Welcome to the Adient First 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. Now, I'll turn the call over to Eric Deighton. Sir, you may begin.

Thank you, Shirley. Good morning, and thank you for joining us, as we review Adient's results for the first quarter of fiscal 2024. 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 Jerome Dorlack, Adient's President and Chief Executive Officer; and Mark Oswald, our Executive Vice President and Chief Financial Officer. On today's call, Jerome will provide an update on the business followed by Mark, who will review our Q1 financial results and outlook for the remainder fiscal 2024. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Jerome and Mark, 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 Jerome Dorlack.

Thanks, Eric. Good morning. Thank you to our investors, prospective investors and analysts joining the call, as we review our first quarter results for fiscal year 2024. Turning to Slide 4, let me begin with a few comments related to the quarter. As we began fiscal 2024, the company maintained its laser focus on business performance, including launch, execution and continuous improvement. The team navigated challenges from strike-related production disruptions, while maintaining focus on the day-to-day operational execution that is driving the business forward. Despite the challenges in the beginning of the quarter, the focus on operational execution and cash management actions, allowed us to successfully navigate any short-term impacts. Turning to Adient's key financial metrics for the quarter, which are shown on the right hand side of the slide. Revenue for the quarter, which totaled $3.7 billion was down about 1% compared to last year's fiscal quarter, first quarter. Adjusted EBITDA for the quarter totaled $216 million, up 2%. The UAW at strike in certain of our North American customers, ultimately impacted Adient by approximately $125 million in sales and $25 million in EBITDA. Adient ended the quarter with a strong cash balance and total liquidity of $990 million and $1.9 billion, respectively. We continue to drive the business forward, winning both new and replacement business with customers that are expected to drive continued margin improvement in the coming years. We are demonstrating our ability to add value to customers through our engineering capabilities, manufacturing footprint and process discipline. At the bottom of the slide, we've highlighted a number of customers and industry awards received in each of our regions in Q1 as proof points of our commitment to delivering excellence. Both the business we have been awarded and the recognition we've received show that our strong business performance,…

Thanks, Jerome. Let's jump into the financials on Slide 11. Adhering to our typical format, the page is formatted with our reported results on the left side 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 in the underlying performance. For the quarter, the biggest drivers of the difference between our reported and adjusted results were related to purchase accounting amortization and restructuring and impairment costs. Details of all adjustments for the quarter are in the appendix of the presentation. High level for the quarter, sales were approximately $3.7 billion, down about 1% compared to our first quarter results last year. Lower volumes, primarily in the Americas resulting from strike-related production stoppages at our customers, were partially offset with positive FX movements between the two periods. Adjusted EBITDA for the quarter was $216 million, up 2% year-on-year. The increase is primarily attributed to benefits associated with improved business performance. These benefits were partially offset by the impact of lower volume and mix, and to a lesser extent, the negative impact of currency movements between the periods and timing of material economics. I'll expand on these drivers in just a minute. Finally, at the bottom line, Adient reported adjusted net income of $29 million or $0.31 per share. Let's break down our first quarter results in more detail. I'll cover the next few slides rather quickly as details for the results are included on these slides. This should ensure we have adequate time for the Q&A portion of the call. Starting with the revenue on Slide 12, we reported consolidated sales of approximately $3.7 billion, a decrease of $39 million compared with Q1 fiscal year '23.…

Thank you. [Operator Instructions] Our first question comes from Rod Lache with Wolfe Research. Your line is open. You may ask your question.

Good morning, everybody. I had a couple of questions. It's really nice to see the acceleration in share repurchases. Could you just remind us, is your minimum cash position still $700 million, which would imply maybe almost $300 million of excess cash now? And if you do achieve the $300 million of free cash flow, can you remind us how much you would earmark towards share repurchases versus debt, because it looks like you could actually complete your $430 million remaining authorization while still staying in the leverage targets?

