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Adient plc (ADNT) Q4 2020 Earnings Call Transcript

By Motley Fool Transcribers - Nov 30, 2020 at 2:00PM

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ADNT earnings call for the period ending September 30, 2020.

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Adient plc ( ADNT -5.38% )
Q4 2020 Earnings Call
Nov 30, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome, and thank you for standing by. [Operator Instructions] I would also like to inform all parties that today's conference is being recorded. If you do you have any objections, please disconnect at this time.

I would now like to go ahead and turn today's call over to Mr. Mark Oswald. Sir, you may begin.

Mark Oswald -- Vice President, Investor Relations & Corporate Communications

Thank you, Jacqueline. Good morning and thank you for joining us as we review Adient's results for the fourth quarter and full-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'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today's call Doug will provide an update on the business, followed by Jeff, who will review our fourth quarter and full-year financial results. In addition, Jeff will provide our outlook for fiscal '21. After our prepared remarks, we will open the call to your questions.

Before I turn the call over to Doug and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete Safe Harbor Statement.

In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the Company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release.

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

Doug Del Grosso -- President & Chief Executive Officer

Okay. Thanks, Mark. Good morning. Thanks to our investors, prospective investors and analysts joining the call this morning as we review our fourth quarter results and outlook for fiscal 2021. I hope you and your families are staying safe and healthy in these difficult times.

Turning to Slide 4, let me begin with a few comments related to fourth quarter, specifically Adient's strong finish to a challenging fiscal year. Remaining focused on our priorities, combined with increasing vehicle production continued to drive improved business performance in the most recent.

Q4's adjusted EBITDA of $287 million was up $72 million or 33% year-on-year, no doubt a strong result, but even more impressive when you consider Adient's consolidated revenue was down about 8% in that same period. Lower year-on-year global vehicle production and Adient specific launches were primary drivers of the lower sales.

On the far right hand side of the slide, you can see our cash and liquidity. We're extremely strong at September 30th. Total liquidity of about $2.5 billion made up of cash on hand of approximately $1.7 million and approximately $800 million of undrawn revolver capacity. As noted and included in our cash on hand is the approximate $500 million of cash proceeds collected during the quarter from closing on our previously announced strategic actions.

With our operations restarted, vehicle production is trending higher and proceeds from our previously announced strategic actions in the bank, the team began to voluntarily pay down a portion of the Company's outstanding debt. Just over at $103 million in principal of Adient's 10 year 4.875% senior unsecured notes were repurchased using just under $100 million of cash. Again, a strong financial finish to the year, Jeff will provide additional details on Adient's Q4 and full-year's financial performance in just a few minutes.

Turning to Slide 5, focused and resilient are the two words that come to mind when describing Adient in fiscal 2020. Those traits were instrumental in enabling the Company to deliver on its 2020 commitments. As the year began, the team was focused on advancing the Company's turnaround plan, launch management, operational improvement, continued cost reduction and commercial discipline were cited as key enablers underpinning the expected improvement in Adient's business performance.

With our operations and financial results steadily improving, the team pivoted and began to execute on a number of strategic actions, including the closure of our transactions with our joint venture partner Yanfeng, sale of our fabrics business and the sale of RECARO's Automotive Seating. In addition to these portfolio adjustments, the team also began efforts to de-risk the balance sheet as mentioned just a few minutes ago.

While executing the Company's 2020 plan, Adient's resiliency was brought to light as the team successfully managed through significant obstacles brought on by the global COVID-19 pandemic. The slide highlights certain of the measures the team took throughout the year to mitigate COVID's negative impact, many have been discussed on prior calls.

Bottom line, executing and delivering on plans within our control while managing through unplanned obstacles, as we did in 2020, positioned Adient for sustained success and, equally important, drives value to our future shareholders.

Turning to Slide 6, although the team is proud of the accomplishments achieved in 2020, we've turned the page and are now focused on 2021 and looking forward to build on that progress. The graphic on Slide 6 should look familiar since Adient's expected earnings growth in fiscal '21 is underpinned by the same focus areas that drove improvement last year, namely launch management, operational and cost improvement and customer profitability management.

Let me spend a few minutes discussing a few of these focused areas in more detail on slides 7 and 8. First on Slide 7, launch management will remain a key pillar supporting Adient's turnaround. The team made significant progress in 2020 delivering several flawless launches throughout the year.

We plan to stay vigilant to ensure that these best-in-class launches continue. That said, and given the significant progress made throughout the last 12 months, the contribution from launch management to our expected earnings growth this year will be less impactful compared with contributions from cost and operational improvements and our customer profitability initiatives.

With regard to cost and operational improvement pillars, we've identified a number of initiatives the team is executing to drive improved business performance, and ultimately, earnings and cash flow growth. These initiatives span across the organization and include improved capacity utilization, especially within certain of our foam and trim facilities; align our manufacturing footprint to sales projections.

In Europe, for example, we do not expect volumes to return to pre-COVID levels for a number of years. In fact, certain third-party estimates predict production in 2025 will be below 2019 levels. As such, we're spending a fair amount of time and dollars restructuring the region.

