© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome and thank you for standing by. And at this time, all participants are in a listen-only mode until the question and answer session of the call. [Operator Instructions] Today’s conference is being recorded. Any objections, you may disconnect at this time.
I would now like to turn over the meeting to Mark Oswald. Thank you. You may begin.
Thank you, Andorra. Good morning and thank you for joining us as we review Adient’s results for the second quarter of fiscal year 2020. The press release and presentation slides for our call today have been posted to the Investor section of our website at adient.com.
This morning, I am joined by Doug DelGrosso, Adient’s President and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today’s call, Doug will provide an update of the business, followed by Jeff, who will review our Q2 financial results in more detail. 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 face today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements. Please refer to Slide 2 of our presentation for our complete Safe Harbor statement.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the Company’s operating performance. Reconciliations to these non-GAAP measures to the closest GAAP equivalent can be found in the Appendix of our full earnings release.
This concludes my comments. I will turn the call over to Doug. Doug?
Thanks, Mark, and good morning, and thanks to our investors, prospective investors, analysts joining the call this morning and spending time with us as we review our second quarter results. I hope you and your families are staying safe and healthy in these difficult times.
Turning to Slide 4, let me begin with few comments related to our recent developments. I’ll then focus the majority of my comments around the COVID-19 specifically, what we are doing today, steps we’ve taken and we’ll continue to take to mitigate the impact of the pandemic against operation and ability to restart our operations and finally Adient’s expectation for the industry as we move past from the crisis.
On top of Slide 4, you can see Adient’s headlines, Financials, which when you exclude the impact of COVID-19, were solid and built on the momentum established in late 2019 and Q1 2020. These results further demonstrate the improvement phase of our turnaround plan what’s accelerating and ahead of schedule.
Sales at $3.5 billion were down $700 million versus last year Q2 just over $500 million and the volume decrease was contributed to lost production associated with the pandemic. Adjusted EBITDA increases to $211 million, up $20 million year-on-year.
Excluding the appropriate approximate $100 million impact from COVID-19, earnings were on pace to eclipse last year’s second quarter by $120 million. The similar outperformance the company achieved in the first quarter of this year.
Also worth noting, our year-to-date free cash flow which essentially breakeven improved by over $200 million versus same time period a year ago, improved earnings, lower CapEx were primary drivers of the improvement.
In the bottom box, we’ve highlighted at a high level the proactive actions Adient took to help protect the financial health of the company as the impact of the pandemic intensified as the quarter progress. These included the implementation of cash conservation initiatives. Actions bolstered Adient’s cash and financial flexibility including the successful issuance of $600 million senior secured notes and the development of restart procedures to ensure our operations are ready to reopen with proper safety protocols in place. We are running to these in a minute.
Finally, before leaving this page, I’d like to highlight and thank the Adient team members who work tirelessly to provide supports to their local communities through various manufacturing initiatives. Namely the design and production of face protection in 3D printing for parts for facial.
Turning to Slide 6, let me expand on a few key points. I planned to do a 3D slide relatively quickly. I know you’ve had a chance to download the materials and like to leave ample time for Q&A at the end of this call.
The current global automotive environment remains uncertain although as we look to China we are encouraged. All of Adient’s 79 plants are open, in fact 45 plants are running two shifts while advocating its customers are up and running and plants in Wuhan and Hubei have opened with SGM building 2,000 vehicles per year.
Now it’s an encouraging data point related to Adient’s profitability through the ramp up production because the team acted quickly and decisively to improve on variable costs. Margins have returned to normalized levels in the first month since production resumed. We’ve taken the proven China playbooks and applied it to Europe and the Americas.
Beginning with significant actions and improved our variable cost and reduced our cash burn, while at the same time, developing detailed plans to reopen with COVID safety precautions in place.
We started reopening in Europe over the past weeks, ten days. Certain of our customers have resumed production some quick steps. Progress in these 20 of JIT plants are in production with various rates of pulling from OEs, ranging from 30% to 100%. We expect 80% to 90% of the OEs will be in production by the end of the month. The UK is expected to be the last country to restart.
In North America, customer restart plans continue to evolve after certain delays, limited restarts are planned for the weeks of May 4th and May 11. We anticipate meaningful restarts to occur in the week of May 18. In addition, given Mexico’s shelter in place orders is still - suppliers and OEs will need to navigate through the added layer of complexity. We are in daily discussions with our customers and suppliers to ensure successful launch.
Turning to Slide 7, we’ve provided a snapshot of the current environment in China, which we hope signals a likely path for Europe and the Americans in the coming months. I will read all the bullets, but I wanted to point two key highlights.
First China business activities are gradually resuming, almost all supermarkets, retail and entertainment are open with foot traffic close to normal. And public transit ridership returned to 90%.
