Adient plc (ADNT) Q2 2019 Earnings Call Transcript

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Adient plc (NYSE: ADNT)Q2 2019 Earnings CallMay. 7, 2019, 8:30 a.m. ET

Contents:

Prepared RemarksQuestions and AnswersCall Participants

Prepared Remarks:

Operator

Welcome and thank you for standing by. At this time, all participants will be on a listen-only mode until the question-and-answer session of today’s call. (Operator Instructions) Today’s call is being recorded, and if you have any objections you may disconnect.

I’d now like to introduce Mark Oswald. Sir, you may begin.

Mark Oswald — Vice President, Global Investor Relations

Thank you, Robin. Good morning, and thank you for joining us, as we review Adient’s Results for the Second Quarter of Fiscal Year 2019. The press release and presentation slides for our call today have been posted to the Investor section of our website at adient.com.

This morning, I’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 will open the call to your questions.

Before I turn the call over to Doug and Jeff, there are few items I’d like to cover. First, today’s conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 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 to these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release.

This concludes my comments. I’ll now turn the call over to Doug. Doug?

Douglas Del Grosso — President and Chief Executive Officer

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 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 segment combined with significantly lower vehicle production in China were the primary contributors to the $171 million year-over-year decline in EBITDA.

Adjusted earnings per share of the $0.31 in the most recent quarter at the lower level of operating profit dropped right to the bottom line. We ended the quarter with $491 million of cash at March 31st. Important to note, the adjusted results covered exclude certain charges that we view as 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 provide strong liquidity and flexibility to our capital structured 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 the customer secured I thought it was important to point out that the JV is progressing to plan. I’d also like to point out that the JV is staffed and run completely outside of our core business as such. It’s not distracting us from our turnaround efforts.

Story continues

Finally, as noted within our earnings release this morning during the second quarter, we reorganized certain elements of our management structure, which resulted in a realignment of our company’s reportable segments, the new segment consists of Americas, Europe and Asia.

Slide 5 provides a illustration of what the new organization structure looks like. Turning to slide 5, I would characterize the organization that was in place as the heavily matrix organization, which can be very appropriate for companies that are relatively stable. Unfortunately, that’s not our case. We decided to lean down our organization moving to a regional focus and put general managers in place that have complete academy and responsibility. In addition, we essentially replace the front-line operating team expect for Asia, which continues to perform well.

The leaders brought in a 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 for 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 highlighted the benefits associated with the new organization. And I would say, speed and focus are the primary reasons for making the change. We implemented a new organization to drive change to do it quickly and within specific areas, namely commercial discipline and operational performance.

We’ve taken a large amount of cost out of our organization and expect additional benefits in the coming quarters followed about $90 million in total on annual run rate basis when fully implemented. This is largely driven by decentralizing new organization and moving away from traditional matrix, organization performance measurement groups.

We flattened the organization eliminated number of layers dramatically enhancing our ability to make decisions on the business and push responsibility and autonomy back into the organization. Our second quarter results began to demonstrate what an organization structure like this within virtual as I mentioned in charge and deliver.

Turning to Slide 7. Let me comment on the team and where the team is focused in our few back to basics priorities are providing a solid foundation for our path forward to future success.

First it starts with an increased focus on operational execution in commercial discipline. It is essential for us to stabilize the business, especially with our handful of troubled plants and underperforming programs. While stabilizing the current business, we are prioritizing future business, insuring business quoted is core to our operations. We’ve taken a path on business we believe are non-essential such as Tier 2 structures and mechanisms business that are marginally profitable or higher risk businesses such as business associated with boutique manufacturers pursuing next-gen, our futuristic mobility alternatives. This will benefit as we maximize returns and reduce engineering and development costs and transition to a less capital-intensive business.

Ultimately improving our margins and more importantly the Company’s cash generation. Not surprising the biggest question I’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 are thinking about the pace of improvement and what to expect in the coming quarters and years.

I think of it in three buckets. First, the near-term or stabilization period, what to expect as we progress through fiscal year ’19. Second, the improvement here’s what they expect in fiscal years ’23, ’22. And finally the optimization years, what they expect beyond 2022. So far this year, and as I pointed out with our Q2 results, efforts to stabilize the business are taking route, we would expect further stabilization in EBITDA improvement in half two versus half one based on further benefits associated with the new organization structure.

