Adient PLC (ADNT) 2017 Q2 法說會逐字稿

Welcome and thank you all for standing by. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this point.

Now I will turn the meeting over to Mr. Mark Oswald. Sir, you may now begin.

Thank you, Ivy. Good morning and thank you for joining us as we review Adient's results for the second quarter of fiscal 2017. The press release and presentation slides for our call today have been posted to the investors 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 the 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 will now turn the call over to Bruce McDonald. Bruce?

Thanks, Mark, and good morning to everybody on the call. We appreciate your taking time with us to talk about our second-quarter numbers here.

Although this is only our second quarter reporting our numbers as an independent company, we are well on the way to delivering on our midterm commitments, which are really simple. It's 200 basis points of margin expansion, and that's without the benefit of a growing equity income base, accelerating our free cash flow, deleveraging our balance sheet, and returning the seating business here, Adient, to its historic growth trajectory.

If we start at slide 4, some of the accomplishments in the quarter I would like to talk about should demonstrate that we are not only focused here on the near-term financial results, but also putting in place the things that we need to do to position the business for long-term success. So starting off with our financials, which obviously Jeff will cover in a lot more detail, and I will take you through the highlights here.

If you look at our adjusted EBIT for the quarter at $334 million, up 12% versus the second quarter of last year, and if you look at the margin progression, 100 basis points year-over-year improvement here to 7.9%. I just couldn't be happier with the progress that our team is making on reducing our SG&A, driving our margin expansion initiatives, and getting us to the levels that we need to get to here on a go-forward basis.

To go to our EPS, more big conversion here, EPS up 16.3% to $2.50 in the quarter so again great progress there. If you look at the accomplishments on the balance sheet, I think they are equally impressive. We had strong operating performance in the quarter, good cash generation which drove our net debt and net leverage down to $2.6 billion and 1.64 times, respectively, at the end of the quarter.

Jeff is going to talk about where we see the full-year leverage coming in, but on our last call we said we thought we would end the year around 1.64 times -- 1.6 times and you can see we are pretty close to that now. So we will be upping -- or reducing our leverage target here for the balance of the year and that's good.

On slide 4 you also can see that we talk about the fact that we are going to increase our full-year guidance and again Jeff will cover that in his part of the presentation. We also continue to make strong progress on some of the initiatives that we have in what we call our five-year marker, which really talks about where we want to be in five years' time.

Really excited to share a little bit more in terms of the announcement that we had early in the quarter with Boeing, where we are collaborating with Boeing to explore opportunities in the aircraft seating business. This is an area where we really think and we can take some of the world-class capabilities that we have in the automotive seat space, combined with our knowledge and expertise in delivering lower volumes that we have in our RECARO business, and applying those techniques to the complex, high-margin business class seats.

Last -- in early April, on the sixth, seventh of April, we actually took a demonstrator seat out to [aircrowd], the fold-flat business class seats, to the Hamburg Aircraft Interior Expo and we showed that product as an experiential prototype product. We showed that to about 70% -- customers representing about 70% of the world's airline market. Absolutely terrific feedback from some of our customers. We will be incorporating that feedback into a production seat here that we will have finished off by the end of September and that is when will be looking to go out into the market with a ready-to-sell product.

Again, our adjacent market strategy is very focused on taking what we do really well in automotive and finding areas where we can leverage that expertise. And partnering up with Boeing really bring -- the parts of that industry that we don't know, we get the expertise from Boeing around FAA certification, access to their knowledge on some different materials in the supply base, and obviously their unparalleled access to the world's airline customers.

Turning over to slide 5, we debuted -- had a good showing here at the Shanghai Automotive Show the week before last. Couple things that we need to talk about here in terms of our debutes. We introduced an integrative luxury seat and our Luxury by Design concept.

In addition, in our booth we introduced our RECARO product line. We sort of had a store-within-a-store type concept. RECARO is a real unpolished, hidden gem in our portfolio. It sells racing car seats, but also has a really higher-end, niche-type product line that we sell to sport enthusiasts in the aftermarket, as well as some niche applications as some of our customers that really want to have a sport-type performance vehicle. So I think we really haven't invested heavily in our past and we see that as something that we can take advantage of here on a go-forward basis.

The brand is unparalleled, and we talk about here on this slide, it's very rewarding to see that our RECARO brand took the top four spots in the 2017 readers' choice poll. So it's a great hidden gem and it's something that we will be looking to grow on a go-forward basis as well.

Look at our -- some of the actions that we announced in the quarter and took to enhance shareholder value. I'm really pleased to share a few of these. First of all, our Board of Directors announced in March, and we paid here on April 20, our first quarterly dividend at $0.275 per ordinary share.

