Adient plc (ADNT) Q1 2022 Earnings Call Transcript

Welcome and thank you for standing by for the Adient First Quarter Fiscal 2022 Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct the question-and-answer session. This call is being recorded. If you have any objections, you may disconnect at this point. Now I will turn the meeting over to your host, Mark Oswald. You may begin.

Thank you, operator. Good morning and thank you for joining us as we review Adient's Results for the first quarter fiscal year 2022. The press release and presentation slides for our call today have been posted to the Investor section of our website at adient.com. This morning I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; Jeff Stafeil, our Executive Vice President and Chief Financial Officer; and Jerome Dorlack, Adient's Executive Vice President of the Americas. On today's call, Doug will provide an update on the business followed by Jeff, who will review our Q1 results and outlook for the remainder of the year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug, Jeff, and Jerome, 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 statements. 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.

Great, thanks Mark. Good morning, and thank you to our investors, prospective investors and analysts joining the call this morning as we review our first quarter results for fiscal 2022. Turning to Slide 4, let me begin with a few comments related to the quarter. As we anticipated heading into the quarter, the ongoing supply chain disruptions related to semiconductors and the resulting customer production stoppages combined with elevated commodity prices continue to impact Adient's first quarter. As the quarter progressed it was encouraging to see signs of stabilization emerge for certain of these headwinds. Specifically, the softening of steel prices and the less volatile production schedules for our customer production. Like the green shoots that began to appear, the overall narrative has not changed; we continue to operate in a very challenging environment. This is evident when looking at Adient's first quarter EBITDA results, which contain approximately $185 million of temporary operating efficiencies and commodity headwinds. Adient's key financial metrics for the quarter can be seen on the right-hand side of the slide, revenue for the quarter totaled $3.5 billion, which was about $500 million compared to last year's first quarter adjusted for portfolio actions executed in 2021. As a reminder, the supply chain disruptions that have resulted in significant downtime at our customers began in late Q2 of 2021 and did not impact last year's Q1 results. Adjusted EBITDA for the quarter totaled $146 million and as pointed out on the slide included approximately $185 million in lost volume, temporary operating inefficiencies, and premiums, again primarily driven by chip shortages and unplanned production stoppages. Adient's December 31 cash balance totaled just under $2.1 billion and included approximately $625 million in net proceeds collected as the final payment associated with Adient's strategic transaction in China, which closed at the end of our 2021 fiscal year. Despite the continued difficult operating environment, Adient continues to execute actions within its control to position the company for sustained success. These actions include, but are not limited to, the team's intense focus on launch, execution, cost, operational improvement, and customer profitability management. Continued progress on transforming the company's balance sheet, as called out on this slide, Adient's recently launched $800 million in debt tender offers targeting any and all of the company's 9% U.S. dollar secured notes, which had $600 million outstanding, and up to €177 million, about $200 million of our 3.5% Euro unsecured notes. And finally, we recently issued our 2021 sustainability report, highlighting Adient's increased commitment to operating the business in an environmentally friendly manner. I'll cover this in greater detail in just a few minutes. But first, turning to Slide 5, let me expand on what we're seeing with regard to the current operating environment. In the middle of the slide, we've highlighted several of the headwinds the industry and Adient continue to face. The list should look very familiar as many of these macro headwinds surfaced at the end of our second quarter last year and have continued into fiscal 2022. The most significant influences include ongoing supply chain and semiconductor shortages, which continue to impact production at our customers. Similar to the second half of 2021, these unplanned production stoppages are leading to premiums and operating inefficiencies across the network. For Q1 fiscal 2022, we estimate that supply chain disruptions resulting in lost production, operating inefficiencies, premium freight, etc., had a net impact on the top line of $680 million and adjusted EBITDA by approximately $185 million. The $185 million EBITDA headwinds for the most recent quarter is modestly better compared to what we saw in Q4 fiscal 2021. As mentioned earlier, we're cautiously optimistic that the supply chain disruptions related to the semiconductors are beginning to stabilize. As the first quarter of 2022 progressed, customer cancellations and short notice production stoppages have lessened. That said, by no means are we out of the woods. The operating environment remains very challenging, especially considering the spike in COVID cases, elevated trade costs, and labor uncertainty. Those specific headwinds have not improved. For the full year, we continue to expect production stoppages resulting from supply chain disruptions and temporary operating inefficiencies will look very similar to fiscal 2021, specifically impacting Adient's top line by just under $2 billion and adjusted EBITDA by approximately $400 million. With regard to the material economics, a modest dip in steel prices during Q1 suggested stabilization, and hopefully further improvement may be realized as 2022 progresses. For the quarter, Adient's net commodity headwinds totaled $3 million. This result was better than expected aided by additional recoveries over and above our contractual agreements. Also important to point out, our European operations had locked in pricing for 2021 calendar year. As the negotiated contracts for 2022 kick in during our fiscal second quarter, we're expecting to see a more significant impact on Europe results for that region. Based on the recent steel price movements, the upcoming pricing in Europe combined with the contractual escalators and negotiated commercial terms above contractual obligations, we currently forecast commodity headwinds of about $95 million versus previous forecasts of $125 million. Although moving in the right direction, this remains a pretty stiff challenge for the year. Taking a step back and looking at the overall operating environment, we're encouraged to see green shoots of stabilization for certain of the headwinds. However, the overall narrative has not materially changed, and we're in the midst of a pretty tough operating landscape. As mentioned on prior calls, we're not sitting back waiting for the tide to turn. The team continues to implement actions to help mitigate the negative impact of the headwinds. Actions include, but are not limited to, focusing on operational excellence, driving down SG&A costs, executing both temporary and permanent actions, partnering with our customers to drive innovation and add value to address the needs today and tomorrow, and continuing the transformation of the balance sheet. Simply put, we're executing actions within our control to position Adient for long-term success.

