Welcome to the Adient Second Quarter Financial Results Earnings Conference Call. [Operator instructions] Today's conference is being recorded. I'd now like to turn the call over to Mike Heifler. Thank you, you may begin..

Thank you, Amanda. Good morning, and thank you for joining us. 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 Jerome Dorlack, Adient's President and Chief Executive Officer; and Mark Oswald, our Executive Vice President and Chief Financial Officer. On today's call, Jerome will provide an update on the business followed by Mark, who will review our Q2 financial results and outlook for the remainder fiscal 2024.

After our prepared remarks, we will open the call to your questions. Before I turn the call over to Jerome and Mark, there are few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties.

I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete Safe Harbor statement.

In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release.

And with that, it’s my pleasure to turn the call over to Jerome..

Thanks, Mike. Good morning, everyone. Thank you for joining as we review our second quarter results, discuss the drivers for a revised full-year outlook, and share insights into the long-term direction of the business and how we plan to create value for our shareholders. Turning to slide 4, let me begin with a few comments related to the quarter.

I'm proud of the Adient team for delivering strong results underscored by 60 basis points of margin expansion from a year ago through being nimble, finding incremental efficiencies and maintaining a laser focus on flawless launch execution.

The team was able to overcome a production volume environment that was weaker than ongoing expectations, driven by slower than anticipated ramp of key launches and softening EV demand in the Americas and EMEA regions.

The Americas and EMEA were able to proactively take out costs through austerity measures, reduced freight expense, and carefully controlled launch expense, driving improved business performance in the face of volume challenges.

In China, we continue to execute at a best-in-class level operationally, which drives commercial success and new business wins. Turning to Adient's key financial metrics for the quarter, which are shown on the right hand side of the slide, revenue for the quarter, which totaled $3.8 billion, was down about 4% compared to last year's second quarter.

Adjusted EBITDA for the quarter, which totaled $227 million, was up 6%. Adient ended the quarter with a strong balance sheet with modest leverage of 1.7x and a strong cash and total liquidity position of $905 million and $1.9 billion, respectively.

We've highlighted a number of customer and industry awards received in Q2 as proof points of our strong operational execution and commitment to delivering on-time and on-target for our customers.

And our customers are recognizing us as a supplier of choice as evidenced by two significant honors from GM, the Overdrive and Supplier of the Year awards, the Supplier of the Year award from Toyota, and recognition from Hyundai Kia Motor Group at their Global Supplier Day, where our customer underscored the pivotal role Adient plays in sustaining supply chain efficiency, delivering world-class quality, and advancing sustainable practices.

J.D. Power recognized our China team with nine initial quality study awards, another proof point that we are operating and executing at best-in-class levels.

In addition, as part of our balanced capital allocation policy, we remain committed to returning capital to our shareholders and repurchase $50 million of our shares bringing our total share repurchases year-to-date to $150 million.

Turning to slide 5, let me walk through some of the dynamics influencing our first half and the expected second half results versus our original expectations going into the fiscal year. In the first half of the year, Adient delivered very strong results totaling more than $85 million of year-over-year cumulative performance in the first two quarters.

We drove larger than anticipated improvements in operational execution and SG&A through additional compensation-related austerity measures, and our commercial teams were successful in working with our customers to recover inflationary headwinds. Performance improvements offset challenges in production volumes.

The company was impacted by weaker program mix, slower than expected launches on key programs and softer than anticipated EV demand in the Americas and EMEA regions. The net result of these puts and takes was a solid first half in line with internal expectations.

As we entered the year, we anticipated improved volumes in the second half as we put the effects of the strike-related production disruptions behind us and move past the launch phase of some very significant volume programs.

Today, we see a production environment that continues to be adversely impacted by negative customer and customer program mix, particularly in EMEA and the impacts of lower EV demand in the Americas and Europe. These factors are expected to negatively impact earnings contribution.

That said, we continue to expect our track record of solid business performance to continue and we are working hard to execute what we can control to drive performance in the face of volume challenges.

As you can see on the right hand side of the slide, the net effect of these factors, specifically volume and customer mix are driving a lower FY24 outlook. Mark will cover this in further detail in a few moments. Turning to slide 6, let's discuss the dynamics influencing our regions in FY24 and more importantly beyond FY24.

Our APAC business is the growth engine of the company, particularly in China as we participate in numerous launches and new business. We are growing with the domestic OEMs in both NEV and ICE and expect these customers to represent 60% of our in-region revenue in the next few years, up from 40% last year.

As we look beyond this year, we expect our strong growth to continue in the region, continuing to improve total Adient margins and free cash flow as this region becomes a larger part of the portfolio, presenting any tailwind from a mixed standpoint.

