Adient plc (ADNT) Q3 2020 Earnings Report, Transcript and Summary

Welcome to Adient's Third Quarter Financial Results Call. [Operator instructions] Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mark Oswald. Thank you. You may begin.

Thank you, Amanda. Good morning, and thank you for joining us as we review Adient's results for the third quarter of fiscal year 2020. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Doug Del Grosso, 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 on the business, followed by Jeff, who will review our Q3 results and outlook for the remainder of our fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements. Please refer to Slide 2 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 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, spending time with us as we review our third quarter results. I hope you and your families are staying safe and healthy in these difficult times. Turning to Slide 4. Let me begin with a few comments related to our turnaround plan. First off, the team remains laser-focused on the plant while navigating through the global pandemic. We continue to implement actions to ensure the plan progresses in a positive direction. When looking at our results, you'll see operational improvements are driving down waste inefficiencies. The financial slides within Jeff's section illustrates how our improved business performance partially offset the significant COVID bid headwinds. The team is exercising commercial discipline, resulting in new business wins with a higher return on capital versus outgoing programs. I'll expand on this point in a few minutes. Our launch performance continues to make significant strides with -- and extremely important as we head into critical launch quarter. We're proactively executing measures to take out structural costs to ensure the cost base is aligned with our expected smaller industry. And finally, we're moving closer to closing the 2 previously announced strategic transactions. The approximate $500 million of our cash proceeds will strengthen our balance sheet and help drive our total liquidity position higher exiting fiscal 2020. Essentially, we have our hands on the wheel and continue to drive initiatives that are within our control. That said, turning to Slide 5, our third quarter results were significantly impacted by COVID, where you saw industry production essentially at 0 across Europe and Americas in April and slowly resumed operations in May and June. We've highlighted a few of Adient's headline financials since Adient's financial performance is highly dependent and correlated to vehicle production. Our results mirrored the overall industry, essentially 0 sales in April, with steadily improvement into May and June. Sales at $1.6 billion were down about $2.6 billion or 60% on a year-over-year basis. I mentioned sales were essentially 0 in April. The exit rate for the quarter was about 75%, the pre-COVID levels for both EMEA and the Americas. Adjusted EBITDA was a loss of $122 million, driven by the significant reduction in sales. We estimated the impact of COVID around $400 million for the quarter. The team did a very good job flexing costs, unfortunately, the capital intensity of our business makes it difficult to offset fixed costs in the environment we were managing through. As production ramped up throughout the quarter, our earnings and margins progressed in a positive direction. With regard to cash, we ended the quarter with just over $1 billion of cash on hand and $1.2 billion of total liquidity. Important to note, cash was significantly impacted by approximately $500 million temporary level trade working capital headwinds resulting from the restart of our operations across Europe and the Americas. We expect that a majority of these headwinds will reverse as we move through Q4. As far as the $1.2 billion of liquidity, we expect that we will be at a quarterly low point. In fact, total liquidity is expected to exceed $2 billion by the end of September, before factoring any potential debt repayment as a combination of additional JV dividends, proceeds from our previously announced strategic transactions and the reversal of working capital headwinds mentioned earlier will help drive Adient's total liquidity higher. One other point worth calling out. The value of Adient's strategic joint venture network was highlighted in Q3 as the company collected approximately $240 million in cash dividends in the quarter. Year-to-date, the JV has contributed around $250 million with an additional $30 million expected in Q4. Turning to Slide 6. Let me spend a few minutes discussing the current state of Adient's operation and restart status, first in the APAC region. In China, the market continues to provide encouraging data points. Adient's China operations have returned to pre-COVID levels, in fact, more than 50% of our plants are running two shifts. China auto sales year-over-year volume continues to grow and improve sequentially. Adient's performance has outpaced the market, driven by our favorable customer and platform exposure as premium OEMs and Japanese OEMs have performed extremely well during 2020. Outside of China, certain Asian countries are showing early signs of market recovery. We expect that trend to continue in the coming months. In Europe, the market is recovering, but at a slower pace compared to recoveries in China and the Americas. Potentially all of Adient's operations have really started with the exception of the small JIT facility in the U.K. operations revamp. Production. Adient sales improved month-over-month in Q3, essentially 0 in April to about 75% of pre-COVID levels in the quarter. Based on current customer release schedules, we expect that rate to continue to improve as we move throughout the fourth quarter. Important to note, given production has not fully returned to pre-COVID levels, Adient continues to flex cost structure utilizing furloughs and short-time work as appropriate. We recognize the benefits associated with these programs will lessen over time and have taken proactive measures to address our structural costs in the region. More on that in a minute. In the America, all of the Adient's and JV plants have restarted production, similar to Europe. Adient sales have improved sequentially as Q3 