Our Board of Directors also authorized a $250 million share repurchase plan. The intent of this program is really to offset option dilution. Look, we are focused, I would say, primarily on deleveraging and derisking our balance sheet here, but nonetheless, we do want to take some of our free cash flow and offset accretion or dilution that's associated with some of our equity compensation plans. We will be doing some buyback in the second half of the year, somewhere in the $50 million to $100 million range.

And in terms of our debt reduction, derisking our balance sheet, we paid off $100 million of our $1.5 billion term loan A. Clearly these actions demonstrate the commitment that we have to increase our shareholder value over time.

Turning to slide 6. Just put -- again, like the last quarter, we put a slide together of some of the important launches in the quarter. And I think the take away from this slide is you can just see how many CUVs and SUVs that we are launching. I mean the shift in the market that we are seeing in North America, in China away from passenger cars to these types of vehicles is pretty breathtaking, and for us in the seating industry, we like that because there's a lot more dollars of content.

The other thing I would point out is many of these programs -- I know we show a number of them in Europe and Asia here and South America -- a number of these start to include our next-generation of global front and rear seat structures, particularly the VW Gen 2 program, which is a huge launch for us.

A lot of that financial performance of our metals business has been tied up in introducing a couple of really big programs. And as that business continues to improve -- and in the quarter it did better than it had last year -- we are starting to see the accretive margin impact of launching those next-generation products into the market.

Then, lastly, just before I turn the call over to Jeff I will spend a few minutes here on slide 7 just talking about the global operating environment. I would say from a production point of view things are pretty stable. We continue to see some near-term adjustments in the US, primarily in passenger car.

If you look at -- I think on the last call I talked about the fact that we thought there was going to be about $100 million revenue that we were going to miss associated with passenger car downtime. That has continued to worsen and I'd say that's a number that's more like $250 million headwind for us this year as some of our customers take weeks out of their schedule or slow down their line speed.

In China, continued really strong performance in the quarter. Our sales in the seating side of our business were up 18%, or nearly 3 times as much as -- and I think that production was 6% to 7% in the quarter. So if probably back out our price downs, we're probably, volume-wise, 3 times higher than market.

I know there's a lot of questions about China and I spend a lot of time, obviously, there. I was there last week and meet with our partners at least once every other week. I would tell you that the optimism in the market has improved. I would say, generally speaking, our customers and our partners talk about 5% to 7% type growth that they are looking at for this calendar year.

I think some of the comments that I hear from our OE partners here in North America I think put a little bit of a negative bias on the market and are kind of overshadowing two big trends. One is the content growth that we are seeing, especially coming from either richer interiors or the CUV side, but also some pretty breathtaking market share gains by some of the Chinese owned brands that are really helping the production.

And our market share gain is really attributable to the Chinese owned-brand growth. That's where we are seeing the outperformance versus the market. Again, I continue to feel good about China and I would tell you I feel better about it now than I did a quarter ago.

If you look at our growth initiatives, they are gaining momentum. Last quarter we talked about truck seating. This time we're talking about aircraft seating and RECARO, so again I feel good about the growth initiatives that we have. Our margin expansion initiatives continue to track ahead of schedule with 100 basis points improvement here.

For us, rising commodity costs are a headwind for us. And again, when Jeff goes through the details, you will see that even here in the quarter we did have a negative impact of commodities, primarily steel. That's really just a lag effect. It takes us a quarter or two to sort of get some of our mechanisms and commercial negotiations buttoned-down. Nonetheless, we will have a net headwind here in fiscal 2017.

And then, lastly, our cash performance and shareholder value actions are tracking better than we thought. And our confidence level in terms of being able to deliver our increased commitments for 2017, I feel real good about that. So with that I'm going to turn it over to Jeff to cover the financials in a little bit more detail.

Great. Thanks, Bruce. Good morning, everyone. Turning to our financial performance, hopefully you had a chance to review our second-quarter results that were posted earlier this morning. As Bruce mentioned, we had a good quarter as we continue to build on positive momentum from Q1.

I will start my comments on page 9 of the slide deck. As you can see from the table, we continue to execute on driving earnings growth and margin expansion during the quarter. As expected, revenue was down, but I will cover that more on the next page. But, meanwhile, our earnings were up again by double-digit percentages in the quarter.

This page is formatted with our reported results on the left and our adjusted results on the right side. While reported results show well over a 200% increase in EBIT and over a $9 per share of EPS growth, I will focus my commentary on the adjusted numbers. These adjusted numbers exclude various items that we view as either one-time in nature or otherwise skew important trends in the underlying performance.

