Adient PLC (ADNT) 2019 Q2 法說會逐字稿

Welcome and thank you for standing by. (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 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 of the business, followed by Jeff, who will review our Q2 financial results. After our prepared remarks, we'll 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 will caution you that our actual results could differ materially from these forward-looking statements made on the call. 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 of 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, 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 4. 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 demonstrate that 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 fell to $0.31 in the most recent quarter as the lower level of operating profit dropped right to the bottom line. We ended the quarter with $491 million of cash at March 31.

Important to note, the adjusted results covered exclude certain charges that we view as onetime in nature or otherwise skewed trends in the 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 provides 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 debuted on the Hawaiian Airlines' Dreamliner in 2021. We've not spent a lot of time discussing Adient Aerospace, as the team's primary focus is directed at stabilizing our core business. However, with the first launch of a 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 and 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 segments will consist of Americas, Europe and Asia. Slide 5 provides an illustration of what the new organization structure looks like.

Turning to Slide 5. I would characterize the organization that was in place as a heavily matrixed 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 and put general managers in place that have complete autonomy and responsibility.

In addition, we essentially replaced the front line operating team except 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 was a very tough time in the auto industry.

Directly below the front line operators, we've 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 VA/VE, operations, purchasing and finance. The last point here is we've aligned our incentives from a compensation standpoint that directly correlates to our financial objectives, namely, profitability and cash flow.

Moving to Slide 6. We've 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 the new organization to drive change, to do it quickly and within specific areas, namely, commercial discipline and operational performance. We've taken a large amount of costs out of our organization and expect additional benefits in the coming quarters, call it about $90 million in total on an annual run-rate basis when fully implemented. This is largely driven by decentralizing the organization and moving away from traditional matrix organization performance measurement groups.

We flattened the organization, eliminated a 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 7. Let me comment on the team, on where the team is focused and how our few back-to-basics priorities are providing a solid foundation for a path forward and future success. First, it starts with an increased focus on operational execution and 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, ensuring business quoted is core to our operations and taking a pass on business we believe are nonessential, such as Tier 2 structures and mechanisms business that are marginally profitable or higher-risk businesses, such as business associated with boutique manufacturers who are pursuing next-gen or futuristic mobility alternatives. This will benefit us as we maximize returns and reduce the 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've 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 8 illustrates how we're thinking about the pace of improvement and what to expect in the coming quarters and years. I think of it in 3 buckets: first, the near-term or stabilization period, what to expect as we progress through fiscal year '19; second, the improvement years, what to expect in fiscal years '20 through '22; and finally, the optimization years, what to expect beyond 2022.

So far this year, and as I've pointed out with our Q2 results, efforts to stabilize the business are taking root. We would expect further stabilization in EBITDA improvements half 2 versus half 1 based on further benefits associated with the new organization structure, the recent success -- progress we've made in resolving the backlog of open pricing issues with a handful of customers. Keeping in mind, the resolutions stopped the program from hemorrhaging 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, lessen premium freight and drive down launch costs. And finally, we had expected a stabilization in China vehicle production, which would drive improved results in the region, half 2 versus half 1. That said, we're still optimistic in a 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 2020 to 2022, we expect our continued focus on operational execution, commercial discipline, the reduction in overall launches and the rightsizing of SS&M will drive a large improvement in margin, but an even greater and more tangible benefit in free cash flow. Keep in mind, one of the mile markers that we've guided for you to measure the progress is cash flow neutrality of our SS&M business as we exit 2021. We've shown previously that the business burned close to $425 million last year, a simple calculation based on approximately $170 million of EBITDA loss and the CapEx spending totaling over $255 million.

In addition, we'd also expect cash flow to benefit as we improve our operating performance within our core Seating business. While we're excited about the opportunity that lies ahead in the near term, we also recognize it's a long journey to achieve full gap closure and optimal cash generation.

Continuation in rightsizing at 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 gap 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'll work to improve the pace of the improvement.

