Welcome to the Adient Fourth Quarter Financial Results Conference Call. The lines have been placed in 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. I’ll now 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 fourth quarter and full year 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 Q4 and full year financial results. In addition, Jerome will provide you with the company's initial outlook for fiscal 2024. 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. 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. Thanks to our investors, prospective investors, and analysts joining the call this morning as we review our fourth quarter and full year results for fiscal 2023. Turning to Slide four, let me begin with a few comments related to the quarter and a few about Adient's full year successes, starting with the numbers. You can see Adient financial performance as highlighted by certain key financial metrics in the box on the right hand side of the slide. Adient finished the year strong, delivered improved year-over-year earnings growth in Q4 fiscal '23, underpinned by the relentless focus on execution, operational excellence and better than expected production volumes versus internal expectations at the beginning of the quarter, and despite labor related work stoppages at certain customers. Adient's fourth quarter results continued to build on positive momentum established earlier this year. For the most recent quarter, revenue, which totalled $3.7 billion, was up $79 million compared to last year's fourth quarter. Adjusted EBITDA totalled $235 million, up $8 million year-over-year and finally, Adient ended the quarter with a strong cash balance and total liquidity of $1.1 billion and $2.0 billion, respectively. Given the uncertainty surrounding the timing and magnitude of the loss production due to the strike related work stoppages, Adient executed actions to preserve cash and liquidity as we progressed through the quarter. For the full year, Adient delivered on its commitment to increase earnings, margin, and free cash flow versus fiscal '22. Jerome will expand on the full year 2023 fiscal year results in just a moment. Adient's successes in 2023 extended beyond our strong financial performance. A few examples include the team's execution of day-to-day processes that enable world-class launch execution, continuous operational improvements, and thoughtful cost reductions. Winning new business across various regions, customers,…

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. I'll focus my commentary on the adjusted results, which exclude special items that we view as either one-time in nature or otherwise skew important trends in underlying performance. For the quarter, the biggest driver of the difference between our reported and adjusted results relate to a non-cash valuation allowance release, pension mark-to-market, restructuring and impairment costs and purchasing accounting amortization. Details of all adjustments for the quarter and the full year are in the appendix of the presentation. High level for the quarter, sales were approximately $3.7 billion, up 2% compared to our fourth quarter results last year. Improving vehicle production in the Americas combined with positive impact of currency movements were the primary driver of the year-over-year increase. Adjusted EBITDA for the quarter was $235 million, up $8 million year-on-year. The increase is primarily attributed to the benefits associated with improved business performance and higher volume and mix. These benefits were partially offset by the adverse impact of net commodities driven by recovery timing, primarily in the Americas. I'll expand on these key drivers in a minute. Finally, at the bottom line, Adient reported an adjusted net income of $48 million, or $0.51 a share. Slide 13 provides a similar high-level summary of Adient's full-year financial metrics. For the year, sales were $15.4 billion, up 9% compared to fiscal 2022. Improved volume and mix across all three regions was the primary driver of the year-over-year increase. Adjusted EBITDA was $938 million, up $263 million year-on-year. The increase is primarily attributed to benefits associated with improved business performance and higher volumes, partially offset by increased net…

[Operator instructions] Our first question comes from Colin Langan with Wells Fargo You may ask your question.

Great. Thanks for taking my questions. Maybe I should kick it off. Doug, any color on why leaving by the end of the year? It seems like you guys have been making pretty phenomenal progress on sort of your multiyear plan. Why not sort of stay it out until you fully close the margin gap to the targets you've been talking about?

Sure. Thanks for the question, Colin. As you would imagine, there's certainly personal reasons I won't discuss on the call, but from a professional perspective, I've been here five years. The focus over those five years was really to, get the company back to basics, focus on operational excellence, change the culture around that and I think, we've successfully done that. We've spent time on the call today talking about the dynamics and the shifting dynamics and where we need to go in the future from a technology perspective and, shifting customer perspective. And I just felt at this time it was a good exit point for me. My operational background, got the culture on the execution side back and with the team that transitions, we can really focus on how we shift from a technology and customer perspective. I just think, generally speaking, five years is a good timeline for a CEO and, in refocusing on our energies on where we move in the future, we'll be well served under Jerome's leadership.

Maybe if we just switch to the guidance. I think in the past you've talked about 100 basis points of margin performance per year over the next three years. I think you outperformed last year. What is offsetting? Is that all just the FX kind of washing out some of that performance that you have executed in the pipeline? It's kind of keeping the year-over-year margin expansion a bit more muted?

