Adient plc (ADNT) Q2 2019 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. At this time, all participants will be on a listen-only mode until the question-and-answer session of today’s call. [Operator Instructions] Today’s call is being recorded and if you have any objections you may disconnect. I’d now like to introduce Mark Oswald. Sir, you may begin.

Thank you, Robin. Good morning. And thank you for joining us as we review Adient’s Results for the Second Quarter of Fiscal Year 2019. The press release and presentation slides for our call today have been posted to the Investor section of our website at adient.com. This morning, I am joined by Doug DelGrosso, Adient’s President and Chief Executive Officer; and Jeff Stafeil, 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 Q2 financial results. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, there are 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 our 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 to 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 will now turn the call over to Doug. Doug?

Thanks, Mark. And thanks to the investors, prospective investors and analysts joining the call this morning, spending time with us as we review our second quarter results. Turning to slide four, first just a few comments on recent developments, including certain of our key financial metrics, which are called out at the top of the slide. Although, our second quarter results are down year-over-year, the sequential improvement in the most recent quarter compared to our first quarter results demonstrated actions taken to improve the operating and financial performance are taking hold. Sales and adjusted EBITDA for the quarter totaled $4.2 billion and $191 million, respectively. Sales were in line with our internal expectation. Operational challenges within the Americas and Europe segments combined with significantly lower vehicle production in China were the primary contributors to the $171 million year-over-year decline in EBITDA. Adjusted earnings per share of the $0.31 in the most recent quarter at the lower level of operating profit dropped right to the bottomline. We ended the quarter with $491 million of cash at March 31st. Important to note, the adjusted results covered exclude certain charges that we view as one-time in nature or otherwise new trends in core operating performance of the company. A list of adjusting items can be found in the appendix. Outside of the financial results, other recent developments include the successful execution of our debt refinancing, which provide strong liquidity and flexibility to our capital structure, a key element to enable our turnaround efforts. Jeff will provide full details of our financial performance, including comments around our recent refinancing in just a few minutes. Adient Aerospace, our 50-50 joint venture with Boeing announced its first customer Hawaiian Airlines. The Ascent Seating System will be debut on the Hawaiian Airlines Dreamliner in 2021. We have not spent a lot of time discussing in Adient Aerospace as the team’s primary focus is directed at stabilizing our core business. However, with the first launch of the customer secured I thought it was important to point out that the JV is progressing to plan. I’d also like to point out that the JV is staffed to run completely outside of our core business as such it’s not distracting us from our turnaround efforts. Finally, as noted within our earnings release this morning, during the second quarter, we reorganized certain elements of our management structure, which resulted in a realignment of our company’s reportable segments. The new segment consists of Americas, Europe and Asia. Slide five provides a illustration of what the new organization structure looks like. Turning to slide five, I would characterize the organization that was in place as the heavily matrix organization, which can be very appropriate for companies that are relatively stable. Unfortunately that’s not our case. We decided to lean down our organization move it to a regional focus, put general managers in place that have complete autonomy and responsibility. In addition, we essentially replace the front-line operating team expect for Asia, which continues to perform well. The leaders brought in are strong tested operators with proven turnaround credentials. In fact many of the former colleagues are -- that I worked with between 2008 and 2012, which you know was a very tough times in the auto industry. Directly below the front-line operators we have also increased our bench strength by bringing in approximately 10 to 12 individuals that will help us accelerate our turnaround efforts. The added horsepower spans across several organizations, including [inaudible], operations, purchasing and finance. The last point here is we have aligned our incentives from a compensation standpoint that directly correlates to our financial objectives. Namely, profitability and cash flow. Moving to slide six, we highlighted the benefits associated with the new organization and I would say, speed and focus are the primary reasons for making the change. We implemented a new organization to drive change to do it quickly and within specific areas, namely commercial discipline and operational performance. We have taken a large amount of cost out of our organization and expect additional benefits in the coming quarters, followed about $90 million in total on annual run rate basis when fully implemented. This is largely driven by decentralizing the new organization and moving away from traditional matrix organization performance measurement groups. We have flattened the organization, eliminated number of layers, dramatically enhancing our ability to make decisions on the business and push responsibility and autonomy back into the organization. Our second quarter results began to demonstrate what an organization structure like this with the individuals I mentioned in charge can deliver. Turning to slide seven. Let me comment on the team and where the team is focused and now our few back to basics priorities are providing a solid foundation for our path forward to future success. First, it starts with an increased focus on operational execution in commercial discipline. It is essential for us to stabilize the business, especially with our handful of troubled plants and underperforming programs. While stabilizing the current business, we are prioritizing future business, insuring business quoted is core to our operations. We have taken a path on business we believe are non-essential such as Tier 2, structures and mechanisms business that are marginally profitable or higher risk businesses such as business associated with boutique manufacturers pursuing next-gen or futuristic mobility alternatives. This will benefit as we maximize returns and reduce engineering and development costs, and transition to a less capital intensive business, ultimately, improving our margins, and more importantly, the company’s cash generation. Not surprising, the biggest question I have heard from the investment community over the past several weeks is, how long will it take to execute the turnaround plan and close the margin gap. Slide eight illustrates how we are thinking about the pace of improvement and what to expect in the coming quarters and years. I think I will put that in three buckets. First, the near-term or stabilization period, what to expect as we progress through fiscal year ‘19, second, the improvement here is what to expect in fiscal years ‘23, ‘22, and finally optimization years, what to expect beyond 2022. So far this year, and as I pointed out with our Q2 results, efforts to stabilize the business are taking route. We would expect further stabilization in EBITDA improvement in half two versus half one based on further benefits associated with the new organization structure. The recent success progress we have made in resolving backlog of open pricing issues with a handful of customers. Keep it in mind the resolution starts the program from emerging cash. They do not return the programs to a significant level of profitability. Further work is needed to improve profitability from the current levels. Operational focus will continue to improve utilization, less in premium freight and drive down launch costs. And finally, we had expected stabilization in China vehicle production, which would drive improved results in the region half two versus half one. That said, we are still optimistic in the China recovery, but it seems to be pushing out beyond Q3 at this point, more on that later. These actions will help set the stage for our margin gap closure in the out years, but more importantly begin to improve cash performance of the company in the near-term. As we exit fiscal ‘19 and progress through to 2020 and 2022, we expect our continued focus on operational execution, commercial discipline, the reduction in overall launches and the right-sizing of SS&M that will drive a large improvement in margins, but even greater and more tangible benefit in free cash flow. Keep in mind, one of the mile markers that we have guided for you to measure the progress is cash flow neutrality of SS&M business as we exit 2021. We have shown previously the business is burning close to $425 million last year. Simple calculation based on approximately $170 million of EBITDA loss and the CapEx spending totaling over $255 million. In addition, we also expect cash flow to benefit as we improve our operating performance within our core seating business. I am over excited about the opportunities lies ahead in the near-term. We also recognize it’s a long journey and to achieve full GAAP closure and optimal cash generation. Continuation and rightsizing the SS&M needs to be completed, VA/VE will need to be expanded, new business that has been developed with our focus on commercial discipline will need to roll on and replace certain of our underperforming programs. For these reasons, we do not expect full margin closure and optimal cash generation to take place before 2023. Certainly we have a lot of work in front of us, but the team is up for the challenge and we will work to improve the pace of improvement. With that, I will turn the call over to Jeff, so he can take us through Adient’s financial performance for the quarter and what to expect in the coming months. Thanks.

