Adient plc (ADNT) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome to day 2 of the -- my name is Rajat Gupta. I'm a member of the Automotive Equity Research team at JPMorgan. Very pleased to kick off day 2 with the team from Adient, Mark Oswald, Executive Vice President and Chief Financial Officer; and Jim Conklin, Executive Vice President of the Americas region. I believe the Adient team has a couple of slides they want to run through, and then we'll go into Q&A.

Great. Thanks so much, Rajat. And thank you very much for hosting us today. Really appreciate being out here today. Thank you for joining us this morning. As you know, Adient released its Q3 fiscal year '26 earnings last week. So I'm not going to go into a lot of detail just in terms of the financials. A lot of people have looked at those. We've had the post earnings calls. But I do think it was worthwhile to kind of go through at least a summary of how we see '26 shaping up. We've got one quarter left here and then more importantly, what we're seeing as we head into '27. And then I'll turn it over to Jim Conklin. Jim heads up our Americas operations within the Americas. So I know there's going to be a lot of questions just in terms of what the Americas team is doing in terms of onshoring, how they're implementing automation across the enterprise, what they're doing in terms of margin expansion. So I'll leave some time for Jim and then obviously take some questions, Rajat. So just starting off with '26, I'd say the key takeaway there is we're delivering on our commitments, right? So we laid out some commitments at the beginning of the year. Team has done a good job at executing against that. The Adient operating model is working extremely well. There have been some external macro challenges, obviously, with Middle East, higher input costs, right? But what we've shown is each of the regions have been very resilient. We've been able to battle through certain of those. We do view those as temporary. When I look at what's more sustaining, though, is really the growth over market that we're seeing within the Americas division, what we're seeing over in China. We would expect that to continue as we look into '27. Again, if I look at what we're doing from a capital allocation perspective, we said that we're going to be balanced with the capital allocation. We've been buying shares back. We expect to buy more shares back here in the fourth quarter. It's all about generating cash flow, how can we return that to the shareholders, whether it's through buybacks, whether it's through some voluntary debt paydown, so you could expect more of that. So when I look at that, as we exit '26 into '27, I think we are entering '27 from a position of strength. We expect that the program wins that Jim and team have done through the onshoring in the U.S., obviously, will help the top line there. Growth over market in China is going to be continued strong in 2027. That's going to allow us to continue to increase our business performance, right, business performance improving on the backs of whether it's automation, whether it's the restructuring that we've spent over in Europe starting to take hold, the continuous improvement. That in turn will continue to drive margins higher as we go into '27 from '26. So again, as we look into '27, there's a lot of positive notes that we're seeing on that front. We did indicate that there's a few things that need fine-tuning as we go through the next couple of months here, right? We still have to look to see where inventories end up in '26, what that's going to impact in terms of overall vehicle production in '27. Restructuring, kind of hard to call at this point. We're looking -- especially over in Europe, we spent quite a bit of dollars restructuring in the past couple of years. That's going to be dependent in terms of what happens with our customers in terms of what they're going to do with their product programs, what they're going to do with their plants. Does it have a ripple effect into us. And some of those bills could be $20 million to $30 million. That's why when we're sitting here today, I can't give you a specific number in terms of restructuring other than say that we'll continue to operate in a fiscally responsible way and spend the money if we need to with you in mind. And then we'll look at other items such as CapEx as we continue to spend in automation, right? Again, being fiscally responsible, but understanding that we need to continue to invest in the automation to continue to drive the business performance and margins higher. So really positive about where we're finishing '26. Very positive in terms of heading into '27 that the Adient business operating model will continue to drive the results positive. So from this view right now, very positive in terms of next year. And with that, I'll turn it over to Jim where he could touch base on the Americas.

