Adient PLC (ADNT) 2017 Q1 法說會逐字稿

Welcome and thank you for standing by.

(Operator Instructions)

This call is being recorded. If you have any objections, please disconnect from the conference. Now I'll hand the call over to Mark Oswald. Sir, you may begin.

Thank you, Jerry. Good morning, and thank you for joining us as we review Adient's results for the first quarter of FY17. 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 Bruce McDonald, our Chairman and Chief Executive Officer and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today's call, Bruce will provide a few opening remarks followed by Jeff, who will review the financial results in greater detail. At the conclusion of Jeff's comments, we will open the call to your questions. Before I turn the call over to Bruce and Jeff, there are a few items I would 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 a complete Safe Harbor Statement.

In addition to the financial results presented on a GAAP basis, we will also 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 Bruce McDonald.

Thank you, Mark, and good morning, everybody. This is a great day for us. It's is our first earnings call as an independent company. As I'm sure everyone knows, we completed our separation from Johnson Controls on October 31.

And I think when we set out to take the separation from Johnson Controls, to put that into place, one of the things that we wanted to do was make sure that we separated and created two strong companies. And I think if you look at our first quarter results here, it really demonstrates that we're true to our principles, and I think Adient has been really set up to start off from Johnson for us to be a great success. For that, I'm really grateful to Alex Molinaroli and Brian Stief in particularly, who really steered the separation activities, and set us up to be a long-term winner here.

I think if you look at the investment thesis that we talked about coming out as an independent company, we've seen really strong acceptance for that. And the key tenets are for a long, long time, the automotive seating business was the growth engine for Johnson Controls, and we've demonstrated as our time as an independent company we're back on track and resuming our long history of successful growth.

We also talked about earnings expansion through a number of self-help initiatives. We have a four-year goal here to get to 200 basis points improvement, and we're off to a great start.

Then lastly this is a strong free cash flow generating business. And, again, we really demonstrated that here in the first quarter.

As we've seen a turnover in our shareholder base in the first quarter here, although rotating out of previous Johnson Controls and Tyco shareholders to people that want to own the industry's leading automotive seating supplier with strong position in its global market, our stock has traded up just a bit over 40% since we became officially traded after the one-issue period.

Jeff is going to go into obviously a little of the details later on the call. I just wanted to maybe comment on how we're doing delivering to some of our key financial commitments. So if you look at our adjusted EBITDA here, in the quarter, up 14% to $290 million, but real important for us is the focus we have on market expansion.

And we couldn't be happier with the start that we had to the year. We were up over 120 basis points year-over-year here in Q1 to 7.2%. Then the last thing on the balance sheet side, I think the other highlight here is we continue to focus on our working capital. And in the quarter here, our net debt declined by just a bit over $200 million, and we're at $2.75 billion as we finish the quarter off here.

I would tell you that if you look at our first-quarter results overall, our numbers are better than our plan, and all areas of our businesses are contributing to these better-than-expected results. I really would like to recognize our employees around the world, and a lot of them I know are here on this call, for their hard work and dedication and commitment to delivering on the things that are important to our investors.

Turning to slide 5, I think it's worth -- while we delivered a terrific first quarter from a financial perspective, we're also making the necessary investments that we need to do, to get our business back on a historic growth trajectory. At the North American Auto Show, we highlighted the fact that in seating, our three-year backlog increased by 14% to $2.4 billion, and we also highlighted the fact that a lot of that growth was back in our consolidated operations. So we do expect to start to see top-line growth in the 2019 type time frame.

We also for the first time introduced the backlog for our Yanfeng Automotive Interiors joint venture, or YFAI, up $2.3 billion. And just to put the magnitude of that number into perspective, that joint venture has [saled] a little bit more than $8 billion. So it's about nearly 30% growth here over the next three years in a flat market, so we're really excited about the start that the YFAI business has for us.

At our analyst event last September, we talked about one of our growth strategies being growing in adjacent markets, and we're really pleased to announce here that in the quarter, we were able to announce the win of a commercial vehicle truck seating program, and that's under our RECARO business with MAN.

And lastly, as part of our growth initiatives, we're really going to step up our game in terms of innovation. At the North American auto show, a couple pictures here, we were able to demonstrate two buck vehicles that were designed specifically for level three and level four autonomous driving, and really showcase how we think the interior of the vehicle is going to radically change in autonomous mode here. And then lastly, we opened up an office out in the West Coast to really deepen our relationships with many of the new automotive entrants that we're seeing in our space.

Turning to slide 6, I just summarized some of the product launches that we have across the globe. Maybe just a few comments. I mean, you can obviously see the customer diversity, the fact that we're in many, many segments, and particularly noteworthy is the number of launches in trucks, SUVs, and CUVs.

