Adient plc (ADNT) Earnings Call Transcript & Summary

We're going to be continuing here as we continue the Barclays Global Automotive and Mobility Tech Conference. Very pleased to have with us, Adient. The number 1 player, depending on market share. Okay. The largest or one of the largest seating players in the world. So very pleased to have with us, Jerome Dorlack, who is currently CFO, but in roughly 30 days, is going to be the new CEO. So Jerome's going to go through a series of slides, and then we will have a discussion fireside chat style. Anyone who has questions, please feel free to raise your hand. Those folks have questions from the webcast you can e-mail into my colleagues, Joshua Cho, [indiscernible]@barclays.com, they can ask us announcement. So with that, thank you.

All right. Thank you very much. So yes, you can put the slide deck, please. So I just wanted to walk through a couple of slides today and really go through a couple of things that are, I think, some unique dynamics in not only the seating industry, but also kind of the automotive industry and how it's impacting the seating industry and how Adient has been responding to that. So looking at the first slide, we kind of went through this in our earnings call, but I thought it would be good to recap it. Coming out of 2023, we've kind of had these four tenants. First, we are the leading supplier in terms of seating. We've really been able to strengthen our leading position through strong execution and then working through sustainability and using that as what we think is this differentiator that we can pivot off of, but then also underpinning that through strong execution. And then also there's this new element of this really changing dynamic of EVs, but really EVs in China and leveraging our China operation and using that as this really platform to accelerate upon moving outside of China. And I'll talk about that a little bit today. And so one of the things that we've talked about a lot in the past is this ES3 concept and bringing together everything from J.D. Powers through to market research, VAVE, Warranty Analysis, benchmarking and IIHS and what I'll go through today on the last three slides are really tangible outputs of ES3, whether that be things like long distance jet. We'll go through today really an industry first around an Adient cushion module assembly and then some back frame module assemblies and then also a reusable back frame architecture that we're launching first in China that we'll then be able to read across to other regions. And then the last point before I get into some of these trends is really the seating content growth that we see really first in China now starting to spread across into Europe and outside of Europe into North America. And what you see on the page there is what we call a Zero Gravity seat that we've launched with Neo within the China region, which has -- if you look at the amount of content that's in there, I mean it is everything from side airbags through to comfort systems, heating mass, massage systems, very advanced lumbar systems. It has a belt to seat system that's in it. So the content growth that we see is really explosive that's driving not only significant growth, again, within China, but we see that now reading across into Europe as the European manufacturers are seeing this content growth, saying this is really becoming table stakes and also now starting to read across into North America. Not only does it pair itself with -- as we were ADAS, but also just kind of core comfort systems. And so really, the question is really move from if, when this additional content will be realized, but really a question of when. And so then I'll skip the executive summary and really move on to so what are we doing now to kind of capitalize on this? So the first one is really looking at modular seat assembly. So modular seat assembly is something that we've been working on, I think, quietly in the background. And so you've seen a lot of talk, I think, from one of our peers on what they've been able to do with the back frame and packaging up components in the back frame and then bringing potentially to market a modular comfort assembly for the back frame. And what we've actually been able to do is on the cushion assembly, which is far more labor-intensive to assemble is in '24 calendar year, we'll be bringing to market a full modular assembly on the cushion itself and so taking all of the components of the cushion, so you're thinking about the vent system