Great. Thanks, Doug. Good morning, everyone. And starting on slide 10 and before jumping into the numbers, I wanted to point out how the organizational changes Doug mentioned earlier impacted our reportable segments. As you know, prior to Q2, we reported our results between seating, SS&M and interiors. As we drove responsibility to the regions and transitioned away from heavily matrix organization, we were required to realign our reportable segments. The new segments, America, EMEA and Asia, and the composition of those segments are shown on the right-hand side the slide. The second quarter results shown today reflect the new segment structure. We realized the big part of Adient turnaround story related to our former SS&M segments. The performance for that business will be included within the results for the Americas, EMEA and Asia segments going forward, but for transparency purposes and to help demonstrate progress of the turnaround within that business, we plan to provide commentary and color within our new segment structure. In addition, within the appendix of our earnings presentation we plan to call out as a memo, SS&M results similar to what we disclosed in the path. Turning to slide 11, and adhering to our typical format, the pages formatted with our reported results in the left-hand side and our adjusted results in the right-hand side of the page. We will focus our commentary on the adjusted results. These adjusted numbers exclude various 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 adjusted results relate to asset impairment and restructuring. Specifically, the realignment of our reportable segments and past operating performance required us to tap SS&M’s long life assets for impairments. As a result of the impairment test, $11 million of North America long life assets and $55 million of EMEA’s long life assets were determined to be impaired. In addition, we booked a net tax charge of $43 million to establish valuation allowances against deferred tax assets in Poland during Q2 2019. The reason we book such charge was due to earnings in Poland, partially driven by higher levels of DTAs in Poland resulting from the fixed asset impairments just mentioned. Finally, we booked $47 million in restructuring as we among other things modified the structure of the company and downsize our engineering team supporting SS&M business. Complete disclosure of the adjusting items are called out in the appendix. Moving onto the high level, sales of $4.2 billion were down about 8% year-over-year. FX accounted for more than half of the decline. Adjusted EBITDA for the quarter was $191 million, down $171 million or 47% year-on-year, largely explained by a decline in business performance, which I will cover in more detail in a few minutes. Also contributing to the decline was equity income, which was down $30 million in the quarter compared to the same period last year, largely explained by significant declines in vehicle production in China and $8 million decrease within our interiors YFAI business. And finally, adjusted net income and EPS were down approximately 83% year-over-year at $29 million and $0.31 per share, respectively. Now let’s break down our second quarter results in more detail, starting with revenue on slide 12. We reported consolidated sales of $4.23 billion, a decrease of $368 million, compared to the same period a year ago. As mentioned just a moment ago, the negative impact of currency movements between the two periods, primarily the euro accounted for just over half of the decline, lower volume mix in Europe and Asia, impacted the year-over-year results by approximately $168 million. This result was consistent with internal expectations. Moving on with regard to Adient’s unconsolidated revenue, our Q2 results were significantly impacted by the much lower levels of vehicle production in China. Unconsolidated seating and SS&M revenue driven primarily through our strategic JV network in China was down about 12% when adjusting for FX, an outcome that was generally in line to slightly favorable comparative vehicle production in the region during the quarter. Sales for unconsolidated interiors recognized through a 30% ownership stake in Yanfeng Automotive Interiors were also down approximately 12% year-on-year, when adjusting for FX. Important to remember, roughly 50% of that business is conducted outside of China. Moving to slide 13, we provide 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 operations, such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was $191 million in the current quarter versus $362 million last year. The corresponding margin related to the $191 million of adjusted EBITDA was 4.5%, down approximately 280 basis points versus Q2 last year after excluding equity income. The primary drivers of the year-over-year decline is attributable to negative business performance, largely launch related, the negative impact of lower volumes and mix, and primarily within EMEA and Americas region, plus a $30 million decline in equity income. Macro factors including the negative impact of foreign exchange and increased input costs also weighed on Q2. I will point out that despite being down year-over-year SS&M progressed positively versus the first quarter of 2019 as global results improved about $21 million sequentially. Similar