In Europe, we are seeing the impacts of unfavorable customer and platform mix and its lower EV adoption curve.

Beyond the current fiscal year, external forecasts and our internal expectations are for a structurally lower addressable market driven by lower exports, imports from Asia, and the potential for customers to insource the JIT portion of our seating revenue.

As we announced a few weeks ago, we have taken actions to proactively address these changing dynamics. We will continue to evaluate our cost structure to align with the reset production environment. We are not sitting still. Opportunities to improve business performance are being evaluated.

And finally, in the Americas, we continue to see solid core execution within the business. The volume pressures in the region are temporary to some extent.

Our expectations for the region are to continue to reshape our metals portfolio, reducing our lower margin business and replacing it with business where we can earn an appropriate return and support our increasing levels of vertical integration.

We expect to continue to emphasize customer relationships where we can strategically add value and de-emphasize business where we do not see a path towards increasing profitability. Turning to 7, and diving a bit deeper into each of the regions. Our Asia Pacific region continues to be the growth engine for the company led by our business in China.

The APAC business has consistently delivered the strongest margins of our three regions driven by flawless execution, a solid customer base, high levels of vertical integration and a world-class operating team. Given the strengths of the business, we expect to continue to allocate capital to the region and emphasized growth.

As indicated on the slide, we have built a solid backlog including a very strong portfolio of wins, an FY23, which contributes to our expectation for substantial growth in China. And our customer base continues to be shaped. We've been awarded business from a host of new customers over the past several years.

Our team in China is able to work at the pace of our Chinese domestic customers, the leadership in the region is tasked with driving that business and has the tools and the autonomy to act with speed. Our customers value that speeds to market and the team's high level of execution.

Our Asia business outside of China is also strong and is a growing business with a solid customer portfolio. Turning to slide 8, as I discussed earlier, the European automotive market is quite dynamic and continues to be impacted by external and structural influences, resulting in a flat to declining vehicle production environment.

As such, the company routinely assesses the landscape to identify and execute actions to improve Adient’s profitability and cash generation. The actions we announced two weeks ago are in direct response to structurally lower production volumes in the region.

The European production environment is taped substantially from the pre-COVID environment, driven from imports from Asia, the pace of EV adoption, and again, the potential insourcing of the JIP portion of our seating business by certain customers within the region.

We took $125 million cash restructuring charge in the quarter that we expect will result in future cash expenditures of a similar amount. These expenditures will be primarily spread between fiscal years ‘25 and ‘26 and substantially complete by fiscal year ‘27. Payback period is typical of these types of actions with approximately a 2.5 year payback.

We anticipate approximately $60 million in reduced annual operating costs from this activity of which roughly 80% will result in net savings of $50 million. The incremental restructuring is intended to align our cost structure across our functional teams to reset the production environment.

We believe these actions will support better margin performance in Europe and are consequently a step in helping us achieve the overall margin expansion. The team is in process of evaluating various scenarios to enhance shareholder value over time.

Once we complete our long-term strategic plan expected later in 2024, we will provide additional details. Turning to slide 9, in the Americas region, we view the setup as favorable for continued execution and margin expansion.

Our relationship with the Asian OEMs is a competitive advantage and we believe we benefit from their flexibility and powertrain decisions in the current environment as they have emphasized hybrids and longer dated BEV launches.

These customers also tend to source Adient, a highly vertically integrated program which drives opportunities for improved operational efficiencies. Earlier this month, we launched a modular program with one of our Asian customers that we expect to deliver margin expansion versus the prior generation of the same vehicle.

We also continue to reshape our metals portfolio with the expectation for a smaller, higher margin metals business that supports our JET business. Lastly, we can leverage our innovative offerings that are in production in China to drive increased seating content within the Americas region.

Moving on to slide 10, several recent and upcoming launches are highlighted here. The team is focused on executing on our launches, which include a large number of high complexities launches.

We continue to deliver exceptional safety, quality, and on-time delivery metrics, several programs are experiencing slower than unexpected launch ramps as customers produce at lower volumes. However, our execution has been strong.

I do want to take the opportunity, however, to highlight the Infiniti QX80 launch occurring in our Asia Pacific segment as an example of how Adient can add value to our customers through greater vertical integration and a high feature seat system. On this program we have the JIT, Foam, Trim, and Metals.

In addition, versus the prior generation, we've in-sourced the metals where it was previously produced on the outside.

The customer uses Adient engineering design, and the seat system encompasses a high level of content that includes sound and seat, massage, seat heat, ventilation, power side bolster, power lumbar support, and recline features and mechatronics that are above and beyond what we've done historically.