progressed and exited the quarter at about 75% of pre-COVID levels. Customer releases for trucks and SUVs are running extremely strong. In some instances, production for certain platforms have returned to pre-COVID levels. While this is an encouraging sign, we remain cautious as rising COVID levels in Southern U.S. and Mexico and restrictive rules in the Chihuahua region in Mexico at risk to the production environment. Turning to Slide 7 and shifting gears. Let me address a common question related to new and existing business awards that continue to bubble up when meeting with our investor base. Specifically, are we losing business to our competitors? Simple answer, our focus on capital allocation and return on capital is driving profitable business awards, both new and incumbent business. We've studied and reviewed Adient's profitability by customer, by platform, by plant, basically slicing and dicing the data. What's clear is that certain businesses and platforms have consistently failed to earn an appropriate return. The team is focused on ensuring an adequate return is realized over the platform life is a key driver in determining which platforms we keep and which platforms we're comfortable walking away from. Over the past 12 months, we've successfully replaced approximately $700 million in consolidated revenue incumbent business with a negative return profile with new business awards, including conquest business with significantly better returns. You can see a few examples on the right-hand side of the slide. In addition, our solid execution and value-add initiatives are driving additional opportunities to quote and win profitable new business. We're excited about Adient's book of business that we'll be launching in the coming years. It's an important component of enhancing our margin profile. Speaking of launches, and turning to Slide 8, we've highlighted several critical launches, including the Ford F-150, Adient's second largest platform by revenue. Over the past several quarters, launch management has been a specific focus area, helping to drive Adient's improved operational and financial results. Adhering to a robust process around change management, enhanced readiness and program reviews and early escalation of potential issues made a significant impact. Over the past several quarters, we've called out several platforms, including the Cadillac CT5, Chevy Onix, Toyota Corolla, Nissan Leaf, for achieving flawless launch scores, which we define as 0, 0, 100, 100, 90, which breaks down to 0 safety incidents, 0 customer rejects, 100% on-time delivery, 100% achievement of financial targets, within 90 days from the start of production. We're not here to declare victory today, rather, we mention these examples as evidence of the team's hard work and preparedness for the upcoming launches. Turning to Slides 9 and 10. Let me conclude my comments with an update and the actions that are being taken to execute and position Adient for long-term success. As we discussed in our Q2 earnings and in subsequent investor meetings, Adient took quick and decisive actions to help mitigate the impact of steep production declines experienced across Europe and the Americas as a result of the pandemic. Many of these actions, such as furloughing our direct and indirect employees at the plant, enacting salary reductions and salary deferrals above plant, suspending 401(k)s, just to name a few, were temporary in nature. As Adient operations restarted and production increased in Q3, the benefits associated with these measures were reversed. Addressing the company's cost base with structural, more permanent measures is essential as we look to create stronger, more profitable business, especially given Adient's expectation of a smaller industry next year versus fiscal year '19 and the company's extreme focus on capital allocation and return on capital. The rightsizing actions identified and are being executed include the above measures -- above plant measures within our operations. The goal is simple, reduce Adient's breakeven point, be free cash flow breakeven or better in fiscal year '21, even though vehicle production is forecasted to be below pre-COVID levels. We have a lot of work ahead of us to achieve that target, but we're well on our way. And in fact, we've identified and are in the process of executing cost reductions between $75 million and $100 million versus 2019 in our central functions and regions. Slide 10, we've provided a few examples of these actions that have been announced. I won't read through the actions. But as you can see, the measures are far reaching, impacting above plants and joint venture operations. Certain of the actions identified can be executed rather quickly, such as force reductions that impacted our Americas regions and central functions in late May or actions implemented in Asia earlier this year. Other measures have a much longer lead time, such as significant reduction in personnel planned in Europe. As noted in the middle of the slide, in July, we began negotiations with the works council in Germany to execute force reductions impacting approximately 500 engineering and above plant personnel. The reductions are estimated to result in annual labor savings of about $40 million. It's important to note, a portion of the saving relates to flexing of the cost baselines, in other words, the prevention in margin degradation. Given certain of the actions will be implemented in fiscal '21, we only achieve a partial benefit next year. Full run rate savings are expected for fiscal year '22. Given the size and magnitude of the measures being implemented, we do expect to have an elevated level of restructuring costs running through our financials in the coming quarters. The team is currently finalizing our fiscal '21 plan. Once completed, we'll be able to provide you an estimate of the size and timing of the charges and the cash outlays associated with these measures. In the end, significantly lower cost base, combined with continued operational improvement and a strengthening platform portfolio is expected to result in a stronger, more profitable business, essentially further positioning Adient for long-term success. With that, I'll turn the call over to Jeff, so he can take us through Adient's financial performance for the quarter.