Purchasing is another area of opportunity, ensuring the business units -- Adient's purchasing organizations are well aligned, including better make versus buy decisions is expected to drive significant performance enhancements in 2021. In addition to these actions, we tend to produce results relatively quickly.

We're also focused on how we can position the company to ensure improvements continue several quarters down the road. Initiatives such as design for manufacturability where we're engaging the plant teams early in the design phase to reduce labor cost and improve quality; increase in automation and technology, again, looking toward the future to ensure improved cost and quality.

On the commercial and customer profitability front, we turn to Slide 8. Again, several initiatives are well under way. It begins with our mind-set. We want to become the supplier of choice for our customer in many ways and we're along that journey. As mentioned on previous calls, we spent significant time understanding the profitability associated with specific platforms and relationships with those customers.

This has resulted in the team better understanding who they want to grow with. Of course, this needs to be profitable growth metrics such as return on capital employed, continue to drive program bidding for new and incumbent business. For programs in production that emerge in challenge, the team is focused on opportunities to improve margin profiles. We refer to this as our leakers and bleeders. One of the tools the team uses to enhance margin profile are VA/VE initiatives.

The process has evolved significantly over the past several months into what we now refer to as Cost and Technology Optimization. The team gathers inputs from various sources such as JD Power, VAVE workshops, Market Research, IIHS Rating. By bundling and leveraging this available knowledge, we can create opportunities and value for our customers to improve market performance and increase Adient's value add.

Moving to Slide 9, I'll spend a fair amount of time this morning discussing our 2020 accomplishments and how we plan to build on that progress in the New Year. The key component of progress to date, expected improvement relates to Seat Structures & Mechanisms business. Although the SS&M business is managed regionally and is included in the America's EMEA's and Asia regional performance, I want to take a few minutes to provide a brief update on SS&M.

The turnaround is solidly on track, the operations made steady improvements in fiscal 2020 and continue to trend toward being free cash flow neutral as we exit fiscal '21. As a reminder, free cash flow calculations is the simplifying definition, essentially adjusted EBITDA for the unit less capex.

During the most recent year, we were able to cut 2019's free cash flow burn, which was approximately $400 million, by more than 50%. This was accomplished by improving both the profitability of the business, as well as reducing its capital expenditures.

We expect continued progress driven by a continuation of our targeted business selection process; improving cost competitiveness, essentially fixing the underperforming plants, creating cost-efficient designs and reducing our above-plant cost structure; making better make or buy decisions which will aid in asset utilization; ultimately improved earnings and focus on asset utilization employed [Phonetic] to improve free cash flow for the business.

Switching gears and moving to slides 10 and 11, let me provide a few comments on Adient's recent business wins and the status of our launches. On Slide 10, you see new business wins, which clearly show our continued focus on capital allocation, return on capital with targeting new or incumbent business has not limited our ability to secure business. We've highlighted a number of recent program wins here, including the replacement business for the Jeep Wrangler, Jeep Gladiator. New platform wins including Tesla's Model Y, future EV program at Ford, the Ford Transit, and Geely/Daimler Smart.

In addition to those programs pictured on the slide, Adient recently secured business awards for an undisclosed European manufacturer that is non-incumbent business and two GM future product programs which include an all new EV program, the replacement business for Chevrolet and Buick crossovers and also a GMC crossover, which is non-incumbent business to Adient.

As our new book of business continues to launch, we expect the balance-in/balance-out platforms to further enable margin expansion. One additional note, as we've secured business over the past several quarters, we also experienced content growth for certain of our new incumbent wins, for example, include the addition of foam to the new Ford F-150 and trim to the Nissan Pathfinder.

Flipping to Slide 11, we've highlighted several critical current and upcoming launches, including Ford F-150, Mustang Mach-E, Nissan Rogue to name a few. I'm happy to report the launch is currently under way, including the F-150, one of Adient's largest programs and they are progressing smoothly. The second F-150 manufacturing location in Riverside, Missouri is also well prepared for its first quarter launch.

As mentioned earlier, the team has made significant improvements to our launch management over the past several quarters as strong focus on process discipline around launch readiness is underpinning Adient's successful performance.

At the bottom of the slide, we've provided how fiscal year '21's launch volume and complexity compare to last year. Although volume and complexity are trending higher, especially in the Americas region, we feel the team is well prepared. Actual launch performance over the past few quarters provides positive proof points.

Turning to Slide 12, let me conclude my comments with an update on various macro factors we're watching that will likely impact the industry in Adient's fiscal '21. On the positive side, continued monetary stimulus expected to result in positive economic growth. Global vehicle production and mix remains strong, driven by improved consumer demand and a rebuild of inventory. And it appears advancements are being made with regard to COVID treatment and vaccines, all of which is very good news and supportive of the industry.

Factors we are watching that are tampering the expectations include the resurgence of COVID-19 cases across Europe and the Americas, labor shortages, which have become increasingly the concern since we restarted our operations in Q3. Risk to the supply chain, although it's great to see vehicle production in the U.S. reach annualized levels of 16 million units, like we experienced in the fourth quarter, these sharp increases could fortunately put strains on the system. And an uptick in premium freight and increases in prices for certain commodities such as steel and chemicals.

