Welcome to the Adient Fourth Quarter Earnings Call. [Operator Instructions]. I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Mark Oswald. Thank you.

Thank you, Danielle. Good morning, and thank you for joining us as we review Adient's results for the fourth 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. This morning, I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer; and Jerome Dorlack, Executive Vice President of the Americas and recently announced incoming CFO. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q4 and full year financial results and provide our outlook for fiscal 2023. 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 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 fourth quarter and full year results for fiscal 2022. Turning to Slide 4, let me begin with a few comments related to the quarter. Continuing the trend experienced throughout 2022, a number of external factors, including supply chain disruptions and the resulting operating inefficiencies, increased energy costs and labor availability to name a few, continue to influence the industry in Adient's near-term results. On a positive note, I'm looking at where we exited fiscal 2022 versus a few quarters ago, we're seeing the operating environment trend in the right direction. Commodity costs are softening, ocean freight costs are trending lower, and our customers are continuing to make modest improvements with regard to their operating patterns. While these metrics signal we're moving in the right direction, our challenges such as uncertainty with regard to consumer demand, energy costs and availability and labor inflation, which is running extremely hot in a number of European countries, such as Hungary, Poland, the Czech Republic, remind us, it's too early to declare a victory. Clearly, a different set of challenges will need to be managed in 2023. More on that in just a minute. For the quarter, Adient's EBITDA results contained approximately $65 million of loss volume and temporary operating inefficiencies and including less than $10 million of temporary savings. This is sequentially better versus Q3 and in line with our expectations heading into the quarter. 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 $3.7 billion was up about $700 million compared to last year's fourth quarter adjusted for portfolio actions executed in 2021. Adjusted EBITDA for…

Thanks, Doug, and good morning, everyone. Let's start on Page 12. Before jumping into the financial results, I'd like to point out that Adient's most recent quarter and future financial results, specifically equity income and consolidated income will be impacted by a change to the shareholders' agreement at Adient's Keiper joint venture. This change should be considered further fine-tuning of our China operations. If you recall, over the past few years, Adient has transformed its China operations in several facets. The most significant being the monetization of several joint ventures, which enable Adient to drive its strategy independently, capture growth in profitable and expanding segments, integrate best practices around -- across the market and finally provide for more certain value realization. While integrating and growing our 100% owned CQADNT entity, the team has also continued to improve and optimize our global capability in metals and mechanisms through our Keiper joint venture, formerly named AYM. The 50-50 joint venture with Yanfeng provides Adient with access to world-class mechanisms and enables Adient to reduce our own investment in this area. To further strengthen the value of our Keiper interest, Adient recently restructured our shareholders' agreement with our partner, the key outcome being a reduction in prices charged by Keiper to Adient and Yanfeng. Adient's reduced equity income is expected to be approximately offset by higher consolidated income saw this result in Adient's Q4 and which I'll cover in just a minute. Adient has agreed that Keiper will expand its operations to include Mexico, resulting in expected annualized savings to Adient plus an additional working capital pickup. And finally, the restructured relationship is also expected to save Adient's significant future capital spending in its mechanisms platforms. With that as a backdrop, let's jump into the financial results on Slide 13. Adhering to our…

[Operator Instructions]. Our first question comes from John Murphy, Bank of America.

And Jeff, congratulations on moving to a slightly more complex situation, you seem like a glutton for complexity. And Jerome taking over here, you'll have to deal with us more. Just quickly, on the 2023 outlook in the context of your statements on 2022, Jeff, you kind of alluded to this disruption in the industry costing you about $2.2 billion on the revenue line and $600 million at the EBITDA line. for 2022. I mean, how much of that do you think is -- you're not going to repeat going forward or maybe even beyond 2023 is the kind of stuff that will disappear as things normalize? I mean, how do you -- what part of that is kind of onetime based on the volatility and what is kind of normal course because those are big numbers.