As you're aware, from our perspective, the trend in terms of these factors in the market gaining share, because there's more dollars of content for us. We're seeing strong global growth in particularly the CUV sector. If you just look at the China market, SUV and CUV volumes here in 2016 increased by 44%.

And here in North America, CUV sectors captures about 10 points of share, largely at the expense of the passenger car market. So big shift globally in terms of CUV, and that's a really tailwind for our industry.

Another really noteworthy one is the 5 series for BMW. We launched that product here in the quarter, that's a big program for us. That's business that historically has been in-house at BMW.

Again, I think when we have previously talked about the growth trends for Adient, we've talked about the fact that there's still a pretty big chunk of the market available to us, especially in the emerging markets, with in-house players exiting the seating business. And the same thing with smaller regional players, shifting their production to big global players like Adient. The Volkswagen Blue Cross and the Audi Q2 are good examples of us winning business on new vehicle platforms.

And maybe just in addition to the product launch, I'll comment on the fact that we continue to be very active in terms of booking new business here in the first quarter. We booked just a shade over $1.3 billion of new replacement business. About a third of that would be new incremental volume for us.

And then, lastly, before I turn it over to Jeff here, maybe just a few comments on the overall operating environment, as I see it. Generally speaking, global production estimates for IHS have improved over the last few months. Our outlook for the overall industry are better than we guided to here, when as we set our guidance for this year.

In terms of the short-term, a few headwinds here this quarter. Maybe just point out we are seeing some cutbacks on passenger car production in the days and weeks coming out in the schedule, and a couple of line rates slowing down. Nothing significant, but a few of our customers are taking actions to reap out inventory.

And in China, we saw such an exceptionally strong finish to the year in China last year. We're just taking a little bit of a wait and see attitude, to see how the market responds to the fact that the incentives on smaller vehicles have been reduced by about 50%. Probably a little bit of a waiting game to see what happens in China after the New Year holiday.

We'll be into China actually next week and have a bunch better feel for how the market is looking, but that's something we'll keep an eye on. We would also point to rising commodity prices as a bit of a headwind for us right now. I would say most of our exposure is in steel and some chemical prices. This is probably more of a second half of the year issue. And I just remind folks, we do have indexing and recovery mechanisms, with nearly all of our customers, but we could have some short-term timing impact. Again, not a big deal for us, but, again, something that we'll keep an eye on.

In terms of currency, maybe we're feeling a little bit better here in the last few days. The euro seems to get back to our guided rate of is $1.10. And the RMB weakness here, is putting a little bit of pressure on our equity income from our Chinese joint ventures.

I think on the positive side, however, our margin expansion initiatives are well ahead of schedule, and we're seeing strong growth in our non-consolidated joint ventures. Our growth initiatives are gaining momentum, and I'm really, really pleased with the start of the year, in terms of our cash position.

And then lastly, and Jeff will cover tax and tax policy in a lot more details, but I think the take away here is, obviously we don't know what is going to happen. We're a cash tax payer here in the United States. We don't have any NOLs. And nearly half of our tax expense is in the United States. So all things being equal, Adient will be a net beneficiary of a reduction in US rates.

In terms of border tax, Jeff will touch on this a little bit more, we are a net importer. Half of our exposure is our custom sew operations that we have in Mexico, where our industry has outsourced the cutting and sewing of fabrics and leather. That's something that, some of it is directed by our customers. It's the lowest capital intensity part of our business, and it's something that we feel pretty confident that we could quickly readjust to minimize, or completely offset the impact.

So with that, I'll turn it -- I guess I'll just say I'm feeling pretty good about where we sit right now. And I'm highly confident in our ability to deliver our 2017 commitments with the operating environment as it sits right now. So with that, I'll turn it over to Jeff, and he'll go through things in more detail.

Great. Thanks, Bruce. Good morning, everyone.

Turning to our financial performance, hopefully you had a chance to review our first-quarter results that were posted earlier this morning. As Bruce said, the year is off to a very good start, as the positive momentum achieved last year continued into 2017. As you can see on slide 9, we had a very good quarter on many fronts, including delivering on our commitment to drive earnings growth and margin expansion. In addition, cash and cash equivalents at December 31 totaled $709 million.

Solid operating performance combined with our cash balance had an immediate positive impact on our net leverage, which was reduced by about 10%, compared to the period ending September 30, 2016. I'll expand on our cash and capital structure in just a minute, but first let me drill down into the first-quarter results in a bit more detail.

Moving to slide 10 and beginning with revenue, we reported consolidated sales of just over $4 billion, a decrease of $195 million compared to the same period a year ago. The decrease was primarily related to lower volume, which was largely driven by capital constraints prior to FY16. The lack of consolidated interiors revenue also impacted the year-on-year results by about $50 million.

