Adient plc (ADNT) Earnings Call Transcript & Summary

Let's begin, shall we? Very pleased to welcome Adient to the Global Auto Conference. Joined here by the President and CEO, Jerome Dorlack; and CFO, Mark Oswald. Thank you for joining us. Adient, for those of you who are not familiar, is a leading global auto supplier with top market share positions in most regions. And to kick off, I think Jerome would like to present you a few slides.

Yes. Thank you very much. Appreciate the time today. Just a couple of slides. I'll maybe present one and then I'll hand it over to Mark as well. Just a little bit in terms of how do we view creating value for our stakeholders. I think what's important is we are really laser-focused on capital and capital allocation. And how we think about that is really through the sustainable value creation flywheel. It's really around operational excellence that underpins everything that we do. I mean we're focused on driving our operations. Seating is really about doing 1,000 things right every minute of every day at all of our JIT operations, our trim, our foaming and our metal operations. We drive that then with innovation. Talked about disciplined capital allocation and then portfolio management. When we came into the business in 2018, we undertook a lot of, I'd say, rationing of our portfolio, eliminating things that weren't adding value even as recently as what would have been Q4 of last year, we made another announcement where we trimmed out one of our joint ventures in the U.S., freed up dividends to NCI going forward. And so you have a management team that's focused on disciplined capital allocation, managing the portfolio, underpinned by operational excellence and then innovation in order to drive margin expansion. With that, Mark.

Thanks, Jerome. So again, we're fresh off our Q2 earnings. So I'm not going to go into a lot of details just in terms of the earnings. But I did want to make a few comments just in terms of -- with regard to the earnings, they were obviously a very strong start to the first half of the year. We're a September 30 fiscal year. We had a good start in Q1. We continued that progression in Q2. You saw the margins there, the cash there. The cash, Adient is typically a second half cash-generative company. And so the cash came in, in line with what we had expected. We continue to look at the balance sheet. And as Jerome indicated, we are very much focused on capital allocation, right? So we did take a few steps to basically look at the capital structure. We refinanced certain of the notes there that you'll see there on the chart, really no near-term maturities for us. We have $500 million in 2028 that's due. So we'll start to look at that. But all in all, very strong cash position, very strong flexible capital structure there. Jerome mentioned capital allocation. So we typically -- and we've given a target of our leverage ratio between 1.5 to 2x. We've been in that range now for the past, call it, 1 year, 1.5 years, 2 years. And that's really afforded us to do share buybacks. And so we're out there actively purchasing shares. You've seen in first quarter, we bought $25 million. We expect to generate more positive cash flow this year. So I'd expect that would continue as we go through the second half of the year and our cash generation comes on. We'll also look at making sure that we continue to be flexible with that capital structure. We recognize that we're a cyclical company. So in the event that there's certain debt that we want to voluntary opportunistically repurchase, we may do that. So again, just keeping in mind you, the shareholders, the debt holders, making sure that we're adding value to our customers, our investment group, right? That's really what we're focused on. And I think through the results that we've shown in the first half of the year as well as the capital structure that's here laid out on the slide, I think you can see that we're making progress towards that. So that's really all I wanted to talk about here in terms of the capital structure.

Fantastic. I'm sure we'll come back to this topic a little bit later. To kick off, we've been asking all the other companies taking part about the industry conditions. It's been a dynamic start to the year, needless to say, from certainly a policy perspective. What are you seeing on the ground in the various regions that you're involved in.

