Abc Technologies Holdings Inc

TSX:ABCT

Earnings Call Transcript 2022-Q4

[Operator]

Greetings, and welcome to ABC Technologies Fourth Quarter and Fiscal 2022 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Nathan Barton, Vice President, Investor Relations. Thank you, sir. You may begin.

[Nathan Barton, executive]

Thank you, and thanks to everyone for joining us today. With me on the call are ABC's newly appointed President and Chief Executive Officer, Terry Campbell and David Smith, Chief Financial Officer of ABC Technologies. This call is being webcast live on ABC Technologies Investor Relations website. 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 cannot 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, 2021. All references to Q4 of fiscal 2022 are to our fiscal quarter ended June 30, 2022, and Q4 of fiscal 2021 are to our fiscal quarter ended June 30, 2021. References to fiscal 2022 are to the 12 months ending June 30, 2022, and fiscal 2021 are to the 12 months ending June 30, 2021.

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'll move to Slide 4. As we announced on August 16, the Board of Directors has appointed Terry Campbell as ABC's new President and Chief Executive Officer, taking over the position from Todd Sheppelman.

This transition has been in the works since Terry joined ABC earlier this year, bringing with him a strong track record of operational leadership from his time with other major Tier 1 suppliers, including Magna, Johnson Controls and most recently, The Woodbridge Group, where he was Chief Operating Officer, overseeing more than 10,000 employees in 60 locations across 14 countries.

The Board of Directors, along with the rest of ABC, look forward to supporting Terry as the company continues to grow its leadership in the automotive plastics and lightweighting space. With that, I'd like to turn the call over to our newly appointed President and Chief Executive Officer, Terry Campbell.

[Terry Campbell, executive]

Thank you, Nathan, and good morning, everyone. I'm very excited to be taken on the position of President and Chief Executive Officer here at ABC. And I want to take this opportunity to thank the Board for the confidence they've shown in me to lead this great organization. As I look forward, I'm excited about the opportunities that ABC has ahead, from new business wins and product portfolio tailwinds as the automotive industry transitions to electric vehicles through the integration of our recent acquisitions and the runway ahead of us for future M&A.

And most importantly, working with all the great people that make ABC a leader in the lightweighting space. I hope that my 25-plus years of experience leading other Tier 1 suppliers in operations, manufacturing, launch and strategy will bring a new perspective to the organization and help us continue to build on ABC's existing strengths while guiding the company into its next phase of growth as an innovative supplier of automotive plastics.

With that said, I will now turn to our results for the quarter and the year on Slide 6. David will provide additional data on our financials and his remarks. But to summarize, though, we saw some promising trends this quarter. Top line strength continued to be offset by industry-wide cost inflation pressures and operational challenges at a few of our plants, brought on by the production volatility from our OEM customers.

These pressures could not be adequately offset by cost controls and operating efficiency improvements, resulting in margins that still significantly miss both our internal targets and those that we have previously communicated with the investment community. The contribution from last quarter's acquisitions of dlhBowles and Karl Etzel, elevated consolidated gross margin, but not enough to offset the continued profitability pressures in core ABC operations.

However, given the challenging macro environment, we still find ourselves in, the senior leadership of ABC are exploring several measures, controls and actions to bolster future performance, streamline operations and manage costs. And finally, you have seen in our SEDAR filings and press release from this morning, ABC entered into an agreement to acquire Continental's Washer Systems product line for approximately EUR 20.5 million just prior to the end of the quarter.

This acquisition will add to our growing washer systems portfolio and expand our ability to serve our customers globally. Moving to the fiscal year 2022 highlights on Slide 7. Our full year revenue remained roughly flat at about $972 million against revenue of $971 million last year.

Adjusted EBITDA was $45.7 million for the year, and adjusted free cash flow came in at a negative $46.2 million, largely due to working capital cash usage as production volumes fell off a cliff in fiscal Q1 during the worst of the semiconductor crisis and the resulting OEM production shutdowns.

As anyone covering the auto universe is aware, the supply chain issues that began to impact the industry in our fiscal Q3 2021 continued through the entirety of our fiscal 2022, severely impacting our financial results. Semiconductor shortages, raw material price increases, labor shortages as well as wage inflation and utility cost inflation, all drove results that fell well short of our expectations.

We have seen resin, steel and other components remain elevated at historically high levels. In fact, management estimates the impacts of these various macro factors was $240 million of revenue and over $150 million of EBITDA when you include stranded labor costs, components and nonresident raw materials. The significantly higher negative flow-through on profitability was driven by the elevated costs I've just discussed that have no associated revenue with them.

