Q4 2020 Adient PLC Earnings Call
Welcome and thank you for standing by at this time of parties are in a listen only mode until the question. The inter segment of today of conference at which time you May Press Star one on your touched up on to ask the question I would also like him from all parties at today's conference is being recorded if you do you have any objections. Please disconnect at this time I would now like to it in.
Turning to the coverage Mr. Mark I'd Love for you may begin.
Thank you Jack on good morning, and thank you for joining us and the review for the country.
For the fourth quarter and for your 2020 the.
The press release on presentation slides for our call today have been posted to the investors section of our website at <unk> Dot com.
This morning, I'm joined by Doug Del Grosso, Adams, President and Chief Executive Officer, and Jeff to file for Executive Vice President and Chief Financial Officer.
On today's call Doug will provide an update on the business followed by Jeff will review, our fourth quarter and full year financial results. In addition, Jeff will provide our outlook for fiscal 2001.
After our prepared remarks, we will open the call of your question.
Before I turn the call over the dog and Jeff There are a few items I'd like to cover first of today's conference call will include forward looking statements. These statements are based on the environment as we see it today in there for involve risks and uncertainties I would caution you that our actual results could differ materially from these forward looking statements made on the call.
Please refer to slide two of the presentation for a complete the safe Harbor statement.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance reconciliations for these non-GAAP measures of the closest GAAP equivalents can be found in the appendix of our for earnings release. This concludes my comments on the other turn the call over the top.
That's right.
Thanks, Mark good morning, Thanks to our investors the prospective investors and analysts joining the call. This morning, as we review our fourth quarter results.
The outlook for fiscal 2021.
I hope you on your family sort of staying safe and healthy these difficult times.
Turning to slide for let me begin a few comments related to fourth quarter, specifically the on strong finish to a challenging fiscal year.
The remaining focused on our priorities combined with increasing vehicle production continued to.
To drive improved business performance in the most recent quarter.
Q fours adjusted EBITDA of 287 million was up 72 million or 33% year on year.
No doubt of strong results, even more impressive when you consider adding on its consolidated revenue was down about 8% in that same period.
Lower year on year global vehicle production and the on specific launches were primary drivers of the lower sales.
On the far right hand side of the slide you can see our cash and liquidity, we're extremely strong at September thirtyth.
Total liquidity of about $2.5 billion made up of cash on hand on the approximately 1.7.
Approximately $800 million of Undrawn revolver capacity.
As noted and included in our cash on hand is the approximate $500 million of cash proceeds collected during the quarter.
From closing on our previously announced strategic actions.
But the operations restarted vehicle productions trending higher and proceeds from our previously announced strategic actions and the bank. The team began to voluntarily pay down the portion of the company's outstanding debt.
Just over a $103 million in principle of audience 10 year of 4.75 per cent senior unsecured notes were repurchased.
Using just under $100 million of cash.
Again, the strong financial finish of the year, Jeff will provide additional details on any of this Q4 and for years financial performance.
And just a few minutes.
Turning to slide five.
Focused and resilience of the two words that come to mind, when describing adding on in fiscal 2020 of those traits were instrumental in enabling the company to deliver on its 2020 commitments.
As the year began on the team was focused on advancing the company's turnaround plan launch management operational improvement continued cost reduction and commercial discipline, where the site.
On it as the key enablers underpinning the expected improvement in audience business performance.
What their operations and financial results steadily improving the team pivoted and began to execute on the number of strategic actions.
Including the closure of our transactions with our joint venture partner he on thing.
The sale of our fabrics business and the scale of for Carls automotive seating.
In addition to these portfolio adjustments of the team also began efforts to de risk the balance sheet.
As mentioned just a few minutes ago.
Well executing the company's 2020 plan at the end resiliency was brought to light because the team successfully managed through significant obstacles brought on by the global visiting team pandemic.
The slide highlight certain of the measures the team took throughout the year or to mitigate cobots negative impact many.
Plenty of been discussed on prior calls.
Bottom line executing and delivering on plans within our control by managing through on plan obstacles as we did in 2020 positions at it for the.
On the team's success and equally important drives value to our future share holders.
Turning to slide six.
Although the team is proud of the accomplishments achieved in 2020, we turned the page and are now focused on 2021 looking.
Looking forward to build on that progress.
The graphic on slide six should look familiar since adding of expected earnings growth in fiscal 21 is underpinned by the same focus areas that drove the improvement last year, namely lots.
The launch management operational and cost improvement.
Customer profitability management.
Let me spend a few minutes discussing the few of these focused areas more.
More detail on the slides seven and eight.
First on slide seven lots of management will remain the key pillars supporting evidenced turnaround.
The team made significant progress in 2020, delivering several flawless launches throughout the year.
We plan to stay vigilant to ensure the best in class losses continue.
That said given the significant progress made throughout the last 12 months the contribution from launch management to our expected earnings growth this year will.
We will be less impactful compared with contributions from costs and the operational improvements.
And our customer profitability initiatives.
With regard to cost in the operational improvement pillars, we've identified a number of initiatives. The team is executing to drive improved business performance and ultimately earnings and cash flow growth.
