Welcome to the Adient Second Quarter Financial Results Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer session. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'll turn the call over to Mark Oswald. Sir, you may begin.

Thank you, Shirley. Good morning, and thank you for joining us, as we review Adient's results for the second quarter of fiscal 2023. 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 Jerome Dorlack, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business followed by Jerome, who will review our Q2 financial results and outlook for the remainder of our fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jerome, there are few items I'd like to cover. First, today's conference call will include forward-looking statements. The statements are based on the environment as we see it today, and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to slide two of the presentation for our complete Safe Harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. 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 second quarter financial results for fiscal 2023. Turning to slide four, let me begin with a few comments related to the quarter. First and foremost, Adient's operational execution, positive commercial momentum and an extreme focus on containing costs continue to drive the business forward. Adient's second quarter results which provide very positive proof points of these actions can be characterized as very solid, building on the positive momentum established earlier this year. The company's key financial metrics for the quarter can be seen on the right hand side of the slide. Revenue for the quarter, which totaled $3.9 billion, was up $406 million compared to last year's second quarter. Adjusted EBITDA for the quarter totaled $215 million, up $56 million. In addition, Adient ended the quarter with a strong cash balance and total liquidity of $826 million and $1.8 billion, respectively. Speaking of cash, the strong cash balance reflects the impact of certain opportunistic strategic transactions executed during the quarter. Namely, the use of $30 million to repurchase just under 760,000 shares of the company's common stock kicking up our previously announced enhanced capital allocation plan. And the use of a $100 million combined with proceeds from $1 billion new US senior notes issuances to paydown about $750 million of euro notes due 2024 and pre-pay $350 million of Adient's Term Loan B. Jerome will review the additional commentary on these actions during his financial review. This is no doubt a very good start to the year, as we reached the halfway point. Although we are closely monitoring certain external headwinds, such as a soft auto demand in China and increased steel prices in the Americas. We…

Thanks, Doug. Let's jump into the financials on slide 12. Adhering to our typical format, the page is formatted with our reported results on the left, and our adjusted results on 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. For the quarter, the biggest drivers of the difference between our reported and adjusted results relate to restructuring and impairment costs, purchasing accounting amortization and costs associated with our recent debt refinancing. Details of all adjustments for the quarter are in the appendix of the presentation. High-level for the quarter, sales were approximately $3.9 billion, up 12% compared to our second quarter results last year. Improving vehicle production in the Americas, Europe and Asia, excluding China were the primary driver of the year-over-year increase. Adjusted EBITDA for the quarter was $215 million, up $56 million year-on-year. The increase was primarily attributed to the benefits associated with higher volume and mix, improved business performance and commercial recoveries. These benefits were partially offset by the impact of increased business operating costs and the negative impact of currency movements between the two periods. I'll expand on these key drivers in a minute. Finally, at the bottom line, Adient reported an adjusted net income of $3 million or $0.32 per share. Let's break down our second quarter results in more detail. I'll cover the next few slides rather quickly as the detail for the results are included on the slides and this should ensure we have an adequate amount of time set-aside for the Q&A portion of the call. Starting with revenue on slide 13. We reported consolidated sales of approximately $3.9 billion, an increase of $406 million compared with Q2…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Emmanuel Rosner with Deutsche Bank. Your line is open, you may ask your question.

Thank you so much. First question is on China, and I think you're obviously raising the potential risk of downward revisions to production schedule there based on how demand has been playing out and inventories. Are you seeing any risk in terms of some of your launches there, either being pushed out or downward revisions? I think this year's strong growth of market that's concentrated in your outlook has a lot to do with new launches. And I'm wondering if the current environment is pushing some automakers to revise some of these projections down?

Yeah. Thanks, Emmanuel. I appreciate the question. Nothing really material significance on the launch status. Jerome and I were both over in China recently. We had pretty in-depth launch reviews with the team. And right now, everything is for the most part on schedule. I think what we're seeing more of is that products that have been in the market for a while, we're seeing changes in-production schedules, kind of consistent versus S&P forecasts. And as we committed on, it feels like the market is waiting to return and with all the price cut activity with the OEs have pause the consumer to wait for that to settle out and re-enter the market.

