Adient plc

Welcome to Addient's second quarter earnings. Participants will be in listen-only mode until the question and answer session of today's call. I'd like to inform all participants that today's call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Linda Conrad. Thank you. You may begin. Thank you, Denise. Good morning, everyone, and thank you for joining us. The press release and presentation slides for the call today have been posted to the investor section of our website. at adiant.com. This morning, I'm joined by Jerome Dorlak, Adiant'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. Mark will then review our second quarter financial results and our 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 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 is my pleasure to turn the call over to Jarrell.

Thanks, Linda. Good morning, everyone, and thank you for joining us to review our second quarter results. Today we will focus on the quarter's solid performance and provide an update to our fiscal year 2026 outlook. Overall, Q2 results came in line with our expectations, reflecting typical seasonality in China and some temporary production inefficiencies on a few key programs. Despite that, revenue was up 7% year-over-year, driven largely by FX tailwinds, with underlying growth in both the Americas and Asia. Adjusted EBITDA was down modestly year over year, reflecting temporary mix, launch costs, and customer-driven inefficiencies, partially offset by favorable FX and SG&A. Free cash flow in Q2 reflected the normal seasonality of the second quarter, and we ended the quarter with a cash balance of $831 million and $1.6 billion of liquidity. Given normal cash flow seasonality and the increased geopolitical uncertainty, we paused stock repurchases during the quarter, consistent with our approach last year. Turning to growth, we continue to aggressively pursue new business in all regions. In the Americas, more OEMs are announcing their intentions to onshore production in the United States. We are working with our customers to capitalize on these opportunities as their plans materialize. We have also won significant conquest programs in South America and China. And in China, our growth over market remains strong despite the overall production volume challenges in the region. Finally, as we look beyond the quarter to the full year, based on what we know today, we are increasing our guidance modestly for revenue, adjusted EBITDA, and free cash flow. Favorable volumes and strong business performance are being muted by $35 million of expected input cost headwinds, which Mark will outline further in his remarks. Here we now to slide five. Well, I just noted that Adyen is raising guidance slightly for fiscal year 2026, we acknowledge that the overall macro environment remains volatile. The ongoing geopolitical conflicts, elevated energy, and commodity costs, trade policy uncertainty, and shifting consumer sentiment continue to influence the industry. While nobody can predict what will happen for the remainder of the fiscal year, what differentiates Adyen and this environment is our operating model. we combine strong commercial discipline and pricing mechanisms with exceptional operational execution, flexing labor, controlling costs, and launching flawlessly, supported by a strong balance sheet with ample liquidity. That allows us to execute at a high level even amid production volatility and supply chain challenges. Despite these external headwinds, Our year-to-date results reinforce our ability to execute. We continue to drive positive business performance despite temporary disruptions and customer-driven inefficiencies. We continue to outpace the market in China, as expected, and we maintain margin discipline across regions while preserving a strong and flexible capital structure. This is how we manage what's within our control and why we continue to deliver on our commitments and maximize long-term shareholder value. Before I get into the regional update, I want to recognize our global team's exceptional performance here today. We have received over 60 awards in the last two quarters comprised of recognition from our customers, industry organizations, and independent quality assessors across the globe. a testament to our operational excellence and the trust our customers place in Adiant. In addition to these noteworthy accomplishments, Adiant continues to be recognized as an employer of choice in the regions we do business, validating our commitment to our people and enabling us to attract and retain top talent worldwide, which strengthens our ability to execute. These recognitions validate that our strategy is working. We are winning with customers, investing in our people, and delivering the consistent quality that builds long-term partnerships and shareholder value. Now let's talk a bit more about the regions on slide six. While our business is global, each of our regional businesses is impacted by unique market dynamics, and each is facing its own set of opportunities and challenges. In the Americas, we are navigating a complex and dynamic environment driven in part by tariff policies, which are manageable at current rates but continue to be fluid. Onshoring and growth remain a key focal point for the Americas team, especially as onshoring momentum continues. In addition, the teams are driving margin improvements through our continuous improvement programs, automation, and optimizing our manufacturing footprint. The team is also focused on launch execution for multiple programs, including the Kia Telluride Rivian R2 and the Toyota RAV4. In EMEA, market uncertainty and overcapacity persist and continue to impact not just Adiant, but the overall industry. Our team continues to rise to these challenges. We are pursuing and winning new and replacement business, and continue to strengthen our supplier of choice DES in the region. Operationally, the European team is driving favorable business performance through commercial execution, cost discipline, and restructuring actions that more than offset the current volume headwinds, all while successfully executing more than 30 launches so far this year. Turning to Asia, the market dynamics with shorter vehicle development cycles and innovation are a key differentiator. As we will highlight in a few slides, our Asia team continues to commercialize innovation products, which our customers are excited to invest in. Despite industry pressures in China, we continue to outperform the market through launches with local OEMs, which now represent about 70% of our wins. Our world-class JV structure further strengthens our local presence, and expand their market. Beyond China, Asia outside of China is also positioned for above-market growth in the second half of this year as new launches ramp. While we do expect some manageable margin compression, the region is expected to remain accretive to Adyen's EBITDA and cash generations. While each region is distinct, what ultimately defines Addion is that we operate as one unified company. Across every region, our teams are aligned around a common purpose, serving our customers, supporting our employees, and delivering value for our shareholders. We do that through disciplined execution, seamless collaboration across borders, a strong culture of integrity, and the ability to adapt quickly as conditions change. Turning to slide seven, this page highlights how our growth strategy has continued to gain momentum. In the Americas, onshoring and conquest winds continue to drive meaningful volume gains. This quarter, we secured roughly 200,000 incremental units from the Chevrolet Equinox U.S. onshoring and conquest winds, along with approximately 180,000 units from Volkswagen conquest programs in South America. These wins reflect the strength of our footprint and our ability to execute reliably as customers regionalize production. That momentum is showing up in our forward book as well. FY27 booked business has increased to about 400 million, and FY28 to roughly $630 million, representing close to 700,000 incremental vehicles and market share gain. Importantly, that figure reflects what we've booked