Adient - Earnings Call - Q2 2025

Executive Summary

• Q2 FY25 delivered a solid operating beat: Revenue $3.611B vs S&P consensus $3.440B and adjusted diluted EPS $0.69 vs $0.33; adjusted EBITDA margin rose 40 bps YoY to 6.5% as operational efficiencies offset volume/FX headwinds. Values retrieved from S&P Global.*
• GAAP results were heavily impacted by a non‑cash EMEA goodwill impairment of $333M, driving GAAP diluted loss per share of $(3.99) despite stronger underlying performance.
• Management reaffirmed FY25 revenue and adjusted EBITDA outlook, while raising expected interest expense to ~$190M (from ~$185M) and lowering FY25 free cash flow guidance to $150–$170M due to timing of tariff recoveries and accelerated European restructuring cash costs.
• Tariffs were a manageable headwind (~$9M in Q2) with ~75% of gross exposure already addressed via resourcing and customer recoveries; management is targeting 100% offsets/resolution over time.
• Near‑term stock catalysts: visible EPS/revenue beat vs consensus, reaffirmed EBITDA outlook, and tangible tariff mitigation progress; goodwill impairment may temper reaction but underscores EMEA restructuring urgency.

What Went Well and What Went Wrong

• What Went Well

  • Adjusted EPS and revenue beats vs consensus with margin expansion: Adj. EPS $0.69 vs $0.33; revenue $3.611B vs $3.440B; adj. EBITDA margin 6.5% (+40 bps YoY) as business performance and lower launch costs offset headwinds. Values retrieved from S&P Global.*
  • Americas outperformance and margin improvement driven by efficiencies and favorable program mix; adjusted EBITDA up YoY with 5.5% segment margin.
  • CEO emphasized resilience and proactive tariff mitigation: “We are targeting 100% cost offsets or recoveries with all customers…we have already resolved 75% of our gross position”.

• What Went Wrong

  • Non‑cash EMEA goodwill impairment of $333M triggered by weaker European demand and share price decline, resulting in GAAP diluted loss per share of $(3.99) for the quarter.
  • Tariffs created ~$9M net headwind in Q2 and uncertainty for H2 volumes; gross monthly exposure ~ $12M at quarter‑end, with remaining 25% path still under negotiation/resourcing.
  • Free cash flow was negative in Q2 on seasonal working capital/timing, and FY25 FCF guidance was reduced to $150–$170M to reflect timing of recoveries and restructuring cash costs.

Transcript

Operator (participant)

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. During the question-and-answer session, please press star one on your phone. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the meeting over to Michael Heifler. Thank you, sir. You may begin.

Michael Heifler (Head of Investor Relations)

Thank you, Denise. Good morning, everyone, and thank you for joining us. The press release and presentation slides for our call today have been posted to the investor 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. Mark will then review our Q2 financial results and our outlook for the second half of our fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Jerome and Mark, there are a 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 two 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. With that, it's my pleasure to turn the call over to Jerome.

Jerome Dorlack (CEO)

Thanks, Mike. Good morning, everyone, and thank you for joining us today. We will review our strong second quarter results, share our perspectives and analysis on tariffs, and explain how we are addressing the situation through leveraging our global footprint and working with our customers to add value. High level, the Adient business model is strong and resilient, and our team has built positive momentum going into the second half of fiscal 2025. I will walk you through these topics in more detail and then turn it over to Mark to review the Q2 financials and dynamics for the balance of the year. Turning now to slide four. Our positive momentum accelerated in Q2 with improved business performance versus a year ago across all regions, allowing us to mitigate ongoing customer volume and mixed headwinds in EMEA and Asia.

In Americas, we outperformed industry volumes and saw strong year-over-year margin improvement as we drove additional efficiencies and had favorable comparisons with last year's heavy launch calendar. As a result, we were able to improve total company adjusted EBITDA margins by 40 basis points. We achieved $233 million of adjusted EBITDA. Importantly, Q2 results underscore the Adient team's deep commitment to operational excellence and solid execution and demonstrate the resilience of our operating model during times of volume pressure and macro volatility. In fact, looking at our Q2 performance over a three-year period, our EBITDA results have improved by $18 million, and our margins have expanded 90 basis points on $300 million of lower sales. While lower customer volumes have played a significant role, we have also made a conscious decision to focus on more profitable business and to invest in innovation, automation, modularity, and other efficiency measures.

This strategy is paying off with a stronger, more profitable business that is well-positioned to take advantage of future volume improvements. Free cash flow in Q2 was in line with internal expectations, reflecting normal seasonality and timing differences between Q1 and Q2. Importantly, we ended the quarter with a strong cash balance of $754 million and $1.6 billion of liquidity. The company's ongoing operational excellence, combined with innovative seat solutions, are helping us win significant new business across all regions. I'll walk you through some of our new business wins in a few slides. External validation of the value we provide and how we operate the business speaks volumes, and I'm proud that our team continues to win broad-based customer and industry recognition. We are focused on delivering best-in-class quality, value, and service to our customers.

Notably, we have earned our fourth consecutive GM Supplier of the Year award, with GM recognizing our transparency and clear communications. We also won the Excellent VA Achievement Award from Toyota Motor North America for excellence in optimizing value by improving performance and reducing costs. Hyundai Motor Group awarded Adient the Best Supplier Award for ESG Management. Also, Adient China won 11 JD Power's Seat Quality Awards. Mark will get into our outlook in more detail in a few minutes. Given our positive momentum and mitigating actions we are taking around tariffs, we are reiterating our fiscal year 2025 guidance for revenue and adjusted EBITDA, excluding potential tariff-related volume impacts. That said, let's discuss the tariff landscape, Adient's exposure, and our action plan.