Yes. Thanks, Mark. So the Americas for us is about a $7 billion region, made up of North and South America. We have a little over 40 plants within the network. And just a little bit of color specifically on Americas specifically. As Mark mentioned, we continue to execute extremely well. It's our day-to-day execution with our customers that's really the key foundation for us to be able to have the growth that we're anticipating, call it, over $400 million of new incremental conquest and onshoring business over the next couple of years that really allows us to be one of the key drivers of growth within the network. That includes going over recent launches. We recently launched the Kia Telluride seats as well as Rivian R2 seats. We'll continue to see more and more of that as we go forward and executing very well. From the customer and supplier partnerships, we continue to stay very close with our customers, not only on the launch activities, but how we're growing, where we're growing and how to bring the right level of innovation and creative solutions for our customers as they execute onshoring, new program launches and things like that. For example, we've had multiple customer meetings just even in the month of July. We had one customer with members of their Board of Directors come to one of our manufacturing plants and their top executive team to walk them through how we're executing today on their products and our vision with very tangible evidence on our shop floor of how we're executing the next generation with a new level of innovation, automation, implementation of AI in order to be more cost effective, driving the right quality solutions for our customers going forward. And a lot of that customer interaction includes dealing with some of the ups and downs that we've seen over the, call it, 2026 in the truck market, making sure that we're staying ready, available and adaptable and flexible. However, they choose to be able to run trucks from a high content version to a low content version and some of the erratic nature that we're getting passed on some of the truck production that we have. On the innovation and automation side, this is where we're spending one of the biggest parts of our energy and efforts right now. What's clear to us is that if you're not thinking of the next way to make seats or any type of interior product, if you're sticking with the traditional manufacturing mentality in this market, you're going to be left behind. So we have to be very aggressive. We have to be very creative on how we're driving cost out of our network, whether it's the cost of labor going forward, availability of labor going forward or simply a way to drive the overall vehicle price down. This has to be and is a way that we continue to challenge ourselves on the next way to manufacture, design and manufacture seats going forward. So we've started at this. We've been very aggressive with this. We started by targeting what I'd call the non-value-added activities as a part of seat manufacturing. Non-value-added activities would mean the end customer doesn't really care about it. End customer doesn't care if you have to test the seat to make sure it functions correctly or it looks pretty at the end of your seat assembly line. So we started on really focusing on automation on that. Since then, we've expanded that to look at how do we do more of the value-added content. How do we install components and parts as a part of the manufacturing process to be more cost-effective? So we've launched multiple pilots that are actually currently going on in our plants right now that all have, frankly, less than a 2-year payback period. While a lot of the generation and creativity of these innovations start in the laboratory environment, start at our corporate offices, we worked very quickly to get it on to the shop floor. What we've seen is that once we get this technology and these new ideas and these new innovations into a plant's hands, they're going to drive a whole new level of execution and creativity to it to make sure that we have the right uptime, that we're delivering the right quality and most importantly, we're getting the payback that we've committed their valuable capital dollars to. It's a part of a payback period to make sure that we're seeing the cost-effectiveness on this and not just increasing our fixed cost as a part of that going forward. So that continues to be a very high priority for us. Our customers are extremely interested in it. And this is one of the keys that's driving a lot of our -- it's a contributing factor to how we're growing within this market in the region of Americas. And then finally, on growth, I mentioned a little bit about the growth that we've had. We've recently announced wins on Dodge Dakota, the VW business, Conquest business in South America. And finally, a lot of replacement business that we have today like on the Ford Mustang. So we continue to be in a favorable position with several of our customers and have the ability to chase, pursue and win business with the right customers, with the right products where it makes sense. For example, the Dodge Dakota win for us was very strategic for us. We already supply Jeep seats to Stellantis on their Toledo campus since the Dodge Durango will be built on that campus. For us, this fits in very well to our existing footprint, utilization of existing resources and assets. It will build on one of the Jeep lines we already have today. So it's very strategic for us while increasing revenue and profitability while minimizing the amount of investment going forward. As a part of this growth, there's also a little bit of offset we've been very open and transparent about, about continuing to execute our strategy and minimizing third-party metals business. In our next fiscal year, we'll have a little bit less, around $100 million less on third-party metals business going forward. We'll continue to execute metals business with the right customers that like to have full integration that we do very well with. We want to continue to grow with them, and that's a part of the business model we have with them. And while we're growing, we're also trying to make sure that we're being very smart about our fixed costs. Over a 2-year period, we'll be restructuring growth through rightsizing. We'll be consolidating 4 plants within our network over the next 2 years. Some of that's already started. Some of that is yet to be announced. So we're making sure while we're growing, we're not just taking on the growth, but we're also trying to be very smart and strategic about how we mitigate our fixed costs and use some of the sale of those assets to fund some of our restructurings and some of that growth going forward.

Great. No, thanks so much for that quick overview. Maybe -- and there are like 5 or 6 topics, I think, which investors have been debating. Free cash flow is like a big topic, then capital allocation, Europe restructuring, China margins and then Americas is obviously a pretty good story. Maybe I'll just start with Americas first. Could you unpack a little bit the GM conquest win that you had? How much of it came down to modularity, footprint, ability to support long-distance low-cost labor. Just help us run through like what helped you get that win?

