Q3 2020 Adient PLC Earnings Call
[music].
Welcome to third quarter financial results call I would like to inform all participants. So your lines have been placed on the listen only mode until the question and answer session of today's call. Today's call is being recorded if anyone has any objections. You may disconnect. At this time I would now like to turn the call over to Mark Oswald. Thank you you may begin.
And your Randall good morning, and thank you for joining those because when you started this result for the third quarter fiscal year 2020.
It's really from presentation was.
Our goal is has been posted to the instructors much more workforce and stuff tell.
This morning, I'm joined by Brookdale Girls, So as President and Chief Executive Officer in just a while our executive Vice President and Chief Financial Officer I.
Today's call Doug will provide an update on the business followed by Jeff will review, our Q3 results and outlook for the remainder work this winter.
After our prepared remarks, we will open the call your questions.
Before I turn the call over to Doug and Jeff.
I'd like to cover first today's conference call will include forward looking statements. These statements are based on the environment as we stand today, and therefore involve risks and uncertainties I would caution that our actual results could differ materially from these forward looking statements.
Please refer to slide two of our presentation for complete Safe Harbor statement.
Additional financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the companies operating performance reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix or a full earnings release. This concludes my comments I'll now turn the call over to Doug.
But.
Thanks, Mark good morning, Thanks to our investors prospective investors and analysts joining the call. This morning.
And with US as we review our third quarter results.
I Hope you and your family pristine sake and hoping in these.
Turning to slide four let me begin with few comments related to our turnaround plan.
First off the team remains laser focused on the plan, while navigating through the global pandemic.
We continue to implement actions to ensure the plan progressive sort of positive direction.
When looking at our results you will see operational improvements are driving down waste and inefficiency.
Financial slides within Jeff section illustrate how our improved business performance, partially offset the significant kogut headwinds.
The team has exercising commercial discipline, resulting in new business wins with a higher return on capital versus outsourcing programs.
I'll expand on this point in a few minutes.
Our launch performance continues to make significant strides with extremely important as we head into critical launch quarter.
We're proactively executing measures to take out structural cost to ensure.
The cost base is aligned with our expected smaller industry.
And finally, we're moving closer to closing the two previously leased announced strategic transactions.
The approximate 500 million up our cash proceeds will strengthen our balance sheets and helped drive our total liquidity position higher exiting fiscal 2020.
Essentially we have our hands on the wheel and continue to drive initiatives.
That are within our control.
That said turning to slide five.
Third quarter results were significantly impacted by cobot, where you saw industry production essentially at zero across Europe, and Americas in April and slowly resumed operations in May and June.
We've highlighted a few of had against headline financials and financial performance is highly dependent in correlated to vehicle production.
Our results mirrored the overall industry essentially zero save sales in April with steadily improvement into May and June.
Sales at $1.6 billion were down about 2.6 billion or 60% on a year over year basis.
I mentioned sales were essentially zero in April the exit rate for the quarter was about 75% the pre cool that levels for both EMEA in the Americas.
Adjusted EBITDA was a loss of $122 million driven by the significant reduction in sales.
We estimated the impact to cover at around 400 million for the quarter.
The team did a very good job flexing costs. Unfortunately, the capital intensity bar business makes it difficult to offset fix cost.
Environment, we were managing through.
As production ramped up throughout the quarter, our earnings and margins progressed in a positive direction.
With regard to cash we ended the quarter with just over 1 billion cash on hand, and 1.2 billion of total liquidity.
Important to net of cash was significantly impacted by approximately 500 million.
Temporary level trade working capital headwinds, resulting from the restart of our operations across Europe and the Americas.
We expected a majority of these headwinds will reverse as we move through Q4.
As far as the $1.2 billion up liquidity, we expect that we will be a quarterly low point in fact total liquidity is expected to exceed 2 billion by the end of September before factoring any potential debt repayment as a combination of additional JV dividends proceeds from our previously announced struck.
Dziedzic transactions.
And the reversal of working capital headwinds mentioned earlier will help drive that against total liquidity higher.
One other point worth calling out the value of adding in strategic joint venture network with highlighted in Q3 as the company collected approximately 240 million in cash dividends in the quarter.
Year to date JV has contributed around $250 million with an additional $30 million expected in Q4.
Turning to slide six let me spend a few minutes discussing the trend state of at its operation that restart status versus in the APAC region in China. The market continues to provide encouraging data points.
That ends China operations have returned to pre corporate levels in fact more than 50% of our plants are running two ships.
China Auto sales year over year volume continues to grow improved sequentially Allianz performance has outpaced the market driven by our favorable customer and platform exposure is premium Oems and Japanese Oems have performed extremely well during 2020.
Outside of China, certain Asian countries are showing early signs of market recovery, we expect that trend to continue in the coming months.
In Europe, the market is recovering, but at a slower pace compared to recoveries in China in the Americas.
Potentially all of the Eddie's operations every started with the exception small chips facility in the UK operations revamp.
Production, adding sales improved month over month in Q3, essentially zero in April to about 75% of pre cobot levels in the quarter.
Based on current customer release schedules, we expect that rates continue to improve as we move throughout the fourth quarter.