As mentioned previously, Adient retained a few interior operations that didn't go to YFAI. The revenue from those operations wound down over the course of last year, and is effectively zero today, compared to about $50 million in last year's Q1. In addition to the decline in volume, currency negatively impacted scales by approximately $39 million during the quarter. Excluding the effects of currency, our consolidated sales were down between 3% and 4%. And if you adjust for the run-off in interior sales, you get something closer to a decrease of 2.5% per quarter.

With regard to Adient's unconsolidated revenue, top-line growth has not been impacted by the same capital constraints that are affecting our consolidated business. Unconsolidated seating revenue, driven primarily through our strategic JV network in China, grew approximately 13% year-on-year, excluding the impact of foreign exchange.

Unconsolidated interiors recognized through our 30% ownership stake in YFAI, was down 9% year on year, as a result of lower cockpit assembly sales in the current quarter and FX. Adjusting for FX, interiors was down just over 3%. However, if you exclude the low margin cockpit sales from both periods and adjust for FX, interior sales were up over 10% in Q1 versus a year ago. Given about 50% of our unconsolidated interiors sales are generated outside of China, we were quite encouraged with the growth in this operation during the period.

Moving along to our earnings before interest and taxes, on a reported basis, EBIT increased to $234 million versus $209 million last year. Adjusted for special items and FY16 pro forma adjustments, adjusted EBIT expanded to $290 million, an increase of $35 million or 14% versus the same period last year. The corresponding margin of 7.2% was up 120 basis points versus Q1 last year.

The primary drivers contributing to the year-over-year margin improvement are shown on slide 11, and include SG&A savings initiatives, which contributed approximately $25 million of improvement year over year, improved operational performance, which contributed approximately $17 million of improvements; and a higher level of equity income, which was up 13% excluding FX compared to the same period last year.

An increase in commodity prices, primarily steel, partially offset these benefits. Although we have pass-through agreements and escalators built into a majority of Adient's buy, it's common to have a lag as prices rise. At this time, we see these inflationary pressures as being headwinds, but are comfortably captured in our guidance range.

Regarding our goal to increase our margins by 200 basis points, excluding equity income, we're off to a very good start. Adjusted EBIT, excluding equity income, expanded by $28 million to $184 million in FY17 Q1. The corresponding margin of 4.6% was up 90 basis points year-over-year.

The improvement achieved in the most recent quarter builds in the progress achieved in Q4 2016, which experienced an approximate 100-basis point improvement compared to Q4 FY15. The drivers of the improved performance in Q1 include SG&A improvements, as Bruce mentioned, of approximately 50 basis points, notably achieved with less sales, as we discussed earlier. And two, operational performance, which added an additional 25 basis points in the quarter, again, on lower revenue. I would like to point out that our first-quarter margin is typically is the lowest of the year due to seasonal factors.

Clearly, the results focused today, combined with the performance achieved in Q4 of last year, demonstrate we're on track to delivering our short-term margin improvements. Meanwhile the metals business is operating according to plan, and is expected to drive further margin expansion in late FY18 and FY19, after they complete some of their restructuring projects and execute on the significant new launch inventory and system.

If you recall, at the Analyst Day in September, I mentioned progress on our margin initiative would be tracked against the LTM June 30, 2016 results. Although we were using JCI's reporting definition at that time, which was slightly different versus Adient's adjustments and definitions today, the puts and takes do not change our commitment to delivering at least 200 basis points of improvement. In the appendix section of the charts published today, we provided historical results, which will serve as a reminder of the starting point, as well as a roadmap that you can use to measure us against, as we progress towards our commitment.

Moving down the income statement, interest expense for Q1 totaled $35 million, in line with our expectations. With regard to taxes, Adient's effective tax rate adjusted for special items was 13.3% for the quarter. As pointed out previously, our equity income is shown net of tax in the financials, so when you remove the equity income, the tax rate on our consolidated income was about 18.5% for the quarter.

Our effective tax rate in the quarter was slightly higher than we initially expected, due to the geographic composition of our earnings. Specifically, the US represented a larger share of our profit than expected. As you would expect, we're working on quite a few initiatives to drive the rates lower in the future.

For planning purposes, you should expect the rate on the consolidated income to be in the mid to high teens, but the overall rate will be impacted by several factors, including our geographic mix of profits, and any changes in tax regulations. Regarding the impact of potential tax changes resulting from the house blueprints, including border tax in the US, we like everyone else, are monitoring and assessing the impacts of the tax reform provisions.

That said, as Bruce mentioned earlier, we are a taxpayer in the US today. And any reductions in the US rate, all else being equal, would be favorable to us, with the obvious exception of a one-time adjustment to our deferred tax assets. In this event, we would certainly evaluate our global tax structure to capitalize further on the lower rate as appropriate.