Adjusted EBIT improved 12%, or $36 million, versus last year, which represented 100 basis points of improvement. Meanwhile, equity income was up 17% year over year, but if you adjust for FX it was up 22%. And, finally, adjusted net income was up 16% despite a slightly higher tax rate than expected. I will cover taxes in more detail shortly, but clearly our second quarter is built off the momentum of our strong Q1 results.

As I will discuss later, stronger earnings translated to stronger cash performance as well. We repaid $100 million of our term loan during the quarter and still ended up with $729 million cash balance at quarter end.

Turning to slide 10, let's break down our revenue in more detail. We reported consolidated sales of just over $4.2 billion, a decrease of $86 million compared to the same period a year ago. More than half of the decrease was driven by foreign exchange, while the balance of the decline was largely the result of volume, including recent production cuts to passenger cars in North America.

In addition, and as we have stressed on earlier calls, our current sales volume is also hampered by capital constraints prior to the decision to spin off the automotive business in 2015. However, since the spin announcement we continue to book attractive new business and our backlog is growing; thus, we expect to start seeing positive growth again on our top line starting in 2019.

The lack of consolidated interiors revenue also impacted our year-on-year results. As mentioned previously, adding (inaudible) a few interior operations that didn't go to Yanfeng Automotive Interiors were Wi-Fi. The revenue from those operations wound down over the course of last year and is effectively zero dollars today compared to about $19 million in last year's Q2. Excluding the effect of currency and adjusting for the runoff of the interiors business, you get sales that were essentially flat year over year.

With regard to Adient's unconsolidated revenue, growth remains strong as the top line has not been impacted by those same capital constraints that are affecting our consolidated business. Unconsolidated seating revenue, driven primarily through our strategic JV network in China, grew approximately 18% year on year excluding the impact of foreign exchange. Broadly speaking, this outcome outpaced vehicle production growth in the region in excess of 2 times as Adient continues to capture the benefit of our position in the market, plus an improving vehicle mix, namely the switch from passenger cars to SUVs and CUVs as well as added content, as Bruce discussed earlier.

Unconsolidated interiors, recognized through our 30% ownership stake in Wi-Fi, was about flat year on year. Adjusting for FX, though, interiors was up about 3%. Excluding the low-margin cockpit sales from both periods and adjusting for FX, interior sales were actually up 21% in Q2 2017 versus a year ago. But as a reminder, about 50% of our unconsolidated interiors sales are generated outside of China, so the results when adjusting for the low-margin cockpit sales are quite impressive. More importantly, and as you will see in a moment, this helped improve the earnings performance of the business as well.

Let's move to slide 11. Adjusted EBIT expanded to $334 million, an increase of $36 million, or 12.1%, versus the same period last year. By segment, our seating adjusted EBIT increased 11% year over year to $312 million. Meanwhile, our adjusted EBIT for interiors, driven by the better mix, specifically the lower cockpit sales that I mentioned a moment ago, increased approximately 29% to $22 million.

The corresponding margin to the $334 million of adjusted EBIT was 7.9%, up 100 basis points versus Q2 of last year. The primary drivers contributing to the year-over-year improvement include: SG&A savings initiatives, which contributed approximately $34 million of improvement year over year excluding engineering; a higher level of equity income, which was up about 17% year over year, but if you adjust for FX, equity income was up about 22% compared to the same period last year; and finally, improved operational performance contributed about $9 million.

However, we did, as Bruce mentioned earlier, have approximately $24 million of offsets to these items. Similar to our first-quarter results, commodity prices, namely steel and chemicals, continued to escalate. While we largely have indexed agreements with our customers to offset price increases or decreases, there is typically a lag of a couple of quarters until the price adjusts. At this time, we see these inflationary pressures as being headwinds to 2017, but these are captured in the updated guidance range we will cover in a moment.

Regarding our goal to increase our margins by 200 basis points excluding equity income, we remain solidly on track. Adjusted EBIT, excluding equity income, expanded by $22 million to $238 million in Q2 despite the lower sales. The corresponding margin of 5.65% was up 60 basis points year over year.

The improvements achieved in the most recent quarter builds on the progress achieved in Q4 of 2016 and the first quarter of fiscal 2017. The primary drivers of the performance in Q2 include SG&A improvements, which are tracking on plan to the 150 basis points of gross margin improvement we targeted. It's also noteworthy to point out that the improvements recognized to date have been achieved with lower sales. Operational performance is just providing a nice tailwind and partially offsetting these benefits, and as discussed earlier, we are experiencing higher commodity and material costs and FX has been a headwind as well.