With that, I'll 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 a heavily matrixed 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 of the slide. The second quarter results shown today reflect the new segment structure. We realize a big part of Adient's turnaround story relates to our former SS&M segment. 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 our SS&M results, similar to what we've disclosed in the past.

Turning to Slide 11 and adhering to our typical format, the page is formatted with the reported results on the left-hand side and our adjusted results on 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 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 adjusted results relate to asset impairment and restructuring. Specifically, the realignment of our reportable segments and past operating performance required us to test SS&M's long-lived assets for impairments. As a result of the impairment test, $11 million of North America long-lived assets and $55 million of EMEA's long-lived 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've booked such charge was due to earnings in Poland, partially driven by higher levels of DTAs in Poland resulting from the fixed asset impairment just mentioned.

Finally, we booked $47 million in restructuring as we, among other things, modified the structure of the company and downsized our engineering team supporting the SS&M business. Complete disclosure of the adjusting items are called out in the appendix.

Moving on. At a 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'll 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 an $8 million decrease within our Interiors' YFAI business. 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 2 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 regards 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 compared to vehicle production in the region during the quarter.

Sales for unconsolidated Interiors, recognized through our 30% ownership stake in Yanfeng Automotive Interiors, was 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 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 the 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 [corrects] positively versus the first quarter of 2019 as global results improved about $21 million sequentially.

Similar to past quarters, we've included detailed bridges for our reportable segments, which now consist of Americas, EMEA and Asia, on Slides 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 launch related. I won't go into the specific line items as we've called them out in the call-out box on the page. However, I'll point out that partially offsetting the negative business performance, but not shown on 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 costs resulted in an approximate $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 and commodities resulted in an approximate $19 million headwind in Q2 this year versus the same period last year, and lower volume mix impacted the segment by roughly $17 million.

I'll 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 in the region gained 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 include a $23 million decline in equity income driven by lower vehicle production in China and operating challenges at YFAI. Equity income at YFAI of $4 million was 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 considering 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 drive inefficiencies as well as a few million dollars in warranty and tooling. Note that despite these headwinds, margin 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 on 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 the reduction in aged receivables, an increased focus on customer tooling collections, reduction in becoming Adient costs, lower cash taxes and CapEx, plus benefits associated with quarter-close timing differences between Q2 fiscal '19 and Q2 fiscal '18, helped drive the year-on-year improvement.

Worth noting, as we call out on the slide, one factor that can greatly influence the cash outcome is Adient's trade working capital, which is highly sensitive to quarter end dates. 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 footnote, we continue to break out CapEx by segment. 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 $3,383,000,000 and $2,892,000,000, respectively, at March 31. As disclosed, subsequent to quarter end, the company successfully executed a debt refinancing to strengthen and increase the flexibility of our capital structure.

Slide 18 provides a 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 plus 4.25% due in 2024, and a new $1.25 billion asset-based revolver or asset-based loan. As called out in the footnote on the page, the rates for the ABL and the TLB change based on certain criteria. For the TLB, the rate steps down 25 basis points if secured leverage is 1.5x or less. For the ABL, the rate steps 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 repay in full the company's prior credit agreements and increase 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-light 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 re-evaluate our intercompany 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 a determination that a significant portion of our deferred taxes will not be realizable and result in a noncash 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 the $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 expecting revenue, as seen with our Q2 results. With regard to adjusted EBITDA, we continue to expect the second half results and margin to surpass 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 a rebound is on the horizon, citing actions the China Central Government is considering or has implemented to stimulate auto demand, tangible evidence has not surfaced. In fact, China sales and production in April continue to come under pressure. Included in our EBITDA assumption is 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'd 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 multiyear journey. We do not anticipate a step change in performance from quarter-to-quarter. Instead, improvements will be steady, although occasionally lumpy, as we live within 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 onetime charge related to unamortized portion of the prior credit agreement, facility fees and approximately $35 million in fees related to the recent 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's approximate 30% adjusted effective tax rate.

As a result, we believe providing a cash tax estimate for the year would be of greater use when 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 relate to consolidated JVs and withholding taxes on dividends from JVs.