Regarding the border tax, we, as Bruce mentioned earlier, are a net importer today in the US market. From a high level, we import goods from our internal operations, and we buy goods from third-party suppliers outside of the US as well. Adient is prepared to pivot as needed to mitigate the impact of the tax, including assessing the sourcing of our materials, analyzing whether it would be cheaper to produce the components in the US, and revisiting the tax structure of our operations.

The majority of our internal operations imported into the US relate to our cut and sew business, as this product is labor intensive and thus sourced from low cost countries. Regarding our third-party purchases from outside the US, the majority are directed suppliers by our customers, with cost pass-through arrangements. That said, in the event of a border tax, we would work with our customers and purchasing teams to evaluate the benefits of resourcing these products to a US based supplier, and/or adjusting the price of our products accordingly.

Although the border tax has been a key topic, you can't look at it in isolation. It's part of a bigger package of tax reform, with many moving pieces. With that said, we will continue to monitor and provide updates as appropriate.

Moving to the bottom line, we posted Q1 GAAP EPS of $1.59 per share, compared with $1.46 in last year's first quarter. Adjusting for special items in pro forma adjustments, adjusted EPS grew 13% year-over-year to $2.12.

Let me now shift to cash and capital structure on slide 12. On December 31, 2016, we ended the quarter with $709 million in cash and cash equivalents. Solid operating performance, combined with predetermined mechanisms to true up and adjust for working capital and capital expenditures with JPI drove the balance higher, compared with our pro forma preliminary opening balance on October 31, 2016.

Basically the predetermined mechanisms were established to address and adjust items such as payables, receivables, and CapEx, due to known timing differences, resulting from JCI's December 30 fiscal year end, and Adient's spin date of October 31. Additional mechanisms for the final true-up are in place, but overall we would anticipate that we will receive additional funds, for the mechanisms defined in the separation agreement. We will quantify these amounts at a later date, once we have worked through the details with Johnson Controls.

Capital expenditures for the quarter were $207 million, compared to $108 million last year. The higher level of spending supports our initiatives and focus on growing the business, and certain stand-up costs associated with our spin. Gross debt and net debt totaled $3.461 billion, and $2.752 billion respectively at December 31, 2016.

As a result of our strong operating performance and cash balance, Adient's net leverage ratio at December 31, 2016 was 1.76 times, down about 10% from the 1.95 times at September 30. We expect a strong operating performance and cash generation to continue, as we progress through the year. In fact, we expect our net leverage ratio to be approximately 1.6 times at the end of FY17.

Before moving to the Q&A portion of the call, just a few comments related to the remainder of the year and our guidance on slide 13. Clearly, the solid start to the year lays a strong foundation for us to achieve our 2017 commitment. As mentioned at the Deutsche Bank conference last month, despite our consolidated top line being challenged, and likely to come in below our current guidance, we're tracking towards the high end of our adjusted EBIT guidance. As the year progresses, and we gain clarity on the various factors influencing our top line, such as FX, we will update you accordingly.

With regard to our effective tax rate, despite our being higher in Q1, we'll continue to work on various initiatives to drive the rates lower. Thus, there is no change to our forecast at this time. Capital expenditures are tracking to plan, and we continue to make growth investments.

With regard to free cash flow, we are on plan to deliver the $250 million, if not slightly more for the year. And, finally, while we are on the subject of cash flow and capital allocation, and consistent with earlier comments, we expect to begin paying a quarterly dividend in fiscal Q3. Stay tuned for additional details.

With that, let's move to the question-and-answer portion of the call. Operator, if you can open the line for questions.

(Operator Instructions)

Our first question comes from the line of Colin Langan from UBS.

Sir, your line is open. You may proceed.

Congrats on a good first quarter. My first question is when you look at your adjusted EBITDA guidance, it actually for the full year looked about flat, particularly on a consolidated basis. You obviously started off with a very strong Q1. So what are the major drags that keep it flattish for the rest of the year? I mean, is it the commodity drag, FX, what are the concerns that we should be thinking about?

Well, thank you, Colin, on the first comment. As you look at the year, I think there are some uncertainties out there. We mentioned commodity prices. Again, we think our range covers that.

We also mentioned our top-line sales, which we're monitoring closely, which we said are a little softer than we had initially guided towards. But overall margin improvement has been good, so I could see ourselves on a positive side to those numbers. But I think we have to see how the year develops, and revenue probably being the biggest variable for us.

Colin, it's Bruce here. Here is how I see it.

You think about the savings that we said we would set up by establishing a leaner corporate infrastructure -- tick, done. We're getting the full run rate. Other SG&A initiatives will gain traction throughout the year. Metals turnaround is beneficial to this year, but it's really a 2018, 2019 story. Doesn't really move the needle a lot.

