Adient plc (NYSE:ADNT) Q4 2023 Earnings Call Transcript

Adient plc (NYSE:ADNT) Q4 2023 Earnings Call Transcript November 8, 2023

Adient plc misses on earnings expectations. Reported EPS is $0.51 EPS, expectations were $0.52.

Operator: Welcome to the Adient Fourth Quarter Financial Results Conference Call. The lines have been placed in a listen-only mode until the question-and-answer session. [Operator instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I’ll now turn the call over to Mark Oswald. Sir, you may begin.

Mark Oswald: Thank you, Shirley. Good morning and thank you for joining us, as we review Adient’s results for the fourth quarter and full year fiscal 2023. 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 Doug Del Grosso, Adient’s President and Chief Executive Officer; and Jerome Dorlack, our Executive Vice President and Chief Financial Officer. On today’s call, Doug will provide an update on the business followed by Jerome, who will review our Q4 and full year financial results. In addition, Jerome will provide you with the company’s initial outlook for fiscal 2024. After our prepared remarks, we will open the call to your questions.

Before I turn the call over to Doug and Jerome, 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.

This concludes my comments. I’ll now turn the call over to Doug. Doug?

Doug Del Grosso: Great. Thanks, Mark. Good morning. Thanks to our investors, prospective investors, and analysts joining the call this morning as we review our fourth quarter and full year results for fiscal 2023. Turning to Slide four, let me begin with a few comments related to the quarter and a few about Adient’s full year successes, starting with the numbers. You can see Adient financial performance as highlighted by certain key financial metrics in the box on the right hand side of the slide. Adient finished the year strong, delivered improved year-over-year earnings growth in Q4 fiscal ’23, underpinned by the relentless focus on execution, operational excellence and better than expected production volumes versus internal expectations at the beginning of the quarter, and despite labor related work stoppages at certain customers.

Adient’s fourth quarter results continued to build on positive momentum established earlier this year. For the most recent quarter, revenue, which totalled $3.7 billion, was up $79 million compared to last year’s fourth quarter. Adjusted EBITDA totalled $235 million, up $8 million year-over-year and finally, Adient ended the quarter with a strong cash balance and total liquidity of $1.1 billion and $2.0 billion, respectively. Given the uncertainty surrounding the timing and magnitude of the loss production due to the strike related work stoppages, Adient executed actions to preserve cash and liquidity as we progressed through the quarter. For the full year, Adient delivered on its commitment to increase earnings, margin, and free cash flow versus fiscal ’22.

Jerome will expand on the full year 2023 fiscal year results in just a moment. Adient’s successes in 2023 extended beyond our strong financial performance. A few examples include the team’s execution of day-to-day processes that enable world-class launch execution, continuous operational improvements, and thoughtful cost reductions. Winning new business across various regions, customers, and platforms are expected over time to strengthen our leading market position, not to mention support improved margins and earnings. The team is also executing actions that provide value add to our Adient stakeholders every day, whether that’s our customers, suppliers or employees. A variety of customers and automotive industry awards reinforce Adient’s commitment to excellence.

The company and its employees were recognized with approximately 60 awards in fiscal ’23. Highlights include GM Supplier of the Year Award, J.D. Power Award for receipt satisfaction, and many more, as you can see. I mention these awards as proof points that the team is operating at very high levels across the company. The accomplishments in fiscal ’23, both financial and operational, are even more impressive considering the challenging external headwinds that impacted the industry and Adient, including labor inflation and availability, the strengthening dollar and a still fragile supply chain. The company’s unwavering focus on our strategy enabled us to successfully navigate these challenges and position Adient for future success. Speaking of challenges, and turning to Slide five, I wanted to provide a quick update on how the UAW strike here in North America and its impact on Adient.