It's important to note given production is not fully returned to pre code levels, having continues to flex cost structure utilizing furloughs in short time work as appropriate we.
We recognize the benefits associated with the program will lessen over time.
And have taken proactive measures to address our structural cost in the region.
More than that in a minute.
In the America all of it ends.
In JV plans have restarted production similar to Europe and sales have improved sequentially as Q3 progressed and exited the quarter at about 75% of pre cobot levels.
Customer leases for trucks and Cds are running extremely strong in some instances productions for certain platforms have returned to pre corporate levels.
While this has an encouraging sign we remain cautious as rising Copa levels.
Southern us in Mexico.
And restrictive rules in the 12 or region in Mexico at risk to for the production environment.
Turning to slide seven in shifting gears address a common question related to new and existing business awards that continue to bubble up with meeting with our Investor base, specifically I was losing business to our competitors.
Simple answer our focus on capital allocation and return on capital is driving profitable business Awards.
Both new and incumbent business.
We've studied and reviewed at adding and profitability by customer by platform by plant.
Basically slicing and dicing the data, let's clear a certain businesses and platforms have consistently fail to earn appropriate return.
The teams focused on ensuring an adequate return this realized over the platform life as a key driver in determining which platforms, we keep wix plant or we're comfortable walking away from.
Over the past 12 months, we've successfully replaced approximately 700 million.
Salivated revenue.
The business with a negative return profile with new business awards, including conquest business was significantly better returns.
Can see a few examples on the right hand side of the slides.
In addition, our solid execution and value add initiatives are driving additional opportunities to quote in wind profitable new business.
We're excited about Cadient book of business that we'll be launching in the coming years, it's an important component of enhancing our margin profile.
Much management has been a specific focus area.
Hoping to drive any it's improved operational financial results.
[noise] adhering to a robust process surround change management enhanced readiness and program reviews.
Early escalation of potential issues.
Made a significant impact.
Over the past several quarters, we've called several platforms.
Including the Cadillac 65, Chevy Onyx, Toyota Corolla, Nissan leaf for achieving and flawless scores.
Which redefined and 001 hundred hundred 90, which breaks down to.
Zero safety incidents zero customer rejects 100% on time delivery, 100% achievement of financial targets.
Within 90 days from started production.
Okay.
We're not here to declare victory today, rather we mentioned these examples as evidence teams hard work.
Preparedness for the upcoming launches.
Turning to slides nine and 10, let me conclude my comments with an update and the actions that are being taken to execute imposition, adding it for long term success.
Since we discussed in our Q2 earnings.
And and subsequent investor, meaning to it into a quick and decisive actions to help mitigate the impact of steep production declines experienced across Europe in the Americas as a result of the pandemic.
And these actions such as furloughing or direct and indirect.
Employees, that's the plan.
Connecting salary reductions in salary deferrals above plants spending 401k is just to name a few where temporary in nature is any operations restarted production increasing Q3, the benefits associated with these measures were reversed.
Addressing the company's cost base with structural more permanent measures essentially as we look to create stronger more profitable business, especially given adios expectation of a smaller industry next year versus fiscal year 19th.
And the company's extreme focus on capital allocation return on capital.
The right side teen actions identify that are being executed include the above measures above plant measures within our operations.
The goal is hipbone reduce adience breakeven point.
The free cash flow breakeven or better fiscal year 21, even though vehicle production is forecasted to be below premium coed levels.
Have a lot of work ahead of us to achieve that target, but we're well on our way in fact, we've identified in our in the process.
The executing cost reductions between 75 and $100 million versus 2019.
And then our central functions in regions.
Alright, 10, we've provided a few example of these actions and announced.
Won't read through the actions, but as you can see measures are far reaching impacting above plant planters and joint venture operations.
Certain of the actions identified can be executed rather quickly such as force reductions that impact are America's regions in central functions.
In late May or actions implemented in Asia earlier this year.
Other measures.
Have a much longer lead time.
Such as significant reduction in personnel planned in Europe.
Is noted in the middle of Slide in July we began negotiations with works Council and Germany to execute ports reductions impacting approximately 500 engineering above plant personnel.
The reductions are estimated to result, an annual labor savings about $40 million.
It's important to note a portion of the saving relates to flexing of the cost baselines in other words prevention margin degradation.
Even certainly the actions will be implemented in physical 21, we only achieve a partial benefit next year.
We'll run right savings are expected for fiscal year 22.
And the size of magnitude of the measures being implemented we do expect to have an elevated level of restructuring costs running through our financials and becoming quarters.
The team is currently finalizing our fiscal 21 plant once completed we'll be able to provide you an estimate.
So the sides of the timing of the charges and the cash outlay associated with these measures.
And the significantly lower cost basis, combined with continued operational improvement in a strengthening platform polio.
Expected to results and stronger more profitable business.
Sensually further positioning adient prolong term success.
With that I'll turn the call over to Jeff. So we can take us through Adience financial performance for the quarter.
Thanks, Doug Good morning, everyone and Doug how your earlier comments and hope everyone is safe and well.
Starting on slide 12, and adhering to our technical format.