The recent success progress we’ve made in resolving backlog of open pricing issues with a handful of customers. Keeping in mind the resolution 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, less and premium freight and drive down launch costs. And finally, we had expected stabilization in China vehicle production, which would drive improved results in the region half two versus half one. That said, we’re still optimistic in the China recovery, but it seems to be pushing out beyond Q3 at this point more on that later.

These actions will help set the stage for our margin gap closure in the out years, but more importantly begin to improve cash performance of the Company in the near term. As we exit fiscal ’19 and progress through to 2020 and 2022, we expect our continued focus on operational execution, commercial discipline, the reduction in overall launches and the Rightsizing SS&M will drive a large improvement in margins, but even greater and more tangible benefit in free cash flow.

Keep in mind, one of the mile markers that we’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 is the business grown close to $425 million last year. With the simple calculation based on approximately $170 million of EBITDA loss and the CapEx spending totaling over $255 million.

In addition, we also expect cash flow to benefit as we improve our operating performance within our core seating business. I’m over excited about the opportunities lies ahead in the near term. We also recognize since a long journey and to achieve full gap closure and optimal cash generation.

Continuation and rightsizing 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 generations 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 improvement.

With that, I will turn the call over to Jeff, so we can take us through Adient’s financial performance for the quarter and what expect in the coming months. Thanks.

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

Great. Thanks, Doug. Good morning, everyone. And starting on Slide 10, and before jumping into the numbers, I wanted to point out how the organizational changes Doug mentioned earlier impacted our reportable segments. As you know, prior to Q2, we reported our results between seating, SS&M and interiors. As we drove responsibility to the regions and transitioned away from heavily matrix organization, we were required to realign our reportable segments. The new segments, America, EMEA and Asia and the composition of those segments are shown on the right hand side of the slide. The second quarter results shown today reflects the new segment structure. We realized the big part of that in turnaround story related to our former SS&M segments. The performance for that business will be included within the results for the Americas, EMEA and Asia segments going forward. But for transparency purposes and to help demonstrate progress of the turnaround within that business, we plan to provide commentary and color within our new segment structure. In addition, within the appendix of our earnings presentation we plan to call out as a Memo, SS&M results similar to what we disclosed in the path.

Turning to slide 11, and adhering to our typical format, the pages formatted with reported results in the left hand side and our adjusted results in the right-hand side of the page, we will focus our commentary on the adjusted results. These adjusted numbers exclude various items that we view as either one-time in nature or otherwise skew important trends in the underlying performance. For the quarter the biggest drivers of the difference between our reported and adjusted results relate to asset impairment and restructuring. Specifically the realignment of our reportable segments and past operating performance required us to tap as the SS&M long-life assets for impairments.

As a result of the impairment test $11 million of North America long-life assets and $55 million of the EMEA’s long-life assets we determined to be impaired. In addition, we booked a net tax charge of $43 million to establish valuation allowances against deferred tax assets in Poland during Q2 2019. The reason we book such charge was due to earnings in Poland partially driven by higher levels of DTAs in Poland, resulting from the fixed asset impairments, just mentioned.

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

Moving on to the high level, sales of $4.2 billion were down about 8% year-over-year. FX accounted for more than half of the decline. Adjusted EBITDA for the quarter was $191 million, down $171 million or 47% year-on-year, largely explained by a decline in business performance, which I’ll cover in more detail in a few minutes.

Also contributing to the decline with 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 at $8 million decrease within our interiors WiFi business. And finally, adjusted net income and EPS were down approximately 83% year-over-year at $29 million and $0.31 per share, respectively. Now let’s break down our second quarter results in more detail. Starting with revenue on Slide 12, we reported consolidated sales of $4.23 billion, a decrease of $368 million compared to the same period a year ago. As mentioned just a moment ago, the negative impact of currency movements between the two periods, primarily the euro accounted for just over half of the decline, lower volume mix in Europe and Asia impacted the year-over-year results by approximately $168 million. This result was consistent with internal expectations.

Moving on with regard to Adient’s unconsolidated revenue, our Q2 results were significantly impacted by the much lower levels of vehicle production in China. Unconsolidated seating and SS&M revenue driven primarily through our strategic JV network in China was down about 12% when adjusting for FX and outcome that was generally in line to slightly favorable imperative vehicle production in the region during the quarter.