Yes. GM is a great customer for us. We do have very strong relationships with them. We have an existing footprint. We have an existing footprint within the Kansas City area that supplied the GM plant there for a number of years. The feedback we got is really -- that helped us win that business is, frankly, around the creativity that we brought, a combination of modularity from a long distance perspective, utilizing long distance subassembly deliveries using low-cost markets where possible as well as a combination and commitment we've made to automation and that part of the innovation to be able to execute accordingly. That's really the feedback we got from General Motors. They really liked our creativity and aggressiveness on that. We have a very strong network within our Mexico region. And so utilizing those assets where we can build the trim for that product, the foam for the product and incorporate the metals that will come from someone else, executing nontraditional manufacturing solutions to be able to make sure we're optimizing the cost of that seat product going into GM's plant there was really what set us apart is the feedback we've got. So we're trying to maintain that level of creativity and aggressiveness while staying very flexible and nimble based on what happens with USMCA. We have multiple strategy and multiple solutions that -- while we control the things we can control and have, I'd like to say, operating, we're walking around on roller skates to be able to stay nimble and flex as we need to on what we can't control, which is where USMCA ends up in some of those negotiations.

Maybe double-clicking on automation. Can you give us a sense of what the payback looks like, where the incremental margin opportunity sits as you're rolling these out?

Yes. So again, every project we look at is ideally a minimum worst-case scenario under a 2-year payback, right? And that's going to vary based on where we're implementing the automation, what type of environment we're operating in, the cost structure of the facility where we're automating. We have great teams in our plants. And so what we like to make sure we're prioritizing is augmenting the great work that our teams do today while equipping them with the right tools to be able to automate some of those non-value-added activities. A great example for that for us within the region is we stay very close globally with our peers globally. For example, we have teams that work globally on the right way to move material around on the shop floor. Our plants in China operate without a single team member doing a non-value-added activity of moving material around the shop floor to take it from a material storage area to line side to be built into a seat. They are our benchmark to be able to execute that within the Americas. So moving material around on the shop floor is an area that to us is low-hanging fruit as non-value-added to be eliminated, all the way to actually installing components on the seat line side, installing headrest, installing the plastic side shields with the controls to move the seats. We've got a lot of innovation that are being executed right now and some that are actually successful in plants that we can now roll out to the rest of our network. And we do a lot of global partnership to make sure that we're taking the innovation and creativity around the globe and executing that in each region.

And the other point on that, Rajat, is it's across all of our components, right? So Jim's team will focus on not only automation within the JIT plant, but also within our foaming operations, right? If you ever want to come and look at a metals plant, if you look at the weld inspection, right, what they're doing on that, what they're doing on the trim, the cut and sew, right? And again, it's not only Jim's network, but it's across the whole globe, right? And so as he indicates, we have the subject matter experts that share best practices, how do we look to move that from one region into another region, right? And so it's really a global effort on that in terms of making sure that we can get that across our network.

One of your competitors obviously talks about being a lot ahead when it comes to automation. I mean, what's the difference in approach would you say that you have versus some of your bigger peers? Where do you think Adient is ahead? Or where do you think there's still more work to do?

Yes. I can't speak to whether we're ahead or not. We're trying to be as aggressive as we can within our market. And I believe our competitors are also doing things extremely well. I'm not going to say it's better or worse. But again, what we've seen is to be able to get the equipment -- to get a new process into our plants as soon as possible to allow them to take it, call it, from a 40%, 50% concept, something that works well in the laboratory, to get it into the hands and actually have it executed on a shop floor is a real big enabler for us. Our plant managers are awesome, but they can also be very stubborn, right? Why you gave me this new toy to play with, right? Is it going to be reliable? Is it going to give us the right quality? How many maintenance people do I have to be able to, right -- to be able to keep it up and running. So once we get it to the shop floor, we really see it really boom and grow to be able to be executable. We can get one plant and one plant manager and their team to be able to find success in that. It's really easy to make that team a champion to tell their peers to say, no. We got it in and we kicked the tires on it. We found a way to execute it. We changed X, Y and Z. Now it runs awesome. It's got 99.5% uptime and those types of things. We can then sell it to the rest of our network, those other stubborn plant managers, if you will, that have their own financial commitments to make sure we're getting the payback at every site that we need to.

Got it. Maybe just rounding out Americas a little bit. You have the $100 million metals business rolling off. I mean, it's low margin. I imagine then you have the $400 million backlog rolling in. How comfortable you are with Americas outgrowth into '27? And do you think like investors or us, are we underestimating the margin opportunity here given the mix dynamics and also the payback you can start to get from automation?

Yes. We're very optimistic and very happy about the growth that we're seeing. It's a very exciting time to be within Americas region because of the growth that we're seeing. And it's really based on the execution we see every day of our teams. The relationships from our business unit teams at our corporate offices with our customers continue to be extremely strong, driven and supported by the execution of our plant teams day in and day out. For example, our South American region, the Conquest business that we got there is almost a 50% improvement in their revenue on an annual basis that we get right now. So very excited and not concerned as far as we're looking to maintain that. As we continue to see a level of onshoring within the region, Ford just announced yesterday that they're going to be moving some Lincoln production from China back into the Americas. Toyota recently announced that they're going to be moving Tacoma vehicle production by 2030 back into the Texas area. Each one of those moves and announcements is an opportunity for us. So each one of those, we approach very aggressively with those customers that we continue to have very strong relationships with. So we have a lot of confidence in our ability to continue that growth above market that we've been describing.

