Q1 2021 Adient PLC Earnings Call
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Welcome to Adient 'twenty 'twenty, one earnings call I would like to inform all participants that your lines have been placed on a listen only mode until the question and answer session of today's call today's call is being recorded and if anyone.
And has any objections you may disconnect at this time I would now.
And I like to turn the call over to Mark Oswald. Thank you you may begin.
Thank you Amanda good morning, and thank you for joining us as we review adient results for the first quarter of fiscal year 2021 the.
The press release and presentation slides for our call today have been posted to the investors section of our website and adient Dot Com. This morning, I'm joined by Doug del Grosso, Adient, as President and Chief Executive Officer, and justify all of our executive Vice President and Chief Financial Officer on today's call Doug will provide an update on the business followed by Jeff who will review our Q1.
Financial results and all.
And look for the remainder of our fiscal year.
After our prepared remarks, we will open the call to your questions before I turn the call over to Doug and Jeff. There are a few items I'd like to cover first today's conference call will include forward looking statements. These statements are based on the environment as we see it today and therefore 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 presentations of our complete safe Harbor statements.
In addition of the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful and evaluating the company's operating performance reconciliations for these non-GAAP measures to the closest GAAP equivalents can be found in the appendix of our earnings release. This concludes my comments I'll now turn the call over to Doug Doug.
Great. Thanks, Mark good morning, Thanks to our investors prospective investors and analysts joining the call. This morning, as we review our first quarter results for fiscal 2021.
Well I'll take a moment to two.
And to wish our hope you and your families are staying safe and healthy at this.
Very challenging time for all of us.
Let me get started let's turn to slide four.
And begin with few comments related to our first quarter, specifically adient strong start to the fiscal year.
The remaining laser focused on our priorities combined with relatively robust vehicle production.
Continued to drive improved business performance and the most recent quarter.
Q1, adjusted EBITDA of $378 million was up $81 million or just under 30% year on year.
Important to remember last year's results included earnings from our interiors fabrics and <unk> businesses.
Which we divested post Q1 and 2020 adjust.
Adjusting for those businesses. This year's first quarter EBITDA was up $110 million year on year.
Equally impressive with respect to the absolute level of earnings was adding the adjusted EBITDA margin performance of nine 8%.
Or seven 4% excluding equity income.
That's a very strong proof point that adient can achieve margins equal to if not better.
To our nearest competitor.
No doubt the strong result, but even more impressive when you consider adient consolidated revenue was down about 2% during the same period.
Adient specific launches and impact of portfolio adjustments.
Executed in fiscal year 'twenty were the primary drivers of lower sales.
Also shown on the left and side of the slide our adient and strong Q1, ending cash balances and total liquidity.
And which were approximate approximately $1 8 billion and $2 8 billion respectively.
As you can see adient, and Q1 financial metrics point to a strong start to the year.
And we believe blaze of solid path to adient, achieving its fiscal 'twenty one commitments.
Commitments.
And the right hand side of the slide we've highlighted a few items that will give you further confidence and the team.
The show that in addition to delivering strong quarterly financial results. We are also focused on the future to ensure sustained long term success.
That success will be driven in large part by adient <unk> ability to provide world class products and services to our customers.
As mentioned on previous call adient, and striving to become the supplier of choice for our customers.
During the quarter progress toward that goal was validated through a number of external awards.
And Ikea selected adient as one of their supplier of the year 2020 honorees toward delivering several flawless launches excellent quality and supply chain management.
Adient, new floating seat pictured on the right hand side of the slide one of bronze medal at the tedious.
Clipper Innovation award ceremony.
I'd also point out that adient supplied seats for the winners of the 2021, North America and utility and truck of the year afford marquee and the Ford F 150.
And China, Daimler presented R. B J, a joint venture with the loyal Companion Award.
Centrally recognizing adient for being a reliable supplier for Beijing Daimler for the past 20 years.
We are among three suppliers, who received the award from Daimler.
Who just delivered its 3 million of the car in the market.
And in Thailand, Daimler also presented US with supplier performance Excellence Award.
The only seat supplier for this award.
Again, I mentioned this recognition and lead to provide proof points that our team continues to execute on many fronts spanning across operations products and customer relationships.
When properly executed we believe the.
These focus areas will continue to drive value for all of the adient and stakeholders.
Speaking of driving value.
We understand that of commitment to positive environmental social and governance related business practice and strengthens our company.
Increases our connection with our shareholders and helps us better serve our customers and the communities and which we operate.
Adient commitment to operate its business and and environmentally responsible manner was recently outlined and the publication of the company's 2020 sustainability report.
As you can see on slide five.
And 2020 sustainability report outlines the company's key policies and actions regarding environmental responsibility.
People and communities governance and compliance and more.
Our aim is to ensure the adient manages risk in these areas and achieves our environmental social and governance goals.
We've included a link to the full report please take a few minutes to learn how adient incorporating these policies into our day to day operations.
Turning to slide six let me provide a few comments on adient and recent business wins.
On slide six you'll see a few of our new business wins, which shows that our continued focus on capital allocation and return on capital when targeting new and incumbent businesses has not limited our ability to secure new business.
