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Greetings, and welcome to ABC Technologies' Q4 and Full Year Fiscal 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Nathan Barton, Director of Investor Relations. Thank you, sir. You may begin.
Thank you, and thanks to everyone for joining us today for ABC Technologies' Q4 and Fiscal 2021 Earnings Conference Call. With me on the call are Todd Sheppelman, President and Chief Executive Officer of ABC Technologies; and David Smith, Chief Financial Officer of ABC Technologies. This call is being webcast live on ABC Technologies Investor Relations website and the webcast and accompanying slides will be available for replay for 12 months following this call. The content of today's call is the property of ABC Technologies. It can't be reproduced or transcribed without prior written consent from the company. Before we begin, I would like to remind you that today's call will include forward-looking statements within the meaning of applicable securities laws, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the Canadian Securities Regulatory Authorities on SEDAR. Please review the disclaimer on Slide 2 of the earnings presentation for additional information. We assume no obligation to update any of these forward-looking statements or information unless required by law. I want to remind our investors that we are on a fiscal year that began July 1, 2020; all references to Q4 fiscal 2021 are to our fiscal quarter ended June 30, 2021; and Q4 fiscal 2020 are to our fiscal quarter ended June 30, 2020. References to fiscal 2021 are to 12 months ending June 30, 2021, and fiscal 2020 are 12 months ending June 30, 2020. I also want to note that while ABC shares trade in Canadian dollars, the company reports its financials in U.S. dollars. With that, I'd like to turn the call over to Todd Sheppelman.
Thank you, Nathan, and good morning, everyone. We closed this year on a positive note with our performance running ahead of what we anticipated on our last quarterly update call. As we saw certain customers make some positive production adjustments relative to our expectations, and our ABC team's strong execution demonstrated our ability to manage a difficult and unpredictable production schedule. We remain extremely positive on both the long-term macro environment and ABC's positioning to grow its market share as our products address the light-weight requirements of future vehicles. While we continue to be impacted by the global semiconductor shortage, we view these issues as temporary, though it's still uncertain as to when normal production schedules at our OEM customers will return. On another positive note, I'm very happy to report that ABC was recognized by General Motors as the Winner of the Coveted Overdrive Award and named the Supplier of the Year award winner in 5 product categories this year. ABC was one of only 26 companies to be selected for this prestigious Overdrive Award for 2020. This distinction is reserved for suppliers to display outstanding achievements within General Motors global purchasing and supply chain organizations, key focus areas of sustainable value streams, total enterprise cost and profitability, safety, launch excellence, accelerating innovation and nurturing relationships. At the end of the fourth quarter, Cerberus closed its sale of a 51% majority stake in ABC to Apollo Global Management and we are excited to add their expertise and global perspectives to our team. As we've spoken about extensively before, growth via M&A in the fragmented automotive plastics market is a key pillar of ABC's growth plan for the future and having deal-making professionals at Apollo along with Cerberus, who retained the 26% stake, deeply involved with ABC, give us the firepower we need moving forward. Now let's go to Slide 4 and look at the fiscal fourth quarter highlights. David will provide additional data on our financials in his remarks. But to summarize, we performed better-than-expected this quarter, notwithstanding the ongoing supply chain disruptions related to semiconductors and elevated resin pricing, which continued to impact our results just as we expected and spoke about in last earnings call. Our revenue for the fourth quarter increased to $233.2 million from $82 million in the year ago period, which reflects the lows of the pandemic. Adjusted EBITDA improved to $26.9 million from a loss of $30.5 million last year, and adjusted free cash flow was negative $17 million, largely as a result of working capital changes. Moving to fiscal year '21 highlights on Slide 5. Our full year revenue increased 18% to $970.9 million from $822.9 million. Adjusted EBITDA was up approximately 50% to $133.4 million from $89 million, and free cash flow of $79 million was up 216% or $147.8 million from fiscal 2020. Given the headwinds we faced, we are pleased to be able to beat our revised guidance in all 3 categories. Revenue, adjusted EBITDA and free cash flow for fiscal 2021 would have been higher but for multiple and frequent shutdowns related to the industry-wide semiconductor shortages, weather-related conditions in the Southern United States and other supply chain issues. While fiscal 2020 was deeply impacted by both the industry-wide suspension of production due to COVID-19 as well as a strike at one of our OEM customers that occurred in our fiscal 2020. On the next slide, as we did in Q3, we will briefly discuss the impacts of the supply chain disruptions on our fiscal 2021 results. On Slide 6, as we have previously pointed out, our results for fiscal '21 were impacted by 2 exogenous factors that were only beginning to impact the automotive industry in our fiscal Q3, but they have now become well known. First, the global semiconductor shortages of our OEM customers, which has forced widespread shutdowns that began during the middle of our third quarter and remain ongoing today. And second, elevated resin demand in North America has caused prices to spike to record highs. We also saw a transient impact in the third quarter related to winter weather. While the bulk of the impact related to weather was felt in the third quarter, chip shortages and elevated resin costs continue into the fourth quarter and are continuing even into our fiscal 2022. For the first half of calendar '21, which is the second half of our fiscal calendar, 1.5 million vehicles were removed from IHS production forecast, amounting to a 9% decrease in annual figures, but a 