Welcome and thank you for standing by. [Operator Instructions] I would now like to turn the call over to Mr. Mark Oswald, Head of Investor Relations. Sir, you may begin..

Thank you, Julie. Good morning and thank you for joining us as we review Adient’s results for the second quarter of fiscal year 2021. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com.

As usual, this morning, I am 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 Q2 financial results and outlook for the remainder of the 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 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 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 will now turn the call over to Doug.

Doug?.

Great. Thanks Mark. Good morning and thanks to our investors, prospective investors and analysts joining the call this morning as we review our second quarter results for fiscal 2021. I hope you and your families are staying safe and healthy. Turning to Slide 4, let me begin with a few comments related to our second quarter.

Simply put, Adient delivered solid results despite turbulent production environment. Remaining focused on our priorities, which continue to drive improvements in Adient’s business performance enabled the company to partly offset a variety of macro and industry related headwinds.

Focusing on the left-hand side of the slide, Adient’s Q2 adjusted EBITDA of $303 million was up $92 million or 44% year-on-year. If you recall, last year’s results included the negative impact of significantly lower production in China which impacted Adient’s equity income.

Production stoppages across Europe and the Americas were just beginning toward the end of March as COVID-19 started to impact the industry in those markets. Adient’s adjusted EBITDA margin performance of 7.9% or 6.5%, excluding equity income, was up 190 and 80 basis points, respectively, versus Q2 of last year.

I point this out as a proof point that the company continues to close the margin gap with our nearest competitor. Just one more point on Adient’s adjusted EBITDA. The performance in Q2, much like Q1 of this year, was aided by the phasing of our commercial settlements, which for fiscal year ‘21, is heavily weighted toward the first half.

Jeff and I will have additional color on half one and half two influence in just a minute. Adient’s Q2 ending cash balance and total liquidity were approximately $984 million and $1.9 billion, respectively. Cash balance was impacted by approximately $700 million of cash used during the quarter to voluntarily pay down a portion of the company’s debt.

Specifically, $700 million was used to successfully tender $640 million in aggregate principal of the company’s 7% senior notes. Subsequent to the quarter, Adient exercised an early redemption option of $80 million in principal on the 7% notes, leaving a small stub of $80 million of 7% notes outstanding, which we expect to take out relatively soon.

Lastly, keeping with the capital structure being amended, extended and upsized its term loan B. No doubt these actions are good first steps in transforming the company’s capital structure. Jeff will have more on the topic in just a few minutes.

On the right hand side of the slide, we’ve highlighted a few of the negative headwinds the team has and continues to manage through as a result of unplanned production stoppages at our customers.

These disruptions were driven by the well-documented 70 conductor and petrochemical supply chain disruptions, which ultimately resulted in lower sales, operating inefficiencies as many of the stoppages in production happened with little or no advanced warning, increased freight costs, which were rising as we ended the quarter, but increased significantly due to petrochemical supply chain issues in North America, to name a few.

Continued improvement in the company’s business performance helped lessen the impact of these headwinds. I wish I could report 100% of these issues are behind us. Unfortunately, certain of the headwinds such as production disruptions, driven by chip shortages have continued in our fiscal third quarter.

As you would expect, the team is working hard to help mitigate the negative impact. Turning to Slide 5, in addition to executing actions to mitigate current headwinds and strengthen the business in the near term, Adient also began to execute actions to transform the business long term.

The first action involves Adient’s strategic transformation in China. As announced in mid-March, Adient entered in definitive agreements with our joint venture partner, Yanfeng, to end its YFAS joint venture in China.

The transactions contemplated by these agreements upon closing will allow Adient to independently manage our business in China, which is expected to result in a variety of benefits, including capturing growth in profitable and expanding segments, improving the integration of the company’s China operations and allowing for more certain value realization relative to the status quo where cash and value are generated from dividends at entities, not in Adient’s control.

As mentioned in March, we expect to remain a leader in China market. Projections of what the China business looks like will include annual sales of about $4.5 billion, including both consolidated, non-consolidated sales. We will have 9 major entities with extensive customer and geographic coverage.

Our complete in-house engineering capabilities will be second to none, supported by 3 global tech centers with more than 800 engineers. This is expected to result in Adient being on par with and among the top 3 complete seat suppliers in the market, which based on our estimates, equates to a market share of just under 20%.

We are excited about the opportunities that lie ahead for Adient in the China market. Equally exciting is the transformation that is underway with Adient’s capital structure.

Executing the company’s strategic transformation in China, combined with the cash on balance sheet and improvement business performance provided a unique opportunity for Adient to make transformational changes to our capital structures.

I just mentioned the progress made through April with a 7% notes tender offer, early redemption of the term loan B agreement. These actions placed us on a solid path to de-risking the balance sheet and achieving our leverage target between 1.5x and 2x.