Great, thank you Doug and good morning everyone. Let's jump into Adient's Q1 results starting on Page 11. 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 important trends and underlying performance. For the quarter, the biggest drivers of the difference between our reported and adjusted results related to purchase accounting amortization, restructuring, and a derivative loss in the Yanfeng strategic transaction. Details of all the adjustments for the quarter and the full year are in the appendix of the presentation. I'd also point out that within the appendix, we've included pro forma results for each of the quarters in fiscal 2021 adjusting for the numerous portfolio actions executed last year. These pro forma figures attempt to show 2021 on a consistent basis or footprint with this year. We believe these serve as a helpful tool to compare our year-over-year results. High level for the quarter, sales were $3.5 billion, down about 10% compared to our first quarter results last year, or down about 12% compared to last year's pro forma results. Similar to the past few quarters, the most recent quarter was significantly impacted by lost production, primarily related to supply chain disruptions related to semiconductors. Adjusted EBITDA for the quarter was $146 million, down $232 million year-on-year as reported, or down $179 million compared to last year's pro forma results. The decrease is attributed to the significant reduction in volume and mix and numerous temporary operating inefficiencies driven from the challenging operating environment. I'll expand on these key drivers in just a minute. Finally, on the bottom line, Adient reported an adjusted net loss of $36 million or a loss of $0.38 per share. Now let's break down our first quarter results in more detail. I'll cover the next few slides rather quickly as additional detail is contained in the slides. This should ensure we have an adequate amount of time set aside for the Q&A portion. Starting with revenue on Slide 12, we reported consolidated sales of $3.5 billion. The sales shown include the sales at Adient's recently acquired CQ and LF businesses, which are now consolidated since closing the strategic transformation in China, as well as other portfolio actions executed in fiscal 2021. The $3.5 billion is a decrease of $495 million compared with Q1 2021 pro forma results. The primary driver of the year-over-year decrease was lower volume, approximately $485 million related to the volume and lower commercial recoveries partially offset by roughly $65 million in commodity recoveries. The negative impact of FX movements between the two periods impacted the quarter by just over $70 million. Focusing on the table on the right-hand side of the slide, you can see our consolidated sales outperformed production in each of the major regions. Important to note and as highlighted on the slide, the quarterly year-over-year performance was adjusted to account for the portfolio actions implemented in fiscal 2021. Adient's growth over market in each of the regions can be attributed to the company's customer mix. In China, strong production at NIO and Xpeng underpinned Adient's performance. In Asia, specifically in Korea and Japan, Adient's customer platforms were less impacted by supply chain disruptions compared with the overall market, and in Europe, favorable mix and commercial actions drove the outperformance versus the market. With regard to Adient's unconsolidated seating revenue, year-over-year results were up about 4% when adjusting for FX and portfolio actions executed in fiscal 2021. Adient's sales growth over market growth was largely driven by outperformance in China, specifically at Adient's Keiper JV, which benefited from very strong Tesla sales during the quarter. Moving to Slide 13, we provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate finance, and legal. Big picture, adjusted EBITDA was $146 million in the current quarter versus $378 million reported a year ago, or $325 million pro forma adjusted for the portfolio actions executed last year. I'll focus my commentary on the drivers between this year's results and the pro forma adjusted results as we believe that provides a more meaningful comparison to today's business. The primary driver of the decrease are detailed on the page and are consistent with what we expected heading into the quarter. Lower volume and mix, primarily driven by supply chain disruptions at our customers, impacted the year-over-year results by just over $100 million. Adverse business performance, driven by temporary operating inefficiencies resulting from the unplanned production stoppages at our customers and customers not running at rates, increased freight and lower year-over-year commercial settlements impacted the quarter by about $60 million. Just a reminder, last year's first quarter commercial settlements were abnormally high. In fact, last year, we called out approximately $30 million of settlements that were not considered ongoing. With regard to my comment about certain of our customers failing to run at rate, this unfavorable trend, which surfaced at the start of the supply chain disruptions last year, not only highlighted the difficulty in forecasting production, it also illustrates why we continue to experience inefficiencies in the operating system, such as excess labor at our facilities. For example, our customers typically forecast their expected production volume three months out. Adient, in turn, is required to staff to those levels. Unfortunately, the production rates that are ultimately being achieved is on average 20% below those levels, with certain platforms and customers performing better, while others are performing worse. It's definitely a challenging environment for everyone to work through. Other headwinds included higher SG&A cost of about $9 million, primarily driven by adverse events in the most recent quarter, such as the flood in Malaysia, and a limited number of legal settlements. Equity income was lower by about $5 million, underpinned by lower volumes. Finally, with regard to commodities, the $3 million headwind was favorable versus our initial expectations, aided primarily by better than expected commercial recoveries. I'd also point out that in Europe, we were operating under steel contracts established in early 2021, and then expired at the end of December. We expect pricing in Europe to step up beginning in our second quarter with the execution of the new contracts, which carry pricing above last year's level. Based on the current outlook and considering the improvements in commercial recoveries for Q1, we now expect a full year net commodity headwind of $95 million versus our previous guide of $125 million. Similar to past quarters, we've provided our detailed segment performance slides in the appendix of the presentation. High level for the Americas, adverse business