Just formatted with Ah reported resolved from the left and are adjusted results in the right side of the page, we will focus or commentary on the adjusted results, which excludes special items that we view is either one time in nature or otherwise skew important trends in the underlying performance for the quarter. The biggest drivers of the difference between a reported in our <unk>.
Good results relate to restructuring cost asset impairments and purchase accounting amortization details of these adjustments or in the appendix of the presentation.
Sales are one $6 billion per quarter down about 60% year over year, which is Doug noted was driven by productions production stoppages at our customers across Europe and the Americans.
Adjusted EBITDA for the quarter was a loss of 122 million by applying are projected margin on lost sales and netted netting out our various short term austerity actions, we estimate that covid cost us approximately $400 million per quarter, however, and as well discuss more of a moment Adam Adam.
Operations across Europe in America continued to experience improved business performance.
With regard to equity income Q3 fiscal maintain included $15 million of income related to our interiors business that is no longer part of our consolidation today. Therefore on an apples to apples comparison adience seating equity income was up $8 million or 15% year over year.
Good performance.
As a result of our China operators are trying to operations continue to capitalized and the improving that China market.
Finally, adjusted net income and Etfs were down significantly year over year, I'll off $261 million and $2 78 per share respectively.
I'll also point out at our tax expense of $14 million in the quarter contributed to our net loss.
Those of you wondering why out and did not recognized acts benefit and the current quarter associated with our losses.
If you recall during it's 2018 and 19 fiscal years, adding recorded valuation allowances against the differed tax assets. Many entities located in significant jurisdictions in which and operate including the United States, Germany, Mexico, United Kingdom.
I didn't kingdom among others no tax benefits are recognized for losses by entities with valuation allowances and therefore tax benefits, we're not recognize during Q3 by many entities heard losses.
One last comment on taxes similar to Q2 of this year at either third quarter effective tax rate was based on an actual tax rate calculation person versus an estimated annual effective tax rate calculation. The continue to use of this methodology was necessary due to the uncertainty of the pandemic.
Now, let's break down a third quarter results in more detail detail starting with revenue on slide 13.
We reported consolidated sales of one $6 billion, a year or decrease of almost two $6 billion compared to the same period a year ago.
Lower volume across North America, Europe, and Asia was the primary driver of the year over year decrease again attributed to Los production volume associated pandemic.
In addition, the negative impact.
Currently movements between the two periods impacted the quarter by roughly $100 million. The biggest driver included the Brazilian real the Chuck Corona and Euro.
Worth, noting and on the call out box in the right consolidated sales and both Europe and Americans were down substantially at the beginning of the quarter almost 100% for the Americans April.
Both markets improved month on months is the quarter progressed exiting the quarter of between 75% to 80% of pre coven levels and China Adios sales were strong exiting the quarter driven by our favorable custom-make customer and platform mix for markets outside of China in Asia sales began to improve is.
Production volumes returned or materially impacted by this pandemic similar to what we saw in America in Europe.
For each of the markets Adience sales were in line or better comparative production within the markets.
With regard to add him unconsolidated seating revenue year over year results were relatively flat. However, as you feel back the onion. The result, very significantly between unconsolidated sales in China vs on consolidated sales outside of China.
And China, driven primarily for our strategic JV network sales were up 14% year over year, excluding FX. The sales performance first the market is attributable to Adience strong mix of business, specifically, our exposure to luxury and Japanese ONEOK.
Outside of China, and it has a variety of unconsolidated Jv's. These operations were impacted by.
By the same production stoppages that affected Adience consolidated results on average the unconsolidated sales of these jv's were down approximately 60% plus and the most recent quarter. We're encouraged we were encouraged with the sales trend.
As part of that it's positively progressing again similar to what we're seeing with our consolidated sales.
Moving to slide 14, we've provided a bridge of adjusted EBITDA sharp performance of our segments between periods.
Bucket labeled corporate represents central cost that are not allocated back to the operation such as executive office communication corporate finance legal in marketing.
Big picture adjusted EBITDA was a loss of $122 million in the quarter versus $205 million last year.
The impact of significantly lower volumes across America, Europe, America's Europe, and Asia with the primary driver of the Steve year over year decline. In addition into a much less lesser extent the planned divestiture of Wi Fi also had a negative impact of the year over year comparison as we stopped recording it's income last summer.
Since Adience financial performance is highly dependent on and correlated to vehicle production adjusted EBITDA showed steady improvement Mon bond month, as we moved through the third quarter.
In fact after a horrible April and start to May or June adjusted EBITDA results were about equal to June 2019, despite sales being down approximately 25% year over year.
Speaking of monthly results. This one more data point, excluding in April April and May Adios margins have improved year over year every month to September of 2019.
Back to the quarter and is Doug alluded to earlier.
Personally offsetting the significant volume reduction was improved business performance and lower SG&A cost.
Labour an overhead performance a reduction in SG&A cost lower ops waste launch and tool in cost or the primary drivers.
Proximate $45 million reduction in SG&A costs are primarily concentrated between EMEA America's and included increased efficiencies in positive benefits associated with the deconsolidation of adding an aerospace and the divestiture Carl.
But it's also important to point out a portion of the improvement call at about $20 million related to the temporary benefits associated with employee compensation that are not likely to repeat next year is temporary benefit was included in the net cove it impact approximately $400 million.