to past quarters, we have included detailed bridges for our reportable segments, which now consists of Americas, EMEA and Asia on slide 14, 15, and 16. Starting with Americas on slide 14. Adjusted EBITDA decreased to $34 million, down $64 million compared to the same period a year ago. The primary drivers between the periods include approximately $24 million in unfavorable volume and mix, $19 million of negative business performance headwinds, many of which were launched related. I won’t go into the specific line items as we call them out in the call out box in the page. However I point out that partially offsetting the negative business performance, but not shown in the bridge was a $6 million improvement within the SS&M business in the region. SG&A was a headwind of approximately $12 million due to increased investment in Adient Aerospace, as well as temporary SG&A benefits recognized last year that did not repeat in Q2 of this year. The negative impact of currency movements and increased commodity cost resulted in approximately $8 million headwind in Q2 versus the same period last year. One last point on Americas, our CapEx for the segment was approximately $52 million in the quarter. Turning to slide 15 and our EMEA segment performance. For the quarter adjusted EBITDA was $59 million or $71 million lower compared with Q2 2018. The primary drivers between Q2 this year and last year’s second quarter include negative business performance, call it $34 million headwind, including launch related costs and inefficiencies associated with increased production of the common front seat architecture. The negative impact of currency movements in commodities resulted in an approximate $90 million headwind in Q2 this year versus the same period last year and lower volume mix impact of the segment by roughly $17 million. I will point out that although the SS&M business in Europe was down $22 million year-over-year, results were $12 million better than Q1 as actions taken to stabilize the business and the region gain traction. CapEx for EMEA was approximately $46 million in the quarter. Finally, turning to slide 16 and our Asia segment performance. For the quarter, adjusted EBITDA was $123 million or $34 million lower compared with Q2 2018. The primary drivers between Q2 this year and last year’s second quarter included a $23 million decline in equity income driven by lower vehicle production in China and operating challenges of YFAI. Equity income at YFAI of $4 million is down 67% year-over-year. The lower level of vehicle production also drove an approximate $2 million volume headwind in our consolidated business. This is an impressive result concerning volume impacted sales by an approximate $63 million and highlights the benefit of our strong mix of business. In addition, business performance was also a modest headwind, call it, $7 million, driven in part by the lower volumes, which as you know, will driving efficiencies, as well as a few million dollars in warranty and tooling. Note that these headwinds, margins on our consolidated business increased approximately 60 basis points in the region. And finally, but to a lesser extent, macro factors, namely foreign exchange and commodity costs weighed in the quarter by approximately $4 million. Regarding Asia CapEx for the quarter, the unit spent roughly $10 million. Let me now shift to our cash and capital structure on slide 17. On the left hand side of the page, we break down our cash flow. Adjusted free cash flow defined as operating cash flow less CapEx was $60 million for the quarter. This compares to an outflow of $146 million last year, an increased focus on working capital, such as a reduction in aged receivables and increased focus on customer tooling collections, reduction in becoming Adient costs, lower cash taxes and CapEx plus benefits associated with order flows timing differences between Q2 fiscal ‘19 and Q2 fiscal ‘18 helped drive the year-on-year improvements. Worth noting as we call out of the slide, one factor that can greatly influence the cash outcomes Adient’s trade working capital which is highly sensitive to quarter end date. When smoothed over the course of the year, we would expect working capital to be essentially neutral for us. Capital expenditures for the quarter were $108 million, compared with $123 million last year. As you can see in the foot note, we continue to break out CapEx by segments. On the right-hand side of the page, we detail our cash and debt position. At March 31, 2019, we ended the quarter with $491 million in cash and cash equivalents. Gross debt and net debt totaled $3,383 billion and $2,892 million, respectively, at March 31st. As disclosed, subsequent to quarter end, the company’s successfully executed a debt refinancing to strengthen and increase the flexibility of our capital structure. Slide 18 provides the pro forma capital structure summary. Elements of the debt refinancing included the issuance of $800 million senior first lien notes due 2026, a new $800 million term loan B credit facility with pricing set at LIBOR+ 4.25% during 2024 and a new $1.5 billion asset-based revolver for the asset based loan. As called out in the footnote in on the page, the rates for the ABL and TLB change based on certain criteria. For the TLB, the rate steps down 25 basis