Yeah. So I think your commentary in terms of if you look at '23, we executed around about 130 basis points of margin expansion. If you look at '24, net of FX, it's around that kind of 70 basis points. So over the two years, it's still combined 200 basis points and it's really the FX piece of it on the transaction side in '24 that's muting really kind of that performance piece of it and especially the Mexican peso piece and, the teams are aggressively working with the customers and working to claw that back. There are going to be very difficult discussions that we'll work through and work to pursue. But it is an unwelcome development on our path at the moment.

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

Good morning, everybody. A couple of questions. I first want to say congrats, Doug, on your retirement. You've done a lot at this company and in your career, and I wish you the best in your next adventure.

Appreciate it, Rod. Thanks.

I wanted to ask you just firstly, on this FX impact specifically, it was a million dollars on your EBITDA in the fourth quarter and just looking back, in the Zloty, the RMB, and especially the peso, it looked like they were pretty significant headwinds all year. Can you maybe just elaborate a little bit on what's driving the acceleration of the $60 million?

Yeah, and so it really comes down to, Rod, our hedging strategies and how our hedging strategies execute, and that we were in a position where we were able to protect or smooth the company, and as a result, our end customers throughout the '23 fiscal year. Obviously, that's temporary. You can't hedge things forever and so as some of those hedges roll off in '24, we're now exposed to the market movements and the dynamics and the shifts of the peso and so it's really getting to where the peso settles in at now, and that's where you're seeing these movements occurring, and you're seeing this big shift or headwind year-over-year.

Okay. And then also just another housekeeping thing. I'm only seeing, I think you referenced $10 million of reversal on the commodities. You absorbed something like $120 million of commodity headwind this year. Can you talk a little bit about whether that's just conservatism or whether there's something else that's happening there that's changing what you have to absorb versus pass along and maybe just remind us of that bridge to the 8% from here, from what we saw, I guess, ex that $30 million gain you did, like 5-3 [ph] in 2023. How do you see that coming through from volume, your performance, and contract rollovers?

Yeah. So I'll take the material question first and then go to the second question after that. So on the material question, if you recall, the $100, just call it $120 million, about almost half of that is an inventory reval topic, which is just a true-up on the balance sheet of our inventory that we have and then there was another significant portion of that, less than a third of it, which was really a non-reoccurring benefit that we had in '22 from a customer settlement that did not repeat in '23 that caused us an issue. And so then the remaining amount that we have to really go and get in our '24 is, there's a couple of factors on the material side. One is, we have $10 million of benefit, but then also we haven't cut our '24 European steel contracts yet. So we're in the process of working through those. And then the last piece I would say is, when we think about recovering some of these material econ deals, it's not always going to be a straight flow through on that net commodity line. It's really a basket of goods discussion with some of our customers. We don't have a perfect recovery mechanism and I think we've always said it's -- we're somewhere between 70% to 80% on steel, and then it's a 12-month to 18-month lag on the window. And so we don't have these perfect recovery mechanisms. It's going to be a basket of goods discussion and I think the way to think about it is, if you look at '22 to '23 and kind of that flow through margin, we expanded our margins by, call it, if our normal flow through is 16', we actually expanded by almost 200 basis points in…

Thank you. Our next question comes from John Murphy with Bank of America. You may ask your question.

Good morning, guys, and congratulations to all of you on sort of a hard fought next steps in your lives and careers. It's impressive. Just a first question on cash conversion, Jerome, the numbers, obviously, to finish the year were very strong given the focus on cash conservation. The number for '24 looks pretty good. I'm just curious, is there any kind of swing factor to the negative in '24 because there was such a strong performance at the end of '23 and how do you think about, cash conversion over the mid to long term in the business?

In terms of a swing factor, I think there's a couple of things. One is if you look at CapEx as an example, CapEx we ended '23 at call it a $260 million run rate and we'll go into '24 at kind of $310 million level. There was a lot of these cash conservation activities that we had in the business really driven by Doug and the team. As we knew with the UAW strike, we really had to kind of batten down the hatches and get aggressive from a cash conversion standpoint. So there's that, that element of normalization. We also had from a couple of customers actually just ARAP timing. Nothing we did, they actually timed it out a bit differently. So there is a swing in there that occurred. We won't necessarily quantify it, but there is a level of swing. So when you think about long term cash conversion, I'd look at that number that we have in '24, kind of the $300 million on $985 million is the long term cash conversion rate for the business going forward.