Yes. I mean maybe if we just kind of go around the world, I think in the Americas, we've started to see stability, certainly stability in customer production schedules, both in -- whether it's coming out of the U.S. or Mexico, we've seen customers, I think, balance in that level load. That's been welcome from that standpoint. If you move over to Europe, if you compare Europe this year to what would have been Europe last year, significantly more stability. You saw that kind of year-over-year in Adient sequential results with business performance now starting to show through already in Q2. And so we expect to see continued improved business performance as it pertains to us, really driven from not only self-help that we've talked a lot about, but also just improved macro from customer stability schedules, not necessarily expanding volume, but really just customer stability. As you move into China, I think in China, it's important to recognize, even though you may see an expanding SAAR there, a lot of that SAAR is driven from exports year-over-year driving and expanding it. But there is stability in the region, but not necessarily, I'd say, domestic growth. And then in Asia, ex China, even with the risk of tariffs, we still see very strong demand on Adient products. And with that demand, there has been some, what I'd say, instability driven from overtime requirements, especially in our Japan footprint. But that's been, I'd say, welcomed because it's driving, I think, incremental revenues year-over-year on some of the launch programs that we had last year. And we talked about that, especially when you think about things like the QX80 and the Armada, where we have the JIT, trim, foam and metals on vehicle content upwards of $3,000 a vehicle. And then looking into other regions, Thailand, Malaysia, areas like that, I think we see stability. Thailand, which is a very large region for us, we have greater than 45%, 50% market share in that area. There is a broad-based kind of vehicle recession there. There's stability in the schedules, albeit at a depressed level.

Maybe we could go a little bit more on the various regions. On North America, I think probably the most -- the biggest things are tariffs. You provided already very detailed analysis on the exposure. Is that trending kind of as you expected? Did some of the truce with China help at all? Any updates there?

Yes. I think we were very transparent in terms of what the tariff exposure meant. We had declared prior, call it, $12 million of gross run rate with China being the leading exposure of that. I think we had spelled about $9 million, if I recall, from China, and that was at roughly about 145%. Now there are some stacking elements in there and other things. Since the truce that had taken place, that's obviously come down just as you go from 145% to maybe a blended rate of closer to 45%, that's going to come down naturally. That said, there has been no letup in what is both our self-help. And we talked a lot about the self-help that we are engaging in, really leveraged from what is our world-class footprint on our Metals and Mechanisms business, where maybe historically, that had been a drag on the business coming out of what were the 2014 and '15 acquisitions of CRH and Kuiper. We've really now been able to turn that into a positive, leveraging our footprint with our joint venture partner, Kuiper, in Mexico, but also leveraging our own internal capacities in Rockenhausen, Germany and also Thailand. And so we're quickly pivoting to those regions where maybe you have a different tariff profile, but then also reshoring product back into the U.S., working with our customers in order to drive that exposure down. We haven't let up on that activity at all in order to take that exposure down. I think the other thing on tariffs that we're starting to see, and we talked a little bit about this on the call, is as the customers now are getting greater clarity into what some of this could mean for them, the opportunities for Adient longer term, even maybe midterm, and by midterm, I think we mean potentially fiscal year '26, are starting to come to light. And we have always said there's going to be winners and there's going to be losers in this, and we firmly believe Adient is a potential winner just driven from what is our class-leading footprint in the U.S. If you look at where we're positioned, we've gone through and really looked at where do customers have body-on-frame production in Mexico, where would they move body-on-frame production in the U.S. because you can't put body-on-frame vehicles in a unibody plant, you can't put unibody production in a body-on-frame plant, at least not in the short term. Longer term, you can. And then where does that line up with an Adient footprint? So customers looking to move unibody production to a unibody plant in the U.S., does Adient have a footprint there? And do we have capacity? And we did that analysis. We've then taken that analysis, and we started to proactively reach out to customers and provide them value solutions. And it's starting to now, I think, pay dividends where we're not going to front-run our customers, but we're starting to see contracts being released. We're starting to see incremental volumes coming from that in plants where we have open capacity. And so it's going to be without large incremental tranches of capital. It's going to be bolt-on capacity for us, bolt-on revenues that we'll start to see paying dividends. And so we believe in that conviction when we look at tariffs long term that Adient is going to be a winner from this as we move forward.

So when you look at that region in total, right, the Americas, it's really giving us excitement just if I look out over the next couple of years, right, in terms of pivoting to the growth engine over there, looking at what that margin progression can be, looking at the improved business performance, right, the cash generation of that segment, that region. So we're very excited about the Americas region.

Yes. And I think if you just step back and you'd say how we're -- how is Adient positioned heading into the tariffs. We had basically exited Canada in 2022. We didn't have a lot of Canadian exposure to begin with. And then if you look at our Mexico versus U.S. revenue, just by the way our business has formed over time, we were generally kind of overweight U.S. and underweight Mexico to begin with in terms of the platforms we supported. So we had generally a better position going into the -- kind of what is the current setup versus some of our peer group.