Specific to the auto industry, as mentioned, all OEMs got opened, nearly all dealers are open for business, sales are progressing in a positive direction, in fact their retailers suggest retail sales between April 1st and April 25th is comparable to last year’s level representing a big improvement from March.
And finally, retain a strong mix of business that benefits Adient as the premium brands in Japanese OEMs are outperforming the overall market.
Slide 8 illustrates the steps we took in China during the shutdown period to reduce our breakeven and improved our variable cost structures. These actions such as flex in headcount, postponing new investments to reduce capital spend, driving VAVE initiatives and optimizing engineering resources to name a few resulted in our business to maintain 10% EBITDA margins despite a 18% drop in volumes.
We’ve taken the China playbook and applied this direct to operations to manage cost, preserve liquidity and protect Adient’s long-term health.
Flipping to Slide 9, we outline the cash conservation actions we’ve taken to reduce our monthly cash burn rate down to about a $179 million per month. This monthly rate is based on production environment experienced in April which was essentially zero in Europe and North America. These actions are significant reach across parts of our organization.
While the planned actions were actually heated quickly and included on a compensation across employees from 10% to 20% salary reduction plus an additional 10% salary deferrals in U.S. Myselves and my direct reports have taken a full 30% salary reduction. On top of that, I am deferring the rest of my salaries to mid-July.
Outside the U.S., e-band employees are taking an approximate 20% reduction in salary. We’ve also worked with unions and employee groups closely to achieve salary reductions throughout Europe, Mexico, South America and parts of Asia.
By flex, we’ve reduced cost at our plants and JVs by furloughing direct and salaried plant workers delaying merit increases, reducing engineering costs and identifying subsidy opportunities from local governments. To further reduce their cash burn, we’ve delayed investments that are not critical to keeping their plants operational.
Jeff and the finance team are closely monitoring our receivables and JV dividends to ensure it’s highly cautioned.
I won’t to spend a lot of time on Slide 10, but then I’ll say in addition to measures within our direct control Adient is also investigating cash conservation opportunities the results of government stimulus.
Moving to Slide 11, and our restart plants. Important to remind you that from the beginning of the crisis, Adient assembled an operational leadership team to manage through the challenges and ensure best practices for our share across regions. The collaboration was extremely helpful when developing our global restart guidelines. Since China has a proven playbook, we use those procedures as a framework, the detailed procedures are posted on Adient’s website.
Bottom-line, Adient’s business operations are prepared to restart which includes not only providing a safe work environment for our employees, but also leveraging the COVID situation to clean-up business from a commercial perspective.
One of the initiatives we took a few weeks ago, was to send a developed list of cost reduction ideas to all of our customers that could be acted upon immediately and we'd be willing to share the benefit associated with that.
In addition, we've taken the opportunity to sweep all of our open commercial issues prior to restart with our customers using these extraordinary times to push towards resolution. Some of the premium customers that I’ll say we had an enhanced relationship with, we’ve gone and asked for special terms post restart to improve liquidity. And on the opposite end, with certain customers, where had non-profitable situation, we’ve taken this opportunity to exit the business.
The COVID situation behaves similar to 2009, 2010 anticipating customers will reduce to delay launches and new program development. We think there is significant opportunity for us to continue to push our cost structure down.
Turning to Slide 12, there is no doubt pandemic has created economic unrest for the consumer. We are cautiously optimistic that the stimulus being put into the market will help drive consumption. We’ve seen and heard many different options that are being explored such as cash reform in the U.S., and in Europe potential softening of CO2 compliance requirements in Europe and incentives to advance alternative propulsion vehicles.
Adient expects to benefit from any one of these alternatives as we are essentially agnostic with regard to powertrain mix. In addition, vehicle manufacturers are combining spring selling season, advertising with expanded incentives ranging from 0% financing, payment deferrals, and first responder discounts to persuade consumers now it's the time to buy a car.
Finally, before turning the call over to Jeff and flipping to Slide 13, despite being encouraged with the efforts to stimulate demand, we are also taking a realistic approach that the post restart consumption will be down and corresponding volumes will be down. As such, we are taking additional actions to further flex our cost structure to improve earnings and cash flow in this new sales environment.
I think of this in three phases. The first phase is survival, weather the storm phase. We've taken steps to do just that, many of which we shared with you this morning. The second phase is resizing the business to be profitable and be cash flow positive in a lower sales environment and view the lower sales environment as the new norm, but it will likely be with us for a period of time as adding and taking steps to size the cost structure accordingly and in line with expected sales levels.
This includes accelerating plans to turnaround our SS&M business. When the industry fully recovers, Phase 3, we anticipate that the actions we’ve taken to resize the business and lowering the cost base will enable Adient to emerge as a stronger company with earnings and cash generation comparable to those of our closest peers.
With that, I’ll turn the call over to Jeff, so he can take us through Adient’s financial performance for the quarter.