Ultimately, this level of content drives more than triple the average seat content, and our level of vertical integration is a key driver of profitability. Several new recent business awards are highlighted on slide 11. These new business awards once again represent our deepening levels of vertical integration with a strategic customer set.

Wins include foam and trim in addition to the multiple JIT programs, which are expected to drive future margin expansion. We are continuing to emphasize customers and programs that we expect to be winners as the market dynamics around ICE and varying levels of electrification across the globe play out.

In closing on slide 12, as I have met with many of you in recent weeks, I appreciate the question around what is the long-term vision for the company, and do we still believe in the 8% EBITDA margin goal? I want to assure you that Adient is committed to driving shareholder value through margin expansion, free cash flow, and earnings growth.

We are not counting on growing industry volumes and expect to achieve these goals in a flat production volume environment. The key enablers of margin improvement are listed in order of magnitude and are expected to deliver 200 basis points of margin enhancement.

These are the key drivers towards adding and achieving an 8% adjusted EBITDA margin as we exit fiscal year 2027. We expect to progress steadily over the upcoming years towards that target underpinned in part by the assumption that production volumes will largely be in line with third-party forecasts.

That said, we are not satisfied with the status quo. As we continue to plan for the mid and long term, we expect to proactively identify and execute actions to accelerate our attainment of that margin target. And with that, I'll turn it over to Mark to cover the financials..

Thanks Jerome. Let's jump in the financials on slide 14. Adhering to our typical format, this page is formatted with our reported results on the left and our adjusted results on the right side.

We will focus our commentary on the adjusted results which excludes special items that we view as either one time in nature or otherwise skew important trends in underlying performance.

For the quarter, the biggest drivers of the difference between our reported and adjusted results relate to the European restructuring charge which Jerome covered, purchase accounting amortization, and certain tax adjustments. Details of all adjustments for the quarter are in the appendix of the presentation.

High level for the quarter, sales were approximately $3.8 billion, down 4% compared to our second quarter last year. Lower volumes resulting from the timing and slower ramp of launches as well as slower pace of electrical vehicle production and the negative impact of FX movements between the two periods drilled the year-on-year sales decline.

Adjusted EBITDA for the quarter was $227 million, up 6% year-on-year. EBITDA margins expanded 60 basis points. This favorable performance is primarily attributed to benefits associated with improved business performance in net commodities. These benefits were partially offset by the impact of lower volume and mix.

And to a lesser extent, the negative impact of currency movements between the periods. I'll expand on these key drivers in just a minute. Finally, at the bottom line, Adient reported an adjusted net income of $49 million or $0.54 per share. Let's break down our second quarter results in more detail.

I'll cover the next few slides rather quickly as details for the results are included on the slides. This should ensure that we have adequate time for the Q&A portion of the call. Starting with revenue on slide 15, we reported consolidated sales of approximately $3.8 billion, a decrease of $162 million compared to Q2 fiscal year ‘23.

The primary driver of the year-on-year decrease was lower volumes of $134 million. The impact of FX movements between the two periods weighed on the quarter by $28 million.

Focusing on the right hand side of the slide, Adient’s consolidated sales were lower in Americas and EMEA while sales in Asia grew by about 2%, driven by a 13% year-on-year increase in China.

In the Americas, lower sales were the result of program launches on key platforms such as the RAM, Tacoma, Traverse, and Enclave that moved slowly through the launch curve at our customers. In Europe, we modestly outperformed the market in line with our internal expectations.

In an Asia Pacific, our China business enjoyed strong volumes, outpacing the market by over 3x. Platforms providing the tailwind included Shaopeng, H93, Schengen, E12, and Lincoln Nautilus, among others. With regard to Adient's unconsolidated seating revenue, the year-on-year results were up about 18% adjusting for FX.

In China, where a large majority of Adient's unconsolidated sales are derived, the strong increase in sales was driven by improved volumes at certain of our joint ventures. The effect of a deconsolidation of our Langfang entity also provided a sales benefit, call it 300 basis points.

Moving to slide 16, we've provided a bridge of our adjusted EBITDA to show the performance of our segments between periods. Big picture, adjusted EBITDA was $227 million in the current quarter versus $215 million reported a year ago. The primary drivers of the year-on-year comparison are detailed on the page.

Improved business performance of $47 million largely helped offset a stronger than expected volume and mixed headwind as the team drove incremental efficiencies and achieved strong commercial recoveries. Within that bucket, the biggest positive driver was improved net material margin of $33 million.

Improved freight costs, engineering spend, and certain compensation-related austerity benefits also contributed to the strong performance. Partial offsets within business performance were launch and tooling costs as we navigated a quarter with significant launches as well as increased labor costs.

