Welcome, and thank you all for standing by. [Operator Instructions] Today's call is also being recorded. If anyone does have any objections, you may disconnect at this time. And I would now like to turn the call over to Mr. Mark Oswald. Thank you. You may begin.

Thank you, Sue. Good morning, and thank you for joining us as we review Adient's results for the third 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. This morning, I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; Jeff Stafeil, our Executive Vice President and Chief Financial Officer; and Jerome Dorlack, Executive Vice President, Head of Americas Seating. On today's call, Doug will provide an update on the business followed by Jeff, who will review our Q3 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 discuss. 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 the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments. I'll now turn the call over to Doug. Doug?

Great. Thanks, Mark. Good morning. Thank you to our investors, prospective investors and analysts joining the call this morning as we review our third quarter results for fiscal 2021. Turning to Slide 4. Let me begin with a few comments related to our third quarter. As we anticipated heading into the quarter, the ongoing supply chain disruptions related to semiconductors and the resulting customer production stoppages, combined with escalating commodity prices, provided a difficult operating landscape for the industry and Adient. I'll dig deeper to those macro pressures in just a minute. Despite the many challenges, the Adient team remained focused and successfully executed items within our control, while at the same time took proactive actions to lessen the impact of the production stoppages and lost sales. Starting on the left-hand side of the slide. Adient's revenue for the quarter was $3.2 billion, up significantly from the $1.6 billion reported in Q3 fiscal '20. Last year's results, as you're aware, were significantly impacted by vehicle production shutdowns across Europe and Americas due to COVID-19. Although revenue increased year-over-year, this year's top line was also impacted by significant headwinds, specifically the numerous production stoppages at our customers due to semiconductor supply disruptions. Adjusted EBITDA for the quarter totaled $118 million. And as pointed out on the slide, this included just over $50 million in premiums and temporary operating inefficiencies, again, primarily driven by chip shortages and unplanned production stoppages. Adient's June 30 cash balance totaled $1 billion. I'll point out that the cash balance does not include about $270 million held in other assets as a deposit related to certain assets Adient is acquiring from the YFAS joint venture as part of our China strategic transformation. In addition, about $190 million of cash was used during the quarter to repay a…

Thanks, Doug. Good morning, everyone. Before jumping into the financial results, which, to a certain extent, provides less insight into the ongoing operations given the abnormal operating environments in both Q3 of last year and this year, let me spend a few minutes discussing commodity inflation. Specifically, what we're seeing today, how it's impacting the business and steps the company is taking to lessen the impact, especially as it relates to the out-years. First, on Slide 11, we've provided a chart illustrating price movements and expected price movements for hot-rolled steel in North America. As you can see, despite repeating forecasts that prices will fall, prices have continued to increase while forecast for price decreases continue to be pushed out. For Adient, this has resulted in more than a 3x increase in the cost over the last 12 months for steel. Assuming prices remain constant, the impact on our cost for steel and chemicals would be approximately $650 million higher or more in 2022 than prices paid in 2020. The $650 million is based on current market conditions, such as hot-rolled steel prices in excess of $1,800 a ton. If the current market conditions hold and we do nothing commercially to pass through this increase to our customers beyond our current commercial agreements, net commodity price headwind for fiscal '22 would be approximately $200 million versus 2021. However, as you would expect, we're taking aggressive actions to mitigate the impact, which I'll discuss further on Slide 12. And for that reason, it's premature for us to know how much of this headwind will be realized in 2022. We've spoken at length on prior calls with regard to Adient's recovery mechanisms that are in place to recover material cost changes. As a reminder, our pass-through agreements differ by customers in 2…

[Operator Instructions] Our first question is from Rod Lache with Wolfe Research.

A couple of things. One is, I was just hoping you can clarify the $200 million commodity headwind that you described for next year, that's just 30% of the $650 million, I believe. Just to confirm, is that relative to 2021 or is that relative to 2020 because you are absorbing about $80 million this year? And then secondly, can you just discuss the nature of the inefficiencies? You mentioned on one slide, $300 million for the year, which I think included some revenue impact. And separately, you talked about $53 million for the quarter, which may not have included anything. I'm not sure if that's apples-and-apples. But basically, should we view the $300 million impact is a likely tailwind at some point once production normalizes?