17.5% decrease in volumes from January to June of 2021. Taking into account the production stoppages across all OEMs and vehicle types, we estimate that the semiconductor shortages reduced fiscal 2021 revenue and adjusted EBITDA by $84 million and $23 million, respectively. According to media reports and company commentary, most OEMs and semiconductor chip manufacturers are currently expecting the shortage to slowly ease as the current calendar year goes on, but still continue somewhat into calendar year 2022. Based on these reports, customer production announcements from as recently as last week and IHS Markit industry data as of August, which reflected significantly declining volumes and expected production since their last report in July, we expect the impact on our OEM customers and ABC to continue into our upcoming fiscal year. The second exogenous factor in fiscal '21 was the financial impact from elevated resin prices. When winter storms Uri and Viola hit the U.S. Gulf Coast in February, resin supply was already constrained due to COVID-related logistics issues. These storms caused disruptions across the major petrochemical plants that provide key resin feedstocks and push prices to 10- to 15-year highs. While resin prices have come down from the highest seen in the third quarter, they remain at historic elevated levels. Resin represents the largest component of our raw material cost. And these same winter storms also forced additional production stoppages across OEM factories in the Southeast. And we estimate the combination of resin and winter storms negatively impacted fiscal '21 by $6 million of revenue and $8 million of adjusted EBITDA. While we expect to continue to be impacted by both resin and semiconductor shortages in fiscal 2022, we do anticipate sequential improvement in both of these factors as the year progresses. Moving on to Slide 7. We spoke about this slide last quarter, and we wanted to touch on it again because the production environment has been extremely dynamic and it points to a clear picture of why we're so confident and positive about the long-term growth trajectory of the industry and ABC. OEM production of 3.6 million vehicles in our fiscal Q3 declined to 3.2 million for our fiscal Q4, and IHS expects to see reduced production through the end of calendar '21. In fact, IHS expects there to be at least 2 million production units lost in just North America for calendar year 2021. However, we expect to see those figures climb back as the supply chain disruptions abate. IHS is projecting, we'll see on average 4.3 million vehicles produced each quarter from calendar 2022 through at least 2028. Total inventory is the lowest it's ever been and major ABC customers like General Motors have less than 25 days of supply versus a 10-year average of 77 days' supply. Based on IHS data, current inventory of less than 1.3 million vehicles equates to just under 25 days of inventory for the entire U.S. market versus 70 to 80 days under normal circumstances. Last year's COVID shutdowns, combined with increased demand for both fleet and retail vehicles, means there are multimillions of production volumes that will need to be made up, which will likely take multiple years. The industry continues, coupled with the ongoing economic recovery and the aging North American vehicle fleet, indicates robust growth for the industry and ABC going forward. Moving to Slide 8. The production may be slowed temporarily. OEMs are not slowing their new business quoting process or plans for future production. Despite the tough production environment, ABC set a new record for business wins in fiscal 2021. We were awarded 106 distinct program wins across 17 different OEMs for approximately $1.7 billion of lifetime program revenue. 34 of these programs were EVs from 8 different OEMs, representing approximately 20% of the wins for the year on a revenue basis and almost 1/3 of the individual awards for the year. Based on the direction of the industry, we expect ABC will continue to book further meaningful EV wins in the coming fiscal year and we're actively quoting dozens of new product programs right now. On this slide, you'll also see some of the important launches and product wins during fiscal 2021. We launched a number of products on the New Bronco as well as the Bronco Sport, 2 important launches for Ford and ones on which ABC has significant content. We've launched product on a major mid-cycle refresh of the F-150, the most popular vehicle in North America. We also launched fluid management products on Jeep's Grand Cherokee as well as HVAC on the new Kia Sorento and multiple product groups on the updated Nissan Pathfinder and INFINITI QX60, both of which demonstrate the growing importance of the Asian OEMs to ABC that we'll continue to see growth with over the next several years. On the new business wins front, we had a very large lifetime revenue win on a CUV from a U.S.-based OEM and another large win on a North American luxury OEM's BEV platform. We expect to see more and larger EV wins in the coming year. And finally, on Slide 9, we are proud that we are able to deliver and even exceed our revised guidance as the production environment has been arguably even more challenging in the months since we reported our fiscal third quarter results. Our team has executed well through the quarter and through the year. We continue to navigate a difficult and dynamic production environment as our customers and ABC managed through the global supply chain disruptions brought on by COVID-19 pandemic. We booked a record amount of new business this past year despite the macro challenges, which tells you that the OEMs are looking to the future when the semiconductor chip shortages subside as customers and consumers are hungry for new vehicles and OEMs want to deliver fresh products to meet the demand. We're especially proud of the level of EV wins for the year, which I mentioned on the prior slide. As ABC and others in the industry have discussed at length, we continue to be confident that the supply chain imbalance and demand imbalance point to a bright future for the automotive market and for ABC. And while our first fiscal year as a company was certainly more turbulent than we expected when we set out back in February, we are no less confident in our ability for ABC to deliver for our customers and for our shareholders as we continue to build the business for future growth. With that, I'll turn it over to David.