However, against this backdrop, ABC made several strategic strides by closing on 2 acquisitions, signing a third and signing a large sale leaseback, which will bring in approximately $50 million of capital that we will use to pay down debt.

Taken together, these moves will continue to strengthen ABC's long-term competitive position providing additional scale and runway for growth. Additional runway from the acquisitions complement success in our top line seen through our business wins, which exceeded target for second year in a row, with $2.2 billion in life of program revenue. ABC also benefited from the largest year ever of electrical vehicle wins with $435 million in lifetime revenue.

As we have spoken about extensively each quarter, the industry witnessed significant operational challenges during the fiscal year that were both unpredictable as well as out of ABC's control. What we can say is that following the dismal industry-wide performance during our fiscal first quarter, production stabilization did improve with our financial results following suit to some degree, albeit at levels well below where we would expect to operate under normal conditions.

As we enter calendar 2023, we are hopeful that production begins to look something closer to normal. While we expect continued impact from supply chain issues into fiscal 2023, we're hopeful that the OEM production levels will continue to improve. As a result of the expectation, the cost pressures will continue ABC has taken actions to mitigate the impact on our results and improve margins in the near term as well as strengthen the normalized operating margin of the business for the future when production returns to a more normal cadence.

Moving on to Slide 8 for a review of the broader auto market related to production and inventory. On the left, you can see the total U.S. inventory has remained depressed, though on a slight improvement past since October 2021. With roughly 1.2 million vehicles on dealer lots, average inventory of 24 days is roughly 65% lower than dealers had historically kept on hand pre-COVID.

Now shifting our focus to the production environment. So IHS has reduced the production forecast through Q2 2027, a more normalized production environment is still expected to resume in calendar year 2023 as macroeconomic challenges abate, with inventory build potentially beginning in late calendar 2023.

IHS is projecting that we'll see an average of 4.1 million vehicles produced each quarter from calendar 2023, through 2029 or later. Depressed inventory levels, combined with a strong consumer and an aging North American vehicle fleet indicate robust long-term demand for both the industry and ABC going forward. However, it remains to be seen when the supply side will bounce back to meet demand or when semiconductor shortages and inflated input costs might abate. With the added uncertainty of the economic slowdown, ABC continues to push operational improvements and investigate strategies to offset ongoing challenges.

Moving to Slide 9, where you will see some of our important launches and product wins during fiscal 2022. In the year, we launched a number of products on the new Ford Bronco along with 2 important halo EV platform launches with GM via the new Cadillac Lyric as well as the GMC Hummer. Through these launches, ABC continues to demonstrate the positive mix shift in the top line performance that are aligned with some key trends in the auto industry.

Specifically the shift towards light trucks and electric vehicles. ABC also launched exterior system products on the Honda Civic, a consistently top-selling vehicle in North America, which enables us to continue broadening our customer base with key Asian OEM customers with which we expect to see additional growth over the next several years.

Though industry-wide production has been temporarily affected given a challenging macroeconomic environment, OEMs, new business quoting activity signals expectations for a robust future production. For example, our new business wins, we had $1.2 billion lifetime revenue win on a U.S.-based OEM truck, along with a large lifetime battery electric vehicle win with a luxury OEM.

In addition to these 2 notable platform wins, ABC has also exceeded its new business win target for the second year in a row. We were awarded 84 distinct program wins across 15 different OEMs for approximately $2.2 billion of lifetime program revenue. Importantly, for the future growth of the company, 33 of these programs were EV wins on 19 different vehicles, representing approximately 25% of total awarded annual and roughly 20% of life of program revenue. We continue to expect that ABC will book further meaningful EV wins in the upcoming fiscal year. With that, I will turn the call over to David.

[David Smith, executive]

Thanks, Terry. I'll start with an overview of our financial performance in our fiscal fourth quarter ended June 30, followed by a brief summary of our full year fiscal 2022 financial performance. The charts on Slide 11 show revenue, adjusted EBITDA and adjusted free cash flow over the course of our fiscal year, but I will also give additional color to these and other major income statement lines.

Looking first at the graph on the top left, ABC's revenue for Q4 fiscal 2022 was $319.2 million. This is up from $233.2 million in Q4 of fiscal 2021, which was a 36.9% increase with just over half of that growth attributable to the recent acquisitions of dlhBowles and Karl Etzel. As a result of ABC's favorable product mix in the quarter, the legacy business' top line growth of 14.5% outpaced industry production in North America which increased by only 11.7% in Q4 of fiscal 2021 to Q4 of fiscal 2022.

