Adient plc

Welcome to ADN's third quarter financial results 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. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mark Oswald. Thank you. You may begin.

Thank you, Amanda. Good morning, and thank you for joining us as we review ADN's results for the third quarter of fiscal year 2020. The press release and presentation slides for our call today have been posted to the investor section of our website at adiant.com. This morning, I'm joined by Doug DelGrosso, Adiant's President and Chief Executive Officer, and Jeff Stifile, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update of the business, followed by Jeff, who will review our Q3 results and outlook 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. Please refer to slide two of our presentation for our complete state harbor statement. In addition to the financial results presented on a gap 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 to the closest GAAP equivalent can be found in the appendix for our full earnings release. This concludes my comments. I'll now turn the call over to Doug.

Doug? Thanks, Mark. Good morning. Thanks to our investors, prospective investors, and analysts joining the call this morning, spending time with us as we review our third quarter results. Hope you and your families are staying safe and healthy in these difficult times. Turning to slide four, let me begin with a few comments related to our turnaround plan. First off, the team remains laser focused on the plan while navigating through the global pandemic. We continue to implement actions to ensure the plan progresses in a positive direction. When looking at our results, you'll see operational improvements are driving down waste and inefficiencies. Financial slides within Jeff's section illustrate how our improved business performance partially offset the significant COVID headwinds. The team is exercising commercial discipline, resulting in new business winds with a higher return on capital versus outgoing programs. I'll expand on this point in a few minutes. Our launch performance continues to make significant strides with an extremely important as we head into critical launch quarters. We're proactively executing measures to take out structural costs to ensure the cost base is aligned with our expected smaller industry. And finally, we're moving closer to closing the two previously announced strategic transactions. The approximate $500 million of our cash proceeds will strengthen our balance sheets and help drive our total liquidity position higher, exiting fiscal 2020. Essentially, we have our hands on the wheel. and continue to drive initiatives that are within our control. That said, turning to slide five, our third quarter results were significantly impacted by COVID, where you saw industry production essentially at zero across Europe and Americas in April and slowly resumed operations in May and June. We've highlighted a few of ADEON's headline financials since ADEON's financial performance is highly dependent and correlated to vehicle production. Our results mirrored the overall industry, essentially zero sales in April, with steadily improvement into May and June. Sales at $1.6 billion were down about $2.6 billion or 60% on a year-over-year basis. I mentioned sales were essentially zero in April. The exit rate for the quarter was about 75%. The pre-COVID levels were both EMEA and the Americas. Just at EBITDA was a loss of $122 million, driven by the significant reduction in sales. We estimated the impact of COVID around $400 million for the quarter. The team did a very good job flexing costs. Unfortunately, the capital intensity of our business makes it difficult to offset fixed costs in the environment we were managing through. As production ramped up throughout the quarter, our earnings and margins progressed in a positive direction. With regard to cash, we ended the quarter with just over 1 billion of cash on hand and 1.2 billion of total liquidity. Important to note, cash was significantly impacted by approximately 500 million temporary level trade working capital headwinds resulting from the restart of our operations across Europe and the Americas. We expect that a majority of these headwinds will reverse as we move through Q4. As far as the $1.2 billion of liquidity, we expect that we will be at a quarterly low point. In fact, total liquidity is expected to exceed $2 billion by the end of September before factoring any potential debt repayment as a combination of additional JV dividends proceeds from our previously announced strategic transactions and the reversal of working capital headwinds mentioned earlier will help drive Addian's total liquidity higher. One other point worth calling out, the value of Adiant's strategic joint venture network was highlighted in Q3 as the company collected approximately $240 million in cash dividends in the quarter. Year-to-date, JV has contributed around $250 million with an additional $30 million expected in Q4. Turning to slide six, let me spend a few minutes discussing the current state of Adiant's operation and restart status, first in the APAC region, In China, the market continues to provide encouraging data points. Cadian's China operations have returned to pre-COVID levels. In fact, more than 50% of our plants are running two ships. China auto sales year-over-year volume continues to grow and improve sequentially. Cadian's performance has outpaced the market, driven by our favorable customer and platform exposure, as premium OEMs and Japanese OEMs have performed extremely well during 2020. Outside of China, certain Asian countries are showing early signs of market recovery. We expect that trend to continue in the coming months. In Europe, the market is recovering, but at a slower pace compared to recoveries in China and the Americas. Essentially, all of Addian's operations have restarted, with the exception of the small chip facility in the UK. The operations revamped production. Addian sales improved month over month in Q3, essentially, 0 in April to about 75% of pre-COVID levels in the quarter. Based on current customer release schedules, we expect that rate to continue to improve as we move throughout the fourth quarter. Important to note, given production is not fully returned to pre-COVID levels, EDI continues to flex cost structure, utilizing furloughs and short time work as appropriate. We