performance, driven by temporary operating inefficiencies, lower commercial settlements, and increased freight costs combined with significantly lower volumes drove the year-over-year decrease in earnings. The negative factors just mentioned were partially offset by better launch performance, tooling, and improved SG&A. In EMEA, the negative impact of lower volume, temporary operating inefficiencies and increased freight costs were partially offset by favorable commercial settlements and improved SG&A performance. Meanwhile, in Asia, a slightly different story unfolded as volumes were up year-on-year. Unfortunately, the positive impact of the higher volumes was generally offset by increased freight costs, launch costs and higher SG&A costs. The SG&A costs are largely viewed as event-driven, as costs are primarily related to the flooding in Malaysia. One final point for Asia, specifically in China, there was a longstanding pricing dispute settled in Adient's favor, approximately $10 million. That should not be modeled in our normalized run rate going forward. Let me now shift to our cash, liquidity and capital structure on Slides 14 and 15. Starting with cash on Slide 14, adjusted free cash flow, defined as operating cash flow less CapEx, was an outflow of $74 million for the quarter. This compares to a positive $160 million in Q1 2021. The year-on-year decline was primarily driven by lower earnings, timing of working capital, the timing and level of commercial settlements and lower equity income, primarily driven by our strategic transformation in China. The negative factors were partially offset by reduced interest payments underpinned by our balance sheet transformation, lower restructuring costs, and lower cap spending. Flipping to Slide 15, as noted on the right-hand side of the slide, we ended the quarter with about $3 billion in total liquidity, comprised of cash on hand of about $2.1 billion and approximately $880 million of undrawn capacity under Adient's revolving line of credit. Also noted, the December 31 cash balance includes approximately $625 million of net proceeds collected as the final payment associated with Adient's strategic transaction in China, which closed in September 2021. Adient's debt and net debt position totaled about $3.7 billion and $1.6 billion respectively at December 31. As Doug mentioned earlier, and noted on the slide, subsequent to the quarter, the company launched an $800 million tender offer targeting any and all of Adient's 9% U.S. secured notes, which totals $600 million at quarter end, and up to €177 million of the 3.5% Euro unsecured notes, which is about $200 million. The tender process is currently underway, and updates will be provided as appropriate. In addition to the cash outflow expected in Q2 resulting from the debt tenders, I'd also point out and as highlighted on the slide, in January Adient completed its agreement with Boxun to purchase Boxun's 25% equity interest in CQADNT, bringing Adient's equity stake to 100%. Total payment to Boxun totaled approximately $200 million for their equity interest, historical dividends and other items. $15 million of the $200 was paid in Q1 and reflected in the December cash balance. The balance of the payment, approximately $185 million will be paid out and reflected in Adient's fiscal Q2. One last point on the balance sheet. Although we're solidly on track to transform the balance sheet, driven by our voluntary debt pay down, the depressed level of EBITDA expected for fiscal 2022 keeps us outside our leverage target of 1.5 to 2 times. As such, we will continue to prioritize debt pay down with approximately $1 billion of voluntary debt pay down expected in fiscal 2022. As we progress through the year and hopefully gain better visibility on the operating environment, and its impact on Adient's free cash flow, Management and the Board will continue to assess enhancements to the company's capital allocation plan. Now moving to Slide 16, let me conclude with a few thoughts on what to expect as we progress through fiscal 2022. As expected, the operating environment in early fiscal 2022 remains challenging, as evidenced by Adient's first quarter results. Despite green shoots of stabilization emerging for the industry such as modestly softer steel prices, and fewer abrupt stoppages of customer production schedules, we expect near-term results to continue to be impacted by temporary operating inefficiencies, COVID-related costs, increased freight, labor concerns, and elevated commodity prices. That said, we expect the headwinds to lessen as we progress through the year, particularly in the back half of the year. Based on Adient's first quarter results, expected debt pay down, and current market conditions, we currently forecast revenue of about $14.8 billion, which is consistent with our earlier forecast. Although third-party production forecasts are modestly better, versus the assumptions we used at the start of our fiscal year, FX movements are offsetting the benefit of higher production. For adjusted EBITDA, we continue to expect fiscal 2022 will be modestly lower versus our fiscal 2021 pro forma results of about $810 million. The challenging operating environment, specifically the ongoing supply chain disruptions, limited visibility of customer production schedules, and labor concerns continue to prevent us from providing a more specific forecast at this time. Equity income, which is included in our adjusted EBITDA, is now forecast to be approximately $90 million. This is up slightly versus the $80 million to $90 million guide provided last quarter and reflects Q1's strong performance. Moving on, interest expense is still expected at about $150 million, and includes the assumption of $1 billion of principal debt prepayments in 2022. No change in our cash tax assumptions of around $80 million. Our book taxes are expected to be slightly higher, approximately $100 million at this time; $20 million to $25 million per quarter is a good run-rate assumption. As mentioned on our last call, during fiscal 2022 we might see our adjusted effective tax rate higher than normal and fluctuations among quarters due to the valuation allowances and our geographic mix of income. That said, it's important to remember that we maintain valuable tax attributes, such as net operating loss carryforwards, and that these tax attributes can be used to offset profits on an ongoing basis. So cash taxes on Adient's operations should remain relatively low even as profits increase. And finally, capital expenditures are forecast to be about $300 million to $325 million. As you can see at the bottom of the slide, given the backdrop of the current operating environment, and consistent with the commentary related to an adjusted EBITDA forecast, providing a specific full-year estimate for free cash flow with reasonable certainty is not possible at this time.