We have recently highlighted a number of recent program wins here, including the all new <unk> program with GM.
The two show of three 008, and five 008, both new programs for Adient.
And in China, we secured the Lincoln Nautilus program.
Net shown but very important to our portfolio of business. The team secured the incumbent GM traverse and enclave crossovers as well as the GMC Acadia crossover, which is non incumbent to adient.
Also it should be noted that our recent business awards include a good mix combination of jet foam trim and metals business.
As our new book of business continues to launch, we expect the balance and and balance out platforms to further enable margin expansion.
One last point of new business wins.
Specifically sourcing of the new business.
Fiscal 2021 is shaping up to be of higher than normal year for quoting and sourcing new and incumbent business.
We expect the outcome to be favorable for adient.
Which will strengthen the business and the out years the.
And the uncertainty for the remainder of fiscal year 'twenty, one as the impact of customer productivity demands of nomination fees.
Required to secure the business.
This is not unusual however, it's worth mentioning considering the volume of sourcing is elevated this year.
Flipping the site seven.
We've highlighted several critical launches that are and the process.
Scheduled to begin in the near term.
I'm happy to report the.
The launch is currently underway, including the F 150 of progressing well.
The second F 150 manufacturing location.
And the Riverside, Missouri is well underway and progressing up the launch curve as planned.
The launches.
And platforms show not only impact adient jet facilities, but also span across our network of phone trim and metal facilities.
The entire team is performing at a high level as evidenced by our current performance.
As mentioned on prior calls the team has made significant improvements and our launch management over the past several quarters.
A strong focus and discipline around launch readiness is underpinning adient successful performance.
I might add we have no intention of letting up on this activity.
Turning to slide eight let me conclude my comments with an update on various macro factors, we're managing through.
And are expected to impact the industry and adient and the coming quarters.
The list should look very familiar as many of these factors were highlighted as we entered fiscal year 'twenty one.
And the positive side continued monetary stimulus.
Expected to result in positive economic growth.
And the economic growth is forecasted to accelerate later in the year as the number of individuals who are vaccinated against Coke teen virus increases.
All of this is very good news and supportive of the industry.
That said there are several factors, we're managing through that are tempering our expectations. They include <unk>.
Supply chain disruptions, primarily related to semi conductor shortages.
Which are resulting in near term production downtime across the industry impacting adient customers.
And continue to monitor the situation at this time, it's too early to know if loss production in Q1 or Q2 will be made up before the end of adient This fiscal year.
Putting the temporary production disruptions of side.
The current level of global production appears to be supported by improving consumer demand and the rebuild of inventory.
Moving on and commodity costs, specifically steel and chemicals have continued to escalate versus our original estimates.
The teams are working hard to help mitigate these increasing costs.
Important to remember, even though escalators and agreements are in place to help recover these costs of the agreements do not.
Cover 100% of the increase.
In addition, the time and method for true ups vary by customer, resulting in and time lag as to when adient and begins to receive recoveries.
Jeff will provide additional detail on the topic and just a few minutes.
Few other items noted on the slide include labor shortages.
And premium freight and all regions and the elevated launch cadence and the Americas.
As mentioned earlier Adient launched performance has improved significantly and we feel well positioned ahead of the launches.
That said, we're very aware of the hard that lies ahead.
And we're not taking the current or upcoming launches for granted.
Some of it up our strong start in 2021 provides a solid path to achieving our fiscal 'twenty one commitments.
The path appears to contain a few speed bumps the rest assured the team is working hard to navigate around them.
I am confident adient will manage through these obstacles much as we did in 2020.
And with that I'll turn the call over to Jeff to take us through Adient first quarter 2021 financial performance.
And what to expect as we move through the rest of fiscal 2021.
Thanks, Doug good morning, everyone.
Let me Echo Doug's earlier comments and I hope, everyone is safe and well.
I'll start my comments on slide 10.
Adhering to our typical format the pages formatted with our reported results on the left and our adjusted results on the right of the page, we will focus our commentary and the adjusted results, which exclude special items that we view as either onetime in nature or otherwise skew important trends and underlying performance.
For the quarter the biggest drivers of the difference between our reported and our adjusted results relate to restructuring cost and purchase accounting amortization details of these adjustments are in the appendix of the presentation.
Sales were $3 8 billion down about 2% year over year, which as Doug noted was driven by portfolio adjustments executed in fiscal 'twenty, which impacted the year over year comparison by about $70 million and addition, adient specific launches such as the F. 150 also contributed to the year over year decline adjusted.
EBITDA for the quarter was $378 million up $81 million or just under 30% year on year more than explained by improved business business performance and lower SG&A costs, partially offset by a decrease and equity income.
Speaking of equity income, which is included in our adjusted EBITDA result, Q1 fiscal 'twenty included $17 million of income related to our JV that we sold earlier last year. Therefore on an apples to apples comparison adient seeding equity income was up year over year.
The detailed the drivers within the equity income and just a minute.
Finally, adjusted net income and EPS were up significantly year over year at a 162 million and of $1 71 per share respectively.
Now lets breakdown the first quarter results in more detail starting with revenue on slide 11.
We reported consolidated sales of $3 8 billion, a decrease of $88 million compared to the same period a year ago. The.