Thanks, Doug. Good morning, everyone. And Doug, I echo your earlier comments and hope everyone is safe and well. Starting on Slide 12 and adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side of the page. We will focus our commentary on the adjusted results, which excludes special items that we view as either onetime in nature or otherwise skew important trends in the underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to restructuring costs, asset impairments and purchase accounting amortization. Details of these adjustments are in the appendix of the presentation. Sales were $1.6 billion for the quarter, down about 60% year-over-year, which, as Doug noted, was driven by production stoppages at our customers across Europe and the Americas. Adjusted EBITDA for the quarter was a loss of $122 million. By applying our projected margin on lost sales and netted -- netting out our various short-term austerity actions, we estimate that COVID cost us approximately $400 million in the quarter. However, and as we'll discuss more in a moment, Adient's operations across Europe and America continued to experience improved business performance. With regard to equity income, Q3 fiscal '19 included $15 million of income related to our interiors business that is no longer part of our consolidation today. Therefore, on an apples-to-apples comparison, Adient's Seating equity income was up $8 million or 15% year-over-year, a very good performance as a result of our China operations continuing to capitalize in the improving China markets. Finally, adjusted net income and EPS were down significantly year-over-year, a loss of $261 million and $2.78 per share, respectively. I'll also point out that our tax expense of $14 million in the quarter contributed to our net loss. For those of you wondering why Adient did not recognize the tax benefit in the current quarter associated with their losses, if you recall, during 2018 and '19 fiscal years, Adient recorded valuation allowances against the deferred tax assets of many entities located in significant jurisdictions in which it operates, including the United States, Germany, Mexico, the United Kingdom, among others. No tax benefits are recognized for losses by entities with valuation allowances, and therefore, tax benefits were not recognized during Q3 by many entities that incurred losses. One last comment on taxes. Similar to Q2 of this year, Adient's third quarter effective tax rate was based on an actual tax rate calculation versus an estimated annual effective tax rate calculation. The continued use of this methodology was necessary due to the uncertainty of the pandemic. Now let's break down our third quarter results in more detail, starting with revenue on Slide 13. We reported consolidated sales of $1.6 billion, a year -- a decrease of almost $2.6 billion compared to the same period a year ago. Lower volume across North America, Europe and Asia was the primary driver of the year-over-year decrease, again, attributed to lost production volume associated with the pandemic. In addition, negative impact of currency movements between the 2 periods impacted the quarter by roughly $100 million. The biggest driver included the Brazilian real, the Czech koruna and the euro. Worth noting on the call out box on the right, consolidated sales in both Europe and Americas were down substantially at the beginning of the quarter, almost 100% for the Americas in April. Both markets improved month-on-month as the quarter progressed, exiting the quarter at between 75% to 80% of pre-COVID levels. In China, Adient sales were strong exiting the quarter, driven by our favorable customer and platform mix. For markets outside of China and Asia, sales began to improve as production volumes returned, but were materially impacted by the pandemic, similar to what we saw in America and Europe. For each of the markets, Adient's sales were in line or better compared to production within the markets. With regard to Adient's unconsolidated Seating revenue, year-over-year results were relatively flat. However, as you peel back the onion, the results varied significantly between unconsolidated sales in China versus unconsolidated sales outside of China. In China, driven primarily through our strategic JV network, sales were up 14% year-over-year, excluding FX. The sales performance versus the market is attributable to Adient's strong mix of business, specifically our exposure to luxury and Japanese OEMs. Outside of China, Adient has a variety of unconsolidated JVs. These operations were impacted by the same production stoppages that affected Adient consolidated results. On average, the unconsolidated sales of these JVs were down approximately 60% plus in the most recent quarter. We are encouraged -- we were encouraged with the sales trend. It's -- that's positively progressing, again, similar to what we're seeing