On a full year basis, reported revenue remained roughly flat year-over-year, increasing from $970.9 million in fiscal year 2021 to $971.9 million. Excluding acquisition contribution, ABC experienced a significant decrease in revenue compared to fiscal year 2021 due to lost production as a result of OEM plant closures driven primarily by semiconductor shortages.

Last year, in contrast, production approached near normal levels after the initial COVID-19 lockdown from March to May 2020. It is worth noting though that ABC's top line, excluding acquisitions, still performed better than North American industry production by 1.9% in the year. And finally, before I move on from the top line, I'd like to point out the positive trend we've seen with revenue increasing progressively through the year.

While the first 3 quarters saw a declining trend in terms of impact, from external factors, management notes, the volatile nature of these challenges and the renewed impact in fiscal Q4. Global inflationary pressures continue to negatively impact cost of sales, resulting in gross margin contraction due in large part to increased raw material costs primarily resin, glass, rubber, paint and steel as well as higher labor and freight costs.

As a result, cost of sales of $90.8 million from $200.7 million in Q4 of fiscal 2021 compared to $291.5 million in Q4 fiscal 2022, though it should be noted that roughly half of this increase is attributable to recent acquisitions.

Moving on to SG&A. Total SG&A increased from $36.3 million in Q4 fiscal 2021 to $44.1 million in Q4 of fiscal 2022. ABC reported a net loss of $13.6 million in Q4 compared to a net loss of $11.7 million in Q4 of the prior year. The net loss per share in Q4 of fiscal 2022 was $0.12 versus a net loss per share of $0.22 in the same quarter last year. Both figures are on a basic and fully diluted basis.

Moving on to the 2 graphs you see on the right-hand side of the slide. Adjusted EBITDA for the Q4 fiscal 2022 decreased to $15.2 million from $26.9 million in Q4 of the prior year. The adjusted EBITDA margin for the quarter was 4.3% compared to 10.1% last year. Higher year-over-year sales were offset by inflationary input costs resulting in this EBITDA margin compression, as Terry discussed with you earlier.

Looking to the final bar on the graph on the bottom right of the slide, you'll see that ABC closed the year with adjusted EBITDA for the fiscal year 2022 at $45.7 million. This was compared to $133.4 million in fiscal 2021, a decrease of $87.7 million. This depressed full year EBITDA performance was largely driven by inflationary cost pressures and production challenges that ABC faced in fiscal Q1 and Q2 and then again in fiscal Q4.

These production challenges were brought on by broader macroeconomic issues affecting the industry, in particular, semiconductor shortages that cause our OEM customers to frequently start in stock production, resulting in significant stranded costs for ABC. From Q2 onwards, the benefits of solar recovering going and production volumes were offset by inflationary cost pressures as well as operating issues we have faced at some of our plants that Terry alluded to earlier.

I will note that in this regard, ABC, like our other Tier 1 competitors is in discussions with the OEMs about recovering some or all of the inflationary costs that we've incurred. This recovery is intended to offset some of the negative year-over-year financial results of the business has faced this fiscal year. These conversations are ongoing.

As I did with revenue, I'd point to the graph on the bottom right that shows our cumulative adjusted EBITDA performance to highlight that despite the difficult first quarter of this fiscal year, this -- the positive trend of EBITDA performance in subsequent quarters is offered ABC some relief, albeit not enough to offset the impact of inflationary cost pressures that we are incurring.

With adjusted free cash flow for the quarter improving significantly to $600,000 from adjusted free cash usage of $17.1 million in Q4 fiscal 2021, this quarter marked a key trend reversal after 3 consecutive quarters of lower year-over-year adjusted free cash flow. As you'll see in the final bar of the graph on the bottom left, adjusted free cash flow was negative $46.2 million for the fiscal year. This is compared to adjusted free cash flow of $79.3 million for fiscal 2021.

This deterioration was largely a carryover from Q1 cash usage at $60 million as acute production cuts had a large impact on our working capital balances and effect, which is unwound to some degree over the course of fiscal 2022. But that we expect to continue into fiscal 2023 as production continues to become more normalized at our OEM customers.

As we and many of our peers and customers have repeatedly referenced over the last 3 years, our business continues to be adversely impacted by a number of unfavorable market dynamics, including reduced production volumes at our OEM customers due to semiconductor chip shortages, inflationary pressures for costs, including labor, freight, utilities, resin, glass, rubber, paint and steel COVID-19-related demand imbalances and related supply chain disruptions.

