Adient plc (ADNT) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to Adient's 2021 Earnings Call. I would like to inform all participants that your lines have been placed on a listen-only mode until the question-and-answer session of today's call. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mark Oswald. Thank you, you may begin. Mark Oswald: Thank you, Amanda. Good morning, and thank you for joining us as we review Adient's results for the first quarter of fiscal year 2021. 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 DelGrosso, Adient's President and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q1 financial results and outlook for the remainder of our fiscal year. After our prepared remarks, we will open the call to your questions. Doug DelGrosso: Great, thanks Mark. Good morning. Thanks to our investors, prospective investors, and analysts joining the call this morning as we review our first quarter results for our fiscal 2021. I want to take a moment to wish our hope you and your families are staying safe and healthy at this very challenging time for all of us. Let me get started, let's turn to Slide 4 and begin with few comments related to our first quarter specifically, Adient's, strong start to the fiscal year, remaining laser focused on our priorities combined with relatively robust vehicle production continued to drive improved business performance in the most recent quarter. Q1's adjusted EBITDA of $378 million was up $81 million or just under 30% year-on-year. Important to remember, last year's results included earnings from our Interiors, Fabrics, and RECARO businesses, which we divested post Q1 2020. Adjusting for those businesses, this year's first quarter EBITDA was up $110 million year-on-year. Equally impressive, with respect to the absolute level of earnings, was Adient's adjusted EBITDA margin performance of 9.8% or 7.4% excluding equity income. That's a very strong proof point that Adient can achieve margins equal to if not better to our nearest competitor. No doubt a strong result, but even more impressive when you consider Adient's consolidated revenue was down about 2% during the same period. Adient's specific launches and impact of portfolio adjustments executed in fiscal year 2020 were the primary drivers of lower sales. Also shown on the left hand side of the slide are Adient's strong Q1 ending cash balances and total liquidity which were approximately $1.8 billion and $2.8 billion, respectively. Jeff Stafeil: Thanks, Doug. Good morning everyone. Let me echo Doug's earlier comments and I hope everyone is safe and well. I'll start my comments on Slide 10. Adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right of the page. We will focus or 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. Operator: Thank you. Our first question comes from John Murphy with Bank of America. Your line is open. Aileen Smith: Good morning guys. This is Aileen Smith on for John. Going back to that normalized adjusted EBITDA margin of 6% to 6.5% that you commented on for the first quarter, running the math on your outlook, we get to an EBITDA margin that's in the high 6% to low 7% range for 2020. Can you talk about the cadence of the margin that you anticipate for 2021 with some of the headwinds you noted like chip shortages and raw mats? And on a normalized basis should we be thinking about sequential improvement in margins through the first half of the year versus second half as you’ve been able to demonstrate in the past or are there some factors at work that we should be thinking about through the cadence of the year as we use that 6% to 6.5% as a starting point? Doug DelGrosso: Yes, that's a great question, Aileen, it's I will say, it's a tough year to forecast and -- some of these things which are just changing every day, primarily the production schedules relating to chip shortages are difficult to predict, and commodity headwind is certainly going to have a negative impact on our margin. But when we tried to highlight in the 6% to 6.5%, what I did, what we did there as we said, we had about 20 to 20, let's say $25 million of one-time commercial benefits we did, which we took out of that number when calculating that. And then we took out, we had more than, let's say, 25% of our normal years, commercial settlements occur in the first quarter, so call that another $25 million. So, we kind of backed out that $50 million in calculating it. Some of the other quarters are going to be underrepresented on commercial recoveries, because we did more in the first quarter, so I'd say you're going to see some bumpiness on our margin because of those few factors, the chip shortages, the commodity inflation, and then the timing of these commercial settlements. But I will say as we look at it, we continue to see the fundamentals of the business improve, so there's going to be some noise probably in the bottom-line margin, but fundamentally here, we've been seeing improvements in performance that we could -- we do expect to continue to trend well but do expect some noise in the quarter-to-quarter margins. Aileen Smith: Okay, that's helpful. And second question is following up on the raw materials commentary, can you provide us with an estimate of what this was in the quarter? I wasn't able to follow it in the bridge and specifically how you expect it to increase in magnitude for the remainder of the year? And then can you just remind us how this gets shared with the automakers via pass-throughs and escalators and if you have any hedging or other vehicles or mechanisms that you use to offset that? Doug DelGrosso: Yes. So on the first question, there's about $5 million, give or take in the first quarter of commodity. So, we've called out about 80 now, so there's about $75 million in the balance of the year. I'd say most of that is going to be Q3 and Q4. As you -- in that, what we've also seen is freight, the freight issues kind of multiply a bit. You've seen a shortage of containers, primarily from Asia but that impacts a number of our regions. That has increased freight, and it's also required us to do some other forms where we, every once in a while we unfortunately have to fly things because of some of the challenges in the freight side. I'd say, really, none of that hit in the first quarter, and that's $10 million to $20 million that we're factoring in for the year. As you asked about the recovery mechanisms, it depends on the customer. Some of our customers are immediate, but other ones -- and so there's immediate recovery, and we have an index. And I would say what you've seen with steel is you've seen an unprecedented jump in steel prices. And we tend to, the way we model this is, we tend to lock in for a quarter or two, but then as the year rolls we have to -- where we've seen these big increases, we have to start to pay a higher price. And our customers in some cases where they're immediate were able to grab that disconnect quickly. Other ones where we have a year lag, which is pretty much all of our Japanese customers, which is significant for us, will take time. And that's why we don't see, 70%, 90% of the increase is being recovered in fiscal '21. We see some of those things being pushed to '22. So, they should be favorable for us if the prices maintain stability in '22, but that recovery on those particular customers will happen later. Jeff Stafeil: Yes. And Aileen, I think the other point I would add to it is, that's myopically around just the way our agreements work, the contractual agreements that we have in place right now we're experiencing really unprecedented, particularly in steel levels of buy, and it's difficult to see when that will mitigate. So, what we lump into the discussion with our customers is how we think about annualized productivity in the midst of this environment in the midst of chip shortage as these issues all kind of converge at the same time. We're in discussions with them and in other avenues that we can go down to mitigate some of the impact. So, you have this best suite of goods kind of approach that you have to take into account. It's too early to really tell what's happening. I guess the point I was trying to make is, even if we have a year lag, that doesn't necessarily mean that, that's what we're willing to accept in an environment we're operating in right now. Aileen Smith: Right, that's, very helpful color. Doug DelGrosso: Just to clarify something you said before, which you didn't, you had mentioned our 2020 progression of ROS, when I was talking to the 6 to 6.5, that excluded equity income. So I don't know if that was in your calculation, but that is an improvement. We haven't seen that level of margin, even with those adjustments I put forward in any of the quarters in 2020. So this is even after making those adjustments would be an improvement over what we've seen. Aileen Smith: Okay, fantastic. That's very helpful. Thanks for taking the questions. Doug DelGrosso: Yes, thank you. Jeff Stafeil: Thank you. Operator: Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open. Rod Lache: Hi, everybody. Can you hear me? Doug DelGrosso: Yes. All right, Rod. Jeff Stafeil: Yeah, hi Rod. Rod Lache: Okay, hey, good morning. I was hoping you could talk about the targets for cost and business improvement that you're sort of looking out for over the next 12 months and how that could contribute upside beyond that $1 billion to $1.1 billion EBITDA that you're looking at for this year? I think you've previously talked about $200 million of restructuring with a two-year payback. So presumably, that's about $100 million and I think you said that SS&M would go from EBITDA breakeven, the cash breakeven, which was another 100. I'm not sure if that's double counting. And then presumably, you have non-recurrence of the semiconductor shutdowns and COVID containment costs. So kind of high level, if we kind of fast forward, hopefully a year from now, things are looking better and the world is kind of normalizing. And you've got your, some of the things you've accomplished, I mean what are some of those big items that we should be looking out for? Doug DelGrosso: Well, I'll start. The one that you didn't hit on rod, which has been part of our