The results posted today, combined with the performance achieved over the past two quarters, demonstrate we are on track to deliver our short-term margin improvements. Meanwhile, the metals business is operating according to plan and is expected to drive further margin expansion in fiscal 2019 after they complete some of their restructuring projects and execute on the significant new launch inventory in the system.

In the appendix section of the charts published today we continue to include our historical results, which will serve as a reminder of the starting point as well as a roadmap you can measure us against as we progress towards our commitment. As a reminder, the starting point we are using for the 200 basis points of margin improvement is Adient's June 2016 LTM, or last 12 months, results.

Now let's turn to slide 12. Let me take a few minutes to talk about our tax rate. As shown in the release, Adient's effective tax rate, adjusted for special items, was 14% for the quarter. In viewing our tax rate, it is worth noting that our equity income is shown net of tax in the financials, and when you remove the equity income, the tax rate on our consolidated income was just under 20%.

Our effective tax rate in the second quarter and for the first half of 2017 is higher compared to our initial expectations due to the geographic composition of our earnings. Specifically, much of our improvements in performance has come in the United States and is thus taxed at a rate much higher than our average rate. We have several tax planning initiatives underway to reduce the rate but the timing and implementation of the initiatives must be sequenced appropriately in order to maximize the full benefit. As a result, we will not realize a full-year benefit from the initiatives in fiscal 2017.

However, if these actions had been finalized and fully implemented at the beginning of the year, our pro forma 2017 effective tax rate would be about 3 to 5 points lower. Based on the current plans we would expect to be at this run rate as we exit 2017. For modeling purposes in 2017, plan on a rate between 14% and 15% with the expectation that we will be back to our original estimate of 10% to 12% in fiscal 2018.

It is important to note that the overall tax rate will be impacted by several factors moving forward, including our geographic mix of profits and any changes in global tax laws and regulations.

Let me now shift to our cash and capital structure on slide 13. On the left side of the page, we break down our cash flow. Adjusted free cash flow, defined as operating cash flow less CapEx plus cash received from Johnson Controls, was a positive $148 million to the quarter. Cash received from Johnson Controls totaling $315 million since the spinoff primarily represents working capital reimbursements. To explain, let me step back and provide a little color on this topic.

At the beginning of the year, given our flat to lower sales outlook for fiscal 2017, our base plan of $250 million of free cash flow guidance assumed neutral, essentially a zero change, in working capital requirements. However, as you can see from the table on slide 13, Adient incurred significant net working capital headwind of $236 million year-to-date.

These headwinds were driven by spin-related activity associated with our payables and receivables due to system cutover and other timing differences resulting from Johnson Controls' September 30 fiscal year-end and Adient's spin date of October 31. Predetermined mechanisms were established to address these headwinds, essentially returning Adient back to a neutral trade cap working capital position.

In the end, we received approximately $315 million from Johnson Controls to cover the working capital headwinds and a minor amount of capital expenditures, call it $30 million to $40 million, that would have been otherwise paid in fiscal 2016 under normal course. In fact, our working capital outflow shown on slide 13 would have been greater if not for positive actions the team has been able to take to improve our overall working capital position as part of Adient.

Capital expenditures for the quarter were $95 million, compared with $78 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. Finally, dividends from our equity affiliates are weighted more towards the back half of the year as dividends are approved and distributed from the calendar 2016 earnings.

On the right-hand side of the page, we detail our cash and leverage position. At March 31, 2017, we ended the quarter with $729 million in cash and cash equivalents. This is definitely a great results as the Company's strong cash generation and cash balances has enabled us to deliver on our commitments to initiate a quarterly dividend, which, as Bruce mentioned, was an opt-in margin paid in April, and derisked the balance sheet for prepayment to debt.

Speaking of debt, gross debt and net debt totaled $3.352 billion and $2.623 billion, respectively, at March 31, 2017. As I mentioned at the beginning of my comments, the Company prepaid $100 million of the $1.5 billion term loan during the quarter. The prepayment essentially covers the 2017 and 2018 scheduled loan amortization.

As a result of our strong operating performance, cash balance and debt paydown, Adient's net leverage ratio at March 31 was 1.64 times, down about 16% from the 1.95 times at September 30, 2016. We expect the strong operating and cash generation to continue as progress through the year. In fact, we now expect our net leverage ratio to be approximately 1.5 times at the end of fiscal 2017.