Yes. Thanks for the question, Rod. I do think that we could run the company with, call it, $700 million of cash. That said, we also look at the overall macro environment, right, to see whether or not there are certain times that we want to run with a little extra cash on there. The way I think about the capital allocation this year, Rod, is we are off to a strong start with the share repurchases. We expect to generate more cash. We do have to balance that, though, we do have some 3.5% notes that we have to take care of this year, call it, about $130 million, right? There could be an opportunity to take down a little bit of our higher priced debt rate. So, again, I'd look at it as a balanced approach there. And as we move through the year, clearly, we'll be looking at -- we're adding stock is trading and the pacing of that measured approach as we go through 2024.

It does look like something like this pace is achievable even with the 130 for what it's worth. The margins are improving despite labor headwinds, transactional headwinds, and you in fact mentioned that performance is a net positive. Could you just remind us of the impact of labor and transactional headwinds and what actually is mitigating that to actually achieve the positive performance?

Yes. So, let me start and then Jerome feel free to jump in. So, you're absolutely right. Business performance continues to improve. And we said all along, Rod, that business performance continues to be positive or needs to be positive to offset the challenges or the macro external headwinds such as labor inflation, et cetera. We had indicated before that we thought FX was going to be about a $60 million headwind this year. We're still in that camp where we sit today, which means we have to get better in terms of our continuous improvement. We have to basically our balance in, balance out continues to improve. That helps lower freight costs, right? It's just what I'd say just core operating efficiencies that we have to pull through.

And with respect to your question, Rod, what's kind of enabling some of that, I'd say, it's it really is when we talk about things related to ES3 and some of the things we'll highlight next week, when we're actually with you around modularity, looking at activities like long distance jet, remapping our supply chains in concert with our customer and not just what I would call the standard blocking and tackling, but really redesigning the way we conduct some of our core business and taking large chunks of labor sloth and relocating them and displacing them to lower cost countries or eliminating them altogether, so that we can really start to kind of leapfrog and get out of the day-to-day trench warfare and actually take big chunks out, is what's enabling some of these changes. And then the other piece of that would be and we've talked about it as we roll on and roll off some of the legacy programs and make progress in rolling into some of this business that's, I'd say, priced correctly for the market. We've started down that journey in '23. In '24, we see more of it and we'll continue as we get into '25 and '26. And we've been very vocal, there's some metals projects in particular. When we get into '26 and '27 now, that we expect to continue to roll out of our portfolio. And that's what we just continue to make progress on that front.

Our next question comes from John Murphy with Bank of America.

Obviously, there's been an all-out melee that's broken out around ICE versus EV and what's going to happen as far as penetration rates and volumes here. Jerome, I just wonder if you could kind of run through as simply as you can, what your relative exposure or content potential is on an ICE versus an EV and how much it impacts, how you think about cap allocation and the business in general?

Yes. I think when we think about content between ICE and EV, it really varies by region, I would say. In the Americas, when we think ICE versus EV, it's generally a push for us. If we just look at our platforms, in which platforms we have ICE versus EV, really where we see an acceleration is in China. In China, when we go to market on the EV side of the house, especially with NIO and Xiaoping, whereon they're very highly contented EVs, the NIO high end, the Xiaoping high end EVs. And you compare that to an average content per vehicle level in China and we see kind of almost a 2x or 3x multiplier there. And that's why, if you look at by segment what I would call penetration, it's almost 2x, if you compare that to by dollar penetration in the EV market in China and that's just because of content per vehicle there. That's where we really see this multiplier effect is in China, when you look at content per vehicle. We've talked a lot about, when you think pelvic crash management, belts to seats, massage systems, sound in seat and those things are now being right across into Europe and into the Americas. That's where you see this really big accelerator of content per vehicle. To your second question, exposure and risk of capital and capital deployment, we've been I think very good stewards of capital when it comes to leveraging existing brick-and-mortar from an EV versus ICE deployment. And really looking at things like long distance jet, particularly in the Americas and when we've went after an EV platform, we haven't installed new brick-and-mortar. We've really leveraged existing asset footprints. We've leveraged where we can existing lines run those programs side-by-side with their EV counterparts or with their ICE counterparts, sorry, such that, we're somewhat agnostic. If the EV platform doesn't hit, we've got the ICE platform and we can kind of run the two both side-by-side and play off on the volume. Where we don't have the ICE counterpart, we at least have the building, we have the brick-and-mortar. And so we're not stranded with a bunch of fixed costs. We're able to offset that with either more trim volume or put trim or foam or metals capacity into the building or other JIP platforms into the building and utilize that labor. We don't have a lot of stranded costs and we've been able to do that really in Europe and the Americas pretty effectively. We don't have this big fixed cost overhang on the business right now.