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 rightsize 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're hopeful the 2 countries can reach a resolution and avoid an escalation of tariffs, which if 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, 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'll provide updates as appropriate.

With that, let's move on to the question-and-answer portion of the call. Operator, first question.

(Operator Instructions) And the first question is from Colin Langan with UBS.

This is Gene Vladimirov on for Colin. 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 8.

Yes. I mean the way we've initially talked about it, it's 1/3 commercial, 2/3 operational. But when you think about operational, and that's why we've tried 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's a portion of the business, primarily on the SS&M side, that is going to need to roll off.

And the replacement business will either be not a program because we're downsizing that business, or where we're much more selective on customers and products that we've historically proven to be more profitable, a better return on investment. So it's how do you want to capture that. You can call that commercial. 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. And then could you break down the performance you saw in the JVs? Like, what sort of decrementals are you seeing in the business? And are you seeing any additional margin pressure beyond what would we expect given the sales declines?

Yes. So good question. Generally, you can expect that the contribution margin of those businesses across all our businesses was roughly 2x EBITDA margin, or maybe even a little higher. So a 12% sort of margin reduction -- or I mean sales reduction in the region, you'd expect something closer to 25-plus percent decremental margins on a variable basis. But it requires us to really take out the necessary headcounts and flex the workforce because if you leave too many direct workers, you're going to do worse than that. I would characterize the business having -- which it's never going through a period like this. The last 7, 8 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've even managed to take out portions of fixed and have performed well. So I'd say the margins you see are really just a reflection of the sales -- the margin reductions are purely a reflection of the sales reductions that we've seen today.

Maybe just a little bit more color regarding customers. I would characterize the market moving quickly. We're 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 of what we have to man our plants for versus the rate that they're going to run their plants.

So I think the smart suppliers just anticipate the environment they're operating in, and we fully expect that and we'll try and be instrumental in finding solutions and to help our customers, but not at the expense of margins in the business.

Got it. Okay. And then finally, congratulations on the airline Seating contract. How should we be thinking about when that actually begins to hit the P&L in a meaningful way?

Yes. I guess the way I think about that business is it's running -- maybe a couple of factors of how I think about that. It's costing us around $30 million in EBITDA, and roughly, free cash flow, maybe just a little bit more than that in free cash flow because there's a little bit of CapEx. But that's probably what we'll run at the next couple of years or so -- couple, few years as we develop that program and develop a few others.

And you're -- 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're contributing half, their share. So -- but the real impact to us is less. I expect that to run the next couple of years. What you're looking at is a 2020-2021 timeframe when revenue starts to hit on this business.

Our next question is from Emmanuel Rosner with Deutsche Bank.

I was hoping to see if you can give a little more color around the gradual pace of improvements you're expecting in the operational and commercial actions.

Obviously, Q2 showed some traction. But I guess on an EBITDA basis, it's still, I guess, a modest sequential improvement. Is there a potential for acceleration in the sequential improvement as we move through the year? Or are you essentially signaling that what we've seen Q2 is sort of like the sustainable pace of improvement?

No. 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 commercial issue. We -- on the commercial side, what we wanted to communicate is, we've broken this into waves. So the first wave with our commercial negotiations with our customer is stop the hemorrhaging. We -- this needs to be addressed most immediately. We balance that with thinking about our long-term relationship with our customer and making sure that we're 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're expecting 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 Jeff's comments on what we think might happen in Asia. So we haven't completely modeled it. But at least, it gives you some idea of the pace of change. And that's not on an annualized basis, it's calendarized. So 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 very -- solving some very near-term and pressing issues. Are you also having some discussions 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 at less-than-desirable profitability? Is that something that is going on or that still needs to happen?

Yes. That's -- we've really increased activity there. We've been very transparent with the customers, too. With all of our major customers, particularly ones where we are performing below what we deem an acceptable level, we've gone in and walked them through the profitability of our business by region, by product, where there's strength and where there's weaknesses. And that's with 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've had some pretty successful conversations with customers around those issues.