Good morning everyone, and thanks, Doug, and I echo your earlier comments and hope everyone is safe and well.
I’ll start on Slide 15. Adhering to our typical format, the page is formatted with the reported results in the left and our adjusted results in the right side. We will focus our commentary on the adjusted results which excludes the special items that we view as either one-time in nature or otherwise skew important trends and underlying performance.
For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to restructuring cost and purchase accounting amortization. Details of these adjustments are in the Appendix of the presentation.
Sales were $3.5 billion, down 17% year-over-year which included over $500 million of estimated negative impact due to COVID-19. Adjusted EBITDA for the quarter was $211 million, and included about $100 million impact related to COVID-19 despite the headwind, EBITDA was up $20 million year-on-year and is more than explained by improved business performance across Americas, EMEA and Asia.
Note that equity income was down for the quarter due to COVID-19 as we only had $10 million of equity income in the quarter versus $63 million a year ago. As the bulk of our equity income arises out of China, the impact is the virus have hit our equity income heavily in both February and March.
Finally, adjusted net income and EPS were up significantly year-over-year at $58 million and $0.62 respectively. As you can see, the improved operating results and a lower effective tax rate between periods drove the year-over-year improvement.
Speaking of taxes, Adient’s Q2 fiscal 2020 effective tax rate was based on an actual tax rate calculation versus an estimated annual effective tax rate calculation. The shift in methodology was necessary since the impact of the pandemic has made a legal entity-based outlook in practical.
Now, let’s breakdown our second quarter results in more detail, starting with revenue on Slide 16. We reported consolidated sales of $3.5 billion, a decrease of $717 million, compared to the same period a year-ago. Lower volume and mix across North America, Europe and Asia, impacted the year-over-year results by approximately $634 million.
Approximately, $530 million of the volume decrease was attributed to lost production volume associated with the pandemic. In addition to the negative impact, the currency movements between the two periods primarily in Europe impacted the quarter by $83 million.
It’s worth noting the call out on the right side – right-hand side of the slide, our consolidated sales in China was down about 36% year-on-year better than vehicle production in China, which was down approximately 49%. Adient’s exposure to luxury and Japanese OEMs is a benefit as those manufacturers outperformed the overall market.
Also noted are Adient sales in Thailand, which were essentially in line with industry production. With regard to Adient’s unconsolidated seating revenue, driven primarily through our strategic JV network in China, sales were down 35% excluding FX outpacing the 49% decline in China’s vehicle production over the same period.
Also important to note, sales in China improved as the quarter progressed and – an encouraging sign that fortunately accelerated in April.
Moving to Slide 17, we’ve provided a bridge of adjusted EBITDA to show the performance of our excitement between periods. The bucket labeled the 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 $211 million in the current quarter versus $191 million versus $191 million last year. The corresponding margin related to the $211 million of adjusted EBITDA was 6%, up approximately 150 basis points versus Q2 last year.
Excluding equity income, our EBITDA margins on the consolidated business increased from 3% last year to 5.7% this year, a very good result, especially considering the sharp decline in revenue.
As noted earlier, this year’s second quarter EBITDA contains about $100 million headwind from COVID-19. Excluding the $100 million, Adient was on pace to show a similar year-over-year improvement to the one posted in our first quarter of this year, a good proof point that Adient’s turnaround plan was accelerating ahead of schedule.
I’ll mention, I’ll also mentioned about two-thirds of the $100 million COVID impact, related to Adient’s consolidated business, the remaining one-third is associated with the decline in our equity income. Based on that, you can see the teams did a nice job at keeping our decremental margins in check.
The year-over-year improvements in adjusted EBITDA is largely driven by improved business performance and lower SG&A costs. Lower launch, ops waste and freight made up the bulk of the improved business performance.
With regard to the approximate $40 million reduction in SG&A costs, which again is spread out between the regions, drivers included, increased efficiencies, and the positive benefits associated with the deconsolidation of Adient’s aerospace and the divestiture of Recaro.
And also important to point out, a portion of the improvements, call it, $20 million relate to temporary benefits associated with employee concentrations that are not likely to repeat next year, this temporary event that was included in the net COVID impact of $100 million.
Partially offsetting these improvements was the negative impact of volume and mix, call it, $93 million and a $51 million decline in equity income between periods, both of which were primarily driven by the pandemic. FX also impacted the year-over-year comparison, but to a much lesser extent, call it, $6 million.
Finally as noted in the bottom of the slide, Americas and EMEA SS&M were actually in positive direction with plant manufacturing results improving about $40 million versus last year’s Q2 and approximately $10 million compared with Q1 2020.
To ensure enough time to allocated to the Q&A portion of the call, we’ve provided our detailed segment performance slides in the Appendix of the presentation, improved business performance and lower SG&A costs, partially offset by the lower – or by the impact of lower volumes is the primary takeaway from Americas and EMEA regions.