That's a super interesting point. And I know you're not going to necessarily announce anything, but there's obviously some big news yesterday on one of the U.S. OEMs that maybe is relevant. But maybe if we switch to kind of the element of just the recoveries themselves. That's been a big point. Is that kind of trending as expected, both in terms of timing and quantity?

Yes, it is. So we came out a couple of weeks ago. We gave you the gross amount. We gave you the net amount, right? So I'd say those are playing out as expected. So yes, no change from those perspective.

Okay. Shifting to Europe. You actually had a very strong quarter in Europe, very strong performance. I think you alluded to some of that being maybe timing, but it does seem that Europe has turned the corner. Would you agree with that? What should we look out for next?

Yes. I'll start, and Jerome, feel free to weigh in. I'd say, and I think I made the comment on the call, 1 quarter does not make a trend, right? So we are seeing some, what I'd say, green shoots of certain of the restructuring actions that we've taken. It's going to be a multiyear, right? You can't look at second quarter and all start to pencil an upward sloping line there. The macro conditions, the overall dynamics of that region is just structurally easily fixed, right? And it's not only an Adient issue, right? It's structural within automotive. But we are seeing the green shoots of the restructuring. More importantly, we're winning business over there. We're winning conquest business. So when I look out into, call it, '27, '28 in addition to what I'd say, the benefits of the restructuring, the balance in balance out, we'll also get some top line support, right, in growth there. So again, longer term, I'm enthused for the region, but I'm not ready to call victory over the restructuring yet.

On China, you mentioned the market is dynamic, and there's quite a few moving parts. One angle -- sorry, the foreign, the JVs have struggled a lot, as I'm sure you know. Do you think kind of the worst is over maybe for them from a market share perspective? Can it get any worse?

I mean I would never say, it can't get any worse. I think it's all about product, product, product, and they've got to be able to get a competitive product into the space. And with the pace of change, the cycle, how quickly the domestics are able to develop, launch and place a competitive product in the space, the Western OEs have got to be able to catch up and put a competitive product into the space there. I think what's important for Adient is our diversification that we have, the fact that we're not overly dependent on one OE or one domestic or one Western OE. We have a very diverse customer base. We continue to drive that diversification by the time we get to -- back half of '26, 2027, we'll be kind of reshaping our mix from what was 40-60 to 60-40 with Chinese OEMs. In addition to that, because of our extensive joint venture footprint that we have there, we have, in addition to our, call it, what is it, $1.4 billion, $1.5 billion or so of consolidated, we've got another almost $2.2 billion of nonconsolidated that we bolt on top of that, that spits out a very attractive dividend stream every year. And that is largely all Chinese domestics that are on there, along with -- if they're not Chinese domestics, it is Western, but more and more, that business is controlled by the local Chinese given the JV structure that they have behind our JV partners. And so it is a very nice mix that we have that's kind of developed over time since we exited our own JV there. And we really pared it back the JVs that we need and the partners that we need along with our own wholly-owned business in that region.

Are there some unique factors going on just more from the content perspective or from the feature perspective, we see like zero gravity being much more popular. You would think that's higher content and also the -- is the competition more intense because the cycles are faster...

I mean, certainly, they have -- it's a unique content and very competitive content. And a lot of that is just by driver positions, where occupants choose to sit in the vehicle. In a lot of cases, the primary occupant will sit the second row versus first row, which drives a lot of the zero G solutions into the second row versus the first row of the seat there, which means you do get a lot of higher content, not only in first, but also in second row that follows throughout. And so you do see on certain vehicles, higher content, which is for Adient, if you look at where we tend to play in that market, our content per vehicle is generally higher than that of our peer group because where we segment ourselves in the market is generally in $700 and above content per vehicle seating in that marketplace. And then to the second part of your question, on the competition side, is it more aggressive because of the cycles? I think that fuels a more competitive product. When you're able to innovate with an 18- to 30-month cycle, you're able to constantly be driving through a more competitive product. And that's one of the reasons why I think in that space, we, as Adient are very competitive. First, we have a China for China management team there. That starts with our engineering group. Our Head of Engineering there is a Chinese local. We just relaunched our Chongqing Technical Center that has full capability all the way from [ testbeds ] through to a full multi-axis shaker table, full airbag testing the entire suite, which is highly competitive. We have as many engineers in China as our next closest competitor and almost twice as many as the fourth guy in the region. And so we are extremely competitive from an engineering standpoint with a local team in that region. And then that runs all the way through our operations. So we're able to keep up with the pace of innovation there. And then with that comes change and change that allows us to drive margin, allows us to drive a competitive nature in our business as well.