recognize the benefits associated with these programs will lessen over time and have taken that in a minute. In the America, all of the add-ins in JV plants have restarted production, similar to Europe. Add-in sales have improved sequentially as Q3 progressed and exited the quarter at about 75% of pre-COVID levels. Customer releases for trucks and SUVs are running extremely strong. In some instances, productions for certain platforms have returned to pre-COVID levels. While this is an encouraging sign, we remain cautious as rising COVID levels in southern US and Mexico and restrictive rules in the Chihuahua region in Mexico at risk to the production environment. Turning to slide 7 and shifting gears, let me address a common question related to new and existing business awards that continue to bubble up when meeting with our investor base. Specifically, are we losing business to our competitors? Simple answer. Our focus on capital allocation and return on capital is driving profitable business awards, both new and incumbent business. We've studied and reviewed adding in profitability by customer, by platform, by plan, basically slicing and dicing the data. What's clear is certain businesses and platforms have consistently failed to earn an appropriate return The team's focus on ensuring an adequate return is realized over the platform life as a key driver in determining which platforms we keep and which platforms we're comfortable walking away from. Over the past 12 months, we've successfully replaced approximately $700 million in consolidated revenue from an incumbent business with a negative return profile with new business awards. including conquest business with significantly better returns. You can see a few examples on the right-hand side of the slide. In addition, our solid execution and value-add initiatives are driving additional opportunities to quote and win profitable new business. We're excited about Gedeon's book of business that we'll be launching in the coming years. It's an important component of enhancing our margin profile. Speaking of launches and turning to slide eight, we've highlighted several critical launches, including the Ford F-150, Adiant's second largest platform by revenue. Over the past several quarters, launch management has been a specific focus area, helping to drive Adiant's improved operational and financial results. In adhering to a robust process around change management, enhanced readiness and program reviews, and early escalation of potential issues, made a significant impact. Over the past several quarters, we've called out several platforms, including the Cadillac CG5, Chevy Onyx, Toyota Corolla, Nissan LEAF, for achieving flawless launch scores, which we define as 00-100-190, which breaks down to zero safety incidents, zero customer rejects, 100% on-time delivery, 100% achievement of financial targets within 90 days from start of production. We're not here to declare victory today. Rather, we mention these examples as evidence of the team's hard work and preparedness for the upcoming launches. Turning to slides 9 and 10, let me conclude my comments with an update on the actions that are being taken to execute and position Adiant for long-term success. As we discussed in our Q2 earnings and in subsequent investor meetings, Adiant took quick experienced across Europe and the Americas as a result of the pandemic. Many of these actions, such as furloughing our direct and indirect employees at the plant, enacting salary reductions and salary deferrals above plants, suspending 401ks, just to name a few, were temporary in nature. As any operations restarted in production, increased in Q3, the benefits associated with these measures were reversed. Addressing the company's cost base with structural, more permanent measures is essential as we look to create stronger, more profitable business, especially given Addie's expectation of a smaller industry next year versus fiscal year 19, and the company's extreme focus on capital allocation and return on capital. The right-sizing actions identified that are being executed include the above plant measures within our operations. The goal is simple, reduce add-ins break-even point, be free cash flow break-even or better in fiscal year 21, even though vehicle production is forecasted to be below pre-COVID levels. We have a lot of work ahead of us to achieve that target, but we're well on our way. In fact, we've identified and are in the process of executing cost reductions between 75 and 100 million versus 2019. Then our central functions and regions. Slide 10, we've provided a few examples of these actions that have been announced. I won't read through the actions, but as you can see, the measures are far-reaching, impacting above-plant plants and joint venture operations. Certain of the actions identified can be executed rather quickly, such as force reductions that impact our Americas regions and central functions. In late May, four actions implemented in Asia earlier this year Other measures have a much longer lead time, such as significant reduction in personnel planned in Europe. As noted in the middle of the slide, in July we began negotiations with Works Council in Germany to execute force reductions impacting approximately 500 engineering and bug plant personnel. The reductions are estimated to result in annual labor savings of about $40 million. It's important to note a portion of the relates to flexing of the cost baselines. In other words, the prevention of margin degradation. Given certain of the actions will be implemented in fiscal 21, we only achieve a partial benefit next year. Full run rate savings are expected for fiscal year 22. Given the size and magnitude of the measures being implemented, we do expect to have an elevated level of restructuring costs running through our financials in the coming quarters. The team is currently finalizing our fiscal 21 plan. Once completed, we'll be able to provide you an estimate of the size and timing of the charges and the cash outlays associated with these measures. In the end, significantly lower cost base combined with continued operational improvement and a strengthening platform portfolio is expected to result in stronger, more profitable business. Essentially, further positioning, adding in for long term success, With that, I'll turn the call over to Jeff so he can take us through Eddie's financial performance for the quarter.