points as secured leverage is 1.5 times or less. For the ABL the rates stepped up or down based on utilization. Net proceeds from the notes together with borrowings under the new TLB and asset based revolver were used to prepay in full the company’s prior credit agreement and increased available liquidity. Not only does this refinancing increase our liquidity to approximately $2.1 billion, it also extended our maturities, since the new credit facilities are covenant like and do not contain the same restrictive financial maintenance covenants that were previously in place, today’s capital structure provides the operating team significant room to execute our turnaround plan. One last point before moving on and as a result of the external financing, Adient will reevaluate our inter-company financing structure. As this may create a shift of interest income and expense between jurisdictions, we are continuing to monitor the potential for valuation allowances. It may result in the determination that a significant portion of our deferred taxes will not be realizable and result in a non-cash charge in Q3. Moving on to slide 19. Let me conclude with a few thoughts on what to expect for the second half of 2019. Based on current vehicle production plans and expected movements in foreign exchange, we continue to expect revenue to settle in $16.5 billion to $16.7 billion range. As a reminder, FX is expected to be an approximate $500 million headwind versus fiscal 2018. Softer market conditions in China and a reduction in complete seat business in Europe is also impacting revenue as seen with our Q2 results. With regards to adjusted EBITDA, we continue to expect the second half result and margins just surpassed first half performance as actions taken to improve the company’s operating and financial performance gain traction, especially as it relates to the self-help initiatives within the Americas and EMEA segments. The pacing and magnitude of improvements within China and Asia remains a bit murky due to macro factors. Although industry observers believe will rebound is on the horizon, citing action that China Central Government is considering or is implemented to stimulate auto demand, tangible evidence is not surfaced. In fact China sales and production in April continued to come under pressure. Included in our EBITDA assumption in equity income of between $290 million to $300 million, although down from last year’s level, primarily impacted by lower vehicle production in China, we would expect to see improvements in the second half versus the first half of the year as the China market stabilizes. However, given my comments on April a moment ago, we are now anticipating these improvements to probably be delayed until Q4. Important to remember and echoing Doug’s earlier comments, the turnaround will be a multi-year journey. We do not anticipate a step change in performance from quarter-to-quarter and that improvement will be steady, although occasionally lumpy as we live within the cycles of the auto industry such as what I just described in China. Moving on, based on our expected cash balance and debt we expect full year interest expense to be approximately $175 million, excluding a $13 million one-time charge related to unamortized portion of the prior credit agreement, facility fees and approximately $35 million in fees related to the regions debt refinancing. With regard to taxes, the establishment of valuation allowances in several jurisdictions over the past few quarters has significantly impacted our adjusted effective tax rate and the variability of the rates between quarters as evidenced with Q2 is approximate 30% adjusted effective tax rate. As a result, we believe providing a cash tax estimate for the year would be a greater use for modeling Adient. For 2019 based on our expected earnings and composition of those earnings, we expect cash taxes to be approximately $105 million to $115 million, about $30 million less than fiscal ‘18. One additional point on cash taxes, important to remember that more than 50% of our cash tax payments related to consolidated JV’s and withholding taxes on dividends from JV’s. One last item for your modeling, we now expect capital expenditures to trend towards the lower end of our previous range of about $550 million. As you would expect, the team continues to assess opportunities that may further reduce the planned spend. In addition, looking further out we continue to see opportunity to significantly reduce capital expenditures as we right-size the SS&M business. Finally, we continue to monitor the progress of trade negotiations that are currently taking place between the U.S. and China. We are hopeful that two countries can reach resolution and avoid an escalation of tariffs, which you have implemented would significantly impact the industry and Adient. As a reminder, the impact to Adient today as a result of tariffs both 301 and 232 [ph] is approximately $20 million. The true-up to plus the imposition of a 25% duty on all remaining imports of Chinese origin goods could result in an approximate $1 million per month in additional headwind if enacted. As we gain clarity on potential outcomes we will provide update as appropriate. With that, let’s move on to the question-and-answer portion of the call. Operator first question?