Thank you, Jeff. As you just heard from Doug and Jeff, the operating environment remains challenging despite early signs of stabilization for certain headwinds. The team remains focused on launch execution and operational excellence. In fact, when stripping out customer shutdowns, and the impact of certain customers not running at rate, we're performing at a very high level. That said, being able to run at rate, reduce excess labor, and eliminate many of the inefficiencies, will ultimately be achieved when production stabilizes in a meaningful way. On Slide 17, we've identified a number of positive and negative influences that have the potential to improve or further disrupt the operations, and I'll walk through a couple of those. On the positive influences side, given the current execution of the operation, Adient will see benefits as our customers demonstrate the ability to run at rate consistently. In addition, if the labor market were to demonstrate stabilization, particularly in the US, this would present additional tailwind for the operation. On the negative influences, we are carefully watching our customers and how they intend to ramp. If they continue to run as they have in Q1, their stop-and-start nature, this will present additional challenges to our operation. This leads to trapped labor and limited paths to recovery. The issue can be worked out in the longer term, but does present a short-term headwind. We are keeping a close eye on these factors and if necessary, we’ll make the appropriate adjustments to our operations to ensure we capitalize on the positive and mitigate the negatives. With that, I will turn it over to the operator to move to the Q&A portion of the call.

Thank you. Our first question comes from Rod Lache, Wolfe Research. Your line is now open.