Net commodities were a $20 million benefit within the quarter. Improved gross costs were partially offset by lower commodity recoveries. The year-on-year comparison benefited from the nonrecurrence of unfavorable inventory revaluation in the year ago period. Equity income was $8 million higher year-on-year.

This was a result of improved volumes at unconsolidated joint ventures and to a lesser degree the effect of the deconsolidation of our Langfang entity.

Headwinds partially offsetting the benefits I just described included the volume and mix impacts of $51 million, Adient’s program mix in the Americas was influenced by a number of launches that moved slowly through the launch phase as customers did not run at anticipated rates as I previously mentioned.

The negative impact of currency movements between the two periods was $12 million. As we indicated previously, we expected FX to be a headwind for the quarter and full year, no significant changes to those expectations as we look out over the remainder of the fiscal year.

All-in-all, a very strong quarter, the team deserves credit for the solid performance as we navigated a challenging launch and volume environment. Similar to past quarters, we provided our detailed segment performance slides in the appendix of the presentation.

High level for the Americas, improved business performance was the primary factor driving positive results.

Business performance was driven by lower freight costs as freight lanes and manufacturing efficiencies resulted in lower logistic costs, increased net material margin, certain compensation related austerity measures, and lower engineering spent. Partially offsetting these benefits was increased labor costs, as well as higher launch and tooling costs.

Partially offsetting the improved business performance was the impact of lower volume and mix, as I discussed earlier.

In EMEA, the year-on-year improvement was influenced by several factors, such as improved net commodities, which were driven by improved gross pricing and nonrecurrence of unfavorable inventory revaluation in the year ago period, and improved business performance driven by improved material margin and lower freight costs.

Volume and mix were a headwind. In Asia, business performance improved as net material margin and labor efficiencies more than offset increased launch costs. Equity income was driven higher by strong sales and solid performance at our JVs.

Offsetting these benefits were headwinds associated with adverse mix in the quarter in FX, primarily related to the RMB, Japanese Yen, and Thai baht. Let me now shift to our cash, liquidity, and capital structure on slides 17 and 18.

Starting with cash on slide 17, I will focus my comments on the year-to-date results as the longer timeframe helps smooth some of the volatility in the working capital movements. Adjusted free cash flow defined as operating cash less CapEx was an outflow of $2 million. This compares to $53 million of free cash flow in the first half of last year.

The primary drivers for the year-on-year results are listed in the right hand side of the slide. I will not read each, but important to point out that the slight cash outflow in the first half of this year is related to timing in line with our expectations. We continue to expect strong free cash conversion for the full year.

One last point and called out on the bottom of the slide, adding continue to utilize various factoring programs as a low cost source of liquidity. At March 31, 2024, we had $131 million of factored receivables versus $170 million at fiscal yearend.

Flipping to slide 18, as noted on the right hand side of the slide, the company returned $50 million to shareholders in the quarter, bringing the total year-to-date cash return to shareholders to $150 million.

As we indicated previously, the cash on the balance sheet combined with our confidence and our ability to generate cash underpins the company's ability to execute its capital allocation strategy. As a reminder, we have $385 million remaining on our share repurchase authorization. With regard to our balance sheet, it remains strong.

Adient's debt and net debt position totaled $2.5 billion and $1.6 billion, respectively, at March 31, 2024. The company's net leverage at March 31 was just over 1.7x, well within our targeted range of 1.5x to 2.

Our total liquidity of $1.9 billion, comprised of $905 million of cash on hand and $974 million of undrawn capacity under Adient's revolving line of credit. Now turning to slide 19, just a few comments related to our outlook for the remainder of fiscal year 2024.

We are updating Adient's 24 guidance to reflect our Q2 results in current market conditions, including revised production assumptions and current FX rates. At the top line, we have updated our sales guidance to $14.8 billion to $14.9 billion. Relative to our prior expectations, we have seen softness in Adient's customer vehicle production.

This is driven by the factors that Jerome and I discussed earlier, specifically the slower ramp of launches, adverse customer mix and lower volumes on electric vehicles versus previous expectations. The slower launches impacted our second quarter by approximately $150 million in sales.

The balance of the expected lower production is spread across the second half of this fiscal year. Our adjusted EBITDA outlook is updated to reflect the volume impact of the lower top line.

Using a typical 17% to 18% decremental on the lower sales expectations, we see about $100 million of volume and mixed headwinds on EBITDA versus our previous guide. We expect to partially offset the headwinds through performance, which now places our forecasted EBITDA in the range of between $900 million and $920 million.

Equity income is now expected at $80 million. This is driven by higher volumes at our unconsolidated joint ventures. Moving on, interest expense is still expected to be about $185 million, given our expected debt and cash balances, as well as interest rate expectations. Cash taxes continue to be forecast at about $105 million.