Thank you. [Operator Instructions] And our first question is from Colin Langan with UBS. Your line is open.

Hey, guys. This is Gene Vladimirov on for Colin. Good morning.

Good morning.

Good morning.

When you think about getting margins in line with peers, can you sort of quantify how much of the opportunity as you see, it is operational versus what’s commercial. Just trying to get a sense of the magnitude of the margin improvements within the timeline that you laid out on slide eight?

Yeah. I -- I mean, the way we have initially talked about, it’s one-third commercial, two-third operational. But when you think about operational and that’s why we try to provide a little bit more detail. It’s -- this third element that we anticipate taking time which is not just a function of addressing those issues, but there is a portion of the business, primarily on the SS&M side that is going to need to roll-off and in the replacement business will either be not the program, because we are downsizing that business for where we are much more selective on customers and products that we historically proven to be more profitable, had a return on investment. So it’s a -- how do you want to capture that, you can call that commercially, you can call that operational, it’s really both, it’s bringing products in line with the right pricing and launching them effectively.

Got it. Okay. Very helpful. Thank you. And then could you breakdown the performance you saw in the JV’s, like what sort of decrementals are you seeing in the business and are you seeing any additional margin pressure beyond what would be expect given the sales line ?

Yeah. So, good question, generally you can expect that the contribution margin of those businesses across all our business is roughly two times EBITDA margin or maybe even a little higher. So a 12% sort of margin reduction or I mean sales reduction in the region, you would expect something closer to25% percent decremental margins on a variable basis. But it requires us to really take out the necessary headcounts and flex the workforce as if you leave too many direct workers you are going to be worse than that. I would characterize the business having, which has never gone through a period like this, the last seven months and eight months in China are somewhat unprecedented at least for that duration and time and magnitude of a setback and the teams have performed very well. I’d say that they have taken out the variable cost. They have even managed to takeout portion to fix and have performed well. So I’d say the margins you see are really just a reflection of the sale. The margin reductions are purely a reflection of the sales reduction that we are seeing today.

Great.

Maybe just a little bit more color regarding customers, I would characterize the market moving quickly, we are anticipating at some point that customers will come to us and that’s why we have revamped our activity in VA/VE to better support that. But you also have to think that we also have counter to that commercial claims for the volume drops and we run into contractual obligations, so what we have to manner plants for versus the rate that they are going to run their plants. So I think the smart suppliers just anticipate the environment they are operating in and we fully expect that we will try and be instrumental in finding solutions and not with our customers but not at the expense of margins in the business.

Got it. Okay. Thank you. And then, finally, congratulations on the airline seating contract, how should we be thinking about when that actually begin to hit the P&L in a meaningful way?

Yeah. I guess the way I think about that business is, it’s running, maybe couple factors, I think, about that. Is it -- it’s costing us around $30 million in EBITDA and roughly free cash flow, maybe just a little bit more than that free cash flow is a little bit of CapEx. But that’s probably what will run out the next couple of years or so, couple of few years as we develop that program and then develop few others. And but on that point roughly half of the free cash flows and earnings are being contributed or funded in cash, which is outside of our free cash flow or earnings through our partner Boeing. They are contributing half their share. So the real impact to us is less. I expect that to run the next couple of years, what you are looking at in the 2020, 2021 timeframe when revenues start to hit on this business.

Okay. Great. Thanks for taking our questions.

Okay. Thanks.

Thank you. Our next question is from Emmanuel Rosner with Deutsche Bank. Your line is open.

Hi. Good morning, everybody.