In addition to the dividend announcement and the debt repayment which occurred during the quarter, the Adient Board of Directors also approved at $250 million share repurchase program that runs through 2109. A primary purpose of the program is to offset dilution, as Bruce mentioned, from equity-based compensation plans. However, the authority is also sized to potentially use the program for modest and opportunistic repurchases. The dividend, early debt repayment, and share repurchase program clearly demonstrates our commitment to enhancing shareholder value over time.

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 14. Starting with revenue.

As I mentioned on our first-quarter call, the Company's top line has been challenged, primarily as the result of the negative impact from foreign exchange and near-term production adjustments to passenger cars, primarily in North America. At this time, we see our revenue for the full year 2017 in the range of $16.15 billion to $16.25 billion. Although we have been very successful at winning new business, the increased bookings will not have a positive impact on our consolidated revenues until 2019 fiscal year.

Despite the soft revenue guide, we continue to execute on earnings growth and margin expansion. Given our strong first-half performance and our outlook for the remainder of the year, we are increasing our expectations for adjusted EBIT to between $1.24 billion and $1.26 billion, representing an approximate $75 million increase from the prior guidance.

Depreciation and amortization will likely end the year at about $375 million, slightly lower than our prior guide. Interest expense expectations are now estimated at about $140 million due to our strong cash performance.

Taxes, as discussed earlier, are running higher versus our original plan, given the geographic composition of our earnings, namely the higher proportion of US earnings. For modeling purposes, plan on a rate of 14% to 15% this year with the expectation that we will be back to our original estimate of between 10% to 12% in fiscal 2018 based on the current tax laws.

For the bottom line, the range for our adjusted net income has tightened to between $875 million and $900 million as a portion of the improved operating performance will be offset by the higher-than-expected taxes. Capital expenditures are tracking slightly higher versus plan as certain of the expenditures that were expected to occur pre-spin bled into fiscal 2017. This impact was accounted for with the final JCI true-up discussed earlier.

Finally, with regard to free cash flow, we now expect to generate approximately $400 million in free cash flow in the year. The primary drivers of the improvement include our solid operating performance, including working capital management and slightly higher equity dividends. Additionally, we expect to benefit by approximately $50 million related to the timing of certain restructuring and becoming Adient costs that we expect to drift into next year.

In closing, we are pleased with our strong second-quarter and first-half results. Our accomplishments to date provide a firm foundation for us to achieve our commitments in 2017 and beyond.

With that, let's move to the questions-and-answers portion of the call. Operator, can we have our first question?

(Operator Instructions) Colin Langan, UBS.

Thanks for taking my questions and congrats on a good quarter. Can you provide a little color on the airline opportunity in terms of how fast do you think you could get a developed prototype to the market? Any color on how much investment will be needed and what kind of margin pressure that would have and if any of that investment has already been started?

Thanks, Colin, for your congratulatory comments. Yes, sure, I'm happy to.

I think probably the best way to think about it is, first of all, there is no margin pressure. If you recall our roadmap for the 200 basis points of improvement, we had a downward block in that waterfall associated with the investments that we needed to make to grow the business and so it's covered within that. We are spending money.

I would tell you that the cost of developing a seat that we can go in -- I'll say a ready-to-sell type seat and design is comparable to a reasonably complex auto seat. So it's not exceptionally high.

In terms of the timing, we hope to have -- what we basically put together within a six-month timeframe was we call it an experiential prototype, so something that someone could go and sit in and look in. Didn't have all the completed fit and furnishing, I would say, around it, but enough to sort of demonstrate some of the things that we are doing that are out-of-the-box compared to the traditional industry. We wanted to take that to Hamburg, which is sort of the primary -- it's the one and only aircraft interior show that everybody goes to. We wanted to go there, have something that we could sit down and show our customers, and get some input as we sort of finalize our production and tent design.

We also have or we expect to have a seat design finalized and a beta-type prototype that is certifiable by the end of our fiscal year. In terms of a revenue-type cycle, this is a market that on the line fitment side is probably like a three-year type window, but there's also an important part of the market that is retrofit that could be, say, 2.5 type year. So it's not abnormal to automotive. It's the timing, the cost, the process is very similar to what we are used to in automotive.

Got it, all right. Thank you. Then you've targeted 150 basis points of SG&A opportunity; you've got a lot of that passed. How much is left and is that something we should be thinking about as we look into the second half and the guidance implies fairly flat? What is the opportunity that you still see left on that?

Colin, great question. We have -- we still have lots of opportunity I think and there's lots of things we're going to continue to push on from an SG&A perspective. We really said that was a two-year journey so a lot probably weighted towards 2017, but there's going to be more as we move forward, we believe.

Maybe like two-thirds this year, one-third that's in the future.