with our consolidated sales. Moving to Slide 14. We've provided a bridge of adjusted EBITDA to show our performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was a loss of $122 million in the quarter versus $205 million last year. The impact of significantly lower volumes across Americas, Europe and Asia was the primary driver of the steep year-over-year decline. In addition, and to a much lesser extent, the planned divestiture of YFAI also had a negative impact on the year-over-year comparison as we stopped recording its income last December. Since Adient's financial performance is highly dependent on and correlated to vehicle production, adjusted EBITDA showed steady improvement month-on-month as we moved through the third quarter. In fact, after a horrible April and start to May, our June adjusted EBITDA results were about equal to June 2019 despite sales being down approximately 25% year-over-year. Speaking of monthly results, just one more data point. Excluding in April and May, Adient's margins have improved year-over-year every month through September 2019. Back on the quarter, and as Doug alluded to earlier, partially offsetting the significant volume reduction was improved business performance and lower SG&A costs. Labor and overhead performance, a reduction in SG&A costs, lower ops waste launch and tooling costs were the primary drivers. The approximate $45 million reduction in SG&A costs were primarily concentrated between EMEA and Americas and included increased efficiencies and positive benefits associated with the deconsolidation of Adient Aerospace and the divestiture of RECARO. But It's also important to point out, a portion of the improvement, call it, about $20 million, related to temporary benefits associated with employee compensation that are not likely to repeat next year. This temporary benefit was included in the net COVID impact of approximately $400 million. Business improvement, combined with labor and overhead efficiencies and lower SG&A, helped to contain our decremental margins to the mid-teens, call it, 16%, even as certain of the temporary cost reductions began to reverse. For example, the benefit associated with furloughing our direct and indirect plant personnel. This outcome was in line with internal expectations. And if you recall, we mentioned on the Q2 earnings call, the 13% decremental margin experienced in the second quarter would trend higher as Adient's operations restarted but would be contained below the 18% decrementals we typically expect. To ensure enough time is allocated to the Q&A portion of the call, we've provided our detailed segment performance slides in the appendix of the presentation. Improved business performance and lower SG&A costs, partially offset by the impact of lower volumes -- more than offset by the impact of lower volumes is the primary takeaway from the Americas and EMEA region. In Asia, a $15 million improvement in our Seating equity income offset the YFAI equity income from last year, but overall performance was driven by lower volumes and earnings outside of China. Let me now shift to our cash, liquidity and capital structure on slides 15 and 16. For the quarter, adjusted free cash flow, defined as operating cash flow less CapEx, was an outflow of $528 million. There were several factors that had a significant impact in the quarter's cash compared to our Q2 ending balance. Excluding Adient's ABL, these factors included, at a high level, lost production. Given sales were down roughly 60%, COVID essentially cost us about two months of production in the quarter. We stated heading into the quarter, every month of shutdown cost us approximately $175 million of cash. Therefore, loss production resulted in a burn of roughly $350 million, again, at a very high level. Also a temporary net trade working capital headwind of approximately $530 million heavily impacted Q3. This working capital outcome was expected with the sudden shutdown and subsequent restart of our operations. Q3 working capital headwind is expected to unwind in Q4 and benefit the quarter by approximately $400 million as noted on the right-hand side of the page. For full transparency, I'd also remind everyone in our -- that in our second quarter, working capital provided an approximate $100 million benefit to cash flow when production immediately ceased, reinforcing Adient's working capital movements tend to smooth out over a period of time. Moving on. Partially offsetting the approximate $880 million of headwinds just mentioned was just over $240 million of dividends received from our China JVs in the quarter. This, of course, was a very good outcome and highlights the value of our strategic joint venture network. In fact, for the full year, the dividends expected from China will be $70 million to $80 million higher versus our earlier estimates. In addition to the China dividends, a