Thanks, Doug. Good morning, everyone. And Doug, I echo your earlier comments and hope everyone is safe and well. Starting on slide 12 and adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side of the page. We will focus our commentary on the adjusted results which excludes special items that we view as either one time in nature or otherwise skew important trends in the underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to restructuring cost, asset impairments, and purchase accounting amortization. Details of these adjustments are in the appendix of the presentation. Sales were $1.6 billion for the quarter, down about 60% year over year, which, as Doug noted, was driven by production stoppages at our customers across Europe and the Americas. Adjusted EBITDA for the quarter was a loss of $122 million. By applying our projected margin on lost sales and netting out our various short-term austerity actions, we estimate that COVID cost us approximately $400 million in the quarter. However, and as we'll discuss more in a moment, Adyen's operations across Europe and America continue to experience improved business performance. With regard to equity income, Q3 fiscal 19 included $15 million of income related to our interiors business that is no longer part of our consolidation today. Therefore, on an apples to apples comparison, Adyen's exceeding equity income was up $8 million or 15% year over year, a very good performance as a result of our China operations continue to capitalize in the improving China markets. Finally, adjusted net income and EPS were down significantly year over year, a loss of $261 million and $2.78 per share, respectively. I'll also point out that our tax expense of $14 million in the quarter contributed to our net loss. For those of you wondering why Adian did not recognize tax benefit in the current quarter associated with their losses, if you recall, during its 2018 and 19 fiscal years, Adian recorded valuation allowances against the deferred tax assets of many entities located in significant jurisdictions in which it operates, including the United States, Germany, Mexico, United Kingdom, among others. No tax benefits are recognized or losses by entities with valuation allowances, and therefore tax benefits were not recognized during Q3 by many entities that incurred losses. One last comment on taxes. Similar to Q2 of this year, adding third quarter effective tax rate was based on an actual tax rate calculation versus an estimated annual effective tax rate calculation. The continued use of this methodology was necessary due to the uncertainty of the pandemic. Now let's break down our third quarter results in more detail, starting with revenue on slide 13. We reported consolidated sales of $1.6 billion, a decrease of almost $2.6 billion compared to the same period a year ago. Lower volume across North America, Europe, and Asia was the primary driver of the year-over-year decrease, again attributed to lost production volume associated with the pandemic. In addition, the negative impact of Currency movements between the two periods impacted the quarter by roughly $100 million. The biggest driver included the Brazilian real, the Czech corona, and the euro. Worth noting on the call-out box on the right, consolidated sales in both Europe and Americas were down substantially at the beginning of the quarter, almost 100% to the Americas in April. Both markets improved month on month as the quarter progressed. exiting the quarter at between 75% to 80% of pre-COVID levels. In China, add-in sales were strong, exiting the quarter, driven by our favorable customer and platform mix. For markets outside of China, in Asia, sales began to improve as production volumes returned, but were materially impacted by this pandemic, similar to what we saw in America and Europe. For each of the markets, add-in sales were in line, or better compared to With regard to Adiant's unconsolidated seeding revenue, year-over-year results were relatively flat. However, as you peel back the onion, the results varied significantly between unconsolidated sales in China versus unconsolidated sales outside of China. In China, driven primarily through a strategic JV network, sales were up 14% year-over-year, excluding FX. The sales performance versus the market is attributable to Adiant's strong mix of business, specifically our exposure to luxury and Japanese OEMs. Outside of China, Adiant has a variety of unconsolidated JVs. These operations were impacted by the same production stoppages that affected Adiant's consolidated results. On average, the unconsolidated sales of these JVs were down approximately 60% plus in the most recent quarter. We were encouraged with the sales trend that's positively progressing, again, similar to what we're seeing with our consolidated sales. Moving to slide 14, we've provided a bridge of adjusted EBITDA to show our performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communication, corporate finance, legal and marketing. Big picture, adjusted EBITDA was a loss of $122 million in the quarter versus $205 million last year. The impact of significantly lower volumes across America's Europe and Asia was the primary driver of the steep year-over-year decline. In addition, and to a much lesser extent, the planned divestiture of Wi-Fi also had a negative impact on year-over-year comparisons. Since Adiant's financial performance was highly dependent on and correlated to vehicle production, adjusted EBITDA showed steady improvement month on month as we moved through the third quarter. In fact, after a horrible April and start to May, our June adjusted EBITDA results were about equal to June 2019, despite sales being down approximately 25% year over year. Speaking of monthly results, Just one more data point. Excluding in April and May, IDM's margins have improved year over year, every month since September of 2019. Back to the quarter, and as Doug alluded to earlier, partially offsetting the significant volume reduction was improved business performance and lower SG&A costs. Labor and overhead performance, a reduction in SG&A costs, lower ops waste, launch and tooling costs, were the primary drivers. The approximate $45 million reduction in SG&A costs were primarily concentrated between EMEA and Americas and included increased efficiencies and positive benefits associated with the deconsolidation of Addy and Aerospace and the divestiture of Recaro. But it's also important to point out a portion of the improvement, call it about $20 million, relates to temporary benefits associated with employee compensation that are not likely to repeat next year. This temporary benefit was included in the net COVID impact of approximately 400 million. Business improvement combined with labor and overhead efficiencies and the lower SG&A helped contain our decremental margins to the mid-teens, call it 16%, even as certain of the temporary cost reductions began to reverse. For example, the benefit associated with furloughing our direct and indirect plant personnel. This outcome was in line with internal expectations, and if you recall, we mentioned on the Q2 earnings call the 13% decremental margin experienced in the second quarter would trend higher as ADEOS operations