Adient plc (ADNT) Q2 2022 Earnings Report, Transcript and Summary

00:04 Thank you for standing by, and welcome to today's conference. All lines will be in a listen-only mode for today's presentation until the question-and-answer session. [Operator instructions] The call is being recorded. If you have any objections you may disconnect at this time. 00:22 I would now introduce your conference host, Mr. Mark Oswald. Sir, you may begin.

00:28 Thank you, Catherine. Good morning, and thank you for joining us as we review Adient's results for the second quarter of fiscal year 2022. The press release and presentation slides for our call today have been posted to the Investors section of our website at Adient.com. 00:42 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 of the Americas. 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 year. After our prepared remarks we will open the call to your questions. 01:07 Before I turn the call over to Doug and Jeff, there are 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. 01:32 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 or full earnings release. 01:51 This concludes my comments. I'll turn the floor over to Doug. Doug?

01:54 Great. Thanks, Mark. Good morning and thank you to our investors, prospective investors and analysts joining the call this morning as we review our second quarter results for fiscal 2022. 02:06 Turning to slide four, let me begin with a few comments related to the quarter, continuing the trend established during the second half of fiscal 2021, numerous external factors including supply chain disruptions and resulting operating inefficiencies elevated commodity prices and increased freight to name a few continue to influence the industry and Adient's near term results. 02:30 As the quarter progress pressures intensified, primarily resulting from the conflict in the Ukraine and the widespread COVID lockdowns in China. Unfortunately, unlike commentary provided in the first quarter call signs of stabilization for the industry did not advance. In fact they took a step back bottom line, the operating environment remains very challenging. This is evident when looking at Adient's second quarter EBITDA result which contains approximately $160 million of lost volume, temporary operating inefficiencies and elevated commodity prices. 03:09 The $160 million contains approximately $10 million of temporary savings. Adient's key financial metrics for the quarter can be seen on the right hand side of the slide. Revenue for the quarter, which totaled $3.5 billion was about $440 million compared to last year's second quarter adjusted for portfolio actions executed in 2021. Adjusted EBITDA for the quarter totaled $159 million and as pointed out on the slide, included approximately $160 million in lost volume, temporary operating inefficiencies and premiums. 03:47 Again, primarily driven from the chip shortage and unplanned production stoppages. Adient's March 31 cash balance totaled approximately $1.1 billion, total liquidity was about $1.9 billion. We're very much focused on managing our cash and liquidity given the difficult operating environment the industry is facing. 04:11 Despite the continued difficult operating environment Adient continues to execute actions within its control to position the company for sustained success. These actions include, but are not limited to as a team's intense focus on launch execution, cost operational improvement and customer profitability management. Continued progress on transforming the company's balance sheet, as called out on the slide, Adient completed its tender offer during the quarter for over $700 million of voluntary principal on debt repayment. 004:46 And lastly, as highlighted at the bottom of the slide, the company continues to deliver on its commitment to provide product -- process excellence to our customers as evidenced by numerous customer and industry awards, including GM Supplier of the Year for 2021, Hyundai/Kia Quality Excellent Award and three awards from Toyota including Superior Value Analysis Achievement Award, Excellent Quality Award for Adient Metals and a Supplier Diversity Award. The Diversity Award is especially pleasing as Adient's DE&I efforts continue to mature and drive our business forward. I mentioned these awards not as bragging points, but as proof points that despite the challenging operating environment the company has focused and continues to operate at a very high level. 05:39 Slide five, let me expand on what we're seeing with regard to the current operating environment. In the middle of the slide, we've highlighted several of the headwinds that the industry and Adient continue to face. The list should look very familiar as many of these external headwinds surfaced at the end of our second quarter last year, and have continued into fiscal 2022. The most significant influences include ongoing supply chain disruptions which continue to impact production at our customers. Unfortunately, the supply chain disruptions expand beyond semiconductors and blood over to other components. Similar to our commentary in Q1, these unplanned production stoppages are leading to premiums and operating inefficiencies across the network. 06:29 Q2 fiscal 2022 we estimated that supply chain disruptions resulting loss production, operating inefficiencies, premium freight, et cetera had a net impact on the top line of about $790 million and adjusted EBITDA by approximately $140 million. For the full year, we expect production stoppages resulting from supply chain disruptions and temporary operating inefficiencies to continue. Unfortunately, with no signs of stabilization on the horizon, expectations for significantly improved results in the second half of our fiscal year have greatly reduced. 07:09 With regard to material economics, Adient is having success eliminating the negative impact this year through successful commercial negotiations, which I will discuss further in just a minute and timing of our steel buy contracts which were put in place earlier this year. For the quarter, Adient's net commodity headwinds totaled about $20 million. This result was better than expected, aided by additional recoveries over and above our contractual agreements. 07:37 Based on recent steel price movements, contractual agreements in place, both for our steel buyers as well as for our customers' recoveries based on escalators pass-throughs in place, we currently forecast a commodity headwinds of less than $15 million versus previously forecasted $95 million. Although we're seeing good results here, other inflationary pressures, such as rising energy costs and ocean freight continue to escalate. 08:09 Turning to slide six, we've illustrated a few examples how navigating through these certain of these commodity inflationary pressures and mitigating the overall risk to Adient. For example, the company's efforts to reduce risk with price movements in steel. The team is very focused on increasing the percentage of contracts with our customers that contain escalators pass-through and their associated recoveries. 08:37 In addition, we're having success at shortening the time lag in recouping the costs. For example, if you look back a year ago, the percentage of contracts that had formal agreements across Adient was about 70% with an approximate lag of two quarters. Today, we're north of 70%, in fact in the Americas we're probably closer to 85%. Not only the overall percentage increasing, but the recoveries associated with the agreements are increasing. With regard to foam chemicals, we continue to tweak the contract as appropriate. That said, the contracts in place generally are more efficient versus the risk mitigation that is in effect for Adient steel exposure. 