Sales for unconsolidated interiors recognized through a 30% ownership stake in the Yanfeng Automotive Interiors were also down approximately 12% year-on-year when adjusting for FX. Important to remember, roughly 50% of that business is conducted outside of China.

Moving to Slide 13, we provide a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operations, such as Executive Office, communications, corporate finance, legal and marketing.

Big picture, adjusted EBITDA was $191 million in the current quarter versus $362 million last year. The corresponding margin related to the $191 million of adjusted EBITDA was 4.5%, down approximately 280 basis points versus Q2 last year after excluding equity income.

The primary drivers of the year-over-year decline is attributable to negative business performance, largely launch related, the negative impact of lower volumes and mix and primarily within EMEA and Americas region, plus $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 repped positively versus the first quarter of 2019 as global results improved about $21 million sequentially. Similar to past quarters, we have included detailed bridges for our reportable segments which now consists of Americas, EMEA and Asia on Slide 14, 15, and 16.

Starting with Americas on Slide 14, adjusted EBITDA decreased to $34 million, down $64 million compared to the same period a year ago. The primary drivers between the periods include approximately $24 million and unfavorable volume and mix, $19 million of negative business performance headwinds, many of which were launched related. I won’t go into the specific line items as we’ve call them out in the call out box on page. However I point out that partially offsetting the negative business performance but not shown in the bridge with a $6 million improvement within the SS&M business in the region.

SG&A was a headwind of approximately $12 million due to increased investment in Adient Aerospace, as well as temporary SG&A benefits recognized last year that did not repeat in Q2 of this year. The negative impact of currency movements and increased commodity cost resulted in approximately $8 million headwind in Q2 versus the same period last year. One last point on Americas, our CapEx for the segment was approximately $52 million in the quarter.

Turning to Slide 15 in our EMEA segment performance. For the quarter adjusted EBITDA was $59 million or $71 million lower compared with Q2 2018. The primary drivers between Q2 this year and last year’s second quarter include negative business performance call it $34 million headwind, including launch related costs and inefficiencies associated with increased production of the common front seat architecture.

The negative impact of currency movements in commodities resulted in our approximate $90 million headwind in Q2 this year versus the same period last year. And lower volume mix impact of the segment by roughly $17 million. I’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 gain traction. CapEx for EMEA was approximately $46 million in the quarter.

Finally, turning to Slide 16, in 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 second quarter included a $23 million decline in equity income driven by lower vehicle production in China and operating challenges of YFAI. Equity income in 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 driving efficiencies as well as a few million dollars in warranty and tooling. Note the despite these headwinds, margins on our consolidated business increased approximately 60 basis points in the region.

And finally, but to a lesser extent, macro factors, namely, foreign exchange and commodity cost weighed in the quarter by approximately $4 million. Regarding Asia CapEx for the quarter, the unit spent roughly $10 million.

Let me now shift to our cash and capital structure on Slide 17. On the left hand side of the page, we break down our cash flow, adjusted free cash flow defined as operating cash flow less CapEx was $60 million for the quarter. This compares to an outflow of $146 million last year. An increased focus on working capital, such as a reduction in aged receivables and increased focus on customer tool and 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 slide, one factor that can greatly influence the cash outcomes Adient’s trade working capital which is highly sensitive to quarter-end date. When smoothed over the course of the year, we would expect working capital to be essentially neutral for us.

Capital expenditures for the quarter were $108 million compared with $123 million last year. As you can see in the foot note, we continue to break out CapEx by segments. On the right hand side of the page, we detail our cash and debt position. At March 31, 2019, we ended the quarter with $491 million in cash and cash equivalents. Gross debt and net debt totaled $3,383 million and $2,892 million, respectively at March 31st.

As disclosed, subsequent to quarter end, the Company is successfully executed a debt refinancing to strengthen and increase the flexibility of our capital structure. Slide 18 provides the pro forma capital structure summary. Elements of the debt refinancing included the issuance of $800 million senior first lien notes due 2026, a new $800 million term loan B credit facility with pricing set at LIBOR plus 4.25% due in 2024 and a new $1.25 billion asset-based revolver for the asset based loan.