Summing up, we're entering '21 with an encouraging backdrop, driven by our self-help initiatives and improving vehicle production. We expect to encounter challenges along the way much of which we did in 2020, but be assured the team is ready to work hard to mitigate the headwinds that may arise.

And with that, I'll turn the call over to Jeff, so he can take us through Adient's fourth quarter 2020 financial performance and our specific outlook for 2021 in greater detail.

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Great. Thanks, Doug and good morning, everyone. Let me echo Doug's earlier comments and hope everyone is safe and well.

And starting on Slide 14, and adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side. We will focus our commentary on the adjusted results, which exclude 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 adjusted results relate to restructuring cost, asset impairments, purchase accounting amortization and pension mark-to-market; details of these adjustments are in the appendix of the presentation.

Sales were $3.6 billion, down 8% year-over-year, which, as Doug noted, was driven by lower year-on-year global production and specific Adient launches. Adjusted EBITDA for the quarter was $287 million, up $72 million or 33% year-on-year, more than explained by improved business performance, lower SG&A, and an increase in equity income.

Speaking of equity income, which is included in our adjusted EBITDA result, Q4 2019 included $14 million of income related to our interiors JV that we sold earlier this year. Therefore, on an apples-to-apples comparison, Adient's seating equity income was up $28 million or 47% year-over-year. Finally, adjusted net income and EPS were up significantly year-over-year at $109 million and $1.15 respectively. I'll also point out that a tax benefit contributed to the year-over-year improvements in net income.

The tax benefit was driven primarily by the write-off of certain deferred tax liabilities relating to the sales of WiFi and Adient's Fabrics business. As a reminder, Adient's effective tax rate is currently quite volatile and arguably provides little value as you model the Company, given the valuation allowances recorded in recent years. As such, we'll continue to focus more on cash taxes.

Full-year results are shown on Slide 15. Sales of $12.7 billion finished the year down approximately 23% compared with 2019. The significant impact of lower vehicle production, particularly in our third quarter as the COVID-19 pandemic cost production stoppages at our customers was the key driver in the year-over-year decline. The significant reduction in volume more than explain the $114 million decline in EBITDA. Partially offsetting the negative volume were the benefits driven by the continued execution of the Company's turnaround plan.

Although year-over-year earnings -- although year-over-year earnings improved significantly -- although down year-over-year, earnings improved significantly in early 2020 -- fiscal 2020 prior to the impact of COVID-19 and during Adient's fourth quarter, where the impact of the pandemic lessened. And finally, the decline in operating income resulting from lower volumes dropped directly to the bottom line as adjusted net income and EPS were a loss of $4 million and $0.04 respectively.

Now let's break down our fourth quarter results in more detail. Starting with revenue on Slide 16, we reported consolidated sales of $3.6 billion, a decrease of $324 million compared to the same period a year ago. Lower volume across North America, Europe and Asia primarily attributed to lost production volume associated with the pandemic was the key driver of the year-over-year decrease. Adient specific launches also contributed to year-over-year sales decline, but to a much lesser extent.

Worth noting, the call out on the right, consolidated sales in the Americas was negatively impacted by production downtime for the Ram classic. In EMEA, adjusting for the divestiture of RECARO automotive seating, Adient's sales were generally in line compared to the production within the European market.

In China, Adient's sales were strong and outperformed vehicle production in the region. Adient's favorable customer and platform mix continues to drive growth over market in the region. For markets outside of China and Asia, Adient's sales were impacted by export reductions in Thailand and Japan, primarily related to certain Nissan and Mitsubishi programs. The divestiture of RECARO automotive seating in Japan was also a contributor to the year-over-year decline.

With regard to Adient's unconsolidated seating revenue, year-over-year results were up approximately 15%. In China, driven primarily through our strategic JV network, sales were up 18% year-over-year, excluding FX. The sales outperformance versus the market is attributable to Adient's strong mix of business, specifically our exposure to luxury and Japanese OEMs. Outside of China, Adient has a variety of unconsolidated JVs. These operations performed generally in line with production in the regions.

Moving to Slide 17, we provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled Corporate represents central costs that are not allocated back to the operation such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was $287 million in the current quarter versus $215 million last year.

Key drivers of the increase included; improved business performance, which consisted of lower labor and overhead freight and ops waste; lower SG&A cost across all regions driven by increased efficiencies and the positive benefits associated with the deconsolidation of Adient Aerospace and divestiture of RECARO.

Also important to note, between $5 million and $10 million of the SG&A savings should be viewed as temporary and are not expected to repeat next year. And in Asia, a significant increase in seating equity income also contributed to the year-over-year increase in EBITDA.

Speaking of equity income, last year's EBITDA of $215 million included $14 million of equity income related to the Wi-Fi investment we sold and stopped consolidating last December. Partially offsetting the positive factors just noted was approximately $55 million of headwind related to lower volume and mix.

I'd like to point out that our adjusted EBITDA margin, excluding equity income, increased by just under 200 basis points year-over-year to 5.5%. A good proof point Adient's core operations are benefiting from the numerous turnaround actions executed to-date. I would caution, however, certain of the macro factors that benefited Q4's margins are likely unsustainable such as the extremely rich mix of production.