restarted, but would be contained below the 18% decrementals we typically expect. To ensure enough time is allocated to the Q&A portion of the call, we provided our detailed segment performance slides in the appendix of the presentation. improved business performance, and lower SG&A costs, partially offset by the impact of lower volumes, or more than offset by the impact of lower volumes, is the primary takeaway from the Americas and the MIR region. In Asia, a $15 million improvement in our seeding equity income offset the Wi-Fi equity income from last year, but overall performance was driven by lower volumes and earnings outside of China. Let me now shift to our cash, liquidity, and capital structure on slides 15 and 16. For the quarter, adjusted free cash flow, defined as operating cash flow, less capex, was an outflow of $528 million. There were several factors that had a significant impact in the quarter's cash compared to our Q2 ending balance. Excluding Addian's ABL, these factors included high-level loss productions. Given sales were down roughly 60%, COVID essentially cost us about two months of production in a quarter. We stated heading into the quarter, every month of shutdown cost us approximately $175 million of cash. Therefore, lost production resulted in a burn of roughly $350 million, again, at a very high level. Also, a temporary net trade working capital headwind of approximately $530 million heavily impacted Q3. This working capital outcome was expected with a sudden shutdown and subsequent restart of our operations. In Q3 working capital, headwind is expected to unwind in Q4 and benefit the quarter by approximately $400 million, as noted on the right-hand side of the page. For poll transparency, I'd also remind everyone that in our second quarter, working capital provided an approximate $100 million benefit to cash flow When production immediately ceased, reinforcing Adiant's working capital movements tend to smooth out over a period of time. Moving on, partially offsetting the approximate $880 million of headwinds just mentioned was just over $240 million of dividends received from our China JVs in the quarter. This, of course, was a very good outcome and highlights the value of our strategic joint venture network. In fact, for the full year, the dividends expected from China will be $70 to $80 million higher versus our earlier estimates. In addition to the China dividends, a handful of other positive benefits aided the quarter, such as deferring certain tax payments and VAT-related items, call those benefits around $70 million. Although executing these actions throughout the year enhanced our liquidity and helped us weather the storm, these $70 million of deferrals will need to be paid next year. At the very bottom of the page, you can see we ended the quarter at about $1.2 billion in total liquidity, which included our cash on hand of $1.3 billion plus $155 million of undrawn capacity under our revolving line of credit. Looking forward, we believe Q3 represented our quarterly low point liquidity and would expect liquidity to exceed $2 billion by the end of September before factoring in any potential debt repayment. Key drivers would include cash proceeds expected from previously announced transactions, call it $500 million, additional China GB dividend of $30 million, the reversal of temporary working capital, headwinds, and increased capacity under our revolver. On slide 16, in addition to showing our debt and net debt position, which totaled $4.5 billion and $3.5 billion, respectively, at June 30th. We've also provided a snapshot of Adiant's capital structure. Just a few comments here. We believe this capital structure not only provides flexibility to weather the storm, it provides flexibility to pay down debt after we cycle past the crisis. Subsequent to the quarter close, Adiant proactively repaid the $179 million previously drawn on the revolver. I'd also note that capacity under the revolver is based on a one-month lag, such that Q3 availability was based on May AR and inventory balances. Updating the AR and inventory balances to the end of June increased our revolver availability to approximately $650 million in July, or a bit more than $300 million than reported at the end of Q3. Improving Adyen's cash generation remains a top priority. As Doug pointed out, the actions Adiant has taken and plans to take are designed to improve our earnings and cash flow to be profitable in a smaller sales environment. Once the crisis is in the rearview mirror, we look to pay down various excess debt obligations. Over time, post-crisis, we'd expect to have zero outstanding balance in the revolver and run with a cash balance somewhere in the $500 million to $600 million range. Finally, a few closing remarks on slide 17. First, we expect the global economic impact of COVID-19 will continue to influence the auto industry and Adiant for quite some time. That said, we're encouraged by the green shoots that emerged as we progressed through Q3. Building on the positive trend in vehicle production established in our third quarter, Adiant expects vehicle production across Europe and America to continue to improve sequentially in the coming months. Since Adiant's financial results are highly dependent on and correlated to vehicle production and based on the environment today, we expect Adiant's sales, earnings, and margin performance will also trend higher in the coming months. Specifically, we expect Q4 sales to be in the range of $3.3 to $3.5 billion. Although this implies a 13% decline versus Q4 last year at the midpoint, it's important to remember our sales in North America will be impacted by the launch of the F-150. Adjusted EBITDA for Q4 is expected to range between $180 million and $200 million. At the midpoint, this would be down versus last year's Q4, but significantly less down than would otherwise be implied by the expected decline in volume. Just a comment on our full year adjusted EBITDA, which is not shown, but I'm assuming you'll do the math. I would settle in around $580 million range at the midpoint of Q4's guide. And as you know, it includes an approximate $500 million impact from COVID. I know many of you will be tempted to take the $1.08 billion and use that as your starting point for fiscal 21. Unfortunately, it's not that simple. The biggest factor being production volumes, which heading into our fiscal 21 are very uncertain. More likely than not, we expect volumes to be lower than our COVID adjusted numbers for 2019. In addition, our portfolio moves, such as the sale of Recaro and the expected sale of fabrics and Wi-Fi, will impact the year-over-year walk into 2021. The team is presently finalizing our fiscal 21 plans, which we'll plan to share with you later this calendar year. Moving on and back to Q4, with an adjusted EBITDA, equity income will settle in the $50 million to $60 million range. in line with last year after backing out Wi-Fi equity income of $14 million. Based on our customer line plans, we expect CapEx to be about $100 million. And finally, for free cash flow, we'd expect Q4 to be in the range of $300 to $400 million. With that, let's move to the question and answer portion of the call. Operator, we'll have our first question.

