Adient plc Q4 FY2022 Earnings Call

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

Thank you, Danielle. Good morning, and thank you for joining us as we review Adient's results for the fourth quarter of fiscal year 2022. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer; and Jerome Dorlack, Executive Vice President of the Americas and recently announced incoming CFO. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q4 and full year financial results and provide our outlook for fiscal 2023. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments. I'll now turn the call over to Doug.

Great. Thanks, Mark. Good morning. Thank you to our investors, prospective investors and analysts joining the call this morning as we review our fourth quarter and full year results for fiscal 2022. Turning to Slide 4, let me begin with a few comments related to the quarter. Continuing the trend experienced throughout 2022, a number of external factors, including supply chain disruptions and the resulting operating inefficiencies, increased energy costs and labor availability to name a few, continue to influence the industry in Adient's near-term results. On a positive note, looking at where we exited fiscal 2022 versus a few quarters ago, we're seeing the operating environment trend in the right direction. Commodity costs are softening, ocean freight costs are trending lower, and our customers are continuing to make modest improvements regarding their operating patterns. While these metrics signal we're moving in the right direction, our challenges such as uncertainty regarding consumer demand, energy costs and availability and labor inflation, which is running extremely high in a number of European countries, remind us it is too early to declare a victory. Clearly, a different set of challenges will need to be managed in 2023. More on that in just a minute. For the quarter, Adient's EBITDA results contained approximately $65 million of lost volume and temporary operating inefficiencies and less than $10 million of temporary savings. This is sequentially better than Q3 and is in line with our expectations heading into the quarter. Adient's key financial metrics for the quarter can be seen on the right-hand side of the slide, revenue for the quarter, which totaled $3.7 billion, was up about $700 million compared to last year's fourth quarter, adjusted for portfolio actions executed in 2021. Adjusted EBITDA for the quarter totaled $227 million, including approximately $65 million of lost volume, temporary operating efficiencies, again, primarily driven by unplanned production stoppages at our customers. Adding at September 30, our cash balance totaled $947 million, total liquidity was about $1.8 billion. The cash and liquidity position, which includes the impact of repaying the remaining stub of our 9% senior first lien notes due in 2025, is a good proof point that the company is successfully balancing its commitment to strengthen our balance sheet while maintaining ample liquidity to navigate through the challenging operating environment. For full disclosure, we estimate that external headwinds such as lost volume, temporary operating inefficiencies and rising input costs negatively impacted Adient's fiscal year 2022 revenue and adjusted EBITDA by $2.2 billion and approximately $600 million, respectively. Despite these headwinds, 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 execution of its day-to-day process with an intense focus on launch execution, cost and operational improvement and customer profitability management. In addition, we continue to execute actions to mitigate prolonged supply chain disruption and rising input costs, which include structural cost reductions, collaborating with our customers to reduce material costs and newly adopted measures to lessen the impact of rising energy prices and European labor inflation. We expect these additional self-help initiatives combined with an improving operating environment will support earnings, margin and free cash flow growth in fiscal 2023 compared to fiscal 2022. Jeff will provide greater detail on Adient's 2023 planning assumptions and guidance in just a few minutes. Lastly, as highlighted at the bottom of the slide, Adient's strong operational performance, significantly transformed balance sheet, and confidence in achieving our mid- and long-term plan led the Board of Directors to approve a $600 million share repurchase