As Doug mentioned, we see certain headwinds on the horizon such as rising commodity prices and an uptick in premium freight that the team will need to manage through in the coming quarters. More on our 2021 expectations in just a minute. To ensure enough time is allocated to the Q&A portion of the call, we provided our detailed segment performance slides in the appendix of the presentation.

Let me now shift to our cash, liquidity, and capital structure on slides 18 and 19. Starting with cash on Slide 18, for the quarter, adjusted free cash flow defined as operating cash flow, less capex was $450 million. There were several factors that had a significant impact in the quarter's cash compared to our Q3 ending balance.

These factors included, at a high level, first, just under $500 million of cash proceeds collected from the closure of the Yanfeng transaction and the fabric sale; the reversal of temporary net trade working capital headwinds experienced in Q3; higher level of operating income and partially offsetting these were -- these positive contributions was just under $100 million of cash used to voluntarily pay down $103.5 million in principal of Adient's 10-year 4.875% senior unsecured notes.

On the right hand side of the slide, you can see we ended the quarter and year with approximately $2.5 billion of total liquidity, comprised of cash on hand of about $1.7 billion and just under $800 million of undrawn capacity under Adient's revolving line of credit. Just one more point to make before moving on; you can see within the table, Adient's capital expenditures for the year totaled $326 million, down $142 million year-on-year.

The team continues to work extremely hard to reuse capital where appropriate, especially within the SS&M business, where capital spending was down just under $100 million compared to the last year.

Moving on and turning to Slide 19. In addition to showing our debt and net debt position, which totaled $4.3 billion and $2.6 billion respectively at September 30th, we've also provided a snapshot of Adient's capital structure.

Just a few comments here; Adient's capital structure provided us with the flexibility to weather the COVID storm and is now providing ample flexibility to voluntarily pay down debt, which we began during the fourth quarter with $103.5 million in principal pay down of Adient's 10 year 4.875% unsecured senior notes. As uncertainty related to the crisis lessens over time, we look to pay down additional debt obligations.

As mentioned on past calls, over time we'd expect to have zero outstanding balance on the revolver and run with a cash balance somewhere in the $500 million to $600 million range, which points to significant opportunity for debt pay down in fiscal '21.

One final note on the slide, and related to our ABL, capacity under the -- under Adient's revolver is based on a one-month lag such that Q4 availability was based on August AR and inventory balances. Updating the AR balance and inventory balances to the end of September increased our revolver availability to just under $900 million in October or approximately $100 million more than the $787 million available at quarter end.

Moving on slides 21 through 24, let me conclude with a few thoughts on what to expect for fiscal 2021. Starting on Slide 21, on the right hand side, we've laid out our planning assumptions for production and FX compared with fiscal '20. The production assumptions are based on the current environment and could be significantly different if a production stoppage occurred. We are not forecasting such a stoppage, however, with the escalation in COVID cases, it remains a possibility.

As Doug noted earlier, our current expectations assume global vehicle production will continue to trend higher, increasing year-over-year in each of the major regions. The foundation of our '21 plan is generally aligned with the October IHS estimates with certain overlays for known customer release schedules. Although vehicle production schedules have remained robust entering fiscal '21, Adient assumes second half fiscal '21 production will decline compared with the first half of fiscal -- compared with the first half of '21 production, which is also aligned with IHS forecast.

On the far right side of the table, you can see how we expect our sales to perform by region relative to production. Bottom line, Adient's consolidated sales are expected to outpace global vehicle production growth by roughly 300 basis points. If you adjust for the RECARO and Fabrics divestitures completed in fiscal '20, growth over market would be roughly 400 basis points.

Within the regions, growth over market is expected in both Europe and China. In North America, certain fiscal '21 headwinds such as Tesla's decision to insource their seat manufacturing and lower volumes at Nissan will likely result in sales lagging production growth.

Now I'll review these assumptions and how they impact our 2021 outlook, beginning with sales on Slide 22. We've included a bridge that walks our fiscal 2020 sales of $12.7 billion to our expected 2021 sales range of between $14.6 billion and $15.0 billion.

Volume and mix are expected to have the greatest impact on our 2021 performance due to the overall industry growth. Outside of volume, Adient's positive backlog of new business and FX are expected to have a positive impact of between $350 million and $400 million for the year, partially offsetting the positive factors were the divestitures completed last year as well as customer pricing headwinds.

Now turning to Slide 23, we've also included a high level bridge illustrating our expectations for adjusted EBITDA. Walking from our fiscal 2020 results of $673 million, which included $408 million of consolidated EBITDA, we expect several factors will influence Adient's performance in 2021, many on the positive side including, benefits driven by continued execution of the Company's turnaround plan, specifically related to operational improvements, cost containment and customer profitability management. Higher volumes will also be a significant driver to improved year-over-year profitability, complementing Adient's self-help initiatives.

These positive influences are expected to be partially offset by approximately $150 million of headwinds. Certain of these headwinds are macro related, while others are specific to Adient. For example, rising commodity cost, specifically for chemicals related to our foam operations and steel, are estimated to be an approximate $50 million headwind. Launch cost associated with both the volume and complexity of launches, although not significant, are expected to be approximately $20 million more in fiscal '21 versus fiscal '20.