I don't know, Mark, if there's anything you want to add.

The only other thing I'd say, John, when I think about longer term cash conversion, right, our calls for cash going forward are pretty stable, right? So if you just think about what the drivers for cash is going to be, it's going to be EBITDA growth, right because I know what my interest is going to be. I know my restructuring is down to a normalized level. My cash taxes, right, thanks to our, plumbing that we've set up is very favorable. So really with the calls for cash stabilized, I'd really look at EBITDA growth and use that as a proxy for where you see pre-cash flow going forward.

Okay, that's very helpful. And then just a second question. You guys snuck this in in one of your slides that, in China you're going to swing. you have a leading position in China already, but from 40% Chinese domestic, mix in China to 60%, but you didn't give a timeframe on when that was going to happen. I was wondering if you can maybe talk to that and then also if you've got a handle on, at this point and where this will go over time, the sort of the mix of your vehicles that stay in country versus those that get exported, because obviously it's, China swung to a major export hub in a way over the last two years. So as you're increasing that mix to the Chinese domestics, that might be helpful in market, but might even be more helpful on the export basis. I don't know if you can give us some color on that.

So, first of all, appreciate your comments on the leadership transition. With regard to that mix of customer change, we're anticipating that's going to happen over, definitely in our five-year planning period, probably along, the three-year timeline and we're fairly confident in that because when you look three years out, the bookings are, if not done are, clearly visible. and we view that with high level of confidence. With regard to the amount of vehicles China is exporting right now, as you know, those are lower level vehicles and have not necessarily been on our radar. Our focus certainly has been on the Chinese domestics, certainly the ones that are growing or outgrowing the market. We're still focused on the luxury segment and still paying attention to our traditional customer base, though we clearly see the mix changing. I don't think it's crystal clear what's going to play out over the course of the next five years. Certainly there's indications that Europe's going to put up some level of resistance that's probably going to drive domestic Chinese and they've already signalled that to reshore in the European market in Eastern Europe, but, if it continues to be an export market and those vehicles shift into the higher end vehicles, we think we're well positioned there. If they move and reshore into the European market, we think our infrastructure capability there in Europe, particularly in Eastern Europe, puts us in a pretty good position. So we're pretty confident the way that is going to play out but, as you know, it's like I say, it's not crystal clear how that's all going to come together. But we do understand, the competitive advantages that the Chinese have, and that's a compelling case for them to continue to grow market share.

Thank you. Our next question comes from Emmanuel Rosner with Deutsche Bank, You may ask your question.

Thank you very much. So I appreciate your assessment of the shift in industry dynamics that is now taking place and I wanted to hone in a little bit on electric vehicles in particular. So as you mentioned in the slides and in the prepared remarks, there's a little bit of a push out of some of these launches or reduction of some of the near-term EV volumes, especially in North America. Can you comment to what extent, if any, this is impacting your business? This is impacting your backlog? Does it have an impact on your growth of a market in the near term? And specifically, and maybe second part of this question, when I look at the growth of a market, guided for 2024, which seems to be about a point, maybe a little bit below average, when it seems like you were heading in an above average type of direction, I'm wondering if EV push out is a factor within that.

Yeah, What's happening on the EV front, as you correctly point out, is primarily a North America-related issue. I think maybe to a lesser degree, a European issue, but if you look at where the penetration is at right now, it's not really having a huge impact on us as a company when we look at our backlog and outlook. Characteristic, what happens with our customers if they pull back on one, they extend a nice platform to offset that. So we still see relatively stable level of production. In China, we're not seeing any pullback. I think we've got eight significant launches scheduled for China. This fiscal year, no indication at all that our customers are pulling back on those launches. So I'd characterize it as a North America issue, and I'd just look at EV penetration rates as they exist today, being relatively small, not hugely disruptive to how we look at our outlook in the region.

And I guess the second part of the question around this year's gross of a market, about one point you've been running at one and a half, on average for the last three years. I think your comment in last earnings poll suggested that with this success in China, maybe you could run a little bit above average. This seems to be maybe a little bit less than planned. So can you maybe just discuss the factors in that?

Well, I think one is -- one is there's a significant FX weight because of the RMB and our China growth. So the growth is still significantly there in China, but you're seeing a really big FX impact on that. Just a comment, and then two, if you look at what we said last call versus this call, or even for the last year, I think it's really we've said our Europe market will kind of grow at or even slightly below because of planned exits in Europe. That's still holding. North America is kind of at market. That's still really where it's running at and China is significantly outpacing, and we still expect China to significantly outpace. So there's no, I really don't see any change from that standpoint, Emmanuel, if you would.