Beginning on slide five, tariff rules and values continue to be fluid, but based on our current interpretation, Adient has multiple degrees of freedom to mitigate impacts through resourcing components, engaging with customers to find lower-cost alternatives, and where there is no alternative, negotiating a resolution. We are targeting 100% cost offsets or recoveries with all customers. As we begin to look at our exposure, appreciate that we do not ship complete seats into the U.S. that would fall under Annex 1. Our exposure arises from parts such as recliners, seat transmissions, headrests, electrical components, etc. Importantly, nearly 95% of Adient's parts produced in Mexico and Canada and shipped to the U.S. are USMCA compliant, and nearly all of those parts are not listed in Annex 1 and therefore not subject to those tariffs.

Adient's key advantage is our unmatched global footprint, which provides us enormous value for our customers in these circumstances, as we were able to quickly resource parts from different locations to significantly reduce tariff exposure. As you can see in the chart on the upper right-hand side, our largest exposure is from goods coming from China and Mexico. We believe, based on current tariff interpretation, our gross monthly tariff exposure is approximately $12 million, $9 million excluding purchases that are directed by our customers. We have already resolved 75% of our gross position and have roadmapped the remaining 25% and are working closely with our customers to close that gap. Turning now to slide six, as I mentioned earlier, we are targeting 100% resolution.

Our objective is to work with all our customers to create value for them and to reduce overall tariff exposure, in addition to providing long-term sustainable solutions. Our general view is that historical shocks like the Great Financial Crisis, COVID, supply chain shortages, etc., were acute crises that the industry collectively worked through to get back to normal, but tariffs could drive a fundamental reset with definitive winners and losers. We see Adient as a winner through these changes and are looking for opportunities to grow our business. I would point you to our strengths, including our resourcefulness as scrappy problem solvers, best-in-class global manufacturing footprint, our diversified customer relationships, our joint venture network that allows us to quickly help our customers pivot. By leveraging our global footprint, utilizing modularity, and adding more value in the USMCA zone, we are significantly lowering our tariff exposure.

For example, we are assembling a front seat back frame made in Mexico with an imported recliner mechanism, and by adding to that a seat cushion frame produced within the USMCA zone, we are driving a favorable outcome for our customers. Some other examples of opportunities we are currently working on with customers include localizing headrest mechanisms currently coming from China, sourcing those into the U.S., and resourcing recliner mechanisms from China to either Mexico or Germany. We are also in a strong position to support complete seats for certain of our Japan and German customers who are localizing production into the U.S. In summary, our tariff exposure appears to be manageable. The biggest uncertainty is the magnitude of the tariff impact on volumes. I'll talk more about that later. Next, let me walk you through some of the regional dynamics on slide seven.

First, in the Americas, we continue to expand margins and benefit from strong business performance. Our volume mixed performance relative to the industry has been strong as key launches in 2024 are now at full run rate. As mentioned earlier, we are focused on navigating tariff dynamics and driving value for our customers. By doing so, we believe we will capitalize on growth opportunities. We are already seeing certain customers onshoring production. Finally, we are realizing benefits from low-margin business rolling off, such as certain metal platforms, and we expect further margin improvements in the future. In EMEA, we are gaining momentum and seeing improving business performance, including realization of restructuring benefits. The region is winning key programs with European customers, as well as developing opportunities with China-based OEMs as they localize. With regards to FX, we have seen some headwinds from cross-currency exposures, primarily related to the Polish zloty.

While production volumes in the quarter were lower, we are seeing more stable production schedules overall. As we have shared in previous quarters, we have been monitoring the situation closely in the region. Given industry headwinds in Europe, combined with the decline in our share price, we have determined a triggering event has occurred, and we have recorded a $333 million non-cash goodwill impairment this quarter. In Asia, the team continues to drive strong business performance. While we expect near-term pressure on China revenue, we believe this to be temporary as new business with local China OEMs are expected to drive growth. Our strong relationships and footprint in China are helping us win more business this year, and we expect to capitalize on China OEM growth abroad. In short, we see strong business performance mitigating near-term volume mix and headwinds, as well as macro uncertainty.

Next, let me turn to new business wins and launches on slide eight. We continue to prioritize winning the right business and executing successful launches. Our business awards this quarter demonstrate further growth with China local OEMs and enhancement to our global customer relationships. I would like to highlight the new business with FAW Hongqi H5, which is a complete seat system, as well as the replacement complete seats for the Kia K5 midsize sedan and the replacement business on the Ram 1500 for metals and foam. As you can see on the right-hand side of the slide, we are launching on several key platforms around the globe. Underpinning our new business wins is our high level of execution on multiple launches. We continue to perform on safety, quality, and on-time delivery metrics for our customers.

Turning to slide nine, we are leveraging our emphasis on product innovation and automation to support our customers. This is a large enabler of growth with China OEMs globally. Our recent expansion of Adient's China Technical Center in Chongqing reinforces our leadership in electrification and smartification, driving developments of innovation and automotive seating solutions. We are developing cutting-edge automation equipment and processes utilized in Adient operations around the world, including automated cobots, AI visual inspection, automated steaming and sewing, and more. This is a key differentiator for Adient to support local China OEMs as they expand their footprint outside of China. Additionally, Adient's first mechanical massage system was successfully launched with GAC's Trumpy M8 new PHEV model during the 2025 Shanghai Auto Show. The mechanical massage system is a first-of-its-kind innovative product that more effectively relieves occupant fatigue versus traditional pneumatic massage.