Yes. They are big numbers. I think we would expect to recover the volume and the volume is roughly 2/3 of the $600 million, call it, $400 million. We would expect to get back to $90-ish million or 90 million vehicles, give or take. As it relates -- the other $200 million were made up of what we call the operating inefficiencies, call it, about $100 million and about $100 million of inflationary type cost, energy and freight, et cetera. The temporary operating inefficiencies, we've already started to see some improvements there as supply chains have become a little better. I would say, certainly not to full level, but we've seen a little bit of green shoots in there, and we would expect that to continue to improve. As it relates to some of the what we call sticky costs, some of this inflation tapped down and negotiating with our customers, commercial contracts that make sense for the space where if we're going to have that type of inflation in our type of business model. Some of that is going to have to be covered by the customer. We've had great progress on that. But that one will probably take hopefully, within 2023, but there is some sort of a time period, at least of a few quarters. And what you really need is some sort of coming of the inflationary waters here. If it gets back to more normalized rates, I think you're going to see us have that money come back in the system as well.

Okay. And then just a follow-up. And Doug, just maybe more for you. I mean as you look at this, I mean the operating or EBIT margin for next year of '23 is implied sort of mid-3% range. I know you're kind of making improvements. But could you remind us where you think that can ultimately go and how fast or what the sort of the market conditions are going to be to get to sort of that ultimate target?

Sure, John. So we -- getting back to kind of that 300 basis point, we still haven't walked away from our commitment to get the business adjusted EBITDA in the 8% range. So when we look at where we need to walk from this year, I'll say, out over the course of the next few years, what's most important is volume coming back. Jeff alluded to it in his comments on the walk to 2023, we need to get back to a 90 million build that brings quite a bit of EBITDA back. That's the biggest piece of it. The other 2 pieces he touched on as well. When we made that commitment, it was in the 2019 time frame. There's been a lot of inflationary pressure on the business. We need to ultimately get that back. You could say that's I don't know if I'd go as far to say that's 1/3, but it's 20% of the way. And then it's just driving continued performance and maybe that's another 20% piece of the equation. The last piece is FX. That doesn't really close the return on sales gap, but it certainly adds to EBITDA. So those are the pieces. And I think about it more and when does the market get back to some level of normal behavior that drives volume. And I think either we commercially address the other pieces or we -- or the market corrects them themselves.

Doug, I'm sorry, just a follow-up. So you're basically saying 90 million units normalized market plus inflation of kind of normalized, that would get you to that 8% -- mid-8% EBITDA margin. But like is that the kind of thing you could do in the next 1 to 2 years if things normalize, which is tough to believe, but as far as a normalization? Or is there still micro-specific actions that you're taking internally that would need to be taken to get you there, meaning that, that would sort of be maybe 3 year -- 2 to 3 years out that if things normalize and those actions are taking you get that point? I'm just trying to understand market conditions in time.

Yes. That's a fair question. No, I think it's realistic to see it happen in 2 years if the market normalizes. Our business is performing extremely well right now. We've addressed a lot of the issues that plagued the business not that long ago. So I think that's a realistic time frame to consider. I think the only disclaimer I'd put on that, but I don't -- I'm not really trying to disclaim it, is this business is about execution every single day. So we have to continue to perform the way we've been performing, I'm confident that the team is in place to do that. So that's my expectation, is that something that happens over the course of the next couple of years.

And one thing to think about that, John, is if you -- the last moment of really kind of relatively normal operating environment we had was the first half of our fiscal '21, and we were north of 7% margin. Since that time, I would argue we still can brought down a bunch of our cash expenses. And we have also experienced positive roll in, rollout of business. So when we look at, let's say, the '22 versus '23 equation across each region, we've seen improvements in the business coming in versus the business going away. That's going to be a portion of this as well. But we need some operating environment that's a bit more normalized like we had in that first half of the '21.

Our next question comes from Rod Lache with Wolfe Research.

I was hoping to just get a little bit more insight into the drivers of that earnings bridge for 2023. So you're talking about $175 million of EBITDA growth looks like about 10% organic growth at a 15% margin, that forward would add about $210 million, and it looks like you would subtract maybe $50 million from FX and equity income [indiscernible] up to like $160 million. I guess I just don't see the benefit from eliminating some of the temporary or sticky costs. And if you could just help us understand what's in behind that.