Good morning, everybody. A couple of things, if you can just clarify for us. It sounds like the $30 million settlement that you called out and then that $10 million China price settlement were separate items, so I just wanted to confirm that cumulatively that was $40 million or whether that was one item of $30 million. And was this in your original guidance? And can you confirm that that's separate from what you're describing as, I guess, a better commodity outlook, the $125 million declining to $95 million, that these are all kind of separate and discrete moving parts?

Yes, they are all separate and discrete, Rod. On the $30 million settlement that actually related to 2021, so that’s really just a comparison point. We called out last year when we talked about our Q1 performance that we had about $30 million of unusually high commercial recoveries, which we said don’t count on a continuing basis. As it related to the $10 million, that was this year, and we called out, we had sort of an unusual settlement, unusual, something that wouldn’t necessarily reoccur, so we wanted to call that out. When you think of our $146 million that we had in EBITDA. There are obviously a lot of negative things, those key events we talked about, but separately there’s this $10 million, approximately $10 million in China that we wouldn’t want you to include as you model forward earnings out. It was something we were planning to do this year, so it was embedded into our numbers which I think was your question. And again, that is all separate and distinct from the commodity impacts we talked about.

Great, thank you. And then just secondly, Doug you mentioned the balance-in, balance-out of contracts as being margin accretive. Can you maybe give us a little bit more color on that, and how we should think about the roll on and roll off going forward? And any update on just discussions with your customers? I think you had originally said that there’s like 30% of your commodity exposure is subject to negotiation. So, if commodities stay at current levels, what would be a reasonable expectation as we think out and maybe even to next year on what you should be able to recover that you’ve been absorbing?

Sure. So, first, I guess right on your question of new business, I think it's consistent with what we've been communicating all along, that we had this three-prong approach to getting margins back to a level that is consistent with our peer kind of the adjusted EBITDA north of 8%. So, we stabilized from an execution standpoint, we were able to reprice where we could reprice, and then the last piece of it was bringing on new business where we couldn't reprice a contract or reach some sort of commercial settlement. And so, what we’re trying to communicate is, we're consistent with that original plan that we had. We're on track to close that margin gap as we've been discussing for quite some time now. Associated with that are all the instability we have in the market right now that delays some of that, but fundamentally, we feel our business is on track towards that objective. With regard to commodities, it was a bit difficult to project, but I would say we've made good progress there on reopening discussions where we could to get resolution on just some extraordinarily high material economic increases. I would just say that levels out over really about a 12-month period where the way our contracts work, even without extraordinary measures, we get that recovery built back into our business in one form or another.

So just to clarify, last year you had $70 million and now you have another $95 million, so do you believe that you can recover that over a 12-month period? Also, do you have an estimate for the legacy contracts that you are waiting to replace or let expire? What is the impact we can expect from that going forward?