Turning to Slide 6, let me provide a few comments on Adient’s business wins and how we’re strengthening our leading market position. A big part of the story, as we’ve communicated over the past several quarters has been our intense focus on profitable business wins. These include new business, conquest business and replacement business.

Alternative powertrain programs such as BEV or BEV have also been a big component of our recently awarded business. Although the seating business is generally immune to the market shift toward BEVs, we’re excited to see the company’s success at capturing BEV programs accelerating.

Not only would these programs strengthen our diversification, they also provide Adient with an opportunity to participate in clean technologies. The question was recently raised as to whether or not Adient can retain its leading market position given the proliferation of BEV platforms, specialty platforms produced by non-legacy manufacturers.

The simple answer is, yes. Adient’s acceleration of BEV wins and the production assumptions associated with the platform suggested our future market share will be commensurate with Adient’s current leading market position. Let me share a few stats that give us reason to be optimistic.

In EMEA, Adient is presently the market leader with approximately 50% share of complete seat BEV market. We expect the wins to continue giving us confidence that we will retain our leadership position over the next few years.

In China, legacy OEMs and new entrants wins with OEMs like Xpeng and NIO are expected to drive a steady increase in Adient’s market share of the complete seat BEV market over the next several years, outpacing BEV sales growth over the same period.

Speaking of NIO, I am pleased to report Adient’s joint venture CQ Adient, was recently awarded the NIO Quality Premium Partner Award for 2021, a great accomplishment and another proof point of Adient’s ability to provide quality products and services to all of our customers, both new and legacy.

In North America, where adoption of BEVs has lagged other markets, Adient is well positioned given our recent accelerating wins. In fact, if I look over the next several years, we expect our complete BEV sales to grow appreciably versus our current BEV sales. Adient’s expected pace of growth far exceeds the BEV sales growth rate over the same period.

Turning to Slide 7, as we typically do, we have highlighted several critical launches that are complete in process or scheduled to begin in the near term. I’m happy to report at the midway point in this fiscal year, the team’s continued focus on process discipline around launch readiness, is underpinning Adient’s successful performance.

In addition to the Ford F-150 launch, which is in the rearview mirror, the team has also completed successful launches with the Volkswagen ID3, Mercedes B Class and FAW-VW Golf A8.

We are pleased with our continued success, especially considering the heavy launch load, particularly in North America, and many temporary production disruptions that took place during the quarter.

We have no intention of letting up and look to finish the year strong with the launches that are in process and scheduled to begin in the third and fourth quarter. Turning to Slide 8, my commentary this morning touched several components of how the company is driving value to our stakeholders.

First, the team’s continued execution of the company’s turnaround plan, the success. The actions implemented are very transparent, as illustrated within our improved financial results not only for Adient’s second quarter results announced today, but for the past several quarters.

Business improvement has spanned across operations and segments, most notable being the improvement within Adient’s metal business which, as we highlighted last month at an investor conference, is now forecast to be free cash flow breakeven in fiscal year ‘21, 1 year ahead of schedule.

Although we have made significant progress in closing the margin gap with our nearest peer over the past 12 to 18 months, more work lies ahead, which we are confident, will drive further earnings and cash flow growth. Second, we continue to strengthen our leading market position with profitable new business wins.

As I mentioned just a few moments ago, an accelerating component of that growth is the – is related to EV platform wins across legacy OEMs and new entrants. Third, with operations steadily improving and our market position strengthening, Adient is now in a position to execute strategic transformations to the business.

Actions executed and announced to date include various portfolio adjustments made in the fiscal year ‘20. The strategic transformation announced for Adient’s business in China and the transformation that is taking place with Adient’s capital structure.

We are confident this comprehensive plan when properly executed, will further Adient for sustained long-term success driving additional value to our stakeholders. Of course, this is the auto industry, and we’re going to be speed bumps along the way.

It’s important we stay focused and managed through the headwinds, much like we did last year through the first two quarters of 2021. Rest assured, the team is working hard to navigate them. The team is working hard not only to deliver on our fiscal year ‘21 commitments, but also to position the company for sustained success.

Our first half results provide a solid pathway to achieving our goals. Before turning the call over to Jeff, let me conclude my remarks with a few comments around the major influences that drove Adient’s first half performance, and more importantly, what we’re expecting for the second half of our fiscal year.

On Slide 9, you can see the overlap of the two circles improved business performance, including launch performance, lower ops waste and lower normal course SG&A costs drove improved profitability in H1. We would expect the trend of ongoing business improvement to continue in the second half of fiscal 2021.