handful of other positive benefits aided the quarter, such as deferring certain tax payments and VAT-related items, call those benefits around $70 million. Although executing these actions throughout the year enhanced our liquidity and helped us weather the storm, these $70 million of deferrals will need to be paid next year. At the very bottom of the page, you can see we ended the quarter at about $1.2 billion of total liquidity, which included our cash on hand of $1.32 billion, plus $155 million drawn -- of undrawn capacity under our revolving line of credit. Looking forward, we believe Q3 represented our quarterly low point of liquidity and would expect liquidity to exceed $2 billion by the end of September before factoring in any potential debt repayment. Key drivers would include cash proceeds expected from previously announced transactions, call it, $500 million; additional China JV dividend of about $30 million; the reversal of temporary working capital headwinds; and increased capacity under our revolver. On Slide 16, in addition to showing our debt and net debt position, which totaled $4.5 billion and $3.5 billion, respectively, at June 30, we've also provided a snapshot of Adient's capital structure. Just a few comments here. We believe this capital structure not only provides flexibility to weather the storm, it provides flexibility to pay down debt after we cycle past the crisis. Subsequent to the quarter close, Adient proactively repaid $179 million drawn -- previously drawn on the revolver. I'd also note that capacity under the revolver is based on a 1-month lag such that Q3 availability was based on May AR and inventory balances. Updating the AR and inventory balances to the end of June increased our revolver availability to approximately $650 million in July or a bit more than $300 million that reported at the end of Q3. Improving Adient's cash generation remains a top priority. As Doug pointed out, the actions Adient has taken and plans to take are designed to improve our earnings and cash flow to be profitable in a smaller sales environment. Once the crisis is in the rearview mirror, we'd look to pay down various excess debt obligations. Over time, post crisis, we'd expect to have 0 outstanding balance in the revolver and run with a cash balance somewhere in the $500 million to $600 million range. Finally, a few closing remarks on Slide 17. First, we expect the global economic impact of COVID-19 will continue to influence the auto industry and Adient for quite some time. That said, we're encouraged by the green shoots that emerged as we progressed through Q3. Building on the positive trend in vehicle production established in our third quarter, Adient expects vehicle production across Europe and America to continue to improve sequentially in the coming months. Since Adient's financial results are highly dependent on and correlated to vehicle production and based on the environment today, we expect Adient's sales, earnings and margin performance will also trend higher in the coming months. Specifically, we expect Q4 sales to be in the range of $3.3 billion to $3.5 billion. Although this implies a 13% decline versus Q4 last year, at the midpoint, it's important to remember our sales in North America will be impacted by the launch of the F-150. Adjusted EBITDA for Q4 is expected to range between $180 million and $200 million. At the midpoint, this would be down versus last year's Q4, but significantly less down than would otherwise be implied by the expected decline in volume. Just to comment on our full year adjusted EBITDA, which is not shown, but I'm assuming you'll do the math, it would settle in around $580 million range at the midpoint of Q4's guide. And as you know, it includes an approximate $500 million impact from COVID. I know many of you will be tempted to take the $1.08 billion and use that as your starting point for fiscal '21, unfortunately, it's not that simple. The biggest factor being production volumes, which, heading into our fiscal '21, are very uncertain. More likely than not, we expect volumes to be lower than our COVID-adjusted numbers for 2019. In addition, our portfolio moves, such as the sale of RECARO and the expected sale of fabrics and YFAI, will impact the year-over-year walk into 2021. The team is presently finalizing our fiscal '21 plan, which we plan to share with you later this calendar year. Moving on and back to Q4. Within adjusted EBITDA, equity income will settle in the $50 million to $60 million range, in line with last year after backing out YFAI equity income of $14 million. Based on our customer launch plans, we expect CapEx to be about $100 million. And finally, for free cash flow, we'd expect Q4 to be in the range of $300 million to $400 million. With that, let's move to the question-and-answer portion of the call. Operator, we'll have our first question.