These initiatives span across the organization and include.
The improved capacity utilization, especially within a certain number of home and trim facilities.
The line or manufacturing footprint to sales projections in Europe. For example, we do not expect volumes to return to pre coven levels for a number of years.
The act certain third party estimates predicts production in 2025 will be below 2019 levels.
As such we're spending a fair amount of time and dollars restructuring in the region.
Purchasing is another area of opportunity.
Ensuring the business units, adding on purchasing organizations are well aligned including better make versus buy decisions is expected to drive significant performance enhancements in 2021.
In addition to these actions we tend to produce results relatively quickly. We're also focused on how we can position the company to ensure improvements continued several quarters down the road initiatives such as the.
Design for Manufacturability.
Where we're engaging the plant teams early on the design phase to reduce labor cost and improve quality.
Increasing automation and technology, good looking toward the future to ensure improved cost and quality.
On the commercial on customer profitability front.
Turn to slide eight.
Again, the several initiatives are well underway the begins with our mindset.
We want to become the supplier of choice for a customer in many ways.
And we're along the journey.
As mentioned on previous calls.
We spent nipigon time understanding of the profitability associated with specific platforms and relationships with those customers.
This has resulted in the team better understanding who they want to grow with.
Of course, this needs to be profitable growth metrics, such as return on capital employed continued to drive program bidding for new and income in the business.
For programs in production that are margin challenged the team is focused on opportunities to improve margin profiles.
We refer to this as our leakers of leaders.
One of the tools the team uses to enhance margin profile.
D.A.B.E. the initiatives.
The process has evolved the significantly over the past several months into what we now refer to as cost in the technology optimization.
The team gathers inputs from various sources, such as JD power the the workshops market research.
Each EPS range.
Bundling of leveraging this available knowledge, we can create opportunities and value for our customers to improve margin performance and increase enhance value add.
Moving to slide nine.
But a fair amount of time this morning discussing their 2020 accomplishments on how we plan to build on.
On that progress in the new year, the key component of the progress to date expected improvement relates to see structures in the mechanisms business.
Yes.
Although the assessment of the business is managed regionally and is included in the Americas of me as.
Each of regional performance on what it takes a few minutes to provide a brief update on this as for now.
The turnaround the solidly on track for the operations made steady improvements in fiscal 2020 and continued to trend toward being free cash flow neutral as we exit fiscal 2001.
As a reminder, free cash flow calculations as the simplified definition essentially the adjusted EBITDA.
For the unit less capex.
During the most recent year, we were able to cut the 2019 free cash flow burn.
Which was approximately 400 million more.
More than 50% the.
This was accomplished by improving both the profitability of the business as well as reducing capital expenditures.
We expect continued progress driven by continuation of our target business selection process.
Improving cost competitiveness, essentially fixing the underperforming plants, creating cost efficient designs.
Reducing our above plan cost structure, making better make for buying decisions, which will aid in asset utilization ultimately improved earnings.
Position.
To true free cash flow for the business.
Switching gears and moving to slide 10 11.
Let me provide a few comments on Indians recent business wins for the status of our launches on slide 10.
The new business wins, which clearly show our continued focus on capital allocation return on capital targeting New force on the business does that limited our ability to secure the business.
We've highlighted the number of recent program wins here, including the replacement business for the Jeep Wrangler Gladiator.
The new platform wins, including the Teslas model why.
The program at Ford for Transit and Julie Daimler's Smart.
In addition to those programs pictured on the slide.
Any of recently secured business awards for an undisclosed European manufacturer that has no net income that business.
Two g. of future product programs, which include the all new TV programs the replacement business for AAA in view of crossovers.
And also the G.M.C. crossover, which is non income the business.
As our new book of business continues to launch we expect the balance in balance of platforms to further enable margin expansion.
One additional note as we've secured business over the past several quarters. We also experience content growth for certain of our new income net wins for.
For examples include the addition of FFO.
To the new Ford F. One of 50 and trim to the Nissan Pathfinder.
Flipping the slide 11.
We've highlighted several critical care.
For it and upcoming launches, including for excellent 50, let's.
Lets thing marquee piece on ROE to name a few.
After the report the launch is currently underway, including the up on 51 of the largest programs and they are progressing smoothly.
Okay.
The second step 150 manufacturing location at Riverside in Missouri is also well prepared for its first quarter ones.
As mentioned earlier of the team has made significant improvements to our launch management over the past several quarters of strong focus.
On process discipline around launch readiness is underpinning of adding in the successful performance.
At the bottom of the slide we provided.
Fiscal year 20 ones launch volumes of the flux of the compared to last year.
Although volume.
And complexity are trending higher, especially on the Americas region, we feel the team.
As well prepared.
Actual losses performance some of the past few quarters provides positive proof points.
Turning to slide 12, let me conclude my comments with an update on various macro factors, we're watching that will likely impact the industry in the us fiscal 21.
On the positive side continued monetary stimulus is expected to result in positive economic growth.
Global vehicle production of mix remains strong driven by improved consumer demand and the rebuild of inventory.
And it appears the advancements are being made with regard to code the treatment in vaccines.
All of which is very good news in the supportive of the industry.