That's about right, yes. The thing, and Bruce mentioned this or alluded to it, is at the same time what we are starting to experience as we are still cutting some of that SG&A we don't need, we will say, from an efficiency perspective, there is an element of investment we are making for the future growth. The red bar or the down bar Bruce mentioned relating to some activities to support the new order book or the larger order book, the airline, or some of the adjacent market businesses not terribly material yet, but those things will build a little bit. But we should still continue to see margin improvement with the view of a lot of that 200 basis points we talked about, or the really next big step of it, is going to be on the metals turnaround, which should start to really show in the numbers in 2019.

All right, thank you very much for taking my question.

Adam Jonas.

Thanks, everyone. So just a question about free cash flow. You explain, I think, in detail and very effectively the move to the $400 million this year. Question is, looking forward to 2018, previously you talked about doubling the $250 million to $500 million. Is there any follow-through from this year to next year, even if you can't be specific because we don't talk about 2018 yet? But just in general is there some follow-through to make that -- also lift that bias a bit?

Yes, we will give you more color as we get closer to 2018 and -- or more specifics I should say. But our 2017 numbers have a little over $300 million of restructuring and becoming Adient type costs. Those should go down materially.

I did mention that there's a little bit of a timing element of about 50-ish of those, but net-net those should go down quite a bit. As margin performance continues to come through, those should both have positive impacts on our free cash flow in 2018 and then 2019 should be even be better. So as we work through those you should see some meaningful step-ups in both years as we move forward.

Okay, great. Then my last question. If the market does not give you the appropriate value for your Chinese JVs, and I think you and your team have expressed a bit of frustration of that apparent lack of value implied in the stock price; if that were to continue do you see strategic alternatives to potentially unlock the value for those businesses?

I would say no. I think our challenge is -- we are only six months into it here. I think we're trying to enhance the granularity in our communication and the financial characteristics, the growth and things like that, backlog that we have in those businesses, and so I am certainly not ready to give up on that yet.

But I think more importantly is the -- our Chinese operations are integral part of our seating business. They are not sort of a hang on. If you think about some of our customers, General Motors, they are developing global platforms. They're developing their GEM program together with SAIC for global production. And so us having a joint venture in China with their same partner, very beneficial for us to participate in the sourcing and development of that vehicle and then have add-on benefits elsewhere.

Volkswagen, when we talk about our Gen 2 framing, a huge chunk of the global volume is the Chinese market. So our franchise without China would be severely eroded and then one of our competitors would pick it up and we'd be at a disadvantage. And so we really can't -- we have to do a much better job on the communication, but we really can't think about that China is separateable. That is from a seating perspective.

Now from interiors, it is a little bit of a different story because that is not integral in terms of our global seating operation. I continue to like the interiors business for a number of reasons. First of all, it's just getting started and we're only at the early stages of seeing the benefit of the growth that we have in that business.

Secondly is, as we think around autonomous vehicles and our West Coast strategy, especially some of the new entrants, our key differentiator that we have is being able to go in and talk to our customers about complete interior solutions. I know that you, Adam, and a lot of the other folks on the call had the opportunity to see our two demonstrator vehicles. But just showing what we can do around level four automation and how the interior and the seats and the whole interior of the vehicle is going to change, I personally like having the optionality that we have with that business.

Okay, Bruce. Appreciate that, thanks.

John Murphy.

Good morning, guys. Just a first question on margin expansion and the 200 basis points you guys are looking at. I think this question has been somewhat asked, but is there a reason to think that that would be an asymptotic limit as to what you could get to? Or should we be thinking about that 200 basis points as your target near term, after 2019, and there could be some upside from that thereafter?

I think we've kind of -- I don't know if there's a limit per se, because there's some element of the farther away science becomes a little bit -- a little challenged. I think, John, if you look at that set of numbers and we have an opportunity, as revenue continues to grow, which we think it will grow after 2019 with improved order book, to get some benefits of increased scale, which I think gives us an opportunity to go north of that number.

We have used the 200 as really more of the measure of what we can do at around we'll say close to that $17 billion of consolidated revenue. But as that number grows, we think that there probably is some additional opportunity.

And if other markets like the airline comes in and if it has successes, we could have -- that's certainly a higher-margin space and we could do better there.

I think, John, the other thing is when we set that target, we said it was a four-year target, just to be clear, not three. Just wanted to clarify that. But in that timeframe we do not have the [profit] of our metals business where it ultimately should be. We will not be done rolling over all of our programs. We still have an awful lot of launches coming globally on some of these big Gen 2 IDK initiatives.

