Welcome and thank you for standing by. [Operator Instructions] I would now like to turn the call over to Mr. Mark Oswald, Head of Investor Relations. Sir, you may begin.

Thank you, Julie. Good morning and thank you for joining us as we review Adient’s results for the second quarter of fiscal year 2021. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. As usual, this morning, I am joined by Doug Del Grosso, Adient’s President and Chief Executive Officer and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today’s call, Doug will provide an update on the business, followed by Jeff, who will review our Q2 financial results and outlook for the remainder of the fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, 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 2 of our presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company’s operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments. I will now turn the call over to Doug. Doug?

Great. Thanks Mark. Good morning and thanks to our investors, prospective investors and analysts joining the call this morning as we review our second quarter results for fiscal 2021. I hope you and your families are staying safe and healthy. Turning to Slide 4, let me begin with a few comments related to our second quarter. Simply put, Adient delivered solid results despite turbulent production environment. Remaining focused on our priorities, which continue to drive improvements in Adient’s business performance enabled the company to partly offset a variety of macro and industry related headwinds. Focusing on the left-hand side of the slide, Adient’s Q2 adjusted EBITDA of $303 million was up $92 million or 44% year-on-year. If you recall, last year’s results included the negative impact of significantly lower production in China which impacted Adient’s equity income. Production stoppages across Europe and the Americas were just beginning toward the end of March as COVID-19 started to impact the industry in those markets. Adient’s adjusted EBITDA margin performance of 7.9% or 6.5%, excluding equity income, was up 190 and 80 basis points, respectively, versus Q2 of last year. I point this out as a proof point that the company continues to close the margin gap with our nearest competitor. Just one more point on Adient’s adjusted EBITDA. The performance in Q2, much like Q1 of this year, was aided by the phasing of our commercial settlements, which for fiscal year ‘21, is heavily weighted toward the first half. Jeff and I will have additional color on half one and half two influence in just a minute. Adient’s Q2 ending cash balance and total liquidity were approximately $984 million and $1.9 billion, respectively. Cash balance was impacted by approximately $700 million of cash used during the quarter to voluntarily pay down a…

Great. Thanks, Doug. Good morning, everyone. I will start on Slide 11. And adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right hand side of the page. We will focus our commentary on the adjusted results, which exclude special items that we view as either onetime in nature or otherwise skew important trends in the underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to a gain on the sale related to the SJA divestiture, transaction costs, financing related adjustments, specifically the premium paid to repurchase the debt and write-off the deferred financing charges, restructuring costs and purchase accounting amortization. Details of these adjustments are in the appendix of the presentation. Just one more comment before jumping into the results. You will notice the company continued and will continue to report YFAS earnings and equity income until the transaction closes, as we legally still own our 49.99% interest. If you recall, we had stopped recording WiFi equity income last year when we announced the sale because we were in an impairment position which required us to effectively impair our investment based on the recoverable amount via the sales price. We’re in a much different situation with the YFAS transaction. For the quarter, sales were $3.8 billion, up about 9% year-over-year, which were in line with internal expectations and primarily driven by improved volume across the regions. Portfolio adjustments executed in fiscal ‘20, which impacted the year-over-year comparison by about $32 million was a partial offset. Adjusted EBITDA for the quarter was $303 million, up $92 million or 44% year-on-year, more than explained by an increase in equity income, volume and mix and improved business performance. The…

Thank you. [Operator Instructions] Our first question comes from John Murphy with Bank of America. Your line is open.

Good morning, guys and thanks for all the detail. It’s incredibly helpful. Maybe just a first question is if you look at Slide 16 business improvements of $35 million to $60 million in the second half of the year versus the first half. That’s pretty good momentum that’s continuing. How much more do you think there is to go there? I mean, are you looking at that as getting back to normal industry margins on seating? Is that the way we should think about that or is there any way to sort of delineate exactly what you are going after on our cost, is there particularly in light of this stepped up restructuring spend this year, you just mentioned, Jeff, of $200 million?

Yes, good question, John. Thanks for the comment. The goal still remains the same to bridge or eliminate the gap we have had to our closest competitor from a margin standpoint. So, we look at that business improvement as a continual portion of that. Some of that’s factory floor driven, some of it’s better commercial success, more vertical integration of our business, attaching to better programs, etcetera of having some of the old programs that were somewhat challenging roll off. There is a lot of components in that and it all kind of falls in that business improvement, but bridging that margin gap is key.