program. Obviously, great news and a proof point our strategy is creating value for Adient's stakeholders. Turning to Slide 5, just a few comments on our strategy and how it continues to drive business forward. Adient's strategy to create value for our stakeholders, which includes our investors, customers and employees, is fairly simple and can be broken down into four key components. First, we are a pure play in automotive seating, no distractions. Our leadership position provides global reach and scale. We provide solutions to legacy customers as well as new entrants. Our vertical integration enables us to provide complete seat solutions supported by our component-based business, including foam, trim and metals. Our in-house capabilities allow the company to effectively take products from research and design to engineering and manufacturing. Our back-to-basic mindset has and will continue to drive operational and financial improvements. Our intense focus on launch management, execution, and quality has further solidified our supplier of choice status. Our efforts to reduce costs, enabling earnings and margin growth are firmly on track. In fact, these efforts produce Adient's free cash breakeven to about 80 million units annually versus 90 million units a few years back. I'd also like to point out that Adient's efforts to transform its balance sheet are progressing extremely well, with just under $2 billion of debt repayments since Q4 of fiscal 2020. In addition to seeing improvements in our financial results, we have strengthened our leading position in a number of other ways, including winning new business and encompassing business. The business wins in fiscal 2022 include a great mix of EV and ICE platforms and increased vertical integration across various legacy customers and new entrants. We don't expect to see this level of business wins declining anytime soon as we continue to partner with our customers to develop seat solutions for the future, including offering them sustainable solutions. Speaking of sustainable solutions, Adient's commitment to creating a sustainable future is a key element of our strategy. During fiscal 2022, we concluded and increased that commitment with several announced initiatives and projects. In fact, as pointed out in the press release this morning, during the most recent quarter, we published our detailed deforestation policy, human rights policy statement and DE&I commitment statement. Additionally, Adient and H2 Green Steel signed an agreement with Swedish steelmaker to supply the company with fossil-free steel with a low carbon footprint. We're excited to advance our ESG journey, and we realize our commitments and actions will create a better environment for everyone. Bottom line, this focused strategy is working and driving value for all Adient's stakeholders. Advancing to Slide 6, I'm pleased to announce an enhancement to Adient's capital allocation plan. As you're aware, the company's capital allocation plan has prioritized deleveraging, with just under $2 billion of debt paid down since Q4 of fiscal 2020. We are solidly on track and progressing towards a target leverage threshold of 1.5x to 2.0x net debt to adjusted EBITDA. In fact, our fiscal '23 plans suggest our net leverage will settle in that range. Given the significant progress made on transforming the balance sheet and our confidence in Adient's near- and long-term outlook, the company's Board of Directors has approved a $600 million share repurchase program. Adient expects to take a measured approach to the timing and the amount of the buybacks to be executed, clearly driven by cash needs and market conditions. The enhanced capital allocation plan is expected to balance future free cash flow between internal growth projects, share repurchase, and potential opportunistic inorganic growth opportunities. Moving to Slides 7 and 8. Let's take a quick look at our business wins and launch performance. As you can see on Slide 7, a few of Adient's recent new business wins continue to navigate the challenges of the operating environment and related commercial discussions while winning new and replacement business. Programs highlighted represent a good mix across powertrains, ICE and various levels of EVs, with both new entrants and legacy customers as well as deepening levels of vertical integration, including complete seat, foam, trim and metals. It's worth noting that we retained more than 99% of