To begin with, we look at production disruptions through two lenses, the near-term impact and the potential longer-term negative effects the strike could have on the industry. Near-term, the strike has impacted Adient’s just-in-time operations, as well as our component plants. With the strike beginning late in our fiscal year, the negative impact was limited in fiscal ’23, call it around $30 million in sales and under $5 million in EBITDA. As the strike extended and began to impact other Adient facilities, including JIT and other component plants, the impact increased. We’re encouraged progress has been made over the past week to 10 days to settle the strike. That said, given the timing of Adient’s new fiscal year, the work stoppages through October and early November have undoubtedly had a bigger impact on fiscal ’24 compared to the limited impact on Adient’s fiscal ’23 results.

Through early November, we estimate the impact on our 2024 sales and EBITDA have been approximately $125 million and $25 million, respectively. Jerome will have additional commentary related to the impact of the strikes on fiscal ’24 with his prepared remarks. As you would expect, the company moved quickly to lessen the negative impact. We’ve listed a few of the actions on the right-hand side of the slide. I won’t read through the list, other than to point out the company went into cash conservation mode and reduced or eliminated non-discretionary spending early in Q4. Given the duration of the strike, we are concerned about lingering downstream impacts to the industry, especially related to supply chain and its ability to run production at rate when called upon.

The financial health of lower-tier suppliers and labor availability are just a few. In addition, risks or repercussions related to the increased labor costs at D3, such as the typical playbook to extract value from the supply base, the ability to maintain existing and future product plans, and the ability to complete against lower-cost manufacturers, especially Chinese manufacturers that not only have a lower-cost base, but new products that are extremely well-contended and desired by consumers. No doubt, concerning on many levels, that said, Adient, similar to prior external headwinds, has and will continue to execute actions to lessen the impact of these negative pressures. Turning to Slide six, you’ve heard us mention on several occasions that Adient’s focus strategy is a key enabler to our success at driving the business forward and navigating through external challenges.

The key tenets of the strategy are laid out on the left-hand side of the slide. As a reminder, the top four tenets has helped drive strong business and financial performance in both fiscal 2022 and ’23. At the bottom of the slide, you’ll see a fifth tenet, embracing and leveraging a shift in industry dynamics. When looking ahead, we feel it’s imperative that Adient adapt to the evolving auto industry, an industry that is being influenced by a number of factors, including the pricing and affordability of EVs versus traditional device platforms, which is clearly impacting the pace of EV adoption here in North America. In fact, as you’re aware, certain traditional manufacturers have recently announced various retiming of EV launches to align with demand.

Adient’s processes, which focus on acid reuse and flexibility, enable the company to meet the EV or ICE production requirements. In other regions, namely China, the industry is being reshaped by the growth and influence of the Chinese domestic auto manufacturers. In addition, access to technology and innovation is taking place through global partnerships versus in-house capabilities; the one constant, the importance of being cost competitive. Recognizing these shifts resulted in us fine-tuning the company strategy going forward to ensure that we have the right vision to create additional value to Adient stakeholders. Speaking of value creation and turning to Slide seven, one exciting trend that has begun to emerge, especially in China, is added content within seating.

Presently, China is bringing a vehicle concept to the market that is very different from traditional auto manufacturers with a focus on electronics, functionality, ADAS, the interior configurations around creature comfort. Adient’s zero-gravity seat, built to balance the ultimate in comfort by keeping safety in mind, is an example of the kind of innovation that these new players are generating. Longer term, as advanced driver assistance systems and comfort features become more prevalent and as seating solutions intersect with passive safety systems, seating content is expected to outpace vehicle production as OEMs adopt this innovative new interior configuration and features. Although green shoots of this added content are primarily in China, today we’re optimistic that the trend will cascade into other regions.

Important to note, Adient’s ability to provide innovative solutions for our customers in China with speed and world-class execution are critical to our past and future business wins with this customer group. Turning to Slides eight and nine, now let’s take a look at our launch performance and new business wins. As you can see, Slide eight highlights a few of Adient’s in-process and upcoming launches. Adient continues to execute at a high level on launch performance. The programs highlighted represent a good mix of wins across EV powertrains and ICE powertrains and are diversified across a number of segments, including SUVs, luxury, mass market and contain a high level of vertical integration across complete seat, foam, trim and metals. I’d also like to point out that these launches include a number of Adient innovative technologies that are being well-received by our customers, including our zero-gravity seat, which increases ergonomic comfort and body pressure distribution, and Changan’s E12 in China.