Want to shift gears a bit more higher level. I think there's lots of talks in the past about maybe a little bit of consolidation going on in Seating. Curious on your latest thoughts about the market positioning.

I mean I think there's been a lot of discussion about consolidation in Seating. I mean I've been cracking on now for 7 years, and I haven't seen any consolidation in Seating. I could maybe be more detailed than that answer, but I think that's kind of the simple answer to the question. I mean, I've always been very vocal that there are too many players in Seating. I don't think I've ever given a different answer to that. And when I've answered the question about Europe, I've said, in Europe, you used to make 21 million seats. Today, we make 14.5 million seats. But yet there's still the number -- same number of seating plants. There's the same number of seating players, if not 1 or 2 more. And fundamentally, I think there needs to be consolidation in seating. You got to find someone to do it.

Do you think that's the main problem, just not an obvious consolidator or...

Yes. I mean I think you have to find -- I go back to what I started the discussion that is Adient is going to be a disciplined allocator of capital with focus on creating value for our shareholders. And so we're not going to go out and consolidate for the sake of consolidating. We're going to be laser-focused on driving value for our shareholders. And so we'll consolidate if it makes sense because it's going to create value because the worst thing you can do is just consolidate to consolidate. And so if we think there's something to be done to create value, we'll create value. And I think if someone else is out there that thinks you can consolidate to create value, that's what capital markets do, someone will create value with it. Why it hasn't been done over 7 years or however long it's been happening, I don't know, but I do think fundamentally, there's probably too many seating players.

Just from a content perspective, we sort of touched on this on the China aspect. It seems that you look at most of the new cars coming, the content is getting more advanced, more feature-rich. Would you agree with this? And I guess, how do you see the CPV kind of playing out across the world going forward outside of China?

I think there is more content coming into seat. I think you see flat goods, however, coming down. And what I mean by that is flat goods trim. So I think you're seeing more substitution of eco-friendly materials still. So you're seeing more PU, PVC replacing leather. And so that content is coming down and it's being substituted by other things. You're seeing more, call it, massage systems, heating systems, those types of things coming in that are replacing that. And so feature content is higher. That doesn't necessarily translate into content per vehicle, however. And what's driving that is because if you take the comfort system market, and we've talked about this in the past, if you go back 4 years ago, you probably had 3 qualified players or 2 qualified players on an 8-way adjustment system in a seat. You maybe had 3 qualified players on a pneumatic massage system. Today, you've got 5 or 6 qualified players on a pneumatic massage system. And as those players come in, you're seeing the pricing on pneumatic massage system come down and you're talking double-digit compression on price on those products. It's the same thing with an 8-way lumbar system. You're seeing double-digit compression. And those guys are all localizing into the U.S. or into Mexico, I should say. And so the number of options that you have to source from on some of these high-end comfort systems has gone from 3 to 6 or from 2 to 7. And so the price of the components has come down at almost a double-digit CAGR. And so while content is going up, affordability is coming down. And so your CPV, while it is going up, it's not going up necessarily at the same rate that you would think. And so the value to the end consumer is actually a significant value proposition from that standpoint.

That's fascinating. Moving on to, I think, more of the financials. Obviously, there's -- we talked a bit about Europe. Can you maybe remind us of the margin opportunity there? How you think about it over multiple years? And where are we kind of in the process of rightsizing?

So Europe specifically?

Yes.

So I'd say that we're somewhere in that 3% today, right, plus or minus. We've got the restructuring actions in place. We're executing those. Additional restructuring will need to be done, right? It's just a question of being prudent and being good allocators of capital with that. Do I think that based on where we see the overall market just in terms of volumes are not going to back to pre-COVID levels. You've got a lot of factors. Jerome has talked about certain of those, right, the Chinese imports coming in. You've got certain OEs that are looking at in-sourcing, right? So there's going to be more restructuring that has to be done. Do I think that, that market ever gets to a margin where our corporate target is of, call it, 7.5% to 8%-ish? No. Do I think that we can go from, let's just say, a 3% to somewhere in a 5% range sustainable? Absolutely. It's going to take time to get there. This is a multiyear journey.