Yes, Rod, I'll start on those. The first question as it relates to the material inflation and the net impact, that $200 million was compared to 2021. And you're right, 2021 had $80 million in it. It doesn't exactly, I think the computation was about that 30%. It's sort of a mix of the lag we have and then the timing of the recoveries. So that would be if we just ran through with the mechanical agreements as they stand today. As I mentioned, we're working, just with the size of the increases, those mechanisms don't make sense for a supplier like ourselves that essentially is putting value add to materials. So we're working with our teams and our customers to help improve that, but that's where it would fall out if no actions were put forward, about $200 million in 2022 versus 2021. As it relates to the second part of your question on the $300 million, about $200 million of it relates to volume. And you can say the rest, there's the chemical supply chain issues were a bit over 40-ish. There's some container and freight type of issues, which were north of $25 million. There are still some COVID-related issues that were sort of the balance there to get you up to the $300 million.

Okay. And what is a reasonable kind of aspirational target for recovery of commodities? And if you could just maybe help us a little bit with bridging beyond 2022. I mean, you'll do $950 million of EBITDA this year. You'll lose about maybe $200 million or so from the China equity income sale, but you're going to recover at least this $100 million of inefficiency and I presume this $80 million of commodities. And then in your last 10-Q, there was some disclosure about 5,000 remaining headcount reduction, which might be $300 million. So just kind of high level, what are you sort of aspiring towards as far as margin recovery as we think beyond this? I know you've got the longer-term mid-8% margin, but as we think about maybe 2023.

Yes. No. All good questions, Rod, and we're in the process of putting a lot of that together, but I'll give you a few crumbs here and we'll obviously work to expand. But right now, I guess I'd start with volume running at $14.3 billion to $14.5 billion or so in volume this year. We think that's a depressed level. And timing of chip production coming back is a bit uncertain here, we expect it probably hits at least our first quarter of 2022 still in some fashion, if not further. But we would expect volume to improve. We certainly would expect a lot of those inefficiencies to improve, if not fully go away. We'll continue to chip away at the material inflation issues. We'd also get a big benefit if we start to see some reductions in material prices. I highlight the steel forecast, everyone you look at continues to show that the next month or next couple of months, it's going to start to go down. It just hasn't done that yet, and that's created some of the challenges for us. We continue to drive the things that are internally within our control. I see nice improvements on our cost structure, see nice improvements on our manufacturing efficiencies, our CI benefits, et cetera, the VA/VE program we've put in place. So the margin expansion and the benefits we have from the restructuring are still there. So it's really going to be largely dependent upon the success we have of going after that material inflation and the pace of recovery on the underlying market.

Rod, this is Doug Del Grosso. I would just add to that, relative to material inflation, I would characterize that it is somewhat concentrated across a small group of customers. As Jeff's mentioned, we've got a wide variety of agreements. Some are working reasonably well and others are working less well, and that's why we've had the impact that we've talked about for this year. And so as we go after that, we're approaching it kind of 3 ways. One is, it can naturally correct itself. We're not sitting on our hands waiting for that to happen. We're heavily engaged with the concentrated customer base where we have those issues. I would say it's a customer base that I feel pretty confident that we can make some ground in those discussions. I'm not here today to peg a number, but it's customers that we've got excellent relationships with. And our level of patience is going to be measured to a certain degree on a longer-term outlook with those customers. Right now, we've not done anything I would call super aggressive as we deal with this issue because we always have to keep in mind, we want a sustained relationship with these customers and taking into account our backlog and new business opportunities is on our mind as we engage in those discussions.

[Operator Instructions] Our next question is from Brian Johnson with Barclays.

Yes. Obviously, margins being the topic of the day. How do we get a sense of in EMEA? It still looks like, even if we exclude the $18 million business inefficiencies, a step down from last quarters. You talked about commodities. And obviously, that will help in Americas where you, of course, have your metal footprint that you're working on winding down. But what has to happen in EMEA? And what's your level of confidence in getting that segment back to a 7% and eventually peer margins?

Well, I'll start. And obviously, Jeff can comment as well. I think when you look at EMEA, what we talked about last quarter was, I don't want to say a bit, an unusually high level of commercial settlements that occurred. They occur every year, so it's not completely unusual. It was just calendarized at a higher level than normal that I think distorts a little bit of the margin picture. And I would suggest you have to look at EMEA margin over a longer period than a quarter-to-quarter because of that phenomenon where we just settle up on a lot of issues, and that tends to occur in Q2.