But the thing I would point to is when I talked about some of those growth initiatives in my comments is that those, on the other hand, will ramp up as we go through the year. The investment that we need to make in supporting our backlog growth ramps up. So we're in a nice position here in the first quarter, where we get -- a disproportionate amount of bang for the buck is front-end loaded here and the SG&A initiatives and the investments are a little bit of a headwind for us.

On the SG&A, I think you said it's 50 basis points year over year benefiting Q1. I think you've targeted 150, is what you see as the opportunity. What is the time frame towards getting at that? Should we see that accelerate as we go through the year in terms of getting toward that 150?

Yes, Colin. It's a good question. For one, we were very happy with the 50-basis-points improvement, especially being down a couple hundred million dollars in revenue. Because it's obviously a variable there.

So as we move forward, a couple of things. We are, as Bruce mentioned, at the first step of separating from the corporate structure and seeing what Adient's corporate structure as compared to that Johnson Controls had. That's in place, that's done, and that's reflected in the numbers.

There are a number of initiatives, as we've talked about, that are going on, multiple, multiple ones across the Company of driving down those numbers further. Those should be steady really through this year and next year to drive us to those performance numbers. So I would really expect by the end of FY18, you should start to see those numbers flow through.

The good news here too is we think we'll get down to a number, and our SG&A percent as a percent of sales will get there. But as sales come back up with our order book, and as that order book starts to launch, we don't see ourselves having to really add to that. So that will also help our margin too as the sales improves.

The last question, you highlight you feel somewhat comfortable with the border tax. Any numbers around the percent of content that is imported or exported out of the US to frame the exposure? You mentioned the cut and sew is where you see the biggest risk. How about the structures business or those other large capital intensive businesses? Is the footprint there actually a bit better from a US?

Yes. Maybe I'll go in reverse a little bit on that one. If you think of our supply chain, the JIT side of the business has to be co-located effectively with our customer. If our customer is in Mexico or our customer is in the US, you'll generally see our JIT plant right next door. So not anything moving over the border in that regard.

As you look at our metals and our foam business, it's generally regional sourced. It doesn't ship terribly well. Generally you find those in region or country. There's a couple you might see right over the border, but fairly easy to adjust because we have foam and metal plants on both sides of the border. Those things should be fairly reasonable.

So as we mentioned, the cut and sew side of the business is really the more complex one because it's so labor intensive. It's just never been economical, and it's a question of whether those jobs would be the ones desired back in the US anyway. But as you look at the border tax in general, or I guess the numbers, let's just talk about numbers, we have about $0.5 billion of net purchases from third parties, Colin. That $0.5 billion, a lot of it is directed by our customers.

I mentioned we obviously work with our customers if the border tax is actually in place there. Then from a net export standpoint -- and this isn't just to Mexico, this is really globally -- there's about another $500 million of intracompany movements that we would have, which would mostly be that cut and sew business on top of that.

Imports.

I'm sorry. Imports. A net import of about $500 million intracompany.

Got it. So total of $1 billion -- well --

Yes.

Half of it is your exposure. Half is the supplier.

Supplier. Yes. Correct.

The majority of that would be your cut and sew type product.

Correct. On the second part of it. The intracompany side.

Very helpful. Thank you very much.

Thank you. Our next question comes from John Murphy of Bank of America.

Sir, your line is open. You may proceed.

Just a first question maybe to follow up on Colin's line on Mexico and the border tax adjustment. The capital expansion, or capacity expansion, we were seeing from the auto makers in Mexico, you had highlighted it as an opportunity to potentially bid and win new product to grow your backlog. I'm just curious what you're seeing there. Obviously, Ford cancelled the San Luis plant. If there's other cancellations coming or you think that capacity is just going to land someplace else, and it will still be an opportunity for you?

Yes, I'll take that one. So obviously the Ford cancellation of their new plant has detrimental impact on us. That was business that we were set to take on that obviously now we won't. So that had a net negative implication on our backlog of probably $100 million, give or take a little.

A little less.

We're working -- and I would say some of the components we've obtained. So I would say that impact right now is less than that.

In terms of the other investments that are going into Mexico, we have two other foreign customers that are looking to expand or introduce capacity into Mexico. We feel like those programs, if a decision is made not to invest in Mexico but somewhere else, that we will retain that business. They're with customers that we have in global programs or where we don't really have a lot of competition. So I don't think we have any further risk, other than the Ford issue.

Okay. That's helpful.

Then just a second question. As we think about cash distributions from the JV equity income in China or other potential cash that would come back to the US. I mean, is there anything that you are thinking that might change as policy changes here in a boomerang effect in China, as far as the distribution of cash that you may be able to get out of that JV? Or how much, and also, how much cash do you have overseas that you could potentially bring back to the US if we get a holiday on taxes?

Well, I'll comment. Like you said, a whole bunch of big questions are there, but a few comments. So first of all, because we are Irish-domicilied, we don't have an overseas trapped cash issue. That doesn't exist for us.