And in terms of the -- I guess, what was...

Yes. So again, we indicated last year, I think we announced $160 million charge, right? We Indicated this year's cash restructuring is elevated, call it, $100 million plus, $120 million, somewhere in that range. Do I think that we're going to need to be in that range probably this year, next year and then look at years 3, 4 and 5 to see what's absolutely necessary, what could be pushed based on our customers' production programs, what customers -- what programs are going to run off, which ones are going to be backfilled. I have a better look in years 3 and 4, but for this year and next year, do I think it's elevated over $100 million, absolutely.

In the Americas, I think you've called out some opportunities to roll off less profitable order business. Can you give us a sense of the size of that and how that's progressing?

Yes. I think it's progressing to plan. So if you looked at end of first quarter, U55X, which was an underperforming Metals program that ran off. So that was part of our balance out. We got the IBK2 that will start to balance out within the Americas. We got new programs that are rolling on. We've got opportunities for the onshoring into the U.S., right? So I think that helps the balance in balance out equation. That's what gives me confidence and the line of sight in terms of what happens to margin within the Americas over the next couple of years. That will, in fact, get towards that 8%-ish corporate average due to those factors and drivers.

How much can -- this is broadly speaking, not necessarily specific to any region. How much can automation potentially help on efficiency and margin?

Yes. I mean I think we continue to drive automation where we see returns and where we see labor scarcity. You've really got to look at it from both sides is do you have the labor, if you don't, can automation supplement it? And do you have a reasonable payback on the automation that you're putting in. We've been on the forefront of automation in our Metals business. We had automated lines, building and welding front seat backs before our peers did. And we certainly had automated lines, welding second row, complicated structures before our peers did, and we had that in high-cost countries, both in Spain and in the U.S. And in those cases, we see fairly reasonable returns, call it, less than 2 years where we have new capital investment that needs to go in. And so we continue to drive that aggressively. In our foaming business, we continue to drive high levels of automation, really driven from what I'd call labor scarcity, but also returns. Foaming line is a difficult place to work, especially in the south where you've got 100-plus degree temperatures and you really think about a line that's moving at this kind of a pace, you've got to place parts on it, and we're able to do that now in an automated fashion, which has, I think, paid significant dividends for us. And if you think then about trim, where I think we've got kind of the 2D flat state in a very competitive state automated and everyone is driving towards where can we get to 3D. And we've landed our first cells in both Mexico and Asia, working on 3D selling. It's always going to be a question of payback. And what does the payback look like when you're replacing what is an asset that is fairly, what I call, fungible that you can scale as volume scales with now what will be a fixed asset. And the beauty of the Trim business is it's always been a high ROCE business because it's low capital investment. And do you want to trade that off and make it more similar to what is your Metals business, which then becomes a very high fixed asset base. And that's what we're always evaluating on the automation front. But I think our automation portfolio is very healthy. We continue to drive significant CI year-over-year. If you look at our business performance, we continue to drive positive business performance in all of our regions and automation is a very large part of that. We've chosen to do it so far through either direct investment in Series kind of B funding for a couple of companies or through what would be partnerships with companies. That we think it's a very healthy way to do it.

There's a couple of questions left at the time. We're going to hit on the guidance a little bit naturally to the end. So you did reiterate at last earnings, you're obviously on a slightly different calendar than the most suppliers. But you had -- I think there was a bit of conservatism perhaps embedded in that. And with, I think, maybe the tariff situation, the volume situation seemingly more stable, do you feel better, maybe more optimistic about that?

Yes, we're not going to update guidance today. Obviously, we were out a couple of weeks ago. We gave what our inputs were to that just in terms of where we thought production was going to land. Nothing significantly has changed since then. I think certain of the conservatism that you might be referencing or referring to is around the tariff recoveries, right? So we know that we're getting hit with certain of the tariffs. We do have negotiated outcomes with our customers in place, but there's going to be some level of timing difference between when we incur those costs versus when we receive the funds coming in. So I think when you look out into our Q4, that's probably -- it's mitigating certain of that upside. If those weren't in existence, right, could we have increased our outlook for the year? Very likely, right? So it's just a question of timing in terms of when those recoveries come in. But we're feeling very comfortable just in terms of the overall dynamics now versus where we sat a couple of weeks ago.