As mentioned earlier on the call, a portion of the improved business performance has been partially offset by temporary operating inefficiencies resulting from unplanned production stoppages, adverse weather and COVID-19.

These influences had a significant impact on Adient’s second quarter results and are expected to influence our third quarter results as well. Looking at the far left circle, we have highlighted influences that provide a significant benefit to our first half results.

But due to timing or changing macro conditions are not expected to have the same impact on our second half results. These include commercial settlements. Excluding the approximate $25 million in onetime settlements called out on our Q1 earnings call, the absolute size of settlements expected in fiscal year ‘21 are similar compared to past performance.

However, the phasing of commercial settlements this year are heavily weighted towards half 1. This is especially true in Europe and driven by a number of factors, including timing of LTA payments, timing of recoveries and lower volumes in fiscal 2020, which drove settlements and accrual true-ups in early 2021.

Strong volume and temporary COVID savings supported our H1 results. However, as we look at H2, volume is expected to be down versus H1 and temporary savings from COVID actions will be much smaller.

Two other H1 influence is expected to shift as the year progresses include equity income, strong in half one, however, half two results will be negatively impacted by the expected decline in volume and divestiture of our SGA joint venture and Adient’s engineering spend, which is expected to be greater in half two versus half 1.

The shift or heavy concentration in half two is largely driven by previous program delays. In addition to the changes expected to the major H1 influences, we also expect increased commodity prices and increased freight costs to have a much more significant impact on our second half results.

With that, I will turn the call over to Jeff to take us through Adient’s second quarter 2021 financial performance and to provide a little bit more color on what to expect as we move through the second half of fiscal 2021..

Great. Thanks, Doug. Good morning, everyone. I will start on Slide 11. And adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right hand side of the page.

We will focus our commentary on the adjusted results, which exclude 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 a gain on the sale related to the SJA divestiture, transaction costs, financing related adjustments, specifically the premium paid to repurchase the debt and write-off the deferred financing charges, restructuring costs and purchase accounting amortization.

Details of these adjustments are in the appendix of the presentation. Just one more comment before jumping into the results. You will notice the company continued and will continue to report YFAS earnings and equity income until the transaction closes, as we legally still own our 49.99% interest.

If you recall, we had stopped recording WiFi equity income last year when we announced the sale because we were in an impairment position which required us to effectively impair our investment based on the recoverable amount via the sales price. We’re in a much different situation with the YFAS transaction.

For the quarter, sales were $3.8 billion, up about 9% year-over-year, which were in line with internal expectations and primarily driven by improved volume across the regions. Portfolio adjustments executed in fiscal ‘20, which impacted the year-over-year comparison by about $32 million was a partial offset.

Adjusted EBITDA for the quarter was $303 million, up $92 million or 44% year-on-year, more than explained by an increase in equity income, volume and mix and improved business performance.

The improvement in business performance was achieved despite numerous temporary operating inefficiencies stemming from supply chain shortages, adverse weather in North America and ongoing COVID related influences, more on that in just a minute.

Finally, adjusted net income and EPS were up significantly year-over-year at $110 million and $1.15, respectively. Now, let’s move down our second quarter results in more detail. Starting with revenue on Slide 12, we reported consolidated sales of $3.8 billion, an increase of $308 million compared to the same period a year ago.

Key drivers of the year-over-year increase included a $219 million benefit related to higher volumes and the positive impact of currency movements between the two periods of about $121 million.

The positive benefits of volume and FX were partially offset by just over $30 million of headwinds related to portfolio adjustments executed in fiscal ‘20, namely the divestiture of our fabrics business.

As you can see from the table on the right hand side of the slide, Adient’s consolidated sales achieved growth over market in Americas, EMEA and China, primarily driven by strong product mix and Adient customer composition. Adient’s sales in Korea faced some temporary headwinds driven by customer launches and model changeovers.

With regard to Adient’s unconsolidated seating revenue, year-over-year results were up approximately 70%, excluding FX. In China, where the majority of our unconsolidated seating entities exist, unconsolidated sales were up 87% year-over-year, excluding FX.

Adient’s sales outperformance versus the market is attributable to Adient’s strong mix of business, specifically our exposure to luxury and Japanese OEMs. As a reminder, Q2 production in China last year was significantly impacted by production stoppages resulting from COVID-19.

Moving to Slide 13, we have provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled Corporate represents central costs that are not allocated back to the operation such as executive office, communications, corporate finance, legal and marketing.

Big picture, adjusted EBITDA was $303 million in the current quarter versus $211 million last year. Key drivers of the increase included an increase in equity income of $43 million. The improved equity income was driven by higher volume and strong vehicle mix in China.

If you recall, last year’s Q2 production in China was significantly impacted by COVID-19 production stoppages. Increased volume and strong mix were also present across Americas and Europe. In total, volume and mix benefited the quarter by approximately $33 million year-on-year.