replacement business awarded in fiscal 2022, proving the value our customers see in us delivering. One of the programs we've highlighted is the recent awarded Toyota RAV4 in the Americas. We were awarded the replacement JIT foam and trim business as well as adding front and rear structures, a testament to our customers' recognition of our strong execution and our ability to win metals business where it makes sense. Lastly, I'll point out that nearly half of the business awards to Adient in fiscal '22 was related to EV platforms. Customers continue to value our expertise and execution as they develop and launch future platforms. Flipping to Slide 8. The team continues to focus on process discipline around launch readiness and has driven a high level of performance, especially considering the launch load and complexity of launches that were planned for the year. In addition to the number of launches and complexity, the disruptions to production schedules presented additional challenges that the team successfully managed through. Again, this is a testament to the discipline we've instilled around the process. As you can see at the bottom of the slide, we provided some commentary on what we can expect for fiscal 2023 with respect to volume and complexity of launches. Generally speaking, volume is down in the Americas, Europe, and Asia, excluding China. China is expected to face an uptick in launches versus last year. Although complexity is up slightly in the Americas and China, I'm confident we'll maintain our focus on process discipline around launch readiness, driving similar results or better than 2022. Flipping to Slide 9. The significant program wins and quality launches just discussed are a few examples of the company's accomplishments achieved this past year. We're also pleased with our success at further transforming the balance sheet, with just under $1 billion of debt repayment, our continued focus on reducing costs, which has enabled Adient to lower its breakeven free cash flow to about 80 million units, and our increased commitments to ESG initiatives in 2022. These accomplishments were hard-fought especially considering the challenging backdrop in the internal operating environment. As we look ahead, fiscal 2023 will likely bring a unique set of challenges and obstacles to be navigated. A few that most of you have commented on include the strong dollar and the impact of FX movements, rising interest rates, and uncertainties around customer demand. Probably the biggest risk or unknown is European energy, specifically cost and availability. Similar to prior obstacles such as COVID, supply chain disruptions, and rising input costs, Adient has developed and will continue to refine a risk assessment including contingency plans to help mitigate any potential impact. We've listed a few actions on the slide, including recuperation using heat recovery from production processes where appropriate, increased safety stock on products that require gas for their manufacture, operating facilities at lower temperatures, and in certain circumstances, the installation of local gas tanks and electric boilers. Again, these are examples intended to demonstrate that Adient is not sitting idly by but is actively navigating the environment to ensure we're positioning the company for long-term success. Before turning the call over to Jeff and turning to Slide 10, let me conclude with a few reasons why we're optimistic regarding the future. First, Adient's operations are performing extremely well outside of the temporary operating inefficiencies. We're focused on executing our strategy, which enabled the company to drive the business forward last year despite challenging operating conditions. Because of that, we entered fiscal 2023 from a position of strength. Although we expect the operating impairment to improve in 2023 compared to 2022, there are several obstacles we'll need to overcome. But the team is ready for the challenge, and our track record suggests we're more than capable. We are confident successful execution of our strategy will continue to create value for all Adient stakeholders, including our investors, customers, and employees. Our announced enhanced capital allocation plan demonstrates this confidence. With that, I'll turn the call over to Jeff to take us through Adient's fourth quarter and full year 2022 fiscal performance and provide our initial thoughts on what to expect in fiscal '23.