09:22 In addition to the commodities there has been widely discussed in the past, such as steel and foam chemicals. The team is also implementing actions to address inflationary pressure impacting the input costs, such as ocean freight and utilities. To sum it up, we've successfully executed actions to produce steel and chemical headwinds, we're now working through actions to reduce and mitigate other inflationary pressures, such as ocean freight and utilities as shown on the slide. Impact on the ocean freight front, we've been able to whittle down the impact by about $10 million this year, and we're not finished. 10:03 It's essential we continue to progress through these efforts to mitigate the impact inflation is having on the business. As you know, Adient's business model is based on being a value-added supplier. Continued inflationary risk is not currently priced into the model. We're making progress on this front, and we'll continue to work hard to further lessen Adient's exposure. 10:27 Turning to slide seven, let me provide a few comments related to the narrative for the fiscal year 2022, and how it continues to evolve. As a reminder, as Adient entered fiscal 2022, we expected a number of positive and negative influence to drive our overall results. On a plus side, volumes were expected to increase as the year progress, driven by an improved supply chain, less restrictions from COVID, et cetera. Adient will continue to progress its back to basics strategy, driving further improvements to our operation. This, along with our focused customer and profitability actions would continue to narrow the margin gap to our peers. 11:09 And from a balance sheet perspective, the company would continue to prioritize debt pay down. Largely offsetting these positive influences were elevated input costs, primarily commodities, freight and energy, risk around labor availability and costs, lower equity income and a modest increase to engineering and launch costs. When mixed together, we expected result somewhat lower versus our pro forma 2021 results with sequential improvement as Adient progress through the year. 11:44 What's the same and what's different today? There's been no change to items within Adient's control. We remain focused on executing the company's strategy operationally, financially and strategically. When stripping out customer shutdowns and the impact of certain customers not running at rate, we're performing at a very high level. What has changed is the intensity of the external headwinds, primarily driven by the Ukraine conflict and widespread COVID lockdowns in China. Again, unlike last quarter visibility is unclear at the present time as to when these pressures might subside or lessen. It is clear the expectations of significant improvements taking place in the second half of our fiscal year have diminished. 12:31 Although, certain temporary headwinds resulting from supply chain disruptions are expected to eventually reverse, certain of the inflationary pressures are likely to persist. Requiring further commercial and-or operational improvements to overcome the impact of margins in fiscal year 2023 and beyond. Jeff will provide commentary on what we're seeing today, including which costs are transient versus sticky with his prepared remarks. As you would expect, we continue to make appropriate adjustments to our operations to ensure we capitalize on the positives and mitigate the negatives. 13:01 Shifting gears and turning to slides eight and nine. Let's take a look at our business wins and launch performance. As you can see, slide eight is our typical new business slide highlighting a few of Adient's recent wins. The programs highlighted represent a good mix of incumbent wins, all new platforms and multiple conquest wins. Also noted is a degree of vertical integration from a number of these wins. One such example we've illustrated on the slide is the replacement business for Toyota's Camry in the Americas, which contains metals, foam, trim and jet. As our new book of business continues to launch, we expect the balance in, balance out platforms to further enable margin expansion. 14:00 Flipping to slide nine, as we typically do, we've highlighted several critical launches that aren’t complete in process or scheduled to begin in the near term. I'm happy to report that the launches currently underway are progressing smoothly. We're particularly excited with the F-150 Lightning launch in the Americas. Program consistent with other launches is meeting quality, delivery and financial expectations. 14:30 The launches and platform shown not only impact Adient's jet facilities, but also span across a network of our foam, trim and metal facilities. The team continues to focus on process discipline around launch readiness and has driven a very high level of performance, especially considering the launch load and complexity of launches that are planned for the year. In addition to the number of launches and complexity, the disruptions to production schedules continue to present another layer of challenges. The team is successfully managing through, again, a testament to the discipline we've instilled in our process. We have no intention of letting up. 15:13 Flipping to slide 10, in addition to winning business and executing successful launches, which are vital to Adient's future success. One other area I'd like to highlight, which is equally important to the company's success are the company's efforts related to ESG. These efforts were on full display a few weeks back as several Adient's employees celebrated birthday across various regions. Few of the projects that were celebrated are highlighted on the slide, it's exciting to see the level of engagement and excitement of our employees as we share common goal of bettering our processes and operating our business in an environmentally responsible manner. 15:59 Before turning the call over to Jeff, and turning to slide 11, let me conclude with a few summary comments. As mentioned in my prepared remarks and as you know, the operating environment remains very challenging for the industry and Adient. That said, we remained continued to execute actions within our control to position the company for success, including advancing our back to basic strategy, implementing actions to process, to reduce inflationary costs and continuing efforts to perform -- transform the balance sheet. As certain of the external pressures lessen over time, Adient expects to be well positioned to take advantage of an industry recovery. 16:49 It's not all doom and gloom, several industry metrics remain supportive for example. Interest fee remains supply constraint, demand continues to be robust, vehicle production levels are near all-time lows, a good set up for production in coming years. There are a lot of new innovative product scheduled to be launched in the coming years. These factors, combined with the benefits expected from continued Adient's specific actions executed from our operations and customer profitability perspective give us reason to be excited about the future. We see significant opportunity for value creation for our shareholders in the coming years. 17:32 With that, I'll turn the call over to Jeff to take us through Adient's second quarter 2022 financial performance, and provide additional detail on what to expect as we move through 2022.