Understood. That's helpful color. Maybe going to like a little more global, maybe on Europe. So you have the same metals roll-off margin mix benefit that you would get. But I think you kind of indicated that the growth is a little more challenging. Maybe you could double-click on that. What are you seeing there? What are the risks? And given some of the uncertainty around growth, how comfortable are you with still expanding margins in that region?

No, good question. And so as we look at Europe, you're absolutely right. We think of it as a low growth, no growth region for us, right? I mean if you think about where we were a few years ago back to where we are now, right, we're down to about $4.5 billion revenue. And so we recognize that. So we've taken some actions over the last couple of years to obviously [indiscernible]. I think we've done a good job on that. The big question mark is what's happening over in Europe in terms of our customers, what they're going to do with their programs, what plants they're going to be operating in, what does that do to us in terms of we're supplying that plant. Put that aside, we'll continue to focus on SG&A. [indiscernible] know that the restructuring dollars that we spent over the last couple of years will add to that business performance as I go from '26 to '27. I do have, call it, $90 million of third-party metals business rolling off within that region. So that's going to contribute to that business performance. Continuous improvement is going to continue. So I do have a good line of sight just in terms of even in a no-growth environment that margins can increase from where we are today. So let's just say that we're at 2.5% margins in Europe today. If I look out over the next couple of years, again, just on the roll-off -- roll-on, roll-off, if I look at the automation that's taking place there, if I look at the restructuring spend and the benefits of that, I do see the margins improving over in Europe, and we're confident with that. The question becomes what's the terminal margin for Europe, right? Do I think that, that region will ever get to, call it, a 6%, 7%, 8% margin? No. I think it's structurally different than the other pieces of Adient. Do I see it going from, say, a 2.5% margin business to a 4%, 4.5% over the next couple of years? Yes. I do see opportunity of that. And then if you think about just the overall growth for the company, right, if I look at Jim's region, I see that top line continuing to grow, I look at China and APAC continuing to grow, my weighting for Europe is going to be less. So even if I get margin improvement there with no growth as a whole, I still continue to improve my margins over the next several years as we continue to march up from where we are today.

Got it. Is there a scenario where margin expansion might be difficult at all from these levels in Europe, given what you know today?

Yes. I'd say based on what we know today and all else equal, I still say with my insight into the balance in balance out, my benefits from restructuring, right, and my automation, it still improve margins at that point, right? The uncertainty is what happens, right, to the broader economy over there, what happens to consumer demand, what happens to some of those knock-on effects that could influence. But from what we have control, I see margins walking higher.

Understood. Maybe just pivoting to China a little bit. It seems like you're tracking a little bit better than what you communicated on just the margin headwind this year, the 100 basis points and maybe some of that flows into next year. Maybe help us understand like how it's coming better, why it's coming better? Are we up for another surprise next year? Maybe just help us run through that.

Yes. I'd say that we've been very transparent over the course of the last year, indicating that as we pivot from being more concentrated in the past, go back 2 years ago, we were probably 60% weighted towards foreign manufacturers, 40% to local Chinese manufacturers. We announced a couple of years ago, based on our backlog, based on our wins, that we'd see that pivoting and we'd be more representative of what the Chinese macro look like in the industry there. And today, we're sitting at, call it, 60%, 65% Chinese local, 40% foreign. Well, as that has happened, we indicated that there would be margin compression as certain of our legacy customers like the Volvos of the world, the Mercedes of the world sold less and the Chinese manufacturers sold more. But the team has done a good job at managing that. So we gave you the guidance of about 100 basis points. Team has done a good job of offsetting certain of those headwinds, right, whether it's through automation, whether it's being more efficient with SG&A, right? So as Jim and his team continues to work to expand margins over there, the APAC team and the China team is working very hard to at least minimize any type of degradation, right? So that's why you're seeing the margins result come out a little bit better this year. But if some of that bleed into '27, probably we'll be out within, call it, 1st of November with our guidance for '27. But our overall thought is if we can contain that margin degradation to, call it, 100, 150 basis points in total from where we were starting with, which was a very robust double-digit margin, right, as long as we're continuing to grow the top line, it's going to convert into additional EBITDA, going to convert into additional cash flow, right? Net-net, it's better for the region and for the company.