Thank you, Todd. I'll start with an overview of our financial performance in our fiscal fourth quarter ended June 30, followed by briefly summarizing our full year fiscal 2021 performance. On Slide 11, this chart shows sales, adjusted EBITDA and free cash flow for our fiscal fourth quarter, but I also spent some time to give additional color to these and other major income statement lines. ABC's revenue for Q4 fiscal 2021 more than doubled to $233.2 million from $82 million in Q4 of fiscal 2020, largely due to automotive manufacturing operations resuming after COVID-19-related temporary shutdown in March 2020 and April 2020. So cost of sales increased on an absolute basis as a percentage of revenue. Cost of goods sold decreased to 86.1% of revenue in Q4 of fiscal '21 from 112.3% in the same quarter last year. Operating leverage increased as overhead costs were better absorbed with the expansion in sales volumes. SG&A expenses were $36.3 million compared to $31.7 million, mainly on account of costs related to the Apollo transaction and share-based compensation expense. As a percentage of revenue, SG&A expenses declined to 15.6% in the current quarter from 38.7% in Q4 fiscal 2020. ABC reported a net loss of $11.7 million in Q4, compared to a net loss of $46.2 million in Q4 of the prior year. The net loss per share in Q4 fiscal 2021 was $0.22 per share versus a net loss per share of $0.88 in the same quarter last year. Both figures are based on basic and fully diluted basis. Adjusted EBITDA for Q4 fiscal 2021 increased to $26.9 million from a loss of $30.5 million. The adjusted EBITDA margin for the quarter was 10.1% compared to a negative 30.9% last year. Adjusted cash flow for the quarter was negative $17.1 million versus negative $65.8 million in Q4 fiscal 2020. These improvements were driven by higher year-over-year sales as OEM customers resume their automotive manufacturing operation compared to Q4 fiscal 2020, which was adversely impacted by shutdowns related to COVID-19. I'll note for modeling purposes again, that our adjusted EBITDA includes 50% proportionate share of our JV's EBITDA and likewise, computation of adjusted EBITDA margin includes 50% of the JV revenue in the denominator. Because the JV is included in income statement on the equity amount of basis, you need to refer to our MD&A to see the JV proportionate sales and adjusted EBITDA details. Our MD&A is filed on SEDAR and is also available on our investor website. Moving to Slide 12. We closed the year ahead of our revised guidance as our team worked to mitigate the financial impact of the production disruption from our OEM customers. I'll spend some time providing some details around the impact of exogenous factors on business during fiscal year 2021. But before that, I will briefly go through our revenue, adjusted EBITDA and free cash flow. Revenue for the fiscal year 2021 increased 18% to $970.9 million from $822.9 million in fiscal year 2020. ABC benefited from the increased auto production in North America in fiscal 2021 as plants came back online after shutdowns related to the COVID-19 pandemic and the OEM strike. However, the overall improvement was partially offset by production curtailments caused by the industry-wide semiconductor shortage as well as weather-related supply chain issues in the Southern United States during fiscal 2021. Adjusted EBITDA for fiscal 2021 rose 49.8% to $133.4 million from $89 million in fiscal 2020. The adjusted EBITDA margin was 12.1% in fiscal 2021 compared to 9.2% in fiscal 2020. Adjusted free cash flow was $79.3 million compared to adjusted cash usage of $68.5 million. These improvements were driven by higher sales volumes as fiscal 2020 was adversely impacted by COVID-19 pandemic-related shutdowns and the 2019 OEM strike mentioned previously. As you know, during fiscal 2021, our business was adversely impacted by reduced production volumes at our OEM customers due to semiconductor chip shortages and the winter storms in the Southern United States as well as higher resin prices driven by weather, COVID-19-related demand imbalances. Excluding the chip shortage, management estimates the fiscal 2021 revenue and adjusted EBITDA would have been higher by $84 million and $23 million, respectively. Management also estimates that the weather-related OEM shutdowns and higher resin costs had a combined impact of $6 million and $8 million in revenue and adjusted EBITDA, respectively. Slide 13 shows the walk from cash from ops down to free cash flow. Despite the tough microeconomic conditions, free cash flow was strong during fiscal 2021 at $79 million. Note that free cash flow for the year was possibly impacted by onetime working capital normalization of $25 million related to the resumption of production following the COVID-19 industry-wide shutdowns. We also continue to be more efficient with our capital spending than we expected at the beginning of the year. So when you think about normalized free cash flow for the year, we delivered approximately $38 million of free cash flow, a fairly strong result and consistent with normal levels despite the challenges we faced this year, which is a testament to ABC's ability to control its cost structure and manage CapEx. On Slide 14, you'll see the details of our capital structure and ample liquidity. Net leverage of 1.9x, we view as fairly conservative, and is based on our fiscal 2021 adjusted EBITDA of $133.4 million and net debt of $257 million. We also have total liquidity of $184 million. With that, I'll turn it back over to Todd to discuss guidance and give a few closing remarks. Todd?