Business improvement combined with labor an overhead efficiencies in the lower SG&A helped contain our detrimental margins to the mid teens call at 16% even uncertain of the temporary cost reductions began to reverse for example, the benefit of associated with Furloughing or direct and indirect plan to personnel.
This outcome was in line with internal expectations and if you recall, we mentioned on the cue to earnings call to 13% detrimental margin experienced in the second quarter with Trent higher is adios operations restarted.
B contain although the 18% decrementals, we typically expense.
To ensure enough time is allocated to the Q&A portion of the call. We've provided are detailed segment performance slides and the appendix.
Presentation.
Improved business performance and lower SG&A cost, partially offset by the impact for lower volumes.
More than offset by the effective lower volumes is a primary take away from the Americans in the mirror region.
In Asia $15 million improvement in our seating equity income <unk>.
<unk> the Wi Fi equity income from last year, but overall performance was driven by lower volumes and earnings China.
Let me know shift to our cash liquidity and capital structure.
Slides 15 and 16.
Quarter adjusted free cash flow defined as operating cash flow less capex was an outflow of $528 million. There were several factors that had a significant impact and a quarter horse cash compared to our Q2 ending balance.
Excluding adience ABL. These factors included at a high level Las production given sales were down roughly 60% copay essentially cost us about two months of production in the quarter. We stated heading into the quarter every month of shutdown cost is approximately $175 million cash.
Therefore loss production resulted in a burn of roughly $350 million again, and it's very high level.
Also a temporary net trade working capital headwind of approximately $530 million heavily impacted Q3.
It's working capital outcome was expected with a sudden shut down and subsequent restart of our operations.
Two to three working capital headwind is expected to unwind and Q4 and benefit the quarter by approximately $400 million is noted in the right hand side of the page for bold transparency at also remind everyone in our.
That in our second quarter, working tadpole provided an approximate hundred million dollars benefit to cash flow when production immediately ceased reinforcing adience working capital movements tend to smooth out over a period of time.
Moving on partially offsetting the approximate $880 million headwinds just mentioned was just over $240 million a dividends received from <unk> and the quarter.
This of course was a very good outcome and highlights the value of our strategic joint venture network. In fact for the full year dividends expected from China will be $70 million to $80 million higher versus earlier estimates.
In addition to the China dividends, a handful of other positive benefits eight of the quarter, such as differing certain tax payments and Vit related items call those benefits around $70 million.
Executing these actions throughout the year enhanced our liquidity and help us whether the storm is $70 million of deferrals, we'll need to be paid next year.
The very bottom of the page you can see we ended the quarter at about one 2 billion total liquidity, which included our cash on hand of $1 billion $32 million plus $155 million drawn.
US of Undrawn capacity under our revolving line of credit.
Looking forward. We believe Q3 represented are quarterly low point liquidity and would expect liquidity to exceed 2 billion by the end of September for factoring in any potential debt repayment.
Key T drivers would include cash proceeds expected from previously announced transactions call at $500 million additional China, JV dividend $30 million the reversal, a temporary working capital headwinds and increase capacity under a revolver.
On Slide 16 in addition to showing our depth and net that position, which total for $5 billion and three 5 billion respectively. At June 30th. We've also provided a snapshot of Adience capital structure.
Just a few comments here, we believe this capital structure not only provides flexibility to whether the storm it provides flexibility to pay down debt. After we psychopath crisis.
Subsequent to the quarter clothes, adient proactively repay the $179 million drawn previously drawn on the revolver.
I'd also note that capacity under the revolver is based on a one month lag such that Q3 availability was based on may a or an inventory balances.
Getting the AAR in inventory balances to the end of June increased our revolver availability to approximately $650 million in July are a bit more than $300 million and reported at the end of Q3.
Improving Adams cash generation remains the top priority is Doug pointed out the action that is taken and plans to take our designed to improve our earnings in cash flow to be profitable in a smaller sales environment. Once the crisis as in the rearview mirror, we'd look to pay down barriers access that obligations.
Overtime post crisis, we'd expect to have zero outstanding balance in the revolver and run with the cash balance somewhere in the $5 million to $600 million range.
Finally, a few closing remarks on slide 17.
First we expect the global economic impact of Kobe 19 will continue to influence the auto industry and Adience for quite some time that said, we're encouraged by the green shoots that emerged progressed through Q3 building on the positive trend in vehicle production established.
And our third quarter Adient expects vehicle production across Europe in America to continue to improve improve sequentially in coming months.
Dalliance financial results are highly dependent on and correlated to vehicle production and based on the environment today.
We expect guidance sales earnings and margin performance will also Trent higher than the coming months, specifically, we expect Q for sales to be in the range of three three to three 5 billion.
Although this implies a 13% decline versus Q4 last year at the midpoint, it's important to remember our sales in North America will be impacted by the launch a D. F 150.
Justin EBITDA for Q4 is expected to range between $180 million and 200 $200 million at the midpoint. This would be down versus last year's Q4, but significantly less down that would otherwise be applied by the expected decline volume.