Okay.

In terms of, I would hate to speculate about what might or could happen in China. But what I would tell you is we continue to get payments, dividends, management fees, things like that. There's been no change whatsoever. We don't have any frustrated payments or anything like that have been held up here. Obviously, we continue to keep an eye on things.

But I would say right now it's business as usual. The dividends that we get out of China, our partners and our joint ventures are controlled entities. So they all say no. They need the dividends out of them, as well. In terms of our cash balance in China, and you can probably comment on that, Jeff.

Yes.

I don't have that at my fingertips.

I think I gave you the cash balances in China at Deutsche Bank. So our seating business at the end of December had something around a $1.1 billion net cash position across all of the JVs. YFAI had something around a net $300 million of net cash. What we're told and to Bruce's earlier comments, we have seen dividend flows continuing uninterrupted. We've been told to continue to expect that as we go forward during the year.

As far as our ability to extract a large amount of that net cash balance I just mentioned right away, I wouldn't anticipate that in the short-term. But we'll obviously look to continue working with our partners. The good news is our partners in China enjoy those cash dividends as well. We expect those flows to continue. The really strength of their balance sheet gives us further optimism to support that those flows will continue in the future.

Okay. That's helpful.

Then just lastly, there's a $228 million cash payment from JCI in the quarter that you are including in free cash flow. I know, Jeff, you mentioned that you're not sure exactly what those additional payments might be going forward, as you go through those discussions with JCI. But is that number included in the $250 million you're talking about for the full year, or is there any other future payments that would be included in that $250 million?

Yes, good question, John. What that was, was we set a bunch of pegs up with Johnson Controls, as you can imagine, as we were preparing the spinoff. As our systems were being converted and all of the noise around the year end and our separation, there was a variety of, we'll say, AP, accounts payable, that should have really fallen into FY16 that slipped into FY17.

The big part of that mechanism we had with Johnson Controls is just truing up for those amounts. So for the most part, you can think of those things as really should have been included in the 2016 cash flow. So the reality is 2017 should be better by those amounts.

So that $228 million is not included in the $250 million?

It is included in the $250 million.

Okay. Got you.

Yes. So we're adding it to our free cash flow and our free cash flow guidance -- I said we should be able to deliver the $250 million, and I did include, or maybe a bit more.

Got you. One last quick question. Bruce, you mentioned that the 5 series, that had been outsourced to you from BMW. I was under the impression that most seats at this point are largely outsourced. How much of an opportunity still exists out there in the OEM base for outsourcing on seats?

If you look at it regionally, there's very little in-house seating left here in North America. Virtually none. There's still -- I don't have the exact shares. Maybe that's something we can follow-up.

There's still an element of seating that's in house at some of our joint customers. As we go into Asia, there's even more.

Yes.

So if you think back to a slide that we had in the investor deck, we had a snapshot of the global industry. We showed some gray space, which was the available market that's either in-house or at traditional smaller regional players. That number is North America was about 10%. That number in Europe is 23%. That number in China is 43%.

What I don't have, John, in front of me here is what was the split between smaller regional players and in-house. Why don't we give that to Mark here as a take away.

That's very helpful. Thank you. That's great. Thanks a lot.

Thank you. Our next question comes from Emmanuel Rosner.

Sir, your line is open. You may proceed.

The first one is on your revenue guidance. You were saying you're potentially tracking a bit below the previous guidance. Is this mainly an FX issue? If so, can you quantify it? If not, can you just say what other factors are leading to that?

Yes. Emmanuel, I think you can think of at today's rate, it's a couple hundred million dollars of exchange pressure that we have for the year. Then we've also seen some volume softness as well. So I would say it's a mix between the two.

I think, Emmanuel, I talked about some inventory corrections. I've looked here at the current quarter that we're in right now. I'd put $100 million Q2 inventory correction on the passenger car side in your model as well that obviously we weren't anticipating.

Right. Understood.

Then I guess on the equity income line. So, again, in guidance, we're looking for $380 million. That's fairly flat versus the $377 million, I think, from FY16 in spite of the incredibly strong dynamics you have there with your backlog.

So I was curious. What are the puts and takes in terms of this year's expected equity income?

I think, just to be clear, I think the number actually was $357 million.

Plus the $20 million for the amortization, so it's $377 million.

$377 million going to $400 million is what we guided to.

Yes. That's with some weaker exchange too, Emmanuel. So as Bruce said, we've now started 2017 after a very good 2016 calendar year in China. They're coming back off their holiday. We'll see how incentives and other things play out.

But with the R&D where it is, we definitely see growth; but we've hedged that. So about $25 million growth, give or take, in equity income, reflecting exchange.