to date. Unshoring trends continue, and we remain in active discussion with global OEMs on additional opportunities that extend beyond what's captured here. we continue to see ourselves as a net beneficiary of customer onshoring. In Asia, our team has done an exceptional job of competing and winning in a highly dynamic market. As I mentioned in the last slide, approximately 70% of our new business wins in China are with local OEMs, reflecting strong customer relationships, faster development cycles, and adding its ability to localize engineering and execute at scale. That execution is translating into above-market growth, with China up 10% in Q2 versus a declining industry. Taken together, this reinforces the momentum we're building across regions, and onshoring, conquest, and localized execution continues to expand our growth runway. Moving to the next slide, After the quarter end, we announced the completion of a tuck-in acquisition that expands our foam manufacturing footprint in the Americas. We acquired a foam production plant in Romulus, Michigan, which supports multiple OEM seeding programs, expanding our Americas foam network to 10 plants and 30 plants globally. This is a strategic core business move that strengthens our vertical integration capabilities and helps improve supply assurance and responsiveness for our customers. Our focus is on a smooth integration with uninterrupted service, and we see opportunities over time from logistics advantages, operational flexibility, and productivity improvements. This targeted acquisition strengthens Adyen's operational model by further improving control over critical inputs, lowering execution risk, and supporting more resilient margins. We are thrilled to welcome the Romulus employees to Addiant and are excited about the capabilities and commitment they bring to our organization. Moving on to slide nine, I want to spend a moment and talk about our recent launches and the new business wins, because these are important proof points on how Addiant is growing. These wins aren't about volume alone. They reflect higher content, more complex seating systems, and deeper integration with our customers across the regions. In the Americas, Addi continues to be a net beneficiary of customer onshoring trends. We are happy to announce the recent conquest win of the Chevrolet Equinox, highlighting once again how our world-class footprint, consistent operational execution, and strong customer partnerships reinforce our supplier choice status. We also recently won conquest business on several Volkswagen platforms in South America. This is strategically important growth for Adyen as it deepens our footprint with a major global OEM, strengthens our regional manufacturing relevance, and positions us for sustained revenue growth and incremental opportunities in the market over the coming years. In EMEA, program wins such as the new Porsche SUV, and recent launch of the Citroën C4 demonstrate continued momentum with leading global OEMs. Importantly, these wins reflect discipline, selective growth, where we are prioritizing programs that align with our operational strengths, higher value content, and improve earning resilience in the region. In Asia, growth is being driven by domestic OEMs and EV platforms. including Xiaoping, Lead Motor, and Chang'an, where we are delivering advanced comfort features, high adjustability, and multivariate seating architectures, often with Adiant-led engineering development in region. Importantly, many of these awards involve premium comfort content, higher complexity, and greater value per vehicle. When you look at this slide, I think it's important to step back and look at the balance of our growth portfolio. On one hand, programs like the Chevrolet Equinox represent disciplined growth on high-volume, onshore ICE platforms, where Adiant is winning complete C content, taking shares through conquest and leveraging our market-leading North American footprint, delivering strong execution and solid cash generation. At the same time, launches like the Rivian R2 and Leap Motor D19 position us on next-generation EV platforms where higher complexity, tighter integration, and engineering-led execution support higher content per vehicle and stronger, higher-quality earnings over time. Together, these programs demonstrate that we're not making an either-or choice between legacy and next-gen. We're deliberately building a portfolio that balances scale and cash flow today with complexity-driven, higher-quality earnings tomorrow. That balance is exactly what underpins stateability of our results and our confidence in the long-term outlook. Overall, this slide reinforces why Addient continues to be a supplier of choice, winning across regions, technologies, and vehicle segments while executing complex launches at scale. Turning to slide 10, I want to highlight two recent innovation milestones that underscore how Addian continues to turn technology leadership into realized commercial execution. Most recently, we achieved an industry-first launch of our StepJoy foot massage system on the Neo ES9. This is a key example of how we're expanding seating comfort beyond traditional lumbar and back applications while maintaining compact packaging, cost efficiency, and automotive-grade reliability. Importantly, this is not a concept. It is in production today, validating our ability to industrialize differentiated comfort solutions at scale. In parallel, we're advancing our mechanical massage portfolio with ProForce Massage Flow. which builds on our already validated ProForce platform. ProForce Massage significantly expands massage coverage and gives customers the ability to offer premium seating experience, providing differentiation over traditional, highly commoditized massage offerings offered by our competitors. The modular design and production validation allows this technology to be deployed across multiple seat architectures and vehicle segments within an OEM, enhancing scalability and is already scheduled for production on two COEM models. The ProForce system is differentiated from what our competitors offer. Together, these launches demonstrate how we're leveraging innovation to drive higher content per vehicle, deepen OEM relationships, and support higher quality earnings over time. This is how innovation plays into Adiant's operating model. Disciplined, scalable, differentiated, and commercially focused to help our customers enhance their overall in-vehicle experience. Before turning this over to Mark, I want to pause here on slide 11 because this slide really connects the dots between our operating model and what it delivered this quarter. We speak a good deal about operational excellence, profitable growth, innovation, and being a supplier of choice, but these are not abstract concepts. They are the foundation that allows us to execute consistently, especially in an environment like this one. In the second quarter, that execution showed up in very tangible ways. We delivered multiple complex launches as planned, continued to convert supplier choice recognition into conquest and onshoring wins, and advance innovation programs that are already in production and generating value for our customers. We also strengthened our footprint and reduced execution risk through a targeted tuck-in acquisition. Our teams have received more than 60 customer and industry awards across the region over the past two quarters, reflecting Adiant's day-to-day execution and quality, launch performance, responsiveness, and employee satisfaction. This recognition is translating directly into outcomes, key talent retention, deeper customer trust, conquest and onshoring wins, and the ability to launch more complex, higher content programs consistently. That external validation reinforces why our operating model continues to scale in a challenging environment. These proof points are the direct result of how we run the business every day, and they're what gives us the confidence in our ability to convert performance into cash flow generation and sustainable value creation going forward. Now I'd like to turn it over to Mark to walk you through the financials.