As you can see at the bottom of the slide, we’ve provided some commentary on what you can expect for fiscal 2024 with respect to volume and complexity of launches. Generally speaking, volume and complexity are up in the Americas, Europe and Asia, outside of China versus last year. Despite that fact, I’m confident we’ll maintain our focus and process discipline across launch readiness, driving similar results or better versus 2023. Flipping to Slide nine, the strong operational execution and launch performance, as well as innovation I just talked about are foundational for new business wins. A few program awards are highlighted on the slide, and it’s noteworthy that these programs include a high level of vertical integration of both bone, trim and metal components, as well as the JIT business.

We continue to secure our replacement business. We’re winning our fair share of new business, leveraging our existing footprint and we’re having success winning business while navigating the difficult macro conditions and related commercial discussions. Before handing the call over to Jerome with Slide 10, let me conclude with a few comments related to our initial thoughts on 2024. To begin, Adient’s focused strategy continues to drive the business forward. Our fiscal 2023 financial and operational results, in addition to our year-to-date results, provide positive proof points. The team delivered many accomplishments last year that were hard fought, especially considering the external operating environment. Although we’re confident that positive momentum will continue into 2024, we’re also aware the New Year will likely bring a unique set of challenges and obstacles to navigate.

The few that most of you have commented on include temporary production disruptions that are nearing resolution, concerns related to supply chain and the ability to run at rate, restart of production in the Americas, the impact of FX movements, stubbornly high interest rates that are likely to be in place through the midterm, and uncertainties around consumer demand. Similar to prior years, Adient has and will continue to develop and execute contingency plans to help mitigate and lessen any potential impact. I’m confident, combining a resolve with an unwavering commitment to the company’s focused strategy, we will continue to drive the business forward in 2024, further positioning Adient for sustained success, ultimately driving increased value to all of our stakeholders.

With that, I’ll turn the call over to Jerome to take us through Adient’s fourth quarter and full year 2023 financial performance and outlook for 2024.

Jerome Dorlack: Thanks, Doug. Let’s jump into the financials on Slide 12. Adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side. I’ll focus my commentary on the adjusted results, which exclude special items that we view as either one-time in nature or otherwise skew important trends in underlying performance. For the quarter, the biggest driver of the difference between our reported and adjusted results relate to a non-cash valuation allowance release, pension mark-to-market, restructuring and impairment costs and purchasing accounting amortization. Details of all adjustments for the quarter and the full year are in the appendix of the presentation.

High level for the quarter, sales were approximately $3.7 billion, up 2% compared to our fourth quarter results last year. Improving vehicle production in the Americas combined with positive impact of currency movements were the primary driver of the year-over-year increase. Adjusted EBITDA for the quarter was $235 million, up $8 million year-on-year. The increase is primarily attributed to the benefits associated with improved business performance and higher volume and mix. These benefits were partially offset by the adverse impact of net commodities driven by recovery timing, primarily in the Americas. I’ll expand on these key drivers in a minute. Finally, at the bottom line, Adient reported an adjusted net income of $48 million, or $0.51 a share.

Slide 13 provides a similar high-level summary of Adient’s full-year financial metrics. For the year, sales were $15.4 billion, up 9% compared to fiscal 2022. Improved volume and mix across all three regions was the primary driver of the year-over-year increase. Adjusted EBITDA was $938 million, up $263 million year-on-year. The increase is primarily attributed to benefits associated with improved business performance and higher volumes, partially offset by increased net commodities. Just a reminder, the $938 million includes $30 million of insurance recoveries that are considered one-time in nature and therefore should be backed out of the run rate going forward. At the bottom line for fiscal 2023, Adient reported net income of $205 million, or $2.15 per share.