For modeling purposes, tax expense is estimated at $110 million, reflecting our revised earnings expectations for the year. CapEx, largely based on customer launch schedules, is forecast at $310 million, no change from our prior guidance. And finally, our free cash flow is expected at $250 million, reflecting the lower level of earnings.

We expect some modest working capital offsets to the EBITDA impact on cash flow. Turning to slide 20, we thought it would be helpful to include a bridge of our expectations for the key drivers of the year-on-year outlook.

Recall last year, we noted $30 million on nonrecurring items related to insurance recoveries that should be backed out of the run rate heading into ‘24. We expect business performance to drive $190 million to $200 million of benefits in fiscal year ‘24.

The team is working diligently to achieve this and we have a line of sight on the actions we need to take to drive this result. We see about $100 million of volume and mixed headwinds as discussed previously. FX continues to be anticipated as approximately $60 million headwind. Footprint changes are $20 million headwind as previously disclosed.

And equity income is now expected to be $10 million lower previously expected at $20 million headwind. All-in, we continue to forecast margin expansion driven by strong business performance offsetting the volume challenges. With that, let's move to the question and answer portion of the call.

Operator, can we have our first question, please?.

[Operator Instructions] Our first question comes from Emmanuel Rosner with Deutsche Bank..

Thank you very much. Good morning. My first question is around the implied revenue outlook for the second half of the year. So it seems like backing to your business guidance is probably just about flat maybe first half to second half, maybe a little bit better than that. Yet, obviously, your revenues in the quarter were in line or better.

A lot of the launch issues and slow ramps would have probably already occurred this past quarter. So can you maybe just characterize a little bit better what you're seeing in terms of your customer schedules? Because I would have thought some of these launch and ramp issues would have impacted the quarter, but they didn't.

But now it seems like they're impacting the second half to the point that you're not really seeing any sequential improvement, even though these things are still ramping..

Yes, Emmanuel, this is Mark. So as I indicated the launches did impact the second quarter by, call it, the $150 million, which we called out. We do expect that the launch performance will improve, but it's not going to get full up to the, what I'd call the run rate that we had expected heading into the fiscal year.

So you're absolutely right first half sales call it $7.4 billion, second half slightly better. So we do see modest improvement going the second half, but it's not to the expectations that we had originally planned heading into this fiscal year..

And just a quick follow up on this, and then I have a separate question, but what do you think is sort of the fundamental issue around some of these slower rounds? I guess what is the industry struggling with?.

Yes, I guess I wouldn't say it's one particular, I think each customer is different, right.

So if I look at certain of the customers, they've came out and indicated their own specific challenges, whether it's software issues at certain places, whether it's being able to produce the high end trim series on certain pickup trucks that they're trying to launch, right.

So it varies across customers, but it's more of the fact that they're putting more complexity into their vehicles, the fact that when these vehicles are coming together and launched, they're not going up the launch curve as planned, and that tends to have a tail to it..

Understood. And then I wanted to come back to your slide 12 and an update on some of the longer term targets for margin improvement. So the factors you mentioned are helpful.

I wanted to ask you specifically about the metals exits, because I think last quarter you raised essentially a question that the piece of the margin improvement that relates to metal exit may sort of be delayed as a result of some of your customers' decision to maintain those ICE platforms running for longer.

Is this no longer an issue because you have more clarity on it, or is it because now this is a target exiting fiscal 2027 and you assume that by then these platforms will have essentially run out?.

Yes, I think it's the latter portion of your statement, Emmanuel, that is, as we now look at when we believe the balance-in balance-out will occur on these metal programs, and we look at getting to 8% by 2027, the vast majority of those metal projects will be out of the system by then, looking at the latest schedules from our customers and when those things kind of flush themselves out of the system now.

Looking again at their latest LRPs, their long-range plans, their balance-in balance-out, that's what we believe to be true..

Our next question comes from Colin Langan with Wells Fargo..

Hey guys, this is [inaudible] filling in for Colin. I'll start off, if you can just provide a refresher on the EBITDA walk, mainly like breaking out some of the pieces in the business performance and how it's offsetting the volume cut..

Yes, I'll start. So just high level, and that's what we included the slide and the deck indicating walking from last year's what I'd say run rate of $908 million up to call it the $910 million at the midpoint of this year's guide. Right, your business performance is going to be somewhere in that $190 million to $200 million.

We indicated that we expect about $100 million of volume headwind this year, and the rest of the elements pretty much are in line with what we expected as we came into the year. So FX still that $60 million headwind primarily with the Mexican peso there.

Other footprint changes call it $20 million, and then equity income performing slightly better than expectations, call that a $10 million headwind. So those are the primary buckets walking you from last year to this year's guide..