Understood. And then as a follow-up, just hoping to just clarify what is embedded in your 2023 EBITDA outlook for net commodities and inflation net of performance?

In terms of I guess, Emmanuel, I mean just trying to get a bit more clarity on that.

Just so in the walk 2022 to 2023, how much will commodities of headwind or tailwind and how much are you expecting inflation net of performance to be on a full-year basis?

Yeah. I mean, on the full-year, so --

Yes, Emmanuel, it's Mark. What we've indicated in the past right, we didn't give specific markets on that bridge. But what we did say is when I looked at 2022 for example, those results were impacted by call it $100 million of what I'd call transitory costs right, those were the inefficiencies of production schedules. We're seeing that actually lessen, as we expected, as we entered the year. So you pick a number, do we think that, that's going to be half, probably a pretty good number there, so maybe $50 million versus the $100 million. And the inflationary cost, we just label that a sticky, right. So that was another $100 million last year that impacted us. We did indicate that because of labor costs this year that was increasing versus last year. However, we are getting commercial recoveries for that. So you're probably net-net right with the transitory costs and sticky costs again. You're probably a couple of $100 million what I'd say impacting the year-on-year impact, but again we're getting those commercial recoveries from the customers. So it's really more focused on how are we going to exit this year and how is the setup for 2024 going to shape, based on what commodity prices are expected next year, based on the commercial recoveries to-date et cetera. So hopefully that helps.

Okay.

Thank you. Our next question then comes from John Murphy with Bank of America. Your line is open, you may ask your question.

Good morning, guys. I just wanted to ask on mix, maybe sort of short-term and long-term. I mean if you look at your slide 14, you guys are highlighting positive $84 million from volume and mix in the quarter. I'm just curious if you can give us a breakdown between what is volume and what is mix. But more broadly, how much have you benefited from what has been very strong mix in the industry. And is there significant risk, as we step forward later this year into the coming years when mix maybe deteriorate to some degree, at least from an automaker level? And then second kind of along the lines of that. On slide five, you highlighted all this great product on sort of ESG. But then on weight savings real stuff, not just even marketing stuff really improvements in your product, are you able to get paid more for those seats that have less weight NIM or are more ESG friendly or is that just part of the game and part of the product improvement over-time that's needed?

Yeah. So thanks for the question, John. With respect to the first one on volume and mix, I mean when we think of volume and mix, for us what really matters, and we've said this in the past is the volume piece of it. So the mix doesn't -- we're not really sensitive to if it's an F-150 base or an F-150 fully-loaded King Ranch. What we really care about is getting the volume piece of that. And so as your customer demand shifts and if we see more entry-level vehicles versus higher-end vehicles, we're not as sensitive to that aspect of it. For us what really matters is the volume piece of it. And so when we talk about pure volume, that's what we really care about is the volume. And so as the industry returns and as we see volume coming in, that's what we really need is the volume piece. It's not as sensitive to what is the mix within a platform, whether it's high-end or low-end. It's really about the volume piece of it, that's what really matters to us. And I think we've been pretty transparent on that in the past. Its volume that matters to us. Does that help to answer your first question?

Yes, yup. Thank you.

What I would say is -- go ahead. What does matter to us regional mix harder. So -- as we look out where that volume comes through from a region standpoint though, we are sensitive to that. And so if you look at in how our different regions print certainly as Asia comes back, and when we get more Asia volume that is positive regional mix for us. And so that's why we look at the back-half of our year. And what we've basically said holding the guide, as we look at China, we look at Asia and some of the caution that's out there and we said okay, looking at that, looking at what could be there, we basically said, okay. Reason to hold the guide based on that based on maybe a regional mix component of it, not necessarily in platform mix but more regional mix aspect to it.