overall plan and lags a little bit, whether it occurred -- it occurs and evolves over time is the roll-on and roll-off of businesses. And what we've always commented on, we haven't necessarily put a specific target on it, but we said, the last element, in addition to what you mentioned, would be just getting rid of the bad business that we couldn't drive, the efficiencies, whether their labor and overhead, or probably more importantly, materials to sell ratios. And we just had to have those roll-off. So, that's really the buckets that we look to draw from. Jeff Stafeil: But nothing's changed around our target Rod of, really eliminating that GAAP we have to our peer margin. Rod Lache: Right. So if we think about, going from 6 to 6.5 towards closer to 8.5, can you just maybe characterize that the big buckets that you've got, that your kind of targeting, how large are each of these components, whether it's restructuring or, getting out of some of the weaker contracts that you've got? Jeff Stafeil: Yes, so, it's difficult to do in total high level, but some of the big pieces, the seat structures and mechanisms business, we mentioned a $40 million improvement in the quarter, I'd say, and we put out a target to you guys some time ago to exit this year at a, free cash flow, breakeven, which, compared to a couple years ago was a $400 million outflow. That's a combination, obviously, of taking $100 million of CapEx or so out of that business. But it's also, dramatic improvement in the EBITDA. We're in a great progression of that. I'd say, there's lots of work to do there. So, that's a couple billion dollar, business plus operation as an opportunity to, lift as we get to where we want to be, and I think we're starting to see some reasonable, sights on where we can get it to a substantial portion of that margin gap that you noted. The combination of what we're seeing across each region, as we go into our customers with different strategies around how can we take a bigger piece of their volume, control more of the spend, maybe control the foam and the trim, and take that with the VE efforts and the benchmarking we've been doing. There is significant opportunity for us to take cost out of our customers product, while adding margin to our business, that is taking root in the Doug's had, and all the Regional Presidents have been having, really, in depth discussions with our customers on how to do that. And a lot of those activities have been implemented, that trend, we see will continue to drive and be the other real engine on that growth. As it relates to, the restructuring, and some of those, we continue to find efficiencies there as well. You mentioned, the activities we initiated last year in the U.S. and have been able to take out the activities that in Europe that are, we'll say about halfway implemented in 2021. So we'll get some additional benefits as we get the full year effect of those in 2022. And we'll continue to lean out the structure, but I'd say there's going to be more emphasis on those first two pieces then, than the last in that recovery. Doug DelGrosso: I was just going to add to it rather reason at least I was a little bit hesitant to ask is it's, as we've said before, it's really difficult to bucket these things in, and put labels on them, how much is going to be commercial, how much is going to be operational improvement, it. It's, encompasses everything Jeff just referenced. It's really working every element of the cost structure that we have in balancing that against the cost drivers be they inflationary, material economics. And in our, the appetite that our customers have right now for cost reduction. In the one thing I would say that's maybe a little bit different than what historically we've seen, which I think is good news for us. And not that we're changing our outlook or timeline, we've always labeled that timeline to be multiyear and taking us out to 24, 25 to close that gap is an increasing appetite is, as Jeff mentioned, our customers have for cost reduction. And they're really asking for ways to not just the traditional Vabe. Can you make a small change? They are asking for fundamental VAVE change in the way, can you make, a small change. They're asking for fundamental change in the way, they design and develop and market seat systems and their vehicles. And that's a huge opportunity but you can't really call that cost reduction. It's really, recasting how you think you commercially discuss those issues with your customer, the impact that it has on your own operation? And then what kind of sharing that you agreed to put in front of them. Rod Lache: Okay, thanks. I just wanted to ask one other question, just, I'm sure you'd agree, one of the most striking things that we've seen here in the industry over the past year is just how much capital is being raised by new entrants. I was wondering if you could just maybe make a comment about how you're looking at it from Adient’s perspective, are you pursuing business with a dozen new potential customers or are you taking a somewhat more cautious view on that? Doug DelGrosso: Yes, I would say