As called out in the footnote in — on the page, the rates for the ABL and the TLB change based on certain criteria. For the TLB, the rate steps down 25 basis points as secured leverage is 1.5 times or less. For the ABL rate stepped up or down based on utilization. Net proceeds from the notes together with borrowings under the new TLB and asset based revolver were used to prepay and fold the companies prior credit agreement and increased available liquidity.

Not only does this refinancing increase our liquidity, so 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 the capital structure provides the operating team significant room to execute our turnaround plan.

One last point before moving on and as a result of the external financing. Adient will reevaluate our inter-company financing structure. As this may create a shift to the interest income and expense between jurisdictions. We are continuing to monitor the potential for valuation allowances, it may result in the determination that a significant portion of our deferred taxes will not be realizable and result in a non-cash charge in Q3.

Moving on to Slide 19, let me conclude with a few thoughts on what to expect for the second half of 2019. Based on current vehicle production plans and expected movements in foreign exchange, we continue to expect revenue to settle in $16.5 billion to $16.7 billion range. As a reminder, FX is expected to be an approximate $500 million headwind versus fiscal 2018.

Dr (ph) market conditions in China and a reduction in complete seat business in Europe is also impacting revenue is seen with our Q2 results. With regard to adjusted EBITDA we continue to expect the second half result and margins just surpassed first half performance as actions taken to improve the company’s operating and financial performance gain traction, especially as it relates to the self-help initiatives within the Americas and EMEA segments. The pacing and magnitude of improvements within China and Asia remains a bit murky due to macro factors. Although industry observers believe will rebound is on the horizon, citing action the China central government is considering or is implemented to stimulate auto demand, tangible evidence is not surfaced. In fact, China sales and production in April continued to come under pressure.

Included in our EBITDA assumption in equity income of between $290 million to $300 million. Although down from last year’s level, primarily impacted by lower vehicle production in China, we’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 equaling Doug’s earlier comments, the turnaround will be a multi-year journey. We do not anticipate a step change in performance from quarter-to-quarter. Instead improvements will be steady, although occasionally lumpy, as we live within the cycles of the auto industry such as what I just described in China.

Moving on based on our expected cash balance and debt, we expect full year interest expense to be approximately $175 million, excluding a $13 million one-time charge related to unamortized portion of the prior credit agreement, facility fees and approximately $35 million in fees related to the reasons that refinancing.

With regard to taxes, the establishment of valuation allowances in several jurisdictions over the past few quarters has significantly impacted our adjusted effective tax rate and the variability of the rates between quarters as evidenced with Q2 is approximate 30% adjusted effective tax rate. And as a result, we believe providing a cash tax that estimate for the year would be a greater use while modeling Adient.

For 2019, based on our expected earnings and composition of those earnings, we expect cash taxes to be approximately $105 million to $115 million, about $30 million less than fiscal ’18. One additional point on cash taxes, important to remember that more than 50% of our cash tax payments related to consolidated JV’s and withholding taxes on dividends from JV’s.

One last item for your modeling. We now expect capital expenditures to trend toward the lower end of our previous range of about $550 million. As you expect the team continues to assess opportunities that may further reduce the planned spend. In addition looking further out we continue to see opportunity to significantly reduce capital expenditures as we right-size the SS&M business.

Finally, we continue to monitor the progress of trade negotiations that are currently taking place between the US and China. We’re hopeful to two countries can reach resolution and avoid an escalation in tariffs which you’ve implemented with significantly impact the industry and Adient. As a reminder, the impact to Adient today as a result of tariffs both 301 and 232 (ph) is approximately $20 million.

The true up to plus the imposition of a 25% duty on all remaining imports of Chinese origin goods could result in an approximate $1 million per month in additional headwind is an active. As we gain clarity on potential outcomes will provide updates with appropriate.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question is from Colin Langan with UBS. Your lines open.

Gene Vladimirov — UBS Investment Bank — Analyst

Hi, guys, this is Gene Vladimirov for Colin. Good morning.

Douglas Del Grosso — President and Chief Executive Officer

Good morning.

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

Good morning.

Gene Vladimirov — UBS Investment Bank — Analyst

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 strength of the magnitude of the margin improvements within the timeline that you laid out on Slide 8?