Thank you. Our next question comes from Joe [ph] with UBS. You may ask your question.

My congratulations to the three of you on the call as well. Maybe just to pick up there, if North America or of America's is roughly flat, Europe could be down. You have growth in China and then we think about the, some of the detailed EBITDA impacts you talked about, right, the transaction impact in America's, some of these footprint actions in Europe and China. Maybe just help us understand by region where you still have greater room to drive that business performance because -- and maybe a little bit of a color by the regions, because it does seem like at least from a top line perspective and with some of the cost issues you talked about, it almost seems like most of that margin performance has to come out of Asia, unless we're thinking about that incorrectly.

Yeah, I'll start out and then Jerome and Mark can make additional comments. I think first and foremost, what I would point to in America's and in EMEA is it's still been a very volatile volume market. And as we pointed to in the past, every time volume stabilizes, that means the overall environment is relatively stable. So we get the benefit of volume. But what we get added to that is business performance, because we can really drive productivity in our plants and get incremental variable margin out of the business. So, when we think about on a go forward basis, if we get to some stabilization in volume in those two regions, there's added benefit there. With regard to China, I would characterize that as a market that's clearly developing faster than the other markets relative to our product segment. If we just look at the content per vehicle that's being driven in China right now, it's fairly significant to the point where historically it's operated at a lower level of content per vehicle. And as we go out, a few years in our planning horizon, we're seeing with, EV adoption and the way Chinese automakers are contenting their vehicle from an interior standpoint, we see significant content add. And then if we look at this whole concept of vertical integration as kind of a final piece in the way we've really targeted our new business wins, we're getting a much better vertical integration profile on our business. Definitely in the Americas, it is really the way China continues, Asia continues to operate and even true, albeit maybe to a lesser degree in Europe. And as we look at that improved vertical integration, that's historically been just a better profitability profile on our business and again, just a reminder that vertical integration doesn't necessarily mean that we're going to produce all that material, because as I think about our business, one of the things we're staying true to is kind of the fundamentals of this business can operate with relatively low margins, but if we're good asset managers, we can generate a lot of cash. So we're looking, it's vertical integration in terms of our ability to control the supply chain. So when we kind of look at it from those different parameters, if you will, I think we're pretty optimistic that stabilization helps us the way our new business comes on and what we're not winning from supply chain control and then just what's happening in China with the amount of content being driven into vehicles, we think that's particularly positive. So, we should see performance improvements out of all three regions and not just being dependent on Asia to continue to drive the profitability in the business.

And our last question comes from James Picariello with BNP Paribas. You may ask your question.

Hi. Good morning, everyone and congrats, Doug on the news. Just two housekeeping ones, regarding the equity income outlook, the $20 million year-over-year downside, can you just quantify what portion of that attributes to the Kiper [ph] JV rate? My apologies if I missed that and does that benefit the America segment?

Yeah, we didn't provide the breakdown between how much of that's the Kiper JV versus how much of it is other JVs within the region. At this time, I don't think we will provide the breakdown of it. I'd say, yeah, we just -- as we get further on in the year and we see how the equity income starts to flow in, we'll start to provide the breakdown, but it will benefit the Americas is how to think of it, yes.

Okay. Understood. And then on the footprint actions, is in that one slide with all the detail packed around the guide. Is the net EBITDA impact $20 million positive or negative to think of it as '24 bridge?

Yeah, so it's a negative $20 million and the largest one on that $20 million, the vast majority of it was in 2023, we had the opportunity to really go through and deconsolidate one of our operations in China. It was a unique opportunity. Looking forward, we had the ability to harvest some cash out of it. It had a de minimis return going forward. So we took advantage of that. It has obviously, a net year-over-year impact on EBITDA for us. But from a cash standpoint, it was the right thing to do. But it does present a year-over-year headwind for us from an EBITDA -- consolidated EBITDA standpoint.

Is there an associated revenue impact as well, since you're deconsolidating it or no?

Yes, there's an associated revenue impact, but it's more than made up by the increasing sales that we see from our other operations in China.

Great. And surely it looks like we're at the bottom of the hour. So with that, we'll move to conclude the call. If there's anybody that has additional questions, please feel free to reach out throughout the day. Thank you.

Thank you. This does conclude today's call. We thank you for your participation. At this time, you may disconnect your lines.