As you'll see from the graph on the top left of the slide, excluding the semiconductor shortage and other OEM production issues, management estimates revenue would have been about $30 million higher or $249 million in the quarter.

Looking to the graph on the top right now, our management further estimates that adjusted EBITDA would have been about $50 million higher or $31 million in Q4 fiscal 2022 were it not for the negative impact of cost inflation issues and production call-offs, primarily rated to semiconductor shortage and other OEM production issues. And finally, I'll note for modeling purposes, again, that our reported revenue does not include JV revenue, but that adjusted EBITDA includes our 50% proportionate share of our JV's EBITDA.

Likewise, the computation of adjusted EBITDA margin only includes 50% of the JV's revenue in the denominator. Because the JV is included in the income statement on the equity method 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.

Slide 12 shows the walk from cash from operations down to adjusted free cash flow for the year. For Q4, cash from operations was down slightly from last quarter due to lower EBITDA results while other aspects of cash flow remained relatively steady for all 4 quarters of the year.

As we mentioned earlier in the call, you can see the significant improvement since the beginning of the year and cash flow against the backdrop of recovering customer volumes and normalization of working capital. On Slide 13, you will see details of our capital structure and liquidity. Our total liquidity position was $173 million as at the end of the year, which has remained strong throughout the volatility of this fiscal year.

This level of liquidity provides ongoing flexibility for operations. As mentioned on our Q3 call, we increased the size of our credit facility to $550 million and sedans maturity by 2 years to February 2027 on all facilities except the $50 million revolving facility B and improved pricing. We remain fully compliant with all covenants under the amended credit agreement.

And as we previously mentioned, we maintained a high drawn our revolver due to lower levels of industry production, resulting in a temporary and expected increase in leverage. Management expects to leverage multiple to decline as we benefit from improved market dynamics and operational performance, the integration of our recent acquisitions and the proceeds of the sale of the Karl Etzel real estate.

We expect these factors will allow us to pay down debt and return leverage levels below management's target goal of 3x. With that, I'll turn it back over to Terry for a few closing remarks. Terry?

[Terry Campbell, executive]

Thanks, David. So to sum things up, what we've seen this year is conflicting dynamics playing out between the top line and the rest of the P&L. On the one hand, we're continuing to see improvement in some areas of production and top line growth, helped by our recent acquisitions and demonstrated by our business wins through the year.

While the overall dynamic of less frequent and fewer short notice production call-offs from our OEM customers in North America is still improving, in Europe, where we have smaller but still meaningful revenue representation, we're seeing things, I'd say, weaker as input costs have remained more elevated.

On the other hand, as we look further down the P&L, you can start to see some of the operational and macroeconomic challenges reflected through our compressed margins. We are acutely aware of the pivotal role that ABC's core operations play in enabling top line strength to flow through the P&L.

As we alluded to in earlier comments, we are aware of the challenges in our business, and we're implementing a variety of measures, controls and actions that aim to improve operations, but that will require associated and necessary onetime expenses to Q1 and Q2 fiscal 2023.

These actions in the near term are an important part of our medium- and long-term plan. The overall long-term macro picture, at least for the auto market remains strong as we've seen OEM customers continue to commit large dollars to future programs and consumers are buying every car that hits the dealer lots.

We expect this trend will continue to positively impact our financial results in fiscal 2023 as production normalizes further. We signed another acquisition this quarter with Continental Washer Systems, building on the strategic moves we made earlier in the year with the acquisition of dlhBowles and Karl Etzel.

And we are continuing to look at further acquisition opportunities that will strengthen our business for the future and are expecting M&A to remain a focus for our team. As I said in my opening remarks, I'm excited for everything ahead of us and we've got the right team in place to execute on the opportunities to grow ABC, strengthen our operations and achieve financial results that exceed those of years past. That concludes our prepared remarks. Thank you, everyone, for listening and for your support. David and I are now happy to take questions.

[Operator]

[Operator Instructions]

Our first question comes from Mark Neville of Scotiabank.

[Mark Neville, analyst]

Congratulations, Terry. Maybe just my first question. I guess I'm just trying to understand the quarter-over-quarter decline in profitability. And if I look at Slide 11, I think exogenous factors were comparable quarter-over-quarter. So again, just trying to get a better sense of what happened in fiscal Q4 versus fiscal Q3? Yes, we'll start there.