Thanks, Doug, and good morning, everyone. Let's start on Page 12. Before jumping into the financial results, I'd like to point out that Adient's most recent quarter and future financial results, specifically equity income and consolidated income will be impacted by a change to the shareholders' agreement at Adient's Keiper joint venture. This change should be considered further fine-tuning of our China operations. If you recall, over the past few years, Adient has transformed its China operations in several facets. The most significant being the monetization of several joint ventures, which enable Adient to drive its strategy independently, capture growth in profitable and expanding segments, integrate best practices across the market, and finally, provide for more certain value realization. While integrating and growing our 100% owned CQADNT entity, the team has also continued to improve and optimize our global capability in metals and mechanisms through our Keiper joint venture, formerly named AYM. The 50-50 joint venture with Yanfeng provides Adient with access to world-class mechanisms and enables Adient to reduce our own investment in this area. To further strengthen the value of our Keiper interest, Adient recently restructured our shareholders' agreement with our partner, the key outcome being a reduction in prices charged by Keiper to Adient and Yanfeng. Adient's reduced equity income is expected to be approximately offset by higher consolidated income, leading to this result in Adient's Q4, which I'll cover in just a minute. Adient has agreed that Keiper will expand its operations to include Mexico, resulting in expected annualized savings to Adient plus an additional working capital pickup. Finally, the restructured relationship is also expected to save Adient significant future capital spending in its mechanisms platforms. With that as a backdrop, let's jump into the financial results on Slide 13. Adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side. We will focus our commentary on the adjusted results, which exclude special items that we view as either one-time in nature or otherwise skew important trends in underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to a Brazilian tax recovery, pension mark-to-market, purchase accounting amortization, and restructuring and impairment costs. 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, similar to last quarter, within the appendix, we've included pro forma results for each of the quarters in fiscal '21, adjusting for the numerous portfolio actions executed last year. We believe these pro forma adjustments provide helpful comparisons between the current year and the prior year results by adjusting the prior year to be on a consistent basis with the current one. High level for the quarter, sales were approximately $3.7 billion, up about 32% compared to our fourth quarter results last year, or about 24% compared to last year's pro forma results. Improving vehicle production in each of the major regions was the primary driver of the year-over-year increase. Adjusted EBITDA for the quarter was $227 million, up $109 million year-on-year, or $157 million compared to last year's pro forma results. The increase is primarily attributed to benefits associated with higher volume and mix, improved business performance and commercial recoveries. These benefits were partially offset by the impact of increased freight and utilities, higher commodity costs, and the negative impact of currency movements. I'll expand on these key drivers in just a minute. Finally, at the bottom line, Adient reported an adjusted net income of $51 million or $0.53 per share. On Slide 14, we provide a similar high-level summary of Adient's full year financial metrics. For the year, sales were $14.1 billion, up 3% compared to fiscal 2021 or down about 1% compared to last year's pro forma results. The negative impact of FX movements weighed on the comparison by approximately $570 million and more than offset the modest year-over-year increase in vehicle production. Adjusted EBITDA was $675 million, down $242 million year-on-year as reported or down about $135 million compared to last year's pro forma results. External headwinds that weighed on the year-on-year comparison, which we discussed in great detail throughout the year, included increased input costs such as freight and utilities, temporary operating inefficiencies relating to supply chain disruptions, the impact of negative mix, FX movements and to a lesser extent, lower equity income. As Doug pointed out earlier, we estimate that external headwinds such as lost volume, temporary operating inefficiencies, and rising input costs negatively impacted Adient's fiscal '22 revenue and adjusted EBITDA by $2.2 billion and $600 million, respectively. At the bottom line for fiscal '22, Adient reported net income of $11 million or $0.11 per share. Moving on, let's break down our fourth quarter results in more detail. I'll cover the next few slides rather quickly, as detail for the results are included on the slides to ensure we have the proper amount of time for Q&A. Starting with revenue on Slide 15. We reported consolidated sales of approximately $3.7 billion. The sales shown includes sales at Adient's CQ and LF Ventures which are now consolidated since closing the strategic transformation in China, as well as other portfolio actions executed in fiscal '21. The $3.7 billion is an increase of $700 million compared with Q4 fiscal '21 pro forma results. The primary driver of the year-over-year increase was higher volume and pricing, which contributed just under $900 million, including about $72 million of higher commodity recoveries. The negative impact of FX movements between the two periods impacted the quarter by about $197 million. Focusing on the table on the right-hand side of the slide, Adient's consolidated sales for the Americas and EMEA generally outpaced production. That said, when stripping out the impact of commercial recoveries, results were generally in line with regional production. In Asia, excluding China, Adient outpaced the market; this was primarily driven by Korea, where Adient benefited from improved mix, new business wins, and strong exports. In China, Adient was adversely impacted by negative customer mix as certain of Adient's customers were more adversely impacted by supply chain disruptions and/or lockdowns versus certain other local Chinese manufacturers that significantly outperformed the market, such as BYD and Chery that have little or no Adient content. We view this as temporary and will balance out as supply chains continue to improve. 