Okay, are you able to kind of break out what's exactly in the performance bucket the $190 million to $200?.

Well, again, it's the combination of factors that we've been calling out throughout the course of the year, right. So it's certain balance-in balance-out that has a favorable effect. It's the fact that we have lower freight costs, we're getting efficiencies with modularity that plays a role there. Our C&I continues to do extremely well.

And obviously, those are net positive and offset certain of the other headwinds or challenges such as labor costs increasing, right. So net-net that business equation for us on business performance continues to be very positive..

Yes, and I would add to that in addition, you have in there things such as net positions on customer pricing where we have certain things that have creeped into our network, especially in our European operations, such as energy, such as the labor environment over there.

And that's really the net position of what we're able to work with our customers on from a VAVE and repositioning our footprint and other activities to offset some of those pressures. And really the net position of those discussions with our customers, same thing in the Americas.

When we think about the labor inflation that we have in Mexico, some of the constitutional changes that have taken place there with the 20% increases, but yet we're constantly driving our footprint improvement, and the net position of those discussions with our customers on a pricing basis.

So it's really that, what we kind of call a basket of good discussions. In addition to the factors that Mark talked about, the modularity activities, the automation that we have already been driving in our plants and have been driving really for the last two and three years, the net output of that.

It's really all of that that plays into that business performance bucket..

That was an excellent call, thank you. And then one last one on buybacks, I mean, your leverage is trending towards maybe the lower end of their range, you're in good cash position. I think you have a little more than half of the cash backlog remaining in the year, and you reduce your free cash flow.

So how can we think about the cadence on buybacks for the rest of the year? Is 50 million a good sustainable rate, or do you expect to taper down from there?.

I think when I look at the share of purchases this year, clearly, we've been for the first six months of this year, call it pretty much cash neutral for the year, right, in terms of free cash generation. So we've taken cash off the balance sheet to achieve the $150 million of repurchases through the first six months.

We'll generate our free cash flow as we go through H2 this year. So I would expect the buybacks to continue, right, as we've done in the past, we'll continue to execute those prudently and we'll make sure that we balance the share repurchases versus we've got the 3.5% Euro notes that are due in August, right.

So there's going to be certain amounts of calls for cash. But again, I would say that the pacing should be fairly similar..

Our next question comes from [inaudible] with Bank of America..

Hi. Good morning, guys. Just one question on the strength of China.

So what is driving such a strong market there in your market share gain? And on the second leg of this question is, so Asia is your strongest region in terms of margin? Even if we exclude the equity income, could you give us more color why that continues to be that strong?.

So I'll take both of those questions and appreciate your time today on the call. And the first part really what drives our continued share gain and continued strong revenue performance in China really comes down to a couple factors. The first one being the strength of the team that we have there.

It really all starts with our people and that team's ability to execute. And the fact that they're quick, they're nimble, they have the autonomy to really drive a product offering that meets our customers' needs within that region. And they do it with speed. They do it with urgency. And they do it with a focus of every day meeting our customers' needs.

And because we have a very attractive standalone business there, we don't have to operate through a JV network like some of our competitors do. I mean, we have a very attractive wholly owned entity that is very strong in really all regions.

In the north, in the west, and even in the south where we have footprints that are where our customers are, we have three major tech center hubs within the region as well. Two of them are fully capable tech center hubs that our customers really recognize as being world class. And so our customers turn to us for solutions as well.

So if you really look at what it takes to be successful, you have to act with speed. You have to be where your customers are, and then you have to have technical capabilities to be able to turn engineering solutions very quickly. And we have all three of those, and we're able to punch all three of those boxes.

So that's why I really think we're able to grow as fast as we're able to grow within that region. And when we look out over the long term, we really do see that trend continuing with a fairly high booked percentage rate over the next 36 months that gives us a lot of confidence in our continued growth over market within the China region.

Moving to your second question on the margin profile within Asia and really what drives our margin profile within Asia, it comes down to a couple things.

One is the sourcing profile of our customers within Asia is one of they really award us full vehicle platforms and what I mean by that is it is the jet, it is the trim, it is the foam and in a lot of cases, it is the metals and so we have the ability to integrate full vehicle solutions for them and so not only are we getting value but they are also getting value through more cost effective seating solutions because they are not parsing out jet to one guy, trim to another, foam to another so we are able to deliver to them a higher quality seating system at the end of the day with better appearance, better comfort, better quality, more bespoke customer solutions so they get a lower cost solution, they get a better quality solution, they get a solution that’s more customer driven, customer focused and as a result we also enjoy a better margin profile out of that because we have more vertically integrated content than we do in some of our other regions.