we're, if I were to characterize it much more cautious. And that's not to, cast that negative shadow on any particular venture that's out there. I think what we've learned over the last couple of years is, and we've got ways to go to get our business back on track, it's really focus on fundamentals, focus on traditional customers to a certain degree. There are some new OE's that we are participating with, NEO would be a good example, Tesla is another example. We continue to pursue, but they've demonstrated to a certain degree, sustainable volume that they can deliver to the market. And again, with our traditional customers coming on board with propulsion changes in their vehicles, there was opportunity for us to pursue that. As some of the new entrants demonstrate the ability, we'll re examine them. But pursuing, diversifying our customer base and pursuing, that is something we stepped away from a couple of years ago, and we don't see that changing right now. It's, fairly risky. And there's plenty of opportunity. If you just prioritize where there is opportunity for us to drive value, we see it in kind of our traditional markets and not necessarily in these new markets right now. Rod Lache: Great, thank you. Doug DelGrosso: Thanks, Rod. Jeff Stafeil: Thanks, Rod. Operator: Thank you. Our next question comes from James Picariello with KeyBanc Capital Market. Your line is open. James Picariello: Hi, good morning, guys. Doug DelGrosso: Hi James. James Picariello: So I really appreciate all the color on the guide and cadence for the year. Can we just walk through the moving pieces, particularly within EBITDA that leaves the full year guide unchanged? It sounds as though commodities are 35 million worse, another 15 million from premium freight, both of which are back end weighted, and then on the positive side of the ledger you have commercial settlements and favorable mix in the first quarter. What did I miss there? Any clarification would be great in terms of what keeps the full year guide unchanged, the puts and takes? Doug DelGrosso: Yes, James, I'd say, the biggest thing that keeps the year unchanged is the difficult of, it is just the environment. One, we're very early in the year; but two, you just saw, if you read the journal, Wall Street Journal this morning in a big article on Ford, our second largest platform went down yesterday and shorter shifts for while. We've seen that impact on the chip shortage throughout the world. That's significant COVID, still being where it is. So all those things sort of weigh on us, but you grabbed the pieces, the commodity exposure, freight exposure, the timing of those commercial settlements, the fact that we, I'd say we had a little bit of an elevated, we call it, $20 million to $30 million benefit in Q1 that we'd say is not repeatable. So all those things factored in and just, with all that decided, wanted to see a little bit more of this year develop before we changed our outlook. James Picariello: Okay, got it. That’s helpful and then just on the equity income outlook, you made the comment, second half or the first half 50% higher than the second half. So it's kind of a two thirds, one third breakout, what's that? Jeff Stafeil: That was just a quarter reference, not a half year reference. We said, so second quarter includes the Chinese New Year and we said the second quarter would be roughly, half the amount of first quarter. James Picariello: Okay. All right, I got that, all right. Just following up on the commodities, then, so you're now looking at an $80 million headwind, you mentioned the customer recovery mechanisms likely hit next year. So should we assume 75% of that $80 million is recovered next year, just what's the right way to be thinking about that in terms of the recovery? Thanks. Jeff Stafeil: And that one depends a lot on where the prices go. So if prices stay steady, we'll eventually recapture the difference and we will no longer be running at a deficit because just think of it in any given market, if we're buying steel at 100 and our contract with the customers is 100, and just for metrics and then steel goes up to 110, we're still getting only a cost or recovery from a customer based on 100. Once the price goes up to 110, we eliminate that difference. So, all that really happens if price stays steady, is that, we essentially stop the bleeding on this. As prices eventually reduce, then we'll start to get, we'll get recovery, because we'll have it work the other direction. Yes, hopefully that makes sense. Doug DelGrosso: Yes and I guess I would add on top of that, in our opinion it's for you, draw the goal lines. We fully expect it will always recover material economics at some point, it's just a question of how long it takes. As Jeff mentioned, if steel prices go down, then we'll recover it relatively quickly and it won't take extraordinary means for us to get it. If they don't, then it's a different dialogue with our customer because we won't sustain it for an extended period of time, if even if market rates stay high. And so, whether it's true-up on a new product launch, that addresses it