Adient - Q3 preview

All,

Thoughts ahead of the Q3 financials and the call this afternoon (webcast):

Please find our analysis unchanged here.

Macro:

- With the US-China trade war in full swing, any auto supplier reporting only days after the latest round of tariffs must receive another knock.

- Adient have important business in China and the Yaun just dropped to decade lows.

- Adient has even more important business in the US, however, and that side is 100% owned. With potentially fewer cars shipped to the US (tariffs only partially offset by currency movement), production volumes may (as intended) pick up in NA and therefore benefit Adient.

- Ordinarily we’d expect cost pressures during any adjustment period, where Chinese capacity may have to be reduced and US capacity ramped up. But with the effect half offset already and with the Chinese - albeit market slowing down - still growing faster than the US', we think a mere slow-down in Chinese investment and some re-direction of CapEx to the less profitable US might be sufficient and - $ for $ - even more margin accretive. It should also help CF in the 100% owned perimeter (note that $1bn of cash is lying in Chinese JVs).

- So from a macro perspective we’d be buyers on a dip.

Expected Results:

- Sales $ 4.1bn

- EBITDA Just under $ 200m, on the Basis that the US operation is stabilising and margins perhaps slightly improving due to some of the manual assembly lines being unwound and freight costs being eliminated. In Europe We are also expecting a stabilisation, but below the levels achieved in Q2, which we felt had some catch-up from the dismal Q1 propel it. Some of the Brexit related production stand-stills should not recur again this year, but we are forecasting growth at a continued -10% for another quarter and EBITDA - as in the US - to be about half of that in the comparable 2018 period. In China we are forecasting consolidated Net Sales to stabilise around $600m per quarter and at a 20% margin.

- Thus in total, we think we are in a period of continued declining and rationalising sales, but also of margin improvement as a result of measures already taken in the last two quarters.

Expected Outlook:

We expect Adient to remain nebulous in its outlook, but ultimately reiterating guidance that the second half of the year should be more profitable than the first.

We see Adient as improving operations and results sequentially, while adding leverage due to its low CF conversion and LTM EBITDA annualisation. While the trajectory of leverage should turn around from Q120 onwards, we will make an earlier investment dependent on the rate of sequential improvement this quarter and next.

Wolfgang