Adient plc

Welcome, and thank you for standing by. At this time, all parties are in a listen-only mode until the question and answer segment of today's conference, at which time you may press star 1 on your touch-tone phone to ask a question. I would also like to inform all parties that today's conference is being recorded. If you do have any objections, please disconnect at this time. I would now like to go ahead and turn today's call over to Mr. Mark Oswald, sir, you may begin.

Thank you, Jacqueline. Good morning, and thank you for joining us as we review adding results for the fourth quarter in full 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 Stafile, 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 fourth quarter and full year financial results. In addition, Jeff will provide our outlook for fiscal 21, 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 presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of 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 as we review our fourth quarter results and outlook for fiscal 2021. I hope you and your families are staying safe and healthy in these difficult times. Turning to slide four, let me begin a few comments related to fourth quarter, specifically adding a strong finish to a challenging fiscal year. Remaining focused on our priorities combined with increasing vehicle production continued to drive improved business performance in the most recent quarter. Q4's adjusted EBITDA, $287 million, was up $72 million, or 33% year-on-year. No doubt a strong result, but even more impressive when you consider ADEON's consolidated revenue was down about 8% in that same period. Lower year-on-year global vehicle production and At the end, specific launches were primary drivers of the lower sales. On the far right-hand side of the slide, you can see our cash and liquidity. We're extremely strong at September 30th. Total liquidity of about $2.5 billion made up of cash on hand, approximately 1.7, and approximately $800 million of undrawn revolver capacity. As noted and included in our cash on hand, is the approximate $500 million of cash proceeds collected during the quarter from closing on our previously announced strategic actions. With our operations restarted, vehicle productions trending higher, and proceeds from our previously announced strategic actions in the bank, the team began to voluntarily pay down a portion of the company's outstanding debt. Just over $103 million in principle of Etienne's 10-year 4.875% senior unsecured notes were repurchased using just under $100 million cash. Again, a strong financial finish to the year. Jeff will provide additional details on Etienne's Q4 and full year's financial performance in just a few minutes. Turning to slide five, Focused and resilient are the two words that come to mind when describing Adiant in fiscal 2020. Those traits were instrumental in enabling the company to deliver on its 2020 commitments. As the year began, the team was focused on advancing the company's turnaround plan. Launch management, operational improvement, continued cost reduction, and commercial discipline were cited as key enablers underpinning the expected improvement in Adiant's business performance. With our operations and financial results steadily improving, the team pivoted and began to execute on a number of strategic actions, including the closure of our transactions with our joint venture partner, Yantang, the sale of our fabrics business, and the sale of Recaro's automotive seating. In addition to these portfolio adjustments, the team also began efforts to de-risk the balance sheet, as mentioned just a few minutes ago. While executing the company's 2020 plan, Adiant's resiliency was brought to light as the team successfully managed through significant obstacles brought on by the global COVID-19 pandemic. The slide highlights certain of the measures the team took throughout the year to mitigate COVID's negative impact. Many have been discussed on prior calls. Bottom line, executing and delivering on plans within our control by managing through unplanned obstacles, as we did in 2020, positions EDIET for sustained success and, equally important, drives value to our future shareholders. Turning to slide six. Although the team is proud of the accomplishments achieved in 2020, we've turned the page and are now focused on 2021 and looking forward to build on that progress. The graphic on slide six should look familiar since ADDIAN's expected earnings growth in fiscal 21 is underpinned by the same focus areas that drove improvement last year, namely launch management, operational and cost improvement, and customer profitability management. Let me spend a few minutes discussing a few of these focused areas in more detail in slides seven and eight. First on slide seven, launch management will remain a key pillar supporting Addion's turnaround. The team made significant progress in 2020, delivering several flawless launches throughout the year. We plan to stay vigilant to ensure that the best-in-class launches continue. That said, given the significant progress made throughout the last 12 months, the contribution from launch management to our expected earnings growth this year will be less impactful compared with contributions from costs and operational improvements in our customer profitability initiatives. With regard to costs and operational improvement pillars, we've identified a number of initiatives the team is executing to drive improved business performance and ultimately earnings and cash flow growth. These initiatives span across the organization and include improved capacity utilization, especially within certain of our foam and trim facilities, align our manufacturing footprint to sales projections. In Europe, for example, we do not expect volumes to return to pre-COVID levels for a number of years. In fact, certain third-party estimates predict production in 2025 will be below 2019 levels. As such, we're spending a fair amount of time and dollars restructuring the region. Purchasing is another area of opportunity. Ensuring the business units and purchasing organizations are well aligned, including better make versus buy decisions is expected to drive significant performance enhancements in 2021. In addition to these actions, we tend to produce results relatively quickly. We're also focused on how we can position the company to ensure improvements continued several quarters down the road, initiatives such as design for manufacturability, where we're engaging the plant teams early in the design phase to reduce labor costs and improve quality, increase in automation and