or again, we just broaden the conversation to include other issues to mitigate the impact of it. And that's namely, customer product, analyzed customer productivity. Mark Oswald: Thanks, James. James Picariello: Got it. Thanks. Mark Oswald: Operator, if we can move to the last question? Operator: Thank you. Our last question comes from Brian Johnson with Barclays. Your line is open. Brian Johnson: Yes, two questions, one kind of more of a housekeeping and the second more strategic organizational. Just as we watched the production schedules at Ford, kind of, and tried to kind of get an accurate gauge on fiscal 2Q, how should we be thinking about the revenue impact of every kind of week of downtime or every unit of downtime, without getting too deep into your actual Ford pricing? Jeff Stafeil: It's hard to do without getting deep into a Ford pricing. The production numbers… Doug DelGrosso: Pretty quickly what our Ford pricing looks like, I guess I gave you that level of detail just because there is so transparent about the number last unit, so I'd be very reluctant to do that. Brian Johnson: And well, I guess that's just, given the slides we all know how to make slide decks, but kind of as you put together the slides, as you kind of reviewed them before blasting them this morning, are you confident that the Ford news was fully reflected in your outlook? Jeff Stafeil: Yes, I think so. Brian Johnson: Okay. Jeff Stafeil: I mean, what we know, now that doesn't mean that, additional things. Yes, I would say. Brian Johnson: And second question, just kind of following on the theme of the other questionnaires around kind of visualizing the waterfall walk back to industry, competitor margins, yes I want to ask maybe a softer question, particularly Doug kind of, as you look now versus where you came in, at some of the key organizational challenges, I know moving to regional they created accountability. Where do you think you stand? You must be looking at Red, Yellow, Green charts endlessly, but just in terms of do you have the right people in the right roles, both facing off in terms of account management, working, partnering with the key OEMs, and at some of the key factories, and key kind of supply chain positions, how has that evolved, what work is there left to do? Is the team basically that you need, on the field executing or are there still gaps you need to fill? Doug DelGrosso: Yes. And not to be coy, I do not look at Red, Yellow and Green charts to get an indication of how we're performing. We tend to look at numbers. And, respectfully, that's just a different way that we're driving the business. Right now we focus a lot of attention, and we talk, the business and numbers and drive that deep into our organization, so everyone's understanding that we're not managing the KPIs. We're managing to a bottom line level of performance, whether it's EBITDA or EBIT or return on investment or capital or how we're generating cash. Relative to the organization, it's actually it's interesting and time we ask that question. We just had a succession plan review with our Board last week and I was pretty happy to report that, although we'll constantly make tweaks in the organization to adjust to the environment, we feel really good about the organization that's in place right now. We're not foreseeing any major changes. We've brought a lot of new talent into the group and then we've moved the strong talent that we had here and adding into the right roles, and then changed the way we're compensating them and how we expect them, to motivate them. And that's, very much connected to the basics of customer satisfaction, and then business financial performance. So, yes, the regional move worked out well, for us. There's no perfect organization, but I think breaking the company into some smaller parts that we could manage a little bit easier regionally. I feel fortunate that we did that ahead of COVID because it would have been, even with all the technology without having the right people on the ground in region it would have been difficult to do manage the business, but we've got strong leaders in every single region, and then they've all reshuffled their team to some degree. And so, back to the succession plan, as we go layers deep compared to where we were maybe a year or two ago, we feel a lot better about that organization. Brian Johnson: And just a quick follow up. Okay. Mark Oswald: Thanks, Brian. And unfortunately, we're out of time here. So, for those of you who did not get a chance to ask your questions, I'll be available for a follow up, please just feel free to reach out. This concludes the call for this morning. Doug DelGrosso: Thanks, everyone. Stay safe. Jeff Stafeil: Thank you. Operator: That concludes today's conference. Thank you for participating. You may disconnect at this time.ADNT Ratings Summary
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Adient Shares Up 4% Following Q3 EPS Beat
Adient (NYSE:ADNT) shares rose more than 4% on Monday following the company’s reported Q3 results, with EPS of $0.08 coming in better than the Street estimate of ($0.04).