Yes, that's incredibly helpful. And then just a second question, with the JVs being rebalanced and repriced, can you just remind us your exposure in totality for the consolidated and unconsolidated business, your exposure to the Chinese domestic manufacturers?

Yes. Right now, it's about 40/60, John, so about 40% exposed to domestics, 60% foreign. While we've indicated though is, if you go out over the next three years, that flips. And so based on our business wins, based on what we see launching over the next two to three years, it becomes 60% exposed to local domestic, 40% to foreign.

Our next question comes from Emmanuel Rosner with Deutsche Bank. Your line is open. You may ask your question.

Thank you very much. My first question is around the expectation for the outlook for growth of the market this year. In your slide discussing the fourth quarter performance, there was obviously a lot of volatility around it and puts and takes around program launches and some platform mix. I'm curious if you could just discuss at a high level, how do you think about this for the balance of fiscal '24?

Yes, I'll start with that and then I'll hand it over to Mark to kind of finish it. We still expect for the entire year to kind of be, I'd say flattish from a growth over market standpoint, just looking at how we balance between the regions. China, as we've said, we still expect China to be significantly positive to overall growth over market despite where we were at in Q1. If you then go through kind of the other regions, the Americas will be down versus market, Europe down versus market, and Asia really kind of flattish versus market. And that's just an effect of where we have certain launches in certain platforms in those markets, especially in the Americas, really looking at launches within the year, in particular Toyota Tacoma and then certain and our customers with Wrangler taking out shifts. There are certain launches on RAM this year that will be impacted by and other things. So, it's an impact of launches in the Americas along with other shift reductions that will drive that. And then in Europe, we've always said there are certain programs there that we've wound off and it's just the continuing of those wind off programs with non-profitable customers. I don't know, Mark, if you want to add any?

No, I think that was a good summary. The only, I'd just reiterate, China It is the growth engine for us, right? And so we're still expecting, call it, 500, 600 basis points of growth over market there. So, a good news story there.

And then shifting to the margin outlook, so about 70 bps of improvement. Obviously, your framework over number of years, let's say, three years was for about, call it, 3 points of improvement. To get the balance of it beyond what you're guiding for 2024, is there like a specific timeline around it? Do some of these actions take specific time like unwinding of programs or is there an opportunity to, I guess, accelerate this would be my question?

So, I think as when we look at this business, Mark and I, I mean, we still firmly believe, Emmanuel, this business is an 8% business. And that's the, call it, the potential of our portfolio and our business and where it should be at. What I would say is, as Mark and I are into the business now and we continue to evaluate it and we go through our strategic plan, with the extension of certain ICE platforms, the extension of certain metals programs and where those set, we have to go through, look at our strategic plan, look at the layout. And as we go through that, we go through our strategic planning cycle, we'll come back to you with what that looks like and kind of a timeline to achieve and the levers to pull to get to that 8% margin target and what that looks like.

Our next question comes from Colin Langan with Wells Fargo.

In the past, you've mentioned, I guess, about a $500 million-ish of unprofitable business that needed to roll off. So is that the business that's now delayed? And is that going to be now instead of ‘25, ‘26, more like ‘26, ‘27. And also in your overall comments, you actually sounded a little more positive on metals talking about how we're doing the whole system integration, having metals is important. Is your sort of long-term view of that business becoming a little bit more optimistic?