We have a video embedded in our earnings deck that I would encourage you to watch. We believe these investments will strengthen our growth momentum with China-based OEMs and enable business wins beyond China and Southeast Asia and European markets. We are also seeing significant BYD and export growth through our Kuiper joint venture today. We continue to win business with domestic and China OEMs, which represent approximately three-quarters of our new book of business in China. Finally, moving to our key takeaways on slide 10. The Adient team achieved strong Q2 results, and we are seeing positive momentum, though there is significant uncertainty around volumes in H2 due to tariff policies, which I will speak to later. Tariff headwinds appear manageable, and we have a comprehensive action plan to mitigate those headwinds with more than 75% already achieved.

We are executing plans to drive value to our customers and capitalize on opportunities. We remain committed to driving higher levels of business performance to mitigate those headwinds, and Adient has a solid track record of successfully managing through turbulent times and has a strong balance sheet and liquidity with no near-term debt maturities. We intend to capitalize on opportunities arising from changing industry dynamics. Now I'd like to turn it over to Mark to take you through our financials and our outlook.

Mark Oswald (EVP and CFO)

Thanks, Jerome. Let's jump into the financials on slide 12. Adhering to our typical format, the page shows our reported results on the left side 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.

One item to note, as Jerome mentioned earlier, was a triggering event which occurred during the quarter, which required a quantitative impairment analysis, primarily due to the significant decline in the market value of Adient shares resulting from uncertainties surrounding vehicle production volumes, amongst other factors. As a result of the quantitative assessment, a $333 million non-cash goodwill impairment was recorded in the EMEA reporting unit. Details of all adjustments for the quarter are included in the appendix of the presentation. Moving on, high level for the quarter. Adjusted EBITDA for the quarter was $233 million, up 3% year-on-year. We expanded EBITDA margins 40 basis points year-over-year to 6.5%. This improvement reflected outstanding business performance in the quarter, despite a $139 million decrease in revenue from lower customer volumes in FX versus a year ago.

As Jerome mentioned, we continue to demonstrate the resilience of the Adient operating model and ability to mitigate external pressures. Worth noting that our underlying equity income remains quite strong, particularly in our Asia-Pacific segment, despite this quarter's results being negatively impacted by $6 million from the same period a year ago due to the restructured pricing agreement within Adient's Kuiper joint venture. Adient reported adjusted net income of $58 million or $0.69 per share. I'll cover the next few slides rather quickly since details for the results are included on the slides. This should ensure we have adequate time for Q&A. Starting with revenue on slide 13, we reported consolidated sales of approximately $3.6 billion, a decrease of $139 million compared with Q2 fiscal year 2024. The primary driver of the year-on-year decrease was lower volumes of $90 million, resulting from lower customer production.

FX was also a $49 million headwind in the quarter. Focusing on the right-hand side of the slide, Adient's consolidated sales were higher in Americas and lower in EMEA and Asia year on year. In the Americas, higher sales versus industry were driven by favorable comparisons with a year ago, when many of our key customer programs were launching at low volumes, such as GM's large three-row crossover and the Toyota Tacoma. In Europe, we were negatively impacted by overall weaker market demand. Sales were in line with the market. In our APAC region, sales in China underperformed industry production, primarily due to lower volumes from our traditional luxury OEM customers, including Volvo and GAC. We continued to outperform the industry in Asia outside of China due to new customer launches, which occurred in the second half of 2024, which are now reaching full run rate volumes.

Regarding Adient's unconsolidated seating revenue, year-on-year results were down 6% adjusted for FX. Revenue in North America was lower due to a joint venture rationalization, which was partially offset by growth in Europe of our Deniz joint venture in Turkey. Sales in China were up year- -on-year, mainly due to growth with BYD and exports through our Kuiper joint venture, as well as increased sales within the CFAA joint venture. Moving to slide 14, we provided a bridge of adjusted EBITDA to show the performance of our segments between periods. Adjusted EBITDA was up 3% at $233 million. The primary driver of the year-on-year comparison is detailed on the page. The Adient team drove improved business performance of $37 million, primarily resulting from better net material margin and reduced operating costs, including lower launch costs.

The improved business performance was partially offset by volume and mix, which was a $6 million headwind driven by lower customer vehicle production in EMEA and the Asia region, specifically in China. FX was a $10 million headwind, mostly from transactional impacts in EMEA and Americas. Finally, we incurred a net commodity headwind of $15 million in Q2, primarily driven by the timing of recoveries. As in past quarters, we provided our detailed segment performance slides in the appendix of the presentation. High level for the Americas, improved business performance of $15 million in Q2 was primarily driven by favorable commercial actions, lower input costs, and lower launch costs. Tariffs were a $9 million headwind during the quarter, which we expect to mostly recover in the second half of 2025. Non-recurrence of certain discretionary compensation measures, which occurred in fiscal year 2024, adversely impacted the year-on-year comparison.