[Operator instructions] Our first question comes from Brian Johnson with Barclays.

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

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

Understood. Okay. And then second question, maybe a little more medium-term focused. As we look at the operational improvements that you've been able to do year-to-date, if I recall, coming into the year, you're looking at maybe around $200 million or so of performance improvements in 2020, and then you were actually ahead of that in Q1 before the shutdown started happening in China. And I guess, as we look at what you've done year-to-date, it looks to be more in like the $300 million range of performance at the plat and program level. And so just kind of curious here, as we look over the next several quarters or even a year or so, at what point do the comps start to become more difficult to extract performance? And I guess I'm wondering, has the COVID issue, has that allowed you to bring forward some of these performance initiatives? And I guess, just how much more runway is there as we look over the next 4 to 5 quarters?

I'd kind of break the question into 2 pieces. Certainly, a lot of the performance improvements we expected were in the, I'll say, commercial and operational improvement of the existing business. There was another element, as we improve launch performance, which we have, that would continue to improve our overall performance. The other element that we touched on is ultimately exiting business that was not performing up to our level of, I'll say, tolerance and then bringing on new business that would bring that next wave of operational improvement. So I think there's ample opportunity for us to continue to go down that path. I think COVID kind of suspending that for a period of time as we focused on liquidity. We've taken new actions that we have to put into the equation with anticipated a down market that probably wasn't originally envisioned when we started to articulate a turnaround plan. With regard to, is the environment right, I would say the environment is certainly right for our customers to look at cost reductions. If you just look at it from their perspective, they still are making huge investments, particularly in electrification. That was a daunting task. They still have the risk of fines in Europe if they don't meet environmental standards. That was a daunting task before COVID. So COVID in a down market hasn't improved that environment. I know, in fact, in talking with them, it's only increased their appetite to find ways to reduce costs. And when they want to find ways to reduce costs, that creates an opportunity for us. So I'm cautiously optimistic we can continue on our path and maybe even find, as we've mentioned in previous calls, incremental opportunity as customers maybe look to hold on the platform longer, delay launches or engineering and capital investment in program replenishment.

Our next question comes from John Murphy with Bank of America.

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

So first of all, John, I would say, kind of to the point I was trying to make before, maybe I can reemphasize it. Prior to COVID, I think business was somewhat as normal. And our customers were focused on new launch. They, I think, weren't particularly interested in cost reduction initiatives. Some were, some historically always have been, others were, I'll say, perhaps distracted. I think what COVID did was create an inflection point for them to recalibrate. And when they recalibrated against a down market for the foreseeable coming years, I think they recognized that they really needed to intensify their efforts there. Fortunately for us, and we've spent probably the last 9 to 12 months anticipating that, certainly not envisioning what COVID might. But to my earlier point that there was going to be a real need for them due to their investments in, whether it was electrification or autonomous vehicles or meeting environmental standards, that maybe they didn't completely appreciate. And I think COVID's been a catalyst for them to say, "Look, we really need to reach out." And this isn't just speculation on my part, this is direct conversations with our customers. I wouldn't say every single customer has come to that conclusion. But I think what we found is we've exposed them to the work that we're doing in that area, and it's some pretty impressive work. I mean to say it's VA/VE is just a complete understatement. It's what we call it only because we haven't come up with a better name. But it's really focused on this concept of return on capital investment, how to get scale with a customer without putting in brand-new investment, how to do that quickly. There's a tremendous amount of technology on the shelf right now in the area seating that does not need to be reinvented that can be applied to more than meet or exceed consumer expectations. And it's really directing the customer to say, "Look, you should come and take a look at this on your next-generation program." We've talked a little bit about one program we did that with one customer that just launched an electric vehicle, was going to introduce a next generation of an existing platform that's historically been internal combustion. And we said, "Why don't you just take this new architecture and seating systems that you're just launching on electric vehicle and apply it to this next-generation product." And in theory, theoretically, that requires 0 engineering work on your part, 0 capital investment on our part or minimal of us as we just leverage incremental volume off that and arguably minimal capital investment. That's becoming a much more appealing story to our customers, and I would expect that's going to continue.