Yes. So relative to material economics, I would say that's a fairly good estimate of the $95 million taking maybe another 12 months to fully resolve, but that's really a function of where commodities move and what we negotiate. We're in the midst of negotiations as we speak on steel contracts on a go-forward basis. With regard to the drag on closing the gap on the contracts, I've never really specified a number. We've specified a timeframe. And that timeframe has always been in the 20, 25-ish time frame that we resolve all elements of, I'll say, the commercial recovery replacement business, execution side of what we intend to do with the business to close that margin gap.

Okay. Thank you.

Yes. Thank you.

Thanks, Rod.

Our next question comes from Emmanuel Rosner, Deutsche. Your line is now open.

Hey, good morning. Two questions, if I may. The first one is on your Slide 5 and the very helpful regular update on some of the supply chain disruptions. So I think in your comments, Jeff, you were saying that, on a full year basis, you would see some of these impacts from supply chain disruptions. COVID-19, freight cost, labor, all that stuff fairly consistent with the level that was seen in 2021, which was a $400 million impact on EBITDA. And my question is, is this saying that means it's not an incremental headwind, it's just basically not a tailwind or headwind, just stable versus last year?

Yes, pretty stable.

So that's great. And so if that's the case, what sort of environments or conditions will it take for you to start shifting some of these inefficiencies? Is it a volume recovery? I guess, what would we…?

We appreciate the question, Emmanuel. I would refer you to Slide 17 and what Jerome highlighted earlier regarding the factors that could shift our narrative. We're currently receiving customer releases three months in advance, which are generally reliable, and we need to align our staffing accordingly. However, our customers have been operating at an average of just over 20% below their expected run rates, which varies by customer, but that's the general trend. This discrepancy means we have excess personnel and reduced volume, leading to significant inefficiencies that need to be addressed. We also discussed the status of labor. Last month, the surge of Omicron caused considerable absenteeism at our facilities, presenting production challenges that affected not only us but the entire automotive supply chain. We need to achieve stabilization in this area. The inflation effects we've all observed are certainly impacting our business. Issues such as rising steel and foam chemical prices, as well as labor costs, are critical, and global freight expenses remain a major challenge for us. We are actively working to mitigate these issues. While some aspects have improved, others, particularly related to labor and freight, have worsened, complicating our prospects. As these challenges resolve, which we anticipate will happen over time, we see significant potential for enhancing our earnings beyond what we've recently experienced.

Can you quantify how much of it is related to volume? If I assume that in fiscal 2023, industry volume will begin to normalize and the volatility of production schedules will become more predictable, how much of the $400 million can you attribute to that, as opposed to the portion that is more influenced by inflation, where there may be fewer options to consider?

Yes. We would expect the volume piece to be about $300 million or so and the inefficiencies to be a tick over $100 at this point, or about $125 or something like that.

Okay. That's super helpful. And then my second question is, would you be able to give sort of like a high-level puts and takes in your 2022 guidance? So essentially some sort of walk because it seems like at the very least you have quantified a better commodities outlook than what you had before by the tune of $30 million. I think the equity income is playing up maybe sort of like $0 million to $10 million better, but obviously, your outlook is unchanged, and I understand there's a lot of sort of uncertainty, so any way just sort of like frames like the year-over-year walk?

I would summarize it this way: due to the challenges we're facing, it's difficult for us to make accurate predictions moving forward. Recently, I've noticed numerous reports indicating that our customers are experiencing production disruptions this weekend, next week, and throughout the next month for various reasons, primarily related to supply chain issues. This creates a challenging environment for us. When we provided our guidance for the year, we felt uneasy offering the specific ranges we typically provide. Normally, this industry is quite predictable, but with our customers seeing over 20% fluctuations in their production schedules, it complicates our situation, especially because we rely on a just-in-time approach and cannot build up inventory. If shipments are canceled, we may end up with surplus resources that we're still financially responsible for. Now, three months into the year, we continue to confront this uncertainty. Although there has been talk about potential improvements in future production, we have yet to see concrete results, and we remain cautious with our forecasts. We did gain around $30 million in benefits from commodities, and we've noticed slight improvements in equity income, which feels more stable. However, we remain uncertain about labor and other aspects. Given all these factors, it doesn't make sense to refine our forecast at this early stage in the year, but we're committed to making progress. If positive market influences continue, as we described on Slide 17, we anticipate being able to demonstrate better results. For now, though, it is too early and uncertain for us to provide a more definitive outlook.