[David Smith, executive]

Yes. So Mark, I think what we still see is we still see an intensifying impact from what those exogenous factors are in terms of the impact on the business. And so I think you still see relative to every -- virtually every cost and some of the impact on the business relative to inefficiencies caused still by freight and delays in terms of supply.

And it could be that really, as far as the exogenous factors, it could be the impact is a little bit higher. I do know the one other thing, too, that's certainly in there we didn't list as an exogenous factor more because it's related to the accounting for acquisitions is there's about $5.5 million or $6 million that went through the cost of goods sold as a result of some of the fair value adjustments that are pretty normal with acquisition accounting.

So you did also have that impact that would add, as I say, $5.5 million to $6 million to what's listed in those buyers.

[Mark Neville, analyst]

Okay. Can you maybe speak, I guess, to the performance of the Karl Etzel and dlhBowles in the quarter?

[David Smith, executive]

Yes. I think that what we're seeing with the dlhBowles acquisition, again, we've known them for years before, and I think that they've been impacted to a certain extent by some of the sales reductions. But I think what we're seeing is we're seeing them operating much in line with what we expected, apart from the impact of sales. They're having some impact from higher material costs. I think the impact probably for Karl Etzel is different in that, that they are more impacted by the conflict in Ukraine.

And so as all suppliers really that we're seeing in Europe, they're being significantly impacted by energy cost as well as the production call-offs, I think what we've seen from the customers there have been higher. So -- so why I think long term, we certainly believe all these businesses are really strong and going to deliver what we expected. I think there are some short-term factors that are expect -- that really impacted our Q4. But we think they're temporary and should abate as some of the things, particularly the energy crisis in Europe gets solved.

[Mark Neville, analyst]

Great. And those acute factors at Etzel, the production costs and energy would that have been sort of adjusted for? Or is that per the exogenous costs look like?

[David Smith, executive]

I generally think it wasn't adjusted for. It could be captured in the exogenous factors, again, kind of there's nailing down all of that, I think, is there's a bit of art in there as well as science. But I think that certainly some of the inefficiencies and some of the things as it relates to energy cost, probably are not fully contemplated in the exogenous factors that we've got listed there.

I think the other thing too that you do see still there is a lot of inefficiency in terms of managing our workforce that has these other stranded costs but still have where the businesses are operating as efficiently as they should.

[Mark Neville, analyst]

Got it. Maybe just one last question. You mentioned some onetime expenses in the first half. Maybe you can just quantify that or if you could.

[David Smith, executive]

Sorry, Mark, in terms of onetime expenses in the first half of -- could you just clarify the question, please?

[Mark Neville, analyst]

Yes, sure. For the coming fiscal first half, I think you spoke to some onetime expenses related to some of the actions you're taking?

[David Smith, executive]

Yes. I think certainly, as you expect the CEO transition that we're looking at the way the organization has been is set up. And there are some things that we haven't fully completed yet, but I think that you'll see as a result of trying to make the organization leaner, more customer focused, more product focused. But that's the direction that Terry was mentioning that were going in. And maybe, Terry, you want to add a few points to that.

[Terry Campbell, executive]

Yes. I think it's a great question. Thank you for your comments earlier, Mark. Yes. I mean if you kind of look back, I mean, I mean, our customer is changing, so we have to change, and we're trying to align our operating strategy and our operating model to be more efficient and nimble, especially with the way the market is changing and how quickly it's changing.

So we're trying to implement a model that we think is going to allow us to change and pivot accordingly, manage our costs and continue to drive some efficiencies with better efficiencies within our business enterprise-wide.

[Mark Neville, analyst]

Got it. And do you have a rough estimate of what the costs are going to be for the first half?

[Terry Campbell, executive]

At this point, we don't. It's ongoing. We're doing an enterprise-wide evaluation. We're looking at all aspects of our business in terms of where we think there is opportunity to better align with our product and customer focus and create more efficiencies and obviously, try and lower some costs in the business to offset some of these pressures that we're facing today. I would hope at the end of the quarter, the next call, we'll be able to talk more about it.

[Operator]

Our next question comes from Ryan Brinkman of JPMorgan.

[Ryan Brinkman, analyst]

Relative to the lower margin resulting from cost inflation, how much would you say stems from commodities? I read in the release you called about resin, glass, rubber and steel versus how much would you say stems from other costs like you called out in the release, freight and labor. And maybe just a couple of other questions around that, including is it fair to say that your commodity pass-through arrangements relate primarily to resin? Do you have any pass-through mechanisms for glass, rubber or steel?