Yes. Let me try to work through a few of these for you. On the first side, you have the pull-through on volume is somewhere, let's call it, $220-ish million, Joe, about $45 million in FX coming against that. You have -- Econ is -- and Econ for us, is a complicated mix because you're always taking the time where we've set prices for steel. And when I say Econ, I'm just talking steel and chemicals. When you look at the prices we set with our supply base, which is a couple of times a year versus the myriad of algorithms we have with each of our customers on recovery. We've done a lot to improve that, but there's -- the timing of all that still has some impact. And the biggest impact for us in 2023 is going to be Europe. As maybe demand is down, but since energy prices are so much higher, it's caused increases in steel pricing and chemical pricing. And so we have between that negative Econ and some of the commercial items that we'd call inflationary and context, there is going to be somewhere in that $150 million, $130 million, $140 million that we've assumed between those 2 items that are going to go backwards for us. And outside of that, we have a little bit of investment in Asia and from a growth standpoint in engineering, call it $30 million or $40 million. And then we're seeing improvements in the business elsewhere, which is offsetting all those and by driving performance, and this is mostly from balance and balance out of new programs. The China footprint, for instance, is very attractive for us. You see that in the sales number. China should deliver pretty well for us in 2023, a little bit higher equity income as well. We'll balance that out to the $850 million. And we'll continue to work on -- between the commodity piece and some of those inflationary pieces, I would say the team is focused and we'll try to do better than those numbers, but that's what's embedded in that $850 million guide.

Okay. So it sounds like by the end of next year, you'll actually have $250 million of costs that really work on beyond that. That's helpful. Can you just clarify just 2 other things. When you're talking about complexity of launches, maybe you could just explain just external standpoint, what that means for us is we're looking at [indiscernible] and then this Keiper shift in North America, are you replacing internal operations? Or what are you replacing by bringing Keiper into here? Or are they just taking over something in Mexico?

Rod, it's Jerome. So I cover both of those. So the first one on -- when we talk about complexity of launches, what we look at is a couple of factors. The first one being how much vertical integration is there. So if we're only doing say, the JIT portion of it or the just-in-time portion of it, that's, say, one level of complexity versus if we have the JIT piece of it, the trim piece of it, the phone piece of it and then a first row metal, a second row metal, a third row metal, then that's a higher level of complexity. And then if you take that and you say we're shipping them to multiple sites. So if we're doing shipping to plant A and Plant B, then that's a whole other level of complexity. And so when we look at it, that's kind of how we look at the complexity associated with it. And then what's the time from when we're awarded until the time we go into production. And so we kind of look at that and then kind of the last factor is how many different variants are there. So is it on one end of the extreme, call it one trim code with one type of metals. So is it just a very simple, call it, manual front seat? Or is there 30 trim codes and you've got a manual and then a 4-way power and we power with massage and heat and everything else that goes with it. And so that's how we kind of grade our complexity when we look at launch complexity. Does that answer your first question around how we rate complexity of programs?

Yes. I guess I'm just trying to understand financially. So we're looking at consolidated numbers. Are you suggesting that because of all the moving parts, the incremental margins on your backlog or not as good as they normally are initially? Or are they more ultimately because of the vertical integration?

No, it's actually -- more vertical integration is better for us from that standard.

Yes. And I would just add, the other piece to that is just the pricing discipline we installed a number of years ago and the customers that we focus on. So to us, not all customers are equal. So we're very deliberate in who we pursue, and vertical integration is an important part of that. That's why we point to the Toyota program, as an example. And then again, just executing on the commercial discipline side of it.

Yes. Because with all that complexity comes change orders and the discipline around the change orders and the ability to manage and drive margin. And then your second question around Mexico. So what Mexico allowed us to do with Keiper is basically offset our own capital investment. So by them coming to Mexico, it was localization. So we're able to onshore production back into this region and then basically eliminate some of our own planned capital investment that would have otherwise taken place in the region. That was the benefit of, I think, what Jeff called some fine-tuning around that JV.

Our next question comes from Emmanuel Rosner with Deutsche Bank.

Two questions, please. The first one is around the outlook for growth above market. I think you rightfully pointed it looks like 6 points into next year. Can you maybe break this down for us in terms of driving factors? So market share gains, backlog versus vehicle or customer mix, I guess, what gives you confidence in this level of outgrowth?