Moving on, let’s break down our fourth quarter results in more detail. I’ll cover the next few slides rather quickly as the detail for the results are included on the slides, and this should ensure we have an adequate amount of time set aside for the Q&A portion of the call. Starting with revenue on Slide 14, we reported consolidated sales of approximately $3.7 billion, an increase of $79 million compared with Q4 FY’22. The primary drivers of the year-over-year increase included the positive impact of currency movements between the two periods of $49 million and the positive contribution from improved volumes and pricing of $30 million. Focusing on the table on the right-hand side of the slide, Adient’s consolidated sales across the regions were impacted by adverse customer mix in the quarter, which we view as temporary, as well as the negative impact of non-reoccurrence of material econ recoveries in FY’22.

For the full year, Adient’s overall sales outpaced production by about 300 basis points when adjusting for FX. Asia demonstrated strong growth over market, outpacing production gains by two times. No surprise, this was led by China, where consolidated sales were up 8% versus production in the region, which was up approximately 2%. America’s ended the year generally in line with production, and EMEA was modestly lower, driven by our planned exit of certain low-profit platforms. As Doug mentioned earlier, given the favourable trends that we’re seeing in China related to added seeding content, we’d expect growth over market to continue as we look to the future. With regard to Adient’s unconsolidated seeding revenue, year-over-year results were up about 3% adjusted for FX.

Increased production volume at our unconsolidated joint ventures, primarily in China, supported this increase. Moving to Slide 15, we’ve provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labelled corporate reprcesents central costs that are not allocated back to the operation, such as executive office, communications, corporate finance and legal. Big picture adjusted EBITDA was $235 million in the current quarter, versus $227 million reported a year ago. Primary drivers of the year-on-year comparison are detailed on the page. Positive influences include $9 million associated with improved business performance. The business performance bucket includes items such as improved material margin and lower year-over-year input costs, freight, for example.

In addition, volume and mix, and increased equity income, benefitted the quarter by $7 million and $5 million, respectively. Partially offsetting these positive influences was a net commodity headwind of $12 million within the Americas, primarily driven by the timing of contractual true-ups. Similar to past quarters, we’ve provided the detail of our segment performance in the slides in the appendix of the presentation. Let me now shift to our cash, liquidity and capital structure on Slides 16 and Slides 17. Starting with cash on Slide 16, I’ll focus on the four-year results as the longer timeframe helps smooth some of the volatility in working capital movements. Free cash flow, defined as operating cash flow, less CapEx, was $415 million. This compares to $47 million in fiscal 2022.

Key drivers impacting the comparison include the higher level of consolidated earnings driven by improved volumes and better overall operating environment. Lower interest paid driven by the reduced level of debt and the deferral of interest related to the March 2023 debt refinancing and typical month-to-month working capital movements. I’d also point out, as seen in the middle of the chart, timing and temporary compensation-related benefits provided a significant positive benefit to the year-over-year comparison. Given the nature of the drivers within this line item, such as the day of the week the quarter closes, year-over-year bonus accruals, and the impact of compensation-related changes between the two periods, the net impact tends to smooth over the long term, very similar to working capital.

In fact, the benefits experienced in 2023 are largely expected to reverse in 2024. More on Adient’s fiscal 2024 expectations in just a few moments. These benefits were partially offset by the timing of tooling recoveries, VAT deferral payments, and increased engineering in support of customer launch activities. One last point, Adient continues to utilize various factoring programs as a low-cost source of liquidity. At September 30, 2023, we had $170 million of factored receivables versus $269 million at the end of fiscal 2022. Flipping to Slide 17, as noted on the right-hand side of the slide, we ended the year with about $2 billion in total liquidity, comprised of cash on hand of $1.1 billion and roughly $900 million of undrawn capacity under Adient’s revolving line of credit.