In Asia, COVID-19 has significant impacts to our consolidated revenue and equity income or was partially offset by better business performance and lower SG&A costs.
Now let me shift to our cash and capital structure on Slide 18, 19 and 20. I’ll focus on year-to-date results, as the longer timeframe helps move some of the volatility in working capital movements. Adjusted free cash flow defined as operating cash flow less CapEx was about breakeven at minus $2 million.
The $141 million improvements in adjusted EBITDA, $67 million reduction in capital spending and $50 million decline in restructuring explain the vast majority of the $210 million improvement in free cash flow versus last year.
Trade working capital, which is mentioned in the past tends to be quite volatile throughout each quarter and was a partial offset. Speaking of working capital, on the right-hand side of the slide, we’ve highlighted how working capital movements between March and May are expected to impact Adient’s cash flow. Essentially, the production stoppage will result in working capital swings.
We expect to have a benefit in March and April, but reversing into May and generally neutral during the remainder of the shutdown period. Upon restart, we expect an initial drain in month one, followed by a few months of benefit ultimately offsets.
Going back to capital spending, the year-over-year decline is partially related to the timing of our customers launch plans, as well as an increased scrutiny over spending. We anticipate, given the impact of COVID-19 and the likely delays in customer launch plans and new program developments, further opportunities to reduce spending will materialize.
Flipping forward to Slide 19, Adient executed several actions to increase our financial flexibility. First, we took a partial draw on our asset-based revolver of $825 million in March. This draw which was included in our cash on hand balance of $1.6 billion at quarter end, combined with the remaining undrawn availability of $175 million provided Adient with about $1.8 billion of liquidity at quarter end.
That said, it’s important to note, available liquidity associated with Adient’s ABL facility is not static and fluctuates the changes in the underlying business. In other words, a decline in the shrinking receivable balance such as the situation today, due to the significant amount of automotive shutdown across the world.
Looking ahead and realizing we’d be experiencing a contraction of ABL revolver availability due to the shutdown of our customers, we successfully entered into the debt markets and issued a $600 million, five year senior secured note in April. After the quarter end, we were required to pay $137 million of our ABL balance due to declining AR balance.
In addition, we’ve voluntarily repaid the additional $350 million on the facility at month end. This voluntary repayment was not immediately required, but rather represented our estimated required repayment in late May due to further expected declines in AR balances. Thus the drawn amount on the ABL at April 30th was $338 million.
Pro forma for the new secured notes and require $137 million mandatory pay down on our ABL in April, our March 31 liquidity would have been $2.2 billion. Based on the current environment, we believe an adequate level of liquidity to weather the storm especially when factoring in the stats we’ve taken to reduce our monthly cash burn to about $175 million per month.
This burn rate, as we’ve pointed out earlier, is based on the production environments we experienced in April, which is essentially zero production in both Europe and the Americas. Also note that, due to the variety of actions taken to mitigate negative cash flow during the shutdown period, we were able lower our estimated cash burn from approximately $300 million per month to the $175 million figure just noted.
In addition, we expect to close on our previously announced strategic actions before the end of our fiscal year providing proceeds of about $575 million. Adient’s highly profitable network of China JVs, with a strong balance sheet and consistent cash dividend, further enhances our liquidity.
As noted on the slide, the seating JVs had a net cash balance of approximately $1.6 billion at March 31, and approximately $200 million of cash dividends are expected in fiscal 2020.
On Slide 20, in addition to showing our debt and net debt position, which totaled $4.6 billion and $2.9 billion respectively at March 31, we’ve also provided a pro forma look at Adient’s capital structure reflecting the issuance of the $600 million, five year senior secured notes. We believe this capital structure not only provides flexibility to weather the storm, but more importantly, it provides flexibility to pay down debt after we cycle past the crisis.
Improving Adient’s cash generation remains a top priority. As Doug pointed out, the actions taken – the actions Adient has taken and plan to take are designed to improve our earnings and cash flow to be profitable in a smaller sales environment. Over the crisis, - once the crisis is in the rearview mirror, we look to pay down some debt yielding excess liquidity.
Over time, post-crisis, we expect to have zero outstanding balance in the ABL and run with a cash balance somewhere in the area of between $500 million and $600 million.
Finally, a few closing remarks on Slide 21. First, as evidenced by our Q2 results, Adient’s historical operating challenges are being addressed. The team has a firm hand on the wheel and continues to execute against its commitments.
Second, the impact of COVID-19 is being addressed. The playbook used in China in February and March is successfully being applied globally; and third, Adient’s liquidity is strong and we believe provides ample flexibility to weather the storm.
Given the unprecedented level of uncertainty around the global economic landscape and its impact on the auto industry providing specific guidance for the remainder of 2020 is not possible at this time, broaden ourselves our outlook can be thought out in three ways or phases as Doug pointed.