Yes. Maybe in terms of China and our guidance, we guided to a number of 3% to 5% type growth in China, which maybe sounds a little high. But what you need to factor in is we're looking at our fiscal year. So the strength that we saw here in this quarter obviously is much, much better than 3% to 5%.

I talked in my opening comments about the fact that we see IHS production numbers moving up. So we would say there's an upward bias in our equity earnings guidance, given how we performed here in the first quarter and changes to IHS. But balancing that, we have a little bit of a wait-and-see on the reduction of the vehicle incentives for small cars there.

That's very helpful.

Then just a follow-up on that one. So in China specifically, the auto maker seemed to be under a fair amount of cost and margin pressure, even as some of the US ones that we're looking for. Flat margins for the foreseeable futures have changed the outlook to margins coming down.

Are you seeing any erosion in margin in China? I know you're launching a lot of business, which is good for operational performance. But generally speaking in the discussions, are things getting tougher there?

I mean, they're always tough.

But we've seen stable margins. Look, we have to work very hard to keep it. But that's the environment -- I wouldn't want to say that it's an easy market because all of the markets are difficult from our experience in China. This feels like previous years with the same level of difficulty. But we do see the environment conducive of stable margins for ourselves.

Great. Thanks for the color.

Thank you. The next question comes from the line of Brian Johnson.

Sir, your line is open. You may proceed.

Just a couple of questions, one more just on the outlook and the second just around the cash flow. On the outlook, when we looked at your three-year guide you presented in Detroit, we see there's a fall-off between year two and year three, 2018 versus 2019, in the unconsolidated revenue. We don't have a good feel for that historically because this is greater disclosure.

Can you give us a sense of just historically how the Chinese market is quoted? Then what's the typical year two versus year three? What's yet to come in year three, and just comment in particular on what seems to be a rather sharp drop from 2018 to 2019?

Yes. I would say, Brian, in China I would say the quoting cycles are shorter than here. So I would say we still have the opportunity to fill in 2019 and 2020 for sure.

It can be a bit erratic too. You noticed even 2017 had -- there's a big jump between 2017 and 2018 in that chart and then it comes back. I do think we can still influence 2019, as Bruce mentioned.

The point here is those are net growth numbers on the joint ventures. They have certainly a good growth outlook for this year and next year, and we can still influence 2019.

Yes. Keep in mind, that's net incremental new volume.

Right.

That's not replacement in there, and it doesn't have industry growth.

Okay. So any sense of how that number should develop? One of your competitors did give a feel for at least the quoting activity that was still out there in the out years.

I mean, I would just make a general comment. We're number one in the market by a long shot. We continue to do extremely well. If you look at the numbers here in the short-term, we're gaining share; and we've got the power of metal out there. I don't expect us to lose or even give up any of the edge that we have versus our peers in that market.

Which gets to a question, just to drill down on that. We also heard in Detroit one of your competitors saying it was gaining share as well. The question we get from investors is are both leaders gaining share and where is it coming from?

Is it, coming back to John's question, is there more in-house in China that's coming for? Or perhaps there's different metrics of accounting to that.

Well, here is I think the best way to think about it, Brian. Like we show on that -- if you dig that one chart out again. 43% of the seating market in China is with local players, regional players; or it's in-house.

So when we talk about our market share, if I said our market share is 44%, it's more like 70% of the market that's with global players. So as that 43% that's with local or in-house continues to migrate to global players, I don't have an expectation that we're going to be the only one that benefits that, but I think we disproportionately benefit. I think it's the gray box shrinking benefits all of us, and I think we'll disproportionately win as that trends on, plays here.

In general, if you look at the content for vehicle in China market compared to the rest of the world, it's lower. So we think we'll all benefit there, as there's a bit more investment in the seat on a per-vehicle basis. That should benefit us and our competitors as well.

Okay. Final question, just what is your pace of cash flow conversion this year with what you thought? What's the pace of those non-cash expenditures you exclude from the non-GAAP numbers? Then do you have visibility into when that free cash flow conversion starts improving?

Yes. Good question. The first quarter had a lot of noise into it for the cash we received from Johnson Controls to really true-up from really some of the cash that should have outflowed in FY16 that didn't come out until this year and then was reimbursed by them. So as you look forward, I would say generally there is a lot of things in the first quarter.

The coming Adient bucket for a lot of those things relating to separation expense were elevated in our Q1. We wouldn't see the same pace. Although they will continue through the year, they should continue at a lower rate.

Restructuring was probably fairly consistent, should be fairly consistent throughout the year. We talked about an elevated level of restructuring as really part of our whole investment thesis and, the first couple years of our existence, elevated levels of restructuring.

So the coming Adient expenses are probably higher in the first quarter but will continue through the year. Really shouldn't be too much that floats into 2018. The restructuring should be a 2017 and 2018 event. As those two things go away and you start to get the benefit of the margin enhancements, really seeing the pace of that cash flow conversion accelerating a little bit next year but much more in 2019.