The elevated level of cash reflects the company’s cash conservation efforts executed during the quarter to ensure Adient’s balance sheet remains strong and flexible, given the uncertainty related to the timing and duration of the work stoppages at certain of our customers as a result of the UAW negotiations. Recent news related to the tentative agreements at our customers should enable the company to resume its balanced capital allocation plan. As a reminder for the year, shares repurchased and cash deployed totalled approximately $1.8 million and $65 million respectively and as a reminder, during the March 2023 debt tender, $100 million of cash on hand was used towards voluntary debt repayment. Looking forward, cash available for future returns and share repurchases will be based not only on fiscal 2024 free cash flow, but also inclusive of the cash from the balance sheet, considering we ended FY’23 with an elevated level of cash.

Adient’s debt and net debt position at year-end totalled about $2.5 billion and $1.4Adient billion, respectively. One important point to call out, the strong financial performance achieved during 2023, combined with our focus on deleveraging, has driven our net leverage ratio on a trailing 12-month basis to 1.5 times, within our target range of 1.5 to 2 times. This is no doubt a very good result. With that, let’s flip to Slide 19, Slide 20 and Slide 21 and review our outlook for fiscal 2024. Starting on Slide 19, as Doug noted earlier, Adient enters 2024 from a position of strength. We successfully navigated through a challenging 2023 and drove the business forward, as evidenced by the operational and financial accomplishments just discussed.

That said, 2024 began with a new set of obstacles that the team is presently navigating. The guidance provided today is based on the current operating environment. On the right-hand side of the slide, we’ve laid out our planning assumptions for production and FX compared with FY’23. The foundation of our FY’24 plan is generally aligned with October’s S&P estimates. To the far right of the chart, we’ve highlighted our expected sales performance by region. When adjusting for FX, we expect our sales to be slightly favorable to the industry in North America. In line with the market in Europe and significantly better versus the market in China. China’s outperformance is primarily attributed to the roll-on of various new business and Adient’s favourable customer mix.

In the lower right-hand corner, we’ve provided our FX assumptions, which as many of you have commented on in your recent reports, is expected to be a significant headwind year on year. In fact, based on our current assumptions, we estimate the year-on-year impact, 2023 to 2024, for Adient’s top line in EBITDA to be about $180 million and $60 million. Outside of production and FX, other factors that are on our radar include labor availability and cost, elevated interest rates, which are forecast to remain higher for longer, consumer demand and geopolitical concerns. With that said, taking these factors into consideration and based on current market conditions, we expect to deliver earnings and margin growth in 2024 versus 2023. Let’s flip to Slide 20 and review key influences on Adient’s FY’24 revenue and EBITDA, excluding the impact of the UAW strike, which has already had an impact on the company’s 2024 performance.

First, on revenue, high level volume and mix are expected to drive a year-over-year increase in sales, call it about 2%, which is generally in line with S&P’s October forecast. From an FX standpoint, based on assumptions outlined on Slide 19, it is expected to partially offset the benefit of higher volumes, call it an approximate $180 million headwind. The Chinese RMB is expected to be a substantial driver of the headwind and the euro to a lesser degree. In total, Adient’s 2024 plan for revenue, excluding the impact of the UAW work stoppages at our customers, was expected to land between $15.6 and $15.7 billion. Based on the environment today, we estimate the strike-related disruptions and production stoppagesAdient at our customers through November 3, negatively impacted Adient’s top line by approximately $125 million.

Although it’s realistic to assume certain of the lost production will be made up, it’s premature to quantify at this time. As you would expect, the company will provide updates as fiscal year ’24 progresses with regard to the strike-related volume recovery. The bridge for EBITDA has a few more components. First, the positive influences, which include the benefits of improved business performance, volume and to a lesser extent, a $10 million benefit from net material economics. On the topic of net material economics, some of you might question the magnitude of the material econ benefit. Let me remind you of several factors that can influence that. First is the timing of recoveries. Second is the fact that commercial negotiations are often settled as a basket of goods and cannot always be directly linked to specific items.