Thank you, David. As anyone following the auto industry knows, it's an unprecedented time for OEMs and suppliers from the Tier 1s all the way down to the entire value chain. Industry volumes in our fiscal Q4 were down almost 20% from what was anticipated in January. And even for the remainder of the year in 2021, volumes are already projected to be down at least 14% from where IHS expected at the beginning of our fiscal year just 8 weeks ago. We are still seeing production interruptions from our customer with only days' of notice, in some cases affecting very large volumes, as we saw just a couple of weeks ago, when one of our customers announced additional downtimes affecting more than 50,000 units on their highest volume and most profitable trucks and SUVs. The semiconductor shortage issues that have been affecting the entire industry for the past 6 months is likely to continue into 2022 calendar year. I would note for analysts that while OEMs and chip suppliers have begun to catch up somewhat on base chip production, what we are hearing now in the industry is that there is a growing problem in the next steps of the chip production value chain with suppliers in areas being hard hit by COVID right now and having plants shut down by government health officials, which is in turn causing OEM production shortages and stoppages. It's a challenging situation out there and it does not appear it's going to be easier in the very near term. However, as we mentioned before, we are confident based on the automotive demand environment that over the medium and long term, we'll see production normalize, which will provide a tailwind to all industry participants. For ABC in the recent weeks leading up to this call, we've been seeing almost daily announcements of production interruptions occurring at OEMs around the globe. And as we look at fiscal 2022, we see a high level of uncertainty continuing, especially given that our fiscal year starts right in the middle of these continuing, and in some cases, escalating OEM production interruptions. I want to call your attention to the chart on the right, showing IHS volumes to emphasize the swiftness and depth of the cuts that we have seen in the industry, with North America production volumes for the second half of 2021 calendar year expected to be down 14% from where IHS projected just 2 months ago. Unfortunately, this statistic is even higher for some of ABC's main OEM customers and platforms that have seen volumes decline over 30% at a customer level and over 70% on some key platforms. As a result, we are currently seeing Q1 revenue 25% to 30% below our initial internal forecast for the beginning of our fiscal year, which started just 8 weeks ago. While we believe production and our fiscal results will steadily improve as the year goes on, the ability to accurately predict OEM production volume, and therefore our financial results at this current juncture will remain challenging. Against this backdrop, we will issue fiscal 2022 guidance at a time when the production environment has steadied to a degree where we can provide guidance with confidence. Despite all this, I'll close on a positive note. We are also booking record amounts of new business, we have a product portfolio that aligns well with the industry trends toward lightweighting, and we have ample opportunities to grow the business, both organically and inorganically. This was a year of great change for ABC from the IPO to the majority sale by Cerberus to Apollo, both of which we believe will benefit the company and all of its stakeholders and will lead to additional growth opportunities both financially and in scale for ABC. Consumer auto demand remains exceptionally robust. And when we begin to see the green shoots of restored supply chain, hopefully, in early calendar year 2022, we expect we will be able to realize the benefits of higher volumes, and you'll see the business return to the performance we know it's capable of. While we expect to take some time for the supply chain to catch up with the total demand, we remain focused on execution to support our global customers as well as finding ways to maximize value to our shareholders. With that, I will conclude our prepared remarks. Thank you, everyone, for listening and for your support. David and I are now happy to take questions.
[Operator Instructions] Our first question comes from Mark Neville of Scotiabank.
Maybe just a point of clarification on my end, just to make sure I've got the numbers right. You're estimating the impact for the fiscal Q4 and semis to be roughly $13 million on EBITDA and it rising around $5 million. Is that correct, so $18 million for the quarter, combined?
Yes. I think you pulled it off of my section and I think that's right.
Got it. Yes, I was just sort of looking at the annual and what you said last, but okay -- no, that's helpful. So I guess all things considered, it was a pretty good quarter, pretty strong performance anyway. Maybe just -- can you just speak to some of the puts and takes and sort of where you outperformed your prior guide? Because you came in well ahead, presumably mix was part of that. But anything else worth highlighting?
Yes. I would just say, Mark, that there was -- I think some OEMs were able to find a few chips and maybe have a little bit more production volume. You'll see that the revenue was a little bit higher than we had anticipated because of that. And that's certainly [Audio Gap]. But also, while it's been a little bit slower than normal, just continuing to drive improvements in our operations. And so I think you see a little bit of flow through from that going forward as well. So volume at this level of the production curve really helps us out and that's why we're waiting to get back into more of a normal swing like you saw in the first half of our fiscal year. But it's -- the teams are working. We're not just standing by idle. We're constantly driving improvements in our manufacturing operations, in our product development operations, how we execute and launch programs, how we're using our CapEx. And I think those are just some of the things that you see fall through during this last quarter.
Right. And I guess on the semis and the resin, again, the $18 million impact in the quarter, I would assume, again, lost volumes and higher costs, correct? It's both.