The key drivers of the year over year comparison included just over $70 million of lower sales attributed to portfolio adjustments executed in fiscal 'twenty, namely the divestitures of our fabrics and <unk> businesses and addition.
And to the divestitures volume and pricing contributed to just over $80 million of revenue decline.
The biggest drivers included lower volumes and the Americas, primarily the result of adient specific launches such as the F 150 and to a lesser degree of Tesla's decision to in source complete seed production.
For markets outside of China, and Asia, Adient sales were impacted by export reductions and Thailand and Japan.
The positive impact of currency movements between the two periods of about $67 million, partially offset the impact of the divestitures and lower volume.
And China Adient sales were strong and outperformed vehicle production in the region.
Audience favorable customer and platform mix continues to drive growth over market.
With regard to adient unconsolidated seating revenue year over year results were up approximately 11% excluding FX and.
And China, driven primarily through our strategic JV network sales were up 13% year over year, excluding excluding FX and.
And the sales outperformance versus the market is attributable to adient and strong mix of business.
Specifically, our exposure to luxury and Japanese Oems.
Moving to slide 12, we provided the bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operations such as executive office Communications corporate finance legal and marketing.
Big picture, adjusted EBITDA was $378 million and the current quarter versus $297 million last year.
The key drivers of the increase included.
Improved business performance, which consisted of normal course, commercial settlements and lower labor and overhead freight and ops waste regarding the commercial settlements. These settlements as discussed in the past tend to be lumpy in nature between quarters and settlements are common and towards the end of the calendar year as our customers close out their fiscal.
Year.
Settlements tend to be pretty consistent from one year to the next but the timing is not uniform throughout any given year. I'd also say that we saw an elevated number this quarter and thus expect slightly elevated.
The number in 2021 as a result call it about $20 million to $30 million. We would say this elevated portion is not expected to repeat.
It's also worth mentioning that our commercial accrual balance is slightly up year over year again, suggesting that our charges to and releases from the accrual tend to remain in balance over the course of the year.
SG&A was another strong contributor and the quarter across all regions driven by increased efficiencies and the positive benefits associated with the divestitures of fabrics and the cargo.
Partially offsetting the positive factors just noted was about $37 million of headwinds primarily associated with lower equity income of $21 million lower volume and the mix of and the mix of $9 million and the impact of FX called out about $7 million.
With regard to the biggest driver equity income as mentioned just a minute ago. The year over year comparison was impacted by the absence of interiors equity income result, the resulting from the Wi Fi divestiture of about $17 million.
In addition equity income contained approximately $15 million of headwinds, including a $10 million tax refund recognized in Q1 fiscal 'twenty that did not repeat this year.
These headwinds were partially offset by the positive contributions of volume and efficiencies this year totaling about $12 million.
I'd like to point out that our adjusted EBITDA margin, excluding equity income increased by 260 basis points year over year to seven 4%.
Even adjusting for the onetime commercial items I noted and normalizing the commercial settlements noted earlier, we would estimate our margin excluding equity income would be between six and six 5% and thus showing nice improvement over recent quarters.
These results provide a solid proof point that audience core operations are benefiting from the numerous turnaround actions executed to date and more importantly demonstrates the earnings power of adient and its ability to achieve peer like margins are better.
Speaking of the turnaround. We're also encouraged to see continued progress of adient assets and and business for the quarter Americas, and EMEA Americas, and EMEA metal manufacturing combined improved by about $40 million compared to last year's first quarter. The team is working extremely hard to improve the profitability of.
And the free cash flow of that business.
Despite the strong first quarter results I would caution and certain of the factors that benefited Q ones earnings and.
And margin should not be calendar eyes are extrapolated to the full year. For example, the timing of normal course commercial settlements and equity income favor Q1, and our first half results and are not expected to have the same impact on future quarters. This year.
In addition, it is unlikely the extremely rich mix of production experienced in Q1 will be sustainable and.
And finally, as Doug noted, we see certain headwinds and the horizons to supply chain disruptions and rising commodity.
The prices that are expected to have a greater impact on our results as we progress through the year.
On our Q4 call last year, we noted that we expected between $40 and $50 million of commodity headwinds and 2021, but that number has increased has been increasing and today, we'd estimate the impact to be closer to $80 million or $90 million to $100 million. If you add increases.
To freight.
Essentially none of this headwind was experienced in Q1 and the vast majority will be seen in Q3, and Q4 more and that and the outlook discussion.
To ensure enough time is allocated to the Q&A portion of the call. We've provided our detailed segment performance slides and the appendix of the presentation improved business performance, including normal course of commercial settlements positive operating performance, which includes lower freight ops waste and labor and overhead and lower SG&A.
Cost, partially offset by the impact of rising commodity prices is the primary takeaway from Americas and EMEA regions.
And Asia the reduction in EBITDA is explained by the sale of our interest and Wi Fi the non recurrence of certain benefits recognized in last year's Q1.
And that did not repeat this year, such as the $10 million tax refund, which was partially offset by improved performance in China and volume related weakness elsewhere in Asia.
Let me now shift to our cash liquidity and capital structures on slide 13 and 14.