Yes. If I would just add to it, it’s a historic issue we always face in the business. We have to look at expectations that our customers have from annualized productivity and inflation and the basis is that we have enough internal activity that more than offsets that. The only thing I would add is I think – and this has been a theme of a few of our calls, but it’s even more focused now. There is an absolute renewed interest in our customers of finding ways to drive cost reduction in their product. And that’s more than just the normal DAV activity. I can’t think of a single customer that we have right now that’s not at an executive level actively engaged with us to find ways to drive costs out of the product. So, I see that as an incremental pathway for us to support that improvement in our financial performance.

Okay, but sort of a dumb guys rule of thumb is typically sort of an 18 months to 24 months payback on rationalization or restructuring spend. I mean is that the kind of thing that we should think that if you are spending $200 million this year, that flows in at some reasonable level, close to that by the end of 2 years or is that maybe too aggressive?

It’s about the right path for the portion of our restructuring that was efficiency aligned. You will notice – you will remember that we said about a third of what we were putting out there was just responding to capacity or sort of lower volume expectations in Europe, which doesn’t have the same payback on that, unfortunately. But about two-thirds of it should have the rough dynamics of what’s in that, and it just sort of depends by region and people, but that’s a good rule of thumb.

Got it. And in a number of places in the presentation, you kind of have these walks of factors. I think like you might – particularly if you look at ‘19 with the Americas, volume and mix was a small positive, but it just seems like we are hearing from other companies, particularly the automakers themselves, and mix was incredibly strong in the quarter. So, I am just curious why you may not be seeing that or is that still on to come? And if we think about the first half versus second half, what kind of benefit or headwind was what mix created for you just because there is a lot of focus on these higher end vehicles. I have got to imagine you got more content on them. So, I am surprised that the mix might not be stronger for you.

Yes. It’s a little bit of a mix because no pun intended. We have had just a lot of disruption in our high-end vehicles. I would point to the Ford F-150 as being one of those vehicles that, I think, distorting that picture a bit for us. And I would say what we are confident is once some of the chip shortage issues get resolved, we do believe there will be a favorable mix for us. And we have always said we have got peer compared really favorable mix, but whether it was in the first half, with some of the problems we had with petrochemicals that created some disruption and deteriorated some of that performance or just pure volume in the second half is again, I think what’s distorting the picture for us.

Okay. And then just lastly, I mean, you made some comments about your market share in BEV being very strong. I think in Europe, you are saying 50% or maybe even better. I mean, obviously, that kind of market share would be hard to maintain in any segment. But I mean, are you really hearing if there is a concern that you are going to lose out as BEVs grow over time? It just seems like you have a right to play and you actually may even get better content to some degree on the trim levels to start. It just seems curious that people are concerned that as BEV ramps up that you will somehow not be as well positioned. And if anything, I would kind of argue the latter that you would be better positioned. Is there any reason to believe that content would go down or you would lose market share? It just doesn’t seem a rational line of reasoning to me?

No, it’s – we agree with your assessment. We think we are very relevant. We think jet delivery of seat systems is still financially viable option for our customers. We think our expertise in the product, particularly with new starts, who just don’t have that technical competency where we can provide them an array of seating products from luxury vehicles to low-end AB segment if cost is of the focus of their brand strategy. So, we completely disagree with the concept. I think the other point we would suggest is once everyone has got EVs in the market, the fact that it’s just an EV isn’t going to differentiate them. Everyone is going to have similar products, it’s a similar range. And some of the things that will attract buyers to a vehicle will be the functionality of the interior system. And that function drives content and our technical capability there, we think, provides solutions for our customer. That’s – so I would point to someone like NIO who has done some really creative things in their seating system. Right now, we are essentially the exclusive seat supplier to them. They have picked us because of our technical capability to help them with that. And I see that replaying across the broader customer group.

Okay, great. Thank you very much guys.

Thanks John.

Our next question comes from James Picariello with KeyBanc Capital Markets. Your line is open.

Hey, good morning guys.

Good morning.

As we think about the guide and helpful detail you provided in terms of the second half versus first half split, can you just confirm what the commercial settlement figure was in the quarter? It seems like it was probably $100 million plus. Just want to confirm that. And just originally, across your segments, because where did this have the greatest impact?