And how would you say that those pass-through mechanisms or negotiations are progressing to recover commodity costs? And then separately, I think no supplier today has pass-throughs for freight or labor, which must be accomplished only through negotiations. Do you expect to be able to offset these costs also via higher pricing and over what time frame? Or do higher non-commodity supply chain costs maybe need to be more offset via your own productivity, cost saves, operating leverage, et cetera, as opposed to customer pricing.

[David Smith, executive]

Well, Ryan, let me see if I can unpack all of that. I do think that ABC is certainly a very critical supplier to our customers. And so we've sat down and we're having discussions with them, and we are really talking about the full gamut of the impact of these significant inflationary costs on our business. So I'd say that we haven't limited it.

And I think you know in past discussions, we said that we roughly have hedging mechanisms for resin of about 50%. And what's happened on the increased cost on resin are significant to that. So it's -- that part is uncovered. But some other things that we buy, but it's not glass, it's not paint. There's some electronic components where there's a bit of a pass-through arrangement. But that's really not what we're talking about.

What we are seeing is it is the glass, it's the fiber, it's the glue, it's the paper. And as you suggested, a lot of those things are unprotected. And so as I say, we are doing the fulsome discussion with the customers to look at the full gamut. And I would say, we've been at it for a while. I think there's a bit of a process. There's a back and forth, there's a sharing of information. so that the customers can understand and validate what the requests are.

And I think that one of the things ABC has done a really good job with is being prepared to understand -- to help the customer understand where these costs are and how they impact the business. Because I do think largely, this is a partnership and I think that understanding how these costs have affected us is very important to them. So I think right now, we're -- I think we're in the middle of it.

And I think there's probably still some time to go to get through to the conclusion, I know that we're keen to kind of accelerate these so that they don't linger and that we can all move on with the business. I know, Terry, you may have some impact that you want to put or discuss how you're thinking about that.

[Terry Campbell, executive]

Yes. No, I think you captured it very well, David. I mean these are long, complex, difficult discussions we're having with our customer. And we're being transparent in terms of the burdens that we're incurring here in our business and the challenges we're incurring. We're working with them closely. We're going to continue to work with them closely. Some of these pricing pressures that we have based on the inflationary impact or the impact to our resins and other costs in our business. They're just -- they're not sustainable.

So these are discussions that we're going to stay at the table, and we're going to work hard at figuring out a way forward that makes sense for both ABC and the customer. But I can't emphasize enough that these are very complex, difficult discussions. Parts of our business, some of our larger programs -- if we don't come up with a solution, then they're just going to -- it's going to drive some difficult decisions that I think -- and we're prepared to make those difficult decisions because, again, some of these pressures that are on our business that are hitting our pricing and our cost models are just not sustainable as we move forward.

So I am encouraged with the customer. They're listening. They're working with us. We have some further discussions on the horizon with them. We're going to continue to work hard to come up with a solution that obviously mitigate some of the current state of our business.

[Ryan Brinkman, analyst]

Okay. And just as a follow-up to that, when you say you're ready to make difficult decisions, does that entail more like we don't want to re-up this contract or more like we're not going to ship parts as per the existing contract?

[Terry Campbell, executive]

Yes, we're not -- I mean, never we're always going to ship parts. I mean that's the kind of the supplier we are. We're not going to get into that discussion. But I think we're going to have to -- I mean, if we have programs that are underwater and they're not sustainable, we're going to have to find alternative measures to help the customer support those demands. And it may not be ABC. That's not our intent.

Our intent is to continue to grow with the customer. but it's a very difficult time right now, and we're prepared to make the decisions that we think are in the best interest of the shareholders and the company.

[Ryan Brinkman, analyst]

Okay. That's very helpful. And then while you continue to not guide, I think, given obviously the uncertain industry and macro backdrop, are there any guideposts or parameters that you might be able or willing to provide for how you are thinking about how ABC performance could track in fiscal '23. Should the industry or macro play out in a certain way.

So for example, while visibility in the future trends in production and commodity prices remain low, if we were to assume that, say, production tracks in line with IHS expectations and that resin and other commodity prices remain flat versus today's latest spot prices, how might you expect ABCT pro forma revenue or EBITDA to track in that scenario?

[David Smith, executive]

Ryan, I think the subject of guidance for us is very important, and we understand how important it is to you. And I think what we'd like to do is when we feel like the ground is a little bit more firm, we would expect to come back with guidance. And we're hoping that's in a quarter in the very near future. But I think at the moment, we just don't feel like the ground is secure enough yet to do anything that would be other than wildly speculative.