17:45 Great. Thanks, Doug and good morning everyone. Let's turn to slide 13, and jump right into Adient's Q2 financial results. Adhering to our typical format, the page is formatted with our reported results in the left, and our adjusted results in the right side. We will focus our commentary on the adjusted results which exclude special items that we view as either one-time in nature or otherwise skew important trends and underlying performance. 18:12 For the quarter the biggest drivers of the difference between our reported and adjusted results relate to purchased accounting amortization, premiums in deferred financing cost associated with debt repayment, restructuring and an impairment associated with Adient's sole facility in Russia. The facility located in Togliatti, Russia is very small, in fact that operates as a Tier 2 trim supplier to other jet suppliers in Russia. The revenues and EBITDA associated with this operation are de minimis to Adient's overall results. Details of all the adjustments for the quarter and full-year are in the appendix of the presentation. 18:52 I'd also point out, similar to last quarter, within the appendix we've included pro forma results for each of the quarters in fiscal '21, adjusting for the numerous portfolio actions executed last year. We believe these pro forma adjustments provide helpful comparisons between the current year and the prior year results by adjusting the prior year to be on a consistent basis with the current one. 19:14 High level, for the quarter sales were $3.5 billion, down about 8% compared to our second quarter results last year or down about 11% compared to last year's pro forma results. Similar to the past few quarters, the most recent quarter was significantly impacted by loss production, primarily driven by supply chain disruptions. 19:36 Adjusted EBITDA for the quarter was $159 million, down $144 million year-on-year as reported or down $131 million compared to last year's pro forma results. The decrease is attributed to the significant reduction in volume and mix, as well as inflationary pressures on freight, utilities and commodity cost. I'll expand on these drivers in just a minute. Finally, at the bottom line, Adient reported an adjusted net loss of $12 million or a loss of $0.13 per share. 20:08 Now let's break down our second quarter results in more detail. I'll cover the next few slides rather quickly as detailed for the results are included on the slides, and to ensure we have adequate amount of time set aside for Q&A. 20:23 Starting with revenue on slide 14, we reported consolidated sales of $3.5 billion. Revenues included the sales at Adient's CQ and LF ventures, which are now consolidated since closing the strategic transformation in China, as well as other portfolio actions executed in fiscal '21. The $3.5 billion is a decrease of $444 million compared with Q2 fiscal '21pro forma results. Primary driver of the year-over-year decrease was lower volume, call it, approximately $396 million related to volume and lower commercial recoveries, partially offset by roughly $78 million in commodity recoveries. The negative impact of FX movements between the two periods impacted the quarter by about $126 million. 21:15 Focusing on the table on the right hand side of the slide, you can see our consolidated sales were generally in line with production in Americas and EMEA. In China, Adient's customers were impacted by the widespread COVID lockdowns and supply chain issue more severely than the overall market, leading to the temporary underperformance versus production in the region. Just the opposite occurred in Asia, outside of China, which outperformed regional production, driven by the launch of certain conquest business and customer mix. 21:46 Important to note and as highlighted on the slide, the quarterly year-over-year performance was adjusted to account for the portfolio actions implemented in fiscal 2021 and FX impacts. With regard to Adient's unconsolidated seating revenue, year-over-year results were down about 4% when adjusting for FX and the portfolio actions executed in fiscal '21. Similar to our consolidated sales in China, Adient's unconsolidated sales were impacted by the widespread COVID-related lockdowns, which impacted our mix and volumes more than the market average. 22:20 Moving to slide 15. We've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate, finance and legal. 22:39 Big picture, adjusted EBITDA was $159 million in the current quarter versus 330 -- excuse me, $303 million reported a year ago or $290 million pro forma adjusted for the portfolio actions executed in fiscal '21. I'll focus my commentary on the drivers between this year's results and the pro forma adjusted results, as we believe that provides a more meaningful comparison to today's business. The primary drivers of the decrease are detailed on the page and are consistent to what we expected heading into the quarter. 23:13 Lower volume and mix, primarily driven by supply chain disruptions at our customers impacted the year-on-year results by about $57 million. Adverse business performance, primarily driven by increased freight, call it, $28 million, lower net material margin of $22 million, driven by the timing of commercial settlements and negative labor and overhead performance of roughly $18 million, which was driven by off cycle wage increases, retention bonuses and increased utilities accounted for roughly $68 million in negative business performance. 23:48 The negative performance, which for the most part is environmentally driven was partially offset by $15 million of improved ops waste launched in tooling performance, a proof point that the business is running well when stripping out the external factors. Other headwind included are net increase in commodities, call it, just under $20 million, lower equity income of approximately $9 million, again, driven by the widespread COVID lockdowns in China, and the negative impact of FX, call it, $11 million. 24:20 SG&A performance benefited the quarter by approximately $18 million. Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the presentation. High level, for the Americas increased commodity prices, lower volume, increased freight cost, off cycle wage increases and retention bonuses weighed on the year-over-year comparison. These negative influences were partially offset by improved launch, ops waste, tooling performance and SG&A. 24:54 And just one more point in the Americas. The year-over-year comparison was impacted by certain non-repeating factors, namely approximately $17 million of cost related to the Texas freeze storm that impacted last year's second quarter, and thankfully did not repeat this year. In addition, our current fiscal quarter -- current Q2 of fiscal '22 included approximately $10 million of insurance recoveries from that storm that we included as an offset to the $140 million impact that Doug summarized on page five. 25:31 In EMEA, the year-over-year pressure is more pronounced than in the Americas for several reasons. First, as noted above, Americas benefited from a $27 million year-over-year benefit from the 2021 Texas storm. Second, the volume issues in Europe were more pronounced than in Americas, as the volume and mix were over four times greater in Europe than Americas, and this had a compounding effect of making the operating environment less conducive and efficient. The conflict in Ukraine, definitely contributed to the situation. 