Volume and mix was a tailwind of $13 million, benefiting from a stronger production of high-content programs during the quarter, consistent to what we saw in Q1 of this year. Production tracked as expected as we entered the quarter. Notably, we did not see any meaningful overtime or additional shifts added by our customers in our products that would point to the pull forward of production. Commodities were a $9 million headwind driven by the timing of recoveries. Specifically, lower absolute costs in 2025 resulted in less recoveries in Q2 of this year versus Q2 2024. In EMEA, year-over-year results were influenced by lower volume and mix, which negatively impacted the quarter by $9 million. FX was a $7 million headwind, primarily driven by transactional exposure from the Polish zloty, and commodities were a $6 million headwind due to the timing of recoveries.

Business performance accelerated to $16 million in Q2, partially offsetting the headwinds and was driven by better net material margin and operating performance, including the benefits of restructuring actions. As we have previously outlined, we are taking significant steps to adjust our costs in Europe and are studying opportunities to pull forward some rationalization actions in a prudent manner. In EMEA, we continue to focus on driving additional operating efficiencies, restructuring, and executing our plan, which includes the roll-off of lower-performing metals business and the start of production of better margin new business, which we believe will inflect positively in 2026. Moving on in Asia, our results were generally flat year-on-year, with positive business performance being offset by lower volumes and mix. In summary, the company continues to drive improved business performance across all regions, which we expect to continue in the second half of 2025.

Let me now shift to our cash, liquidity, and capital structures on slides 15 and 16. Starting with cash on slide 15, for the quarter, free cash flow defined as operating cash flow less CapEx was an outflow of $90 million. As Jerome mentioned earlier, this was in line with our expectations and reflects timing and normal first-half seasonality, as we typically have first-half outflows and are cash generative in the second half of the year. H1 cash performance is consistent year-over-year after considering restructuring cash costs, particularly in Europe. In Q2, we incurred $33 million of cash restructuring. During the quarter, we also spent $8 million in consulting fees associated with strategic planning related to optimizing our business portfolio as we continue to consider actions to create shareholder value. I would note that while these fees are included in our cash flow, they are excluded from our adjusted EBITDA.

We continue to expect solid free cash conversion in fiscal 2025. One last point and called out on the slide, Adient continues to utilize various factoring programs as a low-cost source of liquidity. At March 31, 2025, we had $170 million of factored receivables consistent with last year's second quarter. Flipping to slide 16, as noted on the right-hand side of the slide, Adient continues to proactively manage its debt maturity profile with no near-term maturities. We successfully refinanced $795 million senior unsecured notes due 2026 during the quarter, issuing new notes with a 2033 maturity, therefore extending our average maturity profile from four years to just over six years. Adient is committed to being good stewards of capital while maintaining a strong balance sheet, ensuring efficient allocation of resources and ample liquidity.

Turning to our balance sheet, Adient's debt and net debt position totaled about $2.4 billion and $1.6 billion, respectively, at March 31, 2025. The company's net leverage at March 31 was 1.9x within our targeted range of one and a half to two times. Total liquidity for the company was about $1.6 billion at March 31, comprised of $754 million of cash on hand and $843 million of undrawn capacity under Adient's revolving line of credit. Moving to slide 17, let's review our first-half performance and expectations for the second half of fiscal 2025. In the first half, we exhibited strong momentum with only 5% decorative margins. While market volumes have been lower, we saw more stability than last year, which helped us from an efficiency standpoint.

I would note that at the onset of tariffs, we incurred $9 million of gross expense, which we expect to mostly recover in H2 of this year. The takeaway for Adient's first half is strong business performance significantly offset ongoing volume headwinds, resulting in solid results in line with internal expectations. Looking into the second half of this year, while the impact of tariffs on market volumes remains uncertain, the company is committed to strong business performance and has solid momentum. Absent significant impacts from tariffs, we would expect H2 performance to be similar to H1. Assuming no significant incremental step down in global volumes, we expect volume headwinds to be manageable and mitigated by ongoing business performance and efficiencies. We expect tariff expenses to be offset by actions we are taking with our customers.

Finally, with regard to our 2025 outlook on slide 18, given our strong momentum going into the second half of the year, we are reaffirming our previous fiscal year 2025 revenue and adjusted EBITDA outlook. Importantly, our guidance assumes no change to current tariff policies. Most tariff costs are resolved and no meaningful declines in previously forecasted volumes from tariffs. While we see some upside to our adjusted EBITDA in the second half of this year, it may be offset by timing of tariff-related customer recoveries. Year-over-year, volume headwinds are being offset by ongoing business performance and efficiencies. We expect this business performance to continue to mitigate macro headwinds and offset decremental margins on lower volumes.

Our interest expense is now expected to be slightly higher, call it $190 million versus the previous forecast of $185 million due to the recent refinancing and maturity extension of our senior unsecured notes. On cash flow, we see potentially accelerated European cash restructuring costs, as well as some uncertainty around timing of customer recoveries at year-end, leading us to adjust our free cash flow forecast to a range of between $150 million and $170 million from our previous guide of $180 million. To sum it up, based on Adient's solid performance throughout the first half of 2025, the company is well-positioned to weather the macro challenges, and the team continues to execute at a very high level.

We remain focused on managing the business controls, such as delivering excellent results for our customers, lowering costs, and generating free cash flow for the owners of our business while maintaining a strong and flexible balance sheet. With that, I'll turn it back to Jerome for a few additional comments.