Yes. Probably Europe would be the greatest impact in the quarter, where – that amount for any given year for us is pretty similar, as we said. And it’s a reasonable size amount. So maybe $300 million, give or take, on an average year is probably pretty reasonable for us. And just – you can see by that chart, sort of the amount that stacks in the first half versus the second half with Europe being probably the big portion of activity in the second quarter.

Okay. That’s helpful. And then within equity income, its $20 million lower now. Is that mainly or exclusively driven by the SG&A JV sale? And has the company already completed that divestiture? And then as we consider the broader JV transformation, right, the $1.4 billion in net proceeds coming in, any color on the timing there? And maybe where the company’s net leverage heads for next year, right? You raised your free cash flow for fiscal ‘21. We get through this year’s noise into what hopefully is a cleaner recovery next year. What could be an achievable net leverage range on a pro forma basis as we sit here next year – at the end of next year? Thanks.

Yes. I will try to unpack a little bit of that. The SJA transaction, which is part of what we announced in the 12th of March, did complete at the end of the quarter. And a portion of the reason we brought our equity income down and you can say it’s about half attributable to that, and half of it is attributable to lower volume expectations, primarily driven by – or really driven by chips, I can say. We have seen the challenges of chip availability, bringing down production schedules globally and China is not immune to that either. So, that’s what’s reflective in our guidance. As it relates to the timing of the transaction for the YFAS deal we announced in the 12th, we are still looking really at the – right at the end of our fiscal year. Our current view is around September 30. Now that could move a little bit, but we do expect it to be completed within calendar 2021. As it relates to the leverage and sort of our expectations of leverage, we did give a range of 1.5 to 2 as a target. We do really see ourselves getting there. And it could be on the better side of that. A lot of it really depends on what the earnings or the operating environment looks like in 2021. As you have heard us talk about, we think the things that are within our control continued to improve. But if production is up as high as where IHS is predicting it right now, it could be a good year, and it could help sort of amplify some of that de-leveraging impact, but we see ourselves sort of in that range and potentially better depending on the operating environment.

Thanks.

Our next question comes from Brian Johnson with Barclays. Your line is open.

Yes. Thanks. So, in terms of your commodity recovery and the timing of it, I am thinking steel, resin/foam, is there anything else we should be looking at? And if – by the way, if you have a good Bloomberg ticker for a foam surrogate, would you look at that might be helpful. And two, is this the kind of thing – you used to have a normalized cadence of getting good recoveries in fiscal fourth quarter and then giving bad recoveries, the other direction in fiscal 1Q, that didn’t seasonality, which might have been a hallmark of the JCI’s CEO, is that out the door? So I guess 2 questions there, kind of, one, what are the key commodities? 2, timing and then 3, how does it affect it in the quarters?

Yes. So, maybe at a high level, I will start, and then Jeff can be a bit more specific. As far as the categories, steel and foam chemicals are certainly the most significant for us. And then when you look at recovery, you literally have to go region-by-region and customer-by-customer. But I would say, all commodities are recoverable over an extended period of time. Many of our customers, I would say, our traditional customers have index agreements in place and that allows recovery to happen on a quarterly basis. Some stretch into 6-month timeframe and the rest falls under an annual calculation. And then we have some customers that tend to mix things together. So, they look at a basket of issues, including commodities and then we negotiate those on an annual basis, and it takes into account all other inflationary elements. But if you extend the bookends long enough, we think you get full recovery, at least that’s what we would project at this stage. I don’t know, Jeff, if you want give more specifics.

That’s right. I wouldn’t say there is so much of a seasonality impact to it. As you mentioned, there Japanese customers tend to do it once a year around their fiscal year ends at the end of March. Some of our customers do it every 6 months, some of them do it, as you said, every quarter. So, it does vary. But we tend to look at it over a 3 year time horizon. And as Doug said, we generally see that kind of coming back to us. So next year, we do see, as I mentioned, is a tailwind for us. Brian, you also mentioned I couldn’t necessarily help you on a Bloomberg terminal, but we do look at the ICIS index for foam chemicals. So, look at TDI, MDI and Polyol and ranges by region. And crew prices, again, for hot-rolled and cold-rolled steel, we would look at those as well.