And some of these things with respect to volume, I think it's getting clarified in some of these things with respect to customer recoveries. As those get clarified, I think those would be some significant milestones where then we'd be able to go back to giving guidance. But I think that's still at least a quarter away.

[Ryan Brinkman, analyst]

Okay. Got it. And then maybe just finally, I see on Slide 15, you mentioned that Europe remains less predictable and call out energy costs there. I know a minority of suppliers, such as Aptiv, have recently called out downside risk to IHS and consensus expectations for this region. What is your outlook for Europe, which matters more to you than before. Does it differ materially from IHS?

[David Smith, executive]

I think that we are looking at the IHS constantly. But I think we feel like the customer we have has maybe a good, strong correlation to what we built into our plans and budgets. And so I think that as far as discounting from IHS, that's something we always look at, but I think that we feel like there's a strong link there.

[Operator]

Our next question comes from Peter Sklar of BMO Capital Markets.

[Peter Sklar, analyst]

So bottom line on this lengthy discussion we're having this morning on the commercial, I guess, commercial negotiations you're having with your customers. Like bottom line, when do you think there could be a resolution where we would see a notable or we would notice an improvement in your financial results? It certainly sounds like it's not going to be Q1 as it's something we could see in the subsequent quarters of this year? Are these going to be lengthy negotiations?

[David Smith, executive]

I think that as we think about it, right, these are -- these are critical relationships to us. And I think that's going to take the time it's going to take. We are certainly cognizant of the fact that we don't want them to linger. And we are -- we think it's in the interest of all parties if we move through it expeditiously. And I can tell you the conversations are happening in real time.

There's not significant delays. It could be a Q1, but given that we're sort of 28 days to go, I think the better play is to think that maybe it's more of a Q2 impact for us. But I can tell you, we're -- they're critical relationships. I think they're sensitive. We want to make sure we deal with the facts information and be very respectful all the way around.

So it's going to take the amount of time it's going to take. But I think that, as I say, we're in the middle of it. There's been a lot of information exchange. A lot of discussions had. And again, I feel like given where we are, it's probably more of a Q2 event than the Q1.

[Peter Sklar, analyst]

And the nature of these discussions you're having is does any of it involved a retroactive adjustments or can -- hopefully, any pricing adjustments going to be prospective going forward?

[David Smith, executive]

Peter, we know that there's a lot of suppliers are having discussions. And I think that until you get to the point where you start to have settlement discussions, it could be anything. So I think it's really hard to predict where the conversation will go -- but I think that from what you heard for our industry sources, it could be any number of solutions that could be retro, but it could be that there's something else.

So I think that it's -- anything that we discussed with you at this point in time would be quite speculative. And I think we just say that we're going to have a professional and respectful conversations with the customer. And that could be part of it, but I think we need to wait and see kind of what the offer is and how things worked out with us in terms of what we can accept.

[Peter Sklar, analyst]

Okay. Switching gears here, Terry, I have a strategic question for you. As I listened to your talk this morning, the company is facing significant and complex issues. Some of them like maybe the volumes will recover, maybe you'll get some cost to recover, but a lot of these issues are not going to go away in the near term and may never go away. At the same time, as you can see, the business is significantly underperforming from a financial point of view, even well below your expectations.

I'm just wondering, like based on your commentary, you've done these 3 acquisitions, the third one being announced today, you said the company is very focused on further acquisitions, given the complexity and the underperformance of the business, don't you think this would be a time to be focusing internally on your existing operations making the necessary changes so that you can be successful in the current operating environment.

Just surprised that you're so focused on M&A in a time when the business is so challenging. So I'd like to hear your comments on what I just talked about.

[Terry Campbell, executive]

Yes. No, it's a great question. So I wish I would emphasize more on the internal efforts as well. So yes, M&A is very important as we sort of move forward. But in parallel, we're undertaking a significant amount of exercises to reassess our business, reposition our business. If you look at it historically, I mean it's been a business that's -- it's been a family-run business. It's been growing organically. It's been a leader in North America.

But if you look today in terms of what we're trying to do, we're trying to expand our customer base. We're trying to become a more global organization. And obviously, the M&A is going to help us with that. But based on the current state of business and the challenges that we're dealing with, especially COVID and the semiconductor and the inflationary pressures, just to name a few, it's going to -- it's creating a different -- we're going to have to make different choices on how we run our business moving forward. And as we sort of manage and through these different types of challenges, it's going to be something that it's going to require the right subject matter expertise and the right team to sort of implement and drive those improvements. So if you go back and my experience in the industry has been dealing with very similar situations. In my previous life, I came out of JCI and Magna. I dealt with quite a few underperforming situations.