Yes. Absolutely. So the -- with the semiconductors, it's -- we would basically -- even during this call, I can tell you that one of our major customers dropped some more volume at 9 manufacturing plants, which was expected, but it's happening on a weekly basis at multiple OEMs. And we typically get 3 weeks -- 3 days of notice on what the following week is going to look like. So we're still in a reactionary mode, and the OEMs are just reacting to the same data. They get maybe 24 hours before we see it and then they figure out what to do with it and then they pass it down to the supply chain. But the visibility just isn't there right now. So it's really revenue in semis, it's the main thing. Resin is, I'll say, out there, but most of the things in this industry right now are being driven by semiconductors.
Yes. Yes. No, understood. Maybe if I can just -- 1 last question? Just on M&A. And I know you spoke to it in the prepared remarks. And I guess, just curious is the environment that we're in sort of change your thoughts or approach and maybe does it make you more or less likely to do something in near term?
No. I think it might even increase the potentials out there. I think you're going to see, with the continued strain in the marketplace and volumes down, that there's a lot of distress already in the supply chain. So I think it might open up some more opportunities out there just from an opportunity sets basis. But it really hasn't changed our primary focus on the items that we've continued to talk about and what we've been doing over this past quarter. I can say that we're engaged actively in several opportunities out there, and the team is focused on it. It still remains a very important step for us in multiple steps, and we're going to continue to drive down that path. And what we really tried to do from just an overall mantra standpoint is, we view the chips and the resins are really short-term issues in our long-term strategy, and we're not losing focus on the long term while we deal with the short-term issues.
Our next question comes from Nauman Satti of Laurentian Bank.
So my first question is more on the execution side. You've mentioned there's a lot of production delays. I'm just wondering if you guys have any room on the cost side in terms of labor? Or how you are sort of adjusting to these last-minute volume declines? Is there something that you've adjusted your business model or is it still the same?
Yes. I'd say that what we do is we have to flex our labor more and more frequently than we typically would like to. But it's just part of the situation that we're all in right now. So that's certainly a part that we focus a lot of attention on given these production call-offs on very short notice. What we don't know typically is the window of how long it is going to last. If we would know that this was a 6-month issue, then you'd probably act one way, but if you think this is a 1-week thing that might come back or there's anticipation that the volumes are coming back the next week or the following week, you have to treat your labor in a different way from that aspect. So we've been very careful and there's pockets of tight labor around the globe. You guys read about it all the time from just overall manufacturing. So we don't want to just shed labor because we will need it the next week. And so it's a difficult balance, but one that I think we're getting better at and have the ability to react on very short notices. And it's important that we continue to retain our workforce, important asset to us, and it really helps drive both the quality and the continuous cost improvement initiatives. So we really pay a lot of attention on how we flex our labor and work to retain the workforce.
Okay. No, that's fair. That's good color. And just on the cost front, the resin prices increase. I know that some of that cost you can pass that on. I'm just wondering if that happens on a step-wise or if there is generally a lag that goes in? How are those contracts worked in?
Yes. And so that's a good question. Approximately 50% of our contracts do have a hedging mechanism attached to them. And I'd say between [Audio Gap] are on a lag basis. So there's either a 3-month or 6-month catch-up period. So I think at least in the back half of our fiscal '21, we'll actually see the benefit of the lag catch-up in our fiscal '22.
Okay. That's great. And just one last one on the M&A front. I'm just wondering when in this environment, where it's challenging for most of the part suppliers, I'm just wondering has the due diligence process changed anyway or is that more difficult now? Or have you adjusted that process in itself?
Well, I would just say a couple of things. In the past, typically, a lot of the due diligence was done both in data rooms, but also maybe a lot more in person. We're still doing a lot of Zoom calls and I'd say fewer in-person than we have in the past. But I'd say it's as robust as it's ever been. And then what you really have to understand is -- and when you're looking at current results, how much of this is a hangover and just issues from the current short-term market and how much of this is structural and long-term cost embedded into the companies? And so we've been doing, I'd say, a little bit more understanding of what we really feel true run rates would be for different opportunities that we're evaluating, and we want to make sure that we've got a cleaner picture because it's pretty murky right now when you're looking at the past really 18 months of performance given COVID, the chip shortages and a few other things to really gauge long-term run rate potential. So we're spending a little bit more time looking at volumes and looking at cost structures and how people flex their organizations and what we think long-term run rates are. So I'd say maybe it gives us a little bit more in-depth look at the numbers, given doing it in a constant state environment. But I'm happy with the due diligence activities that we've got. It's nice to have in our corner the Apollo team and the Cerberus team who have got a lot of experience with this as well. So I think we do a pretty good job on our diligence.
Our next question comes from Ryan Brinkman of JPMorgan.
Congrats on the stronger quarter in a challenging environment. Firstly, I just wanted to check in on the election to not guide. I think we can all empathize with you because, amidst this period of atypically high industry uncertainty, and almost all other auto part suppliers are effectively only being asked to guide for 6 months, not 12 months. So maybe just one place to start is on how much of that election to not guide would you say relates to industry uncertainty around production given semiconductors and other supply chain inefficiencies versus how much relates to industry uncertainty around the direction of raw material prices or other industry-wide factors versus how much relates to maybe the uncertainty around the company's specific ability to recoup and the timing of the recouping of those raw material price increases?