Jerome Dorlack (CEO)

Thanks, Mark. You know, with that, I wanted to give just a little bit of additional color on the guide and why we handled the guide the way we did. First, it was really enabled by a strong start to the year, which is driven by our 70,000 associates around the world, our customers, and suppliers. I want to thank them for allowing us to do that. Secondly, I think it's important to understand how Adient views the tariffs and how we break that down. It's really, I'd say, three orders of magnitude or three buckets.

The first order is the direct impact that we see. I think we've tried to lay out for you today with a level of transparency how that direct impact is flowing through to us, both in terms of where we see it coming in terms of the regions and how it's managing through Annex 1, where we see Annex 1 exposure, where we have USMCA exposure, the fact that we're 95% covered out, where we see recovery, the fact we're already 75% recovered, we have 25% roadmap, and then the fact that we can move through the rest of the year with action plans and drive that recovery. The second order then being what it means to our customers and how our customers have to manage that. They've gone through, made their announcements this week, so we won't cover that off.

There is an element, whether that be through the 2.5% MSRP discount, we have to see what that means to us. In the midterm, as they start to reshore production, we're already engaged with certain Japanese customers and a German OE, and there will be, I think, announcements to come. We just do not have anything today that allows Adient to leverage our best-in-class footprint to potentially see some net volume upside. That, I think, is enabled by, as we talk a lot about, JIT being close to our customers and providing solutions to them. The third order is, what does it mean to the consumer and the macro economy and how resilient the consumer is? That, I think, because we're a September filer, we already have six months behind us.

We're operating on three months of EDI, and we have some amount of visibility into that. Then you have kind of the last three months after EDI. We're running on March S&P right now. Mark already talked about we've assumed no meaningful change in our volume outlook, and we don't have anything today on EDI that would say there is any meaningful change to come. I think we've tried to provide visibility into that. I think there's another thing to note. If you think about outside of the U.S., how dependent are we on export volume? To give a little color on that, on an annualized basis, our European business has somewhere we'll range it between $350 million-$450 million of export volume in their annualized sales figures.

Our Asia-Pacific business has somewhere between $150 million-$200 million of annualized volume in their business that they're dependent upon. As you think on an annualized basis, how dependent would we be if those exports were cut off? That kind of gives you a little bit of flavor there. Again, we're already six months into our year. When you put all those factors and you kind of combine them, that's what's allowed us the confidence to kind of say, given six months are behind, we've done a good job mitigating tariffs. We're 95% USMCA compliant. We have this footprint that allows us to quickly rotate out of China, leveraging our Kuiper JV that has a footprint in Mexico, or we can use Rockenhausen, our footprint in Germany.

We can do things with our customers, or we can drive recovery, has given us the confidence to say, here's our guide for the rest of the year. I just wanted to provide additional color on that before we turn it over to the Q&A segment of the call. With that, we'll open it up to Q&A.

Lizz Thank you. Can we please start the Q&A?

Operator (participant)

Yes, thank you. If you would like to ask a question, please press star one. If you would like to withdraw your question, press star two. Our first question today comes from Joe Spak with UBS. Your line is open.

Joseph Spak (Executive Director and Senior Analyst)

Can you hear me? Can you hear me?

Jerome Dorlack (CEO)

Hi, Joe. Yes.

Joseph Spak (Executive Director and Senior Analyst)

Thanks for all the additional color there. I guess just one quick one on tariffs. You've made good progress here, right? The resolved versus the 75% roadmap, 25%. I'm assuming resolved means you basically have agreements for price recoveries, or that's the majority of that. Is the roadmap portion more what you were talking about, about finding some cost offsets or resourcing, or are there still some potential price negotiations involved in the roadmap portion as well?

Jerome Dorlack (CEO)

Yeah, I'd say it's a mix of both, Joe, from that standpoint. There are still ongoing price negotiations. There are certain customers who have systems that require us to submit documentation. Given there still are things on boats coming over from China, bill of ladings haven't been delivered yet. We need to be in systems for recoveries without getting into too much minutiae from that standpoint. There are things that need to be submitted and negotiated and just need to be rolled through. It's a mix of both. Still resourcing that needs to occur and also negotiations that need to be concluded.

Joseph Spak (Executive Director and Senior Analyst)

Okay. That's helpful. In EMEA, I think it was the I know there's still some challenges there, but it looks like it was a pretty good quarter, at least relative to some expectations and with still some volume headwinds. I know you called out some business performance. Is there anything unusual in that that sort of drove the quarter a little bit better, especially relative to maybe quarter-over-quarter?

Jerome Dorlack (CEO)

Yeah, Joe. Good question. Good observation. I'd say one quarter does not make a trend, right? I wouldn't take that number and annualize it. I'd say that we are encouraged because we are seeing, obviously, business performance turn positive over there. We're getting the benefits of certain of the restructuring actions we've taken.

Again, things are lumpy, especially as you think about commercial actions and recoveries with customers. That lumpiness, I would not peanut butter that 4% margin that we just printed across third or fourth quarter, right? It is going to be some variability as we go through the rest of the year.

Joseph Spak (Executive Director and Senior Analyst)

Mark, I think you did mention last year that you thought the first half of this fiscal year would be sort of a bottoming event for profitability in that region. Is that still the case? If you average, you are saying the first half is a little bit over three, should we expect that it improves off that level from here?

Mark Oswald (EVP and CFO)

Yeah, I would not say that, Joe. I would say that you are right. 3% was the average over the first half of the year, right?