Yes, Q1, Q2. As I think you look at the EMEA picture, the SS&M business has been improving. I think we continue to hit all the operating metrics and other portions there. The metal movements are not helpful for that, so margin certainly there. And it's a region that's been, I highlighted on in my comments the short time frame that we've had to react to call-offs in volume in Americas, but the Europe situation is very similar and their ability to react to those is even less from a worker standpoint to flex cost base. So the operating environment has not been helpful for EMEA in where we're sitting. But from an overall metric standpoint, I think we've been pleased on the operating performance with that region. The restructuring that we're continuing to put through there will continue to drive some improvements as well. But we need a much more stable operating environment. And ideally, a quicker and better sort of mechanisms to deal with the current commodity inflation issues.

Okay. And then secondly, when I toured your plants, one point the plant manager made, it was actually one of your competitors, was that the JIT plant is just the tip of the iceberg. There's a whole supply chain, including freight, cross-docking facilities upstream from that. So to what extent is the nature of your supply chain driving premium freight? And then can that be part of your recoveries?

Sure. With the exception of, I'll say, ocean freight, which has had a pretty significant impact on us when we're bringing components in from namely Asia, both in the U.S., Americas and EMEA region, I would say the impact has been relatively small at this stage. Now that as these mounting pressures continue, certainly, our suppliers will want to come in and talk about it. But we've not experienced a lot of supply chain. In some cases, we've got direct suppliers who were completely immune from any issue associated with it. So I would characterize the issue, the inefficiencies mainly in our internal operation and the fact that we've got a fair amount of vertical integration, so it's all-inclusive. Yes. It hits us hard in the JIT environment because when the customer shuts down with 1 or 2 days notice, we just have to stop immediately. As we go further down the supply chain, we have an ability to manage that a little bit more effectively. We can build inventory. I think you've seen a little bit of increase in inventory as we moved into this quarter. So we can offset some of that. And we've got Jerome here who runs our operations in the Americas region. Anything you want to add to that, Jerome?

Yes. I mean, I think as Doug said, within the JIT site and Jeff quoted some numbers earlier around 1 to 3 days. And in that even maybe smaller window that flows down into our component plants, we're at 60% of notification falls into that, and that really puts the challenge on JIT. But as you flow down in because of our vertical integration, it's not such an impact really. The West Coast, specifically the West Coast and the port delays there for parts coming in from Asia, has been a real constraint for us. And we've actively worked to reroute freight away from the West Coast. So bring it in either on the East Coast of the U.S. now or bring it in further north into Canada and moving it down. So I think, Brian, we've done everything we can to really actively manage those aspects of it to mitigate the impacts further down in the supply chain. JIT has really been the bigger issue for us.

But we have paid a lot of...

Those are the backstop and dedicated?

Yes. I'd say the biggest issue to us has been on cost. Freight expense has gone up, driver shortages, all kinds of things. And I mentioned the $27 million bump in our overall freight. Also, when the chemical supply issues hit us, we were sending airplanes of chemicals to meet customer demand. So freight has definitely been an issue, but it's been more on the cost side.

Yes. And that's embedded in that $300 million number that we put out.

Yes, in the beginning.

So that was very much a specific incident that drove those inefficiencies into the supply base, but not really characteristic, I'd say, of overall chip shortage.

The next question is from Joe Spak with RBC Capital Markets.

As we look through some of the walks in the back, I get the operational impact from these temporary inefficiencies you're talking about. I also noticed, I guess, like in Americas, for instance, and I believe in EMEA as well, there was a year-over-year headwind from launch. So I guess you guys have performed better on launch. Is this just like a lack of execution on launch or just actual like launch costs are higher because you're launching more programs?

Yes. So this is really around, if you take the Americas, in particular, it's the volume of launch that's running through the system. So it isn't inefficiency associated with launch, it's just year-over-year launch load. And so if you look at like P42QR and the programs we're launching in Tennessee for Nissan, as an example, that's a full value chain program for us. So we have the JIT, the trim, the foam and the metals. And so it's a good business. It's a significant amount of launch load coming into the business. But in terms of launch inefficiency and successive launch, we continue to trend very well from that standpoint. And it's reflected, Doug talked a little bit about the customer awards. Nissan was one in particular for a recent launch that we had. And so I'd say we have a high level of control on our launches. It's just the launch load that's coming into the business on a year-over-year standpoint.