that's in the cushion, the ECU system that's on the cushion, the wire harness that's on the cushion, the occupant detection system that's on the cushion. These are components that are historically assembled in the high-cost JIT plant. And we're actually by working with our customers, working with our own engineering team and working with our partners such as Gentherm and some of the other ECU suppliers, we've been able to redesign the cushion assembly and move that content out of our JIT plant and put it into our metals plant and actually displace that labor and not even do it one for one. So if we're taking 20 heads out of a JIT plant, we're replacing those with less heads into our metals plant and take that entire system and now create a modular assembly in our metals plant in a low-cost country. And now basically deliver that assembly sequenced into our JIT facility. And what that allows us to do is basically take 20% of the total labor content on the front assembly line and displace it. And then when you marry that up with the front seat back, so now taking the front seat front seat back comfort module and basically looking at similar to what our competitors said, marrying that up into a module as well doing that same process by the time we get to 2026, you're now talking about 30% of the total labor on the front seat assembly line, displacing that out of the JIT plant. And so 2024, the Cushion module will launch well ahead of what some of our peers are looking at. And by 2026, we'll have the cushion module or so 2026, we'll also have the front seat back module launched and in place as well. The next thing that we're also able to do that's really industry-leading is in areas, especially in Europe, we're able to engage in what is long-distance JIT. So where you have some of these very complex module assemblies as this content comes in, we're really able to leverage where you have smaller programs, especially in the European operating area where you have a lot of programs that are 70,000 units or 80,000 units and multipurpose our JIT facilities and engage in the longest JIT concept so where you maybe have two or three OE platforms running in one JIT manufacturing facility you run them side by side, you're better leveraging your capital. You're less dependent than on one manufacturer you run them and then you basically long distance that out of a low-cost country. You have a sequencing center potentially right next to your customers plant, where you then do just the final stand up assembly portion of it, maybe just the marriage and you then deliver that in sequence to your end customer. Again, this is something that Adient has been doing well ahead of some of our peer group. And then the last one, which we've really been pioneering out of our China operation is a common structure. So if you take, generally speaking, when you launch a new structure for a customer, you have very limited reuse. So somewhere between zero to maybe at the most 35% of structure reuse. What we've been able to do in China with our customers there is to basically take -- and this is really critical because this is where we see the majority of this high amount of contenting is to work with them and say, the only way this is going to work when you want 18-month or 12-month development cycles is you have to work with us and use a high amount of content and really to have an Adient standard seating structure to read across multiple customers and multiple platforms. And so what we've been able to do across now you see that at least four customers is to have an Adient standard design structure with anywhere between 55% up to, in some cases, 100% standard design content structure. What this means is you have a 12-month development cycle lead times compared to sometimes two to four years, you have extremely limited engineering builds. You have extremely limited launch risk and you have customers in the end where you become a supplier of choice. And so we've piloted this, launched it successfully in China, and now we're reading this across -- over into our other regions of the world. And so as we look at what's happening in Seating, as you see this content now being read across really outside of China, you see it coming into our Asia operation, [indiscernible] you see it coming into Europe, you see it coming into North America. It's really niche principles into those other regions of the world. And so with that, those were the opening comments and turn it over to [ Dan ] to start the fireside chat.