And our focus, as we move forward, is to do that well in advance, ideally, a year before start of production when you're making -- we're 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. And so the issues we've run into as we've struggled with our most recent launches is we -- our timing when they had the commercial discussions during launch, and if the launch went bad, then our customer basically postponed any discussion, and that's where we've started to build this backlog of open commercial issues that we've been slowly but steadily working our way through.

Our next question is from John Murphy, Bank of America Merrill Lynch.

I just wanted to kind of focus on Slide 8 here. But Doug, I just wanted to clarify one thing that you just said. I think you were talking about a $50 million improvement by segment in the second half versus the first half. And I'm just curious, I want to make sure if I heard that right. And by segment, do you mean Americas, EMEA and Asia, sort of the new segments, meaning that you might have as much as $150 million performance improvement from...

Yes. 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?

Yes. I'd like it to be per segment, but it's not.

Got it. Okay. And then if we look at Slide 8 here, I mean you have 3 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 are 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're loading the operating margin. So curious what that ultimate sort of peer average is in your mind. And sort of are there sort of step functions as you work through these 3 periods or is it really linear, like Jeff mentioned?

So the way that I would answer the last part of it -- I'll 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 into segments. They do have corporate segregated out, so we kind of just simply take that corporate piece, allocate it by sales for them and use their seating segment, and we compare that back to our numbers.

I would say that the -- and then what we do is we back out our equity income. And to some degree, we back out a little bit, and we've always used like 50 extra basis points of support costs because our large network of JVs in China, we've always said, requires a little bit more governance cost within our consolidated numbers to support that. So roughly 50 basis points less than that competitor would be where we have the benchmark.

And ideally, we'll be better than that. We'll -- there's a lot of reasons why we think our -- our footprint, our size, our capability, our geographical breadth, our customer diversity, et cetera, should play for higher margins over time. But that's the bogey we're chasing, but we try to lay out on Slide 8 a reasonable projection of getting there.

One of the reasons it's going to take a little while, John, too, as you think about -- some of this business, Doug talked about, we're 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 were in such shape, our goal has been to get them so they're no longer hemorrhaging, meaning that they are costing us cash on on-going basis. And that's a lot of the commercial negotiations. And some of those -- you can think 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'm sorry to be a pain in the neck on this, but I mean the math in sort of -- that you did there could land you in a couple of places. I mean is that basically 6.5% to 7%? Is that where you’re landing when you do that math that you just talked about?

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

Okay. And then sort of the...

Obviously, numbers move, but that's kind of the number we've been chasing, essentially that one competitor and the math I just described.

Yes. And the only thing I would add to Jeff's comment is really, the intention there was to say, look, this is the -- at a minimum out of the possible because if we have someone in our same peer group, making the exact same products, who's got a somewhat similar profile to us that can achieve that, then there's no reason we can't and no reason that I'm 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 all that can be achieved, not that I'm going to give you a different number right now. I think about it in terms of you have to have a viable target out there that people can see and get their head around.

Obviously, the issues we have in front of us right now are much more damaging to the business that need 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 vantage points. And that's why we've broken into these 3 segments. Stabilize the business, get ourselves on solid ground operationally and in 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 of maybe the minimum that we should expect to achieve from the business. It's just a question of how fast we can get there. And right now, we've landed -- 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 of $425 million 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 flow.

Yes. Maybe think about it this way, John. We published the numbers for last year of roughly a negative $170 million on EBITDA to $40-ish million to $50-ish million on CapEx. So we've said, with the downsizing of SS&M, with narrowing our focus of where we want to compete in that business and getting the mechanism's conversion that we've been straining on over the last couple of years to launch once that CapEx is all spent on the mechanism side, and we've re-shifted some of the focus on the SS&M business, we think that CapEx should come down to $150-ish million, maybe a little bit lower. And at the same time, the EBITDA, that means, over that time period, is going to have to go from that minus $170 million to at least the $150 million. We think both those are going to be more gradual.

Hopefully, we'll go faster, but I would expect more gradual. We'll obviously work to go as fast as we possibly can.