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 '21 and FX impacts. With regard to Adient's unconsolidated seating revenue, year-over-year results were up significantly compared with last year's production-constrained results. When comparing to the overall China market, where a large majority of Adient's unconsolidated sales are derived, our performance modestly outpaced industry production. Moving to Slide 16, we've 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 $227 million in the current quarter versus $118 million reported a year ago, or $70 million pro forma adjusted for the portfolio actions executed in fiscal '21. 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 drivers of the year-on-year comparison are detailed on the page and are consistent with what we expected heading into the quarter. Positive influences included approximately $118 million associated with increased volume and mix. Improved business performance also benefited the quarter by $85 million. Looking deeper within that bucket, the positive driver was improved net material margin of $62 million, of which we've called out about $15 million related to the restructured pricing agreement within our Keiper joint venture. I'll note that this benefit relates to three quarters retroactive to the start of the calendar year, approximately $5 million per quarter. Labor and overhead performance improved by about $29 million as operating inefficiencies lessened and launch, operations waste and tooling provided an approximate $8 million benefit. Unfortunately, but as expected, certain negative factors muted the positive impact to business performance, specifically about $14 million of increased freight costs. Other headwinds, as noted on the slide, include an increase in SG&A costs of about $32 million, which is primarily driven by performance-related compensation and increased engineering spend. Note that incentive compensation for the full year is slightly down versus 2021, but in Q4, it is a headwind since we decreased the reserve in Q4 of last year while we increased it this past quarter. Additionally, higher net commodity prices of about $9 million and the negative impact of currency movements, about $6 million impacted the quarter. Similar to past quarters, we provided our detailed segment performance slides in the appendix of the presentation. At a high level for the Americas, several positive factors drove the year-on-year increase and included improved volume and mix, improved business performance that was driven by increased net material margin, which, as pointed out, was aided by the restructured pricing agreement at the Keiper joint venture, primarily impacting the Americas. Launch, operations waste and tooling performance, combined with improved labor and overhead, also benefited business performance. Increased freight and SG&A costs, primarily driven by performance-related compensation and increased engineering spend, partially offset these benefits. In EMEA, the year-over-year improvement was driven by several factors, such as improved business performance, which was underpinned by commercial recoveries, favorable launch operations waste, and improved labor and overhead resulting from improved customer production rates. Additionally, volume and mix also contributed to year-on-year improvement. Partially offsetting these benefits were headwinds related to increased commodity costs, increased utility cost, the unfavorable impact of FX movements, and increased SG&A costs, primarily associated with performance-related compensation. In Asia, the benefits of higher volumes and mix were partially offset by unfavorable FX movements and lower equity income, which was expected given the restructured shareholder agreement impacting our Keiper joint venture. As noted previously, this reduction was almost completely offset by higher consolidated income. Let me now shift to our cash, liquidity, and capital structure on Slides 17 and 18. Starting with cash on Slide 17. I'll focus on the full year results as the longer timeframe helps smooth some of the volatility in working capital movements. Adjusted free cash flow, defined as operating cash flow less CapEx, was $47 million. This compares to a breakeven result last year. Year-on-year improvement and positive outcome was hard-fought, especially considering the challenging operating environment. Despite the lower level of consolidated earnings driven by persistent supply chain issues at our customers and lower cash dividends, which were expected as a result of our strategic sales or transformation in China, numerous positive factors, many within Adient's control, more than offset these headwinds. They included a significantly reduced level of restructuring which has been elevated over the past few years as Adient executed its rightsizing efforts within our metals business, reduced interest driven by our focused deleveraging efforts, which included about $1.9 billion of debt prepayments since Q4 of 2020, and the timing of commercial settlements and VAT deferrals and payments. Additionally, a lower level of capital spending, which is largely driven by our customer launch schedules. During fiscal '22, Adient's CapEx spending was below our normalized spend as certain launches were pushed into the future. In addition, the team continues to focus on the reuse of capital where appropriate; this mindset continues to drive CapEx spending lower. One last point, as called out on the slide, Adient continues to utilize various factoring programs as a