Thanks, Jerome. Let's turn the financials on slide 13. Adhering to our typical format, the page shows our reported results on the left side and our adjusted results on the right side. As a reminder, the prior period included a one-time non-cash goodwill impairment charge of $333 million related to the EMEA goodwill impairment, which impacted our GAAP reported results in Q2 of fiscal year 25 and affects the year-over-year imperability. My comments will focus on the adjusted results. which excludes special items that we view as either one time in nature or otherwise not reflective of the underlying performance of the business. Full details of these adjustments are included in the appendix of the presentation for reference. Moving to the right side, high level for the quarter. Sales for the quarter were $3.9 billion, up 7% year over year, reflecting favorable FX, solid volumes, and strong underlying business performance. Adjusted EBITDA was $223 million. While this was down year over year, the comparison reflects the impact of near-term customer-driven production inefficiencies and increased launch expense as we continue to invest in future growth. Equity income was lower year on year as a result of lower volumes with certain of our customers in China. Adjusted net income was $41 million, or 52 cents per share. Let's dig a bit deeper into the quarter, begin with revenue, on slide 14. I'll go through the next few slides relatively quickly as detail for the results are included on the slides, allowing sufficient time for Q&A. We reported consolidated sales of $3.9 billion in the quarter, which was an increase of $254 million compared to the same period last year, primarily reflecting better FX tailwinds, along with favorable volume and pricing. On the right side of the page, we are presenting regional performance on a trailing 12-month basis. This view helps normalize seasonality and timing effects inherent to our operating model and provides a clear picture of the underlying trends. In the Americas, we are seeing growth of 5% outperforming a flat market primarily driven by adding customer profile, pricing, and new vehicle launches. In EMEA, sales have trailed the market, reflecting customer volume and mix in deliberate portfolio actions, such as the recent closure of our Saarlouis Ford plant. For China, while the trailing 12-month view is influenced by earlier period softness, recent performance has notably been stronger. This quarter, sales in China grew at double digits while the overall market declined, building on first quarter's significant outperformance. We expect this trend to continue over the next several quarters based on our book of business and launch schedule. Unconsolidated revenue declined year-over-year, reflecting planned program exits in Europe in lower volumes in China. Turning to Q2 EBITDA performance, Adjusted EBITDA of $223 million included approximately $8 million of temporary customer-driven production inefficiencies, which we expect to recover in future periods, and $11 million of launch expense, which supports future growth in our expanding program portfolio. Excluding these items, Add-In's underlying business performance remains solid, reflecting the strength of our operating model And the continued focus of our teams have on operational excellence in delivering on our full year commitments. As shown on the chart, volume and mix was an approximate $18 million headwind, mainly driven by the shift to China OEMs versus foreign manufacturers in China, which, as mentioned previously, will result in margin compression that we view as manageable. plus a variety of higher volumes on lower margin platforms in North America in Q2. As in prior quarters, we've provided detailed segment level performance slides in the appendix of the presentation for your review. But I'll briefly summarize each region at a high level. In the Americas, they had a solid underlying business performance reflecting strong execution and program momentum. Results for the quarter were partially impacted by mix, temporary production inefficiencies, and launch costs to support the region's future growth. In EMEA, the team continued to focus on driving positive business performance despite a challenging macro environment, and along with FX tailwinds, this helped mitigate the ongoing mixed headwinds in the region. In Asia, results were impacted by equity income, the timing of commercial negotiations, and planned increases in launch as the region invests in new programs and growth. Equity income was unfavorable year on year, primarily reflecting lower volumes in our China joint ventures. Moving on, let me flip to our cash, liquidity, and capital structure on slides 16 and 17. Starting with cash on slide 16. For the quarter, the company generated $8 million of free cash flow, defined as operating cash flow less capex. In addition to the typical seasonality of our business, second quarter cash flow benefited from approximately $90 million of timing-related items, specifically related to a commercial agreement and a hedging transaction. Both items will reverse and become outflows in the third quarter. On a year-to-date basis, Free cash flow totaled $23 million and included the benefit of the same $90 million timing effect just mentioned. Excluding this impact, year-on-year cash flow performance reflects favorable working capital fluctuations driven by typical period-to-period swings, lower