If I move to your second question with regard to sustainable products, you almost have to look at each one individually. Whether they represent a cost-reduction or a cost-add, our focus essentially is to provide product solutions to our customers. That net are neutral to the current cost structure that they have on their bill of material today. So we tend to package them, and look at it from a vehicle perspective of what the net benefit is, and it could be a net benefit for them. And that's why with ultrathin, we talked about increasing interior, I'll say volume within the vehicle that allows it to displace that volume with additional batteries, if that's what the customer ultimately wants. But really, when we look at our sustainable solution, we really walk from current cost to-date. We'll add in a variety of products. And our attempt always is to be net neutral. And then it really is kind of a buffet style that they can -- our customers can add and delete, what they think brings value to the way that they're trying to market position there overall vehicle. So you really have to take it individually, but collectively, it's intended to be neutral.

And Doug if I could sneak one other one in here on slides nine and 10, I mean it seems like you're signaling that restructuring is really more an ongoing part of the business. I mean, you have some catch up to get your margins off the snuff into targets, but it's also it seems like it's a signal that there is a more consistent ongoing restructuring effort that needs to go on. What do you think we should think about for expense and cash outlays for the more ongoing part of this, because it just seems like it's going to be part of the industry or part of the business for forever.

Yeah, I think historically we've always had roughly a $100 million of restructuring in. We're not trying to signal anything beyond that in a go-forward, but we're taking actions, as we see appropriate. We just recently announced an action on the SG&A front to reduce the amount of validation center capacity we had in Europe, for example, because we can do more of a digitally than we've historically had to do physically. And we tried to really use our footprint to our advantage to move work around to not only to the necessary to the lowest-cost region sometimes, but sometimes we'll move work-in to offset having to take a heavy restructuring low because we think we've got productivity in that facility that makes it competitive. And then we look at logistics costs associated with that. So we're constantly rebalancing, but the quick answer is, right now, we're not signaling anything different than historic way our business has operated.

Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open. You may ask your question.

Good morning, everybody. Mark, I kind of lost you on the 2023 bridge because I think you might have misspoken on the inflation, but maybe just to simplify things, if we take a step-back, I think at the start of the year, you guys expected a $200 million headwind from material economics and labor and few other things. And you had something like $250 million of expectations for operational performance recoveries and lower inefficiencies. So it looked like a little bit of a tailwind net-net. And I'm just hoping you can maybe just give us a sense of on excluding volume are the positives and negatives now more neutral, because of the steel issue. And Jerome, on the steel, if I recall correctly, you had kind of a similar issue maybe a year-ago and you end-up mitigating that with recoveries. Is there any reason why that would change.

So and I'll take -- I can take both of them, if you want me to, Rod. So I think on the first one -- yeah, in March, net-net -- I mean, March numbers were correct. I mean, we look at -- if you look at that total bucket between material econ, our -- what we call our sticky costs and the commercial recoveries. I mean it will be net-net this year about call it $100 million headwind for us, when you look at everything all end offsetting with commercial recoveries. So that -- I don't think that's really changed from anything we've said previously. What's new in that equation now as I think some of the steel that's coming in, which goes to the second part of your question, the steel that we've seen recently in North-America in particular where it's gone from and we talked -- I particular talked about this a month ago, New York, it's gone from 650 a ton, up to 1200 a ton. And just wanted it accelerate that pace and the lag in our indices, we eventually get it back. It just takes time for it to cycle back through our system. And that presents that kind of $10 million to $20 million hurdle that we now have to look to overcome. So to your question. Will we be able to overcome that this year? Yeah. I don't see how we can overcome that $10 million to $20 million. I mean, it's -- I mean I wouldn't say anything is impossible, but we went to work really heavily in 2001 to restructure those customer agreements to get to what was a lot of what I would call naked exposure on our customer agreements. We had very significant lags, we brought those in from a year to something more in the six-month range. We went from 50% exposure to 80% coverage. And I think we are where we are now, it's just now we're going to have to let those contracts work themselves through the system and that's going to -- that is going to drag into '24. I think the only thing that would really help us to mitigate that is, if we see the indices now take a rapid correction between now and when we have to strike some of our updated steel contracts.