Factors, we are watching that are tempering. The expectations include the resurgence of cold in the team cases across Europe and the Americas.
Labor shortages, which have become increasingly the concern since we restarted our operations in Q3.
Risk to the supply Jay of though screech see vehicle production on the U.S. reach annualized levels of 16 million units.
Like we experienced in the fourth quarter, the sharp increases the Fortunately put strain on the system.
Yes on an uptick in premium freight increases in prices for certain commodities, such as steel and chemicals.
Some of it up we're entering 21 the.
On an encouraging backdrops, driven by our self help initiatives and improving vehicle production.
We expect to encounter challenges along the way from much of which we did in 2020, but.
But be assured the team is ready to work hard to mitigate the headwinds that may arise.
With that I will turn the call over to Jeff. So we can take us through any of the fourth quarter 2020 financial performance and their specific outlook for 2021 in greater detail.
Great. Thanks, Doug and good morning, everyone let.
Let me Echo Doug's earlier comments on hope everyone of safe and well.
And the starting on slide 14, and adhering to our typical format the.
The pages for him added with the reported results on the left and our adjusted results on the right side, we will focus on our commentary on the adjusted results which exclude.
Actual items that we view as either a onetime in nature or otherwise skew important trends in underlying performance.
For the quarter the biggest drivers of the difference between our reported and adjusted results relate to restructuring cost asset impairments purchase accounting amortization and pension Mark to market details of these adjustments are on the appendix of the presentation.
Sales were $3.6 billion down 8% year over year, which as Doug noted was driven by lower year on year Global global production and specific idea on launches adjusted EBITDA for the quarter was $287 million up 72 million or 33% year on year more than explained.
By improved business performance, lower SGN day, adding and an increase in equity income.
Speaking of equity income, which is included in our adjusted EBITDA result, Q for 2019 included $14 million of income related to our interiors JV that we sold the earlier this year. Therefore on an apples to apples comparison, apple, adding on seating equity income was up $28 million or 40.
The 7% year over year.
Finally, adjusted net income of EPS for Signet were up significantly year over year at 109 million and the dollar and 15 cents, respectively. I'll also point out that a tax benefit contributed to the year over year improvement in net income.
The tax benefit was driven primarily by the write offs of certain deferred tax liabilities relating to the sales of Wi Fi and add ins fabrics business.
As a reminder, aliansce effective tax rate is currently quite volatile and arguably provides little value as you model of the company given the valuation allowances recorded in recent years as such we'll continue to focus more on cash taxes.
Full year results are shown on slide 15.
Sales of 12.7 billion finished the year down approximately 23% compared with 2019, the significant impact of lower vehicle production, particularly on our third quarter as the core of the 19 pandemic caused production stoppages at our customers was the key driver on the year over year decline the.
The significant reduction in volume more than explained the $114 million decline on the EBITDA, partially offsetting the negative volume where the benefits driven by the continued execution of the Companys turnaround plan, although year over year earnings.
Although year over year earnings improved significantly exceeds the.
The other thing although down year over year earnings improved significantly in early 2020 fiscal 2020 prior to the impact of cover the 19 and during adolescence fourth quarter.
For the impact of the pandemic lessened.
And finally, the decline in operating income, resulting from lower volumes dropped directly to the bottom line EPS. Adjusted net income of EPS were a loss of $4 million.04, respectively Ella.
Now lets break down our fourth quarter results in more detail starting with revenue on slide 16, we reported consolidated sales of 3.6 billion a decrease of 324 million compare to the same period a year ago.
Lower volume across North America, Europe, and Asia, primarily attributed to lost production volume associated with the pandemic was the key driver of the year over year decrease adding on specific launch launches also contributed to year over year sales decline, but to a much lesser extent.
Worth, noting the call out on the right consolidated sales in the Americas was negatively impacted by production downtime for the Ram Classic.
In EMEA adjusting for the divestiture of for Carl automotive seating and the sales were generally in line compared to the production within the European market.
In China, adding on sales were strong and outperformed vehicle production in the region and favorable customer or customer on platform mix continues to drive growth over market in the region.
For markets outside of China, and Asia, adding on sales were impacted by export reductions in Thailand, and Japan, primarily related to certain of Nissan Mitsubishi programs.
The divestiture of our car automotive seating in Japan was also a contributor to the year over year decline.
With regard to add an unconsolidated seating revenue year over year results were up approximately 15%.
And China.
Driven primarily through our strategic JV network sales were up 18% year over year, excluding FX. The sales outperformance first of the market is attributable to add into the strong mix of business, specifically, our exposure to luxury and Japanese Oems outside.
The of China, ADM has a variety of unconsolidated Jvs. These operations performed generally in line with production in the region.
Moving to slide 17 Weve.
We've provided the bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represent the central costs that are not allocated back to the operation such as executive Office Communications, corporate finance legal and marketing.
Big picture adjusted EBITDA was $287 million in the current quarter versus $215 million last year cash.
Key drivers of the increase included improved business performance, which consisted of lower labor and overhead freights and ops waste lower.
The lower SGN egg cost across all regions driven by increased efficiencies on the positive benefits associated with the deconsolidation of AD in aerospace and divestiture of Carl.