In addition improved business performance which consisted of normal course commercial settlements, lower launch and ops waste and lower labor and overhead, drove a $24 million net benefit to the most recent quarter.

Important to note, the business performance bucket contained several temporary operating inefficiencies that, in effect, masked the ongoing – true ongoing operating performance of the company.

The temporary inefficiencies, which included ops waste and labor and overhead inefficiencies and increased premium freight, to name a few, were primarily driven by supply chain disruptions and unplanned production stoppages related to the semiconductor shortages, petrochemical disruptions and to a lesser extent, COVID-19.

In total, approximately $40 million of inefficiencies were recognized in Q2 fiscal 2021. We expect certain of these temporary headwinds to continue into the second half of the year, more on that in a few minutes.

Outside of the temporary operating inefficiencies, net commodity increases impacted the quarter by about $8 million and other employee compensation measures impacted the SG&A bucket by approximately $25 million.

In the end, given all of the moving pieces, the team worked hard to lessen the impact of the temporary headwinds to deliver the $92 million year-over-year improvement. I will also note at the bottom of the slide, metals continues to move in a positive direction as that business was up about $29 million compared to last year’s second quarter.

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, a high level, improved volume and mix benefited each of the regions. Ongoing business performance continued to trend in a positive direction.

However, temporary operating inefficiencies resulting from the unplanned production stoppages masked the overall improvement. SG&A costs continued to trend lower. However, the temporary benefits recognized last year did not repeat partially offset this quarter’s performance.

This was especially true in the Americas where planned production stoppages, inclement weather and premium freight resulted in approximately $30 million of temporary operating inefficiencies. SG&A in the region was impacted by about $25 million of headwinds stemming from temporary benefits recognized last year.

In Asia, increased equity income, which benefited from improved volume and mix in China, was the primary driver of the segment’s improved results. Now, let me shift to our cash, liquidity and capital structure on Slides 14 and 15.

Starting with cash on Slide 14, I’ll focus on the year-to-date results as the longer timeframe helps smooth some of the volatility in working capital movements. Adjusted free cash flow, defined as operating cash flow less CapEx, was $14 million.

The $145 million improvement in adjusted EBITDA, net of equity and $60 million reduction in cap spending was more than offset by expected increases in restructuring of $60 million, increase in interest paid of $30 million, elevated non-income tax related taxes, specifically VAT payments and timing of commercial activity.

With regard to the VAT payments, while some of the year-to-date outflow will reverse in the second half, we would expect larger-than-normal outflows in fiscal ‘21 and ‘22 related to government approved delays from 2020 related to COVID accommodations.

As noted on the right hand side of the slide, we ended the quarter with approximately $1.9 billion total liquidity comprised of cash on hand of about $984 million and approximately $945 million of undrawn capacity under Adient’s revolving line of credit. Cash used during the quarter to voluntary pay down debt totaled about $700 million.

Speaking of debt and flipping to Slide 15. In addition to showing our debt and net debt position, which totaled just under $3.7 billion and approximately $2.7 billion, respectively, at March 31, we’ve also provided a snapshot of Adient’s capital structure.

As noted on the slide, efforts to transform the balance sheet began in earnest during Q2 and subsequent to quarter end. Actions included the successful completion of a tender offer for $640 million in aggregate principal of the company’s 7% senior first lien notes due in 2026, which occurred in March.

Subsequent to the quarter end and sticking with the 7% notes, the company exercised an early redemption option on $80 million in principle of the notes, leaving a small $80 million stub outstanding at the end of April.

A second early redemption option of the remaining $80 million of principal is expected to be exercised and completed relatively soon, which will fully take out the 7% notes. Also following the quarter end, the company successfully amended and extended its term loan B.

The amendment, among other changes, extends the maturity date of the loans outstanding to April 8, 2028, reduces the interest rate to LIBOR plus 350 versus LIBOR plus 425 on our previous term loan and establishes incremental term loans in aggregate principal of $214 million.

Adient is solidly on track to make a transformational change in its capital structure as we progress through 2021.

Moving to Slide 16, let me spend a few minutes expanding on Doug’s comments around the major influences that drove Adient’s first half performance and importantly, what we’re expecting for the second half of our fiscal year, specifically how these influences, Doug spoke to on Slide 9 impact adjusted EBITDA in the second half of the year.

On the left hand side of the slide, you can see our actual first half results. With consolidated EBITDA of $534 million and equity income of $147 million, which combined totals $681 million.

Based on the midpoint of our fiscal ‘21 adjusted EBITDA guidance, which remains at between $1.0 billion and $1.1 billion, the implied second half adjusted EBITDA would total about $370 million, comprised of consolidated adjusted EBITDA of about $285 million and equity income of about $85 million.