Hey and just secondly on the European comments you made, I think peripherally China. What's the typical payback on European restructuring that you typically see. And when you think about to the extent that some of the production commentary is driven by exports from China, do you see yourselves as sufficiently hedged with enough exposure within China to the exporters or do you still have to kind of take into account some negatives there?

Yeah, with regard to payback typically the payback on European restructuring is a two-year timeframe. That's on average. Now, certainly the example we included in the deck was what we can be bit smarter about how we handle that. That's a far better payback when we can bring business back into the organization to refill a plant that otherwise was scheduled to go dormant. With regard to China exports into the European market and what that ultimately means to us. I think it's a little bit more complex than just the direct math if those imports increase. Certainly, we hope we can benefit from that in our Asia business with that revenue and the returns on the revenue, even if it's consequential to Europe. But I think what we're seeing in Europe is, we're able to balance our manufacturing footprint to mitigate a lot of the costs associated with it, where it's a direct impact to us, if we have a jet facility and our customer closes one of their assembly plants. That's in the case of more, we were able to do it, but that's not always going to be the case. So it's I think we're essentially saying we have to wait and see how that plays out over-time. We've -- We're putting together certainly strategies to address best-case, worst-case scenarios. Historically, the markets run at $17 million, it's $14-ish million now. If that doesn't recover, what does that ultimately mean to us. But I think at this stage, it's too early to quantify and bake into our extended year outlook.

Thank you. Our next question comes from Colin Langan with Wells Fargo. Your line is open. You may ask your question.

Yeah, thanks for taking my question. Yeah, just to follow-up on that. This is the second quarter you talked about the potential need to restructure in Europe. I mean, how should we think about this. Are you going to be taking small steps that would be incremental that sort of aren't going to be highlighted or are you kind of contemplating a larger sort of scale plan that we should be kind of looking out for over the next year or two?

Yeah, you should think about it in small steps and incremental, not a large scale restructuring of our business there. We took a lot of steps I would say even pre-COVID, but certainly during COVID, to bring down our breakeven close to the levels that we're operating at right now. So we think we're pretty well-positioned. Now if there is something that's currently not forecasted that impacts the region, that's a different story, but right now think about it incremental in that large-scale restructuring.

Yeah, and just as a -- to support that Colin an example is, we just announced our tech center in Kaiserslautern. That's now public. It was -- it's just an -- it's like an incremental steps, as Doug talked about, we've got to virtual validation that makes some of that redundant and we had to take an action there. And that's -- it's those type of incremental steps as we move along the path in Europe, not large-scale activity.

Okay. All right. Got it. And then not to circle back on steel, again, but you did highlight fairly small numbers, but costs are up $10 million to $20 million unlikely to kind of get helped assure. Guidance was held. So what is the sort of I guess slight positive offset that and should you hold guidance if the commodity costs are up a bit?

Yeah. I mean I think there's some volume. I mean you saw the Q2 volume versus what we had previously seen. Also Q2 EBITDA versus where we had previously thought it coming in at -- so yes, volume, we expect to flow through also some underlying performance within the business as well, helping to offset it. The team continues to obviously pedal extremely hard as some of the underlying activities that are there helping to offset that action or that headwind I would say.

Yeah and back to the mix discussion certainly volume in Asia is welcome volume from a mix perspective that we think might be able to offset that steel issue.

And if still holds the current levels in North-America, any sense of how big of a headwind that is for 2024? It sounds like I think you mentioned 80% now is for index. So I guess without even be a big issue at all. How should we think about that?

I mean in the -- I mean, in the long run, it's not. It's really the timing associated with when it would flow through right? So it's if you think about when it would hold -- I've been on the models, Colin, so I don't want to speculate it. Certainly, in the back half of our '24 fiscal year, it wouldn't be a significant issue. There would be some carryover into our Q1, and we'd start to see the recoveries kicking in into three and four is how I would think about it.