Also important to note between five and $10 million of the asked for you in a savings should be viewed as temporary and are not expected to repeat next year.
And then Asia, a significant increase in seating equity income also contributed to the year over year increase in the EBITDA.
Speaking of equity income last year's EBITDA of 215 million included $14 million of equity income related to the Wi Fi investment, we sold and stop consolidating last December.
Partially offsetting the positive factors just noted was approximately $55 million of headwind related to lower volume and mix I'd.
I'd like to point out that our adjusted EBITDA margin, excluding equity income increased by just under 200 basis points year over year to 5.5%.
The good proof point at its core.
For operations are benefiting for.
From the numerous turnaround actions executed to date I would caution however, certain of the macro factors. The benefited Q4's margins are likely on sustainable such as the extremely rich mix of production.
As Doug mentioned, we see certain headwinds on the horizon, such as rising commodity prices and an uptick in premium freight that the team will need to manage through in the coming quarters more on our 2021 expectations in just a minute.
Sure enough time is allocated to the Q on a portion of the call. We provided our detailed segment performance slides in the appendix of the presentation.
Let me now shift to our cash liquidity and capital structure on slides 18 and 19 starting.
Starting with cash on slide 18 for the quarter adjusted free cash flow defined as operating cash flow less capex was $450 million there.
There were several factors that had a significant impact on the quarter's cash compared to our Q3 ending balance. These factors included at the high level.
First just under $500 million of cash proceeds collected from the closure of the on thing transactions and the fabric sales.
The reversal of temporary net trade working capital headwinds experienced in Q3.
Higher level of operating income.
And partially offsetting these were part of these positive contributions was just under $100 million of cash used to voluntarily paid down $103.5 million in principle of adding on 10 year, 4.875% senior unsecured notes.
On the right hand side of the slide you can see we ended the quarter end year with approximately $2.5 billion of total liquidity comprised of cash on hand up about $1.7 billion and just under $800 million of Undrawn capacity under add the answer revolving line of credit.
Just one more point to make before moving on.
You can see within the table, adding on its capital expenditures for the year totaled $326 million down $142 million year on year. The team continues to work extremely hard to reduce capital of where appropriate, especially within the assess the them business for capital spending was down just under $100 million compared to the low.
Last year.
Moving on and turning to slide 19.
In addition to showing our debt and net debt position, which totaled $4.3 billion and 2.6 billion respectively. At September Thirtyth. We've also provided a snapshot of AD against capital structure.
Just a few comments here and the capital structure of provided us with the flexibility to weather the coated storm and is now providing ample flexibility to voluntarily pay down debt, which we began during the fourth quarter with the 103.5 million and principal pay down of out in the 10 year 4.75 per.
Sent unsecured senior notes.
As uncertainty related to the crisis lessens over time, we'd look to pay down additional debt obligations.
As mentioned on past calls over time, we'd expect to have zero outstanding balance on the revolver and run them of the cash balance somewhere in the 500 of $600 million range, which points to a significant opportunity for debt pay down in fiscal 21.
One final note on the slide and related to our ABL capacity under the under audience revolver is based on a one month lag such the queue for availability was based on August HR and inventory balances of.
Dating a our balance and inventory balances to the end of September increased our revolver availability to just under 900 million in October or approximately 100 million more than the 787 million available at quarter end.
Moving on.
Slides 21 through 20 for.
Let me conclude with the fuselage for your thoughts on what to expect for fiscal 2021 starting.
Starting on slide 21.
On the right hand side, we've laid out our planning assumptions for production and FX compared with fiscal 20. The production assumptions are based on the current environment and could be significantly different.
Production stoppage occurred we're not forecasting such of stoppage however, with the escalation uncovered cases it remains the possibility.
As Doug noted earlier, our current expectations assume global vehicle production will continue to trend higher increasing year over year in each of the major regions. The.
The foundation of our 21 plan as generally aligned with the October I adjusted estimates with certain overlays for non customer release schedules although.
Although vehicle production schedules have remained robust entering fiscal 21 at the end assumes second half of fiscal 21 production will decline compared with the first half of fiscal <unk> compared to the first half of the 21 production, which is also aligned with Isis forecast.
On the far far right side of the the table you can see how we expect our sales the performed by region relative to production on.
From line audience consolidated sales are expected to outpace global vehicle production growth by roughly 300 basis points. If you adjust for the Ricardo and fabrics divestitures divestitures completed in fiscal 20 growth over market would be roughly 400 basis points.
Within the region's growth over market is expected in both Europe, and China, and North America certain fiscal 21 headwinds such as Tesla is decision to in source their seat manufacturing and lower volumes that needs on will likely result in sales sales lagging production growth.
Now I'll review of these assumptions.
And how the impact our 2021 outlook beginning with sales on slide 22.
We've included a bridge that walks our fiscal 2020 sales of 12.7 billion to our expected 2021 sales range of between $14.6 billion and 15.0 billion.
Volume and mix are expected to have the greatest impact on our 2021 performance due to the overall industry growth.