So metals is not a -- by 2020 is not where it needs to be, which I would tell you double-digit EBIT margin, not EBITDA margin. So I think beyond 2020 we still have room to grow. I do not think beginning to drive our SG&A lower, lower, lower, but the metals improvement I think the scale benefit that we can get might start to grow our footprint again or the capacity utilization could be a tailwind.

Okay, and then just a second question. You highlighted raws as a bit of a headwind in the quarter. I'm just wondering if you can remind us as to what level of raw material sharing you have with the automakers, either through indexing or pass-throughs, and the timing of the flow of that higher raws and how you pass that along to the customers.

The majority of it, John, is pass-through agreements, but there's also -- we end up getting most of it back., you could probably say almost all of it back, through a combination of those indexed agreements and just general negotiation with the customer through commercial deals. So net-net, for the most part, we are able to offset all of it, but your point on the lag is an important one for us.

It varies by customer. Some have index arrangements that might last -- or might be a quarter delay. Other ones might be a full year. It's probably safe to say on average about two quarters.

Okay, that's incredibly helpful. And then just one last one on the tax rate, the 10% to 12%, up to 14% to 15%. Is there a cash component? I know it's a small [nit], but is there a cash component to that or is that mostly just --?

Yes, the cash -- and that's built into the guidance number that I gave you, John. So the cash and -- you can say they both moved sort of up to about that level. We do expect binding the opportunities I mentioned with some of the structuring changes.

That just for a clarity point there, some of the structural changes we've made and are in the progress of making, we don't start to get the tax benefit until they are done. So this year there's only going to be a partial benefit. The reason we say we will have a better rate in 2018 is we will get the full-year impact of the structuring changes we put forward, which should have both a rate and a cash benefit as we move forward.

Great, very helpful. Thank you.

Joseph Spak.

This is actually Jacob Hughes on for Joe. This -- I just want to get a little additional color on China. I think Autoliv obviously is a different supplier, but they called out some slower sales and some higher inventories over there. Just given your presence there, could you just elaborate on what you're seeing?

I think if you just look at the most recent quarter -- and, again, obviously there's not perfect information over there. But I think if you look at anecdotal evidence, the production, say, was up 6 -- I've seen numbers anywhere from 5%-ish to 7%, but let's call it 6%. And I've seen a range in terms of retail being up sort of the 1.5% to 3%, so there's definitely some build in terms of dealer inventory.

I would say if you look at the quarter that we are going into here, people do expect there will be -- that will unwind a little bit here. So if you ask me what's my view in terms of this next quarter's production, our customers do expect to sort of take some of that out, but nonetheless, pretty robust demand.

Okay, got it. Then on the top-line revision, I think it's about $600 million at the midpoint. Is that -- I know that you think $250 million or about $150 million difference is on the car side, but is the remainder just FX?

No, I think last quarter we said we were -- our guidance was shifting down. And so I wouldn't kind of -- I wouldn't probably bridge from our old guidance to this guidance with $150 million more. The whole $250 billion or $300 million of inventory correction would be in the number.

And there's about $300 million, give or take, of FX in that decline.

Got it, all right. Thank you.

Brian Johnson.

Good morning. Want to talk a little bit more about the midterm in China, less so the debate over production versus retail. But want some more color around the margins on both seating and interiors in China, where you expect those to go. In particular I understand the content drivers on both, but how do you see the competitive environment in each, especially the environment looking at GM's slides, where the OEMs are seeking to offset retail price pressures with supplier cost reductions?

Seats and interiors are big parts of the cost of cars. So what are you seeing there? How do you protect margins in that? And then throw in the final twist of noise out of China about JV partners becoming more assertive in the relationships with their Western partners.

I would say that there is an element of increased pricing expectation from our customers. We've been able to respond to that given our cost base and volume growth, so it hasn't been an issue. But we've always talked about, look, in China our business, our margins are amongst our highest. They are higher than our aspirations, you could say, for the rest of the world because we do have some benefit to the fact that we have localized things that the market imports and so we have a localization benefit.

So we have talked, Brian, about -- and we don't see our seating margins growing in China, but we are pretty comfortable that we can maintain them. If you look at -- I know over the last five years -- Jeff's done some analysis I think he shared at a recent conference -- our margin has actually upticked a little bit here over the last five years in aggregate.

On interiors we expect to have margin increases because we are still incurring some startup costs, particularly on the IT side, standardizing or two companies' prior systems. We've talked with interiors that we are looking for something like 80 to 100 basis points. I don't know how that splits between China and outside of China, but it's not all outside. So that's how I'd answer your question in terms of the margin pressure.

I know there's a lot of skeptics out there that margin pressure is higher than it ever was and it's all going away. I am very confident that we can continue to do exceptionally well there.