cash restructuring outflows in Europe, timing of dividend payments, and an increase in cap spending supporting add-ins growth initiatives and automation spend. Important to point out, last quarter we highlighted a non-recurring tax settlement in a certain jurisdiction that increased our cash tax forecast for fiscal year 26. That settlement was paid out in our second quarter. Despite the expected $90 million outflow in the third quarter, we continue to expect strong free cash flow in the second half of the year, consistent with our historical seasonality and remain confident in delivering on our free cash flow commitment. Turning to our balance sheet on slide 17, Edian continues to maintain a strong and flexible capital structure. As of March 31st, we had a total liquidity of approximately $1.8 billion, consisting of $831 million of cash on hand and $957 million of undrawn revolver capacity. Again, worth mentioning, The $90 million, which benefited second quarter free cash flows, was also included in the March 31st cash balance. I would also point out, Addient did draw on our ABL during the quarter due to typical seasonality and normal working capital fluctuations for our business. The ABL was fully repaid within the quarter. On a trailing 12-month basis, our net leverage was 1.8 times which remains comfortably within our targeted range of one and a half to two times, reflecting both disciplined capital management and the underlying earnings power of the business. Importantly, we have no near-term debt maturities, providing us with significant financial flexibility as we navigate a dynamic operating and macro environment. Overall, the capital structure remains strong and flexible. Turning now to our expectations as we move from the first half into the second half of fiscal year 2026. The first half of fiscal 2026 delivered solid business performance that was in line with our internal expectations, despite a challenging operating environment. We remained focused on what was within our control, maintained discipline in execution and cost management, and exited the first half with a solid cash position and a healthy balance sheet. As we look to the second half of fiscal year 26, we currently anticipate approximately $35 million of input cost headwinds. Approximately $25 million is related to Middle East conflict through higher chemical and freight costs. An additional $10 million is driven by higher costs as a result of the Lion-Bedell-Bissell chemical supply disruption. This $35 million of higher input costs is expected to be more than offset with the benefits from volume and the acceleration of business performance. The team remains focused on driving business performance and generating cash. Turning to our updated outlook for fiscal 2026, based on our performance year to date, improved customer production schedules, we are modestly increasing full-year guidance for revenue, adjusted EBITDA, and free cash flow. We now expect consolidated revenue of approximately $14.8 billion, up from our prior outlook of approximately $14.6 billion, reflecting solid first-half performance, updated near-term customer production schedules, and the latest S&P global production assumptions. Adjusted EBITDA is expected to be approximately $885 million, up from our prior guidance of $880 million, reflecting the impact of higher revenues and increased business performance, which are helping to offset the $35 million of anticipated higher input costs. As a result of these updates, we now expect free cash flow of approximately $130 million up from $125 million previously. This improvement reflects the pull-through of incremental adjusted EBITDA and continued focus on working capital discipline and cash generation. Cash taxes are still expected of approximately $125 million, no change from prior guidance. CapEx also remains unchanged at approximately $300 million. We have included a simple adjusted EBITDA bridge within the materials on slide 20 that illustrates the components of our revised guidance. Before wrapping up, I want to spend a moment on slide 21 because this page speaks to the durability and trajectory of our cash generation. As we've discussed, the $130 million of free cash flow expected this year reflects several elevated and transitional cash uses that are not structural to the business. As these items normalize, we expect materially stronger EBITDA to free cash flow conversion. Capital expenditures are expected to remain at about $300 million, supporting growth, innovation, operational excellence, while remaining aligned with our long-term capital allocation framework. Restructuring cash flows are expected to normalize as European actions progress. Similarly, interest expense is expected to ease with opportunistic repricings and voluntary debt pay down. And finally, cash taxes are expected to revert to a more normalized level following this year's non-recurring settlement payment. Taken together, these actions clearly outline the path to a structurally higher free cash flow profile. Longer term, as business performance and volume continue to scale, and calls for cash remain relatively stable, we believe Add-In is well-positioned to generate materially stronger free cash flow, supporting disciplined and balanced capital allocation, driving enhanced shareholder value. With that, let's move to the question and answer portion of the call. Operator, can we have our first question, please?