I understand. Thank you.

Yes, thanks Emmanuel.

Our next question comes from Colin Langan, Wells Fargo. Your line is now open.

Thank you for taking my question. I just want to follow up, and I apologize for asking again, but I recall that your initial guidance for Q1 suggested it would be flat or slightly above Q4, and it appears to be around $70 million higher. You also mentioned that the steel and JV are slightly better. Should we consider that there might be something else affecting this? I think you mentioned labor, but is there anything materially worse? Or is this just a more conservative outlook, and if so, why isn't the guidance being adjusted? Is there perhaps something that...

I mean, I'll start and I'll let Jeff comment. I think it's more just the uncertainty of what we're seeing out there. As Jeff mentioned, I mean, even as late as yesterday, we saw some fairly significant announcements from some of our customers, albeit the short term on disruptions to production schedules. And so although our performance in Q1 exceeded our original guidance, as Jeff said, we just took a step back in preparation for this call and said, it's just too early in the year to change that guidance. There are some positive things that are developing, but the environment we're operating in is extremely fragile, whether it's, I would say the biggest factor that concerns us is just the impact of COVID and how disruptive it can be to our customers' ability to operate, and then that's further compounded by the semiconductor still being disruptive as well. And there's not a lot of clarity from our customers, though there's certainly positive comments being made by them. But we still know they're running on allocation, and supply chain disruption can occur at any time. And so we just said, we'll continue with the guide we have right now. There's positive and negative things that could develop and as the year plays out, we'll be more specific.

Okay. That makes sense. Can you clarify? I'm not sure if I am misunderstanding the slides; there's a $3 million headwind in commodities for Q1. That seems quite low, particularly with the $95 million for the full year. I think you mentioned Europe is improving, I guess, as we go through the rest of the year. Are there any other factors, or am I not interpreting the slide correctly?

You're reading it correctly, Colin. There are a couple of points that stand out. One is that of the original $125 million, nearly 75% is tied to Europe. We effectively timed the steel contracts we set up last year in Europe, and they expired on December 31. It wasn't until January that we began to face higher prices in our European region, where we have significant metal operations. As you know, many of our mechanism platforms are in our facilities in Europe, so the impact is quite considerable. We are actively taking steps to mitigate this situation and address all these challenges, but these are the issues we are currently dealing with. While some aspects have improved, others, like labor and freight issues, may have worsened, making it very challenging to predict outcomes. However, as these issues gradually resolve, which we anticipate will happen over time, we see a substantial opportunity to enhance our earnings compared to our recent experiences.

Okay. Thanks for taking my questions.

Yes, thanks Colin.

Next up, we have John Murphy, Bank of America. Your line is now open.

Hi, good morning guys. A first question, I mean, obviously, scheduled stabilization is most important here. But once we get beyond that, we think about natural recovery in volume. There's a lot of discussion from the automakers that that will be somewhat negative for mix. So I'm just curious, once we get through this period of volatility, as you think about what's more important to the business from this starting point, is volume or mix more important to you? It seems like it might be volume, but just trying to understand.

Yes, it's volume.

It's volume.

Oh, I understand. So, there's no concern about the potential negative mix being suggested by automakers as things recover? That's not a...?

It worked by volume, yes.

Perfect, that's what I thought. Second, when you think about the three months schedules that you're being given, how fast are things changing? I mean, you're giving schedule three months out, but are they changing on a daily basis? And how short are the changes that you're getting? I mean, you're basically getting called by take tomorrow, we're just not taking seats or you made them, I mean just trying to understand how this volatility is really playing out?

Yes, good morning John, it's Jerome. We receive notifications within the day. I won’t discuss customer specifics, but last week we were informed that a large platform ran out of a supply chain part from China. Our team was on-site, and by 9:30, we had to send them home. We had them come in for our second shift, but they did not restart, and we had to send them home again. This means we incur labor costs without immediate recovery options; we need to resolve it. Additionally, Jeff mentioned that from three months to actual builds, there is typically a 10% to 15% deviation. We have to manage this in a just-in-time environment since I can't pause my customer’s operations. However, when demand isn't met, I am left with trapped labor. This has been a significant challenge in Q1 and is expected to continue into Q2 due to ongoing uncertainties involving labor, chips, and other supply chain factors.