Okay. A follow-up question, just a bit of broader one. So when you came in, it will be 3 years this fall I believe, Doug. You had a book of business that the prior CEO had put out or actually before the interim CEO had done and what was generally perceived in the industry as a bid to win build the book and see what happens on the billings. You have talked about that at length. How do we think about what’s left of the underpriced under-engineerings estimated book that you came with? And how much is just a matter of having 2 years or 3 years left than some of the younger programs that might have started when you were start before, in effect, and I used to do a lot of work in insurance, the poorly underwritten business just rolls off?

Yes. I would say, the vast majority of what was underpriced or, I think, more importantly was stagnated in price recovery that we would normally get because we were struggling on more of the operational performance side, we just couldn’t engage with the customer. I would say that’s largely behind us, if I were to quantify it. I think you are – it’s in the 80% range, maybe 20% are some programs that we just can’t touch. Because it’s strategically not worth pressing the issue or they have got a couple of years left to build-out, and we were better to leave them alone. And that’s how we always arrived at this timeline of 2024, 2025 when we thought on a consolidated basis, we could close the gap on a margin perspective. So, I mean we are generally on that timeline. We have made some improvements to achieving that goal. We mentioned we are about a year ahead on the metal and mechanism business. And that has been largely more cost driven than it’s been price driven. We had some negotiations early on. We settled, but what we found in that business is that there was a lot more opportunity to drive on the cost side than what we originally anticipated. And so that’s why we were able to I would say expedite that improvement in that business segment over and above what we thought. So, it’s always difficult to really break it down if its price or cost and very specifically quantify it because many of them are just a combination of the 2. It’s driving cost. Maybe the customer needs to approve, but us being allowed to retain a certain portion of that. So, I don’t know how you want to bucket that, whether it’s price or cost driven. That’s just – it’s one of the nice things about our business is that there is a lot of opportunity because of the complexity of our module to drive on the cost side and engage with our customer in commercial negotiations.

Okay. Thank you.

And Julie, it looks like we have time for one more question.

Thank you. Our last question comes from Joe Spak with RBC Capital Markets. Your line is open.

Thanks. Maybe just a few questions. The first one here is, obviously, we have seen a strategy that the automakers employers, is partially building these vehicles. And I know seating is generally sort of just in time. But are you – do you believe you are still shipping to these partially built vehicles? And if so, do you have any indication of how much that may have sort of impacted you relative to final vehicle assembly?

Yes. I don’t think it’s had a direct impact on us. With one – maybe one isolated case with Ford F-150, where we had to retrofit I think it was some 20,000 vehicles due to petrochemical shortages. With that as an exception in which we have now provided those and those vehicles have been retrofitted, the partial build shouldn’t have had an impact on us at all since we would have been able to recognize that revenue because we delivered the product and they installed in the vehicle, even though they set it on the sideline until they can get semiconductors in.

Okay. And then Jeff, maybe just – sorry, I understand this – the commercial settlements, like it sounds like it was a sizable number in the quarter, but I am just trying to understand maybe the accounting, when I look at that, that sort of modified cash flow statement, it looks like it’s a $70 million cash outflow. So, is there a timing difference between when you recognize the settlement and when you actually get the cash?

Yes. So a lot of times, what you are seeing on that portion of it is a movement in the accrual in the quarter. But think of it as I have always kind of said, every month, every day, we accrue for some element of customer give back or maybe other issues that are out there with the customer. And then just in time nature of our business has many commercial tie-ins to our customers that agree on shift patterns and the like. So, if things vary significantly, we might have acclaimed to a customer. But what you generally saw in the quarter is that there was a number of things that we settled out with our customer that went to the – essentially to lower our accrual balance during the quarter. And that you can see in the cash flow. Every other period, we expect that accrual will continue to build in other periods, and there was just more settlements of commercial activity in the quarter. It was some conducive for it with the nature of where COVID was sitting and production levels that we closed out a lot of our 2021 productivity agreements with our customers during the quarter.

So, when we think about your free cash flow as per the year, is that relatively neutral for the entirety of the year?

Yes. We think it’s going to be neutral for the entire year, but for the quarter, it had the impact.

Okay. Thanks for that clarity guys.

Anything else Joe.

No. Thanks.

Thanks Joe.

And thanks for joining the call today. It looks like we are at the bottom of the hour. Again, if there is any follow-up questions, I know there is a few people that were in the queue that did not have a chance to ask questions. Please feel free to give me a call. We are happy to help you and go through any questions you might have. But again, thanks for taking time this morning.

Thanks, everyone.

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