Okay. Thank you. Right. So actually, I have set with some questions, but I actually want to ask some questions first on these slides, interesting stuff. And the way that I -- just when I [indiscernible] the way I interpret this is the story of Adient, the last, call it, four years, really when Doug took over was a focus on back to basic streamlining operations and business performance. That's the key opportunity here. And I think the question that's been coming up is it seems like you cleared out a lot of the low-hanging fruit on the business performance side. People asking, okay, what are the next legs that you can push on business performance to drive to your margin targets? Is the answer is what we just saw in these slides -- these are some of the core components.

Yeah, I think these are some of those really key building blocks of those components, whether it's -- if I go back a couple of slides to the modularity as an example -- when you think about what's happening in particular in North America where you have ever increasing labor costs and things along those lines, things like this along modularity where because of our metals footprint, the modularity on the cushion is really enabled because we have a world-class metals footprint in this case. In order to make the cushion happen, you have to have the metals because of the assembly sequence. You've got to have that cushion real estate. You have to own that real estate. And that's an area where we deliver an extremely unique value proposition. And because of our ES3 process, customers see the value we can bring. And so that's launching again in 2024. But immediately after kind of some of the UAW negotiations settled we went in and one of the D3 came to us on a body on frame platform and said, okay, we want to engage in discussions on you about this type of a solution because they see the value in looking at how to better engineer the value chain. And so I think it's transitioned from this discussion of, yes, there's still some low-hanging fruit. We've talked about the roll-on roll-off of some contracts that need to execute. But now it's really executing upon the core tenants of that ES3 principle of how do you deliver value to your customers day in, day out around really understanding the value chain, executing on driving -- striving and simplifying that value chain and doing what we do best, which is harnessing the value creation in a seating system. And I really do think that's what we do better than anyone else because of our world-class footprint that we have on metals that we have on JIT that we have on Trim that we have on foam. And that's what we continue to be laser focused on is executing upon that. And when we need to turn to our partners, we have partners like Gentherm, like [ LNP ] -- those guys that we can turn to that help make these things a reality.

When I look at something like this modular seat assembly, this seems like a very different approach in the manufacturing. And what is enabling the shift -- is this straightforward? Are they going to -- are there challenges here? And how different is this from how your competitors are approaching assembly?

When I think what really enables this type of an activity is our customers have to allow us to control the value chain. And in this case, this will launch in 2024 with a customer who allows us to really control that value chain, control the design and they see the value that we can deliver by doing that. And especially on the cushion assembly, you've really got to own that real estate and control it. And I think that's what really drives the difference in it. And I think as we go forward, as more customers -- and traditionally, it's the Japanese that allow you to do that. And I think we've been very transparent in the past. Those are the customers that see the value and allow that. And I think more and more customers now are seeing the value that you can bring with these types of solutions by really going back to what made this business beautiful when it first started, when before all this [indiscernible] aggregation began in kind of the 2000s and the 2010s when they said, well, we want to take it over, we think we can build a better mouse trap if we disaggregate it, then they started sourcing things. I think as they now start to look at ways to hand control back. I think we're best positioned to capitalize on it because things like owning the metals footprint that we own and having the JIT or having the phone footprint that we have and having the Trim footprint that we have, it will allow us to really accelerate these types of activities.

The way that we thought about VAVE in the past is you find a way to generate some amount of stages, you keep a portion, you pass a portion to your customer, and that's the win-win. How much of this is being spurred by customers that are really feeling a variety of cost pressures, and now you need to react in some way to say, okay, here's a way for us to have a win-win. We get our margin targets and you still find ways to trim content out of the total cost.

I think when you look at things like long distance JIT, I think those are very proactive approaches to that type of VAVE where you're engaged upfront because it takes design even before start of production to really go after core cost targets on vehicles, where you jointly work towards a cost target on a vehicle and you're setting for to hit that cost target and then turn that margin target on a vehicle. And I think more and more we see that type of high-quality engagement with customers where it's not as much of, call it, the reactive cost share. Now that's not to say that the traditional VAVE isn't important because the way I look -- the way I think about the traditional VAVE is it still is very much in the business, and it still is very critical to the business. But more of that is being driven by what I'd call the innovation of processes and technologies that occurs from a time of program launches to a time a program [ adds ]. And so an example is you get mid-flight through a vehicle and consumer preferences change for Trim Styles. As an example, you go through and you realize on midsize SUVs, the preference for leather is no longer there and they can't upsell it anymore. And so you take leather out of vehicle, you change that over to a PE or a PBC. Those types of things still occur, and you engage actively with your customers because you constantly go back to the ES3 slide, you're constantly engaged with your customers in the market resource -- market research portion of it, the benchmarking portion of it going to them and saying, hey GM or hey Toyota, hey, Ford, Customer A just launched their newest version of their midsized SUV. They don't have a leather option anymore. Here's what they're selling. It's been in production for 12 months. Why do you still have a leather option out there? You're no longer able to upsell it. Why don't you take it out as a VAVE and change your marketing material for 2024? That's also the value that we're able to deliver by actively going to our customers and showing them that and engaging in that kind of VAVE activity. For other examples are as different types of technology becomes available on foaming and things along those lines. That's always ongoing in our business and in our industry. And because program life cycles are so long, 7 years and in some cases, on the ICE side, they're going to be extended to 10 years. That will always happen. And we'll always be engaged in that because it delivers value to our customer. They expect that and we expect to deliver it to them. But there is more and more now upfront working towards a target cost model and delivering program margins for our customer.