Good morning.

Good morning, Emmanuel.

I was hoping to see if you can give more color around the gradual pace of improvements you are expecting in the operational and in commercial actions. Obviously Q2 showed some traction, but I guess on the EBITDA basis is still, I guess, a modest sequential improvement. Is there potential for acceleration in the sequential improvement as we move through the year or are you essentially signaling that what we have seen in Q2 is sort of like the sustainable pace of improvement?

Yeah. I think it’s reasonable and certainly our expectation that the sequential pace increases as we implement operational improvement and resolve kind of this backlog of commercial issue. We -- on the commercial side what we wanted to communicate is, we have broken this into waves, so the first wave with our commercial negotiations with our customer is, okay, to stop [inaudible]. We -- these needs to be addressed most immediately. We balance that. We are thinking about our long-term relationship with our customer and making sure that we are not creating a problem with our backlog and walking that fine line on the pace of change. So we expect in the out years more to come. I would say on the operational side we are expecting a pretty significant performance improvements first half to second half in the range of kind of $50 plus million across all the segments. But some of that is being offset with just comments on what we think might have been in Asia, so we haven’t completely modeled it, but at least gives you some idea of the pace of change. And that’s not on annualized basis, it’s calendarize [ph], so it -- if we get those and can sustain that operational improvement on a full year basis, you can get an idea of the magnitude.

Okay. That’s very helpful. And then, I guess, as part of your commercial negotiations it obviously seems like a lot of it is focused on a very -- solving some very near-term and pricing issues. Are you also having some discussion with customers around the profitability of the business that’s in your backlog? So things that you haven’t necessarily launched yet, but may come and launch it in a less than desirable profitability, is that something that is going on or that’s still needs to happen?

Yeah. That’s -- we have really increased activity there and we have been very transparent with the customers too, with all of our major customers [inaudible] where we are performing below what we deem an acceptable level, we have gone in and walk them through the profitability of our business by region, by product, where their strength and where their weakness is and that’s what business today. In addition to that, and I think, this is critical when we talk about effective program management is having the conversation and projected profitability on a program prior to launch with the customer and how that compares with our initial expectation and we talked about this backlog of commercial issues and scope change that occurs we had some pretty successful conversations with customers around those issues. And in our focus as we move forward is to do that well in advance ideally a year before start of production. When you are making -- we are making firm commitments on capital spending, that’s when the discussion needs to happen, not after production started or in the midst of a launch in some of the issues we run into as we have struggled with our most recent launches, since we -- our timing over there the commercial discussions during the launch and if the launch went bad then our customers basically postponed any discussion and that’s where we have started to build this backlog of open commercial issues and we have been slowly but steadily working our way through.

That’s great color. Thank you.

You are welcome.

Thank you. Our next question is from John Murphy with Bank of America Merrill Lynch.

Good morning, guys. Just wanted to kind of focus on slide eight here, but I just want to clarify one thing that you just said. I think you were talking about a $50 million improvement by segments in the second half versus the first half. And I am just curious, I want to make sure if I heard that right. And by segment you mean, Americas, EMEA and Asia so the new segments meaning that you might have as much as $150 million performance improvement from…

That was consolidated across all segments.

Got it. Okay. All right. So the -- okay -- so that’s -- so it’s all segments not per segment?

Yeah. I’d like to be per segment, but it’s not.

Got it. Okay. And then, if we look at slide eight here, I mean, you have three kind of distinct periods. And I know, Jeff, you kind of said the improvement would be a little bit more linear over time, but is that the case and when we think about 2023, depending on what you deem as your peers and how you load costs into operating margins, because some people disclosing overhead differently, I mean, where should the ultimate margins be when you talk about peer. I mean, you could argue it to be 6%, you could argue it to be 8%, depending on how you are loading the operating margins. So curious what that ultimate sort of peer average is in your mind and sort of -- are there sort of step function as we work through these three periods or is it really linear like Jeff mentioned?

So that the way that I would answer the last part of that I will let Doug answer the first part, but just as it relates to the benchmark, one of our key peers has the seating business broken out in segment. They do have corporate side segregated out. So we kind of just simply take that corporate piece allocated by sales forum use their seating segment and we compare that back to our numbers. I would say the -- and then what we do is we back out our equity income and to some degree we back out a little bit, we have always used like 50 extra basis points support costs, because our large network of JVs in China. We have always said requires a little bit more governance cost within our consolidated numbers for that. So roughly 50 basis points less than that competitor would be where we have the benchmark. And ideally, we will do better than that we will now there’s a lot of reasons why we think are our footprint, our size, our capability, our geographical graph, our customer diversity, et cetera, should play for higher margins over time. But that’s the bogie we are chasing, but we have tried to lay out on slide eight, our reasonable projection of getting there. One of the reasons is going to take a little while John to is you think about some of this business Doug talked about we are stabilizing it, meaning it’s not going to really get up to where we would have desired the margins to be if we started with a blank sheet of paper. But some of these programs are in such a our goal has been to get them, so they are no longer emerging, meaning that they are costing cash on an ongoing basis and that’s a lot of the commercial negotiations. And some of those, you can take our business turns over about 17%, 18% a year and some of that business will be required to be turned over before we can really get up to the levels of what we call our benchmark.