If you just remember last year, I think we did about 3%, just over 3%. When we came into this year, we said, "Hey, listen, this year is going to be pretty much similar to that," right? You really do not see that inflection point until we get into 2026, which is when we start to see certain of the underperforming metals business roll off. We see the new business roll on. I would still frame it up in that piece.

Joseph Spak (Executive Director and Senior Analyst)

Okay. Thank you.

Operator (participant)

Thank you. The next question comes from Emmanuel Rosner with Wolfe Research. Your line is open.

Emmanuel Rosner (Managing Director of Senior Autos and Auto Tech Analyst)

Great. Thank you so much. First question is really around just making sure I understand your direct tariff exposure. So 95% of what you produce in mixed and cryogenic analyze is USMCA compliant. That stuff would technically have tariffs, but I guess for now, USMCA parts are not being tariffed. When you mentioned Adient's parts that are not listed in Annex 1, this would relate to what geographies?

Jerome Dorlack (CEO)

I think what we've said is roughly 95%. Do not hold us to exactly 95% of our parts that we import or move across the border from Canada and Mexico into the U.S. are USMCA compliant. Under current policy, that is correct. They are not subject to the 25% tariff rule. If that were to change, obviously we would have to deal with the issue. Annex 1, the way Annex 1 is scoped out, Annex 1 basically carves out those parts and says, "Even if they are USMCA compliant, they are subject to a 25% tariff." However, we do not have any parts that fall under that Annex 1 that we produce today, and we have very little controlled material that would fall under Annex 1.

It's almost all directed. We would be covered off due to the directed nature and the nature of just the way seating is actually constructed from that standpoint. It is worth noting, though, Emmanuel, that the Annex 1 tariffs that were supposed to go into effect May 3 have actually been delayed as the system is not ready at this point. I will say the disadvantage of having your components not falling under Annex 1 is that then they're subject to the stacking effect of IEEPA and the reciprocal tariff, which is why we get hit with the 145% tariff out of China. That is why China is our largest exposure region at the moment. That is really why we tried to provide that visibility into our exposures. You can see that monthly run rate on the graph of China being our largest exposure region.

Again, we're not trying to overwhelm you with detail, but I do think it's important to understand that differentiation into just what is Annex 1, what's USMCA, what's IEEPA, what's 232 and reciprocal and all of that.

Emmanuel Rosner (Managing Director of Senior Autos and Auto Tech Analyst)

Yeah. No, I appreciate all the detail. I guess taking a step back in terms of your margin outlook and then where it fits within the longer-term goals and progression, can you maybe just remind us how much more opportunity there is for some of these cost and efficiency actions and how do you think about, I guess, the self-help and the part that you control and timing of further benefits?

Mark Oswald (EVP and CFO)

Yeah. Good question, Emmanuel. We printed 6% last year, total company. We said there's going to be puts and takes this year, right? We see Americas continuing to improve their margin profile. We just spoke about Europe for the next year or so, kind of in that, call it 3%, which we printed yesterday. Then obviously our APAC region continues to print double-digit margins. We expect that to continue. When we look at what we're benchmarking and what we're targeting, right, clearly we think there's significant opportunity in front of us. We've said in the past, whether or not that's 7.5%-8%, that's typically what people are looking at. That's what we think we could achieve. Clearly, there is a lot that we could do to get there. Some of it's what we spoke about before, whether it's restructuring over in Europe, getting the benefits of that.

I would caution people that the dollars that we spend over in Europe is not a one-for-one in terms of creative to our EBITDA, as certain of that just goes against lower volumes in the region. We do have the positive impact of balance in, balance out, especially with the lower margin, metals business rolling out over there. We have got new products, new wins that are coming on over there that have higher margins. When you add that all up, do I think that there is a couple hundred basis points of opportunity versus where we were in 2024? Absolutely. You could see that within our business performance so far in the first half of this year. That is really what the team is targeting and marching towards.

Emmanuel Rosner (Managing Director of Senior Autos and Auto Tech Analyst)

Great. Thank you.

Jerome Dorlack (CEO)

Thank you.

Operator (participant)

Thank you. The next question comes from James Picariello from BNP Paribas.

James Picariello (Senior Equity Analyst)

Your line is open. Hey, guys. Sorry if I missed this, but have you quantified the change in FX assumptions with your guidance and just what you are assuming for the market and, yeah, just the implied core sales relative to your market assumptions?

Mark Oswald (EVP and CFO)

Yeah. Good question, James. For FX, right, basically there has been a lot of volatility around FX, obviously over the last month, six weeks, etc. What we did is we looked at our prior outlook, and I think for the euro, which is one of the bigger ones for us, we assumed somewhere we kept that constant somewhere in that 1.06, which is where we were last guide. Clearly, with the euro trading around that 1.08 now, there could be some upside, translational upside if we go through and rates hold. We just felt with the volatility around the rates at this point, it was prudent to keep it consistent with where our prior guide was.

James Picariello (Senior Equity Analyst)

Got it. That's helpful. I think we probably have too many factors to focus on given the environment, but it wasn't too long ago we were asking Adient about capital allocation, whether it's share buybacks or participating in some form of industry consolidation. Just wondering what the mindset is at this point, understanding that I think we all have a lot of macro uncertainty to navigate very near term.

Mark Oswald (EVP and CFO)

Yeah. Again, nothing has changed from our perspective just in terms of how we view capital allocation, right? We're going to take a measured approach. Clearly, we're going to continue to invest in the business. Certain of that capital is going to have to be allocated towards restructuring Europe.