Do you think that -- I mean, maybe you can just tie this into your win rate. Do you think that this set of capabilities is unique enough that it is at least supporting your win rate or even accelerate your win rate because as customers are feeling more pressure on the cost side, you have some unique opportunities here where you can work with your customers to unlock more cost out and that's?

I mean I mean we have -- and we absolutely believe it accelerates our win rate. And I wouldn't say, to look at the top line necessarily because we've talked a lot about Adient isn't a top line-focused company. We're a company that's focused on cash generation and how you generate cash in this business is really around disciplined capital deployment, but also when you win a JIT business, you really want to win the JIT plus the Trim plus the foam plus the metals, if the metals make sense. And what this really allows you to do is if you look at our 2022 win rate, 98% had JIT plus Trim plus an element of foam or some mixture thereof. If you look at our 2023 win rate, 95% or greater had some element of JIT plus Trim, plus foam or some element thereof. And so what we're really focused on is winning with customers that allow us to book not just the JIT because winning just the JIT is not what we're about. I mean, we want JIT plus an element of that vertical integration that it has in it. And this really allows us to do that. In addition to that, this with the customers that find value in it has allowed us to go and demonstrate conquest wins. I mean, if you look at whether that be with our Japanese customers, with our Chinese domestic customers with some of our [ ID3 ] customer in particular. I mean this process has led to conquest wins, absolutely.

Maybe we could talk about the benefits of vertical integration. You're saying you're getting a lot of -- a significant portion of your wins have some form of vertical integration. I think this is interesting in that you're counting the Metals & Structures business as a structural benefit. It's interesting because if we just rewind four years ago, the core effort was, in a way, unwinding some of the metals business that had cost some operational pain. So should we look at this as a pivot that, okay, the Metals & Structures business is now where it needs to be, you've sort of gone through the efforts in cleaning it up and reducing the amount of business where you alone are serving as a Tier 2 to someone else, I think it's like well over half of the business. Is it now where it needs to be?

No. I mean I think there's still a portion of that Metals business that really needs to wind off in that '25 in particular, back half of '26 time frame -- third-party, the third-party piece of it. That still is due to wind off in the '25, '26 timeframe really back half of '26 that gets it where it needs to be. Yeah, so it's not where it needs to be yet from that standpoint. We really, really have been focused on metals for JIT where we can service ourselves. That makes a lot of sense for us. But there is a portion of it, yeah, that still does need to wind out of the portfolio.

And then just one more on the vertical integration side. In the past, what we've seen is there's clear opportunity for margin upside for vertical integration, but there's also execution risk. I actually think back to when you were part of JCI, some 12 years ago when you bought KEIPER RECARO and Hammerstein, there was a lot of pain associated with that. So how do we make sure that these shifts in processes don't -- are executed well and there's not execution risk along with them?

Yeah. I think what's really key is -- and if I go forward to this guy here, I think that's what's really excellent about this is it, it is modularizing the things that we're excellent at. And so we're not having to go out and reinvent the wheel in terms of we're not going and doing an ECU in-house. We're not going and doing a lumbar system in-house. We're going to an ECU manufacturer. We're going to our partner like a Gentherm for the cooling system and saying, here's how we need you to partner with us to modify the cooling system to allow us to make our assembly process modular. And so we're working with our partners who are experts at those types of components to allow us to modularize our assembly process. And we're saying -- we're doing what we're really good at, which is the assembly process. That's our core competency from that standpoint. And we're drawing on the asset base we already have in-house from that standpoint to stay with the vertical integration we already have in-house. So on top of this comes the Trim assets we already have in-house, the foam assets we already have in-house. The just-in-time assets we already have in-house all get trimmed med out on top of this. And it goes into a metals plant that we already have established today, and it utilizes those operators we already have today from that standpoint. So it's joined on the core competencies we have in-house, and it's utilizing the external partners that we have today in order to execute this while driving savings in the value chain, it takes working capital out of the loop. It takes freight out of the loop. So it's really drawing on the things we already do in an excellent fashion today from that standpoint without investing excess capital into the network.