The table to the right highlights key factors that are expected to influence full year earnings and compares the expected impact on adjusted EBITDA in the second half versus the first half of the year.

The phasing of commercial settlements, for the reasons discussed is expected to be the biggest factor of the lower earnings in second half versus the first half, call it, between $125 million and $150 million.

Again, absolute full year levels are in line with prior results, excluding the $25 million of one-offs noted in Q1, but fiscal ‘21 is significantly skewed to the first half. Rising commodity prices, as mentioned on previous calls, are much more significant in H2, call it between $50 million and $75 million.

Timing of engineering spend and non-repeat of temporary COVID benefits expected to impact the second half – are expected to impact the second half by between $25 million and $50 million and $10 million and $35 million, respectively.

And finally, the lower level of volume that is expected in H2 versus H1 will impact the second half comparison by between $25 million and $50 million. Masked by these temporary influences is a continued upward trajectory and business performance of between $35 million and $60 million.

In total, these influences are expected to result in H2 consolidated adjusted EBITDA declining between $200 million to $300 million compared with H1 and finally incorporating the approximate $60 million reduction in equity income that is expected in H2, total adjusted EBITDA will likely decline by some $260 million to $360 million versus the first half results.

Two important items to note, first, business performance continues to improve as we progress through the back half of the year. And second, many of these factors are temporary in nature or driven by timing. In fact, if you look at the far-right column, we provide an early view on how we expect these factors to impact fiscal ‘22.

First and foremost, continued business performance is expected – improvement in business performance is expected. Volume based on third-party forecast is expected to trend higher. Net commodity prices should become a tailwind. Commercial settlements and engineering spend are expected to be relatively flat.

And equity income adjusted for the completion of our strategic transformation in China should be relatively flat. No doubt the temporary factors just discussed are having a significant impact on fiscal ‘21.

And in fact, if you adjust for approximately $85 million of commodities, $40 million in efficiency and $35 million of volume impact, the back half of ‘21 would be around $160 million better compared to the back half of fiscal 2019, which demonstrates the improved business performance of the company.

With that, let’s flip to Slide 17 and review our complete outlook for fiscal ‘21. Starting with revenue, our guidance has not changed. We continue to expect consolidated revenue to trend between $14.6 billion and $15.0 billion.

Looking at second half production, as mentioned earlier, we continue to assume second half fiscal ‘21 global production will decline compared with the first half of fiscal ‘21 production. In addition, risks of production downtime, resulting from supply chain disruptions remain elevated, especially in the near-term.

We just walked through the drivers of adjusted EBITDA, which we are forecasting to range between $1.0 billion and $1.1 billion. Moving on to equity income, which is included in our adjusted EBITDA, is now forecast to be around $230 million for the year.

The $20 million reduction from previous forecast provided back in February reflects the divestiture of our SJA joint venture and lower volumes due to the semiconductor shortages.

Interest expense, based on our recent debt pay-down, term loan B amendment and expected cash balance is now forecast to be approximately $215 million, with $250 million of actual cash interest spend. This forecast does not include the positive impact that would materialize with future voluntary debt pay-down.

Cash taxes in fiscal ‘21 are expected to be around $85 million.

It’s important to remember that we maintain valuable tax attributes, such as net operating loss carry-forwards and that these tax attributes can be used to offset profit on an ongoing – or on a going-forward basis so cash taxes on Adient’s operations should remain low even as profits are increasing.

To assist with your modeling, although volatile with fluctuations between quarters as mentioned earlier, we expect Adient’s effective tax rate to be in the mid-20% range, down slightly versus the previous guide of around 30% for fiscal ‘21.

We would expect that rate to fluctuate on a quarterly basis due to the valuation allowances and our geographic mix of income. No change to our capital expenditures, which we expect to range between $320 million and $340 million essentially in line with fiscal ‘20 results.

Although we see opportunity to reduce capital expenditures further in the out years, driven in part by a smaller SS&M business, the current year expenditures are supporting current launch plans. And finally, one last item for your modeling.

We now expect free cash flow to range between $50 million and $150 million in fiscal ‘21, up $50 million from our previous estimates primarily driven by better-than-expected dividends in China.

As previously mentioned, there are several one-off factors driving this result for ‘21, such as an elevated level of restructuring, which is expected to be around $200 million.

The elevated spend, which is about 2x the normal run rate is necessary as we execute actions to right-size the business especially within our European operations, where external and internal production forecast remain below pre-COVID levels for a number of years.

In addition to an elevated restructuring spend the 2021 free cash flow is negatively impacted by approximately $30 million of tax payments that were deferred from last year into 2021. And stripping out these one-offs, adding its free cash flow in a normal year would have been in the $180 million to $280 million range.