We've been very transparent about that. Clearly, we generate free cash flow. So we said that we'll return value to our shareholders through share repurchases. Obviously, when we think about share repurchases, right, we've said all along that we'd look at a couple of elements to see whether or not it makes sense. We'd look at the overall macros to see whether or not we had clarity and certainty there. Clearly, this past quarter, right, there was a lot of uncertainty with vehicle builds, what could happen to vehicle builds in the future. We also said that we'd look at Adient's cash generation, right? As I indicated in my prepared remarks, our cash typically comes in the second half of the year. Again, as we go through the second half of this year, I think we'll look at the overall macros.

We'll see whether or not there's any more clarity just in terms of vehicle demand production. We'll look at our cash generation, and then we'll make the determination in terms of timing of repurchases and the magnitude of repurchases. Overall, nothing has changed with our philosophy when it comes to capital allocation.

Jerome Dorlack (CEO)

Yeah. Just to follow on Mark's comments, I think as it pertains to capital allocation and with the additional color given just on how Adient's, what I call platform mix and regional mix, stacks up, that allows us greater clarity when it comes to that capital allocation, just given our lesser dependency on export volume out of Europe and Asia, our USMCA compliance, the large amount of directed content we have, lessen some of our dependency on customer recoveries.

If we can reach a trade settlement with China, just it helps us add certainty in some of those capital allocation decisions we have to make. Hopefully, that answers your question, James.

James Picariello (Senior Equity Analyst)

Yeah. Much appreciated. Thank you.

Jerome Dorlack (CEO)

Yeah. Thank you for the questions.

Operator (participant)

Thank you. The next question comes from Colin Langan with Wells Fargo. Your line is open.

Colin Langan (Director and Senior Equity Analyst)

Oh, great. Thanks for taking my questions. Just to follow up on that, there was about a month ago media reports that you were considering acquiring ZF LifeTech business or at least a bidder. I mean, I do not know what you could comment on that. Any comment on that would be welcome. Just in general, do you think something like that, a passive safety, does have strategic overlap? Would you be at this point, given the market uncertainty, willing to buy or to do a larger deal? Any color there?

Jerome Dorlack (CEO)

Yeah. I mean, we can't comment obviously on ongoing M&A transactions. It just wouldn't be prudent to do so. In terms of the strategic overlap between seating and safety, a large amount of safety content we're responsible for integrating today into our products. Certainly, the trends between the two we see migrating together in the future. That said, we have to see how the market develops. Our main goal is to add value for our shareholders and for our customers. That's what we're singularly focused on from that standpoint. That's how we view any potential acquisition, is through that lens. Does it add value for our shareholders, and does it add value for our customers? That's how we look at things.

Colin Langan (Director and Senior Equity Analyst)

Got it. Just circling back on the tariffs, I was a little surprised by the comment on Annex 1. I mean, what does that mean for your parts? I think the slide says that you pay 145% on China. If you're not in Annex 1, what kind of tariff are you then looking at for parts coming out of Mexico? And why would a supplier like you not fit into the qualification?

Jerome Dorlack (CEO)

This is really some of the detail that I think gets lost if you just read some of the high-level summaries. I'm not—keep in mind, Colin, I'm not implying that the homework isn't being done. I just think it's some of the reports by some of the consulting firms necessarily aren't at the level of detail they need to be. With Annex 1, it lists out all of the different HS codes that are subject to Annex 1 parts.

In there, there's things that are covered off that Adient just simply doesn't ship across the border, which means that you're not subject to the Annex 1 tariff then. Complete seats, as an example, are Annex 1. They're covered off in Annex 1, but we don't actually ship complete seats across the border. As you know, our business model is we have our JITs close to our customers. We don't actually ship complete seats across the border. We build seats. If we're shipping seats to, I'll take as an example, Toyota in Kentucky, we build our seats by Toyota in Kentucky. We're not shipping seats out of Mexico to Toyota in Kentucky. As a result, we're not shipping parts that are on Annex 1. Some of the components that we may procure are in Annex 1, but they're largely directed from that standpoint.

We would get 100% recovery due to the directed nature of them. What that means then is that recliners, as an example, the parts in the seat structure are not on Annex 1. Those parts come from China. If you are not on Annex 1, you are then subject to the stacking effect, which means you get hit with the IEEPA tariff, which is the fentanyl tariff, and you get hit with the reciprocal tariff, which is the 125% tariff or the 120%, however that stacks up. You are hit with immediately a 145% tariff. That is why China is our largest exposure, because as you know, we have our joint venture with Kuiper and a couple of legacy parts there. Prior to all of these tariffs being laid in, we had about somewhere between just roughly a $60 million buyout of China.

If you think about our Americas business, our Americas business procures about $5 billion worth of stuff. I mean, $60 million on a $5 billion buy, it's not significant. When you put a 145% tariff on it, it becomes an issue that the Americas team needs to deal with. They're dealing with it in a very effective manner, but it becomes a number that needs to be dealt with from that standpoint. That's the nuance between Annex 1, not Annex 1, and then the stacking effect of IEEPA with the reciprocal tariff. You really need to go HS code by HS code.

Colin Langan (Director and Senior Equity Analyst)

Got it. For your parts coming out of Mexico, the IEEPA and the Section 232 are pretty similar. Is it the same tariff anyway, or is it actually higher because of some of the stacking?