Early days, the team executed actions to protect the financial health of the company, limiting our cash burn and ensuring we have adequate liquidity – level of liquidity to manage to the crisis. With those actions executed, the team is now focusing on executing additional measures to resize its business to drive profitability and cash generation in a lower sales environment.
Although we expect a smaller sales environment to be with us for a period of time, possibly a year or two, we did not think it will be the new normal. The end game remains the same. COVID-19 does not changed the plan when the industry is fully recovered, we anticipate that the actions we have taken to resize the business and lower the cost base will enable Adient to emerge as a stronger company as our aim to cash generation comparable to those of our closest peers.
The team is focused more than ever on executing actions to enhance shareholder value.
With that, let’s move to the Q&A portion of the call. Operator, the first question please?
[Operator Instructions] Our first question comes from John Murphy with Bank of America. Your line is open.
Good morning, everyone. This is Aileen Smith on for John. Thanks for all the commentary. When looking at the $100 million improvement in monthly cash burn rate that you’ve been able to achieve through the period of production stoppage.
How much is that you estimate is more structural and will translate into stronger free cash flow on the other side of this crisis versus what is more temporary and may not persist as cost gets added back with production?
Yes, good question Aileen. I’ll start and Doug can jump in. The – a lot of these are really more in the category of stopping the bleeding during a no production environment. So, putting our plants on furloughs, taking the actions we have on reduced salaries, and compensation for employees and reduced capital spending associated with the no production environment.
So, the point we talked about though is, we are taking the opportunity now to do more permanent actions that will improve our profitability as we move forward. But a lot of the actions we talked about getting from the $300 million or so to the $175 million or temporary equip measures to get an immediate benefit of immediate savings during a period of zero production.
Great. That’s helpful. And very much understood that the recent $600 million debt raise was a move to bolstering near-term liquidity and withstands the current market pressure, but over the longer-term, can you remind us what you view as a sustainable or ideal capital structure, specifically, any targets longer-term around net leverage and debt pay downs?
Yes, no, to the question. I mean, I mentioned in my remarks that we looked for cash somewhere between the $500 million and $600 million range, and obviously we have a lot more than that today. We also have $575 million coming from the transactions that we plan to completed – or we expect to complete, I should say, before the end of the fiscal year.
And the back half of the year is always a time period where we get our dividend, is just, we would have never taken that additional liquidity, but for the COVID-19 crisis, the uncertainty it creates. But with the amount of fixed cost, we thought it was prudent to do it with the limited amounts of utility for the ABL during the production shutdown as I mentioned. It drew us to raise the notes.
As we get to the other side of this, we will look to pay down debt and use that excess liquidity to get down to that $500 million to $600 million range. We have the ability obviously to pay our term loan B which is little under $800 million today. And we’ll look for other opportunistic measures too to reduce debt low as we get to the other side of it.
From a overall debt structure, I would say, we’ve looked at something close to a two-times leverage ideally inside that a little bit as sort of our long-term goal on where to get our capital structure down to, obviously COVID has given us a setback. But we expect to come out back on that mission on the other side of this pandemic.
Okay. And the last question, do you have any visibility around customer releases beyond the next month or two in Europe and North America, particularly anything to inform the production ramp in those regions other than the examples that in China over the past month or two?
Sure. So, with all of our customers both beyond just China, we get typically a 12 week broadcast at our JIT plants that are moving in the system. We’ve got very visibility and I think we commented in our formal remarks, we expect Europe to come online pretty quickly and get back to 100% production and that’s what’s reflected.
And we’d say the only area that is still a little bit fluid right now is in the Americas and that’s just the coordination of the state governments are providing the OEs the opportunity to go back to work. And then, the fact that, there is heavy reliance on Mexico which has staying place - in place at this time.
The releases are in our system and the only reason I am discounting a little bit is we anticipate that the shifts will occur over the next couple weeks until we get through that restart.
Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open.
Good morning everybody.
Morning.
I had a couple of questions, just a follow-up, your consolidated EBITDA was $201 million and I was wondering if you might help us walk through some of the adjustments that we might want to think about to extrapolate to kind of an annualized rate of EBITDA. I think you mentioned that there was $20 million of unusual comp benefits that I suspect that you would – we might want to track.
And there was also – it looks like $41 million of positive from commercial settlements on a year-over-year basis and last quarter you had talked about how some of that was normal and some of that was maybe non-recurring kind of true-up from prior periods. Could you just give us a little bit of a sense of what the runrate of EBITDA might be at this level of revenue?
Yes, so good questions, Rob. On the $211 million of EBITDA that we posted for the quarter, we mentioned that there was roughly $100 million debt impact from COVID-19-related issues. Effectively, if you think it like a $120 million of total issues offset by $20 million that we took back in some of our incentive compensation.