And third, the company has yet to finalize its 2024 steel contracts in Europe. The important takeaway is that Adient continues to be successful with its commercial negotiations to mitigate inflationary pressures. Moving on to the headwinds; FX, which is expected to pressure earnings by approximately $60 million or 30 basis points FY’24 versus FY’23. The $60 million headwinds includes a translational impact of about $20 million. Although the Mexican peso is driving the majority of the transactional headwind, various currencies within Europe, such as the Polish zloty, are also contributing to the pressure. Equity income is about $20 million lower than FY’24 versus last year. The primary driver is an additional pricing agreement revision between Kuiper’s JV partners, which reduces equity income but improves Adient’s consolidated EBITDA primarily in the Americas.

And finally, minor footprint actions in Europe and further fine-tuning of the company’s operations will impact the year-over-year comparison. In total, Adient’ 2024 plan for EBITDA, excluding the impact of UAW work stoppages at our customers, was expected to land north of $1 billion. Based on the environment today, we estimate the strike-related disruptions and production stoppages at our customers through November 03 negatively impacted Adient’s adjusted EBITDA by approximately $25 million. Consistent with my comments related to sales, although it’s realistic to assume certain of the lost production and earnings will be made up, it’s premature to quantify. We’ll provide updates as fiscal year ’24 progresses with regard to strike-related recoveries.

Turning to Slide 21, we’ve provided our fiscal 2024 guidance for all of Adient’s key financial metrics, including the impact of the strike-related production stoppages, through November 03. Having just covered revenue and adjusted EBITDA and equity income, I’ll begin with interest expense. For fiscal year ’24, we forecast interest expense to be about $185 million, given our expected debt and cash balances. Cash interest is expected to be slightly higher, call it $195 million, resulting from the deferral of the March 2023 refinancing. Given expectations for improved profitability year over year, cash taxes are forecasted to be $105 million. For modeling purposes, you can assume between $115 million to $125 million of adjusted tax expense. CapEx is expected to trend back to a more normalized level, call it approximately $310 million.

Again, 2023 was depressed given the delay of certain launches at our customers. And finally, free cash flow is projected to be approximately $300 million. The key drivers impacting the year-over-year comparison include the higher level of cash interest, CapEx returning to a more normalized level, and the modest increase in cash taxes. Also, as mentioned in my 2023 cash commentary earlier, the timing benefits recognized in fiscal ’23 related to certain accrued compensation are expected to reverse. Adjusting for fiscal 2023’s outperformance or smoothing FY’23, FY’24 should provide a clearer view of Adient’s run rate cash generation. With that, let’s move on to the Q&A portion of the call.

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Q&A Session

Operator: [Operator instructions] Our first question comes from Colin Langan with Wells Fargo You may ask your question.

Colin Langan: Great. Thanks for taking my questions. Maybe I should kick it off. Doug, any color on why leaving by the end of the year? It seems like you guys have been making pretty phenomenal progress on sort of your multiyear plan. Why not sort of stay it out until you fully close the margin gap to the targets you’ve been talking about?

Doug Del Grosso: Sure. Thanks for the question, Colin. As you would imagine, there’s certainly personal reasons I won’t discuss on the call, but from a professional perspective, I’ve been here five years. The focus over those five years was really to, get the company back to basics, focus on operational excellence, change the culture around that and I think, we’ve successfully done that. We’ve spent time on the call today talking about the dynamics and the shifting dynamics and where we need to go in the future from a technology perspective and, shifting customer perspective. And I just felt at this time it was a good exit point for me. My operational background, got the culture on the execution side back and with the team that transitions, we can really focus on how we shift from a technology and customer perspective.

I just think, generally speaking, five years is a good timeline for a CEO and, in refocusing on our energies on where we move in the future, we’ll be well served under Jerome’s leadership.

Colin Langan: Maybe if we just switch to the guidance. I think in the past you’ve talked about 100 basis points of margin performance per year over the next three years. I think you outperformed last year. What is offsetting? Is that all just the FX kind of washing out some of that performance that you have executed in the pipeline? It’s kind of keeping the year-over-year margin expansion a bit more muted?