Starting with cash on slide 13 for the quarter adjusted free cash flow defined as operating cash flow less capex was $160 million for the current quarter versus $148 million and Q1 fiscal 'twenty the.
The year on year increase was the result of the combination of several factors the most significant being the $81 million improvement and adjusted EBITDA and improvement and trade working capital and lower Capex spending.
Partially offsetting these positive drivers was an expected increase and restructuring higher interest paid elevated non income related taxes, specifically VA payments and some commercial activity.
With regard to payments, we would expect these to be neutral over time due to the timing of certain payments. We're expecting a negative result, this year and reversing and fiscal 'twenty two.
As noted on the right hand side of the slide we ended the quarter with approximately $2 8 billion and total liquidity comprised of cash on hand of about $1 8 billion and approximately $1 billion.
And of Undrawn capacity under Adient revolving line of credit no.
No doubt no doubt of very strong cash and liquidity position that we believe should provide protection against near term macro uncertainties and enable significant debt reduction is the pick up as the company progresses through fiscal 'twenty one.
Speaking of debt and flipping to slide 14.
In addition to showing our debt and net debt position, which totaled just under $4 4 billion and approximately $2 5 billion respectively at December 31.
We've also provided a snapshot of adient capital structure.
Just a few comments here.
We believe adient capital structure provides us with flexibility to weather near term macro uncertainties, such as COVID-19 or supply chain related production stoppages and provides ample flexibility to voluntarily pay down debt.
As you are aware, we began our voluntary debt pay down during the fourth quarter with the $103 5 million of principal Paydown of Adient 10 year of $4, 875% unsecured senior notes.
With the exception of of small repayment on our EIB loan and part triggered by Q4 is voluntary debt Paydown adient and hit the pause button on voluntary debt repayments in Q1, as the uptick and Covid.
Cases, and supply chain chain disruptions cloud of the near term production outlook will look to reinitiate, our debt paydown and initiatives in the near term.
Uncertainties, just mentioned the lesson, which we hope is not too far away.
And as mentioned on past calls over time, we'd expect to have zero outstanding balance and the revolver and run with the cash balance somewhere in the $5 to $600 million range, which points to a significant opportunity for debt Paydown and 2021.
Moving on to slide 15, but sticking with the overall debt team. We included the trend chart for Adient net leverage going back to our spin date.
As you can see at the time, we became an independent company. Our net leverage was just under 2.0 times. Unfortunately operational issues, which were well documented throughout 2018, and 19 drove an increase and leverage that increase was exacerbated with the impact of COVID-19, specifically by the stoppage of vehicles.
Reduction across EMEA, and Americas, which resulted in a significant drop in EBITDA during our Q3.
After peaking in the middle of calendar year 2020, we've seen a steady decline and our leverage ratio. The biggest drivers of the decline include the successful continuation of adient turnaround plan, which is leading to a significant EBITDA improvement and better cash generation the lessening of Covid on vehicle production and proceeds related to certain.
Non core divestitures that took place in fiscal 'twenty.
We'd expect the positive trend to continue as improved business performance continues to drive earnings and cash flow growth.
Moving to slide 16, let me conclude with a few thoughts on what to expect as we progress through fiscal 'twenty one.
While we would definitely characterize our Q1 is a good quarter. The demonstrates the momentum of our turnaround efforts I know many of you and may be tempted to take our Q1 results and multiply by four to get a revised full year estimate I wish it was that easy.
And one quarter into the year, though and the team will keep working to keep the momentum going however, it's important to point out that there are certain adient specific factors and macro headwinds that give us pause and prevents us from annualizing. The strong start to the year, let's break down the specifics.
And with revenue, although we are not changing our guidance. We now expect consolidated revenue to trend towards the upper end of the range provided back in November call. It approximately $15 billion currency movements over the past few months is the primary driver.
I'd also note that even though the production and mix has remained relatively in line with our assumptions heading into the year elevated risks of the production downtime, resulting from supply chain disruptions. The most significant related to semiconductor stoppages of shortages tempers expectations and the near term and fact, just yesterday Ford announced temp.
Gary of production reductions for the F 150, Adient second largest vehicle platform.
For the announcement comes on the heels of Gm's announcement earlier this week announcing downtime at three of their facilities beginning the week of February eight.
They are receiving advanced notice of downtown helps helps to lessen but not eliminate operating efficiencies on our side. The team is also managing through stoppages with little notice, which as you know as cost and inefficiencies.
And our facilities.
Of course, we are working closely with our customers to understand if or when these temporary reductions can be made up.
Given adient September of fiscal year, our current outlook does not assume production is made up before September 30th outside of these near term supply near term temporary disruptions. We continue and just continue to assume second half fiscal 'twenty, one global production will decline compared with the first half of <unk>.
'twenty, one production, especially in China. This assumption is aligned with our current IHS forecast.
Regarding EBITDA, it's early and the year and there are many uncertainties, such as commodity inflation and supply chain disruptions, leading to production uncertainties and the incredible uncertainties related to the direction Covid will take us given these uncertainties, we continue to forecast adjusted EBITDA and a range between $1 billion.
And $1 1 billion as I mentioned as I mentioned previously.
Sure.
And though we're pleased with our time.