Okay. Just one more. One of your competitors said this has gone to a very significant level of depth on vertical integration in a way that others haven't bringing heating and some massage capabilities in-house that historically you either fully [ Tier 2 ] use a Gentherm. Why is that not the right approach for you?

I mean, they're -- so we -- yes, I say one of our competitors. But I mean they're extremely smart. [indiscernible] Jason, they're very smart. And I think they've got their way of looking at it. It's a return on capital type of decision. And for us, I mean, we have -- in our mind, world-class assets in foaming and Trim, in JIT, in metals. And for these components, we can build modular assemblies by relying on our partners, such as a Gentherm, a new development and [ AEW ] or others on the outside. On the cushion assembly, the bottom picture there, you can really only get to that from a modular assembly if you own the metals, which we own. And on the back frame piece of it, they've shown their modular assembly piece that they've developed. Gentherm announced two weeks ago, their own version of a modular assembly that if we want to, we can buy from them or we can develop it in-house. New development in China already has its own modular assembly to basically compete with Lear that we can buy from them or we can develop in-house as well. And so it's just a field that they've went into that is extremely, extremely competitive -- it's not an oligopoly. It's got multiple players in it is the first answer. And then the second answer is there's -- based on feedback from our customers, there's not really a tie-in to if you have the comfort system that they're going to source you the JIT piece of it. So it's not like the tail wagging the dog. And so we want to focus on what we're excellent at, which is executing, building seats, focusing on these things like modular assembly, where we're already be in production in FY '24 and really driving that through to excellence. And we think we can get there through a partner type approach.

That's great. Folks in the audience, any questions?

So we've heard from Ford today changing your [Technical Difficulty] major savings, cost reductions, bunches, not new news, but they can do to commercial pressure, what they can do it in your approach. It sounds like your approach on taking real cost out of the system is like in terms of industry in fact, three, four, five years to kind of fade in. Is that fair? And in terms of the industry impact at your [Technical Difficulty] system chain, I'm trying to figure out the pressure that's going to be coming at you commercially in '24 and '25 with some of these big design changes really aren't even available for the OEMs. Also, I'm kind of getting back to the issue of it's always [Technical Difficulty] '24 and '25 has been more typical in terms of the pricing pressure earlier or even more onerous commensurate [Technical Difficulty] for now worldwide.

Yeah. As you said, I mean, this industry is never easy. I mean you wake up today and you think the [indiscernible] were yesterday. So that number really changes. What I would say is if you take lessons from the Chinese time from idea to implementation is 12 months, the Adient modular Cushion assembly from the time we started working with the customer to the time of implementation was less than two years. We've got the blueprint. The customer we're talking about with it now at the body on frame vehicle -- we think we can get it done in 18 months and taking a pretty short timeframe from that standpoint. So I think there are ways that working collaboratively with our customers, we can help them take real cost out of the network without compressing margins from that standpoint and even working in the case of some of our customers because they have so many trapped inefficiencies in the system that are impacting both of us to 300 variants of the vehicle, and they only sell 150 of them. Those are the 150 costs, both of us. And there are customers that are finally starting now after the union negotiations to listen to that, to get that waste out of the system that's costing both of us, amounts of money, amounts of trapped cash that's in the network. And I think this time, I'm optimistic that there finally will be traction. And so it's never easy, and there's going to be pressure that's in the system. But at some point, the waste has got to come out with it.