low-cost source of liquidity. As of September 30, 2022, we had $269 million of factored receivables versus $126 million in last year's Q4. The increase is primarily attributed to improved sales in the quarter. Note that despite the higher level of factoring, total trade working capital is still an approximate $20 million outflow for the year and reflects the higher volume of sales activity in Q4 '22 versus Q4 '21. Flipping to Slide 18. As noted on the right-hand side of the slide, we ended the year with about $1.8 billion of total liquidity, comprised of cash on hand of $947 million and about $900 million of undrawn capacity under Adient's revolving line of credit. Adient's debt and net debt position totaled about $2.6 billion and $1.6 billion, respectively, at September 30, 2022. Also of note, during the quarter, the company repaid the final stub of its 9% senior secured notes. This brought our principal debt repayment for 2022 to about $960 million. No doubt that we've made great progress on our balance sheet; our net leverage target of between 1.5x and 2x is solidly within reach given our outlook for 2023, which I'll cover next. One last point before moving on, and as noted on the slide, subsequent to the quarter end, the company opportunistically refinanced its ABL revolver. The sizing remained at $1.25 billion, the maturity extended to 2027, with pricing of SOFR plus 150 to 200 basis points. With that, let's flip to Slides 20 and 21 and review our outlook for '23. On Slide 20, as Doug noted earlier, Adient enters 2023 from a position of strength. We successfully navigated through a challenging 2022 and drove the business forward, as evidenced by the operational and financial accomplishments just discussed. That said, several new obstacles will need to be managed in the coming year. The guidance provided today is based on the current operating environment. On the right-hand side of Slide 20, we've laid out our planning assumptions for production and FX compared with fiscal '22. The foundation of our fiscal '22 plan is generally aligned with the October IHS estimates. To the far right of the chart, we've highlighted our expected sales performance by region. When adjusting for FX, we expect our sales to be slightly favorable to the industry in North America, modestly lower in Europe, and significantly better versus the market in China. China's outperformance is primarily attributed to the roll-on of various new business and Adient's favorable customer mix. In the lower right-hand corner, we've provided our FX assumptions, which as many of you have commented on in your recent reports, are expected to be a significant headwind year-on-year. Based on our current assumptions, we estimate the year-on-year impact for Adient's top line and EBITDA is about $750 million and $45 million, respectively. Outside of production and FX, other factors such as commodity prices, labor availability and cost, and freight are expected to impact the industry and Adient in 2023. The biggest unknown risk today relates to our European business, specifically around energy costs and availability, labor inflation in a number of countries, consumer demand, production, and Adient's ability to recover increasing input costs from our customers. With that said, our 2023 plan takes these factors into consideration, and based on current market conditions, we expect to deliver earnings, margin, and free cash flow growth in 2023 compared with 2022. Let's flip to Slide 21 and review the expectations in Adient's key financial metrics. First, based on October production forecasts and the FX rates just discussed, we'd expect Adient's consolidated sales to land at approximately $14.7 billion. This would represent an approximate 10% increase year-over-year when adjusting for FX. For adjusted EBITDA, we anticipate it will be approximately $850 million, translating into an approximate 100 basis point improvement in margin to 5.8%. Excluding equity income, which is forecast at $90 million and included in adjusted EBITDA, Adient's margin would be about 5.2% or 100 basis points higher versus the year just completed. Important to note, we expect the calendarization of the $850 million will be at its trough in the first quarter, but steadily improving as 2023 progresses. One explanation is the lumpiness of expected commercial recoveries. For example, we expect to recover the increase in energy costs as we progress through the year; however, it will take time to negotiate, and unfortunately, the costs are impacting us today. With regard to Q1, as a result of rising input costs that we're experiencing today, such as energy, freight, labor, and certain commodities such as steel in Europe, we expect our Q1 EBITDA to land at or slightly below $200 million, even though sales should settle in around the same level of the quarter just completed, about $3.7 billion. Interest expense is expected at about $160 million, given our expected debt and cash balances as well as interest rate expectations. Cash taxes, thanks to various tax planning initiatives, are expected at about $90 million. CapEx is expected to trend back to a more normalized level, approximately $300 million. Again, 2022 was depressed given the delay of certain launches at our customers. Finally, our improved earnings, combined with our reduced calls for cash, such as the benefits associated with our deleveraging, lower restructuring and relatively flat cash taxes, are expected to underpin free cash generation of about $200 million. As a reminder, and similar to the calendarization of our earnings, Adient's cash flow typically experiences an outflow in Q1, followed by generally positive quarters thereafter, absent exogenous events such as COVID, etc. Circling back to Doug's earlier comments related to our newly approved share repurchase program and our planned measured approach to repurchases. It's unlikely, given the typical calendarization of cash flow, that we'd be in the market before Q2 of this year. With that, let's move to the question-and-answer portion of the call. Operator, first question.