Thank you. We will begin our question and answer session. If you'd like to ask a question, please press star 1. Please unmute your phone and record your name slowly and clearly when prompted. Your name is required to introduce your question. Again, that's star 1 if you'd like to ask a question, and star 2 if you need to withdraw your question. Our first question comes from Brian Johnson with Barclays. Your line is open.

Hi, team. This is Jason Stewart, right around for Brian. I appreciate the color today. I wanted to just first start on the Q4 outlook and specifically on the production side of things. You know, I think some other suppliers are taking a more conservative stance around Q4. It looks like the production assumptions you lined out are more or less in line with third-party estimates. And so I was wondering if you could just comment on your level of confidence around those Q4 numbers. You know, are the schedules you're seeing in the first month here kind of validating those Q4 forecasts that others are putting out?

Yeah. I'll start out, and I'll let Jeff provide the additional comments to answer your question directly. Yes, the schedules that we have in front of us are pretty consistent with what we are anticipating in Q4. As everyone understands, inventory levels for our customers are down. They're trying to replenish the dealers right now. There is a strong desire for our customers to run at peak output, particularly on key models, and certainly we value the mix that we have. I would say the only note of caution that I would have is, as we mentioned in our formal remarks, there's still some volatility, if you will, in the volume in that from time to time our customers are experiencing directly and indirectly COVID related disruptions in the supply chain, not caused by Adiant, but caused by other suppliers. So, you know, that, that, a potential risk that's out there. Certainly, you know, demand is not the risk that we see.

Understood. Okay, thank you for the color. And then second question, maybe a little more medium-term focused. As we look at the operational improvements that you've been able to do year to date, if I recall, coming into the year, you were looking at maybe around $200 million or so of performance improvements at 2020. And then you were actually ahead of that in Q1 before the shutdown started happening in China. And I guess as we look at what you've done year to date, it looks to be more in like the 300 million range of performance at the plan program level. And so, just kind of curious here, as we look over the next several quarters or even year or so, at what point do the comps start to become more difficult to extract performance. And I guess I'm wondering, has the COVID issue, has that allowed you to bring forward some of these performance initiatives? And I guess just how much more runway is there as we look over the next four to five quarters?

I'd kind of break the question into two pieces. Certainly a lot of the performance improvements we expected were in the, I'll say, commercial and and operational improvement of the existing business. There was another element as we improved launch performance, which we have, that would continue to improve our overall performance. The other element that we touched on is ultimately exiting business that was not performing up to our level of, I'll say, tolerance, and then bringing on new business that would bring that next wave of operational improvement. So I think there's ample opportunity for us to continue to go down that path. I think of COVID kind of suspending that for a period of time as we focused on liquidity. You know, we've taken new actions that we have to put into the equation with anticipated, you know, a down market that probably wasn't originally envisioned when we started to articulate our turnaround plan. With regard to is the environment right, I would say the environment is certainly right for our customers to look at cost reductions. If you just look at it from their perspective, they still are making huge investments, particularly in electrification, That was a daunting task. They still have the risk of, you know, fines in Europe if they don't meet environmental standards. That was a daunting task before COVID. COVID in a down market hasn't improved that environment. I know, in fact, in talking with them, it's only increased their appetite to find ways to reduce costs. And when they want to find ways to reduce costs, and maybe even find, as we've mentioned in previous calls, you know, incremental opportunity as customers maybe look to hold on to platforms longer, delay launches, or engineering and capital investment in program replenishment.

Okay. Thank you very much.

Welcome. Thank you. Thank you. Our next question comes from John Murphy with Bank of America. Your line is open.

Good morning, guys. Maybe if I could just follow up on that last question and sort of your discussion there. As you look at this, obviously, as you're going through a rationalization of the business, this kind of disruption can delay things. I'm just curious, in the context of what you're doing right now, are there any net new cost saves or business processes that going forward as the world normalizes might benefit you above and beyond what you were trying to execute before?