Jerome Dorlack (CEO)

No, they've largely removed the stacking effect now. There was, I think, last week they got rid of the stacking effect. Our parts coming out of Mexico now would just largely be 232 from that standpoint. Given our USMCA compliance, we're generally free and clear of that now, which is why USMCA is so critical.

Colin Langan (Director and Senior Equity Analyst)

Okay. Your Annex 1 is mostly China. That's where you're seeing the impact.

Jerome Dorlack (CEO)

Non-Annex 1, yes. Non-Annex.

Colin Langan (Director and Senior Equity Analyst)

Okay. All right. Thank you very much.

Operator (participant)

Thank you. The next question comes from Dan Levy with Barclays. Your line is open.

Dan Levy (Senior Equity Research Analyst)

Hi. Good morning. Thanks for taking the question. I just want to follow up on that. I think you made some references on the China tariffs you are incurring. How easily can you make rotations? Is it just these mechanisms for recliners, headrests? What's the sourcing opportunity elsewhere?

Do you have a sense of how your competitors stack up on this? Is this something that others are incurring as far as importing these different mechanisms from China?

Jerome Dorlack (CEO)

I mean, I would say if you break down our spend from China, there is about, for better or worse, 40 part numbers that make up about 80% of that exposure. Of those 40 part numbers, call it 20 of them, we have tangible plans that we are working through at the moment. The other 20, we will drive customer recovery or we have customer recovery on. The timeline to deal with those 20 that we are moving is a, call it a six- to nine-month window. Maybe it prolongates to a year. In the interim, there will be customer recovery agreements. Some of those actually die out, Dan, in the September timeframe as some programs expire.

There's a bleed-down window just naturally as some programs die off. In terms of other customers, I can't really comment on that. I don't know what their exposure is. Some of them may have comfort systems. Some of them may have wire harnesses. Some of them may have tubes. I just don't know.

Dan Levy (Senior Equity Research Analyst)

Okay. Thank you. Second question is on restructuring. I just wanted to ask if you could provide an update on the European restructuring. Sounds like you're getting some benefits. I think some time ago you had said you're talking about net savings of $50 million a year. Is that still intact? I think you're referencing here the opportunity to accelerate some of the restructuring. Maybe you could give us a sense of how much deeper you can go, you're willing to go, because clearly it seems like there is more opportunity on the European front.

Mark Oswald (EVP and CFO)

Yeah, Dan, I'll start. Then, Jerome, you could jump in if needed. Do we think there's opportunity to accelerate? We're looking at it from a very prudent manner, Dan. We want to make sure. We recognize that there is a cost of those R dollars that we're spending over there, right? We have to spend it in a prudent manner. If there's an opportunity for us to pull something ahead, if we think that it's going to give us benefit right within a couple-year payback, we're going to take a look at that and do that. At this time, there's nothing to announce. We've indicated, obviously, what the restructuring charge that we took last year was.

We've indicated cash restructuring this year is going to be north of $100 million. Most of that is in Europe. It could be slightly higher now that we're looking at accelerating certain of that. Does it go up to like $125 million this year? Possibly. We'll continue to look at that as we go through the back half of this year. I just remind you of the comments I made earlier, even though we take a charge, right, roughly about a third of that would be accretive to our EBITDA going forward. The other1/2, 2/3s, is really just holding serve with the lost volume over there, right? That's really the way that we're looking at Europe right now in terms of restructuring dollars.

Jerome Dorlack (CEO)

Yeah. I think, Mark, that's a very good summary. I mean, I think you just have to constantly look at Europe from the lens of used to build 20 million vehicles, actually was an exporter. Now, if you look, 14.8, 15 million next year is importing vehicles. There's going to be just some amount of restructuring we have to put into that business that's just there to hold serve. It's just the reality of that business from that standpoint.

Dan Levy (Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. The next question comes from Edison Yu with Deutsche Bank. Your line is open.

Edison Yu (VP)

Hey, good morning. Thanks for squeezing me in. Just wanted to check two things real quick. One, on the China local OE mix, I know you're targeting 60% exiting fiscal 2027. Did you disclose what it is for the current quarter?

Mark Oswald (EVP and CFO)

Yeah. We didn't break it out. That's for the current quarter. We can get back to you. Literally, we were like, call it around 40, 60 at the end of last year. Overall, it does not move by several basis points from quarter-to-quarter. I would say that we are still in that, call it 40-45 split, local versus foreign.

Edison Yu (VP)

Okay. And just a second quick clarification on the, I guess, on the walk. I think you said there was $9 million tariff in the quarter. Is that basically just one month, or is that a full representative of a full quarter impact? I know it is getting recovered later, but I just want to check if that is the full impact, or is it actually going to increase for the quarter?

Mark Oswald (EVP and CFO)

That was the full impact for Q2. As we indicated on the slides, our gross exposure now on a monthly basis is $12 million.

Edison Yu (VP)

Okay. Gotcha. Thank you.

Mark Oswald (EVP and CFO)

Thank you.

Edison Yu (VP)

Thank you. Okay.

Jerome Dorlack (CEO)

Denise, I think we're going to close the call at this point.

Operator (participant)

All right. Thank you.

Jerome Dorlack (CEO)

I want to thank everyone for joining us and appreciate your interest in Adient.

Mark Oswald (EVP and CFO)

Great.Thank you.

Jerome Dorlack (CEO)

Thank you. Thanks, everyone.

Operator (participant)

Thank you, everyone, for dialing in for the conference today. We appreciate your participation. Have a great rest of your day, and you may disconnect.