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

Thank you. [Operator Instructions] Our first question comes from John Murphy with Bank of America. Your line is open..

Good morning, guys and thanks for all the detail. It’s incredibly helpful. Maybe just a first question is if you look at Slide 16 business improvements of $35 million to $60 million in the second half of the year versus the first half. That’s pretty good momentum that’s continuing.

How much more do you think there is to go there? I mean, are you looking at that as getting back to normal industry margins on seating? Is that the way we should think about that or is there any way to sort of delineate exactly what you are going after on our cost, is there particularly in light of this stepped up restructuring spend this year, you just mentioned, Jeff, of $200 million?.

Yes, good question, John. Thanks for the comment. The goal still remains the same to bridge or eliminate the gap we have had to our closest competitor from a margin standpoint. So, we look at that business improvement as a continual portion of that.

Some of that’s factory floor driven, some of it’s better commercial success, more vertical integration of our business, attaching to better programs, etcetera of having some of the old programs that were somewhat challenging roll off.

There is a lot of components in that and it all kind of falls in that business improvement, but bridging that margin gap is key..

Yes. If I would just add to it, it’s a historic issue we always face in the business. We have to look at expectations that our customers have from annualized productivity and inflation and the basis is that we have enough internal activity that more than offsets that.

The only thing I would add is I think – and this has been a theme of a few of our calls, but it’s even more focused now. There is an absolute renewed interest in our customers of finding ways to drive cost reduction in their product. And that’s more than just the normal DAV activity.

I can’t think of a single customer that we have right now that’s not at an executive level actively engaged with us to find ways to drive costs out of the product. So, I see that as an incremental pathway for us to support that improvement in our financial performance..

Okay, but sort of a dumb guys rule of thumb is typically sort of an 18 months to 24 months payback on rationalization or restructuring spend.

I mean is that the kind of thing that we should think that if you are spending $200 million this year, that flows in at some reasonable level, close to that by the end of 2 years or is that maybe too aggressive?.

It’s about the right path for the portion of our restructuring that was efficiency aligned. You will notice – you will remember that we said about a third of what we were putting out there was just responding to capacity or sort of lower volume expectations in Europe, which doesn’t have the same payback on that, unfortunately.

But about two-thirds of it should have the rough dynamics of what’s in that, and it just sort of depends by region and people, but that’s a good rule of thumb..

Got it. And in a number of places in the presentation, you kind of have these walks of factors.

I think like you might – particularly if you look at ‘19 with the Americas, volume and mix was a small positive, but it just seems like we are hearing from other companies, particularly the automakers themselves, and mix was incredibly strong in the quarter.

So, I am just curious why you may not be seeing that or is that still on to come? And if we think about the first half versus second half, what kind of benefit or headwind was what mix created for you just because there is a lot of focus on these higher end vehicles. I have got to imagine you got more content on them.

So, I am surprised that the mix might not be stronger for you..

Yes. It’s a little bit of a mix because no pun intended. We have had just a lot of disruption in our high-end vehicles. I would point to the Ford F-150 as being one of those vehicles that, I think, distorting that picture a bit for us.

And I would say what we are confident is once some of the chip shortage issues get resolved, we do believe there will be a favorable mix for us.

And we have always said we have got peer compared really favorable mix, but whether it was in the first half, with some of the problems we had with petrochemicals that created some disruption and deteriorated some of that performance or just pure volume in the second half is again, I think what’s distorting the picture for us..

Okay. And then just lastly, I mean, you made some comments about your market share in BEV being very strong. I think in Europe, you are saying 50% or maybe even better. I mean, obviously, that kind of market share would be hard to maintain in any segment.

But I mean, are you really hearing if there is a concern that you are going to lose out as BEVs grow over time? It just seems like you have a right to play and you actually may even get better content to some degree on the trim levels to start.

It just seems curious that people are concerned that as BEV ramps up that you will somehow not be as well positioned. And if anything, I would kind of argue the latter that you would be better positioned.

Is there any reason to believe that content would go down or you would lose market share? It just doesn’t seem a rational line of reasoning to me?.

No, it’s – we agree with your assessment. We think we are very relevant. We think jet delivery of seat systems is still financially viable option for our customers.

We think our expertise in the product, particularly with new starts, who just don’t have that technical competency where we can provide them an array of seating products from luxury vehicles to low-end AB segment if cost is of the focus of their brand strategy. So, we completely disagree with the concept.

I think the other point we would suggest is once everyone has got EVs in the market, the fact that it’s just an EV isn’t going to differentiate them. Everyone is going to have similar products, it’s a similar range. And some of the things that will attract buyers to a vehicle will be the functionality of the interior system.