26:04 Third, the approximate $35 million increase we expect to incur this year in utilities is nearly all related to Europe, primarily driven by the shock to the market for Russian gas supply. Finally, FX was a hit of approximately $11 million year-over-year due to the decline in the euro versus the dollar. 26:24 In Asia, the widespread COVID lockdowns adversely impacted volumes and equity income. In addition freight -- increased freight, labor cost and commodities added to the downward pressure. These headwinds were partially offset by improved net material margin and improved SG&A efficiencies. 26:44 Let me now shift to our cash, liquidity and capital structure on slide 16 and 17. Starting with cash on slide 16, I'll focus on the year-to-date results, as the longer time frame helps smooth some of the volatility in working capital movements. Adjusted free cash flow defined as operating cash flow less CapEx was an outflow of $102 million. This compares to an outflow of about $14 million for the same period last year. 27:13 Key drivers impacting the comparison include the lower level of consolidated earnings and typical month-to-month working capital movements, which resulted in close to $330 million headwind versus last year. Partially offsetting these negative influences were over $200 million of positive variances, including lower restructuring cost as we trend to what we see as a more normalized rate than what we've seen than we spent in recent years. A lower level of interest paid driven by our balance sheet transformation. And finally, the timing of commercial settlements and VAT deferrals and payments. 27:53 Flipping to slide 17. As noted on the right hand side of the slide, we ended the quarter with about $1.9 billion of total liquidity, comprised of cash on hand of about $1.1 billion and just under $820 million of undrawn capacity under Adient's revolving line of credit. Adient's debt and net debt position totaled about $2.9 billion and $1.8 billion respectively at March 31. As Doug mentioned earlier and noted on the slide, during the quarter the company continue to advance its capital structure transformation by completing its two tender offers. Just over $500 million of principal of Adient's 9% senior first lien notes due 2025 and $200 million of Adient 3.5% unsecured euro notes due 2024 were taken out in the quarter. 28:49 I'll also point out that in the not too distant future we expect to repay the European Investment Bank loan which matures at the end of May. Although, we are solidly on track and committed to transform the balance sheet, driven by our voluntary debt pay down, the company is also very much focused on protecting our cash and liquidity. Our commitment to drive our net leverage down to between 1.5 times and 2.0 times has not changed, but that said, we will be prudent in the timing and execution of additional voluntary pay down given the challenging operating environment. I think of it as a balanced approach. 29:26 Moving to slides 18 and 19, let me conclude with a few thoughts on what to expect as we progress through fiscal '22 and why we continue to be optimistic as we look to the future. First on slide 18. Based on Adient's results through March and the current market conditions, we currently forecast revenue of about $14.2 billion versus our previous guidance of $14.8 billion. The decrease is primarily attributed to the change in production that is now forecasted versus prior expectations stemming from the conflict in Ukraine, continued supply disruptions and the widespread COVID lockdowns in China. 30:07 In Europe, for example, production is now forecasted to be down about 10% compared to our expectations in January. In North America forecasts versus expectations back in January have been revised lower by about between 2% and 3%. For adjusted EBITDA, given our revised expectations for revenue, we now expect fiscal '22 will be significantly lower, call it, greater than $100 million lower versus our fiscal 2021 pro forma results of about $810 million. Obviously, there are a lot of moving pieces, both positive and negative. For example, on the positive side, we're seeing continued improvement in Adient's core operations, including the launch execution, ops waste and a lower than expected material economics headwind, which Doug mentioned, is now expected to land $15 million or less for the year. 31:02 This outcome was hard fought and as a result of a variety of efforts including commercial settlements above contractual obligations and renegotiated contracts that include reduced time lags for true-ups and reduced pain share for Adient on commodity price changes. Unfortunately, in addition to the lower volumes and associated inefficiencies and despite the progress we've made on material economics front, other inflationary pressures have intensified such as freight, utility and off-cycle labor economics. 31:33 The challenging operating environment, specifically, the ongoing supply chain disruptions, the expanded COVID lockdowns in China, limited visibility on customer production schedules and increased inflationary pressures prevent us from providing a more specific forecast for adjusted EBITDA at this time. 31:53 Equity income, which is now -- which is included in our adjusted EBITDA is now forecasted to be $75 million. This is down versus the $90 million guide provided last quarter and reflects the challenging operating environment in China. 32:08 Moving on, interest expense is expected at about $160 million, up slightly from our previous guide of $150 million. No change in our cash tax assumption of around $80 million, our book taxes are expected to be slightly higher, call it, about $100 million at this time, approximately $25 million per quarter is a good run rate assumption. As mentioned on our last call, during fiscal '22 we might see our adjusted effective tax rate higher than normal and fluctuations amongst quarters due to valuation allowances in our geographic mix of income. 32:45 That said, it's important to remember that we maintain valuable tax attributes, such as net operating loss carryforwards and that these tax attributes can be used to offset profits on an ongoing -- on a forward going basis. So cash taxes on Adient's operations should remain relatively low when our profits increase. 33:04 And finally, capital expenditures are forecast to be about $300 million to $325 million, as you know, the majority of our cap spend is related to program launches at our customers. We'll continue to align our spending with their launch plans and adjust as appropriate as we progress through the balance of the year. 33:22 As you can see at the bottom of the slide, given the backdrop of the current operating environment and consistent with the commentary related to adjusted EBITDA forecast providing a specific full-year estimate for free cash flow with reasonable certainty is not possible at this time. 33:38 And with that, let me turn the presentation back over to Doug to cover slide 19.