Outside of volume, adding of positive backlog of new business and FX are expected to have a positive impact of between $350 million and $400 million for the year Harsha.
Partially offsetting the positive factors of the divestitures completed last year as well as customer pricing headwinds.
Now turning to slide 23.
We've also included a high level bridge illustrating our expectations for adjusted EBITDA.
Walking from our fiscal 2020 results of 673 million, which included $408 million of consolidated EBITDA. We expect several factors will influence Eddie on performance in 2021, many on the positive side, including benefits driven by continued execution of the Companys turnaround plan.
Specifically related to operational improvements cost containment and customer profitability management.
Higher volumes will also be of significant driver to improved year over year profitability complementing the on self help initiatives.
The is positive influences are expected to be partially offset by approximately.
$150 million of headwinds certain of these headwinds are macro related while others are specific adient for.
For example, a rising commodity costs, specifically for chemicals related to our from operations and steel are estimated to be an approximate 50 million dollar headwind.
Watch cost associated with both the volume of complexity of launches, although not significant are expected to be approximately $20 million more.
More on fiscal 21 versus fiscal 20.
Audience portfolio adjustments, namely the elimination of our interiors equity income and the sale of our fabrics business will create a GAAP of approximately $20 million to $25 million and finally, the non recurrence of temporary benefits recognized last year as we pull the every lever within our control to cut cost and reduce our cash burn during the pandemic.
[music].
Such as for allowing our direct labor implementing salary reductions in spending the for on K plans.
I'd also mention Brexit as the development are continuing to watch closely.
However, given the many moving pieces and uncertainty surrounding the event, placing an estimate dollar headwind is not possible at this time bottom.
Bottom line when sifting through the puts and takes we expect adjusted EBITDA to increase to between 1.0 and $1.1 billion in fiscal 21.
Our consolidated adjusted adjusted EBITDA at the midpoint is expected to be about $800 million with the corresponding margin of 5.4%. This expected outcome as approximately $390 million better compared with last year.
Important to note. This forecast is based on the current operating environment. Specifically, we are not assuming production stoppages that may occur from supply shortages or customer downtime that as possible given the uptick in coated cases taken place, particularly across Europe and the Americas.
Now that we've covered the fiscal 21 expectations for sales and adjusted EBITDA, Let me quickly comment on our expectations for a few other key financial metrics on slide 20 for.
Starting with equity income based on our assumption of production in China. The elimination of Wi Fi interiors equity income and current FX rates, we'd expect the equity income to be around $250 million about flat compared with fiscal 2000 and again. This is seeding only the negative impact of commodity prices is the primary reason for.
Of the relatively flat year over year expectations import.
Important to note, we're expecting equity income to be particularly strong in Q1 as the market continues to make up for losses earlier in the year due to the pandemic.
Interest expense based on our expected cash balance and debt should be approximately $235 million cash taxes in fiscal 21 are expected to be around $85 million, which is slightly less than we paid in fiscal 20. It's.
It is important to remember that we maintained valuable tax attributes such as net operating loss carry forwards and that these tax attributes can be used to offset profits on a going forward basis. So we expect cash taxes to remain low even us profits are increasing.
Two of to assist with your modeling, although volatile with fluctuations between quarters as mentioned earlier, we're expecting an effective tax rate to be around 30% for fiscal 21.
I would expect that rate to fluctuate on a quarterly basis due to the valuation allowances and our geographic mix of income.
Capital expenditures are forecasted to range between $320 million and $340 million essentially in line with fiscal 20 results, although we see opportunity to reduce capital expenditures further in the out years driven in part by of smaller SSM business. The current your expenditures are supporting current launch plans.
And finally, one last item for your modeling free cash flow is expected to range between breakeven and a $100 million in fiscal 21. There are several one off factors driving this result for 21 such as.
An elevated level of cash restructuring, which is expected to be around $200 million. The elevated spend of which is about two times, our normal run rate as necessary as we execute actions to rightsize the business, especially within our European operations, where external and internal production forecast remains below pre cobot level.
Sales for a number of years.
In addition to an elevated restructuring spend the 2021 free cash flow was negatively impacted by approximately $60 million of tax payments that were deferred from last year into 2021.
Stripping out the one offs at its free cash flow as income in.
In a more normal year would of been expected to range between $160 million to $260 million keeping all the other factor is the same.
With that let's move to the question and answer portion of the call operator, we'll take the first question.
All right on our first question comes from John Murphy. Your line is open.
Good morning, guys and thanks for taking the question.
Hey, a number of questions real quick on the east.
Obviously, it sounds like that's the in sourcing the CD. Just curious is there anything else that you think could shifts on.
As the margin heads towards EPS or is this a net neutral ultimately to you.
How do you think about that.
I think typically insourcing.
In the US is unique to them. It's the decision they made of his make buy decision.
We still see the fair amount of content.
In fact, it's been the.
Problematic for weeks of we.
We continued the production for an extended period of time.
The same look to make the move in.
In contrast in China, it's not the approach they've taken.
The the recently awarded US the model why it's been an extremely successful launch.
And in Europe.
So too early to comment on what their strategy is the we are fixing up the significant amount of content on the product in Europe, I don't really see that being the trend anywhere else.