And I should say, though we're pleased with the strong start to our year.
As Doug and I mentioned macro headwinds, including rising steel and chemical prices and premium freight we'll have a much more significant impact on adient as we've progressed through the balance of the year with regard to rising commodity prices. Just a reminder, even though adient as a formal recovery mechanism including index.
The agreements in place for a significant number of our customers the agreements provide a partial offset price increases let's call. It between 70 and 90% on average however, it's important to remind you at a time lag exists until the price of just as our agreements for certain customers provide for relatively quick true ups.
Our settlements while other agreements primarily with our Japanese based Oems are settled on an annual basis, given our relative overexposure to customers with more infrequent and true ups, a large proportion of the recoveries will occur in fiscal 'twenty two.
Moving on to equity income, which is included in our adjusted EBITDA.
Continues to track on plan and call it approximately $250 million as a reminder, and noted on the right hand side of the slide we continue to expect equity income will mere seasonality patterns of China's vehicle production strongest in Q1, followed by a substantial decline in audience fiscal second quarter, which tends to.
The impacted by lower production surrounding the Chinese new year holiday and.
In fact, we're expecting equity income to be halved and our second quarter compared with our first quarter just completed.
Interest expense based on our expected cash balance and and.
And that should be approximately $235 million. This forecast does not include the positive impact that would materialize with future voluntary debt paydown.
Cash taxes and fiscal 'twenty, one are expected to be around $85 million. It's important to remember that we maintained valuable tax attributes such as net operating loss carryforwards and that these tax attributes can be used to offset profit on a going forward basis, the cash taxes on adient operations should remain low.
So even as profits are increasing.
To assist with your modeling, although volatile with fluctuations between quarters as mentioned earlier, we continue to expect adient effective tax rate to be around 30% for fiscal 'twenty one.
We would expect that rate to fluctuate on a quarterly basis due to the valuation allowances and our geographic mix of income cash.
Capital expenditures are forecasted to range between $320 million and $340 million essentially in line with our fiscal 'twenty results.
Although we see opportunity to reduce capex.
Further in the out years, driven and partially by a smaller assets and and business. The current year expenditures are supporting current launch plans and finally, one last item for your modeling we continue to expect free cash flow to range between breakeven and $100 million and fiscal 'twenty. One as mentioned back in November there are several one off.
The factors driving this result for fiscal 'twenty, one such as an elevated level of cash restructuring, which is expected to be.
$200 million, the elevated spend which is about two times our normal run rate is necessary as we execute actions to rightsize the business, especially within our European operations were external and internal production forecast from what.
Remain below pre COVID-19 levels for a number of years, and addition to and elevated restructuring spend the fiscal or the 2021 free cash flow was negatively impacted by approximately $60 million of tax.
Our payments that were deferred from last year into 2021 stripping out. These one offs adient and free cash flow and a normal year would have been and the $160 million to $260 million range with that let's move to the Q&A portion of the call operator and take the first question.
Thank you we will now begin our question and answer session. If you'd like to ask a question. Please press star one please on mute your phone and record your name slowly and clearly when prompted your name is required to introduce to your question again that star one if you'd like to ask a question. Our first question comes from John Murphy with Bank of America. Your line is open.
And.
Good morning, guys. This is aileen Smith on for John and.
Going back to that normalized adjusted EBITDA margin of six to six 5% that you called and it onto the first quarter running the math on your outlook, we get scale and EBITDA margin, that's and the high fix the low 7% range for 2020 can you talk about the cadence of the margin that you anticipate for 2021, which some of the headwinds and noted like chip shortages.
And we're on that.
And on a normalized basis should we be thinking about sequential improvement in margin during the first half of the year versus second half as you've been able to demonstrate and the path or are there. Some factors at work that we should be thinking about some of the cadence of the areas, we use that 65% and at the starting point.
Yes, that's of Great question Aileen the.
And I will say at the tough year or two.
Forecast and.
Some of these things, which are just changing every day, primarily the production schedules relating to chip shortages are difficult to predict.
The and commodity headwind is certainly going to have a negative impact on our margin, but what we tried to highlight in the six to six 5% what I did what we did there is we said we had about 20% 20, let's say $25 million of one time commercial benefits, we did which we took out of that number.
And when calculating that and then we took out we had more than let's say, 25% of our normal years commercial settlements occur and the first quarter. So call that of another $25 million. So we kind of backed out that $50 million and calculating at some of the other quarters are going to be underrepresented on commercial recoveries because we did.
And the first quarter, so I would say youre going to see some bumpy and us on our margin because of those few factors to the chip shortages and the commodity inflation and then the timing of these commercial.
The settlements, but I will say is as we look at it and we continue to see the fundamentals of the business improve so theres going to be some noise, probably and the bottom line margin, but fundamentally here, we've been seeing improvements and performance that we do expect to continue to try and well, but do expect some noise in the quarter to quarter.
<unk>.
Okay. That's helpful and second question following up on the raw materials commentary can you provide us with the estimate of what it was in the quarter I wasn't able to follow it and the bridge.
Typically how you expect it to increase and magnitude for the remainder of the year and then can you just remind us how that gets shared with the automakers the pass throughs and escalators and if you have any hedging or other vehicles of mechanisms that you use to offset that.