So the $100 million was a net number. So I think you can use the 311 million as a more normalized number. As it relates to your question on commercial, that’s a part of our business all the time, what we – we called it out in the fourth quarter, because that is a period where we have an unusual amount of end of year negotiation settlement with our customers.
If I look at our overall commercial accrual on our balance sheet, it’s roughly the same. It has moved much during the quarter. So I’d say that’s more due to the business performance and doing the things that Doug has talked about and what we have talked about we weren’t doing as well before the turnaround of just being working with our customers from either VAVE opportunities to sticking to contracts or other elements of volume claims or other things.
So I would say, it’s much more normal for us on what you are seeing in this quarter from a commercial settlement activity.
Okay. That’s helpful. But just to clarify, that $100 million COVID impact, there was also a corresponding revenue impact. So, if we were just to say, look, you are sort of at a $14 billion annualized runrate of revenue, would we annualize the EBITDA and maybe just make the adjustment for the consolidated part of the EBITDA which was $201 million and then, just make the adjustment for the comp adjustments and things like that?
Yes, we’ll, so, I guess if your – it depends on – if you sound like you are trying to build another variable of bringing it down into a lower volume environment, the $120 million of impact, less the $20 million of SG&A was the $100 million we talked about.
The – if you want to start thinking about that and what we look like in a reduced operating environment, I guess that I would tell you, for the quarter, we talked about $530 million estimated COVID impact from sales with and we said about two-thirds of the $100 million of impacts related tour consolidated business, about a third related to equity income.
So the decremental margins were just under 13% on that level. So, perhaps you can use that to fill in whatever revenue level you want to use in arriving at an EBITDA estimate.
Yes, the –the only thing I would maybe caution you a little bit on extrapolating that directly, particularly in the Americas we had a relatively like amount of launch activity in the first half of the year that increases significantly in the second half, particularly when we look at launches like the F-series, even though that’s delayed, that’s still going to roll into the second half.
With that as an exception, you can see that we are making pretty good strides when it comes to just overall material margin performance be it commercial or cost that we are taking out, freight, launch ops waste, et cetera and thus the improvement we have in SG&A stands as well.
And maybe Rod, just to give you, maybe another hack at that question from a different direction. The important $201 million consolidated excluding equity income we said roughly two-thirds $67 million of net impact on the consolidated side due to COVID. That is already net of the $20 million. So we’d be closer to the 270-ish range and then you can make any kind of volume adjustment you want to that on – in case if you want to reduce into post-COVID reduced environment.
Thank you. Our next question comes from Brian Johnson with Barclays. Your line is open.
Yes, just want to follow-up on some comments you made about potentially exiting unprofitable segments or product - customer relationships. You’ve talked about downsizing, over time, portions of the SS&M Tier-2 business to the shutdown to accelerate that in any way?
Actually, the specific comments were directed more towards some actions we took in China, specifically, associated with some customers and they don’t want to be specific, we just felt long-term were in our best interest to have in our portfolio. They were primarily a result of the Futuris acquisition that we made.
And as a result, we were able to consolidate some facilities. That being significant in terms of SS&M. We’ve been more finding ways to – find a path towards reducing cost and finding commercial settlements associated with that – on that business. And then, beyond that, there is a few customers that, I think we see that we want to deemphasize, but prefer not at this time to disclose that.
Okay. And in terms of the cash, you mentioned, I think two just housekeeping questions. First, with the receivables coming down, does that mean that the ABL revolver needs to be paid down and that you will use some of the term loan proceeds to do that?
And then, second question, especially with the big kind of largest product, one of the largest product lines in the world or country coming up for a great launch. You mentioned something about getting accelerated payments from OEMs. Is that’s something that you are going to be looking for or even have agreements in place as launch activity and production restarts?
And maybe, I’ll take the first part of that one, yes, and then give Doug on the second. From an ABL standpoint, I guess, first it’s thinking about our cash balance at the end of the quarter was roughly $1.6 billion. So half of that represented the ABL draw and about half represented just our normal cash. It is true that we have to pay down the ABL.
We mentioned $137 million required pay down in April. We said, we made another $350 million voluntary payment in April to reflect in our best guess of what that require a pay down is going to have be in May any way.
So, you can think, we use the proceeds we have of the base $800 million or that $1.6 billion to make those repayments. We also have the proceeds of the note that came in April for $600 million. So, we have a significant amount of cash on hand today.
Yes. And with regard to favorable book terms with our customers, a lot of that activity started initially before we have the successful fund offering. So that alleviated some of it. But we took every opportunity particularly when we have, what we say, a very positive relationship with our customer to go and say, if there is some way we can work this equation that helps us in the short-term, particularly as we were dealing with this working capital-related issue.