Just to be clear, Brian, the $250 million guidance, there's no add-backs for that. That's exclusive of those things.

Right. Yes.

So I think we've talked about the fact that roughly speaking, our free cash flow triples here over the next three years with the unwinding of some of those things. The other one we have is a step-up in dividends associated with getting the full year of YFAI dividends than just the first year. So those three things are tripling here in the next couple of years.

Yes. Just to give you numbers behind that, we have approximately $300 million of restructuring in our cash flow and $100 million of separation becoming Adient expenses. So that's $400 million as a pool that should really come away as margin is expanding, et cetera, to really kick start that $250 million upwards for cash flow.

Okay. Thank you.

Thank you. Our next question comes from the line of David Tamberrino.

Sir, your line is open. You may proceed.

Just a couple quick ones for me. I'm looking at the EBIT walk chart on slide 11, thinking about operational performance. Can you maybe talk to breaking that out? How much of that was price downs, and then what was obviously the net offset from operational performance?

Yes. The price performance during the quarter was pretty good. I would say we did a good job in a few areas. You think of margin, so let's talk about material margin in general.

We were able to maintain material margin, such that the net pricing that we had to our customers was essentially recaptured through commercial actions. We were able to do some mixed elements that was beneficial to us, as well as savings from our purchasing group. So that was a probably even slightly positive equation for us in the quarter.

As you look at the operational performance, very strong globally. Bruce mentioned that. Really all of our operations contributed to the improvements. So it's a bit of a mix, but I would say it's heavier on the operational side.

Places like South America did a nice job. Our North America operations did a really nice job of converting during the quarter.

Got it. Then as you were talking about earlier some of your indexation clauses with your customers, is there any formal lag time that we should be thinking about where maybe a quarter or two is a little bit more of a headwind as we see raw materials coming up?

Yes. I mean, there's almost as many arrangements as we have customers, I would say. But generally speaking, there are lags. But what I would tell you is though that we hedge our commodity buy as well. So some of the increases are lagged with our hedges.

But it's like I said in my comments in terms of headwinds. Steel and some of the rapid increases that we're seeing as associated with some tariffs and anti-dumping legislation and stuff like that that's come in is creating some pretty dramatic swings. So we do anticipate having some short-term headwinds associated with those.

That's going to hit FY 2Q and 3Q?

It should. Q3 and Q4.

But, again, as we mentioned, we should be covered in our guidance as we look at it today.

Understood. Understood.

As those prices settle, the pricing will catch up from our customers. Because your point, it's somewhere between a quarter is probably the most common. But as Bruce said, every customer has their own flavor to it.

Sometimes we have a longer term contract of how we buy our steel, too. So the timing -- there can be some timing gaps there. But net-net, we will recapture those in price. It's just going to be a little noisy for a couple of quarters.

Understood. The last one from me on level three, level four autonomy, we've been hearing a lot from you as well as some of the other competitors of the industry from a seating perspective. Wondering what you're hearing from your OEM customers today?

Are they looking for concepts? Are they looking to start quoting for business in the next couple of years? What are they specking out, if anything? Are they looking for increased mechanization through swivel chairs and redefining the interior of the vehicles, or are we not there yet with the OEM customers?

It's all over the map. I would say we have customers that you could think of on the sportier end of cars that have no interest in autonomy. We have other customers that are really, I would say, the thought leader.

But two comments I would throw here. Some of our customers are deciding, do they want to focus on level three vehicle or a level four vehicle as their entree into things here. No, I would say it's an area that we're all learning.

We don't have like swivel seat or long rail seats, or we don't have any orders. We're talking with the designers, some of the advanced engineering folks. It's at that stage. Those are comments around the main line players.

Out on the West Coast, some of these smaller niche players, it's much more well-defined. We do have orders in hand for some of the technologies that we've showcased. But I can't really talk about which customers or what product because we have NDAs.

No, that's fine perfectly. Perfectly fine. Thank you very much.

Great. Thank you.

It looks like we're right up against the stop time now. So if we could move to conclude the call, that would be appreciated.

Thank you.

Yes. Maybe just in terms of before we sign off here, I guess a few things I would like to just close out with. First of all -- and, again, we certainly want to thank on behalf of everybody here at Adient and Johnson Controls for really giving us this once-in-a-lifetime opportunity to set up a great new Company. Secondly, I would like to thank and recognize our employees all around the world here for their dedication, their commitment, and their hard work for getting us off to a great start.

Thank you for everybody on the call here. Thank for your continued interest in Adient. We're highly focused on delivering our investment commitments and really focused on delivering our mission, which is improving the experience of a world in motion. So with that, thank you, everybody.

That concludes today's conference. Thanks for participating. You may now disconnect.