And Jeff I am sorry to be a painting the neck on this, but I mean the math and sort of that you do there could you in a couple of places. I mean, is that basically 6.5% to 7%, is that where you are landing when you do that math, that you just talked about?

We have shown that benchmark before. I want to say we put it in the Deutsche Bank presentation that we gave in January where we thought that peer margin was. But I think a little higher than what you just said.

Okay. And then sort of the…

Obviously, if numbers move, that kind of the number we have been chasing, essentially that one competitor and the math I just described.

And the only thing I would add to Jeff’s comment is, really the intention there was, look, this is the minimum out of the path forward because they have someone in our same peer group making and checking products to get somewhat similar profile to us can achieve that and there is no reason we can’t and no reason that I am aware from a structural barrier. And to Jeff’s point, I think, in many ways the structure of our business is preferable to anyone else in the space. I don’t know that it was necessarily intended to be, it all that can be achieved, not that I am going to give you a different number right now. I think about it in terms of, you that they have a viable target out there that people can see and give their head around. Obviously, the issues we have in front of us right now are much more damaging to the business that needs to be addressed more aggressively and that’s really where our focus is right now. And I think about it in terms of getting to different advantage point and that’s why we broke it into these three segments, stabilized the business, get ourselves on solid ground operationally and our customer relations, then you can take another assessment of the business and redefine where you can take it. So I think about it more -- maybe the minimum that we should expect to achieve from the business. It’s just a question how fast we can get there and right now we have laid that it’s going to take a number of years to do that.

Okay. And maybe just a follow-up on this, I mean, the free cash flow improvement on SS&M $425 by, it looks like the end of 2022. Is that kind of a smooth improvement or is that -- is there -- are there sort of lumpiness there, because obviously that’s a massive swing factor in the free cash?

Yeah. Maybe think of it this way John. We published the numbers for last year roughly a negative $170 million on EBITDA, $240-ish, $250-ish on CapEx. So we have said with the downsizing about SS&M with narrowing our focus of where we want to compete in that business and getting the mechanisms conversion that we have been straining on over the last couple of years to launch once that CapEx is all spent on the mechanism side and we have re-shifted some of the focus on SS&M business. We think that CapEx should come down to $150-ish, maybe a little bit lower. And at the same time the CapEx -- the EBITDA that means over that time period is going to have to go from that minus $172 million to at least the $150 million. We think both of those are going to be more gradual. Hopefully, we will go faster, but I would expect more gradual will obviously work to go as fast as we possibly can.

Okay. And then if you look at slide five, it looks like two of the regional heads are relatively new to the company. I am just curious, Doug, as you go through the process of bringing in and letting human capital on folks like this. They are going to run the business is for you. I mean, what’s the process and how are you kind of making sort of -- hit -- be so blunt about this and fixed that close process with the human capital in the company. I mean I should understand how this is changing, that seems like that’s a big part of the story here too?

Yeah. It is. So I would think it two ways. First, for us to pivot and move as quickly as we needed to move, I think we just needed to be a bit disrupted the way we are operating organizationally as a group and simplify the business and simplify or eliminate the level of bureaucracy that we had and really within region give general managed for resource availability to drive issues. Not -- we talk about it had a commercial issue, had a operational issue, many of the issues fall in the multiple categories and they effectively solve them. You need to work collectively across the team very much true on launches and I think the way we were structured before we were the so functional in the -- in our structure of that yet. It was a detriment to teamwork and that sounds maybe a little bit corning, but pretty powerful tool when you get it in place that you work on these issues as a cross-functional team, because it requires multiple disciplines to resolve the issue. So that’s really what we are trying to achieve here. It’s a simple kind of business, getting the issues and point people accountable, but with the full complement of resource to address it. As far as how do we brought -- the folks we brought in. These are -- it’s maybe the benefit of being in the industry for 35 years. These are individuals who I worked with in the case of Jerome and Michel, when I worked at TRW. So I spend 2008 to 2012 working with these guys in a pretty challenging environment. So we talked about being battle tested, having a broad skill set. They are not seating experts, but they worked and complicated products arguably more complicated than seating systems, braking, suspension, steering. Jerome, recently he was at Aptiv, so he’s got experience in just in time from a wire harness perspective. And Michel was at Delphi Technologies, broad range of skills from and also product knowledge. But they have demonstrated leadership capability in difficult environments and that’s why I brought them over SS&M to come. I would just mention Kelli Carney who is running the global purchasing is also new. I worked with her from my days at Lear. She understands seating systems. She spent her most recent time at IAC, where she ran global purchasing and also was responsible for the European business, so she got an operating mindset. We brought her back for this global purchasing. Again pretty proven skill set, understands if you want to call it private equity mentality on speed and intensity of getting things done. But what I am most excited about it -- of this group is we are functioning collectively as a team. So and then we have Asia, which just continues to operate well to complement that. So I am feeling good about the leadership and what we just mentioned in this call is the need that we have brought some bench strength to help accelerate the pace of change.