technology, again, looking toward the future to ensure improved cost and quality. On the commercial and customer profitability front, we turn to slide eight. Again, several initiatives are well underway. It begins with our mindset. We want to become the supplier of choice for our customer in many ways, and we're along that journey. As mentioned on previous calls, we spent significant time understanding the profitability associated with specific platforms and relationships with those customers. This has resulted in the team better understanding who they want to grow with. Of course, this needs to be profitable growth metrics such as return on capital employed continue to drive program bidding for new and incumbent business. For programs in production that are margin challenged, the team is focused on opportunities to improve margin profiles. We refer to this as our leakers and bleeders. One of the tools the team uses to enhance margin profile are VAVE initiatives. The process has evolved significantly over the past several months into what we now refer to as cost and technology optimization. The team gathers inputs from various sources, such as J.D. Power, VAV workshops, market research, IHS ratings. By bundling and leveraging this available knowledge, we can create opportunities and value for our customers to improve market performance and increase audience value-add. Moving to slide nine. spent a fair amount of time this morning discussing our 2020 accomplishments and how we plan to build on that progress in the new year. The key component of progress to date, expected improvement, relates to seat structures and mechanisms business. Although the SSNM business is managed regionally and is included in the Americas, EMEAs, and Asia regional performance, I want to take a few minutes to provide a brief update on SSNM. The turnaround is solidly on track. The operations made steady improvements in fiscal 2020 and continue to trend toward being free cash flow neutral as we exit fiscal 21. As a reminder, free cash flow calculations is a simplified definition, essentially adjusted EBITDA for the unit less capex. During the most recent year, we were able to cut 2019's free cash flow burn which was approximately 400 million by more than 50%. This was accomplished by improving both the profitability of the business as well as reducing its capital expenditures. We expect continued progress driven by continuation of our target business selection process improving cost competitiveness, essentially fixing the underperforming plants, creating cost-efficient designs, and reducing our above-plant cost structure, making better make-or-buy decisions, which will aid in asset utilization, ultimately improved earnings and focus on asset utilization to improve free cash flow for the business. Switching gears and moving to slide 10 and 11, Let me provide a few comments on Adiant's recent business wins and the status of our launches. On slide 10, you see new business wins, which clearly show our continued focus on capital allocation, return on capital, and targeting new or incumbent business has not limited our ability to secure business. We've highlighted a number of recent program wins here, including the replacement business for the Jeep Wrangler, Jeep Gladiator. New platform wins, including Tesla's Model Y, Future EV program at Ford, Ford Transit, and Geely Daimler Smart. In addition to those programs pictured on the slide, Adiant recently secured business awards for an undisclosed European manufacturer that is non-incumbent business, two GM future product programs, which include an all-new EV program, a replacement business for Chevrolet and Buick crossovers, and also a GMC crossover, which is non-incumbent business to Addiot. As our new book of business continues to launch, we expect to balance in, balance out platforms to further enable margin expansion. One additional note, as we've secured business over the past several quarters, we've also experienced content growth for certain of our new incumbent wins. For example, include the addition of FOE, to the new Ford F-150 and trim to the Nissan Pathfinder. Flipping to slide 11, we've highlighted several critical current and upcoming launches, including Ford F-150, Mustang Mach-E, Nissan Rogue, to name a few. I'm happy to report the launch is currently underway, including the F-150, one of Etienne's largest programs, and they are progressing smoothly. The second F-150 manufacturing location in Riverside, Missouri, is also well-prepared for its first quarter launch. As mentioned earlier, the team has made significant improvements to our launch management over the past several quarters. A strong focus on process discipline around launch readiness is underpinning EDIAN's successful performance. At the bottom of the slide, we provided how fiscal year 21's launch volume and complexity compared to last year. Although volume and complexity are trending higher, especially in America's region, we feel the team is well prepared. Actual launch performance over the past few quarters provides positive proof points. Turning to slide 12, let me conclude my comments with an update on various macro factors we're watching that will likely impact the industry in Addion's fiscal 21. On the positive side, continued monetary stimulus expected to result in positive economic growth. Global vehicle production and mix remain strong, driven by improved consumer demand and a rebuild of inventory. And it appears advancements are being made with regard to COVID treatment and vaccines, all of which is very good news and supportive of the industry. Factors we are watching. that are tempering expectations include the resurgence of COVID-19 cases across Europe and the Americas, labor shortages, which have become increasingly the concern since we restarted our operations in Q3, risk to the supply chain, although it's great to see vehicle production in the U.S. reach annualized levels of 16 million units, like we experienced in the fourth quarter. These sharp increases unfortunately put strains on the system. in an uptick in premium freight and increases in prices for certain commodities such as steel and chemicals. To sum it up, we're entering 21 with an encouraging backdrop, driven by our self-help initiatives and improving vehicle production. We expect to encounter challenges along the way, much of which we did in 2020, but be assured the team is ready to work hard to mitigate the headwinds that may arise. With that, I'll turn the call over to Jeff so he can take us through Eddie's fourth quarter 2020 financial performance and our specific outlook for 2021 in greater detail.