Douglas Del Grosso — President and Chief Executive Officer

Yeah, I mean, the way we initially talked about is, it’s one third commercial, two third to operational, but when you think about operational and that’s why we traded products provide a little bit more detail. This third element that we anticipate taking time which is not just a function of addressing those issues, but there is a portion of the business primarily on the SS&M side that is going to need to roll off and in the replacement business will either be — now the program because we’re downsizing that business or where we’re much more selective on customers and products that we historically proven to be more profitable at a return on investment.

So, it’s — how do you want to capture that you can call that commercially, you can call that operational, it’s really pulp, it’s bringing products in line with the right pricing in launching them effectively.

Gene Vladimirov — UBS Investment Bank — Analyst

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

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

Yeah. So, good question. Generally you can expect that the contribution margin of those businesses are across all our business is roughly two times EBITDA margin or maybe even a little higher. So 12% sort of margin reduction or I mean sales reduction in the region you’d expect something closer to 25 plus percent decremental margins a variable basis. But it requires us to really take out the necessary headcounts and flex the workforce as if you leave too many direct quarters you’re going to do worse than that.

I would characterize the business having — which has never gone through a period like this, the last seven and eight months in China are somewhat unprecedented at least in — 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 even managed takeout portion to fix and have performed well. So I’d say the margins you see are really just a reflection of the sale. The margin reductions are purely a reflection of the sales reductions that we see today.

Gene Vladimirov — UBS Investment Bank — Analyst

Great.

Douglas Del Grosso — President and Chief Executive Officer

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 is to better support that. But you also have to think that we also have coming to that commercial claims for the volume drops and we run into contractual obligations so what we have to man our plans 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 will try and be instrumental in finding solutions. And none of our customers, but not at the expense of margins in the business.

Gene Vladimirov — UBS Investment Bank — Analyst

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

Douglas Del Grosso — President and Chief Executive Officer

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

Gene Vladimirov — UBS Investment Bank — Analyst

Okay. Great. Thanks for taking our questions.

Douglas Del Grosso — President and Chief Executive Officer

Okay, Thanks.

Operator

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

Emmanuel Rosner — Deutsche Bank — Analyst

Hi, good morning, everybody.

Douglas Del Grosso — President and Chief Executive Officer

Good morning.

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

Good morning.

Emmanuel Rosner — Deutsche Bank — Analyst

Was hoping to see if you can give 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 the EBITDA basis is still, I guess a modest sequential improvement is there potential for acceleration in the sequential improvement as we move through the year or you essentially signaling that what we’ve seen in Q2 is sort of like the sustainable piece of improvement?

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

Yeah, I think it’s reasonable and certainly our expectation that the sequential pace increases as we implement operational improvement and resolve kind of this backlog of commercial issue. We only 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 we’re thinking about our long-term relationship with our customer making sure that we’re not creating a problem with our backlog in 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 a pretty significant performance improvements first half to second half in the range of kind of $50-plus million (ph) across all the segments. But some of that is being offset with just comments on what we think might have been in Asia, so we haven’t completely modeled it, but at least gives you some idea of the pace of change. And that’s not on an annualized basis, it’s counterized (ph). So we get those and can sustain that operational improvement on a full year basis, you can get an idea of the magnitude.

Emmanuel Rosner — Deutsche Bank — Analyst

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 the very — solving some very near term and pressing issues. Are you also having some discussion with customers around the profitability of the business that’s in your backlog. So things that you haven’t necessarily launched yet, but may come and launch it in a less than desirable profitability, is that something that is going on that still needs to happen?

Douglas Del Grosso — President and Chief Executive Officer

No, that’s sense — we really increased activity there, we’ve been very transparent with the customers here with all of our major customers. Secondly, once we are performing below what we deem an acceptable level, we’ve gone in and walk them through the profitability of our business by region-by-product where their strength and where there’s weakness is and that’s what business today. In addition to that, and I think, this is critical when we talk about effective program management is having the conversation and projected profitability on a program prior to launch with the customer and how that compares with our initial expectation and we talked about this backlog of commercial issues and scope change that occurs we had some pretty successful conversations with customers around those issues.

And in our focus as we move forward is to do that well in advance, ideally a year before start of production. When you’re making — or making firm commitments on capital spending. That’s when the discussion needs to happen, not after production. Some of it or in the midst of a launch. And some of the issues we run into as we’ve struggled with our most recent launches, we — our timing whether there the commercial discussions during the launch and if the launch went bad then our customers basically postponed any discussion and that’s where we’ve started to build this backlog of open commercial issues that we’ve been slowly but steadily working our way through.