33:44 Great. Thanks, Jeff. Throughout our call this morning, Jeff and I have highlighted numerous factors that continue to impact the near term results for the industry and Adient. Many of which are external in nature, as you know, a bleak or cloudy outlook for 2022. When digging deeper and isolating the influences into different buckets, we remain optimistic brighter days lie ahead. 34:13 First and foremost, Adient's foundation is strong and continues to strengthen. The team continues to progress our back to basic strategy, leading to improvements to our core operations. This is evident when looking at metrics such as ops waste, launch performance, et cetera. 34:33 Let me share a few facts and figures. In 2019 Adient's operations were experiencing many inefficiencies, in total, ops waste was an approximate $220 million headwind, significant progress was made in 2020-2021 despite the challenging operating environment. Further improvement is expected this year. In fact, if we annualize fiscal year 2022 year-to-date results Adient’s ops waste versus fiscal year 2019 levels have approximately halved. 35:15 With regard to launch performance, similar story. Adient's back to basics mindset and focus on process to enable sequential improvements in the company's launch metrics as we progress through 2020-2021 and again this year. This is especially significant given the challenging operating environment, which experienced COVID interruptions, part shortages, customer downtimes, et cetera, not to mention the increased complex program launches such as the F-150 Infinity QX60 to name a few that occurred during the period. 35:54 Adient's solid launch execution is a key enabler for us winning new conquest and incumbent business, which speaking up incumbent business Adient's win rate stands at 98% so far this year. We're clearly winning the business we set out to win. We remain focused on costs, the company's cost structure continues to be streamlined, we are a much more efficient company today than we were two, three years ago. And finally, our balance sheet transformation is solidly on track. 36:27 With regard to headwinds, we view them in two different buckets, both of which were working hard to mitigate and offset. First, let's call them transitory, include items such as supply chain disruptions which you know, have resulted in significant volume reductions, operating inefficiencies, unfavorable mix as China volumes come under pressure, which as you know, is a higher margin business for Adient. And lastly the elevated commodity costs we're facing. 36:57 Altogether, these headwinds are forecasted to place approximately $470 million of downward pressure on Adient's results in fiscal 2022. Through self-help initiatives and improvements in overall external conditions, we expect the large majority of these pressures to reverse over time. For example, the supply chain stabilizes, we expect customers running at rate, production volumes turning higher and Adient's operating inefficiencies decreasing. Other costs have intensified as of late and they're being viewed as a bit more sticky. These headwinds, which include, but are not limited to increased freight, utility and labor inflation are forecast to add an additional $125 million of headwind on the business this year. 37:49 The team is executing self-help initiatives and working with our customers through ongoing commercial negotiations to lessen the impact on a go-forward basis. When looking into the future, we believe the actions that have and are being implemented will position Adient to capitalize on industry recovery ultimately creating value for our shareholders. 38:12 Regarding margins, we remain committed to eliminating the margin gap versus our peer group. Solving the transitory and sticky cost on this page will not be easy or guaranteed. We will get us over 90% of the way there though. That said, this is not all that we're doing as we continue to transform our portfolio by launching higher margin business and continuing to prove our innovation and execution capabilities. While COVID and supply chain crisis, Ukraine, et cetera have delayed us in reaching our goal we remain confident and committed to the mission. 38:52 With that, let's move to the Q&A portion of the call. Operator, can we have our first question please.