Yeah. So on the first question there was about $5 million give or take and the first quarter of commodity. So we called out about 80 now so there is about $75 million and the balance of the year I would say most of that is going to be Q3 and Q4.
As you and.
And that what we've also seen as freight the.
The freight issues kind of multiply a bit how.
<unk> seen a shortage of containers.
Primarily from Asia, but that impacts a number of our regions.
That has increased free.
Right and it's also required us to do some other forms where we every once while we unfortunately have to fly things because of some of the challenges and the freight side I'd say really none of that hit in the first quarter and thats, 10% to $20 million that we're factoring and for the year.
As you you asked about the recovery mechanisms it depends on customer some of our customers are immediate.
But other ones and so.
And there is immediate recovery and we have index index and I would say, what you've seen with steel as you've seen it and unprecedented jump in steel prices.
And we tend to the way we modeled is we tend to lock in for a quarter or two.
But then as the year Rolls, we have two where we've seen these big increases we have to start to pay a higher price and our customers and some cases, where the immediate we're able to grab that.
Disconnect quickly other ones, where we have the year lag, which is pretty much all of our Japanese customers, which is significant for us we.
We will take time and that's why we don't see 70 and 90% of the increase is being recovered in fiscal 'twenty. One we see some of those things being pushed to 'twenty. Two so they should be favorable for us if the prices maintain stability and 'twenty, two but that that recovery on those particular customers will happen later.
And.
I think the other point I would add to it is.
That's the Myopically around just the way our.
Agreements work.
<unk> agreements that we have in place right now, we're experiencing really unprecedented particularly in steel levels of bi.
And it's difficult to see it of when that will mitigate so.
And what we lump into the discussion with our customers is how do we think about annualized productivity in the midst of this environment of the chip.
Chip shortage.
And as as these issues and all kind of converge at the same time.
We're in discussions with them and and.
The other other other.
Avenues that we can go down to mitigate some of the impact.
So <unk> of this basket of goods kind of approach that you have to take into account.
It's too early to really.
Tell what's happening I guess the point I was trying to make is even if we have a year lag that doesn't necessarily mean debt.
That's what we're willing to accept and.
And the environment, we're operating in right now.
Great. That's very helpful color just the.
Just to clarify something you said before which you didn't you had mentioned our 2020.
Progression of of Ross when I was talking to the $6 to $6 five that excluded equity income. So I don't know if that was in your calculation, but that is an improvement and we haven't seen that level of of margin even with those adjustments I put forward and any of the quarters. In 2020. So this is the <unk>.
Even after making those adjustments would be an improvement over what we've seen.
Okay Fantastic that's very helpful. Thanks for taking the questions.
And thank you.
Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open.
Hi, everybody can you hear me.
Yes, yes right.
Hey, good morning.
I was hoping you could talk about the targets.
And for cost and business improvement that you're sort of looking out for over the next 12 months and how that could contribute upside beyond the one to $1 1 billion.
The EBITDA that you're looking at the this year I think you've previously talked about 200 million of restructuring with the two year payback, so presumably that's about 100 million and.
And I think you said that S. S and M would go from EBITDA breakeven the cash breakeven, which was another 100 and I'm not sure if thats double counting and then presumably you have non recurrence of.
The semiconductor shutdowns and Covid containment costs, the kind of high level, if we kind of fast forward hopefully a year from now things are looking better and the world is kind of normalizing and you've got your <unk>.
Some of the things you've accomplished and what are some of those big.
The big items that we should be looking out for.
And well start the the one that you didn't hit on Rod, which has been part of our overall plan.
And the legs, a little bit and whether it occurs it occurs.
And evolves over time is the roll on roll off of businesses and what the.
And I have always commented on and we haven't necessarily put a specific <unk>.
Target on it, but we but we said the last element.
In addition of what you mentioned would be just getting rid of the bad business that we couldnt, we couldnt drive.
The efficiencies, whether they are labor and overhead or.
Probably more importantly material acceleration and we just had to have those roll off of.
So the.
That's really the buckets that we we look to draw from.
But nothing has changed around our target.
And rod of really.
Eliminating that GAAP, we have to our peer margin.
Alright, so if we think about going from six to six and a half towards closer to eight and a half can you just maybe.
<unk> characterized the big buckets that you've got.
But you're you're kind of targeting <unk>.
How large are each of these components, whether it's restructuring or getting out of some of the weaker contracts that you've got.
Yeah. So.
Ed.
It's difficult to do and total high level, but some of the big pieces the seat structures and mechanisms business, we mentioned of $40 million improvement in the quarter and I'd say and we put out of target to you guys. Some time ago to <unk>.
Exit this year at the free cash flow breakeven, which compared to a couple of years ago was of 400 million outflow.
That's a combination obviously of taking $100 million of capex or sell out of that business, but it's also dramatic improvement and the EBITDA, where and a great progression of that I'd say theres lots of work to do there. So.
That's a couple of billion dollars business plus operation has an opportunity to lift as we get to where we want to be and and I think where we're starting to see some reasonable sites on where we can get it to a substantial portion of that margin gap that you noted.
The.
The combination of.