So first of all, hey, John, how you doing? I would say, you know, kind of to the point I was trying to make before, maybe I can reemphasize it. Prior to COVID, I think business was you know, somewhat as normal. And our customers were focused on new launch. They, you know, I think weren't particularly interested in cost reduction initiatives. Some were. Some historically always have been. Others were, I'll say, perhaps distracted. I think what, you know, COVID did was create an inflection point for them to recalibrate And when they recalibrated against a down market for the foreseeable coming years, I think they recognized that they really needed to intensify their efforts there. Fortunately for us, we spent probably the last nine to 12 months anticipating that, certainly not envisioning what COVID might, but to my earlier point, that there was going to be a real need for them due to their investments in whether it was electrification or autonomous vehicles or meeting environmental standards, that maybe they didn't completely appreciate. And I think COVID's been a catalyst for them to say, look, we really need to reach out. And this isn't just speculation on my part. This is direct conversations with our customers. I won't say every single customer has come to that conclusion, but I think what we found is we've exposed them to the work that we're doing in that area, and it's some pretty impressive work. I mean, to say it's VADE is just a complete understatement. It's what we call it, only because we haven't come up with a better name. But it's really focused on this concept of return on a capital investment, how to get scale, with the customer without putting in brand new investment, how to do that quickly. There's a tremendous amount of technology on the shelf right now in the area of seeding that does not need to be reinvented, that can be applied more than meet or exceed consumer expectations. And it's really directing the customer to say, look, you should come and take a look at this on your next generation program. We've talked a little bit about one program. We did that with one customer that just launched an electric vehicle, was going to introduce a next generation of an existing platform that's historically been internal combustion. And we said, why don't you just take this new architecture and seating system that you're just launching on an electric vehicle and apply it to this next generation product. In theory, theoretically, that requires zero engineering work on your part, zero capital investment on our part, or minimal at best as we just leverage incremental volume off that and arguably minimal capital investment. That's becoming a much more appealing story to our customers, and I would expect that that's going to continue.

Okay, that's helpful. And then just a second question on the mixed benefit in the quarter. And, Jeff, on slide 14, you went through the walk, and volume mixed was a headwind of $438 million on EBITDA. I'm just curious if you were to split that between volume and mix. I mean, how much of a benefit was mixed in the quarter and how sustainable? Do you at least see that in the near-term schedules or expect it to be over time?

Yeah, good question, John. Good morning. I would say the most of what you're seeing there is just pure volume impact. Mix wasn't a huge portion of that 438. Okay. It relates to the mix for our fourth quarter. It's probably a little bit down, or unfavorable for us, just given the launch of the F-150 and how production will go on that. But I'd say for the quarter, I'd take that 438.

The vast majority is for your modeling purposes, I'd call it volume. Okay, that's helpful. And then if you could just, I don't know, illustrate or elucidate where you think 2021 will land in the context of you talking about trying to get to breakeven-free cash flow in FY21. What is sort of the thought process or the business environment that you're fighting to get to that level in?

Well, you know, I'd say that, you know, there's a lot of components to that, and some of them are still being, you know, worked as we complete our 2021 plan, John. But, you know, the As we look through a couple of, you know, dynamics here, we've taken a big chunk out of our cost structure, you know, with the activities. We've decentralized the company and those benefits, you know, some have hit, you know, this year, but we'll have a full year run rate in 2021. That's going to be a big piece. I think there's going to be opportunities on CapEx, you know, where we won't be spending at the historical level, The SS&M business, that's becoming a, you know, the improvement level in that business is significant, you know, with a business that had cost us on a simplified free cash flow to call it $450 million in 2018, 2019 timeframe. It's probably half of that, a little bit, you know, give or take this year. And we'll end next year close to breakeven, or we expect it to be really breakeven by the end Those are going to be big components of the free cash flow story for us next year. But, you know, there's some more work to do for us. It's also the continuation of the improvements that you've seen, you know, Doug talked about. We're seeing, I'd say, from a program perspective, as I sit through, especially big program reviews, the team, not only their command of the data better, you know, all of it's coming through with So, those are all key components, but I'd say we're pretty optimistic about it. The big challenge for us next year, quite frankly, is going to be Europe in general. There is, depending on where the market turns out for next year, we talked about it, Doug talked about it a little bit earlier, but the European market is expected to be Dealing with next year, we are going to have some elevated restructuring costs in Europe.

Great. And just one last housekeeping. What's the minimum liquidity and cash that you're looking for, Jeff?

Yeah, I'd say, you know, we'd like to see cash, give or take, around the $500 to $600 million mark. And, you know, we're going to have, in a healthy time period, around $1 billion on the ABL. and we would expect that to be undrawn. So give or take a billion and a half or so on a normalized basis. And we expect quite a bit over that as we end the year with the transactions, the working capital swing back, and just the ABL kind of rebuilding the asset base primarily from accounts receivable.

Thank you very much.

Thanks, John.