And then I think on the -- if I look at the last quarter, the net performance was incredibly strong. How are you thinking about that, I guess, contributing...

Yes. When I look at the overall business performance or material margin performance, right, that's typically lumpy between quarters, right, because it is timing of certain of the commercial recovery. So I think I made some comments in the Q2 call that when you look at each of the quarters, there is some lumpiness and that lumpiness is driven by those recoveries. If I look at first half, second half, fairly constant. When I look at first quarter versus third quarter, probably fairly close, second quarter to fourth quarter, fairly close. So again, taking a longer view on that, I think you balance out that lumpiness. But again, fairly consistent first half, second half.

Last question...

Just one more point on that, with more cash generation, obviously, in the second half of the year because that's where we generate cash.

Last question for me on -- and it kind of goes back to the slide, I think you showed earlier on the capital allocation. What are the -- I guess, what are your key priorities, I guess, as you think about debt paydown, shareholder returns, maybe some tuck-in M&A. How do you think about, I guess, the various buckets that you can...

Those are the buckets, right? So when I think about what we sit back and Jerome and I have these discussions daily, right, just in terms of creating the value, what we're doing in terms of allocating capital, I think we both agree what separates good management teams from great management teams is the way that you allocate the capital. So from an Adient perspective, right, it starts with operations, right? We have to make sure that we continue to operate very effectively at the plant. We got to make sure that the customer recognizes value with us, right? That then leads to obviously better business performance, which obviously generates more free cash flow. When we have the cash flow, then obviously, based on where we are trading today, we see tremendous value in adding stock, so we'll continue with repurchases. We recognize the fact that we're a cyclical company. So looking at our debt, even though we're within the leverage target range of 1.5 to 2x, would we opportunistically look at bringing in certain of that debt? Sure. And then that third bucket is obviously some dry powder for some inorganic growth, right? When you start talking about the inorganic growth, obviously, there are certain hurdle rates that we look at, right? And we look at the overall industry, we look at the macros, we look at leverage, we look at how fast we could pay down if we did have to take on a little bit more leverage depending on what the size of that asset was. Those are all the conditions that go into those, what I'd say, a determination in terms of any type of inorganic growth or pull the trigger on that.

I'll open it up in the last minute or two to the audience. I think that's in the back.

Just a quick question. You mentioned the increased competition in some of the more advanced seating functionalities and features. How do you -- going forward, how do you -- is there an R&D plan also to go and compete better? And then how do you trade that off with pricing compression? Is there a return on that R&D? If you want to try to differentiate your seating systems, what's the trade-off? Like do you want -- deciding whether to invest or not in certain R&D functionalities?

Yes. I mean I think from an R&D standpoint, if you look at our toolbox that we have really around the world, and that's why we made the investment in our Chongqing tech center to go and expand it to give us the full technical suite that we need in China. And we do see tremendous payback on that. It shows in our bookings and our bookings rate that we have in China. We did the same thing in Japan. I mean, we've expanded our Yokohama tech center. We invested in that, and it shows in our bookings in Japan. I mean, we've expanded our business in Japan by almost $600 million over the past 3.5 years, and we've taken that business in Asia and been able to hold and expand margins and expand free cash flow generation. So that's how we look at those R&D investments. What's the business pipeline we have available? And will this allow us to become more of a relevant factor with our customers. And that's what we look at. And then digging a bit further, it goes back to Mark's question is, is there anything in our portfolio from an inorganic standpoint that we need to compete in order to be more relevant with our customer base, and we're constantly evaluating that. At the moment, I don't think we see any white spaces in our portfolio. And we were asked the question 2 years ago, especially on the Comfort Systems side. I think on that, given all the players that are in the market and the partnerships we form with the likes of Gentherm and players like that, I think we feel like we're in a very good space at the moment. Thank you.

Fantastic. Jerome, Mark, thank you very much for your time.

Thank you.

Thank you.