The other thing that we see in that region generally is a faster turn on the product and I think there is been a lot of talk about this not only from us but also from a lot of publications just on if you look at what happens in some of, in Europe and the Americas when you get into a contract, you're in that contract that used to be for seven years now we have some contracts that are running for 10 years, and we have one contract that's now coming up on a 12-year anniversary, and if it's an unfavorable contract, it's very difficult to then renegotiate some of those terms.

In Asia, in China in particular you're turning some of these contracts every two years, at most it seems like every three years, and so if you do get into a bad contract, you're generally not stuck with it for long, but also you've got the ability just through change management and working with your customers to drive a lot of VAVE as well, and so you're constantly iterating and driving value through Adient's ES3 process to be driving market solutions, be driving cutting-edge engineering solutions into the product that are driving value enhancement, not just for Adient, but you're also driving value enhancement for the customer and more importantly for the end customer.

And I really think if you look at the QX80 the next generation QX80, that's a great example of that, where you've got versus the outgoing vehicle to the incoming vehicle, full content for Adient, but also a world-class interior for Nissan or for Infiniti in this case, and also for the end consumer, where we have the full -- really the full value chain on that.

So that's really what differentiates us in that region versus some of our peers as well is one we operate wholly owned entities in China, a very vast network, but also our Japanese footprint that we have in the region as well..

Thank you, Jerome. And just one additional one on the restructuring action in Europe, should we expect any additional action in the future? And with that, what I'm trying to understand is, so it seems like the region is going to see more input from China, but at the same time, the European Union may enact some actions to prevent some of the imports.

So I'm wondering, have you, did you take all the action to be dimensioned to the current market, or did you leave some, any buffer to account for potential, I don't know, rebound in EU production or volumes?.

I mean, how we would answer that as a management team is to say we're going through kind of our long range strategic plan right now, reevaluating what we need to do to accelerate our attainment of the margin goals, in particular in Europe, we're not satisfied with the status quo and we will act accordingly to address what it takes to be competitive in that region.

And if that, if one path is to drive and act on a reduced footprint size, we'll evaluate that, but more importantly, we'll be good stewards of capital and good stewards of cash for our shareholders and for our stakeholders. So it's -- we're not here today to announce whether we're going to look at additional restructuring in the region or not.

More importantly, what I will say is we'll look at a holistic view of our European region and a holistic view of Adient's capital needs, and look at the best outcome for our shareholders and stakeholders in light of driving towards a long-term sustainable margin target..

Our next question comes from Dan Levy with Barclays..

Hi. Good morning. Thanks for taking the questions. Wondering if you could just provide a couple points on clarification on the revised guidance for this year.

One, maybe you could just talk to the assumptions on commercial recoveries, how much is embedded for the second half, what did we see in the first half, and then maybe you could just delve a bit deeper into the offsetting business performance that's mitigating some of the revenue decline versus the prior outlook..

Yes, Dan, I'll start, and then Jerome can weigh in. But when I look at first half, second half, Dan, commercial recoveries are going to be slightly lower in the second half versus first half, so it was more tilted towards the first half there.

So the big drivers as I get into H2, there's slight volume pickup, but not much as we answered Emmanuel's question earlier. Then we have some what I'd call business performance which really continues to drive increases in H2.

Again, that's certain of the C&I that comes in, that's certain of the labor at the plants as the customers continue to progress up the launch curves, we're going to be more efficient in those plants, right. We're going to drive lower freight costs as we have renegotiated certain of the costs of the freight lanes, right.

As Jerome indicated, we've launched a modular program with one of our JOEMs, right, so that will be at run rate in the second half of the years.

Again, it's more of what I'd say the blocking and tackling with those continuous improvements in those business performance drivers in the second half, that's really what overcomes what I'd say that shortfall in volume that we were expecting..

Great. Thank you. And then the second question, I want to go back into the vertical integration question, which I think you've faced in the past, and you said you're quite happy with the vertical integration that you have.

But amid this tougher environment, I think, for discussions with OEMs and the margins that they're facing, are there any revisions to the vertical integration strategy? Are you still happy with what you have?.

I think in the seating space, we're still very happy with the products that we're vertically integrated in.

I think the footprint that we have on foam is second to none, and our ability to execute on foam is still outstanding, on a trim standpoint, we have very strong competitive moat, and the ability to spin up a trim plant and place 1,500 people and do that at a world-class level like we're able to. It's difficult.

It's proven to be difficult, and there's some pretty high barriers to entry there. And on a metal standpoint, I think I don't necessarily need to replay the challenges that we've had on metals and integrating and how difficult it can be there to break into that area.

And more actively, as we've said, trying to skim back some of our metals and really focus where we have vertical integration. We've talked a lot about the comfort system side of it.