Adient's portfolio adjustments namely the elimination of our interiors equity income and the sale of our fabric business will create a gap of approximately $20 million to $25 million. And finally, the non-recurrence of temporary benefits recognized last year as we pulled every lever within our control to cut cost and reduce our cash burn during the pandemic such as furloughing our direct labor, implementing salary reductions and spending the 401(k) plans.

I'd also mention Brexit is a development we're continuing to watch closely. However, given the many moving pieces and uncertainty surrounding the event, placing an estimated dollar headwind is not possible at this time. Bottom line, when sifting through the puts and takes, we expect adjusted EBITDA to increase to between $1.0 billion and $1.1 billion in fiscal '21. Our consolidated adjusted EBITDA at the midpoint is expected to be about $800 million with a corresponding margin of 5.4%. This expected outcome is approximately $390 million better compared with last year.

Important to note, this forecast is based on the current operating environment. Specifically, we are not assuming production stoppages that may occur from supply shortages or customer downtime that is possible, given the uptick in COVID cases taking place, particularly across Europe and the Americas.

Now that we've covered our fiscal '21 expectations for sales and adjusted EBITDA, let me quickly comment on our expectations for a few other key financial metrics on Slide 24. Starting with equity income, based on our assumption of production in China, the elimination of Wi-Fi interior's equity income and current FX rates, we'd expect equity income to be around $250 million, about flat compared with fiscal '20. Again this is seating only. The negative impact of commodity prices is the primary reason for the relatively flat year-over-year expectations.

Important to note, we're expecting equity income to be particularly strong in Q1 as the market continues to make up for losses earlier in the year due to the pandemic. Interest expense based on our expected cash balance and debt should be approximately $235 million.

Cash taxes in fiscal '21 are expected to be around $85 million, which is slightly less than we paid in fiscal '20. It's important to remember that we maintain valuable tax attributes, such as net operating loss carry forwards and that these tax attributes can be used to offset profits on a going forward basis. So we expect cash taxes to remain low even as profits are increasing.

To assist with your modeling, although volatile with fluctuations between quarters as mentioned earlier, we're expecting an effective tax rate to be around 30% for fiscal '21. We'd expect that rate to fluctuate on a quarterly basis due to valuation allowances and our geographic mix of income.

Capital expenditures are forecasted to range between $320 million and $340 million, essentially in line with fiscal '20 results. Although we see opportunity to reduce capital expenditures further in the out years, driven in part by a smaller SS&M business, the current year expenditures are supporting current launch plans.

And finally, one last item for your modeling, free cash flow is expected to range between breakeven and $100 million in fiscal '21. There are several one-off factors driving this result for '21 such as an elevated level of cash restructuring, which is expected to be around $200 million. The elevated spend which is about 2 times our normal run rate is necessary as we execute actions to right size the business, especially within our European operations where external and internal production forecast remain below pre-COVID levels for a number of years.

In addition to an elevated restructuring spend, the 2021 free cash flow was negatively impacted by approximately $60 million of tax payments that were deferred from last year into 2021. Stripping out these one-offs, Adient's free cash flow is -- in a more normal year would have been expected to range between $160 million to $260 million, keeping all the other factors the same.

And with that, let's move to the question-answer portion of the call. Operator, we'll take the first question.

Questions and Answers:

Operator

All right. Our first question comes from John Murphy. Your line is open.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Good morning, guys and thanks for taking the question. A number of questions real quick. On EVs, obviously, it sounds like Tesla is insourcing their seating. Just curious is there anything else that you think could shift as the market heads toward EV's or is this a net neutral ultimately to you? I mean, how do you think about that?

Doug Del Grosso -- President & Chief Executive Officer

I think Tesla insourcing in the U.S. is unique to them. It's a decision they made. It was a make-buy decision. We still maintain a fair amount of content and in fact that's been problematic for them. We've continued that production for an extended period of time as they've looked to make their move. In contrast, in China, it's not the approach they've taken. They recently awarded us the Model Y, it's been an extremely successful launch.

And in Europe it's too early to comment on what their strategy is there. We are picking up a significant amount of content on the product in Europe. Don't really see that being a trend anywhere else. I think one comment I would make on the transition to alternative propulsion system is many of our customers, as you know, John, are really relooking at their product plans and the cadence of launches and it's going to be interesting to see how fast they accelerate that conversion. I think it is happening quicker than what we anticipated.

But from a seating perspective, we've always said, we're somewhat agnostic. A seat that goes into an EV or hybrid vehicle is essentially the same, there is some minor technical differences, but essentially the same. So long-term, we don't really see it as being an impact on us though we're -- we pay a little bit closer attention as that conversion happens to make sure we're on the right platforms.

John Murphy -- Bank of America Merrill Lynch -- Analyst

And interestingly, the second question, Jeff, you kind of alluded to sort of risk of supply shortages or disruptions as a result of COVID, obviously, this is an impossible situation for any of us to call exactly. But is there anything that you're seeing at the moment, maybe in Mexico or Eastern Europe or China where you're actually seeing sort of flashing yellow or red signs in the supply chain?