Yes. I'll start and then Jerome could jump in, but you're absolutely right. Certain of that metals business that we are planning on rolling off in '25, '26 as our customers have expanded certain of their ICE programs. Clearly, they want us to continue to run those. And so we have to evaluate how long they want to run this. Obviously, there'll be some commercial discussions with them, et cetera, and that's what Jerome was talking about earlier. We have to go through the strategic plan now and understand what those levers are and what we want to do with that. And you're absolutely right. There are certain parts of that business because we've been very strategic and very targeted over the past, call it, two or three years in terms of which business we wanted to win in metals and which ones added no value, right? As we've gone through that process, we are now left with, what I'd call, a good chunk of that metals business that is very favorable for us to do things like the modularity that Jerome was talking about. Jerome?

Yes. Just building off of what Mark said, there is portion of that business in particular certain assembly sequences, if you can imagine on the cushion pan where to really drive modular assembly solutions that we're putting into production this year, that real estate is proving to be extremely precious. And just based on how you have to route certain wire harnesses, occupant detection sensors and calibration sequences and fan routing and things like that, in order to really drive this modular assembly sequence and concept, you need that real estate and that real estate is proving to be very precious. What we've seen with certain customers, we have design authority and sourcing authority, we are really able to drive this concept and quickly accelerate it. And it's proven to be extremely beneficial to them and we're seeing a rapid acceleration on that front. It is with those customers, our metals business is proving to be an asset and a real accelerator. That said, yes, there are going to be certain metals programs that we were anticipating to roll off, that are now lingering, that we need to again go back and revisit in either commercial agreements or certain of our footprints and really look at what impact does that have on our strategic plan.

Got it. And then, just going back to the puts and takes within guidance. Just to be clear, are there any recoveries in guidance? It feels like most suppliers have been sort of expecting some level of recoveries. Is that driving some of the performance? And any update on commodities? I thought the initial guidance had $10 million of help or something like that? I think this quarter had almost $10 million of headwinds.

Yes. Absolutely, we are expecting recoveries included in the business performance is recoveries, commercial recoveries as we go through there. Now again, as I indicated during the prepared remarks, Colin, those are lumpy as we go through the different quarters. They tend to smooth out over the course of the year, but going from Q1, for example, into Q2 will be lumpy. You'll get a little bit smoother as I go from H1 into H2. But there is just that element in there. From a commodities aspect, you're right. There was about a $10 million benefit that we saw as we went into the fiscal year. As I looked at Q1 results, though, clearly timing of those recoveries versus the overall price, the gross price coming down. So again, I look at that as more timing related than anything else at this point.

Our next question comes from Joseph Spak with UBS.

Maybe just picking up there because, obviously, in North America, the results in the quarter, the margin it was really strong, even stronger ex strike closer to 6%. But it does seem like the timing of those recoveries did help a little bit. So, like, I guess, how much of that was sort of out of period or sort of unusual with the sort of lumpiness and what should we expect sort of that sequential maybe decline to occur? And then just more broadly, it sounds like there's a bunch of moving parts in North America with the peso and the Kuiper JV benefit. I think previously you sort of hinted that the North American margin for the year, ex strike could show some expansion, but given the performance to date. Is that -- could we even see expansion with the strike or is there really going to be some puts and takes that sort of knock that back down over the course of the year?

Clearly, there's going to be timing with the commercial recoveries, right? So I wouldn't take my Q1 and just kind of lay that out in terms of expectations for commercial recoveries, they could be lower in Q2, et cetera, as I indicated. We do expect margin expansion as we go through the year, year-on-year, even ex strike, Joe. And so, I do expect that is consistent with what our prior comments were around the margins.

Yes. And just a couple of comments on the Americas. And just the Americas business in general and really why, it's a good example of -- this business is really, I'd say difficult to run on a quarter-to-quarter basis. It's one reason why we don't really provide kind of quarter-to-quarter guidance anymore just because of that reason. Yes, we don't want to drive kind of quarter-to-quarter behavior and there was a lot of lumpiness in that first quarter in the Americas, especially associated timing of some of the commercial recoveries that were out there. But really what's key for us is when we look at the Americas or any one of our segments, we expect the Americas even with the strike impact to be expanding operating margins year-over-year driven by business performance within that segment and that's what we expect to see there.