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

Yes. Good question, John. The -- I would say the most of what you're seeing there is just pure volume impact. Mix wasn't a huge portion of that $438 million. As it relates to the mix for our fourth quarter, it's probably a little bit down just given the -- or unfavorable for us just given the launch of the F-150 and how production will go on that. But I'd say for the quarter, I'd take that $438 million as base. For the vast majority for your modeling purposes, I'd call it volume.

Okay. That's helpful. And then if you could just, I don't know, illustrate or elucidate where you think 2021 will land in the context of you talking about trying to get to breakeven free cash flow in FY '21? What is sort of the thought process or the business environment that you're fighting to get to that level in?

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

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

Yes. I'd say we like to see cash, give or take, around the $500 million to $600 million mark. And we're going to have, in a healthy time period, around $1 billion on the ABL, and we would expect that to be undrawn. So give or take, $1.5 million or so on a normalized basis. And we expect quite a bit over that as we end the year with the transactions, the working capital swing back and just the ABL kind of rebuilding the asset base, primarily from accounts receivable.

Our next question comes from Rod Lache with Wolfe Research.

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

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

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

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

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

Yes. There's a lot of pieces to that question, I suppose. But the payout math was higher this year. If you recall, we were also doing the transaction with YFAI and the change in AYM and the sales on the IP. We were able to extract a higher dividend, in particular, out of that metals venture, the AYM venture. So our payout ratio is significantly higher in 2020 than I would expect necessarily going forward that we've experienced going forward -- or in the past. So that was a positive for us this year that we were able to pull ahead. As it relates to the I guess, China market, we continue to do well. I'd say the -- this past quarter turned out to be better than expected as COVID rebound was strong. We anticipate that this quarter will be positive as well. Let's see where the run rate actually comes out for Q4. But I would say we do have some seasonality in that business from earnings. They tend to have a pretty strong fiscal Q1 in general. Our first calendar -- or our first quarter of our fiscal year, the last quarter of the calendar year tends to be a little strong. So you can't necessarily annualize 1 quarter there.

Our next question comes from James Picariello with KeyBanc Capital Markets.

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

Well, I mean, I guess the one thing I would point out, James, is the $700 million that we're going -- essentially Doug talked about, that we're giving up is business where we have a negative on -- in total, a slightly negative ROS on. So from an air pocket standpoint, when it goes out, there's not really a -- it's not like it's just lower profitability, it's actually slightly negative. So getting that business out will be an improvement to our overall EBITDA, not just our margin. As it relates to the new business coming on, it does launch over -- it's not at one point. There are several programs that are involved. But I would imagine you should model out this all takes place over the next 2 to 3 years.

Yes. With no -- my interpretation of air pocket is no major void in that time frame, unless something rolls out. It's pretty blended over that time frame.

Got it. And then maybe just a flavor on an SS&M update. Tying back to the $700 million that you're winding down or exiting, is there -- what portion of that attributes to SS&M? Is that business still on track to exit that targeted, whatever, $400 million in Tier 2 business over the next 2.5 years? Or are you seeing more profitable replacement activity still within SS&M? Is that trending maybe better than expected in terms of the renegotiations and new contract wins?

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

Our last question comes from Joe Spak with RBC Capital Markets.

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

Not sure I totally follow your question. But yes, I would say we are adjusting for the volume differential. And most of the COVID impact we're really talking about here of 400 -- approximately $400 million in the quarter, $500 million year-to-date is due to significantly lower volume and the pull-through expected that would have been expected from that volume. But help me if -- I think I missed the nuance.

Yes. I guess, like if we just back out the $100 million for the March quarter and the $400 from the June quarter, then EBITDA is still down sequentially, I guess. So what's -- and I thought there was -- there's some more underlying traction. So maybe it's some difficulty in sort of separating what you guys are sort of doing underlying from the volume. But I'm curious as to the explanation for why the sort of sequential drop off.

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

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

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

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

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

Thanks, everyone.

Thanks, everyone.

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