Doug Del Grosso -- President & Chief Executive Officer

Yeah John. This is Doug, I'll take the question to start out with and then Jeff can comment. So, relative to the supply chain, when COVID first hit, we put in, like many others, a dedicated group that tracks all of our supplier activity on a daily basis. And we look at a number of indicators where problems can arise. We try to be a little bit proactive, we don't wait for something to happen then put a contingency plan in place.

And the factors include we look at what the financial stability was of any high-risk supplier that we had, where they're operating, is there a regional risk from COVID, we track COVID infection rates and government lockdown activities to see what we could expect. But as you would imagine, there is a number of yellow and red areas. Mexico has been an area of concern as COVID impacted that region particularly along the border and more us. I think the other element that we have is we're working extremely close with our customers to mitigate those risks. And so far we've been extremely successful.

And in Europe as governments have taken lockdown actions and infection rates have come down, we feel a bit more confident that the supply chains are protected. But, quite frankly, it's a daily battle. And what I think is good about what we're doing is we've committed dedicated resources. It's not a purchasing activity with us. It's a business activity, so that activity includes our operations and then working very closely together.

We take steps, in the case of Mexico, to mitigate the risk by moving production to less infected regions and co-ordinate that with our customer to protect the supply line. So that's just something that's now become normal course of business, I expect that it will be around for a while, so we continue to double down on our efforts there.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Got you. And then, just lastly, with the cash flow being flat to $100 million in the fiscal year '21. I mean when you look at Slide 19, I'm just curious what opportunities you are -- you think there are to rework the balance sheet maybe even a little bit more and what you'll be going after, I mean obviously the four and the 2026s [Phonetic] are something you were looking at. But just curious is that what you just keep going after and hammering or are there other opportunities to potentially refi and swap out that. I'm just curious what you think about there, Jeff?

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Yeah, John, it's a great question, it's one we're managing pretty closely, obviously. We talk about somewhere between $500 million and $600 million of cash would be a more normalized number for us. So we -- even though we don't have a ton of free cash flow generation estimated in our 2021 outlook, we have a lot of cash in our books today. So opportunity to go after some of this is there -- primary focus is to delever, waiting to have a little bit more sunlight from where COVID is heading and where the environment is heading before we probably move too aggressively in that regard.

But I know the term loan is an opportunity for us, those secured notes do have a call feature in year-and-a-half from now, but they're expensive relative to some of the other paper we have. You mentioned the sub debt. So kind of a mix of it. We continue to look and we continue to look at the trading of it. But, again, kind of waiting to have a little bit more clarity from a COVID standpoint before we start to address it in a meaningful way, but we definitely have capacity to do a fairly big step of it we believe in 2021.

John Murphy -- Bank of America Merrill Lynch -- Analyst

So that $500 million of cash target, I mean, it gives you a little over $1 billion. I mean the timeline on that is just basically post-COVID when things settle down, it's not an actual calendar target, it's an event or situational target, is that it...

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

We would have done it now, yeah, no, sorry to interrupt, we would have done it now had it not been for COVID and the clarity on it. So we'll continue to monitor that, but do expect us to make some moves there in 2021. We certainly would expect to make moves that in that $1 billion type of -- up to $1 billion or so in the not too distant future, once we have some clarity on COVID.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Yeah, thanks, john.

Doug Del Grosso -- President & Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open.

Rod Lache -- Wolfe research -- Analyst

Good morning, everybody. Had a couple of housekeeping questions. First, number one, did the Seat Structures & Mechanisms business reach EBITDA breakeven in the fourth quarter? Number two, can you kind of fill us in on the expectation for prospective restructuring savings from what you're spending here. And then third, if you could size up the -- presumably there is some headwind in your fiscal fourth quarter, first -- fiscal first quarter from the F-Series and Ram launches?

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Yeah, let me start on the SS&M question, Rod. We were EBITDA breakeven or better than EBITDA breakeven in the fourth quarter of 2020. We were actually pretty close to free cash flow breakeven in the business, I would say close to it, as we look into 2021, as we mentioned, we do -- it is fairly seasonal, but we do see ourselves getting to free cash flow breakeven in that business, but we had a good Q4 in it.

I'm sorry, your second question was...

Rod Lache -- Wolfe research -- Analyst

Restructuring savings that you're expecting.

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Oh, restructuring. Yeah, it's a bit of a mixed bag, Rod, some of it is -- has really attractive payback where we've, we'll say like a year and a half or so to two years on a lot of it. Some of it doesn't have as much payback to some of the business we see as permanently, well at least for the next several years being down. But I'd say on -- about half to two-thirds of it has a strong payback against it in that probably 1.5 to two-year type of payback, the rest is just covering for short on sales.

Rod Lache -- Wolfe research -- Analyst

And then the F-Series and Ram headwinds that you're anticipating?

Doug Del Grosso -- President & Chief Executive Officer

We're not, I think we were a little bit specific on the Ram truck that it was down significantly as they start building the classic that's restarted. F-Series launch has gone as planned, so it's very much consistent with IHS forecast. And so as we exit the first quarter, we think we'll be close to running at full rate on F-Series, but nothing significant outside of what either Ford or IHS have spoke to on F-Series.