Great. Thanks, Doug, and good morning, everyone. Let me echo Doug's earlier comments and hope everyone is safe and well. And starting on slide 14, adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side. We will focus our commentary on the adjusted results, which exclude special items that we view as either one-time in nature or otherwise skew important trends in underlying performance. For the quarter, the biggest drivers of the difference between our reported and adjusted results relate to restructuring cost, asset impairments, purchase accounting amortization, and pension mark-to-market. Details of these adjustments are in the appendix of the presentation. or $3.6 billion, down 8% year-over-year, which as Doug noted, was driven by lower year-on-year global production and specific adjunct launches. Adjusted EBITDA for the quarter was $287 million, up $72 million, or 33% year-on-year, more than explained by improved business performance, lower SG&A, and an increase in equity income. Speaking of equity income, which is included in our adjusted EBITDA result, Q4 2019 included $14 million of income related to our interiors JV that we sold earlier this year. Therefore, on an apples-to-apples comparison, Adyen's seeding equity income was up $28 million or 47% year-over-year. Finally, adjusted net income and EPS were up significantly year-over-year at $109 million and $1.15, respectively. I'll also point out that a tax benefit contributed to the year-over-year improvement in net income. This tax benefit was driven primarily by the write-offs of certain deferred tax liabilities relating to the sales of Wi-Fi and Addian's Fabrics business. As a reminder, Addian's effective tax rate is currently quite volatile and arguably provides little value as you model the company, given the valuation allowances recorded in recent years. As such, we'll continue to focus more on cash taxes. Full year results are shown on slide 15. Sales at $12.7 billion finished the year down approximately 23% compared with 2019. The significant impact of lower vehicle production, particularly in our third quarter as the COVID-19 pandemic caused production stoppages at our customers, was the key driver in the year-over-year decline. The significant reduction in volume more than explained the $114 million decline in EBITDA. Partially offsetting the negative volume were the benefits driven by the continued execution of the company's turnaround plan. Although year over year earnings improved significantly, excuse me, although down year over year, earnings improved significantly in early 2020, fiscal 2020, prior to the impact of COVID-19. and during Adyen's fourth quarter where the impact of the pandemic lessened. And finally, the decline in operating income resulting from lower volumes dropped directly to the bottom line as adjusted net income and EPS were a loss of $4 million and $0.04 respectively. Now let's break down our fourth quarter results in more detail. Starting with revenue on slide 16, we reported consolidated sales of $3.6 billion a decrease of $324 million compared to the same period a year ago. Lower volume across North America, Europe, and Asia, primarily attributed to lost production volume associated with the pandemic, was the key driver of the year-over-year decrease. Add in specific launches also contributed to year-over-year sales decline, but to a much lesser extent. Worth noting, the call-out on the right, consolidated sales in the Americas was negatively impacted by production downtime for the Ram Classic. In EMEA, adjusting for the divestiture of Recaro automotive seating, Adiant's sales were generally in line compared to the production within the European market. In China, Adiant's sales were strong and outperformed vehicle production in the region. Adiant's favorable customer and platform mix continues to drive growth over market in the region. For markets outside of China and Asia, Adiant's sales were impacted by export reductions in Thailand and Japan, primarily related to certain Nissan and Mitsubishi programs. The divestiture of Recaro Automotive seating in Japan was also a contributor to the year-over-year decline. With regard to Adiant's unconsolidated seating revenue, year-over-year results were up approximately 15 percent. driven primarily through our strategic JV network. Sales were up 18% year-over-year, excluding FX. The sales outperformance 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 perform generally in line with production in the regions. Moving to slide 17. we provided a 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 operation, such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was $287 million in the current quarter versus $215 million last year. Key drivers of the increase included improved business performance which consisted of lower labor and overhead, freight and ops waste, lower SG&A cost across all regions, driven by increased efficiencies and the positive benefits associated with the deconsolidation of Adiant Aerospace and divestiture of Recaro. Also important to note, between 5 and 10 million of the SG&A savings should be viewed as temporary and are not expected to repeat next year. And in Asia, a significant increase in seeding equity income also contributed to the year-over-year increase in EBITDA. Speaking of equity income, last year's EBITDA of $215 million included $14 million of equity income related to the Wi-Fi investment we sold and stopped consolidating last December. Partially offsetting the positive factors just noted was approximately $55 million of headwind related to lower volume and mix. I'd like to point out that our adjusted EBITDA margin, excluding equity income, increased by just under 200 basis points year-over-year to 5.5%. A good proof point, Adyen's core operations are benefiting from the numerous turnaround actions executed to date. I would caution, however, certain of the macro factors that benefited Q4's margins are likely unsustainable, such as the extremely rich mix of production. As Doug mentioned, we see certain headwinds on the horizon, such as rising commodity prices and an uptick in premium freight that the team will need to manage through in the coming quarters. More on our 2021 expectations in just a minute. To ensure enough time is allocated to the Q&A portion of the call, we've provided our detailed segment performance slides in the appendix of the presentation. Let me now shift to our cash, liquidity, and capital structure on slides 18 and 19. Starting with cash on slide 18, for the quarter adjusted free cash flow defined as operating cash flow less capex was $450 million. There were several factors that had a significant impact on the quarter's cash compared to our Q3 ending balance. These factors included at a high level, first, just under $500 million of cash proceeds collected from the closure of the Yanfeng transactions and the fabric sale. The reversal of temporary net trade working capital headwinds experienced in Q3, higher level of operating income, and partially offsetting these positive contributions was just under $100 million of cash used to voluntarily pay down $103.5 million in principal of Adiant's 10-year 4.875% senior unsecured notes. On the right-hand side of the slide, you can see we ended the quarter end year with approximately $2.5 billion of total liquidity comprised of cash on hand of about $1.7 billion and just under $800 million of undrawn capacity under Addient's revolving line of credit. Just one more point to make before moving on. You can see within the table Addient's capital expenditures for the year total $326 million. down $142 million year on year. The team continues to work extremely hard to reuse capital where appropriate, especially within the SS&M business, where capital spending was down just under $100 million compared to the last year. Moving on and turning to slide 19. In addition to showing our debt and net debt position, which totaled $4.3 billion and $2.6 billion respectively at September 30th. We've also provided a snapshot of Adiant's capital structure. Just a few comments here. Adiant's capital structure provided us with the flexibility to weather the COVID storm and is now providing ample flexibility to voluntarily pay down debt, which we began during the fourth quarter with $103.5 million in principal pay down of Adiant's 10-year 4.875% unsecured senior notes. As