Thank you. If you would like to ask a question, please press star 1. To withdraw your question, you may press star 2. Our first question does come from Colin Langan with Wells Fargo. Your line is open.

Oh, great. Thanks for taking my questions. Any color on why the revenue increased? I mean, we've seen S&P actually lower numbers, at least on the calendar year. And anything in particular that's driving that? Is that just a geographic mix, certain platform mix?

Yeah, Colin, I'd say it's a combination of, you know, one, you have to adjust that we're on the, you know, September 30th fiscal year, right? Obviously, we're two quarters through third quarter. We have pretty good visibility now based on production call-offs, right? And then it's, as you indicated, it's based on geographic mix. It's customer platforms that we're exposed to, et cetera.

Oh, okay. And any color on the onshore bidding? I mean, you seem to want a pretty large chunk of that so far. Has this been sort of a short-term action wave and then more actions will come in a few years? Or is this actually still even early days for some of the onshoring opportunities? And we'll see even larger numbers coming as more stuff gets bid and onshored.

Thanks. Yeah. You know, in terms of the discussions with the customers, I think they're still very active, still very dynamic. You know, at the point where we're at now, I think a lot of them are waiting to see how the USMCA negotiations and discussions go. Once there is clarity on how that shapes up and what the rules in terms of content how long that agreement will be, whether it'll be an annual evergreen or another seven-year bilateral or trilateral, whatever that shapes up to be. I think that will then free up the next wave of onshoring discussions. I think what's important, though, and how you think about adding and how we're positioned, and we've presented figures on this in the past, among seeding suppliers, we have the best footprint to be able to capitalize on this. We have more JIT facilities than any other seeding supplier in the US. From a geographic standpoint, we're best positioned to be able to capitalize on this. We have the capacity to be able to do it. And then because of our leading modularity, module tech and capabilities, and now with the foaming acquisition, We have the capital ready to be able to deploy, the footprint to be able to deploy it, and the customer relationships to be able to capitalize on this. And I think, you know, we still feel pretty strongly we'll be a net beneficiary of onshoring.

Got it. All right.

Thanks for taking my questions. Thank you for the questions.

Thank you. Our next question comes from Nathan Jones with Stifle. Your line is open.

Good morning, everyone. This is Andres Toretto-Mollon for Nathan Jones. Thank you for the question. Just on margins, the decline of 70 BIPs, can you maybe give a little bit more color on the temporary customer-driven costs, and are they recoverable later on?

Yeah, so good question. So, yes, you know, if you look at that 70 BIPs, I'd say 60 of that BIPs is really related to mixed And as I indicated in my prepared remarks, a lot of that mix was obviously we were very transparent that as we continue to shift and pivot to the Chinese local manufacturers there, there's going to be margin compression. That's the majority of that. There was also some, let's say, higher volume, lower margin business in the Americas that we saw for the quarter. We do view the mix shift over in China to be very manageable. We've indicated that's going to be falling out somewhere around 100 basis points when we get through the year. So one quarter does not make a trend. We have a pretty good line of sight in terms of what launches are coming on, where production is heading over there. Same thing with the Americas, just in terms of where we see the volumes heading over there in the next couple of quarters.

That's helpful. Thank you. And then just on the split domestic versus foreign OEMs in China, I mean, can you guys, I know you said 70% launches with local OEMs. Can you provide a kind of breakdown of what that mix is now and sort of what you expect for 2026?

Yeah, so last year we ended 2025. We were somewhere just north of 60-40 mix over there. And so as we continue to win, and we indicated last year our 2025 wins was also skewed about 70% local Chinese to 30% foreign. So as we continue to launch this year, that's going to be trending from, you know, call it that low 60 to that 70%. mark over the course of the next 12 months or so.