Rod Lache -- Wolfe research -- Analyst

Okay. And then, as we look out to 2021, your decremental margins have actually been -- on volume, have been quite good and that isn't relatively low? Can you give us some color on incremental margins? And I noticed that the $800 million of consolidated EBITDA guide for 2021 is pretty consistent with where you're annualizing in the fiscal fourth quarter.

You did say that there is $5 million to $10 million of temporary benefit, so that obviously wouldn't recur and you mentioned some extraordinarily good mix. Are those the primary reasons why you wouldn't expect improvement from that run rate, because presumably you're getting some further upside from SS&M and the restructuring savings into next year, your revenue is pretty similar, maybe a little bit up as you look out to 2021 versus the run rate in the fourth quarter?

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Yeah, there is a lot of moving pieces around it. We've seen commodity cost jump up a bit on us, Rod, which we've seen, I mentioned it for both steel and foam chemicals. They both jumped quite a bit. We do have recovery mechanisms with our customers on those, but there is a lag and in some cases, it's not full. But that's one of the pieces that sort of impacts us a bit.

Doug mentioned some of the supply chain challenges and just operational challenges we have in this environment as well. We have to do a few more extraordinary events from sometimes moving production around, sometimes operating in less than an optimal way and with sometimes more absenteeism than we would certainly experience in a normal timeframe. All of it makes it a little bit more choppy from an operational perspective.

But you're right, we've generally performed better on the decremental side, we've generally outperformed there and the incrementals we try to build into the guidance here, but we build those incrementals with a little bit of caution around a couple of things I mentioned, namely, commodity cost in just some of the production side of things. And we do have a few more launches in 2021 than we had in '20 as well.

Rod Lache -- Wolfe research -- Analyst

Okay. But your incrementals -- you're expecting in the 15% to 20% range similar to what you're seeing on the decremental side?

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Yeah, I think that's probably a good blending average. Should be a little bit higher than what we lost on the decremental side.

Rod Lache -- Wolfe research -- Analyst

Great, thank you.

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Yeah. Thanks, Rod.

Operator

Thank you. Our next question comes from James Picariello with KeyBanc. Your line is open.

James Picariello -- KeyBanc Capital Markets Inc. -- Analyst

Hey, good morning, guys. Firstly, it's a great color in the guidance framework, just as we -- as we think about the cadence for fiscal '21, you've laid out expectations for global production to be down in the second half. That makes sense. Some clear puts and takes with respect to net backlog impacts. More broadly, is there a first half versus second half range you could provide in terms of what the split could look like for Adient's revenue and EBITDA?

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

It's hard to -- I would say that's hard to tell in some fashion. I would say Q1, we would expect to be on the high side. I think our Q1 is probably pretty strong. As we look out, it becomes a little murkier and -- but Q2 you know has -- our fiscal Q2 has the Chinese Lunar New Year, which generally will bring equity income down as production is lower. So, in general, I'd say first quarter I think should be strong, but as you mentioned, the back half of the year will be -- we expect to be weaker right now with the current expectations.

James Picariello -- KeyBanc Capital Markets Inc. -- Analyst

Okay, got it. And then just for equity income, China production will still be up for fiscal '21. Adient's revenue, I presume, unconsolidated revenue should also be higher. Why should equity income trend flat year-over-year? I know you mentioned the negative impact of commodity prices, but I mean it just seems as though that that might not be the only headwind kind of factored into that guidance? Can you provide any color there? Thanks.

Doug Del Grosso -- President & Chief Executive Officer

Yeah, so it's a good question. I mentioned in the call that we do expect our Q1 equity income this quarter to be strong. We would -- it's typically pretty strong. We do see as China was shut down and has recovered better than the rest of the world from COVID, we saw production spike up in our fiscal Q3 a bit and then our fiscal Q4 and we've seen that they're finishing the year, we'd say, strong.

As we look into next year, it's going to obviously depend on what their market does and sort of their ability to continue to produce at this rate, but current expectation is we'd expect sales to be a big part of it, we think sales in the first -- our first quarter are going to be quite a bit higher than where we're seeing Q2 through Q4.

And then we mentioned chemical prices and steel prices we think are both going to be a headwind in that region as well. So it's -- but it's primarily going to be driven by sales at this point and we don't see sales being that much different between '20 and '21.

James Picariello -- KeyBanc Capital Markets Inc. -- Analyst

Got it. Thanks.

Doug Del Grosso -- President & Chief Executive Officer

Yeah.

Operator

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

Brian Johnson -- Barclays -- Analyst

Thank you. I know you put the regional profitability in the back, but want to drill in a bit on that. So two questions around EMEA and Asia Pacific. So EMEA, you've got back to a 6%-ish margin, pre-COVID you're at 4%. And two questions around Europe then, kind of is this 6% something to think about going forward? And second is the restructuring cash expense which you noted was 2 times higher in '21, primarily devoted to restructuring Europe? And if so, can we expect further EBITDA margin improvements from those restructuring efforts?

