Adient PLC (ADNT) 2017 Q3 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, you may disconnect at this time. Now I'd like to turn the call over to Mr. Mark Oswald. Sir, you may begin.

Thank you, Brandon. Good morning, and thank you for joining us as we review Adient's results for the third quarter of fiscal year 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'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments. I will now turn the call over to Bruce.

All right. Thank you, Mark. And good morning, everybody. We really appreciate you taking time out of your busy schedule here in earnings season to join us for Adient's third quarter results call here. So we're 3 quarters way through a year here in fiscal 2017. And I guess, my overall comment is I think we're solidly on track in terms of delivering the commitments that we've made to the investment community, both here in the short term, but also the trajectory on to deliver our midterm commitment. Our team is extremely focused on delivering earnings growth, margin expansion and if you -- I think that the results here in the third quarter demonstrate not only our commitment, but the success that we've had and the positive momentum that we've made throughout the year here.

Maybe just turning to slides 4 and 5, I'd like to touch on a number of accomplishments. First of all, starting off with our financial performance and Jeff will obviously talk about these in a lot more detail in his section. I would like to just touch on a few of the key metrics. If you look at our EBIT -- adjusted EBIT for the quarter here at $336 million, up 3% year-over-year and really amazed to see here despite the top line weakness that our corresponding margin was 8.4%, up 90 basis points year-over-year. So really good performance on the margin side. I'm really proud of the work the team has done. Still has some more to do going forward, but off to a great start. As you would expect, the operating performance fell through to the bottom line. If look our adjusted EPS, we came in at 4% higher at $2.52 for the third quarter. Just may be talking about China here and our sort of top line performance. So during the quarter, we were down. I think if you look at our sales, we came in about $100 million lower than we had sort of forecast here for the quarter. And if I sort of think about the -- where we messed it here in the third quarter, it was really 2 areas. One in China, we have 1 joint venture that we consolidated. That joint venture is very heavily exposed to Hyundai/Kia, and we saw very weak volumes in China from the Korean OEs. That cost us about $50 million in the quarter -- sorry, $30 million in the quarter. Additionally, we had additional downtime at several North America passenger car plants because of the timeout of schedules at higher than we thought coming into the quarter here. So those 2 factors kind of drove the $100 million softness on the revenue side versus our expectations. In terms of the balance sheet, again a lot of good progress here. We took some actions to further improve our financial flexibility, and Jeff will touch on these later on. But we did borrow from the European Investment Bank a very low cost, flexible interest rate loan and used that money to prepay some of our term loan A. Cash at the end of the quarter was $669 million. I would note we had a fairly heavy outflow from restructuring in the quarter as we completed a couple of big European plant closures on the Jeep side of our business. So a good outcome when you sort of think about that. In addition, we started to return cash to our shareholders for the first time. We bought back about $40 million worth of stock and we reinitiated our dividend. If you look at our net debt and net leverage, at about $2.7 billion and [1.69x] respectively at the end of the quarter. The only thing I'd note there is we do have about $1.3 billion of euro-denominated debt. With the euro strengthening, obviously we get the P&L benefit through our European operations. But on the balance sheet side, our debt is inflated as the euro strengthened here. That was about an $80 million headwind for us there. So overall, I'd also like to talk about our Chinese business. We had an investor presentation out at Shanghai this year that showcased our -- not only our business, but our China management team. The market there for us, even though it's been a little bit soft for us, the conditions are -- I'd say, did remain especially favorable. In the quarter, passenger car production was down about 1%. If you look at our business overall, we are up about 13% in our joint venture operation -- our seating joint venture operation. I think it's important for us. China is a big part of the investment thesis for Adient. And it's important for the analysts to look beyond the headlines. So when you look into some of our customers here in North America with big Chinese operation, you get sort of one picture. If you look at the overall production numbers, you get a different picture. So you really have to look at what's happening, shifting things between SUVs, content per vehicle, the Chinese-owned brand share in the market. All of those things you got to take a look at to sort of understand what's happening in that market. And for us, generally speaking, it's all favorable. So we're benefiting from new business win, and we continue to see what we call the gray space. So business is either in-house or with Chinese, local suppliers moving to Tier 1. We continue to see the benefit of the mix shift into SUVs, and we continue to see the benefit of premium brands, which have more content in the marketplace. And that's what's really driving the 13% growth. So our unconsolidated seating operations are doing a great job there. We expect to continue -- for us in China, it's not a margin enhancement story, but we continue to expect to deliver strong margin performance and strong cash flow generation as we move forward. I would like to point out for those who weren't able to attend our Investor Day in China. We do have the materials on our website, and I think there's a lot of really good information, so I encourage you to look at that.