And that took a realignment of the business model. So we are creating -- we are looking at implementing a new operating model that's going to be focused. It's going to be much leaner. It's going to be a much better focus on the customer and product strategies.

But at the same time, it's hopefully going to create the efficiencies that we know are necessary to sort of create that competitive advantage when it comes to cost structure. So it -- unfortunately, I'll probably get into more detail in the next quarter because we're sort of -- we're talking real time right now with the variety of actions that we're looking at and prepared to undertake in the next several weeks and months. But I can tell you that we're serious about the measures we know are necessary and we're prepared to invoke them.

[Peter Sklar, analyst]

Terry, you come from -- given your backdrop, you come from various different types of auto parts manufacturing. Is there -- given your time now at ABC, is there anything specific about plastic injection molding and your business that's particularly challenging relative to other kinds of auto parts manufacturing, like the obvious one that comes to mind is you don't have full protection on your resin.

You have about -- it sounds like about half -- I believe you're saying half of your procurement is protected through customer programs. But is there anything unique about plastic injection molding that makes it particularly challenging.

[Terry Campbell, executive]

Yes. And I think even prior to me coming here, ABC was pivoting somewhat relative to being a formal more of a component supplier to a more system integrator. So as you look at their product portfolio and how it's starting to -- the strategic approach they're taking, I want to continue with that strategic approach because that's where the value add really comes in. My experience is in the interior space and the powertrain space.

There's -- the OEMs are definitely looking for suppliers that can be more system integrators versus a component level. So from a product portfolio strategy standpoint, I want to continue to figure out ways to accelerate what ABC has been doing historically and try and figure out ways to take bigger steps there.

And that ties into our M&A strategy as well, where we want to make sure that we look at some of the technologies relative to process and product. We want to make sure they're additive to our respective portfolio. So I like what they're doing. I want to continue to do and enhance and grow what those strategies in place today are. And I think it lines up to what the customer is looking for relative to the supply base.

Now the other thing I'm trying to do here as well is relative to the operating model, we're trying to set it up to where we become more of a customer-friendly business model. So it's easier to do business with us relative to applications engineering, our quality, our operational excellence. So a very significant focus right now on launch excellence, operational excellence and the customer experience.

And that's we're really putting a lot of emphasis with the leadership team in terms of rolling out this new operating model. And the operating model actually aligns with the operating models that you would see in the OEM. So that's what makes it easier to do business with or makes it easier to do business with ABC going forward.

[Operator]

[Operator Instructions]. Our next question comes from Brian Morrison of TD Securities.

[Brian Morrison, analyst]

Just a couple of follow-up questions. It sounds like your peers have had some early success with respect to pass-through on customer recovery on inflationary costs. It sounds like you're a little bit more downbeat. I understand it's quite complex negotiations. But like have you achieved any success to date? Or are you sort of a laggard relative to your peers?

And then the second part of the question I have is you've been quite successful or very impressive in winning new contracts in recent quarters. I'm wondering are there provisions within these contracts that account for the headwinds that you're facing right now? Or are they also subject to inflationary pressures?

[David Smith, executive]

Well, I think that one of the things that I might say we were a little bit late to start relative to the discussions with customers. I think we -- we really took pride in being a good supplier and offsetting the impact of the inflation. And we had some light discussions, but I think that we've sort of decided that given the severity of what's happening here that we needed to ramp up our efforts. So I'd say a little bit late.

But I think that in the discussions, we've also looked at the business that we've quoted and won. But some of it has some automatic mechanisms that are already provided for. But as part of the discussions we're having, if anything, doesn't have the protection built into it and is a future launch, those are included in the discussion.

[Brian Morrison, analyst]

Okay. And then many of my questions have been answered, but I guess I'll follow up with in terms of the acquisitions. Peter makes a very good point about moving forward with the state of the current operations, but maybe you could just provide some metrics with respect to the Washer System acquisition from Continental in terms of annual sales and what the EBITDA multiple could be, please?

[David Smith, executive]

Nathan, can you jump in and just give our[indiscernible] .

[Nathan Barton, executive]

Sure. Yes. So unfortunately, just given the antitrust regulations around the deal, we can't really say much until the transaction is closed, which we expect to occur in the next quarter. So I can't give you a lot right now, unfortunately, but we also have not closed the transaction that time that we do, we'll tell you more.

[Operator]

This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.