And that function drives content and our technical capability there, we think, provides solutions for our customer. That’s – so I would point to someone like NIO who has done some really creative things in their seating system. Right now, we are essentially the exclusive seat supplier to them.

They have picked us because of our technical capability to help them with that. And I see that replaying across the broader customer group..

Okay, great. Thank you very much guys..

Thanks John..

Our next question comes from James Picariello with KeyBanc Capital Markets. Your line is open..

Hey, good morning guys..

Good morning..

As we think about the guide and helpful detail you provided in terms of the second half versus first half split, can you just confirm what the commercial settlement figure was in the quarter? It seems like it was probably $100 million plus. Just want to confirm that.

And just originally, across your segments, because where did this have the greatest impact?.

Yes. Probably Europe would be the greatest impact in the quarter, where – that amount for any given year for us is pretty similar, as we said. And it’s a reasonable size amount. So maybe $300 million, give or take, on an average year is probably pretty reasonable for us.

And just – you can see by that chart, sort of the amount that stacks in the first half versus the second half with Europe being probably the big portion of activity in the second quarter..

Okay. That’s helpful. And then within equity income, its $20 million lower now.

Is that mainly or exclusively driven by the SG&A JV sale? And has the company already completed that divestiture? And then as we consider the broader JV transformation, right, the $1.4 billion in net proceeds coming in, any color on the timing there? And maybe where the company’s net leverage heads for next year, right? You raised your free cash flow for fiscal ‘21.

We get through this year’s noise into what hopefully is a cleaner recovery next year. What could be an achievable net leverage range on a pro forma basis as we sit here next year – at the end of next year? Thanks..

Yes. I will try to unpack a little bit of that. The SJA transaction, which is part of what we announced in the 12th of March, did complete at the end of the quarter.

And a portion of the reason we brought our equity income down and you can say it’s about half attributable to that, and half of it is attributable to lower volume expectations, primarily driven by – or really driven by chips, I can say.

We have seen the challenges of chip availability, bringing down production schedules globally and China is not immune to that either. So, that’s what’s reflective in our guidance. As it relates to the timing of the transaction for the YFAS deal we announced in the 12th, we are still looking really at the – right at the end of our fiscal year.

Our current view is around September 30. Now that could move a little bit, but we do expect it to be completed within calendar 2021. As it relates to the leverage and sort of our expectations of leverage, we did give a range of 1.5 to 2 as a target. We do really see ourselves getting there. And it could be on the better side of that.

A lot of it really depends on what the earnings or the operating environment looks like in 2021. As you have heard us talk about, we think the things that are within our control continued to improve.

But if production is up as high as where IHS is predicting it right now, it could be a good year, and it could help sort of amplify some of that de-leveraging impact, but we see ourselves sort of in that range and potentially better depending on the operating environment..

Thanks..

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

Yes. Thanks. So, in terms of your commodity recovery and the timing of it, I am thinking steel, resin/foam, is there anything else we should be looking at? And if – by the way, if you have a good Bloomberg ticker for a foam surrogate, would you look at that might be helpful.

And two, is this the kind of thing – you used to have a normalized cadence of getting good recoveries in fiscal fourth quarter and then giving bad recoveries, the other direction in fiscal 1Q, that didn’t seasonality, which might have been a hallmark of the JCI’s CEO, is that out the door? So I guess 2 questions there, kind of, one, what are the key commodities? 2, timing and then 3, how does it affect it in the quarters?.

Yes. So, maybe at a high level, I will start, and then Jeff can be a bit more specific. As far as the categories, steel and foam chemicals are certainly the most significant for us. And then when you look at recovery, you literally have to go region-by-region and customer-by-customer.

But I would say, all commodities are recoverable over an extended period of time. Many of our customers, I would say, our traditional customers have index agreements in place and that allows recovery to happen on a quarterly basis. Some stretch into 6-month timeframe and the rest falls under an annual calculation.

And then we have some customers that tend to mix things together. So, they look at a basket of issues, including commodities and then we negotiate those on an annual basis, and it takes into account all other inflationary elements.

But if you extend the bookends long enough, we think you get full recovery, at least that’s what we would project at this stage. I don’t know, Jeff, if you want give more specifics..

That’s right. I wouldn’t say there is so much of a seasonality impact to it. As you mentioned, there Japanese customers tend to do it once a year around their fiscal year ends at the end of March. Some of our customers do it every 6 months, some of them do it, as you said, every quarter. So, it does vary.

But we tend to look at it over a 3 year time horizon. And as Doug said, we generally see that kind of coming back to us. So next year, we do see, as I mentioned, is a tailwind for us. Brian, you also mentioned I couldn’t necessarily help you on a Bloomberg terminal, but we do look at the ICIS index for foam chemicals.