Yes. I would say that if it weren't for the semiconductors, you'd be seeing guidance from us right now. It's 90-plus percent on the semiconductor. We just don't have a clean view on even what next week's production is going to look like, unfortunately. And it's not a blaming statement. The OEMs don't have any more visibility than I do, except maybe they've got 12 hours of extra look. So I think resin is out there. It's not the major reason why we're not doing guidance at this time. We just felt that with the uncertainty, we've had 2 drastic changes in IHS volumes in the last 8 weeks. We've had 8 weeks of continued call-offs from our OEM customers, as I mentioned, including during this conference call, we've had more. And we just don't have the visibility to put down numbers that I can feel comfortable with have any semblance of where we think we're going to be. So I'd love to put out some guidance. We will when we've got a better feel for the stability in the marketplace, but we just don't think it's reasonable to do that, particularly when our fiscal year starts right in the middle of, I think, an uptick in the shutdowns that are going on right now. And so that was just our reasoning behind that, Ryan. And we knew that we'd certainly get questions on why, but we thought it was the correct thing to do given this environment.
Okay. Very clear and helpful. And then what is the latest that you can share on the completeness or your thoughts around the completeness and the degree of the escalator agreements built into the contracts with customers to recoup the material costs? I just heard you say that it's roughly 50% coverage with 50% of that on a more lag basis. I think that's pretty consistent with your earlier communications. But I guess I'm wondering, are you satisfied with that? In this current raw materials cycle, is there the opportunity to increase the percentage of the contracts subject to automatic price adjustments based on spot prices or potentially to decrease lag factors, et cetera? What are your thoughts there?
I do think, Ryan, if there are opportunities, most of them are going to be longer term in terms of changing contracts. But there's always a level of negotiation that's taking place with customers over various aspects. And I think it's common in our industry, customers are talking to us about annual productivity, givebacks and things like that. And so we kind of put all of that into the mix as far as the discussion. And so I think there's things that we think we'll be able to recoup without necessarily adjusting the contracts. But we are really evaluating the way we do contracting going forward to see if maybe we want to hedge a larger portion of the buy for resin with the customers. There's also other mechanisms in the market that we could look at. So I'd say it's fair for us at the moment to think that we've taken a fresh look at how we are protecting ourselves on resin. We haven't really come to any conclusions, and we certainly don't want to lock in prices now because we do think that ultimately the market is going to settle out and come back more in line with where it's been historically. I think we see that some of the force majeures that were in place have been dialing back and producers are starting to get caught back up. I think the one thing that we all see and just watch carefully as we are in the middle of hurricane season. And as you know, last year, there were impacts that affected the ability to produce. But I think that barring any significant hurricane events, we'll start to see the industry get caught back up and pricing begin to get back more in line with what we would think of as normal.
Got it. And then just lastly, suppliers this year seem to have gotten, of course, less heads up than in prior years about production curtailments and whatnot. But they do seem to have gotten more heads up at least relative to IHS Automotive, right? So I wanted to check in on the latest communications that you're receiving from your customers about production call-offs, plant downtime, et cetera? When the other suppliers with December 31 fiscal year-ends were reporting calendar 2Q results sort of like 3 to 5 weeks ago or so, they were mostly pointing to kind of 10%-ish or even a bit less global light vehicle production in calendar '21. And I know you're more levered to North America industry production and that all the suppliers kind of broke that out. But I just want to check in, just given some of the closing comments in your prepared remarks there about like the back-end finishing of chips. It sounds a lot like some of the things we heard sort of toward the end of 2Q earnings season about the Southeast Asia COVID-19 outbreaks, which were becoming sort of clear like around the time that GM reported around August 4, et cetera, impacting their full-size truck production, which had earlier been better protected. So I guess what I'm asking is, if the softening production environment that you're alluding to, including that is causing you to not want to guide right now, is that really just kind of you catching up with sort of where the industry understanding what those guys were sort of publicly saying like a month ago, including regarding GM Trucks in crossovers in the back half versus the first? Or whether you're concerned with even later break-in developments in just several weeks here since we've heard from a number of other industry participants?