Your comment around the partner or whatever, we have outstanding relationships with our partners. Like I said, they are integrated part of our company. Our partner's success and our success are -- we have a symbiotic relationship. We can't get rid of them and compete with them in China. They need our technology, our metals capability, access to the global customer.

A lot of these big programs are obviously -- that are engineered in China have input from their partners, so I spend a huge amount of my time with our partners. I meet with them, because we have so many of them, at least every other week. Not always in China; they are here. For instance, next week I'm in Canada meeting with some at one of our Board meetings and on Thursday of next week one of them from China, a different partner, having dinner with them here in Michigan.

So we spend an awful lot of time with them. And maybe someone in your coverage universe has a specific issue, but I don't see there being anything untoward going on in terms of our relationships whatsoever.

Okay, and just a quick follow-up. On the seating, it sounds like you still have supply chain and other efficiencies you can use and volume to offset price reductions. What you see around the competitive environment, both with the other Western players? And are the Chinese locals just disappearing as competitive forces due to quality issues or have any of them learned the secret to make quality seats?

I wouldn't so much say they have bad quality. I would just say it's the craftsmanship of our -- not just ours, but I will say Western-type suppliers. In the second-row, smaller SUVs, the more complex second-row type structures, those capabilities don't exist with a lot of the local suppliers and that's why the market is all of us global players are winning in China at their expense.

It's those kinds of things. It's not that their quality is terrible and ours is hugely better; it's more a question of capability than quality.

Okay, thanks.

David Leiker.

This is Joe Vruwink for David. A similar question to Brian. When you look at what the other seating peers have reported this quarter, it has generally been high single-digit, low double-digit type growth rates and over the midterm the expectation is maybe mid to high single-digit is sustainable. So when you think about what you are booking today and look out to 2020, is that the type of growth rate you think is going to be possible for your business by that time?

Yes, Joe, I think it is. Right now we are -- on the consolidated side we are certainly suffering from some of those capital constraints in the decisions that predated the spin announcement. But if you look at what we've been winning, and we've been winning attractive business, it starts to turn in 2019 and I think 2020 is a good mark to say we really should be really better than industry growth. And that's primarily because we think that there is an advantage or an increase in content per vehicle trend in the space, which should allow us to grow a little bit faster.

The other thing I would say is obviously we've gone to market in a different way in China. We were there first and when we went there you had to partner and be in a minority position, and so all of our Chinese business is non-consolidated. And I think as you compare us against a lot of the other automotive suppliers, they are not in that situation. Some of their business is non-consolidated, but some is.

And so when you look at our growth rate with zero China growth, it's probably not the best compare growth. But if you were to take our business and put this -- which is half of our business is consolidated, the other half is our non-consolidated joint ventures, and average the two I think you'd find that, look, we are already operating at growth rates comparable to our -- to the automotive industry or the automotive supply industry. And if you -- that's with North America and Europe operating with both hands tied behind their back right now.

Then just one follow-up on this point. You have done a good job of presenting the geographical makeup market share in regions for you and the others, and in every region inevitably there is in-source business that's being done. There's regional peers that are still getting business.

When you think about big guys growing and grabbing what remains out there, is there going to be M&A opportunities where you are grabbing it but maybe some of it is grabbed through acquisition?

Potentially, potentially. I'd say this especially the farther you get away from North America and Europe. I mean Asia is much more fragmented than other regions. So, yes, I'd say potentially that's something that we would like.

I think I need to wrap up the call because we're approaching the end of our time, so maybe just a few closing comments. Our company is just six months old and I just couldn't be more pleased in terms of the market acceptance that we've had and the interest that we see from our investors and the analyst community. We have excellent customer relationships and joint venture partner relationships and that's really the core of why we are growing our backlog.

For many, many, many years the automotive seating business was the growth engine of Johnson Controls and the more time we had been separated as Adient on our own, the more confidence I have in our ability to get back to that position. Our separation from Johnson Controls has been seamlessly completed. The payment that we had from them was the final one. Our businesses are performing really well and that is enabling us to offset some of the volume softness and commodity headwinds that we talked about. Our growth initiatives are, like I said earlier, gaining momentum.

And then just in terms of wrapping up, I would for sure like to thank our employees all around the world for their dedication to our customer, their hard work, especially in a time of significant change. I know our team morale is exceptionally high and engagement is outstanding and I just couldn't be prouder of the global team and I want to thank them all here on this call.

With that, we will conclude things.

Thank you.

Thank you. That concludes today's conference. Thank you all for joining. You may now disconnect.