uncertainty related to the crisis lessens over time, we'd look to pay down additional debt obligations. As mentioned on past calls, over time we'd expect to have zero outstanding balance on the revolver and run with a cash balance somewhere in the $500 to $600 million range, which points to significant opportunity for debt pay down in fiscal 21. One final note on the slide and related to our ABL. Capacity under Adiant's revolver is based on a one-month lag such that Q4 availability was based on August AR and inventory balances. Updating the AR balance and inventory balances to the end of September increased our revolver availability to just under $900 million in October or approximately $100 million more than the $787 million available at quarter end. Moving on, slides 21 through 24, let me conclude with a few thoughts on what to expect for fiscal 2021, starting on slide 21. On the right-hand side, we've laid out our planning assumptions for production and FX compared with fiscal 20. The production assumptions are based on the current environment and could be significantly different if a production stoppage occurred. We are not forecasting such a stoppage However, with the escalation in COVID cases, it remains a possibility. As Doug noted earlier, our current expectations assume global vehicle production will continue to trend higher, increasing year over year in each of the major regions. The foundation of our 21 plan is generally aligned with the October IHS estimates with certain overlays for known customer release schedules. Although vehicle production schedules have remained robust entering fiscal 21, Etient assumes second half Fiscal 21 production will decline compared with the first half of 21 production, which is also aligned with IHS forecast. On the far right side of the table, you can see how we expect our sales to perform by region relative to production. Bottom line, Adyen's consolidated sales are expected to outpace global vehicle production growth by roughly 300 basis points. If you adjust for the Recaro and Fabrics divestitures completed in fiscal 20, growth over market would be roughly 400 basis points. Within the regions, growth over market is expected in both Europe and China. In North America, certain fiscal 21 headwinds, such as Tesla's decision to insource their seat manufacturing and lower volumes at Nissan, will likely result in sales lagging production growth. Now I'll review these assumptions and how they impact our 2021 outlook beginning with sales on slide 22. We've included a bridge that walks our fiscal 2020 sales of $12.7 billion to our expected 2021 sales range of between $14.6 billion and $15.0 billion. Volume and mix are expected to have the greatest impact on our 2021 performance due to the overall industry growth. Outside of volume, Adiant's positive backlog of new business and FX are expected to have a positive impact of between $350 million and $400 million for the year, partially offsetting the positive factors of the divestitures completed last year, as well as customer pricing headwinds. Now, turning to slide 23, we've also included a high-level bridge illustrating our expectations for adjusted EBITDA. Walking from our fiscal 2020 results of $673 million, which included $408 million of consolidated EBITDA, we expect several factors will influence Addion's performance in 2021, many on the positive side, including benefits driven by continued execution of the company's turnaround plan, specifically related to operational improvements, cost containment, and customer profitability management. Higher volumes will also be a significant driver to improved year-over-year profitability, complementing Addion's self-help initiatives. These positive influences are expected to be partially offset by approximately $150 million of headwinds. Certain of these headwinds are macro-related, while others are specific to Adiant. For example, rising commodity costs, specifically for chemicals related to our foam operations and steel, are estimated to be an approximate $50 million headwind. Launch costs associated with both the volume and complexity of launches, although not significant, are expected to be approximately $20 million more in fiscal 21 versus fiscal 20. Add in portfolio adjustments, namely the elimination of our interiors equity income and the sale of our fabrics business will create a gap of approximately $20 to $25 million. And finally, the non-recurrence of temporary benefits recognized last year as we pulled every lever within our control to cut costs and reduce our cash burn during the pandemic, such as furloughing our direct labor, implementing salary reductions, and suspending the 401 plans. I'd also mention Brexit as a development we're continuing to watch closely. However, given the many moving pieces and uncertainty surrounding the event, placing an estimated dollar headwind is not possible at this time. Bottom line, When sifting through the puts and takes, we expect adjusted EBITDA to increase to between $1.0 and $1.1 billion in fiscal 21. Our consolidated adjusted EBITDA at the midpoint is expected to be about $800 million, with a corresponding margin of 5.4%. This expected outcome is approximately $390 million better compared with last year. Important to note, this forecast is based on the current operating environment. Specifically, we are not assuming production stoppages that may occur from supply shortages or customer downtime that is possible given the uptick in COVID cases taking place, particularly across Europe and the Americas. Now that we've covered our fiscal 21 expectations for sales and adjusted EBITDA, let me quickly comment on our expectations for a few other key financial metrics on slide 24. Starting with equity income, based on our assumption of production in China, the elimination of Wi-Fi interiors, equity income, and current FX rates, we'd expect equity income to be around $250 million, about flat compared with fiscal 20. Again, this is seeding only. The negative impact of commodity prices is the primary reason for the relatively flat year-over-year expectations. Important to note, we're expecting equity income to be particularly strong in Q1 as the market continues to make up for losses earlier in the year due to the pandemic. Interest expense based on our expected cash balance and debt should be approximately $235 million. Cash taxes in fiscal 21 are expected to be around $85 million, which is slightly less than we paid in fiscal 20. It's important to remember that we maintain valuable tax attributes, such as net operating loss carry-forwards, and that these tax attributes can be used to offset profits on a going-forward basis so we expect cash taxes to remain low even as profits are increasing. To assist with your modeling, although volatile with fluctuations between quarters as mentioned earlier, we're expecting an effective tax rate to be around 30 percent for fiscal 21. We'd expect that rate to fluctuate on a quarterly basis due to valuation allowances in our geographic mix of income. Capital expenditures are forecasted to range between $320 million and $340 million essentially in line with fiscal 20 results. Although we see opportunity to reduce capital expenditures further in the out years, driven in part by a smaller SS&M business, the current year expenditures are supporting current launch plans. And finally, one last item for your modeling, free cash flow is expected to range between break-even and $100 million in fiscal 21. There are several one-off factors driving this result for 21, such as An elevated level of cash restructuring, which is expected to be around $200 million. The elevated spend, which is about two times our normal run rate, is necessary as we execute actions to right-size the business, especially within our European operations, where external and internal production forecasts remain below pre-COVID levels for a number of years. In addition to an elevated restructuring spend, The 2021 free cash flow is negatively impacted by approximately $60 million of tax payments that were deferred from last year into 2021. Stripping out these one-offs, Addient's free cash flow in a more normal year would have been expected to range between $160 to $260 million, keeping all the other factors the same. With that, let's move to the question and answer portion of the call. Operator will take the first question.