I would say, most of the success we had though was actually in the area of tooling, where we were in the launch cycle with many of our customers. Sometimes, for really a specific kind of bureaucratic issues tooling can lag for many months, sometimes up to a year before we get compensation and we took it upon ourselves to go and really push our customers to true-up on tooling payments on those launch activities ahead of schedule and we were relatively successful there.
Thank you. Our next question comes from Emmanuel Rosner with Deutsche Bank. Your line is open.
Hi, good morning everybody.
Good morning, Emmanuel.
Good morning, Emmanuel.
I wanted to ask you a little bit more color around the actions you are taking as you are restarting, I think a lot of the things detailed on your Slide 11. So that customer restart blitz, you include a lot of very potentially positive actions, JV letters, the commercial items, the premiums in exiting some platforms. And I know you spoke about it a little bit.
I am just curious how material is this, and does that enable you to essentially accelerate some commercial and cost actions that would have otherwise taken much, much longer. So I guess, can you – as you move into the rest of this year, can you essentially take care of all these items which otherwise would have needed - I don't know, platform redesigns or things like that should be taken care of?
Yes, so, from a materiality standpoint, maybe we pointed to China and that China despite the 18% volume drop, we were able to maintain EBITDA kind of historic levels. Much of that activity is captured on Slide 11 and some of the preceding slides. So, we think it’s material. We are in early days in Europe and in the Americas whether we can capture the full value as we were able to capture in China is to be determined.
But, it’s really fully not the same levers. And I am fairly confident that in a relatively short period of time, we can achieve that. What we are really hoping to achieve is that, whatever volume drop we experience in the near-term, that gets somewhat normalized once plants restart, that we can, at a minimum maintain the contribution associated with the business and then hack into the fixed cost side of our business.
So we can maintain an overall level of profitability that we had going in – in a high level how I look at it.
Okay. That’s helpful and then, the follow-up, specifically on this, so, obviously, you are executing actions to be cash flow positive in the lower sales environments. You are also expecting that lower sales environment to eventually continue for 12 or 24 months.
So, I guess, any timeline you can give us around that sort of cash flow positive benchmark, like you’ve got some things that as soon as industry production stabilizes at even in this low level, you would probably be there based on your current actions or the – be there much more to be taken beyond the – sort of the next quarter or so?
There is a lot of moving parts to that, Immanuel. I mean, we are aiming to have that, I would say sooner rather than later and have lot of actions sort of underway. But it also truly depends upon how the market restarts and it’s specifically, how long it takes to restart? And then, at what level of lower – we do think it’s going to be lower production.
But how much lower and the estimates are bouncing around quite a bit on that in the mix of vehicles that sort of sit in there and what our customers launch plans turn out to be that they really slow it down. There is a lot of slowdown in our CapEx. So, we definitely need a few things to come into better visibility before we can give you a full roadmap.
But I won’t say we are being pretty aggressive on actions and accelerating a lot of the things that we might have done a little bit later and doing them now. So, we do think we’ll – and we are prepared to be profitable at a significantly lower level of volume than we have today. We’ll get back to you as we get a little more definition on the future and give you a better view of what that timeline looks when we have that clarity.
Yes, there is a one point I would emphasize on Jeff’s comments, what’s not clear and it’s a bit out of bar scope right now with our customers intend to do. And then, and if you go - if this plays anyway similar to what happened in 2009 and 2010, if there is a significant pullback in – of a new launch, new development activity which we are anticipating that there could very well be and say, look to cut their spending as well.
And particularly on the engineering SG&A side, that dramatically impacts what we’ll do on our end and what happened in 2009 and 2010 as the customers cut back, they extended the production life of many vehicles and that’s eliminated things like capital investment for new launches. It eliminated launch activity and it eliminated kind of roll on, roll off, loss of revenue associated with that.
And so, if you get that kind of stability, that allows us to go much deeper on the cost reduction side and we think that that will have a pretty dramatic impact on both our fixed and variable side of the equation soon.
That’s – so it’s too early to see what’s really going to happen there. But you are starting to see the customers come out with a revised view of that launch cadence in that product line launch activity.
Thank you. Our next question comes from Armintas Sinkevicius with Morgan Stanley.
Great. Good morning. Thank you for taking the question. I thought it was particularly encouraging to look at the ability to get the operations back up and running in China given how much manual labor is involved with seating and that bodes optimistically as we think about your ability to restart operations in Europe and North America.
Maybe you can talk about some of the measures you’ve taken in China, when you think about six feet of distancing et cetera to really get that back up and running?
So, sure. But you have to break it down in our business by the components and the products that we produce. So, on a just in time level, this is our final seat assembly. That’s relatively easy to implement. So that’s going in with our industrial engineers respacing the line, in some case, extending the line a little bit to provide that spacing.
A lot of it has to do with personal protection equipment, screening employees, you have to say, come in. So, I would point you to our website to not tie up the call too much with everything that we are doing. We feel it’s a very comprehensive list and so far as we’ve implemented that in China and then modified it accordingly in Europe and Americas, it’s gone relatively well.