Yes. I would say, Ryan, fully, it's based on things that happened over the last 2 weeks, specifically that I think threw a big monkey wrench into this. So if you look at the IHS that came out, I believe, around the 18th or 19th of August, basically took a tremendous chunk out of the current quarter we're in and then the last quarter of this calendar year. So the overall IHS volumes were down more than 775,000 units over what they were just a few weeks before that in their previous report. So that was a big huge change that has happened, I think, since others have reported out. And then we've actually seen call-offs of volume from our OEMs, multiple OEMs that were not even included in those numbers. So I think IHS was looking out a few weeks and months and then the call-offs that we were seeing even the next day or for the next week for us. So there's a lot of turbulence in the marketplace right now. It's still -- we feel and what we're hearing is that a lot of it's from the secondary operations in Malaysia and some of the other Southeast Asia countries that with the government shutting them down, it's just the fallout of that. The general macro that we're hearing is that actual chip production out of Taiwan has been improving and the OEMs were feeling more positive on that. But we're still in -- it's chips at any level, depending on which -- it doesn't matter if it's Malaysia or Taiwan that prevents the chips from getting there. But we're just reacting to the customer volumes that we see. And typically, the sequence is, on Thursday we find out what we're going to be producing or not on Monday. And again, I've mentioned a couple of times, but within the last half hour, we found out that one of our customers is not going to produce at 9 of its manufacturing plants for the next week for some of them and the next 2 weeks for a lot of them. So this thing is constantly changing. It's gotten a little bit worse than it was at as we've closed the second quarter. But we anticipate it's going to peak during this quarter, get a little bit better in the fourth quarter, and then the recovery should be starting at some point in time at the start of calendar year 2022. But I think we're into, as several called it, murky waters right now. And it's very difficult to see out more than a week or 2 on what production is going to look like. But we have to take into account both what our customers are telling us short term, and then using what the IHS and some of the other forecasting agencies are looking at on long-term volumes, and it has worsened in the recent couple of weeks.
Okay, that is very helpful.
No, I was just going to emphasize that same point, right? IHS looks really strong in our third and fourth quarter, at the start of calendar '22, like Todd said, but you just say the uncertainty in how these changes come with so little notice, it's hard for us to be as optimistic as we'd like to be with what we see in the IHS forecast in our third and fourth quarter.
Okay. Helpful. And then final, final question. I'm sure you probably have an understanding of -- as we sort of try to weigh the impact to the petrochemical industry from Hurricane Ida, you probably have an understanding of which individual factories that you're purchasing from, in that area of the country. Just curious if you have any kind of early assessment here on whether the impact to your subsegment of the petrochemical industry that supplies your plastic materials, whether the impact there from Hurricane Ida is going to be as great, not as great, or greater than the impact from the unseasonably cold weather in Texas back in February this year?
I would just say, Ryan, that from what I've seen from even early reports on Sunday was that not significant impacts. Most of the areas that we're getting resin from are on the west side of New Orleans and the hurricane winds and the power outages really did not affect that particular area like they did last year when those 2 hurricanes and the winter storm went through there. So I have not heard of significant impacts to our supply base from that. And David, if you got something to add to that, too?
No, I think you're right. I think the only thing there, there's some issues with the transportation networks in terms of rail, in terms of water damage and things like that. But I think that those are short term and no one that we're seeing at the moment is expecting it to have anywhere near the significant effect like the winter storms Uri and Viola had last year or even the hurricanes from last fall.
Our next question comes from Peter Sklar of BMO Capital Markets.
This is Chang covering for Peter. Can you provide some more detail regarding the impacts of the labor shortage that a lot of people are talking about, like what is ABC going to mitigate these impacts and to retain more labor -- the necessary amount of labor?
Yes, sure. I think we've all read the reports of mounting labor issues across virtually every industry throughout North America, particularly in the United States right now. And I would say that we have pockets where that's more of a concern than other areas. What we've really focused on is how do we make sure that we've got the right value proposition for our workforce that they remain as part of the ABC family once they enter the organization. And I think we've got really good retention activities underway that we've had in place and then other things that we've been working on is once we get people in the door, how do we work on the retention. We have very good metrics on -- once we have people for a certain period of time, they're here to stay. And so we're really working on engagement of the workforce when they do enter, making sure that we've got the right training going, that we've got a buddy system put in there, that we're listening to them, we're soliciting feedback on a frequent basis while they're going through the introduction phases and training phases. We really want to know what's on their mind as they're entering our manufacturing facilities. So I think it's really forced us to step up how we're focusing on that aspect of our value chain and the importance of the workforce, and I think we'll be a much better company for the activities that we're doing right now.
Okay. In the adjustments between EBITDA and adjusted EBITDA, I see that there is a $7.9 million charge of transactional recruitment and other bonuses. Can you give a little bit more color regarding this line item? Like how much of this is going to be ongoing?
Well, I would accept, Chang, that that's all really related to transactions that occurred either from the IPO or the Apollo transaction. So I would not have you expect those to be recurring transactions.
Okay. And then like in the adjustments between EBITDA and adjusted EBITDA, there's another line of $3.5 million of Apollo transaction costs. Like how come the company ABC incurred these transaction costs when the transaction is between Cerberus and Apollo?
We can just say that, that was the construct that was crafted by the Cerberus team. And there were consultants that were used to facilitate the transaction, and that really is the lion's share of what that cost was.
[Operator Instructions] Our next question comes from Maxim Sytchev of National Bank Financial.
I was wondering if you don't mind clarifying the comment around the covenant and potentially talking to the syndicate right now? Because a level just 1.9, and correct me if I'm wrong, previously covenant was 2.5. So I guess how should we interpret this? I think in the short term, getting much worse than sort of expected? Or are there other covenants that you are trying to get a relief on potentially?