Our first question comes from John Murphy, Bank of America.

And Jeff, congratulations on moving to a slightly more complex situation; you seem like a glutton for complexity. Just quickly, on the 2023 outlook in the context of your statements on 2022, Jeff, you kind of alluded to this disruption in the industry costing you about $2.2 billion on the revenue line and $600 million at the EBITDA line for 2022. How much of that do you think you won't repeat going forward or maybe even beyond 2023? What part of that is one-time based on the volatility, and what is normal course? Those are big numbers.

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

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

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

Doug, I'm sorry, just a follow-up. So you're saying 90 million units normalized market plus inflation of kind of normalized, that would get you to that mid-8% EBITDA margin. Is that something you could do in the next 1 to 2 years if things normalize, or is there still micro-specific actions that you're taking internally to get to maybe 2 to 3 years out?

Yes, I think it's realistic to see it happen in 2 years if the market normalizes. Our business is performing extremely well right now. We've addressed a lot of the issues that plagued the business not that long ago. I think that's a realistic timeframe to consider. The only disclaimer I'd put on that, but I'm not really trying to disclaim it, is this business is about execution every single day. We have to continue performing as we've been performing. I'm confident that the team is in place to do that. My expectation is that something happens over the course of the next couple of years.

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

Our next question comes from Rod Lache with Wolfe Research.

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

Yes. Let me try to work through a few of these for you. On the first side, you have the pull-through on volume, which is about $220 million. You have FX coming against that at about $45 million. Econ is complicated because you're always looking at the timing of when we've set prices for steel. The biggest impact for us in 2023 is going to be Europe. Demand is down, but since energy prices are so much higher, it has caused increases in steel pricing. So we have some factors here that are going to be a little back and forth, say, about $130 million to $140 million between those items. Outside of that, we have a little bit of investment in Asia from a growth standpoint in engineering, around $30 million or $40 million. We're seeing improvements in the business elsewhere, which is offsetting all these and by driving performance, much of it from balance and balance out of new programs. The China footprint is attractive for us; you see that in the sales number. China should deliver pretty well for us in 2023, and we'll continue to work on the commodity piece.

Okay. So it sounds like by the end of next year, you'll actually have $250 million of costs that will work on beyond that. Can you clarify a couple of other things? When you're talking about the complexity of launches, can you just explain from an external standpoint what that means for us?

Rob, it's Jerome. When we talk about launch complexity, we look at a couple of factors. First is how much vertical integration is there. If we're only doing the JIT portion, that's one level of complexity versus if we have more parts involved. The time from when we're awarded to when we go into production is another factor for us. Lastly, how many different variants there are, that’s how we grade complexity when we assess our launch operations.

Yes. I guess I'm just trying to understand financially. Are you suggesting that because of all the moving parts, the incremental margins on your backlog are not as good as they normally are initially?

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

The other piece to that is just the pricing discipline we've installed a number of years ago. Not all customers are equal. We're very deliberate in who we pursue, and vertical integration is an important part of that.

With all that complexity comes change orders, which we manage to drive margin.

Can you clarify about the Keiper shift in North America? Are you replacing internal operations, or what are you replacing by bringing Keiper into here?

What Mexico allowed us to do with Keiper is offset our own capital investment. By them coming to Mexico, it was localization, allowing us to onshore production and eliminate some of our planned capital investment in the region. That's the benefit of the JV.

Our next question comes from Emmanuel Rosner with Deutsche Bank.

Two questions, please. The first one is around the outlook for growth above market. Can you break this down for us in terms of driving factors? What gives you confidence in this level of outgrowth?

One of the nice things about our business is we can trace in really every vehicle being produced into our plan by region. The balance in balance out is the big piece. In China, we’ve seen some nice new volume launching. In the Americas, that's also the big driver as we see the vehicles coming in and their volumes associated versus those that are going out. There are a couple of hundred million of addition there. Overall, we're comfortable with those numbers; we see good awards that we were able to secure for our launches in '23.

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

It's programs that are launching in 2023 versus those programs that have gone out of production.

Okay, great. Then the second question. It looks like both in terms of margin improvement to 2023, but then also towards the midterm target, volume normalization seems to be a fairly large driver of this. So would it make sense to right-size the business for lower normalized volume? Or is your conviction very high that 90 million is where Adient should be sized for?

We're sizing our business for the foreseeable business that's planned in front of us. We've not waited for the market to return. We're always looking at ways to pull overhead costs out of our business to better align with how we foresee the market. If the market dries up, we'll take corresponding actions to adjust to that environment. There would be further cost reductions and potentially restructuring charges.

Our final question comes from Joseph Spak with RBC.

Jeff, congrats, and congrats to the team. Earlier in the year, you had mentioned you'd be aiming for something like close to $100 million in cash restructuring this year, which would have been down a lot, but it was only $57 million, if I'm reading this correctly. Was something delayed there?

Yes, it's kind of more the same on that number. We always leave a little cushion when we guide because you never know exactly as you go through the year. We've been very prudent about how we deal with restructuring. We're really aggressive in 2020 to take out a lot of cost, so most of the cash restructuring has been for actions we've already announced.

Okay, so pretty flat year-over-year then?

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

Okay. And then maybe just a follow-on to Emmanuel's question on the 6% growth over market. Just to be clear, is there no assumption for continued recoveries in that growth over market?

The commercial recoveries are modest. It's about $50 million, $60 million of additional recoveries versus what we achieved in 2022.

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

Thanks, everyone.

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