Okay. And then if we look at Slide 5, it looks like 2 of the regional heads are relatively new to the company. I'm just curious, Doug, as you go through the process of bringing in and vetting human capital and folks like this that are going to run the businesses for you, what's the process? And how are you, kind of, making sort of -- and I hate to be so blunt about this -- the fix, sell, close process with the human capital in the company? I mean I'm just trying to understand how this is changing because that seems like that's a big part of the story here, too.

Yes. It is. So I would think of it 2 ways. First, for us to pivot and move as quickly as we needed to move, I think we just needed to be a bit disruptive in the way we're 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 managers full resource availability to drive issues. Not -- we talked about it, is it a commercial issue? Is it an operational issue? Many of the issues fall into multiple categories and to effectively solve them, you need to work collectively across a team.

Very much true on launches. And I think the way we were structured before, we were so functional in our structure that it was a detriment to teamwork. And it sounds maybe a little bit corny, but it's really a 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're trying to achieve here. It's simplifying the business, getting the issues and point people accountable, but with the full complement of resource to address it.

As far as how do we vet 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, that -- when I worked at TRW. So I spent 2008 to 2012 working with these guys in a pretty challenging environment. So we talk about being battle-tested, having a broad skill set. They're not seating experts, but they've worked in complicated products, arguably more complicated than seating systems, braking, suspensions, steering.

Jerome recently was at Aptiv, so he's got experience in just-in-time from the wire harness perspective. Michel was at Delphi Technologies, broad range of skills from -- and also product knowledge, but the demonstrated leadership capability in difficult environments, and that's why I brought them over to and asked them to come.

I would just mention Kelli Carney, who's running global purchasing, is also new. I worked with her from my days at Lear. She understands seating systems, she spent her more recent time at IAC, where she ran global purchasing and also was responsible for the European business, so she's 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'm most excited about of this group is we're functioning collectively as a team. So -- and then we have Asia, which just continues to operate well to complement that. So I'm feeling good about the leadership, and what we just mentioned in this call is, beneath that, we've brought some bench strength in to help accelerate the pace of change.

And maybe if I can sneak one last one in. Operationally, at your JVs, how much oversight or impact can you have there if that market continues to sort of be tough? I mean is there anything that you guys can interject as far as 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 have not been bashful about talking. We've always had a constructive relationship with our JV, and we're -- we have good ideas. They have good ideas. We'll look to leverage that. So that's something we've been encouraging because it's in both our interest.

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

Okay. Just maybe if you could focus in 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 negotiations? And is that sort of the right pace we should expect here for the rest of the year? Or does that start to improve in the back half?

Well, I'll hit just sort of a base question. What you'd expect usually on a lot of these is to have a negative pricing. We usually get productivity on a net basis to our customers. The fact that you're 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 have caused us challenges, because we're still giving productivity on a large number of our programs as we normally would in the business, but some of these offsets have brought those up to positive numbers.

Yes. And I would say it's not completely reflective of either a full year or a 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're net positive with productivity -- contractual productivity commitments we've had with our customer and, to a lesser degree, inflationary material economics, is a pretty good outcome as well. But as we go forward, you should expect to see those numbers increase on a year-over-year basis.

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

Okay. And then -- and maybe just to sort of attack the sort of improvement question from a different angle. When you sort of are reporting regionally now, it's quite striking that Asia's margins are basically in 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're really aiming for here in those regions.

Some of it's structural. I mean we have a very, I'll say, dominant position in the Asian market, so there's not the same competitive tension that exists 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've had in North America -- in the Americas and in 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 mechanisms business in that region, which certainly is advantageous to them because 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 of 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're doing things well. We have very -- the programs tend to be bigger in nature. Things like the F-150 or the Dodge Ram 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's a greater amount of opportunity for all the self-help to come into the regions. And Americas, I think, is probably the biggest area of opportunity for us.

Thanks, Joe. And Robin, it looks like we're at the bottom of 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 Matthew today. Thank you.

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