Thank you. Our next question comes from Rod Lash with Wolf Research. Your line is open.

Good morning, everybody. I wanted to ask just two questions. One is trying to think about what your Q4 guidance implies for prospective EBITDA run rate. So ex-equity income, if you use the midpoint, your guidance is about $135 million or $540 million annualized. Can you just remind us, you know, what is the seasonality of that? Are there settlements that typically come in in your September quarter, maybe some rough estimate of what the F-150 impact is? And as we extrapolate and think about next year, 75 to 100 million of savings savings Is that a net number, or should we think about non-recurrence of some of the austerity measures this year, maybe subtracting from that?

Yeah, I guess I'll work backwards a bit, Rod. But the 75 to 100 is a net number. We expected – and that's not necessarily from our Q4 cost base, although there will be incrementals to that too. But from pre-COVID level cost base, we see that as – Some of those costs are going to take, you know, the time period for Europe, which is going to be a significant portion of those cost reductions, just with the environment on doing restructuring in Europe, takes some time to enact. So I would expect a lot of those savings won't start to run right until second or third fiscal quarter for us next year. Some have already started to occur, though, today, so it's a bit of a mix. As it relates to the fourth quarter, this is a pretty uncertain time, I'll be honest, and we opted to put guidance in here. As we look to 2021, I would say you can't necessarily use our Q4 as a guidepost for it. The F-150 is a big impact for us in the quarter. over in September, and that's going to bring down the old line, and as we start the new with launch costs and have essentially dwindling production on the old, all that will have a big impact on sales and profitability in our Q4. So I would say more to come, Rod. We'll give you more color on our fiscal 2021 plan on our next earnings call, but I would just say the fourth quarter on doing the math.

Okay. Is there a seasonality to settlements or something like that that we need to keep in mind or no?

I'd say most of them sort of happen through the year, but if there's a seasonal point to it, it tends to be in our first quarter, the calendar year end quarter.

Okay. That makes sense. And then lastly, the 50 to 60 million equity income in Q4, you said that that excludes Wi-Fi. Just given that China is is recovered quite a bit more. Is that a reasonable run rate or something we can extrapolate from? How should we be thinking about the drivers for next year? And is your payout math changing? It looks like this year you're getting more than the typical 70% or 80% from that market.

Yeah, there's a lot of pieces to that question, I suppose. But the payout math was higher this year. If you recall, we were also doing the transaction – And the change in AYM, sales of the IP, we were able to extract a higher dividend in particular out of that metals venture, the AYM venture. So our payout ratio is significantly higher in 2020 than I would expect necessarily going forward that we've experienced going forward or in the past. So that was a positive for us this year that we were able to pull ahead. As it relates to the I guess China market. We continue to do well. I'd say this past quarter turned out to be better than expected as COVID rebound was strong. We anticipate that this quarter will be positive as well. Let's see where the run rate actually comes out for Q4, but I would say we do have some seasonality in that business from earnings. They tend to have pretty strong fiscal Q1 in general. Our first quarter of our fiscal year, the last quarter of the calendar year tends to be a little strong, so you can't necessarily annualize one quarter there.

Okay, great. Thank you.

Thanks, Rob. Thank you. Our next question comes from James Piccarello with KeyBank Capital Markets. Your line is open.

Hey, good morning, guys.

Good morning, James.

On the timing of the $700 million wind down in unprofitable sales, is that over the next 12 to 24 months? And is there any material air pocket we should be considering with respect to the replacement of that unprofitable mix with new programs and conquest ones that you called out?

Well, I mean, I guess the one thing I would point out, James, is The $700 million that we're going, essentially Doug talked about that we're giving up, is business where we have a negative, in total, a slightly negative ROS on. So from an air pocket standpoint, when it goes out, it's not like it's just lower profitability. It's actually slightly negative. So getting that business out will be an improvement to our overall EBITDA, not just our margin. As it relates to the new business coming on, it does launch over. you know, it's not at one point. There's several programs that are involved, but I would imagine you should model out this all takes place over the next two to three years.

Yeah, with with no, you know, my interpretation of air pocket is no major void in in that time frame as somebody rolls out. It's it's pretty blended over that time frame.

Got it and then maybe just a a a flavor on an SSM update. Tying back to the $700 million that you're winding down or exiting, what portion of that attributes to SS&M? Is that business still on track to exit that targeted whatever $400 million in Tier 2 business over the next two and a half years? Or are you seeing more profitable replacement activity still within SS&M? Is that trending maybe better than expected in terms of the renegotiations? renegotiations and new contract lines.