So, look at TDI, MDI and Polyol and ranges by region. And crew prices, again, for hot-rolled and cold-rolled steel, we would look at those as well..

Okay. A follow-up question, just a bit of broader one. So when you came in, it will be 3 years this fall I believe, Doug. You had a book of business that the prior CEO had put out or actually before the interim CEO had done and what was generally perceived in the industry as a bid to win build the book and see what happens on the billings.

You have talked about that at length.

How do we think about what’s left of the underpriced under-engineerings estimated book that you came with? And how much is just a matter of having 2 years or 3 years left than some of the younger programs that might have started when you were start before, in effect, and I used to do a lot of work in insurance, the poorly underwritten business just rolls off?.

Yes. I would say, the vast majority of what was underpriced or, I think, more importantly was stagnated in price recovery that we would normally get because we were struggling on more of the operational performance side, we just couldn’t engage with the customer. I would say that’s largely behind us, if I were to quantify it.

I think you are – it’s in the 80% range, maybe 20% are some programs that we just can’t touch. Because it’s strategically not worth pressing the issue or they have got a couple of years left to build-out, and we were better to leave them alone.

And that’s how we always arrived at this timeline of 2024, 2025 when we thought on a consolidated basis, we could close the gap on a margin perspective. So, I mean we are generally on that timeline. We have made some improvements to achieving that goal. We mentioned we are about a year ahead on the metal and mechanism business.

And that has been largely more cost driven than it’s been price driven. We had some negotiations early on. We settled, but what we found in that business is that there was a lot more opportunity to drive on the cost side than what we originally anticipated.

And so that’s why we were able to I would say expedite that improvement in that business segment over and above what we thought. So, it’s always difficult to really break it down if its price or cost and very specifically quantify it because many of them are just a combination of the 2. It’s driving cost.

Maybe the customer needs to approve, but us being allowed to retain a certain portion of that. So, I don’t know how you want to bucket that, whether it’s price or cost driven.

That’s just – it’s one of the nice things about our business is that there is a lot of opportunity because of the complexity of our module to drive on the cost side and engage with our customer in commercial negotiations..

Okay. Thank you..

And Julie, it looks like we have time for one more question..

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

Thanks. Maybe just a few questions. The first one here is, obviously, we have seen a strategy that the automakers employers, is partially building these vehicles. And I know seating is generally sort of just in time.

But are you – do you believe you are still shipping to these partially built vehicles? And if so, do you have any indication of how much that may have sort of impacted you relative to final vehicle assembly?.

Yes. I don’t think it’s had a direct impact on us. With one – maybe one isolated case with Ford F-150, where we had to retrofit I think it was some 20,000 vehicles due to petrochemical shortages.

With that as an exception in which we have now provided those and those vehicles have been retrofitted, the partial build shouldn’t have had an impact on us at all since we would have been able to recognize that revenue because we delivered the product and they installed in the vehicle, even though they set it on the sideline until they can get semiconductors in..

Okay. And then Jeff, maybe just – sorry, I understand this – the commercial settlements, like it sounds like it was a sizable number in the quarter, but I am just trying to understand maybe the accounting, when I look at that, that sort of modified cash flow statement, it looks like it’s a $70 million cash outflow.

So, is there a timing difference between when you recognize the settlement and when you actually get the cash?.

Yes. So a lot of times, what you are seeing on that portion of it is a movement in the accrual in the quarter. But think of it as I have always kind of said, every month, every day, we accrue for some element of customer give back or maybe other issues that are out there with the customer.

And then just in time nature of our business has many commercial tie-ins to our customers that agree on shift patterns and the like. So, if things vary significantly, we might have acclaimed to a customer.

But what you generally saw in the quarter is that there was a number of things that we settled out with our customer that went to the – essentially to lower our accrual balance during the quarter. And that you can see in the cash flow.

Every other period, we expect that accrual will continue to build in other periods, and there was just more settlements of commercial activity in the quarter.

It was some conducive for it with the nature of where COVID was sitting and production levels that we closed out a lot of our 2021 productivity agreements with our customers during the quarter..

So, when we think about your free cash flow as per the year, is that relatively neutral for the entirety of the year?.

Yes. We think it’s going to be neutral for the entire year, but for the quarter, it had the impact..

Okay. Thanks for that clarity guys..

Anything else Joe..

No. Thanks..

Thanks Joe..

And thanks for joining the call today. It looks like we are at the bottom of the hour. Again, if there is any follow-up questions, I know there is a few people that were in the queue that did not have a chance to ask questions. Please feel free to give me a call. We are happy to help you and go through any questions you might have.

But again, thanks for taking time this morning..

Thanks, everyone..

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