And just on top of that, that's further exacerbated by the fact that you've got labor shortages right now. So we're having to run with fairly high levels of absenteeism just to run at the rate of our customers. So it's got a bit of a compounding effect there. And what's true in the Americas really is true for every region we operate. Obviously, each region slightly different, but that volatility is existing in every single region that we have, so it's pretty challenging.

Yes, it sounds like it. Then just on the EV boom, we're hearing obviously more about that all over the place. As you think about your content on EVs and the impact to your business, is this a net positive just from a content standpoint? I mean how do you think about that?

I think near term it's net slightly positive, but what I would say are the EVs that are in production today for the most part, are using conventional seating systems. As you look further out, particularly with the new entrants that are looking for a combination of EV with higher level of autonomous driving, that's where we start to see significant content increase. But that's a little bit further out as they transition into those vehicles and the full architecture change, 100% committed platforms to EV. Beyond that, we're just seeing whether it's ICE or EV, content per vehicle in seating has continued to go up simply because they are multifunction vehicles. And so what that brings is higher content as you get into articulating and increasing the number of passengers for vehicles, so that's all positive trend. But I think that's happening somewhat independent of what the propulsion system is. But we're pretty excited as you start to get a little bit further out and really the new technologies that will come in place, and the amount of consumer feature content that will be driven into future vehicles, we see that as a pretty positive trend.

I want to follow up on the 9% 20, 25. Is there a call option on those? The tender is a great way to eliminate the expensive debt, but is there another option to address more if the response to that tender isn't favorable? I'm just curious about the timing or if there’s something there.

We're just right ahead of it. So if those people who don't tender, we have the option to call them in mid-April.

Okay. So is the intention to eliminate most of this? I mean what's the...?

Yes. We don't want those notes. It's a 9% note, we issued in the front end of COVID.

Sooner or later, that's gone pretty quickly.

Yes, correct.

Yes.

Thanks so much guys. All right, thank you.

Thanks, John.

If we could have our last question from Dan Levy.

Thank you. I wanted to ask about the top line. You achieved significant growth this quarter, about 7 points above the market. You mentioned your RAM win. Considering your efforts to reduce some of the unprofitable Tier 2 business, one might expect your revenue to lag behind the market, but that isn't happening. Could you elaborate on the strong revenue performance and provide an update on your current market share in seating?

Yes. Well, obviously, we did not prepare specifics around that for today's earnings call, but that being said, we see the balance-in, balance-out of our business by region essentially consistent with our market share positions that we've operated with historically. The one exception I would point out is we did lose a contract in Europe well over a year ago with one very specific customer that we've spoke to in the past, which will drop our European market share, but that's something that's more of an anomaly from revenue perspective, and we backfilled a lot of that business. So when I think about market share, I would say you should expect no major shifts in a negative. And then what really is going to be interesting to see what plays out is how fast the new EVs come online and what opportunities that provides us for market share or content gain.

Great, thanks. And then just a followup on capital allocation. Once you're past the debt paydown, once there is maybe a little more visibility on the cash flows, is the preference for a dividend or a share buyback or would you consider both?

That's a great question. As we evaluate our earnings prospects moving forward and aim to close the gap with Lear, we believe our share price is undervalued. If it remains low by the time we reach that point, it could present an appealing opportunity for us to allocate capital. Regarding dividends, given the current volatility, we've been somewhat cautious. However, as we achieve our expected free cash flow and see more stability in the operating environment, it's certainly something we will discuss and likely include in our future plans.

Hey, great. Thank you.

Yes.

Thank you, Dan.

Operator, it looks like we're at the bottom of the hour, so this will conclude the call. For those of you that are on the line that we didn't have a chance to answer your questions, please feel free to reach out. Eric and I will be here, and we'll be more than happy to address your questions at that time. Thank you.

Thanks, everyone.

Thank you. That concludes today's conference. You may now disconnect.