And no, a year ago in COVID, there were no launches.

Yes. I guess that's what I was sort of getting at. And then sorry if I missed this, a little bit busy morning. But is there sort of any more refined timing update on all the China transactions when that can close and when we can sort of see that new balance sheet?

Yes. No. The good news is no expected changes at this point. We're still on target, we think, to close the transaction in September, by the end of September. And the proceeds dynamic is still the same as we outlined on March 12 when we announced the transaction. So roughly half the dollars come in on that date and then the rest is paid by the end of December. And we'd still expect that time line.

December of '21?

Correct. Yes, this December.

[Operator Instructions] Our next question is from Dan Levy with Credit Suisse.

I apologize if I missed this earlier, but I think you mentioned in your slides about the commercial negotiations. There's a little bit of roll up your sleeves. So maybe you could give us a sense of how the dynamics work on the commercial negotiations given the higher input cost. What's the typical timing of when you might be able to recover that? And then maybe you could just give us the latest on how that would comp versus typical recoveries, which I think you said is like $300 million in a typical year. So just trying to size out what the commercial recoveries could be. And then what's left on the, call it, lower hanging fruit, which I think you've said is mostly exhausted?

Yes. So I'll start at a macro level. Dan, this is Doug Del Grosso. And then, obviously, Jeff and Jerome can provide some additional details. So I'd first start out, we signaled commodity economic inflation was going to be an issue during our Q2 call. So this isn't anything that we didn't see coming. What's been challenging is what we felt the impact was going to be versus what it is now has been continually changing. And that's the one slide we have in the deck that just shows every preceding month forecast is at a higher level for an extended period of time. That said, we've gotten in front of every single one of our customers. This has not been, I'll say, a traditional discussion that we've had. We've gone to extremely high levels of our customer, explaining with a great amount of transparency the impact that it has relative to each one of their recovery mechanisms and why this is such an issue for us, not only in fiscal year '21, but if inflationary costs continue into '22, and it needs to be addressed. As I mentioned, it's concentrated across a few customers. In some cases, we have mechanisms that are in place that better manage the situation. The issue that they have is, these mechanisms are historic mechanisms that have been in place for quite some time in most cases. And to change these is a pretty fundamental change for our customers to enact. It's not like a specific commercial issue. They felt that they've got a mechanism in place, and it's just this really erratic situation we have right now that's causing it not to work, but they understand it. I think what I feel good about is with those customers, they're customers that we're pretty well positioned with. I think we've got outstanding relationships with, and I think they appreciate the value we bring. The only reason I would say I'm reluctant to put a time on it is, it's still a pretty fluid situation. And as commodity costs continue to increase, it's hard to really peg what the final impact is going to be and put some brackets around it. So we'll be working on it through this quarter. We'll have better visibility of where we're at as we go to Q4 and we start talking about our '22 outlook, but it's more than an issue that will take a quarter to resolve. But I'm fairly confident that over time, we'll be able to work this out with the customer base where we have the most significant problems with.

Great. And then just as a follow-up, I know that once your transaction on the China site closes, the pro forma leverage is going to be far below the, I think the 1.5x to 2x range that you typically flagged. What would be the timing on potentially pursuing other capital allocation options once you get below that target leverage or could there be a period where you're a bit more conservative on the capital allocation side given some of the supply chain issues that we're seeing?

Yes, great question. I think as we finish this year, we'll come to you guys with our guide for expectations for 2022, and we'll give you a better definition around where we see things. But to your point, the more volatile the market, the more, I guess, uncertain things are, the more we'd probably delay a little bit or under those situations, I could see us delaying a little bit. But at the same time, we do think the big element here and what we earmarked a lot of that cash for is to deleverage. That is our primary path forward here. But you're right, I think we have a real good path to get under those metrics that we've outlined in the past and we'll start to outline what the intentions are on capital allocation here. We don't expect the disruption in the market to continue indefinitely, for sure.

Thank you. And it looks like we're at the bottom of the hour. So again, if there's anybody that has additional questions, please feel free to reach out to me. I'll be available for follow-up calls. Operator, thank you very much. This concludes the conference call for today.

Thanks, everyone.

Thank you for participating in today's conference. This concludes today's conference and you may disconnect at this time.