What's the timing of getting -- it sounds like this is -- this case was at least on one customer, but to start to scale this out more little wildly. I think we should assume any benefit that would accrue to would really only be later in the decade. Is that correct?

No. I mean I think things like labor, I mean, you start to see these roll in '25, '26 type of time frame, wherever we can really impact it where we have the metals footprint. You think about things like long distance JIT, I mean, again, that we're now in active discussions in North America. Finally, we're starting to see some traction there. You think '26, '27 type of launch timeframe. And then commonality, the last slide that we had in there, common core, common structure. The Japanese have been doing it successfully for a very long time now. It's how quick could we start to deploy that across the others. I think that's going to be a question of when the content comes and the customers really see the need for it. So maybe that's a later in the decade type of question. I think that one [ end ] up being more tied to content. The need this and long distance JIT, particularly on a larger portion of our business in North America really by '26, it will be pretty well accelerated.

If we could just -- I know we're running tight on time, just more near term and on the '24 guide, which you just provided, maybe you can just address a couple of small things. One, there was $60 million of FX headwinds that this is all off of hedges unwinding. How much more is there that, okay, this will -- you have hedges [indiscernible] in '25. So is there another headwind that you would have to face beyond '24? And then what levers do you have to offset this or this is just something you have to absorb?

Yeah. I think if you unpack the $60 million, I want to say $40 million was transactional, $20 million was translational. And the transactional piece, the vast majority was the peso, as we talked about. And I can't -- it's hard for me to say what '25 will be. And the peso within the last as we watch it really closely, it went from [ 18.1 to 17 ] today, it's at [ 17.4 ]. I mean it's hard for me to say what '25 will be because I just don't know where the peso will settle in at. I'm not a favorable hedges, I do know that. So I don't have any more of those to kind of unwind at this point. So I don't know where '25 will end up at. So I don't anticipate any more favorable hedges unwinding. So it's just a question of where does the peso close to [ 16.1 ], it's going to present, obviously, an additional headwind. As far as our ability to recover with our customers, I mean we are in active discussions with all of our customers that are impacted from the peso side of things. And it will be resolved, whether that's through as contracts reset or through kind of an annual price negotiation. So just as time progresses it's a new muscle for our customer because they view it as very transient in nature. I mean, the peso is an anomaly currency against the dollar, pretty much everything else is depreciated with the exception of the peso. So it's an anomaly currency. They view it as very transient. So they're very reticent to make kind of any adjustments because they think it will eventually swing back. But they also realize you can't have 10% labor inflation with a strengthening currency when you're transacting in dollars and expect costs to remain fixed. I mean, they understand that, that doesn't work.

And then just to wrap, just near-term strikes over. You said in your guide, there was a $25 million strike impact. To what extent do you think you could see some of those headwinds offset in fiscal 1Q for you?

Well, in fiscal Q1, I mean, there'll be no relief in fiscal Q1.

You're not seeing recovery builds?

Not in Q1. I mean, Q1 -- I mean right in Q1, I mean just you saw in Q1, unique fabricating when Chapter 7, I mean, that put additional pressure into the network because people were impacted by it. You had Mobis Co. on strike at Toledo North that took Gladiator production down for three days. That was very public. I mean there was really no relief in sight from that standpoint. Full year, I think it's yet to be seen how much back build there is. But in Q1, yeah, there was really no relief in Q1 between the bankruptcy and Yanfeng also at a cyber attack that was also very public and some of the disruption that occurred from that and which plants we supply that were disrupted. So yeah, it was like no relief in Q1. You don't have like a better question [indiscernible].

8% still on track?

I mean 8% all-in is still very clearly the objective, yes.

I mean I'll just close to that. What we're seeing today is not, I would say, it's not an accelerated path to 8%, but it's just.

You do that -- how do you drive the business performance. And these are the things we do day in, day out that we're driving to execute to drive that business performance. Absolutely.

I'll leave it there Jerome. Thank you very much. Good luck in the new seat.

Thanks.