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Good questions. Europe is the primary location where those restructuring dollars are going. As you know, it's more expensive and more challenging to restructuring Europe than other parts of the globe in today's environment and that's reflected in our numbers. So I'd say the vast majority of what you're seeing in restructuring is earmarked for EMEA.

As it relates to margins, we do see continued opportunity to increase over the 6%. We've obviously had good improvement, that's been driven by a number of things. We mentioned the SS&M business continuing to perform better that's driving up margin, but number of things we're doing on their foam and trim as well as the JIT side is driving that.

We would see opportunities to continue to go up. I think we'll have to probably leave it to say we expect it to go up, but kind of come back to you with where it can get to as we move a bit further. But the overall objective for the Company, Brian, as you know is to close the margin gap we have with some of our peers and Europe is going to be a big piece of the story on that.

Doug Del Grosso -- President & Chief Executive Officer

Yeah, maybe just a couple other points on EMEA. When we look at the year-over-year performance, I think in addition to Jeff's comments, we've resolved some long-standing commercial issues that improved profitability. And when you look at year-over-year, the number of launches, and we expect that to continue as we move into '21.

They had a heavy launch cadence in '19 and into '20 that was a bit of a drag in contrast to the Americas, which has got the heavy launch this coming year or '21 this year. They've got a lighter load. So we look at that level of performance as being sustainable. And then the restructuring just helps us on the overhead cost side of it.

Brian Johnson -- Barclays -- Analyst

And secondly, Asia Pacific ex-China also 6% margins, is that about where we should expect it to stay or since that area had a significant volume headwind as -- can we expect typical incrementals to help boost that in '21?

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

Yeah, there is a lot of -- Asia is a really interesting one for -- when you follow us. It's hard to predict because the margins are pretty different by country. But I would say key regions for us -- well, the key region for us there is really Thailand. And Thailand sales, the export sales have been down out of Thailand, which hurts us and overall hurts our mix and thus our margin in the region and that's a bit of what you're seeing between from the reduction from fiscal '19, the heavy reduction across the whole region.

As you look forward, we do see some recovery. We continue to see, I'd say, better management within each region of all those things we can control. Some programs will roll off in the coming years that weren't great for us that the replacement vehicles look to be quite better. So I'd say we have opportunity there, but it's going to be heavily dependent on the mix with those exporting countries Thailand, Japan, Korea, having those export volumes go back up to where they were pre-COVID will drive a lot of that margin opportunity for us in the region.

Brian Johnson -- Barclays -- Analyst

And final question just broader margins, you mentioned, of course, closing the gap to your large competitor. You divested Fabrics. I assume there were probably good reasons for that, but in discussions with the other company it appears that fabrics and leather are very high margin businesses that get them to that 7%-ish, 8% despite the lower margins on Just-in-Time seating just in time seating.

So I think two questions, one I guess Fabrics wasn't that for you or you wouldn't have divest that? And two, with that us then just getting back to cash flow breakeven, where are the higher margin opportunities to get you to peer margins?

Doug Del Grosso -- President & Chief Executive Officer

Sure. I'll start and Jeff can comment. So for us, I would agree the JIT business, albeit low margin is a great cash generator, so -- and a relatively low capex when you look across our network of plants, so we like that business. Trim, cut and sew trim has historically been very strong, as well as foam. The perfect blend for us is when we have that vertical integration level, so we have complete seat and we have a lot of content that includes SS&M business that performs better. One, it's vertically integrated into a complete seat than when we're trying to sell it across a broader spectrum of customers.

The fabric business for us is, it's not bad business. We just didn't see it adding a lot of synergy to complete seat. It's sourced separate. It's sold across a number of different customers. You can't vertically integrate it. And to us, it's a market share volume business and we had a choice. Either we increased market share, we are well positioned in Europe, in the U.S. or we look to exit for us at the multiple we exited, we felt that was a better decision.

With regard to leather, I would say, yes, historically true. Leather has been a good-margin business. We get the benefit of cutting leather high, it's not tanning them when we have the cut and sew business. So that's opportunistic for us. The only caution I would have on leather would be, if you look at the world going in green initiatives and you take a look at what Volvo and what's happening in electric vehicles, you can make a pretty strong argument that leather content per vehicle is going to go down in the near-term.

I don't think there's a lot of people who want to have leather seats in electric vehicle. So I think we approach expanding into that -- agreed, historically, good margins. And on a go-forward basis, I think it's something that take a look at, if there is an opportunity we might pursue it, but right now it's not high on our radar.

Mark Oswald -- Vice President, Investor Relations & Corporate Communications

All right. Thanks, Brian. Jacqueline, it looks like we're at the bottom of the hour. So, I'll ask that we move to wrap up the call at this point.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Mark Oswald -- Vice President, Investor Relations & Corporate Communications

Doug Del Grosso -- President & Chief Executive Officer

Jeff Stafeil -- Executive Vice President & Chief Financial Officer

John Murphy -- Bank of America Merrill Lynch -- Analyst

Rod Lache -- Wolfe research -- Analyst

James Picariello -- KeyBanc Capital Markets Inc. -- Analyst

Brian Johnson -- Barclays -- Analyst

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