Doug Del Grosso: Yeah. So I think your commentary in terms of if you look at ’23, we executed around about 130 basis points of margin expansion. If you look at ’24, net of FX, it’s around that kind of 70 basis points. So over the two years, it’s still combined 200 basis points and it’s really the FX piece of it on the transaction side in ’24 that’s muting really kind of that performance piece of it and especially the Mexican peso piece and, the teams are aggressively working with the customers and working to claw that back. There are going to be very difficult discussions that we’ll work through and work to pursue. But it is an unwelcome development on our path at the moment.

Operator: Thank you. Our next question comes from Rod Lache with Wolfe Research. You may ask your question.

Rod Lache: Good morning, everybody. A couple of questions. I first want to say congrats, Doug, on your retirement. You’ve done a lot at this company and in your career, and I wish you the best in your next adventure.

Doug Del Grosso: Appreciate it, Rod. Thanks.

Rod Lache: I wanted to ask you just firstly, on this FX impact specifically, it was a million dollars on your EBITDA in the fourth quarter and just looking back, in the Zloty, the RMB, and especially the peso, it looked like they were pretty significant headwinds all year. Can you maybe just elaborate a little bit on what’s driving the acceleration of the $60 million?

Jerome Dorlack: Yeah, and so it really comes down to, Rod, our hedging strategies and how our hedging strategies execute, and that we were in a position where we were able to protect or smooth the company, and as a result, our end customers throughout the ’23 fiscal year. Obviously, that’s temporary. You can’t hedge things forever and so as some of those hedges roll off in ’24, we’re now exposed to the market movements and the dynamics and the shifts of the peso and so it’s really getting to where the peso settles in at now, and that’s where you’re seeing these movements occurring, and you’re seeing this big shift or headwind year-over-year.

Rod Lache: Okay. And then also just another housekeeping thing. I’m only seeing, I think you referenced $10 million of reversal on the commodities. You absorbed something like $120 million of commodity headwind this year. Can you talk a little bit about whether that’s just conservatism or whether there’s something else that’s happening there that’s changing what you have to absorb versus pass along and maybe just remind us of that bridge to the 8% from here, from what we saw, I guess, ex that $30 million gain you did, like 5-3 [ph] in 2023. How do you see that coming through from volume, your performance, and contract rollovers?

Doug Del Grosso: Yeah. So I’ll take the material question first and then go to the second question after that. So on the material question, if you recall, the $100, just call it $120 million, about almost half of that is an inventory reval topic, which is just a true-up on the balance sheet of our inventory that we have and then there was another significant portion of that, less than a third of it, which was really a non-reoccurring benefit that we had in ’22 from a customer settlement that did not repeat in ’23 that caused us an issue. And so then the remaining amount that we have to really go and get in our ’24 is, there’s a couple of factors on the material side. One is, we have $10 million of benefit, but then also we haven’t cut our ’24 European steel contracts yet.

So we’re in the process of working through those. And then the last piece I would say is, when we think about recovering some of these material econ deals, it’s not always going to be a straight flow through on that net commodity line. It’s really a basket of goods discussion with some of our customers. We don’t have a perfect recovery mechanism and I think we’ve always said it’s — we’re somewhere between 70% to 80% on steel, and then it’s a 12-month to 18-month lag on the window. And so we don’t have these perfect recovery mechanisms. It’s going to be a basket of goods discussion and I think the way to think about it is, if you look at ’22 to ’23 and kind of that flow through margin, we expanded our margins by, call it, if our normal flow through is 16′, we actually expanded by almost 200 basis points in spite of all that commodity headwind that came at us, really because we were able to negotiate baskets of goods with our customers in spite of all that commodity headwind.

And that’s how I’d really think about those commodities and how they flow through. And then same thing in ’24, if you look at kind of the standard volume flow through, we’re actually, greatly exceeding kind of a normal 16% or 17% contribution margin on the volume because we’re getting some of those commodities back in other basket of goods, is the first piece on the commodity side and then on the topic of how to think about the progression of the margin, the pathway to an 8% margin target, there’s still the other volume piece that we have to get back up to a $90 million run rate within the industry. That’s still, call it, roughly a third of the piece of the story that we have to get there. We’ll end this year now at, call it, that 6.4%, but still about a third to get there.