Emmanuel Rosner — Deutsche Bank — Analyst

That’s great color. Thank you.

Douglas Del Grosso — President and Chief Executive Officer

Welcome.

Operator

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

John Murphy — Bank of America Merrill Lynch — Analyst

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

Douglas Del Grosso — President and Chief Executive Officer

That was consolidated across all segments.

John Murphy — Bank of America Merrill Lynch — Analyst

Got it. Okay. All right. So the — OK — so that’s, so it’s all segments not per segment?

Douglas Del Grosso — President and Chief Executive Officer

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

John Murphy — Bank of America Merrill Lynch — Analyst

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

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

No, that the way that I would answer the last part of it, and 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 in segment. They do have corporate side segregated out, so we kind of just simply take that corporate piece allocated by sales form 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 — we back out our equity income. And to some degree we back out a little bit, we’ve always used like 50 extra basis points in 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 footprint, our size, our capability, our geographical proper customer diversity et cetera should play for higher margins over time. But that’s about we’re chasing, but we’ve tried to lay out on Slide 8, a reasonable projection of getting there, one of the reasons is going to take a little while John to is, you think about some of this business Doug talked about we’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. Some of these programs are in such shape, our goal has been to get them, so they’re no longer emerging, meaning that they’re costing cash on an ongoing basis, and that’s a lot of the commercial negotiations in 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.

John Murphy — Bank of America Merrill Lynch — Analyst

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

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

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

John Murphy — Bank of America Merrill Lynch — Analyst

Okay. And then sort of the (inaudible).

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

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

Douglas Del Grosso — President and Chief Executive Officer

And the only thing I would add to Jeff’s comment is, it really need the intention there was — look this is the minimum the out of the possible because if someone in our same peer group making the tech team products who has got somewhat similar profile of us can achieve that. And there is no reason we can’t and no reason that I’m aware of from a structural barrier. And to Jeff’s point, I think, in many ways the structure of our business is preferable to anyone else in the space.

I don’t know that it was necessarily intended to be — it all that can be achieved, not that I’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 give 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 advantage point. And that’s why we broke it into these three segments of stabilized the business get ourselves on solid ground operationally in our customer relations then you can take another assessment of the business and redefine where you can take it until I think about it more of maybe the minimum that we should expect to achieve from the business. It’s just a question out as we can get there and right now we’ve laid that it’s going to take a number of years to do that.

John Murphy — Bank of America Merrill Lynch — Analyst

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

Douglas Del Grosso — President and Chief Executive Officer

Yeah, maybe think of it this way John, we published the numbers for last year of roughly a negative 170 (ph) on EBITDA, 40-ish to 50-ish (ph) on CapEx so, we’ve said with the downsizing about that and with narrowing our focus of where we want to compete in that business and getting the mechanisms conversion that we’ve been straining on over the last couple of years to launch ones that CapEx is well spent on the mechanism side and we’ve reshifted some of the focus on SS&M business. We think that CapEx should come down to 150-ish (ph), 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 172 at least the 150 (ph). We think both of those are going to be more gradual. Hopefully we’ll go faster, but I would expect more gradual will obviously work to go as fast as we possibly have.

John Murphy — Bank of America Merrill Lynch — Analyst

Okay. And then if you look at Slide 5, it looks like two 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, they’re going to run the business is 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 so close process with the human capital in the company. I mean, I just want to understand how this is change exact seems like that’s a big part of the story here too.

Douglas Del Grosso — President and Chief Executive Officer

Yeah, it is — so I would think it two ways. First, for us to pivot and move as quickly as we needed to move. I think we just needed to be a bit disruptive 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, and we talk about is the commercial issues, the operational issue, many of issues following the multiple categories and that effectively solve them, you need to work collectively across the team very much true on launches. And I think the way we were structured before, we were to sell functional in our structure that yet. It was a detriment to teamwork and that sounds, maybe a little bit corny but pretty powerful tool when you get it in place that you do — 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 simplify the business, giving the issues and point people accountable, but with the full complement of resource to address it as far as how do we bet the folks we brought in these are — it’s maybe the benefit of being in the industry for 35 years. These are individuals who I worked with in the case of Jerome and Michel when I worked at TRW.