Just a comment on a full year adjusted EBITDA, which is not shown but I'm, assuming you will do the math I would settle in around 580 million dollar range at mid point of Q Forest Guide and as you know includes an approximate $500 million impact from Cove. It.
I know many of you will be tempted to take the 1.08 billion and use that as a starting point for fiscal 21. Unfortunately, it's not that simple the biggest factor being production volumes, which heading into our fiscal 21 are very uncertain more likely the not we expect volumes to be lower than are coded adjusted numbers for.
Thousand 19.
In addition, our portfolio. In addition, our portfolio moves such as the sale of Arcaro and the expected sale of fabrics in Wi Fi will impact the year over year walk into 2021.
Team is presently finalizing our physical 21 plans, which were plan to share with you later this calendar year.
Moving on and back to Q4 within adjusted EBITDA equity income will settle in the $50 million to $60 million range in line with last year after backing out Wi Fi equity income of $14 million.
Based on our customer like plans, we expect <unk> to be about 100 million and finally for free cash flow, we'd expect Q for to be in the range of $3 million to $400 million.
With that let's move to the question in order to answer a question and answer portion of the call operators.
Our first question.
Thank you we will be getting a question and answer session. If you'd like to ask a question. Please crestar one please I need your phone and record your name slowly and clearly when prompted your name is required to introduce your question again that star one if you'd like to ask a question and star Q. If you need to withdraw your question. Our first question comes from.
Brian Johnson with Barkley's Your line is open.
Hi team this is Jason stored Rainier Entre Brian.
I appreciate the color today.
I wanted to just first start on the Q4 outlook <unk>.
Specifically on the production side of things.
I think some other supply entertain them more conservative stance around Q for it looks like the production assumptions <unk> line that are more or less in line with with third party estimate and so I was wondering akitas comment on your level of confidence around those those Q4 numbers are the the schedule here seeing in the first month here.
Kind of validating those those coupons forecast and others are putting up.
Yes.
I'll start out.
Provide the additional comments.
Same to you quick question directly yes, the schedules that we haven't in front of us are pretty consistent with.
What we are anticipating.
Q4.
Is.
Everyone understands inventory levels for our customers are down they're trying to replenish.
The dealers right now there is a strong desire.
For our customers to run.
Peak output, particularly in on key models.
Certainly we <unk>.
We value that makes that we have.
I would say the only note of caution that I would have is.
Since we've mentioned in our formal remarks.
There's still some.
Volatility if you will in the volume and that.
From time to time, our customers are experiencing directly indirectly colgate related disruptions in the supply chain.
That caused by adding input caused by other suppliers. So.
That's a potential risks itself there certainly demand is not the risks that we see.
Understood. Okay. Thank you for the color and then second question, maybe a little more.
Medium term focused as we looked at the operational improvements that you've been able to do a year today.
If I recall coming into the year you were looking at maybe around $200 million or so performance improvements at 2020, and then the newer actually ahead of that in Q1 before they shut down started happening in China and I guess as we look at what you've done year to date, it looks to be more than like the $300 million right.
Range of performance at the plant in program level and so.
Just kind of curious here is we look over the next several quarters or even year. So.
At what point do the comps start to become more difficult to extract the performance.
I'm wondering has the cold bid.
Issue hit that allow you to bring for some of these brooklynites initiatives and I guess, just how much more runway is there is we look over the next four to five quarters.
Okay.
Break the question into two <unk> certainly a lot of the performance improvements would you expect it we're in the I'll say commercial and.
Is operational improvement of the existing business. There was another element as we improved blanch performance, which we have that would continue to.
Prove.
Overall performance.
The other element that we touched on is is ultimately exiting business was not performing up to our level of.
I'll say tolerance and bring it on new business that would break that next wave of operational improvement so.
There is.
Ample opportunity for us to continue to go down that path I think could both cove it.
Kind of suspending that for a period of time.
Squeezing focused on liquidity.
We've taken new actions that we kept it put into the equation.
Anticipated.
Down market that probably with it.
Originally envisioned when we started to articulate turnaround plan.
With regard to.
Is is the environment right I would say the environment.
Certainly right for our customers to look cost reductions if you.
If you just.
Look at it from their perspective, they still are makes a huge investments to clean and electrification.
That was.
Teen task.
They still have the risk of finds in Europe.
Meet environmental standards.
That was a daunting task before copay.
And a down market has and improve that environment I know in fact and talking with them.
It's only increased or appetite to find ways to reduce costs and when they want to find ways to reduce cause that creates a opportunity for us.
So.
Cautiously optimistic we can continue on our path.
And maybe even find as we've mentioned a previous calls.
Incremental opportunity.
Is customers, maybe look to hold on the platform lager.
Delay launches.
Or.
Engineering and capital investment and program replenishment.
Okay. Thank you very much.
Well thank you.
Thank you. Our next question comes from John Murphy with Bank of America. You line is open.
Good morning, guys.
Okay, maybe if I could just.
Follow up on on that last question and sort of your discussion there.
Look at this obviously.
You are going through Ah Ah rationalization in the business that kind of disruption is.
Can delay things I'm, just curious in the context of what you're doing right now are there any knit new costs AIDS or business processes.
That going forward as the world normalizes might benefit you above and beyond what you were trying to execute before.