38:58 Certainly. [Operator instructions] The first question is coming from John Murphy, Bank of America. Your line is open.

39:12 Good morning, guys. The change in guidance seems like it's a little bit more in line with the market pressures that we're seeing from other suppliers and it seems a little bit more realistic and not too -- not too optimistic. So I'm just curious, Doug and Jeff, as you think about this, is there something different in your business versus other suppliers? I mean you, it might be calendar timing where the fourth quarter -- calendar fourth quarter is not in this guidance, where there might be some significant increase there. Is there any kind of fundamental difference that you think that you're seeing? And once again, I think your outlook is a little bit more rational than others, it might be a little bit too optimistic.

40:03 Yeah. I’ll point to. To me, one of the obvious difference is, John, appreciate the question, is the fact most of our revenue is just in time revenue. And certainly, the labor inefficiencies have been a big burden for us, particularly because our customers continue to release us, met higher volume levels than they ultimately produce, which hits us with a fairly significant amount of trapped labor. 40:39 So that's -- I would uniquely outline that as something that’s different than -- if you're not building sequentially you can build ahead, you can shut down, you can store an inventory. We have very little ability to do that even in our jet plants, most of them are building live and can store a few hours of inventory and then we have to shut down. I'd point to that, certainly, a good portion of our businesses in Europe, and as Jeff pointed out, the Ukraine conflict has been a significant drag on a year-over-year basis. Jeff, anything --

41:25 Yeah, no, I think especially that first point that Doug mentioned, our just-in-time nature and the really volatile call up schedules from our customers is why we haven't, I think, been reluctant to give a specific guide, a specific range because it moves so quickly and can move so quickly as those production schedules change really daily. 41:49 As far as maybe one other thing to point out, which isn't necessarily different than others, but we do have a lot of equity income coming in from China. And you saw a little bit of an impact in Q2, we saw -- in our fiscal Q2 you saw a lot of the North shut down through a lot of March. So are – just think of the FAW, the Volkswagen business up there was significantly affected. Beijing Olympics hit, we have a lot of business in Beijing area, servicing Daimler and Hyundai. So it's a bit of an impact in Q2, but I would expect it to be a bigger impact in Q3 as a lot of those shut downs extended into really today. And we sort of not expecting normalized operations to continue for a little bit. That's going to have some supply chain impacts, not just in China, but through other regions, not just directly through our supply chain, but we expect through some of our customers. So all of that makes it a little bit cloudy, a little bit uncertain and we try to build that into the commentary we provided you.

42:58 Okay. Then maybe just a follow-up on this. I mean, we're hearing from automakers their willingness to potentially store and take inventory from certain suppliers. So I mean, I guess, that dovetails with what you're saying about your business being jet and others being able to maybe run in store. Is that -- that's basically what you're talking about?

43:18 There are no run in store for us.

43:20 Yeah, that really doesn't work in this business. There is no -- no real way. It is the way we sequence into their facility, they can't store anything.

43:28 If they stop their production we have to call off our shift effectively.

43:35 The next question is coming from Rod Lache, Wolfe Research. Your line is open.

43:40 Good morning, everybody. The target of eliminating the margin gap versus competitors, unfortunately for us has become a little bit more ambiguous since everybody's margins moving around. But I was hoping you might be able to just dive into this slide 19 a little bit more for us, just so that we can square it with where you're -- what you're ultimately targeting. 44:13 So if we look at the $475 million of transitory cost, is it still around $300 million from volume and $150 million from inefficiencies. I thought that the net commodity include cumulatively there still a lot more. And maybe just in addition to that, if you could spend a little bit of time just talking about the timeline for the remaining $125 million of sticky stuff. Just because there is no -- historically there has been no mechanism for passing along utilities or labor and that kind of thing.

44:51 Yeah, I’m going to have Jeff walk through the detail on that. But just for clarification purposes, when we talk margin gap to our peers, it's not a sliding scale. When we think of it, we we've always said we wanted to get to that north of 7.5%, 8% is kind of how I think of what that margin gap is for the fact that we see depressed earnings doesn't mean we've recalibrated what that margin gap looks like. But that said, I'll let Jeff walk through some of the detail around it.