I think when comment I would make on the transition to alternative propulsion system is.
As many of our customers as you know John ER ER.
Really re looking at their product plans and the cadence of launches.
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And.
It's going to be interesting to see how fast the accelerate the the conversion I think it's happening quicker than what we anticipated.
But the but from the seating perspective, we've always said we're somewhat agnostic.
The seat that goes into the b or a hybrid vehicles essentially the same there's some minor technical differences, but essentially the same.
So long term.
We don't really see the net.
Impact on us so were we.
We pay a little bit closer attention as the conversion happens to make sure we're on the right platforms.
And then for the second question.
Adjusted you kind of alluded to so the risk of supply shortages or or disruptions as a result, the cobot, obviously, which is an impossible situation for any of us to call exactly but is there anything that you're seeing at the moment, maybe in Mexico or eastern Europe for China, where.
You're actually seeing sort of flashing yellow or red signs in the supply chain.
Yeah, John this is Doug.
I'll take the question of to start out with and in the.
Jeff can comment on.
So relative to the supply chain.
When would covet first hit we put in the.
Like many others, a dedicated group that tracks all of our supplier activity.
On a daily basis, and we look at the number of indicators of where problems can arise we try to be a little bit proactive we wait for something to happen then put a contingency plan in place.
And the factors include we look at what the financial stability of was of any high risk of.
The player that we had where there were operating as the regional risk from a co but we track because.
Because of it infection rates and government low.
Don't activities to see.
What we could expect.
But as you would imagine theres, a number of yellow and red.
Areas of Mexico has been an area of concern.
As coal that impacted the.
At reach and particularly the along the border and more us.
Oh I think the other element that we have as we're working extremely close with.
Good day.
To to mitigate those risks.
And so far we've been extremely successful and in Europe is.
Governments to take on Lockdown actions and infection rates have come down.
We feel a.
A bit more confident that the supply chains are protected but.
Quite frankly, it's the daily Battle and.
What I think is good about what we're doing is we committed dedicated resources.
Instead of purchasing activity with us it's a business activities of that activity includes.
Our operations and the working very closely together, we take steps.
In the case of Mexico to mitigate the risks by moving production to less infected regions.
Coordinate that with our customer to protect the supply line. So.
The that's just something that's now become normal course of business expected it will be around for a while so we.
Continue the double down on our efforts there.
Got the and then just just lastly.
The cash flow being flat the you know a $100 million in the for the fiscal.
As the year 21, you will look at slide 19, I'm just curious what opportunities you are seeing there are.
To rework the balance sheet, maybe even a little bit more.
What you'll be going after I mean, obviously the the.
The for in the 2020, Sixs or something you are looking at for that I'm. Just curious is the is that what you just keep going after and hammering or are there other opportunities the potentially re fi and swap out data just curious what you think about their jobs.
Yeah. John is the great question, it's one way of managing pretty closely obviously.
We we talk about somewhere between five and $600 million of cash would be a more normalized number for us. So we even though we don't have a ton of free cash flow generation estimated in our 2021 outlook. We have a lot of cash on our books today so opportunity to go after some of this is there are we.
The primary focus for opus as to de lever.
Waiting to have a little bit more sunlight from where co of it is heading and where the environment is heading before we probably move to aggressively in that regard but.
The term loan as an opportunity for us the secured notes do have.
On a call feature and the year and a half from now on but they're expensive relative to some of the other paper. We have you mentioned the sub debt so kind of a mix of it we continue to look and we continue to look at the trading of it.
But again kind of waiting to have a little bit more clarity from from of Covance standpoint, before we start to address it in a meaningful way, but we definitely of capacity to do a fairly big step of that we believe in 2021.
For that 500 million of cash target I mean to give you a little or do you mean the timeline on that is it just basically post code when things settle down its non actual calendar targeted it's an event or situational party. The he would have done it now yeah, sorry to interrupt we would've done it now had it not been for coated and the clarity on it so well.
We'll continue to monitor that book, but do expect us to make some moves there in 2021 are we certainly would expect to make moves that.
On that billion dollar type of.
Up to $1 billion or so.
In the not too distant future once we have some clarity on the of it.
Great. Thank you very much.
Yes, thanks on Ics.
Thank you. Our next question comes from Rod Lache list of Wolfe Research. Your line is open.
Morning, everybody.
Hi, I had a couple of housekeeping questions first.
Number one did the seat structures of mechanisms business reach EBITDA breakeven in the fourth quarter.
Number two can you could you kind.
Kind of fill of sitting on the expectation for prospective restructuring savings from what you're you're spending here and and then third day.
You could size up the the.
Apparently there is some headwind in your fiscal fourth quarter the for fiscal first quarter from the F series and and Ram launches.
Yeah.
Let me start on the EPS us and them question Rod we were.
Free cash we were.
EBITDA breakeven or better than EBITDA breakeven in the fourth quarter.
Of 2020, we said we were actually pretty close to free cash flow breakeven.
In the business I'd say close to it.
As we look into 2021 as we mentioned we do it as fairly seasonable seasonal, but we do see ourselves getting the free cash flow breakeven in that business, but we had a good Q4 in it.