Where things are slightly different than in our cut and sell operations, we really had to re-layout those facilities more dramatically put, I’ll say protective barriers in between employees where we couldn’t provide the six feet of separation. And then, within our Metals and Mechanisms business, it’s a bit easier to accomplish in our full business.
That’s for the most part fairly automated and spread out. So, not a big issue. But – and then, what we’ve implemented in our headquarters, we still have that majority of our employees operating from home. Today, we intend to continue that. We’d probably continue that even if government restrictions are changed just because we think it’s perhaps a safer way for our offices to operate as well.
And just to your point, it sounds like, the measures were not too hard to implement, but how much of it impacted your capacity or your output. Are you operating at sort of 90% levels of normal capacity given that you had to respace your employees or how is that impacting your production ability?
Yes, quite frankly, it’s really not had an impact at all. So, and we measure that by what’s happened in China and actually it’s increased our labor efficiency. Some of that had to do with in the early stages, we were restricted in China with employee availability that wasn’t unique to us. That was with many of our customers, as well as suppliers.
So that really forced us, I’ll say, health and safety aside to become more efficient. So that’s just the basic lean principles that we had to implement an emergency level. And that we felt that we were able to run more efficiently. Where – the only point I’d caution you, where it becomes a problem is not so much on the health and safety side.
We feel pretty good about that. It’s more on how our customers operate and what they – on how they operate within their plant. So, if they lose efficiency in their automotive facilities and they wanted a slower line rate, that will force in efficiencies in our plants, because we will have demand for the line rate, but they won’t run at it.
We would experience that in the past during launch activities. Usually, that translates into some sort of commercial discussion as opposed to us having to burden our operations with that. And we’d say that’s my bigger concern than the loss of productivity or capital spend that we’ve had to put in place at our operations to be – I’ll say, COVID-compliant.
Thank you. Our last question comes from Joe Spak with RBC. Your line is open.
Thank you very much. I just wanted to get back, I guess to the decremental margin kind of discussion which was I think pretty impressive in the quarter. But the mix of regions that is, I guess, impacted in the next quarter look significantly different.
So, maybe can you just help us with that sequential bridge of what you are expecting or maybe even an indication of how the margins held up maybe in the last two weeks of this past quarter?
Yes, good question, Joe. Good morning. I would say, our decrementals in Europe tend to be a little bit of worse than they are in other areas, because we have a lower ability to flex. We’ve been aided to flex in Europe, one, because, I think we went in as I said we were kind of aggressive on a lot of the moves, but there is certain limitations you could have from the various countries on how much you can take labor down.
But governments have put in a number of short time work weeks programs then that have allowed us to take down our labor cost a bit. But I would say it has the probably the worst flexing. Now the good news for us at the moment, you saw a mix standpoint as Europe seems to be getting back to work quicker than the Americas.
So, that will help in the area where we have the hardest time to flex, as well. Their sales are coming back and we have twenty some JIT facilities that have restarted in Europe and that is continuing through the month. So, knock on wood, that should be helpful here from a decremental standpoint for May versus April.
Okay. And then, just looking out like, Doug, some of the comments you made, it got me thinking, if I think about some of the issues over the past couple of years, I mean a good portion of it just was, I think complexity in sort of dealing with the launches.
So, look, if we take a view that over the next couple of years, industry volume is impacted, I understand like the absolute level of EBITDA might be lower, but is there actually a version of that where the margin improvement trajectory is actually greater because of – you are better able to sort of manage the flow of volume and new launches that sort of goes through the system?
Yes, I don’t want to get too far ahead of this. If certainly there is a scenario of where that could be a true statement. I think right now, our focus is, let's get the restart going, let's make sure we create the environment that we can have our employees feel comfortable working in. Let’s make sure that we have the proper productivity in our plant.
You know, as well as I do, the supply chain is gradual. So, we’ve got all hands on that to make sure that we can manage the unforeseens that will come our way. But, if you were to compare a scenario to, again, what happened in 2009 and 2010, I think, many suppliers benefited from kind of that reduced launch cadence that I talked about earlier.
And as I look back, what was the biggest issue that we had to deal with as a company in 2017 and 2018, and to a lesser degree, 2019 and 2020 as we improve was managing the complexity of our launches and we've talked that that launch activity spiked in those prior years. It’s very difficult and challenging to manage the business.
So – and we’ve also pointed to prior to COVID that as that launch activity came down, we anticipated better financial performance. So, I think that’s a scenario that it plays that way, it works to our advantage.
Great. It looks like we are at the bottom of the hour. So, this concludes the call for this morning. If you have any follow-up calls, please do not hesitate to call. We’ll get back to you and again, thank you very much.
Thanks everyone.
Thank you for your participation in today’s conference. Please disconnect at this time.