So I spend 2008 to 2012 working with these guys and a pretty challenging environment. So we talked about being battle tested having a broad skill set. They’re not seating experts, but they worked and complicated products arguably more complicated than seating systems breaking suspension, steering. Jerome recently was at (inaudible) so he’s got experienced in just in time from the way the earnest perspective. And Michel was at Delphi Technologies (ph), broad range of skills from and also product knowledge. But they’ve demonstrated leadership capability in difficult environments and that’s why I brought them over SS&M to come. I would just mention Kelli Carney who is running global purchasing that is also new. I worked with her from my days at (inaudible) she understands seating systems, she spent her most recent time at IAC where she ran global purchasing and also was responsible for the European business. She got an operating mindset. We brought her back for this global purchasing again pretty proven skill set understand.

If you want to call it private equity mentality on speed and intensity of getting things done it. But what I’m most excited about the Compass (ph) 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 the need that we’ve brought some bench strength and to help accelerate the pace of change.

John Murphy — Bank of America Merrill Lynch — Analyst

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

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

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 where we have good ideas, they have good ideas, we look to leverage that. So that’s something we’ve been encouraging, because it’s in both our interest.

John Murphy — Bank of America Merrill Lynch — Analyst

Great. Thank you very much.

Douglas Del Grosso — President and Chief Executive Officer

Welcome.

Operator

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

Douglas Del Grosso — President and Chief Executive Officer

Joe?

Operator

One moment please. Sir your lines are open.

Joseph Spak — RBC Capital Markets — Analyst

Yeah. Can you hear me guys now?

Douglas Del Grosso — President and Chief Executive Officer

Yeah. Hi, Joe.

Joseph Spak — RBC Capital Markets — Analyst

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

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

I’ll have to just sort of a basic 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 caused us challenges, because we’re still giving productivity on a large number of our programs as we normally would as the business. But some of these offsets brought those up to positive numbers.

Douglas Del Grosso — President and Chief Executive Officer

Yeah. And I would say it’s not completely reflective either a full year or second half. Most of the commercial activity we have was focused on implementation in the second half. But to Jeff’s point, the fact that we are net positive with productivity, contractual productivity commitments we’ve had with our customer. And in the 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.

Joseph Spak — RBC Capital Markets — Analyst

Okay.

Douglas Del Grosso — President and Chief Executive Officer

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

Joseph Spak — RBC Capital Markets — Analyst

Okay. And then maybe just sort of attack that sort of improvement question from a different angle. When you sort of reporting reasonably now it’s quite striking that Asia’s margins are basing the 10s and versus low-single digits in Americas and EMEA. And my guess is that maybe that was part of the point of reporting at 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.

Douglas Del Grosso — President and Chief Executive Officer

Some of the structural, I mean we — we have a very — I’ll take dominant position in the Asian market. So there is not the same competitive tension that exist in North America and Europe. And some of it is execution the team has doing very well operating their business. Many of the problems that we’ve had in North America in the Americas and Europe we simply have not experienced their launch costs have been better managed. Operating efficiencies are in place and that’s why we didn’t make quite frankly the organizational change there, because they continue to run that business well. Probably less exposure to the metal and mechanism business in that region, which certainly is advantageous to them I think as their cash flow numbers are also much better because their capital spending is significantly less.

And 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 are doing things well we have very — the programs tend to be bigger in nature. Things like the F150 or the Dodge RAM are key high volume programs where we should be able to extract a good margin of all things are working well.

So I think there is — I would characterize it more as there is a greater amount of opportunity for all the self-help to come into the regions in Americas, I think is probably the biggest area of opportunity for us.

Joseph Spak — RBC Capital Markets — Analyst

Got it. Thank you.

Mark Oswald — Vice President, Global Investor Relations

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 industry today. Thank you.

Operator

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

Duration: 61 minutes

Call participants:

Mark Oswald — Vice President, Global Investor Relations

Douglas Del Grosso — President and Chief Executive Officer

Jeffrey Stafeil — Executive Vice President and Chief Financial Officer

Gene Vladimirov — UBS Investment Bank — Analyst

Emmanuel Rosner — Deutsche Bank — Analyst

John Murphy — Bank of America Merrill Lynch — Analyst

Joseph Spak — RBC Capital Markets — Analyst

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