I'm sorry. Your second question was the restructuring savings that you're operating yeah. It's a it's a bit of a mixed bag right. Some of it is.
You know has really attractive payback where weve.
We'll say like a year and a half or so the.
Two years on a lot of it some of it doesn't have as much payback of some of the business.
We see us permanently world at least for the next several years being down, but I'd say on about half to two thirds of it.
Has a strong payback.
Against it in that probably one and a half the two year type of payback.
The rest is day, just covering for for short on sales.
And then the F series and Ram headwind that you're anticipating.
We're not so I think we were a little bit specific on the truck.
Okay said it was down significantly is the start building the classic that's restarted.
A series launch has gone as planned so it's very much consistent with each of us forecast.
So.
As we exit the first quarter, we think we'll be close to running at of Florida. The series.
But nothing significant outside of what you know.
The quarter Hs.
Spoke to on of series.
Okay.
And then you know as we look at the 2021 your decremental margins of actually been on volume. The then quite.
Quite good in the is in relatively low.
Can you give us some color on incremental margins and I noticed that the.
$800 million of.
The consolidated EBITDA guide for for 2021 is pretty consistent with where you are annualizing.
In the fiscal fourth quarter, you did say that there was five to 10 million, it's temporary benefits of that that obviously wouldn't recur and you mentioned some.
The some some extraordinarily good mix.
Those are the primary reasons why you wouldn't expect improvement from that run rate.
Presumably you're getting some further upside from SSM and the restructuring savings into next year your revenues pretty similar maybe a little bit up as you look out soon.
2021 versus the run rate in the fourth quarter.
Yeah, there's a lot of moving pieces around it we've.
We've seen commodity cost jump up a bit on us rod, which we've seen I mentioned for both steel and from chemicals are they both jumped quite a bit we do have recovery mechanisms with our customers on those.
But there is a lag and in some cases, it's not fall.
But that's one of the pieces that sort of impacts us a bit Doug mentioned some of the supply chain challenges and just operational challenges we have in this environment as well we have to do a few more extraordinary events.
From sometimes moving production around some times operating.
In less than an optimal way and with sometimes more absenteeism, then we would certainly experiencing the normal timeframe all of it makes it a little bit more choppy from an operational perspective, but you're right. We've generally.
Performed better on the decremental side, we've we've generally outperform there and the incremental we tried to build into the guidance here, but we've built those incremental slip.
A little bit of caution around.
A couple of the things I mentioned, the namely commodity cost and just some of the true productions side of things and we do have a few more launches in 2021 than we had in 20 as well.
Okay, the you're incrementals, you're expecting in the 15% to 20% range similar to what your staff detrimental for I think thats, probably a good blending average should be a little bit higher than what we lost on the decremental side.
Great. Thank you.
Yes, Thanks Robert.
Thank you. Our next question comes from James Covello with Keybanc. Your line is open.
Hey, good morning, guys.
Thanks for the good color on the in the guidance for almost just as we as we think about the cadence for fiscal 21, you've laid out the expectations for global production to be down in the second half that makes sense as some kind of puts and takes with respect to net backlog impacts.
More broadly is the first half versus second half of the range you can provide in terms of what the split could look like.
For AD units revenue and EBITDA.
It's hard to you know.
I would say that's hard to tell in some fashion I would say Q1, we would expect to be on the high side.
I think our Q1 is probably pretty strong.
As we look out it becomes a little murkier.
And but Q2, you know has our fiscal Q2.
Has the Chinese lunar new year, which generally will bring equity income down as production is lower.
So in general I'd say first quarter, I think should be strong, but as you mentioned the back half of the year will be we expect to be weaker right now.
For the current expectations.
Okay got it and then.
Just for equity income.
Kind of production will will still be up for fiscal 21.
On the its revenue I presume on consolidated revenue should also be higher.
Why should equity income trend flat year over year, I know you mentioned that the negative impact of commodity prices, but I mean, it seems as though that that.
That might not be the only headwind of kind.
Kind of factored into the that guidance for at any color there. Thanks.
Yeah, It's a good question.
You know I.
I mentioned on the call that we do expect our Q1 equity income this quarter to be strong on.
The next it's typically pretty strong we do see.
As China was shut down and has recovered better than the rest of the world from co of it.
The soft production spike up in our fiscal Q3.
A bit and then our fiscal Q4, and we've seen that the finishing the year, we'd say strong.
As we as we look into next year, it's going to obviously depend on what their market does and sort of their ability to continue to produce.
Produce at this rate but.
Current expectations as we'd expect sales to be a big part of it we think sales in the first our first quarter are going to be quite.
Quite a bit higher than where we are seeing Q2 through Q4.
And then we mentioned chemical prices and steel prices are we think are both going to be a headwind in that region as well so it's.
But it's primarily going to be driven by sales of this point and we don't see sales being that much different between 20 and 21.
Got it thanks.
Yes.
Thank you. Our next question comes from Brian Johnson has Barclays. Your line is open.
Thank you.
I know you put the regional profitability in the back for want of drill in the bid on that.
So two questions around the EMEA and Asia Pacific So email you've got back to a 6% margin on.