Yeah, the one thing I would add to it is we -- and it's a little bit of the nature of the Seating business. You can't always look at these issues in isolation because within our commercial agreements with our customers, we've got their expectations on productivity. We've got our internal expectations from our supply base on productivity since a very transaction oriented business. So there's always opportunities for us to engage. And I'll say, offset anything that is, I'll say, outside of the scope of our normal commercial agreement. So when we see real significant spikes in inflationary pressures on commodities, we fully expect over time we recover that. It may hit us in a quarter, but it's probably a quarter until the recovery is put place.

Thank you. Our next question comes from James Picariello with BNP Paribas. Your line is open. You may ask your question.

Hi, guys. Just a clarification question to start off. What was the sequential guidance commentary on the third quarter EBITDA, fiscal third quarter EBITDA?

Yeah, you're referring to Q3?

Yeah.

Yeah, so around $200 million.

Okay.

On a EBITDA standpoint.

Right. And just from -- if I look at APAC regions, you do -- are you expecting sequential improvement in industry volumes? Or is that a question mark and conservatism embedded within that view?

So we essentially follow IHS. So if you look at what IHS says for Asia ex-China, I mean, it has volumes actually sequentially going down in Q3, what would our Q3 and Q4 fiscal year. And within China, it would say sequentially better Q3, Q4, but not versus first quarter. So really back half in China, in particular, is lower versus first half. Our fiscal year first half versus our fiscal year second half using IHS volume. So really sequentially, actually lower second half versus first half. And that's, again, coming back to the 850 guide, why we've said looking at that, along with Europe volume sequentially lower first half for second half why we've guided to that 850 number.

Yeah, but on a consolidated basis now, China is almost half of the APAC region, right? In terms of just regional mix?

Yeah, absolutely.

All right.

And then -- yeah.

Yeah, please. You want to follow-up to that.

No, no, it was just reinforcing the point. China sequentially first-half versus second-half and following IHS is down on volume in our fiscal year, because it really re-timed that volume into Q4 calendar year, which falls into our Q1 2024 fiscal year.

Yes. Okay. For the quarter though IHS has almost 800,000 improvement -- 800,000 unit improvement for China, but I can follow-up with Mark and you can tell me that I'm confused. More higher-level question on the thermal comfort. And Adient positioning and how you view the competitive landscape within this particular vertical. Who you're aligned with from a supply-chain perspective, is it or could it be an advantage as a Tier 1 supplier to have more of this context vertically-integrated in-house. And just curious if you could share a perspective as just given the latest M&A efforts by your primary competitor.

Sure. At a very-high level. I would say having that capability is an advantage. It's a question in my mind, how you define the capability and the competency. We think we're capable and competent. Although we don't necessarily need to be completely vertically-integrated on it. From an M&A perspective, I'm not here to -- I'll just give you our opinion. I don't know that from an M&A perspective it's necessarily the way to go, because we bring in a lot of integration risk associated with it. What we're finding is in some cases, our customers directing it. So that limits the growth I would say because there's independents that are out there and our customers tend to balance that. Two, I would say the independent. We've got pretty good engagement with them and how we can partner and develop products collectively and bring those two automakers who want an integrated solution. So we think we're competitive from that perspective. And then what we're doing in China specifically is our own organic development. Sometimes in partnership with small Chinese suppliers, but sometimes independently on our own, which is not going down the M&A I'd say route to bring that. So to me, I always look at it like a lot of aspects of our business. You don't need to be vertically-integrated too much vertical integration sometimes has a negative effect. Do we have the competency, do we know how to work with partners and bring a solution together for our customer, I feel pretty good about where we're at there. We certainly understand what the other guys are doing. We understand the motivation associated with it. We're fine with our approach that we're taking on it.

Great. And surely, it looks like we're at the bottom of the hours, so this will conclude the call today. If there is any follow-up questions, please do not hesitate to reach out to myself or Eric this afternoon and we'll be very happy to assess. Thank you.

Thank you. And this does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.