Yeah. And I think as we indicated in the prepared remarks today, our bookings this year are mirroring that same bookings rate. So 70% domestic, 30% transplant for the win rate. So if you look at our forward roll on, you know, we would expect our roll on to continue to drive, you know, mirroring that 70% domestic, 30% transplant. So continuing a very aggressive trend. roll-on business and rotation into the domestic OEM. And it really is leveraged by our world-class joint venture footprint that we have there, working with our joint venture partners, and really the way we operate our business in China, for China, with local Chinese leadership, local Chinese management, and leveraging our technology. That's why we talked a lot today about technology, bringing technology to scale there, And it's not commoditized technology. It is leading-edge technology there that allows our customers to be able to price for value, price for the customer in that region through the products we deliver there.

Awesome. Thank you. Appreciate it.

The next question comes from Joe Spack with UBS. Your line is open.

Thanks. Good morning, everyone. Mark, I want to go back to your comments on normalized free cash flow. And I want to sort of bridge that a little bit to sort of next year as well. And I realize you're not going to guide 27 now, and a lot can happen between now and then. But you are talking about $400 million on the backlog. So even if we assume 10% incremental margin, that's like $40 million in EBITDA. The recoveries from the Middle East is another $25 million. The supplier disruption is another $10 million. You have business performance. There's the $100 million in free cash flow timing items you mentioned in $26 million. So I guess what I'm getting at is it seems like, based on what we know now, and I know things can change, it seems like free cash flow could be up over $200 million next year. I'm just wondering if we're thinking about that correctly, if there's any other offsets we should be thinking about. And if we do see that, I know you said you paused the buyback activity for uncertainty, but why wouldn't you sort of try to maybe get ahead of what seems like a pretty good inflection of cash flow and buy back the stock when it's at relatively attractive valuations?

Yeah, great, great questions, Joe. I think you're thinking about the buckets the right way. Clearly, you know, there's going to be revenue growth that we've been very transparent in mentioning. So obviously that will convert. You know, if I look at my calls from cash, as I indicated, those will be relatively stable to improving right as my cash taxes trends back to its normalized level. Restructuring now, again, restructuring, um, Over time, we'll turn back to its normal level over in Europe. We obviously still have to look to see, you know, the European landscape over there. I don't think anybody's expecting that to get much better over there, right? So we have to see, you know, what our customers do with their programs, what that means for our restructuring. But all in all, that will turn back down to its normalized level. You know, interest expenses I indicated as we're opportunistic with, you know, repricings like we've been doing with the term loan B as we basically, you know, do some voluntary debt pay down because we do recognize that the discipline capital allocation policy includes not only share buybacks, but also debt pay down, right, inter-organic growth opportunities as we demonstrated this past quarter with the Woodbridge business. Yeah, I think you're right. I think the cash, you know, definitely trends, you know, higher. So I think you're thinking about that in the right way, Joe. In terms of why not get in front of it earlier and we hit the pause button this year on the share repurchases, you know, as I indicated, you know, we got into Q2 because of normal seasonality and working capital needs. We actually did draw on the ABL, right? So we drew $150 million that will be called out in our queue this afternoon when we release that. When we paid that back, clearly the war in the Middle East had started. It had escalated. We started to see chemical prices increase. We had the supplier fire, right? So there was greater uncertainty. So it was prudent for us to do that as we went through Q2. As we go through the balance of the year and we go into next year, there's really been no change in our capital allocation policy. We still expect to be good stewards of capital. We'll still be balanced with their allocation policy, right? So no change from that perspective.

Thank you for that, Mark. I guess the second question, I want to go back to China. Again, on the one hand, you're talking about 70% of the wins with China domestics. That's coinciding with margin degradation in the region, which I know you said you can expect, and I think the slides had a comment about how it's manageable. But can you just help us level set, because it's sort of tied up within China, You know, what you show for APAC, I know some of the China business is unconsolidated. Like, where are we now? What level does that backlog really come on from a margin perspective? And like, you know, where can we see, you know, margins going? I think you've been very clear and we can appreciate that that's going to be a margin headwind. But, you know, what sort of the steady state level for that business?

Yeah, I think as we go through the balance of this year, as I indicated, you know, do I still expect us to be down about 100, you know, bips in 2026? Absolutely. You know, as we continue to win new business over in that region, the team has been working very hard just in terms of, again, using automation over there, right? They're basically being sourced the whole seating, you know, whether it's trim, foam, jet, right, metals, right, which continues to help out the overall business. earnings profile that business over there, right? So the team's working hard to continue to maintain it at 100 basis points, you know, degradation. We view that as manageable as we get into 2027 and start to finalize, you know, 2027 and we'll be back out with that. But again, I think that 100 basis points is probably good for your modeling at this point. Thank you.

Thank you. The next question comes from Mike Ward with Citigroup. Your line is open.