Pre cobot, you're at 4% and.
Two questions around Europe that kind of is the 6% something to think about going forward and second is the restructuring cash expense, which you noted of his two x. higher.
In 21, primarily devoted to restructure in Europe, and if so can we expect further EBITDA margin improvement is from those restructuring efforts.
Hi, good questions.
The Europe.
Europe is of the primary location, where those restructuring dollars are going.
Hi, as you know, it's more expensive and.
More challenging to restructure in Europe, and other parts of the globe.
In today's environment, and and that's reflected in our numbers. So I'd say the vast majority of what you're seeing in restructuring is earmarked for EMEA.
It relates to margins, we do see continued opportunity to increase over the 6%. We've obviously had good improvement that's been driven by a number of things we mentioned the assess the non business continuing to perform better that's driving up margin, but a number of things they're doing on their foam and trim as.
Well as the jet side is driving that we would see opportunities to continue to go up I think we'll have to probably.
Leave it to say, we expect it to go up but I'm.
Kind of come back to you with where it can get to as we move a bit further but the overall objective for the company Brian as you know is to close the margin GAAP. We have of some of our peers in Europe is going to be a big piece of the story on that.
Maybe just a couple of other points.
The EMEA.
When we look at the year over year.
Performance I think in addition to jeffs comments, we resolve some long standing commercial issues the.
Improved profitability.
And when you look at year over year of the number of launches and we expect that the continue as we move on the 21 day at a heavy launch.
Cadence in 19 in the 20.
The.
That was a bit of a drag in contrast to the Americas, which has got the heavy launch this coming year of 21 this year.
They've got a lighter low so we you know we.
We look at that level of performance is being.
Sustainable.
In the the restructuring just helps us.
The overhead cost side of it.
And secondly, Asia Pacific ex China also 6% margins is that about where we should.
The expected to stay or synthetic ariad is because of the volume headwind as to expect typical incrementals to help boost that in 2000.
Yeah, there's a lot of Asia is a really interesting one for you know when you follow us.
It's it's hard to predict because the margins are pretty different by country.
But I would say you know key regions for us well the key region for US there is really Thailand.
And Thailand sales of export sales have been down out of Thailand.
Which hurts us and overall hurts, our mix and thus our margin in the region and Thats a bit of what you're seeing between.
From the reduction from from fiscal 19 the.
The heavy reduction across the the.
The whole region as.
As you look forward.
We do see some recovery, we continue to see I'd say better management within each region of all those things we can control on some.
Some programs will roll off in the coming years that work.
Weren't great for us that the.
The replacement vehicles looks to be quite butter. So I'd say, we of opportunity there, but it's going to be heavily dependent on the mix of.
With the exporting countries, Thailand, Japan Korea, having.
Having those export volumes go back up to where they were you know.
Free co bid will drive a lot of that margin opportunity for us in the region.
And final question just broader margins.
You mentioned of course closing the gap to your large competitor.
You divested fabrics I assume there were probably good reasons for that but in discussions with the other company it appears that fabric.
Fabrics and the leather opt for of our very high margin businesses that get them to that sevenish per cent per cent. Despite the low.
Lower margins on just in time seating. So I think your questions. One I guess fabrics wasn't that for you we wouldn't have asked for that too.
No.
With that said then just getting back to cash flow breakeven where are the higher margin opportunities.
To get you to peer margins.
Sure.
I'll start and the you know Jeff.
Jeff can commit to you know for us Oh.
The degree of the chip business of.
Albeit low margin is.
Great cash generator so.
And the real you know relatively low capex when you look across our network of plants. So we like that business.
Trim.
So trim is is historically been very strong as well as fall of.
The perfect blend for US is when we have the level of vertical integration level. So we have complete seat we have a lot of content that excludes.
Assess of them business of performs better when its vertically integrated into a complete seeds and when were trying to sell that across a broader spectrum of customers.
The fabric business for US is it's not bad business, we just didnt see it.
Adding a lot of synergy to complete seat it's sourced separate.
It's sold across the number of different.
Customers you can't vertically integrated.
In two of US it's of market share.
Volume business, and we had a choice either we increased market share we were well positioned in Europe in the.
The U. us or.
Or we look to exit for us of the.
Multiple we exited we felt that was the better decision.
With regard to leather I would say, yes, historically true leather is.
On a good margin business.
We get the benefit of cutting leather hides not tanning them when we have the cut and sew business. So.
That's opportunistic for us.
The only caution I would have on leather would be if you look at.
Of the world going in.
In the green initiatives and you.
Take a look of what Volvo and what's happening in the electric vehicles.
You can make a pretty strong argument that leather content per vehicle is going to go down in the near term I don't think there's a lot of people who want to have leather seats of electric vehicles. So.
I think we approach expanding into that agreed historically good margins on a go forward basis I think it's something the take a look at the.
There is an opportunity we might.
For pursue it but right now, it's it's not the Hyatt or radar.
Robert things right.
Jacqueline it looks like we're at the bottom of the hours, so or less that we moved to wrap the call at this point.
Thank you and thank you for your participation in today's conference you May now disconnect at this time have a wonderful day.