And on the comfort system side, I think to go in on a vertical integration wholesale is, as we've talked about in the past, there's some risk associated just because you have a lot of new entrants and threats coming in from China that are diluting the market and diluting the margin profile there.

And they're spreading pretty rapidly with footprints in Mexico and Europe, and there's inherent risk to be had there. So wholesale to go in, I think, is difficult. We may look at, is there a way to get in potential limited investments and partner with them, similar to what we've done in the past. It's something we may want to evaluate.

I think we have a very strong technical relationship with Gentherm that we've leveraged already to displace some incumbent business with some of the higher cost suppliers, and we continue to drive that with them. And actually, we're using it today even to partnership on pursuing incremental business that's not in our book for both them and us.

So, I think that continues to be fruitful. I think when we look outside of seating, are there other things that are could be attractive for us we continue to evaluate.

That are, say, in the seating space, that are natural bolt-ons to seating that would lead to some level of vertical integration, but also give us exposure in markets that would be accretive. I think we continue to evaluate that.

But again, it comes down to kind of capital allocation and what's the best decision long term from a total capital allocation perspective.

But certainly anything that would make us more relevant long-term and diversify our risk exposure, as you said, to customer pricing pressure is something that we're evaluating and we continue to evaluate in a very dynamic environment.

And anything that would help us gain scale in Europe and defray some of the risk that's there is also something that we're evaluating..

Our last question comes from Joe Spak with UBS..

Thanks. Mark, maybe one first quick clarification.

When you talk about adverse customer mix, are you talking about certain customers growing at different paces than other customers? Are you talking about within the programs you're on, just a lower trim level that maybe less content?.

Yes, it's within the programs we're on. So if you think about, we called out the Acadian Traverse, for example, right. Those are good programs. Unfortunately, they were adversely affected this quarter and looking into Q3 because they're not getting up the launch curve as fast as they had anticipated..

Okay.

And then just back to the path to 8%, I understand like a good chunk of this is sort of that’s going to balance out, which is maybe going to take a little bit longer, but like maybe you could just help it remind us like of the 200 basis points, like how much of it is really that balance-in balance-out, how much of it is more net performance, like under your control, right, improving the self-help improvements with your operations and how much of it is volume..

Yes, I'll start on that, Joe. So when I think about what's in our control, right, as we indicated, we're not assuming a volume tailwind to get us there, right.

So when I think about growing in China, for example, right, that's us making sure that we're winning business and we're providing our customers with value so we can continue to grow that backlog, right.

When I think about improved business performance in the Americas and EMEA, that's within our control because again, as Jerome indicated, right sizing our metals business, right. What can we continue to do on a modularity perspective? The team continuing with automation at certain of our foam and metals plants, right. That's within our control.

Proactive restructuring in Europe, for example, right, that's us taking a look at our footprint, trying to understand, A, can we get scale out there if we can't get scale, right? What do we have to do to revise that footprint? So I'd say it's more concentrated on what we can control. Now that said, there's macro pressures that influence that, right.

So I still have to offset things like FX, for example, the Mexican peso, right. I still have to look at labor costs, right. So certain of those things will obviously impact timing. But again, as Jerome indicated, we have a roadmap to get us to that 8% and we have not walked away from that..

Yes, and I just follow on with what Mark was saying. I think what's important for us as a management team is looking at it and we're not sitting there. We're not happy with the status quo and really identifying what levers do we have to accelerate it.

And I think the European restructuring action that was announced a few weeks ago was really the first step now towards accelerating that, not sitting still and really taking a proactive action towards that.

I think the modularity that we're now accelerating in the Americas is really driving that, realizing that the labor market in the US now has fundamentally shifted. What can we do to downscale some of our JIT plants, actively move labor out, accelerating some of the automation activity that we have already started in our metals plants.

That journey started two and three years ago, working towards accelerating that activity. So these are tools that we have around us. It's now what is -- what can we do to begin to accelerate those to crystallize this path towards the 8% overall goal..

So that's helpful, and I appreciate you guys are doing hard work.

I guess what I'm trying to understand is assuming you can execute on all that, right, I mean how much of the 200 is actually just reliant on this sort of balance-in balance-out? Is it a third of it, or ballpark? What are we talking about?.

Yes, I'd say it's roughly a third of that between now and then is that balance in balance out profile..

Thank you very much..

Yes, so you've got just rough ballpark. You've got about a third of the balance-in, balance-out. You've got, call it a third of what I call a mixed tailwind of our China growth as it accelerates, and then a third of business performance, which I'd put in there. The restructuring actions that we've already announced in other business performance..

And with that, it looks like we're at the bottom of the hour. So again, appreciate everybody's calls, questions. If you have additional questions, feel free to reach out to Mike, myself, who are available today. Again, thanks for the time..