Thanks very much. Good morning, everyone. Mark, maybe just to follow up a little bit on what Joe was asking. On the excess costs, the $25, $35 million, if you're able to recover it by the end of this year, does that provide some upside to your current forecast?

Yeah, so again, Mike, if you think about chemicals in particular, right, We have, you know, pass-through agreements and escalators with our customers, right? Those typically come on at a two-quarter lag, right? So, you know, third quarter, I'm not expecting any recoveries. Am I going to start getting some of those recoveries in the fourth quarter? Absolutely. Will some of that bleed into 27? Yes. You know, some of the, what I'd say, customer production inefficiencies, right, we call that out. You know, is the Americas team going to go back and, you know, work with our customers to try and recoup some of that in the back half of this year? Yes, there will be tough commercial negotiations. So could there be some upside, Mike, possibly? But, again, tell me when the war in the Middle East is going to end. Tell me what oil prices are going to do. Tell me, you know, how fast, you know, Lyondell, Basel can get their, you know, facility, you know, up in operating rates. So those – We're trying to balance what I'd say is the risk for the balance of the year versus, as you indicate, some opportunities for the balance of the year. That's why we came out with the 885, you know, guide is that's our best 50-50 look right now in terms of where we think the year is going to end.

Makes sense. Maybe, Jerome, on more of a strategic standpoint, I mean, the trim acquisition in North America, what type of level of vertical integration do you have for a typical seat?

Yeah, so the Woodbridge plant is a foaming plant for us. If you look at our business in North America, I mean, on an average contract, given our customer mix and our customer platform mix, especially when we talked about the large truck platform that we acquired, you know, it would have been two quarters ago when we went from just having the JIT and foam, we acquire JIT trim and foam on that, we will be well over 80%, probably 85% vertically integrated on our business in North America. It is a very, very healthy level now in our North America business. And when I say vertically integrated, I speak about JIT trim and foam. We've talked a lot about the metals business and trying to look at the metals business and wind out some of our non-healthy metals business. So we've been, I think, very transparent on that. But on the JIT trim and foam level, it's a very healthy level of vertical integration now in the Americas business. And it's one of the reasons why you've seen, you know, the Americas business really have a, I think, nice progression on the margin expansion and the cash flow progression as well.

Yeah, that was my follow-up. I appreciate that. Thank you very much.

Thanks, Mike. Up next is Emmanuel Rossner with Wolf Research. Your line is open.

Great. Thanks so much. Good morning. I was hoping to first follow up a little bit on the commodities outlook. I know we see a lot of moving parts between the disruption and the conflict, but at least in terms of the disruption piece, do you have good visibility in terms of the supply? Is it really just a question of... you know, higher pricing and basically recoveries coming with a lag? Or is there also, I guess, what sort of visibility do you have in terms of, you know, essentially ensuring supply? And then what does that look like into 2027?

Yeah, I think you have to, I think, Emmanuel, you have to break it down into two pieces. I think you have to break down the Lionel Bassal issue and then maybe break down the Middle East slash Straits of Hormuz issue. So on Lionel Bassal issue, I think our team in the Americas with our customer group has done a very good job of working through alternative means of supply and securing alternate supply chains. So I think we have good line of sight, alternative chemicals supplied, validation underway with our customers. I think we've been able to tie that off. On the straight support moves, you know, at the moment, I think, We have line of visibility, you know, as much as anyone in the industry can have when it comes to supply. I'll go back to Mark's comments. I don't think we can sit here today and be any better, you know, forecasters or, you know, prognosticators that would say, you know, if it remains the way it is, I can't tell you what's going to happen in three months, five months, six months, or anything along those lines. I don't know that I can give you a better answer than anyone else can on that topic, Emmanuel, nor should we really be doing that. So, again, I'm lying to all of us all. I think we've done a very good job working with our teams. I think we're supplied. We have, you know, supply secured. On straightforward moves, I don't think we're in any better of condition or any worse of a condition than anyone else in the industry on that topic.

Okay, that's helpful. And then one follow-up on the – normalized free cash flow. So obviously a decent piece of it would be a normalization of restructuring spending. Doesn't seem like, you know, 2027 would necessarily be the year first with, you know, potential restructuring needs in Europe. I guess what would need to happen to, you know, be able to sort of like lower this restructuring need? It just feels like in In Europe, there's maybe some structural industry trends that would require ongoing restructuring for longer.

I think it's too early to say, Emmanuel, whether 2027 is normalized or not normalized, whether there's a tail-off or not a tail-off. I think we're very much in active discussions with a couple of key customers around a couple of key JIT manufacturing sites right now and what the future of those sites looks will be. So it's too early to say what, you know, 27 and even 28 look like at this point. You know, in terms of what needs to happen in Europe, I think there needs to be stabilization within the European theater on industry volumes and capacity rationalization across not only the JIT landscape and the seeding landscape, but also our customers' manufacturing landscape. And I think there's still announcements coming out at our customers where they're trying to repurpose their manufacturing facilities. You've seen announcements around that. And with that, that opens up opportunities for us to be able to service them in different ways than maybe we would traditionally do. And it's some of those discussions that we're in with them. So I think it's too early to say what our 27 restructuring looks like, whether it tapers off or it doesn't, and the same would go for 28.