Okay. So first of all Hey, John how you doing.
Okay.
Okay.
Kind of to the point I was trying to make me quote maybe I can reemphasize.
Alright.
Prior to coed I think business was.
Somewhat as as Norwalk, and our customers were focused on new launched a.
I think work, particularly interested in cost reduction initiatives.
Somewhere some historically always have been other square.
I'll say, perhaps distracted I think what.
Cove it.
It was created inflection point or them to recalibrate.
They recalibrated against a down market.
Receivable coming years.
They recognize that they really neat.
Fortunately for us.
Probably the last.
1912 months.
Anticipating that certainly not envisioning with cove, it like but.
To my earlier point that there was going to be a real neat for them due to their investments and.
Whether it was electrification it or a ton of us vehicles or meeting.
Environmental standards.
That maybe they didn't completely appreciate.
Inc.
Cope it's been a catalyst for them to say, we really need to reach out.
And this is it just speculation on my part.
Conversations with our customers.
I will say every single customers come to that conclusion, but.
I think what we found this <unk> exposed into the work that we're doing in that area and.
Some pretty impressive work.
Let's say, it's <unk>, it's just been completely understatement, what we call it.
Because we haven't come up with.
Her name, but it's really focused on this kind of type of.
Return on capital investment.
It's scale.
With customer without putting in brand new investment how to do that quickly.
As a tremendous amount of technology on the shelf right now in the area of seating that does not need to be reinvented.
That can be applied.
More than meet or exceed consumer expectations.
And it's really directing the customer to say to look you should come and take a look at this on your next generation program <unk>.
We've talked a little bit about what program, we did that with.
One customer that.
Just launched electric vehicle was going to.
Introduce a next generation of an existing credit for him. That's historically been internal combustion and we took like why don't you just take this new.
Architecture and seating system that you just launching electric vehicle and apply it to this next generation product.
In theory theoretically that requires zero engineering work on your part zero.
Capital investment on our part or minimal us as we've just <unk>.
Leverage incremental volume upset.
Arguably.
Minimal capital investment.
That's becoming into a much more appealing.
Story to our customers.
Would expect.
That's going to continue.
Okay. That's helpful. And then just a second question.
On the mixed benefit in the quarter and Jeff on Slide 14, you went through the work environment mix was headwind of $438 million on EBITDA.
I'm just curious if you were to split that between volume and mix I mean, how how much of a benefit was mix in the quarter and how sustainable you'll see that in the near term schedules are expected to be over time.
Yeah. Good question John Good morning.
I would say the most of what you're seeing narrows is pure volume impact.
Mix was in a huge portion of that 438.
Hopefully yeah as it relates to the mix for our fourth quarter, it's probably a little bit down just given the unfavorable for us just given the launch the F 150.
And how production will go on that but I'd say for the quarter I take that 438.
The vast majority of for your modeling purposes high call volume.
Okay. That's helpful.
And then if you could just I.
I don't know illustrate are elucidate, where you think 2021 will land in the context that you're talking about trying to get to breakeven recast loan FY 21, what is sort of the fault process or the business environment that you are fighting to get to that level in.
Well.
United States.
There's a lot of components to that and some of them are still being worked.
As we complete our 2021 plan John but.
As we look through a couple of.
Dynamics here.
Taken a big chunk out of our cost structure.
With the activities Sweet decentralize the company.
And those benefits some of hit.
This year, but we'll have a full year run right <unk>.
2021, that's going to be a big piece I think there's going to be.
Opportunities on Capex.
Where we won't be spending at the historical levels.
<unk> business, that's becoming a.
The improvement level and that businesses significant with a business that it cost us on a simplified free cash flow.
To call at $450 million <unk>.
2018 2019.
Timeframe, it's probably half of that little bit give or take this year.
Animal.
And next year close to breakeven are we expected to be really breakeven by the end.
Those are going to be big components of of the free cash flow story for us next year.
But.
There's there's some more work to do for US. It's also the continuation of the improvements that you've seen Doug talked about we're seeing I'd say from a program perspective as I said through.
Especially big program reviews.
Team not only the end of the data better.
All of it's coming through with better return profiles and what we're seeing and a lot of these key program. So those are are all key components, but I'd say.
Optimistic about it the big challenge for US next year quite frankly is going to be Europe in general there is.
Depending on where the market turns up for next year.
We talked about it I've talked about it a little bit earlier, but.
The European market.
Is expected to be down to.
To restructure to take out cost in Europe is is expensive and so I would expect that.
Dealing with next year, we are going to have some elevated restructuring cost in Europe.
Great and just one less how can I mean, what's minimum liquidity and cash that you're looking for Jeff.
Yeah I'd say.
We like to see cash give or take around five 600 million dollar mark and we're going to have.
A healthy time period around $1 billion on the on the APL.
And we would expect that to be Undrawn, so give or take 1 billion and a half or so on a normalised basis.
And we expect.
Quite a bit over that.
And the year with the transactions that working capital swing back in.
And just be ABL.
Kind of rebuilding the asset base, primarily from accounts receivable.
Okay. Thank you very much.
Thanks, John.
Thank you. Our next question comes from Rod Lash with Wolf Research you line is open.