All right. Our first question comes from John Murphy. Your line is open.

Good morning, guys, and thanks for taking the question. I have a number of questions real quick. On EVs, obviously it sounds like Tesla's insourcing their seating. I'm just curious, is there anything else that you think could shift as the market heads towards EVs, or is this a net neutral ultimately to you? I mean, how do you think about that?

I think Tesla insourcing in the US is unique to them. It's a decision they made. It was a make-by decision. We still retain a fair amount of content. And in fact, it's been a bit problematic for them. We've continued that production for an extended period of time as they've looked to make that move. In contrast, in China, it's not the approach they've taken. They recently awarded us the Model Y. It's been an extremely successful launch. And in Europe, it's too early to comment on what their strategy is. We are picking up a significant amount of content on the product in Europe. I don't really see that being a trend anywhere else. I think one comment I would make on the transition to alternative propulsion system. As many of our customers, as you know, John, are really re-looking at their product plans and the cadence of launches. And it's going to be interesting to see how fast they accelerate that conversion. I think it's happening quicker than what we anticipated. But from a seating perspective, we've always said we're somewhat agnostic. A seat that goes into an EV or a hybrid vehicle is essentially the same. There's some minor technical differences, but essentially the same. So long-term, we don't really see an impact on us, though we pay a little bit closer attention as that conversion happens to make sure we're on the right platforms.

