and, more importantly, beyond FY24. Our APAC business is the growth engine of the company, particularly in China as we participate in numerous launches and new business. We are growing with the domestic OEMs in both NEV and ICE and expect these customers to represent 60% of our in-region revenue in the next few years, up from 40% last year. As we look beyond this year, we expect our strong growth to continue in the region, continuing to improve total adiant margins and free cash flow as this region becomes a larger part of the portfolio, presenting a tailwind from a mixed standpoint. In Europe, we are seeing the impacts of unfavorable customer and platform mix and this lower EV adoption curve. Beyond the current fiscal year, external forecasts and our internal expectations are for a structurally lower addressable market driven by lower exports, imports from Asia, and the potential for customers to insource the JIT portion of our seeding revenue. As we announced a few weeks ago, we have taken actions to proactively address these changing dynamics. We will continue to evaluate our cost structure to align with the reset production environment. We are not sitting still. Opportunities to improve business performance are being evaluated. And finally, in the Americas, we continue to see solid core execution within the business. The volume pressures in the region are temporary to some extent. Our expectations for the region are to continue to reshape our metals portfolio, reducing our lower margin business and replacing it with business where we can earn an appropriate return and support our increasing levels of vertical integration. We expect to continue to emphasize customer relationships where we can strategically add value and de-emphasize business where we do not see a path towards increasing profitability. Turning to slide seven and diving a bit deeper into each of the regions. Our Asia Pacific region continues to be the growth engine for the company led by our business in China. The APAC business has consistently delivered the strongest margins of our three regions driven by flawless execution, a solid customer base, high levels of vertical integration, and a world-class operating team. Given the strength of the business, we expect to continue to allocate capital to the region and emphasize growth. As indicated on the slide, we have built a solid backlog, including a very strong portfolio of wins and FY23, which contributes to our expectation for substantial growth in China. And our customer base continues to be shaped. We've been awarded business from a host of new customers over the past several years. Our team in China is able to work at the pace of our Chinese domestic customers. The leadership in the region is tasked with driving that business and has the tools and the autonomy to act with speed. Our customers value that speed to market and the team's high level of execution. Our Asia business outside of China is also strong and is a growing business with a solid customer portfolio. Turning to slide eight, As I discussed earlier, the European automotive market is quite dynamic and continues to be impacted by external and structural influences, resulting in a flat to declining vehicle production environment. As such, the company routinely assesses the landscape to identify and execute actions to improve Adiant's profitability and cash generation. The actions we announced two weeks ago are in direct response to structurally lower production volumes in the region. The European production environment has changed substantially from the pre-COVID environment, driven from imports from Asia, the pace of EV adoption, and again, the potential insourcing of the JIT portion of our seeding business by certain customers within the region. We took a $125 million cash restructuring charge in the quarter that we expect will result in future cash expenditures of a similar amount. These expenditures will be primarily spread between fiscal years 25 and 26 and substantially complete by fiscal year 27. Payback period is typical of these types of actions with approximately a two and a half year payback. We anticipate approximately $60 million in reduced annual operating costs from this activity of which roughly 80% will result in net savings of 50 million US dollars. The incremental restructuring is intended to align our cost structure across our functional teams to reset the production environment, to the reset production environment. We believe these actions will support better margin performance in Europe and are consequently a step in helping us achieve the overall margin expansion. The team is in process of evaluating various scenarios to enhance shareholder value over time. Once we complete our long-term strategic plan expected later in 2024, we will provide additional details. Turning to slide nine, in the Americas region, we view the setup as favorable for continued execution and margin expansion. Our relationship with the Asian OEMs is a competitive advantage and we believe we benefit from their flexibility and powertrain decisions in the current environment as they have emphasized hybrids and longer dated dev launches. These customers also tend to source Adiant, a highly vertically integrated program which drives opportunities for improved operational efficiencies. Earlier this month, we launched a modular program with one of our Asian customers that we expect to deliver margin expansion versus the prior generation of the same vehicle. We also continue to reshape our metals portfolio with the expectation for a smaller, higher margin metals business that supports our jet business. Lastly, we can leverage our innovative offerings that are in production in China to drive increased seeding content within the Americas region. Moving on to slide 10, Several recent and upcoming launches are highlighted here. The team is focused on executing on our launches, which include a large number of high complexity launches. We continue to deliver exceptional safety, quality, and on-time delivery metrics. Several programs are experiencing slower than expected launch ramps, as customers produce at lower volumes. However, our execution has been strong. I do want to take the opportunity, however, to highlight the Infinity QX80 launch occurring in our Asia Pacific segment as an example of how Adiant can add value to our customers through greater vertical integration and a high feature seat system. On this program, we have the JIT, foam, trim, and metals. In addition versus the prior generation, we've insourced the metals where it was previously produced on the outside. The customer uses adiant engineering design, and the seat system encompasses a high level of content that includes sound in seat, massage, seat heat, ventilation, power side bolster, power lumbar support, and reclined features and mechatronics that are above and beyond what we've done historically. Ultimately, this level of content drives more than triple the average seat content, and our level of vertical integration is a key driver of profitability. Several new recent business awards are highlighted on slide 11. These new business awards once again represent our deepening levels of vertical integration with a strategic customer set. Wins include foam and trim in addition to the multiple JIT programs which are expected to drive future margin expansion. We are continuing to emphasize customers and programs that we expect to be winners as the market dynamics around ICE and varying levels of electrification across the globe play out. In closing on slide 12, as I have met with many of you in recent weeks, I appreciate the question around what is the long-term vision for the company, and do we still believe in the 8% EBITDA margin goal? I want to assure you that Adyen is committed to driving shareholder value through margin expansion, free cash flow, and earnings growth. We are not counting on growing industry volumes and expect to achieve these goals in a flat production volume environment. The key enablers of margin improvement are listed in order of magnitude and are expected to deliver 200 basis points of margin enhancement. These are the key drivers towards adding and achieving an 8% adjusted EBITDA margin as we exit fiscal year 2027. We expect to progress steadily over the upcoming years towards that target, underpinned in part by the assumption that production volumes will largely be in line with third-party forecasts. That said, we are not satisfied with the status quo. As we continue to plan for the mid and long term, we expect to proactively identify and execute actions to accelerate our attainment of that margin target. And with that, I'll turn it over to Mark to cover the financials.