Emmanuel, we -- one of the nice things about our business is we have the ability to trace in really every vehicle that's being produced into our plan by region. And so as we go through that, the balance in balance out is the -- is a big piece of it, say, in China, where we've seen some nice new volume launching. So I'd say that's the big jump in Asia. In the Americas, I'd say that's probably also the big driver here as we see the vehicles coming in and the volumes associated with them versus those vehicles are coming out. There's a couple of hundred million or so of addition there. As I look at I'd say there's a few areas where we have a bit of mix impact as well, just with some of our vehicles. But I'd say, overall, we're pretty comfortable with those numbers, but it's just driven by probably good awards that we were able to secure and our launch in here in '23.

Okay. And just to clarify, because I'm not familiar with balance in, balance outs.

Sorry, it's a word we use, but it's essentially the programs that are coming and being launched in 2023 are coming of kind of full year annualized impact in 2003 versus those programs that have gone out of production or going out of production.

Okay. So net new business launches, basically?

Correct, correct.

Okay. Great. Then second question, it looks like both in terms of margin improvement to 2023, but then also towards the midterm target. Volume -- industry volume normalization seems to be playing sort of like a fairly large oversized driver of this. And I think you mentioned a few times the 90 million in the units reflect level. Now -- when I look at even IHS, they probably don't have 90 million to like 2025, and that doesn't even assume any sort of effect pronounced impact from massive consumer pressure or recession or anything like that over the next few years. So would there be a assuming, I guess, volume doesn't -- industry volume doesn't normalize towards 90 million units in a smooth way over the next couple of years or so. Would it make sense to sort of right size the business for lower in a normalized type of volume? Or is your conviction very high that 90 million is like where Adient should be sized for?

Yes. Fair question. So I would say what we've really been focused on is not really sizing our business to 90 million. We're sizing our business for the foreseeable business that's planned in front of us. And again, if you just look at the actions we've been taking over the last couple of years, we've not waited for the market to return. We've not waited for COVID and supply chains to improve the size back. So we're always looking at ways to pull overhead cost out of our business that's better aligned with how we foresee the market. Again, for modeling purposes, in the way we use IHS that's our plan as we lay it out today. If the market dries up and consumer stopping vehicles, we'll take the corresponding actions to adjust to that market environment. So that's just the way we operate the business, I'll say, almost on a daily basis. So there would be actions, actions would be further cost reductions on the SG&A side likely. And if programs go out of production earlier than expected, there may be some restructuring charge. But again, we're building a model based on our best information that we have in front of us.

Our final question comes from Joseph Spak with RBC.

And Jeff also to echo earlier sentiment, congrats, and congrats towards the team. I guess maybe just to pick up on that last comment. I think earlier in the year, you had mentioned you'd be aiming for something like close to $100 million in cash restructuring this year which would have been down a lot, but it was only $57 million, if I'm reading this correctly. So was something delayed there? Or -- and maybe, Jeff, like what's embedded in your '23 free cash flow guidance for cash restructuring?

Yes, it's kind of more of the same on that number. We always leave a little bit of probably a cushion in there when we guide because you never know exactly as you go through the year. But we've been -- I think we've been very prudent about how we deal with restructuring. We are also really aggressive in 2020 to take out a lot of cost. So most of what we see as far as cash restructuring is stuff that we've already announced. But especially in Europe, it takes a couple of few years for some of those actions to fully spend their way through. So I'd say it's a fairly conservative guide that we usually provide and we try to manage it down from there.

Okay. So pretty flat year-over-year then?

Yes. I think flat. Within $10 million or $15 million plus or minus from that number.

Okay. And then maybe just to follow on to Emmanuel's question on the 6% growth over market. Just -- like you listed a bunch of factors there, which are helpful. Just to be clear, is there no assumption for continued recoveries in that growth over market?

So the -- what we call commercial recoveries sort of add to our sales, it's pretty modest. It's in $50 million, $60 million of additional recoveries versus what we achieved in 2022, which is embedded in that plan, which is pretty small.

Okay. So yes, so that probably helps.

Virtual higher, but not much higher.

Thanks, Operator, it looks like we're at the bottom of the hour here. So with that, that concludes the call. If there's anybody else on the call that do not have questions answered, feel free to reach out to myself or Eric throughout the day. We'll be more than happy to help. Again, thanks for participating this morning.

Thanks, everyone.

That concludes today's conference. Thank you all for your participation. You may disconnect at this time.