And what we're seeing across each region as we go into our customers with different strategies around how can we.
Take a bigger piece of there.
Volume control more of the spend maybe control of the foam and the trim.
And take that with the day efforts and the benchmarking we've been doing there is significant opportunity for us to take cost out of our customers' product, while adding margin to our business that is taking root and of doug's had and all of the regional presidents have been having.
Really in depth discussions with our customers on how to do that and a lot of those activities of had been implemented that trend. We see we will continue to drive and be the other real engine on that growth as it relates to the.
<unk> and some of those we continue to find efficiencies there as well.
You mentioned the activities, we initiated last year and the U S and <unk> been able to take out the activities that in Europe that are.
We will say about halfway implemented in 2021, so we'll get some additional benefit as we get the full year effect of those in 2022, and we'll continue to lean out the structure, but I would say theres going to be more emphasis on those first two pieces than the last and that.
February.
And just where I want to just go and add to it Robert.
And at least I was a little bit hesitant to assets.
As we've said before it's really difficult to to bucket these things and.
And put labels on them, how much is going to be commercial how much is going to be.
Operational.
The improvement.
It's.
The encompasses everything Jeff just referenced it's it's really working every element.
Of the cost structure that we have.
And balancing that against.
The cost drivers be the inflationary material economics.
And and.
And the appetite that I hear that our customers have right now for cost reduction.
And the one thing I would say thats, maybe a little bit different than what.
Historically, we've seen which I think is good news for us and not that we're changing our outlook or timeline, we've always label debt timeline to be multi year and taken of south of 24 25 the.
The clothes that cap.
As is and increasing appetite as Jeff mentioned and our customers have for cost reduction and they're and they're really asking for ways to.
Not just the traditional the a b E.
Can you make.
And a small change there asking for fundamental change and the way.
The design and and develop and market seat systems and their vehicles and.
And that's that's a huge opportunity, but you can't really call that cost reduction it's really.
Re recasting and how you think you commercially discuss those issues with your customer and the impact that it has on your own operations and then we'll kind of sharing that you agree to put in front of book.
Okay. Thanks, and just wanted to ask one other question just I'm sure you would agree one of the most striking things that we've seen here and the industry over the past years, just how much capital is being raised by by new entrants I was wondering if.
And just maybe make a comment about how youre looking at it from adient perspectives.
Are you pursuing business with a dozen new potential customers or are you taking of somewhat more cautious view on that.
And I would say if I were to characterize its much more cautious.
And that's not too.
Cast of negative shadow on any particular.
But true that's out there.
I think what we've.
And over the last couple of years is.
And we've got a ways to go to to get our business back on track is really focus on fundamentals focus on.
The traditional customers to a certain degree.
There are some new.
We said we are.
Participating with Neo would be a good example, Tesla as another example, we continue to pursue.
And.
But they've demonstrated to.
Certain degree.
Sustained of Bowl.
Volume that they can deliver to the market and.
And again with our traditional customers coming on board with you.
Propulsion changes and their vehicles.
There is there is opportunity.
For us to pursue that.
As some of the new entrants.
And to demonstrate.
The ability.
We will reexamine it but.
And.
Pursuing the <unk>.
First phone and their customer base and pursuing that is something we stepped away from a couple of years ago, and we don't we don't see that changing right now.
It's it's fairly risky.
And there is plenty of opportunity and if you just prioritize where's the opportunity.
For us to drive value, we see it in and kind of our traditional.
Markets and the.
Necessarily and these new markets right now.
Great. Thank you.
Thanks Robert.
Thank you. Our next question comes from James.
<unk> with Keybanc capital markets. Your line is open.
Hey, good morning, guys.
And so really appreciate all the color on the guide and cadence for the year.
Can we just walk through the the moving pieces, particularly within within the EBITDA that leaves the full year guide and change it sounds as though.
Commodities of 35 million worse than other $15 million from premium freight both of which are our back end weighted and then on the positive side of the of the Ledger you have <unk>.
<unk> settlements and favorable mix and the first quarter, what did I Miss there any clarification would be great in terms of what keeps the full year guide unchanged the puts and takes.
Yeah, James I would say the biggest thing that keeps the year unchanged is the difficult of yeah.
The environment one we're very early in the year, but two you just saw if you read the journal of Wall Street Journal. This morning, and a big article on onboard our second largest platform.
Went down yesterday and shorter shifts for a while we've seen that impact on the chip shortage throughout the world.
That's significant.
The COVID-19 still being where it is so all of those things sort of way honest, but you grabbed the pieces the.
The commodity exposure freight exposure the timing of those.
Marshall settlements, the fact that we were I'd.
I'd say, we had a little bit of and elevated we call it $20 million to $30 million.
Benefit in Q1 that we'd say, it's not repeatable.
So all of those things factored in and just with all of that decided.
Wanted to see a little bit more of this year developed before we changed our outlook.
Okay got it that's helpful and then.
On the equity income.
Outlook and you made the comment second half or the first half 50% higher than the second half. So it's kind of of two thirds of first quarter 94 and breakout.
What's the that was just the quarter reference not a full half year reference.
We said second quarter includes the Chinese new year, and we said second quarter would be roughly half the amount of first quarter.