And then just getting back to some of the growth of our market commentary. I just want to -- it seemed like there were a couple of statements at odds, because you mentioned, obviously, there was -- in China, there was meaningful underperformance in the first quarter, but you still expect meaningful outperformance for the year. I think, last quarter when you showed it was almost 11%. But then in your prepared comments, you sort of talked about how some of the production uplift was from players that you don't have a lot of content with. So what really sort of drives that acceleration in the outgrowth over the balance of the year?

I think it's the launches, right, and the pacing and cadence of those launches. So for example, in our first quarter, that's the fourth quarter of the calendar year, certain of those customers that we mentioned, whether it's the BYD, SAICs, obviously, they're performing very strong to hit their year-end targets, right. We know that we are going through certain launches in our Q1. We also understand where we're going to be on those launch curves, as we go through Q2, Q3. So again, that's all predicated or based on our guidance. We expect that to improve and progress as we go through 2024, ultimately outperforming by the 500, 600 basis points that I'd indicated.

Thank you. [Operator Instructions] Our next question comes from Dan Levy with Barclays. You may ask your question. Your line is open.

Hi, great. Good morning. Thank you for taking the questions. I wanted to, just go to the slide in which you talked about some of your new wins. Specifically, I don't think you've talked in the past about BYD. This is I think the first time we've seen a BYD one for you. I know you generally don't talk much about specific customers, but given the amount that BYD is responsible for some of the positive revisions in China, maybe you could just talk about this particular win and what you might be expecting with BYD going forward?

Yes. I mean just a couple of words on that win for us. It's one where -- I think it shows the ability of our team to really demonstrate value for a customer on our components segment. And without going into a lot of details in particular on BYD and their total supply chain, I think it is known they have a portion of seeding they do in-house and a portion of seeding that they outsource. And for us to really go in with our team, very deep expertise on the component side and demonstrate to their in-house seeding company that they have, how we can provide value on the components piece of it through that foam and trim, was a very important, what I would call, conquest for us and to show we don't have to be just a JIT type of supplier and we're willing to play on the component side. We're willing to demonstrate our expertise and really drive a significant amount of value for the customer there. And so, for us, it's really kind of a way to dip our toe in the water there and add a tremendous amount of value. This is our real first foray directly into BYD. We did have in a prior call one of BYD's joint ventures, a win on the complete seat side that included JIT, foam, trim and metals that we had announced in our Q3 of FY '23 earnings call, through another joint venture they had. That wasn't directly with BYD, it was through a joint venture. I think it is also important to point out that, through our KEIPER joint venture, where we're a 50/50 holder in that BYD is a very significant customer to them through the mechanism side that we don't always break out the customer breakdown obviously of that joint venture. But we do get a significant amount of, call it, JV income kind of indirectly through BYD, through the KEIPER side of the house as well. So there has been growth there. We've been enjoying that growth through KEIPER and then through the equity income side as well.

Great. Thank you. As a follow-up, I want to ask about mix and specifically in North America. I think we know obviously, from a mix perspective, you benefit tremendously from three row SUVs, larger vehicles. I think one of the questions out there right now is with prices, where they are and potential for negative mix shift in the industry. What would be the impact to you? And to what extent, if there is maybe some slightly negative mix in the industry, could you still hold your path to 8%? How critical is mix in the path to getting to 8% margin?

Yes. Dan, it's de minimis. It's a very small piece, as we've indicated before. It's all about volumes and the stability of those volumes mix. Mix again is not going to be, what I would say, the enabler for us to achieve that 8%.

Yes, I think nothing more to add. I agree with Mark. It certainly isn't mix between high end to low end vehicles and nothing along those lines, I think.

At this time, I'm showing no further questions. I'll turn the call back over to the speakers.

Thanks, everyone, for joining the call. I appreciate it. We'll be available for follow-ups as necessary throughout the day or afterwards. Reach out to me or Mark. We'll be happy to take any other questions. So we have the day, thank you very much.

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