And then just a second question. Jeff, you kind of alluded to So the risk of supply shortages or disruptions as a result of COVID, obviously, this is an impossible situation for any of us to call exactly. But is there anything that you're seeing at the moment, maybe in Mexico or Eastern Europe or China, where you're actually seeing sort of flashing yellow or red signs in the supply chains?

Yeah, John, this is Doug. I'll take the question to start out with, and then, you know, Jeff can comment. So, relative to the supply chain, when COVID first hit, we put in, like many others, you know, a dedicated group that tracks all of our supplier activity on a daily basis. And we look at the number of indicators where problems can arise. try to be a little bit proactive. We don't wait for something to happen, then put a contingency plan in place. And the factors include, we look at what the financial stability was of any high-risk supplier that we had, where they're operating, is there regional risk from COVID? We track COVID infection rates and government lockdown activities to see what we could expect. As you would imagine, there's a number of yellow and red areas. Mexico has been an area of concern as COVID's impacted that region, particularly along the border and Juarez. I think the other element that we have is we're working extremely close with our customers to mitigate those risks. And so far, we've been extremely successful. And in Europe, as governments have taken lockdown actions and infection rates have come down, we feel a bit more confident that the supply chains are protected. But quite frankly, it's a daily battle. And what I think is good about what we're doing is we've committed dedicated resources It's not a purchasing activity with us. It's a business activity, so that activity includes our operations and them working very closely together. We take steps, in the case of Mexico, to mitigate the risk by moving production to less infected regions and coordinate that with our customer to protect the supply line.

know that that's just something that's now become normal course of business i expected it would be around for a while so we continue to double down on our efforts there gotcha and then just just lastly um you know with the the cash flow being you know flat to you know 100 million um in the ford uh you know fiscal year 21 you know we look at slide 19. i'm just curious know what opportunities you are you think there are um to rework you know the balance sheet maybe even a little bit more um and what what you'll be going after i mean obviously the the four and um the 2026s or something you were looking at but i'm just curious is that what you just keep going after and hammering or there are other opportunities to potentially refi and and you know swap out debt i'm just curious what you think about there jeff

Yeah, John, it's a great question. It's one we're managing pretty closely, obviously. We talk about somewhere between $500 and $600 million of cash would be a more normalized number for us. So even though we don't have a ton of free cash flow generation estimated in our 2021 outlook, we have a lot of cash in our books today. So opportunity to go after some of this is there. Primary focus is to de-lever waiting to have a little bit more sunlight from where COVID is heading and where the environment's heading before we probably move too aggressively in that regard. But the term loan is an opportunity for us. Those secured notes do have a call feature in a year and a half from now, but they're expensive relative to some of the other paper we have. You mentioned the sub-debt. So Kind of a mix of it. We continue to look and we continue to look at the trading of it. But again, kind of waiting to have a little bit more clarity from a COVID standpoint before we start to address it in a meaningful way. But we definitely have capacity to do a fairly big step of it, we believe, in 2021.

So that $500 million of cash target, I mean, it gives you a little over a billion. I mean, the timeline on that is just basically post-COVID when things settle down. It's not an actual... calendar, you know, target it's an event or situational target.

We would have done it now. Yeah, no, sorry to interrupt. We would have done it now had it not been for COVID and the clarity on it. So we'll continue to monitor that. But do expect us to make some moves there in 2021. We certainly would expect to make moves in that billion dollar type of, you know, up to a billion dollars or so in the not too distant future once we have some clarity on COVID.

Great. 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. Had a couple housekeeping questions first. Number one, did the seat structures and mechanisms business reach EBITDA break even in the fourth quarter? Number two, can you kind of fill us in on the expectation for prospective restructuring savings from what you're spending here? And then third, if you could size up the, presumably there's some headwind in your fiscal first quarter from the F-Series and RAM launches.

Yeah, let me start on the SS&M question. Rod, we were EBITDA breakeven or better than EBITDA breakeven in the fourth quarter of 2020. We were actually pretty close to free cash flow breakeven in the business. I'd say close to it. As we look into 2021, as we mentioned, it is fairly seasonal. but we do see ourselves getting the free cash flow break even in that business, but we had a good Q4 in it. I'm sorry, your second question was?

Restructuring savings that you're expecting.

Yeah, it's a bit of a mixed bag, Rod. Some of it is, you know, has really attractive payback, you know, where we've, we'll say like a, you know, year and a half or so, you know, the two years on a lot of it. Some of it, Doesn't have as much payback to some of the business. You know, we see it permanently, at least for the next several years being down. But I'd say on about half to two thirds of it has a strong payback against it in that probably one and a half to two year time of payback.