Okay Alright.
Alright, Alright, I got the alright.
Just following up on the commodity and so youre now looking at and 80 million headwind you mentioned the customer recovery mechanisms likely hit next year, So should we assume.
75% of that $80 million is recovered next year, just what's the right way to be thinking about that in terms of the recovery. Thanks.
And.
And that one depends a lot on where the prices go.
If prices stay steady.
We'll we'll eventually recapture.
The the <unk>.
Difference and we will no longer be running at the deficit because.
And just think of it in any given market if if we're buying steel.
Steal it.
100, and our contract of the customers imply it's 100 and just from metrics and.
And then steel goes up to 110.
We're still getting only.
Of the cost or a recovery from a customer based on 100 once the price goes up to 110, we eliminate that difference. So all of that really happens of price stays steady as debt.
We essentially stopped the bleeding on this as prices eventually reduce then we will start to get.
And we'll step will get recovery, because we'll have it work the other direction.
Hopefully that makes sense yeah.
Yeah and it.
I guess I would add on top of that in our opinion and.
Where you draw the goal lines.
We fully expect will always recovered material economics at some point.
It's just the question of how long it takes.
As Jeff mentioned it Steve.
Steel prices go down.
And then we will recover at a relatively quickly and it won't take extraordinary means for us to get it. If they don't then then it's a different dialogue with our customer.
Because we we won't sustain it for an extended period of time.
And even if market rates.
Rates stay high.
And so whether it's true.
True up on of new product launch that addresses set or.
Again, we just broaden the conversation to include other other issues.
To mitigate the impact of it and that's namely customer product annualized customer productivity.
Thanks James.
Thanks.
Operator, if we can move to the last question.
Thank you our last question comes from Brian Johnson with Barclays. Your line is open.
Two questions, one kind of more housekeeping and the second part strategic organizational.
Just as we watch the production schedules for the kind of.
And try to kind of get an accurate gauge on fiscal <unk>, how should we be thinking about the revenue impact of every kind of week of downtime or per unit of downtime.
Without getting too deep into your actual forward pricing.
And it's hard to do without getting deep into a hard price.
The the production pretty quickly what our pork pricing.
And we gave you of that level of detail just because theres. So.
The transparent about the number of lost units, so it'd be very reluctant to do that and.
Yes.
<unk>.
Given the slides, we all know how to make slide decks, but you know and.
Kind of as you put together the slides as you kind of reviewed them before blasting them. This morning are you confident that the force.
<unk> news was fully reflected in your outlook.
Yes, I think so.
The what we know now that doesn't mean the right.
<unk>, Yeah, I would say.
And second question just kind of following on the theme of the other questioners around kind of visualizing the waterfall walk back to in the.
History competitive margins, yes, I want to ask maybe it's off the question, particularly the Dod kind of.
As you look now versus where you came in at.
Some of the key organizational challenges I know moving to a regional thing and created accountability.
Where do you think you stand if you must be looking at red yellow Green charts endlessly, but just in terms of do you have the right people in the right roles of.
Both facing off in terms of account management of working partnering with key Oems and that's some of the key factories.
And key kind of supply chain positions, how has that evolved what work is there left to do it's the team basically that should be.
On the field executing or are there still GAAP should need to fill.
Yes.
And not to be Coy, I do not look at red yellow and green charts to get an indication of how we're performing we we tend to look at numbers.
And.
And we respectfully.
And that's just of different way that we're driving the business right now.
Because of a lot of attention and we talk.
The business of numbers and and.
And drive that deep into our organization. So everyone's understanding that we're not managing the kpis, we're managing too.
A bottomline level of performance whether its EBITDA.
Or EBIT of tour return on investment tour.
For capital or power generating cash.
Relative to the organization.
Actually its interesting and timely asked that question. We just had a succession plan and review with our board last week.
And and I was pretty happy to report that.
Although we will constantly make tweaks and the organization too.
To adjust to the environment.
We feel really good about about the organization Thats in place right now we're not foreseeing any.
Any.
Major changes, we brought a lot of new talent into the group and <unk>.
And then we've moved the strong talent that we had here and the Audi and and to the right roles.
And then changed the way, we're we're compensating them and how we expect them to motivate them and that's very much connected to.
The basics of.
Customer satisfaction and and the business financial performance.
So.
Yes, the regional move worked out well for us.
And.
There is no perfect organization, but I think breaking the company into some smaller parts that we could manage a little bit easier regionally.
And.
Okay.
Feel fortunate that we did that ahead of COVID-19 because it it would have been <unk>.
Even with all of the technology without having the right people on the ground in region.
And would have been difficult to do.
And manage the business, but we've got strong leaders and every single region and then they've they've all reshuffle of <unk> to some degree and so.
The effect of the succession plan and so we go layers deep <unk>.
Compared to where we were maybe a year or two ago, we feel a lot better about the organization.
And just a quick follow up okay.
Okay.
Thanks, Brian and Unfortunately, we're out of time here. So for those of you who did not get a chance to ask your questions I'll be available for follow up please just feel free to reach out.
This concludes the call for all of this morning.
Thanks, everyone. Thank you per se.
That concludes today's conference. Thank you for participating you may disconnect at this time.