And maybe if I could seek one last one in, operationally at your JV, I mean, how much oversight or impact can you have there, if that market continues to sort of be the tough? I mean, is there anything that you guys can interject as far as operation -- operational efficiency or is that sort of outside the purview of how the JVs are set up?

No. We can have influence on it. We can share best practice. James and his team has not been best full of talking. We have always had a constructive relationship with our JV and where we have good ideas they have good ideas we look to leverage that. So that’s something we have been encouraging because it’s in both our interest.

Great. Thank you very much.

You have welcome.

Thanks, John.

Thank you. Our next question is from Joe Spak with RBC Capital Markets.

Joe?

Joe?

One moment please. Sir your line is open.

Yeah. Can you hear me guys now?

Yeah. Yeah.

Hi, Joe.

Okay. Sorry. Just -- thanks for taking the question. Maybe focusing on some of the bridges like the plus 3 in Americas, the plus 1 in EMEA of pricing within that sort of net material margin, is that the correct interpretation, is that the efforts of the commercial renegotiations and is that sort of the right pace we should expect here for the rest of the year, does that start to improve in the back half?

Well, I will hit just sort of a basic question. What you would expect usually on a lot of these is to have a negative pricing. We usually get productivity on a net basis to our customers. But fact that you are able to see some positives in Americas and EMEA, basically reflects the work that Doug has been talking about on going after some of these key programs that caused us challenges, because we are still giving productivity on a large number of our programs as we normally would as the business.

Okay.

But some these offsets brought those up to positive numbers.

Yeah. And I would say, secondly, we were reflective of either a full year or second half, most of the commercial activity we had was focused on implementation in the second half. But to Jeff’s point, the fact that we are net positive with productivity, contractual productivity commitments we have had with our customer and to a lesser degree inflationary material economics is a pretty good outcome as well. But as we feel forward you should expect to see those numbers increase on a year-over-year basis.

Okay.

Probably not going into the long future but for the near-term, I would say that the case.

Okay. And then -- and maybe just to sort of a tact this sort of improvement question from a different angle, when you sort of our reporting regionally, now it’s quite striking that Asia’s margins are basing the 10s and versus low-single digits in Americas and EMEA, and my guess is that maybe that was part of the point of reporting it this way. But how much of that is the challenges versus sort of just a structural difference between the regions. Just so we can get a sense for sort of what we are really aiming for here in those regions.

Some of its structural, I mean we have a very -- I will say dominant positions in the Asian market, so there is not the same competitive tension that exist in North America and Europe, and some of it is execution. The team has done very well operating their business, many of the problems that we have had in North America, in the Americas and Europe. We simply have not experienced their launch costs have been better managed, operating efficiencies are in place and that’s why we didn’t make, quite frankly, the organizational change there, because they continue to run that business well. Probably less exposure to the metal and mechanism business in that region, which certainly, because there have been changes to them, I think, their cash flow numbers are also much better because their capital spending is significantly less.

And I think just -- if you look back a couple years, Joe, the Americas segment had double-digit margins. And the reason for that -- I mean it’s an area where we should be able to make a solid margin if we are doing things well. We have very the programs tend to be bigger in nature, things like the F-150 or the [inaudible] are key high volume programs where we should be able to extract a good margin if all things are working well. So I think there’s -- I would characterize it more as there is a greater amount of opportunity for all the self-help to come into the regions in Americas, I think, is probably the biggest area of opportunity for us.

Okay. Thank you.

Thanks, Joe. And Robin, it looks like we are at the about the hour. So, this will conclude the call today. Again, thank you everybody for joining us and if you have any follow-up questions, please feel free to reach out to myself or Investor today. Thank you.

And thank you. This does conclude today’s conference call. You may disconnect your lines and thank you for your participation.