The rest is just covering for short on sales. And then the F-Series and Ram headwinds that you're anticipating?

You know, we're not – I think we were a little bit specific on the Ram truck, that it was down significantly as they stopped building the classic that's restarted. F-Series launch is gone as planned, so it's very much consistent with IHS forecasts. And so, you know, as we exit the first quarter, we think we'll be close to running at a full rate on that series. But nothing significant outside of what, you know, either Ford or IHS spoke to on that series.

Okay. And then, you know, as we look out to 2021, your decremental margins have actually been – on volume have been – quite good, as in relatively low. Can you give us some color on incremental margins? And I noticed that the $800 million of consolidated EBITDA guide for 2021 is pretty consistent with where you were annualizing in the fiscal fourth quarter. You did say that there was 5 to 10 million of temporary benefits, so that obviously wouldn't recur. And you mentioned some you know, some extraordinarily good mix. You know, are those the primary reasons why you wouldn't expect improvement from that run rate? You know, because presumably you're getting some further upside from SS&M and restructuring savings into next year. Your revenue is pretty similar, maybe a little bit up as you look out to 2021 versus the run rate in the fourth quarter.

Yeah, there's a lot of moving pieces around it. You know, we've We've seen commodity costs jump up a bit on us, Rod, which we've seen. I mentioned for both steel and foam chemicals, they've both jumped quite a bit. We do have recovery mechanisms with our customers on those, but there's a lag and in some cases it's not full. But that's one of the pieces that sort of impacts us a bit. Doug mentioned some of the supply chain challenges and just operational challenges we have in this environment as well. you know, we have to do a few more extraordinary events, you know, from sometimes moving production around, sometimes operating in less than an optimal way, and with sometimes more absenteeism than we would, you know, certainly experience in a normal timeframe. All of it makes it a little bit more choppy from an operational perspective. But you're right, you know, we've generally performed better. The decremental side, we've generally outperformed there. And the incrementals, we tried to build into the guidance here, but we built those incrementals with a little bit of caution around a couple of the things I mentioned, namely commodity costs and just some of the production side of things. And we do have a few more launches in 2021 than we had in 20 as well.

Okay. Your incrementals, you're expecting in the 15% to 20% range? similar to what you're seeing on the decremental side?

I think that's probably a good blending average. It should be a little bit higher than what we lost on the decremental side. Great. Thank you. Yeah. Thanks, Rob.

Thank you. Our next question comes from James Piccarello with KeyBank. Your line is open.

Hey, good morning, guys. I appreciate the great color in the guidance framework. Just as we think about the cadence for fiscal 21, you've laid out expectations for global production to be down in the second half. That makes sense. There's some clear puts and takes with respect to net backlog impacts. More broadly, is there a first half versus second half range you could provide in terms of what the split could look like for Addiance Revenue and EBITDA?

It's hard to... I would say that's hard to tell in some fashion. I would say Q1, we would expect to be on the high side. I think our Q1 is probably pretty strong. As we look out, it becomes a little murkier. But Q2, our fiscal Q2 has the Chinese Lunar New Year, which generally will bring equity income down as production is lower So in general, I'd say first quarter, I think, should be strong. But, you know, as you mentioned, the back half of the year will be we expect to be weaker right now. The current expectations.

OK, got it. And then just for equity income, China production will still be up for fiscal 21. I think it's revenue, I presume, unconsolidated revenue should also be higher. Why should equity income trend flat year-over-year? I know you mentioned the negative impact of commodity prices, but, I mean, it just seems as though that might not be the only headwind kind of factored into that guidance. Can you provide any color there? Thanks.

Yeah, it's a good question. You know, I mentioned in the call that we do expect our Q1 equity income this quarter to be strong. It's typically pretty strong. We do see, as China was shut down and has recovered better than the rest of the world from COVID, we saw production spike up in our fiscal Q3 a bit and then our fiscal Q4, and we've seen that they're finishing the year, we'd say, strong. As we look into next year, it's going to obviously depend on what their market does and sort of their ability to continue to produce at this rate. But, you know, current expectations is we'd expect sales to be a big part of it. We think sales in our first quarter are going to be quite a bit higher than where we're seeing Q2 through Q4. And then we mentioned, you know, chemical prices and steel prices we think are both going to be a headwind in that region as well. But it's primarily going to be driven by sales at this point. And we don't see sales being that much different between 20 and 21. Got it. Thanks. Yep. Thank you.

Our next question comes from Brian Johnson of Barclays. Your line is open.