Good morning, everybody.
Wanted to ask just two questions one is.
Trying to think about what you're Q for guidance implies for perspective, EBITDA run right. So X equity income if you use the midpoint your guidance since about 135 or 540 annualized can you just remind us.
What is the.
The seasonality of that are there settlements typically come in and your and your September quarter.
Maybe some rough.
What the F 150 impact is and.
With.
Extrapolate and think about next year.
$75 million to $100 million of savings.
Is that a net number or should we think about non recurrence of some of the authority measures. This year, maybe subtracting from that.
Yeah, I got my work backwards, a bit rod, but the 7500 is a net number you shall we expected.
That's not necessarily from our Q for cost base.
There'll be incrementals to that too, but from preschool mid level cost base, we see that is naturally targeting to take out of the business. Some of those cough start going to take.
The time period for Europe, which is going to be a significant portion of those cost reductions.
Just with the environment.
On doing restructuring in Europe take some time to enact so I would expect a lot of those savings won't start to run right until.
Second or third physical quarter for us next year.
Some of already started to occur though today, so it's a bit of a mix as it relates to the fourth quarter. It is a.
This is a pretty uncertain time, I'll be honest and we opted to put guidance in here.
And as we look to 2021.
I would say you can't necessarily as our Q4 is a guidepost four at the F. 150 is a big impact for us and the quarter.
We do expect production.
[noise] sensually to switch over in September and that's going to.
Bring down the online and as we start the new with launch cost and have.
Essentially dwindling production of the old.
Will that will have a big impact on sales and profitability in our Q4.
So I would I'd say more economy Rod will give you more color on our <unk> on our physical 2021 plan on our next earnings call, but I would just say the fourth quarter is probably going to be in under guide for Ya I'm doing the math.
Okay is there a seasonality that settlements or something like that that we need to keep in mind doing now I'd say most of them sort of happen through the year, but if there's a seasonal point to it tends to be on our first quarter.
The calendar year and quarter.
Okay that makes sense and then lastly.
50 to 60 million equity income Q4, you said that that excludes Wi Fi just given that <unk>.
Kinda is.
Is recovered quite a bit more.
Is that a reasonable run right.
Or something we can extrapolate from.
How should we be thinking about the drivers for next year and it's your pay out math changing it looks like this you are getting more than the typical 70 or 80%.
From that market.
Yeah, there's a lot of pieces to that question I suppose but the payout math was higher this year you recall, we're also doing.
The transaction with Wi Fi and.
Alright and.
The change in <unk> in sales of the IP, we were able to extract the higher dividend in particular out of that metals venture the Avraham venture.
Our payout ratios significantly higher and 2020, then I would expect necessarily going forward that we have experienced going for in the past.
So I was a positive for us this year that we were able to pull ahead.
As it relates to the.
I guess, China market, we continue to do well I'd say, the this past quarter turned out to be better.
And expect that is.
Coded rebound was strong we anticipate.
This quarter will be positive.
As well, let's see where the run right actually comes out for Q for but I would say, we do have some seasonality in that business from earnings they tend to have a pretty strong fiscal Q1 in general are first calendar first quarter of our fiscal year, the last quarter of the calendar year.
Tends to be a little strong so you can't necessarily annualized one corner.
Okay, great. Thank you.
Okay. Thanks Robert.
Thank you. Our next question comes from James pick her aloe with Keybank capital markets. Your line is open.
Hey, good morning, guys good morning, James.
So on the on the timing of the 700 million wind down and unprofitable sales is that does that over the next 12 24 months.
Is there any material are pocket.
Should be considering with respect to the replacement.
I'll bet unprofitable mixed with with new programs and conquest ones that you called out.
Well I guess, the one thing I would point out James's the 700 million that we're going essentially Doug talked about that we're giving up his business, where we have a negative.
In total a slightly negative rls on.
So from an air pockets standpoint, when it goes out there's not really it's not like it's just lower profitability, it's actually slightly negative.
So getting that business out will be an improvement to our overall EBITDA not just turn margin.
As it relates to the new business coming on it does launch over.
Not at one point there several programs that are involved but I would imagine you should model out. This all it takes place over the next.
Two to three years.
With no.
My interpretation of Air Pocket is no major avoided that timeframe has some great roles. So it's pretty blended over that one frame.
Got it and then maybe just a flavor on and that's S. A M update.
Okay time back to that $700 million that you're that you're winding down our exiting.
Is is there what portion of that attributes to assess to them is is that business still on track to exit that targeted whatever $400 million and two two business over the next two and a half years or are you seeing more profitable replacement activity.
Still within <unk> is that trending maybe better than expected in terms of the renegotiated renegotiations in new contract lines.
Yes.
Maybe I'll try this backwards.
Obviously trip can chime in so.
Jeff mentioned in the business is improving that as a combination of commercial settlements.
Essentially are now behind us.
Other than normal course.
Issues that arise.
Cross that business versus backlog of.
Unresolved pricing that we have.
I think we're we scenes.
Improvement is in.
Faster than expected operational improvement, particularly.
In Europe, but.
But also in North America.
So.
That businesses.
Lined with.
Original.
A portable statements about getting too.