45:23 Yeah, let me help unpack it a little bit, Rod. And feel free to ask if I don't hit everything you need. But for the year, I’d just maybe take a look at 2022, just using a $700 million roundabout number, it's attracting equity income here roughly, that would be $625 million on a $14.2 billion, so 4.4% or so. If you look through the transitory and sticky cost, and you add those back in, within the transitory and I'll break that down a little bit more in a second, you have about $2.2 billion of what we think is lost volume. So the $14.2 billion in sales comes up to something around $16.4 billion and the $625 million kind of find its way up closer to about $1.2 billion. So you're north of 7.25 or so percent if we're able to recapture those. And there is some work to be done, but we've made a lot of headway on it. 46:24 And then, I guess, what's important to realize there is, that's not over staffing, there is still parts for our -- we return a little less than 20% of our portfolio every year as old business runs out and new business runs on. We have been focused heavily, and I'd say, increasingly on margin and new business launch and finding attractive new business to fill our facilities. We would expect opportunities as we continue to execute on that order book and deliver that to provide additional margin expansion. So that's a little bit of the road map, it's all been a little delayed and challenged with the operating environment, but that -- the components of it hasn't really changed. 47:09 Just as a little bit of a breakdown for you on the transitory cost bucket that $475 million, I mentioned about $2.2 billion in lost sales. I think of that about $375 million or so of lost EBITDA profits. Between COVID and supply chain issues from semiconductors or Ukraine or so it's about $100 million. There is several things that offset in the remaining, we mentioned through here that we had some insurance proceeds this year, we deducted that off the $475 million. There were some temporary savings we've achieved this year, as we've tried to do some, we'll say austerity measures within the company such as freezing our 401k and things like that. Which we've offsetting that but overall the two big components, the rest offsets is that $100 million in the $375 million of lost volume. 48:07 On the sticky cost you're seeing a lot of different things, roughly a third of it or a little bit more about $50 million you could say as ocean freight, increases in ocean freight. Utilities and almost exclusively in Europe are driving $35 million and then the remaining is a mix of freight and labor. All of those things we have been going in and trying to manage our cost base better, but as we're generally priced on a value-add basis, some of the stuff needs to be recaptured, and then the customer contracts as well as -- success in doing that. But need to continue.

48:46 So, just to clarify, on the sticky part of this, the $125 million, are you saying that you need kind of the roll-off and roll on of contracts and restructuring to mitigate that? Or do you anticipate that that kind of gets offset by price negotiations? And any kind of timeline for achieving this?

49:18 Yeah. So, our primary focus is to solve those issues in the near term. There are tough negotiations with our customers, because we just got up recent round on material economics, but we're not waiting for things to roll-on and roll-off and it -- to be built into future pricing. That said, it takes time to get done. Material economics probably took us almost a full year to get to where we're at today. And although we want them to be done sooner, if I were to give you a reasonable timeline, I'd say, that's about a 12-month cycle. And it assumes that there is not new issues that appear on the horizon that we have to deal with.

50:14 The next question is coming from Brian Johnson of Barclays. Your line is open.

50:19 Hey team, this is Jason Stuhldreher on for Brian. Maybe just kind of a somewhat housekeeping question first. Just around the -- what is now a $15 million exposure from raw mats for the full year. I mean, it seems -- I think the first two quarters were even higher than that, so it implies that there may be a tailwind in the back half of the year, did I get that right? 50:43 And then if there is a tailwind in the back half of the year, does that tailwind assuming spot prices stay where they are right now, carry into 2023? And I guess maybe just the detail that would be helpful is, is your limited exposure this year a function of you signing contracts for these items, early on in the year and for lower prices but next year. Is the new contract is going to be higher prices and there may be a headwind or is it more OEMs are willing to kind of meet you where the prices are right now and those prices from the OEMs are going to continue into next year and you may still recover it.

51:23 Yeah. At the risk of same. It's all of the above, it is kind of all of the above. So generally speaking, when we look into the future we typically assume that pricing is going to stabilize to where it's at as we predict. So, if there is a decline in the market that's generally good news for us the way our contracts are structured. If it increases, then it's really a function of when we cut our contracts for steel, for example, and how that compares to our customer adjustment that we've made some progress at, I'll say, closing the gap between them as we pointed out, that helps mitigate that. But you really have to be much more specific with an assumption and then how does that crank out for us over the course of the year. I don't know, Jeff, you probably want to add to that.

52:28 Maybe just a couple of specifics on it. In the back half of the year very slight tailwind. We had -- if it ends up around a $15 million headwind for the year, we expect a little bit of tailwind year-over-year, but just in the kind of single-digit character.

52:48 The challenge you look. Your question about what does it mean for next year is a really good one. We tend to lock into our prices on a supply standpoint a couple of times a year and it depends on region. But we tended -- we are fortunate to have done that before -- right before the war in Ukraine or conflict in Ukraine initiated. Is prices for steel jumped up quite a bit after that? We'll see where those fall through. So a lot of this is really going to depend on where that steel measure moves as we probably move into the summer and into the later summer of what it means for next year. We should be able to give you a little bit more guidance on our next phone call. But right now it's pretty cloudy. That market is pretty volatile, right now.