According to the analysts at Deutsche Bank, the company’s latest guidance trim should help de-risk the 2022 outlook, and enable investors to focus on 2023 when industry volume recovery could contribute to significant EBITDA growth.
The analysts now forecast 2022 sales of $14.0 billion (down from $14.1 billion) and EBITDA of $647 million (down from $681 million), in line with management’s latest guidance range.
Looking ahead, the analysts still believe the company could recover a significant portion of the $600 million in cost inefficiencies it has identified, as industry volumes rebound and production schedules stabilize, although this could be partly offset by headwinds from FX and rising energy costs, particularly in Europe. Accordingly, the analysts reduced their 2023 sales/EBITDA estimates to $15.5 billion/$964 million (6.2% margin), from $15.8 billion/$1.002 billion (6.4% margin) previously, still representing considerable growth from 2022.
The analysts believe the company is very well positioned to benefit from industry volume rebound, reduced inefficiencies from higher capacity utilization, and its relatively successful recovery of commodities headwinds, but it certainly remains exposed to some persistent industry and macro headwinds.
Adient Reports Q1 Beat, But Left 2022 Guidance Unchanged
Adient plc (NYSE:ADNT) reported its Q1 results, with adjusted EBITDA coming in at $146 million, well above the Street estimate of $93 million, as the impact from ongoing supply chain constraints was partly offset by a lower-than-anticipated hit from commodity inflation due to better commercial recoveries from customers. Quarterly revenue was $3.5 billion, compared to the consensus estimate of $3.1 billion, helped by an improved vehicle mix including new EV entrant programs in Asia.
Despite strong results, the company left its initial full 2022-year guidance unchanged, calling for EBITDA modestly down compared to 2021’s $810 million.
Analysts at Deutsche Bank provided their views on the company following the results, stating that they now see upside to the unchanged 2022 outlook. The analysts continue to expect considerable EBITDA growth in 2023 and later, and with 2022 de-risked, view the company as one of the best plays in the US supplier group for a multi-year industry volume rebound, capitalizing on its operating leverage from large improvement in revenue, materially reduced inefficiencies from higher capacity utilization, and recovery of commodities headwinds.
Adient Reports Q1 Beat, But Left 2022 Guidance Unchanged
Adient plc (NYSE:ADNT) reported its Q1 results, with adjusted EBITDA coming in at $146 million, well above the Street estimate of $93 million, as the impact from ongoing supply chain constraints was partly offset by a lower-than-anticipated hit from commodity inflation due to better commercial recoveries from customers. Quarterly revenue was $3.5 billion, compared to the consensus estimate of $3.1 billion, helped by an improved vehicle mix including new EV entrant programs in Asia.
Despite strong results, the company left its initial full 2022-year guidance unchanged, calling for EBITDA modestly down compared to 2021’s $810 million.
Analysts at Deutsche Bank provided their views on the company following the results, stating that they now see upside to the unchanged 2022 outlook. The analysts continue to expect considerable EBITDA growth in 2023 and later, and with 2022 de-risked, view the company as one of the best plays in the US supplier group for a multi-year industry volume rebound, capitalizing on its operating leverage from large improvement in revenue, materially reduced inefficiencies from higher capacity utilization, and recovery of commodities headwinds.