Thank you. I know you put the regional profitability in the back, but want to drill in a bit on that. So two questions around EMEA and Asia Pacific. So EMEA, you've got back to a 6-ish percent margin. Pre-COVID, you were at 4%. And, you know, two questions around Europe then. Kind of is this 6% something to think about going forward? And second, is the restructuring cash expense, which you noted was 2X higher in 2021, primarily devoted to restructuring Europe? And if so, can we expect further even at margin improvements from those restructuring efforts?

You know, good questions. Europe is the primary location where those restructuring dollars are going. As you know, it's more expensive and more challenging to restructure in Europe than other parts of the globe in today's environment. And that's reflected in our numbers. So I'd say the vast majority of what you're seeing in restructuring is earmarked for EMEA. As it relates to margins, we do see continued opportunity to increase over the 6%. We've obviously had good improvement. That's been driven by a number of things. I mentioned the SS&M business continuing to perform better. That's driving up margin, but a number of things they're doing on their foam and trim as well as the JIT side is driving that. We would see opportunities to continue to go up. I think we'll have to probably leave it to say we expect it to go up, but kind of come back to you with where it can get to as we move a bit further. But the overall objective for the company, Brian, as you know, is to close the margin gap we have with some of our peers And Europe's going to be a big piece of the story on that.

Yeah, maybe just a couple other points on EMEA. When we look at the year-over-year performance, I think in addition to Jeff's comments, we've resolved some longstanding commercial issues that improved profitability. And when you look at year-over-year, the number of launches, and we expect that to continue as we move into 21. They had a heavy launch. cadence in 19 and into 20. That was a bit of a drag in contrast to the Americas, which has got the heavy launch this coming year, 21 this year. They've got a lighter load, so we look at that level of performance as being sustainable, and then the restructuring just helps us on the overhead. cost side of it.

Secondly, Asia-Pacific ex-China also 6% margins. Is that about where we should expect it to stay or since that area had a significant volume headwind, can we expect typical incrementals to help boost that in 2021?

Yeah, there's a lot. Asia is a really interesting one for when you follow us. It's hard to predict because the margins are pretty different by country. But I would say key regions for us, well, the key region for us there is really Thailand and Thailand sales. Export sales have been down out of Thailand, which hurts us and overall hurts our mix and thus our margin in the region. And that's a bit of what you're seeing between from the reduction from fiscal 19, the heavy reduction across the whole region. As you look forward, we do see some recovery. We continue to see, I'd say, better management within each region of all those things we can control. Some programs will roll off in the coming years that weren't great for us, that the replacement vehicles look to be quite better. So I'd say we have opportunity there, but it's going to be heavily dependent on the mix with those exporting countries, Thailand, Japan, Korea, having those export volumes go back up to where they were pre-COVID will drive a lot of that margin opportunity for us in the region.

And final question, just broader margins. You mentioned, of course, closing the gap to your large competitor. You divested fabrics. I assume there were probably good reasons for that. But in discussions with the other company, it appears that fabrics and leather are very high-margin businesses that get them to that 7-ish percent they percent despite the lower margins on just-in-time seating. So I think two questions. One, you know, I guess fabrics wasn't that for you or you wouldn't have divested it. And two, you know, with SSNEM just getting back to cash flow, break even, where are the higher margin opportunities to get you to peer margins?

Sure. I'll start, and, you know, Jeff can comment. So, you know, for us, I would agree the JIT business, albeit low margin, is a great cash generator. and relatively low CapEx when you look across our network of plants, so we like that business. Cut and sew trim has historically been very strong, as well as foam. The perfect blend for us is when we have that vertical integration level, so we have complete seed and we have a lot of content. SS&M business that performs better when it's vertically integrated into a complete seat than when we're trying to sell it across a broader spectrum of customers. The fabric business for us is it's not bad business. We just didn't see it adding a lot of synergy to complete seat. It's sourced separate. It's sold across a number of different customers, you can't vertically integrate it. And to us, it's a market share volume business, and we had a choice. Either we increased market share, we were well positioned in Europe, not in the U.S., or we looked to exit. For us, at the multiple we exited, we felt that was the better decision. With regard to leather, I would say, yes, historically true. Leather has been a good margin business. We get the benefit of cutting leather hides, not tanning them when we have the cut and sew business. So that's opportunistic for us. The only caution I would have on leather would be if you look at the world going in green initiatives and, you know, take a look at wood volvo and what's happening in electric vehicles. You can make a pretty strong argument that leather content per vehicle is going to go down in the near term. I don't think there's a lot of people who want to have leather seats in electric vehicles. I think we approach expanding into that agreed historically good margins on a go-forward basis. I think it's something to take a look at. If there's an opportunity, we might pursue it, but right now it's not high on our radar.

Great. Thanks, Brian. Jacqueline, it looks like we're at the bottom of the hour, so I'll ask that we move to a wrap-up to call at this point.

Thank you, and thank you for your participation in today's conference. You may now disconnect at this time. Have a wonderful day.