53:40 Okay, that's helpful. And maybe just -- maybe another kind of high level question somewhat related to that. As you guys are at least through this year have been very protected on material. Steel plus 70% recovery, it looks like your foam chemicals are even higher than that. So I was wondering if you could just kind of comment on, of your bill of materials how much is passed troughed to the OEM, where either they kind of directly buy it? And then on the hook for the price or is sourced by you and -- but has that contractual pass-through? How is that evolved in kind of the quotes, you're talking about right now versus some of your -- some of the quotes historically. 54:31And I guess what I'm wondering is, it seems like suppliers are all kind of opening up the black box for the OEMs here. To a lot of extent that's already been done, but I was just wondering if you sense any changes to industry margins or industry ROIC as it relates to kind of more protection on your material and then kind of being valued. Specifically on the value-add that you bring [indiscernible] and whatnot. But if that dynamic perhaps changes any of the margin or ROIC framework for this industry or for you guys specifically.

55:12 Yes. Maybe just a few high-level responses to the questions. So when you think about our BOM, you should think about 50% is directed and 50% we control of our total material buys is a good number. Generally, what we would say is, when we are vertically integrated we think the margin on our business is superior to when it's directed. The main reason for that is not just the integrated margin on the component levels, but we think when we control the supply chain better or when we have greater control over the supply chain we manage it more effectively than our customers do when they direct it. 56:07 And as we navigated through this year one thing we continuously press on with our customers is, in many cases if they allow us to make changes to directed suppliers we think we can offset a lot of the cost impacts associated. And with our global footprint we constantly find opportunity to reduce cost or mitigate cost increase with our customers. So we just generally, think it's a better equation. As the seating business has transformed, evolved if you will over the last few years, our customers took a lot more control over the BOM. And I clearly think that they're are now starting to realize that they don't have quite the network from a manufacturing footprint available to them to mitigate some of these costs. So we constantly remind them that they should give that to us and some of our customers we pointed out, Toyota and the Camry for example sees that benefit and sources in that direction with us.

57:34 Our last question is coming from Dan Levy of Credit Suisse. Your line is open.

57:40 Hi, good morning and thanks for taking the questions. First, I know that in the past you've talked about one of the levers you have to mitigate pressures is the dynamic of VAVE. So maybe you can go a bit more into the mechanism of how VAVE works right now. And how significant of an offset you have with VAVE in your discussions with customers?

58:14 Yeah. It's really depends on the customer, their willingness to engage and their willingness to share some of the savings. What we found most recently is, it's a far more effective tool these days than historically it has, because they're looking for ways to mitigate some of the pressures, even if contractually they don't feel that there are obligated pressures put upon them that as we pointed out, our business model, our value-added business model really didn't comprehend this type of inflationary pressures. 58:57 So I think there has been a healthy increase in engagement. Again, we pointed, I'll go back to Toyota who recognize that they were extremely engaged, we use it as an effective tool to mitigate a lot of the cost increase that we're seeing experience. We kind of hold them as the best model. But I would say across the board our customers are far more effectively engaged. Where we run into some issue and again this is going back to the earlier question about 50% of our BOM is control that means 50% of our VAVE ideas won't necessarily manifest in the cost reduction or cost offset for Adient. 59:58 So we constantly fight that battle with our customers. But maybe -- hopefully, that's a little bit of color that better help you understand how we work the equation.

60:12 No, that's helpful. Thank you. And then just as a follow-up, given the greater macro uncertainty, I think it's fair to assume that any additional capital allocation actions in terms of return of cash to shareholders pushed out. But maybe you can just give us a sense of what you need to see in terms of market conditions to engage the idea of cash return? And then maybe where are we in terms of debt pay downs? Thank you.

60:51 Yeah. So it's a great question. The uncertainty right now where we see our customers calling off quite a bit and the situation in China has -- and I should say in Europe has certainly made us probably slowed down a little bit or take a pause. Although we will repay, as I mentioned, that EIB note this quarter. But as you look forward, we do think there's going to be, I think, eventually there's going to be a bounce back, there is clearly demand out there, but there's a lot of uncertainty, but as that starts to flow through and we start to see more normalized production schedules from our customers that we can rely on, we start having visibility, and we start hitting some weeks and maybe month or two of some normalcy and consistency there. I think we can reopen those discussions. 61:45 We know our earnings will bounce back quickly, we talked about the impact of what these lost sales were, $790 million for the quarter, we did $2.2 billion for the year. As those come back in that will really be sort of pure cash flow that comes to us and we can be confident then to start to be more aggressive get to our 1.5 to 2 time target or at least know that we're in side of it and start doing some actions, especially with our share price where it is today. It's something that's talked about a lot and we'll certainly be central focus as the world starts to come into a little bit more order.

62:27 Great. And Catherine, I'm showing we're at the bottom of the hour. So, this will conclude our call today. If you are still on the line and have not been able to answer your questions, please feel free to reach out to me. I'll be more than happy to accommodate. Again thank you for joining us this morning.

Thanks everyone.

62:43 This will conclude today's conference. All parties may disconnect at this time.