Understood.

Thank you.

Thank you. The next question comes from Dan Levy with Barclays. Your line is open.

Hi, good morning. Thanks for taking questions. Your second half guidance, you're basically saying that you're offsetting the weaker half-over-half revenue and the onset of some of these commodity costs with better business performance, which you've done a really good job putting up. Maybe you could just remind us what's hitting now, and then you've broadly talked about a number of different work streams in terms of restructuring, balance in, balance out, labor efficiency. Maybe just Give us a sense where you are on your journey on business, for instance. It's been so good for so long. And, you know, what else is sort of the next frontier on continuing to drive those benefits, as opposed to sort of clearing out already the low-hanging fruit?

Yeah, Dan, maybe I'll start on, you know, what we see first half, second half. And Jerome can comment just in terms of, you know, certain of the automation, which is going to contribute to the efficiencies and business performance. But You know, you're absolutely right. When I look at first half, second half, you know, sales are going to be down slightly where we call down, you know, $35 million higher input costs. But I've also got, you know, the benefit of lower launch costs in the second half of the year. I've got better business performance, as we indicated. Business performance starts to accelerate, you know, whether that's, you know, through the lower launch costs, my ops waste, my C&I efficiencies that the plant builds as I go through the second half of the year, right? Some of the, what I'd say, frictional cost that hits in Q2 with the customers, you know, we'd expect that to subside as we go through Q3, Q4. So it's really the acceleration of business performance that really gives me comfort in terms of confidence in what I think I could do in second half versus first half, despite the lower levels of volume.

Yeah. And then to your second part of your question, you know, what are the, I think it was my words, you know, the next frontier of, of driving business performance. We've talked a lot about automation, you know, starting to flow in. And even this year, if you look at the capital expenditures that we're putting into the business, that step up year over year in automation, that will start to pay dividends as we get into 27 and 28. And we're really leading the industry in terms of some of the automation we're doing in our foaming business, some of the automation we're putting into our metals business, our trim business. And then on the JIT side of it, you know, what we've been able to do with our modularity, you know, the feedback we get from our customers is, you know, your modularity offerings are leading edge. It's one of the reasons we've been able to conquest and expand our backlog in the JIT side is through our modularity offerings. You know, with that, we're not only able to offer more competitive pricing to our customers, but it also leads to some of this margin expansion story, better roll on, roll off into the business. And so when you look at You know, the restructuring coming in in Europe, starting to pay dividends, but then also modularity, better roll-on, roll-off, and then the automation piece of it. That's really where we see this then starting to fuel some of the additional margin expansion that we'll see in the Americas and in our European business going forward in that sustainability piece. And then just coming back to some of the questions that we had earlier in the call around Asia and China in particular. I think it is worth continuing to highlight that even though there will be margin compression on the Asia side or the Asia-Pacific business, as revenues grow there, even with that margin compression, it will still be cash accretive, margin accretive, and still expanding cash flows for Adiant overall. I think it's always important to keep that in mind.

Great. Thank you. As a follow-up, I wanted to, you know, just – I asked a similar question on the last earnings call, but I think it just gets to a broader theme on where we are on market share dynamics in the seeding market and, you know, more specifically within North America because one of your, you know, competitors has talked about sort of a growing pipeline and traction on awards. So can you just give us a sense, broad strokes, what we are seeing in on market share dynamics? Is there sort of a consolidation within yourselves and another one of your competitors away from the rest of the field?

Yes. I think that that's a fair way to characterize it. I think if we look at where the winds are occurring, where some of the market share is coming from, and how that pie is shaping up, I think based on The competitive offerings that we're able to bring forward are modularity solutions, the technology that we're able to put in place. I think the pie continues to shrink into those who are able to bring the most competitive offerings forward, who have the balance sheet to be able to do it, who are able to deploy the capital, and who are the suppliers of choice into their customers. And I think Addion is certainly one of those, if not the permanent one in the space.

Thank you.

Thank you for the questions. And I think with that, we're at the bottom of the, or I guess the midpoint of the hour. Yeah, I just want to close the call by, you know, first thanking all of the 70,000 Adiant employees around the world for your commitment to making the company what it is. And then, you know, thank all of our customers for your continued support to the business and to the company. And then thank all of our owners and shareholders for your ongoing support. Thank you very much, everybody.

Thank you. Thank you. And in closing, I want to thank you once again for your interest in Etient. If you have any follow-up questions, please feel free to reach out to me. With that, operator, we can close the call. Thank you. That does conclude today's conference. We thank you for your participation. Have a wonderful day. And at this time, you may disconnect your lines.