Cash flow neutral.
And the.
Bye.
Right at least.
22 timeframe.
When it comes to Los and replacement.
There are.
Mental and mechanism business that part of the loss, but there's also.
Two business coming on and that area.
Medicine, Max as well.
That one has always been for us.
A customer related issue.
And what we've been moving away from.
Is trying to to win metal and mechanism business that are these mega programs are going to go across the number of platforms number of regions.
With a single customer or some of which would be sold to our competitors.
Versus programs, where we have an element of vertical integration and some of our customers still source complete seats.
And allows us the opportunity to make her bye.
The metal and back.
Two.
That is easy to talk about it in terms of.
Just.
Segments.
But I would say, there's nothing significant and what we're talking about right now.
Deviating from our original plan, we still a plan to scale that business down over time.
Revenues may come down a little bit quicker on it as a result.
Post cobot.
Volume assumptions versus what we originally had planned.
That talks to some of the restructuring activity that we're going to take and that segment.
So.
Think that's covering most of the question.
Might be a piece of metal left out.
Certainly.
No that's very helpful. Thanks, guys.
Alright, Thanks, Amanda if we could take our last question.
Thank you our last question comes from Jess back with RBC capital markets. You line is open.
Thanks for squeezing me in here.
Maybe.
If we back out sort of what you identified as covid costs from this quarter and last quarter right. You have the adjusted EBITDA down slightly and then the guidance is down again and I understand there's some maybe unique stuff in the fourth quarter, but can you just help us understand that in the context of sort of the underlie.
Turnaround program because at least between the margin June quarter. It seems like you are with that Cove adjustment.
And Justin for the volume differential.
Sure I totally follow your question, but.
Yes, I would say.
We are adjusting for the volume differential and most of it.
<unk> impact are really talking about here of 400, approximately $400 million on the quarter $500 million year to date is due to significantly lower volume in the pull through expected that would've been expected from that volume.
Tell me if I think I missed the new one yeah, I guess like if we if we just back out the hundred from the March quarter, and a 400 from the June quarter, then EBITDA down sequentially I got so what's.
I thought there is.
There's some.
More underlying traction so maybe it's some difficulty and sort of separating.
Sort of doing underlying from from the volume, but I'm curious as to the explanation for.
Why that sort of sequential drop off.
So.
Okay.
I think it's primarily going to be sales job. So.
At the end of the day, if you're pulling somewhere hi teens on on the revenue.
I believe you get.
$400 million, but.
This is also sort of a weird quarter and a sense that it wasn't all this volume and it's hard to totally articulate what the cost of coded impact is we had the plants, especially at the beginning that would run for a little bit there'd be maybe a Kobe case, we shut down the plant.
Clean it we'd go through the process, we ran things inefficiently in this particular quarter, but I think when you cut through all of that.
We are seeing we continue to see positive improvement from the operations. There's a lot of noise to Ron Covid and as you have I'd say, the abrupt stop and kind of.
Really spotty restart, especially at the beginning I think it created a lot of inefficiencies that ran through the numbers that are difficult to quantify and talk about five.
Maybe it's what.
[noise] impacting analysis, you're doing here, Okay, and then just real quick the actions on slide time.
Can you just can you give us some insight into.
Some of the industry planning that went into that because you talked about sort of your customers are fine for low volumes.
These actions that are aligned into that or actions that.
Probably could've been done anyway.
Maybe I'll start off the top on the bulk plant part and can jump in on some of the stuff <unk> been doing more on the operations, but I'd say the above plant stuff, we took a very.
Are significant chunk out of corporate.
And I'd say this has been have we were on we just used cove it as an opportunity to accelerate.
A lot of the actions but.
Been a process your the last couple of years, Doug destroying to decentralize the company put more power in the region, which has served as well.
Served as well and managing Cove.
<unk>, but.
Taking those moves we did amp up the speed of them.
And then I Dunno W y.
Yeah.
I mean to answer your question I would say is.
If you if you.
Carved out the.
Actions that were taken in Europe upside that is primarily.
Volume related.
And then you look at everything else discussed on the page.
You could argue sort of a bit.
ZIP code, but this is just being much more operationally focus looking for opportunities to consolidated facilities a lot of what we're trying to communicate there and it's just a partial list.
This whole concept.
Utilization and.
Simple things that we 0.2 about.
Flexing our manufacturing cells in the case of world cells. So that is we bring.
New programs and we're not reinvesting we're looking at ways to flex lines.
That is something that we.
Lee improved upon over the last few years.
Thank you are still more opportunity there I would say.
That's it depends on the Coke. That's that's just the right thing to be doing to be more efficient manufacturer.
This is corbett.
<unk>.
Catalysts for us to dig deeper.
So there isn't indirect relationship there.
Okay.
So.
Hopefully that provides a little bit for color to your question Yep Yep. Thank you very much.
Thanks, Joe Amanda it looks like we're at the bottom of the hours. So this will conclude the call for today I know there was a couple of questions that we did not get too. Please feel free to reach out to myself I'm available for a follow up questions and again. Thank you very much where are participating in the call. This morning.
Thanks, everyone.
Thank you that concludes today's conference. Thank you for participating you may disconnect at this time.
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