Yeah. Again, maybe I'll try this backwards and obviously Jeff can chime in. So as Jeff mentioned, the business is improving. That is a combination of commercial settlements that essentially are now behind us other than normal course issues that arise unresolved pricing that we had. I think where we've seen improvement is in faster than expected operational improvement, particularly in Europe, but also in North America. So, you know, that business is aligned with our original formal statements about that getting to, you know, cash flow neutral in the, you know, on a run rate at least, you know, in the 22 time frame. When it comes to loss and replacement, there are metal and mechanism business that are part of the loss, but there's also new business coming on in that area in metals and mechs as well. That one has always been for us a customer-related issue. And what we've been moving away from is trying to win metal and mechanism business that are these mega programs that are going to go across a number of platforms, a number of regions, with a single customer, some of which would be sold to our competitors, versus programs where we have an element of vertical integration. Some of our customers still source complete seats and allows us the opportunity to make or buy on the metal and mech. It's not as easy to talk about it in terms of just you know, product segments. But I would say there's nothing significant in what we're talking about right now that is deviating from our original plan. We still plan to scale that business down over time. Revenues may come down a little bit quicker on it as a result of, you know, post COVID volume assumptions versus what we originally had planned that Talks to some of the restructuring activity that we're going to take in that segment. So I think that's covering most of the question. I don't know. There might be a piece I might have left out.

Certainly no, that's that's no, that's very helpful. Thanks guys.

Amanda, if we could take our last question.

Thank you. Our last question comes from Jeff Speck with RBC Capital Markets. Your line is open.

Thanks for squeezing me in here. Jeff, maybe if we back out sort of what you identified as the COVID costs from this quarter and last quarter, right, you have the adjusted EBITDA down slightly and then the guidance is down slightly again. And I understand there's some maybe unique stuff in the fourth quarter, but Can you just help us understand that in the context of sort of the underlying turnaround program? Because at least between the March and June quarter, it seems like you are, with that COVID adjustment, you know, adjusting for the volume differential.

I'm not sure I totally follow your question, but yes, I would say, you know, we are adjusting for the volume differential. And most $400 million in the quarter, $500 million year-to-date, is due to significantly lower volume in the pull-through expected that would have been expected from that volume. Tell me if I think I missed the nuance.

I guess if we just back out the $100 from the March quarter and the $400 from the June quarter, then EBIT does tilt down sequentially, I guess. I thought there's some more underlying traction. Maybe it's some difficulty in sort of separating, you know, what you guys are sort of doing underlying from the volume, but I'm curious as to the explanation for, you know, why the sort of sequential drop-off.

So, okay. The, you know, I think it's primarily going to be sales, Joe. So, at the end of the day, if, you know, you're pulling somewhere high teens on the revenue, I believe you get you know, yeah, the 400 million, but this is also sort of a weird quarter in the sense that it wasn't all just volume and it's hard to totally articulate what the cost of COVID impact is. We had plants, especially at the beginning, that would run for a little bit. You know, there'd be maybe a COVID case. We'd shut down the plant. We'd clean it. We'd go through the process. We, you know, ran things inefficiently in this particular quarter. But I think when you cut through all of that, We are seeing, you know, we continue to see, you know, positive improvement from the operations. There's a lot of noise that's around COVID. And as you have, I'd say, the abrupt stop and kind of a really spotty restart, especially at the beginning, I think it created a lot of inefficiencies that ran through the numbers that are difficult to quantify and talk about. But, you know, maybe it's what's impacting the analysis you're doing.

Okay. And then just real quick, the actions on slide 10, can you give us some insight into, you know, some of the industry planning that went into that? Because you talked about sort of your customers were finding for lower volumes. And are these actions that are aligning to that or actions that, you know, to be frank, probably could have been done anyway?

Maybe I'll start on the top on the above part. the stuff we've been doing more in the operations. But I'd say the above-plant stuff, we took a very significant chunk out of corporate. And I'd say this has been the path we were on. We just used COVID as an opportunity to accelerate a lot of the actions. But we've been on a process here the last couple of years since Doug's joined to decentralize the company, put more power in the region, which has served us well. But in taking those moves, we did amp up the speed of them. And then I don't know, Doug, if you want to cut through there.

Yeah, I would, I mean, to answer your question, I would say it is, if you carve out the actions that were taken in Europe and set that aside, that is primarily, you know, volume-related actions. and then you look at everything else discussed on the page, you could argue some of it is independent of COVID. This is just us being much more operationally focused, looking for opportunities to consolidate facilities. A lot of what we're trying to communicate there, and it's just a partial list, is this whole concept of asset utilization and simple things that we point to about you know, flexing our manufacturing cells in the case of, you know, weld cells, so that as we bring new programs in, we're not reinvesting, we're looking at ways to flex lines. You know, that is something that we have greatly improved upon over the last few years, and I think there's still more opportunity there. I would say that's independent of COVID. manufacturer, you know, does COVID act as a catalyst for us to dig deeper? Absolutely. So there is an indirect relationship there.

So hopefully that provides a little bit more color to your question.

Yep. Yep.

Thank you very much. Great. Thanks, Joe. Amanda, it looks like we're at the bottom of the hour. So this will conclude the call for today. I know there was a couple of questions that we did not get to. Please feel free to reach out to myself. I'm available for follow-up questions. And again, thank you very much for participating in the call this morning. Thanks, everyone. Thanks, everyone.

Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.