Maxim, I would say that the 1 thing that we have -- it's our lender group is exceptionally good partners, and they've really been with ABC since 2016. And I think we've always worked to be very proactive with them. And I think to the extent you saw last year, when there were liquidity concerns associated with COVID-19, they jumped in and provided some additional liquidity. And when we had the concern, just like everyone else, about what our Q4 was in fiscal '20, they jumped in to provide relief. And I think what we're looking at just is a proactive way to approach the discussion given the relative uncertainty that we're seeing in the business, just to be in front of things, because I think the one thing that we have seen is that things sometimes go faster than you want them to do and it's better to have something in place. So I describe this and think of it as just an entirely a proactive action to make sure that if things change and perhaps get worse in the short term that we've got the protection and really an agreement that provides the flexibility we need so that we can continue to operate as we work through this crisis. And again, I think we see it as temporary, the people we're talking to see it as temporary, and it's just kind of making it through this rough patch.
Right. Okay. No, that makes perfect sense. And then another question I had was in terms of, you qualified Q1 sort of 25% to 30% below internal projections. And how would you quantify this versus last year, so we can get sort of a better sense of cadence, if it's possible to comment on that?
Yes, David, if you want to jump in on that one?
At least for me, I think, if the way I hear the question, last year, when we look at it, May of 2020, production started to ramp back up, June was starting to get back. But I would almost say, by the time we started really looking at July of 2020, things were almost roaring back as far as volumes, right? The OEMs were making vehicles. And it just started to feel like things were normal again. So I think if you sort of compare today and this quarter to a year ago, it feels like we've really have gone back in terms of restriction on demand in this year, where last year, the OEMs were just going gangbusters. I don't know, Todd, if you characterize it any differently? But to me, it feels like 2 different times where it was almost under strain in terms of the OEMs trying to get back to normal production, and now because of this chip shortage, they're still struggling to get enough of their products to make vehicles.
Okay. So should we assume like a 25% decline year-on-year in revenue or that's too aggressive? Because again, you're basing it relative to a different baseline for Q1?
I think, again, one of the things that we've talked about and the whole guidance discussion we talked about before really was, we took a lot of time to think through it. And I'd say even what Todd said right now is that we've got announcements from a major customer during this call that said production that we might have expected at least a part of it to be there for the month of September is not going to be there. So I think you should think that year-over-year sales will be down from where they were last year. And I think we're reluctant to try to give you that sense for how quarter 1 of this year will compare to last year because there's just some uncertainty still.
Yes. No, absolutely, and agreed. And then another question I had just in terms of, is there anything we should be thinking about from a working capital perspective given sort of all this volatility? Or kind of like breakeven on noncash is something that we should be expecting for the year despite sort of all the ups and downs?
I think the thing that we do see that gives me a little bit of pause on working capital is just that, it is that when customers do change what they're taking in releases does sometimes give us a hard time to plan for inventory. Some of our supply chains involve product that's coming from overseas. And when they dial back their releases, it's really hard for us to stop a ship that's halfway across the ocean. So I think what we found is there's cases where we've got product that's coming to our factories. And we've got product that we've made that the customer is slowing down. So where I see some pressure coming in the form of inventories just because it's hard to predict in the environment we're in. I think the management of all other elements of working capital continues on the same track that we have in terms of making sure we're collecting on time and that we're managing payables and really doing everything we can to make sure that our tooling inventories are sold and collected timely. But inventory is the one area where you just have uncertainty given what's happened in the production environment.
Yes, sure. And then in terms of the launches, very helpful Chart 8. In terms of the pacing of those things, are they sort of sequenced throughout the year or is it a bit more back-half weighted? How should we think about it, just in terms of the launch cost and things like that?
I think we've got launches that are equally distributed through the year, and it might get lumpy every once in a while, but we just have a steady pace of implementations of the wins that we've had over the last 2 to 3 years, and that will just continue as we've gone forward. And these last 4 years have been very, very successful for us in new business wins, and now we're in the execution phase of those. But I'd say we typically do run dozens of different launches, some large, some small every quarter. And we will continue to see that pace continuing and maybe even escalating a little bit as the number of new business wins we've had has picked up over these last 2 to 3 years.
Okay. That's super helpful.
Great. Thank you. And thanks for your report that came out this morning.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Sheppelman for any closing remarks.
Yes. Thank you. So just in general, I know we're close on time here, I'd just say we had a very strong fourth quarter in a challenging market. This has certainly been a year of a lot of accomplishments as we look back over the last fiscal year, and I'm really proud of the great relationships we've had with the OEMs as well as the hard work by the ABC team. As mentioned, we think it's just difficult looking into the early part of our fiscal '22 that we're into right now, just given a lot of the uncertainty that's out there and the OEM interruptions that are happening, but we still remain very positive on the long term and even the medium term is once we're through this near-term issues on supply chain, the industry is going to go crazy from a volume standpoint, and we're just making sure we're prepared for that. And during this time, we're continuing to focus on making the business better and continue to look at the long term with things like M&A activity as well as normal organic growth is still very, very strong on our radar screen. So we're very positive about the overall company and these short-term things, we will get through and will make us a better company. So thank you for your support of ABC, and I look forward to speaking with you individually in the near term.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.