Moving on to Slide 5. The teams have made great strides in terms of gross sales booking and in terms of growing our backlog. And we'll talk more about our backlog in January, but the pace of us winning new business is accelerating as we roll our backlog out for 2020 and increasingly occurs acceleration that we're going to see in terms of organic growth, especially at our consolidated seating operation. Also worth noting is the diversity of wins on our sales bookings, from not just our traditional manufacturers, but some emerging West Coast players and luxury brands. So it's great news and it really shows the diversification, that we really lead the industry on in terms of sales mix. We continue to see that diversification in our backlog.

If you look at slide 7. You talk about a number of different products -- or sorry, Slide 6, we talk about a number of different products that we launched in the quarter here. Again, a lot of diversity here, you'll see a good mix of trucks, crossover vehicles, SUV, luxury vehicles and a global mix of platforms. This really highlights -- just from -- shown in this slide, really highlights I think the trend around higher content luxury vehicles, obviously truck has more content versus passenger car. Also of note here a number of these are replacement wins. So things like the Chevrolet Traverse, the Volvo XC90, the Honda CRV are new business wins. Others like the VW Tiguan, A-8, the BMW -- sorry the Chevrolet Traverse, the Volvo XC-90 and Honda CRV would be replacement programs for us. New wins for us will be the Tiguan, A-8 and the BMW 5 series Station Wagon. It's also worth pointing out that our metals content is growing for things like the Camry, the A-8, the Tiguan, were all launched with our seat structures and mechanisms.

Lastly, before I turn the call over to Jeff. I mean, I think it's important we just spend a few minutes on the general operating environment. Here in the U.S., sales have softened a little bit. We are struggling here with some down time in the passenger type side of business. We expect that to be abate a little bit here in the fourth quarter. But overall, the first half SAAR is around 17 million units, which is robust. When we look at the growth in our Chinese business, we continue to be very encouraged that we can continue to outperform the market and grow in excess of the market pace here. We're making good progress on both initiatives. Our backlog is growing and our -- we remain on track to kind of come out of the year where we had expected to. In terms of the nonauto side of our business, things like growing our aircraft or introducing an aircraft seat, growing our business in the commercial vehicle sector. Those initiatives are proceeding as planned. As you can see from our financial results that we posted today, we continue to make solid progress towards our margin expansion initiatives. And we remain committed to delivering the SG&A reduction that we talked to here in 2017 and 2018. As we mentioned last quarter, rising commodity prices are actually headwind for us right now. We tend to have indexing range, but they operate a little bit in the rigors. But the things that are sort of headwinds for us and we incorporated in our guidance last quarter were higher steel and chemical prices. Steel, we're starting to see some benefits here. It's trending down a little bit. But if you look at on a year-over-year basis, it's really elevated, especially in Europe. And chemical prices are rising, really driven by tight global supply. And we're looking for some incremental capacity to come on stream here in North -- or sorry, in Europe and the Middle East and that had sort of helped out supply and demand, hopefully will give us a little bit of relief there. So again, the commodity picture is not really much changed versus last quarter on net basis, and we're not changing our guidance at all with respect to that. Just sort of stepping back here and before I turn it over to Jeff, I'm really pleased with where we are here in the third quarter and feel pretty good about where we're sitting right now. I have no doubt in my mind that we're going to deliver here on our 2017 commitments despite the fact that we're seeing some headwinds in terms of top line pressure. I think we're really well positioned, and we play the great foundation for Adient as we enter into 2018. And maybe just lastly, speaking of 2018, I think we're right now just putting the final touches on our plans for next year. And I think the self-help story that we laid out, you will continue to see that next year. But for those of you who I'll say are on the bullish side of things and thinks that the U.S. industry is kind of going to get just plateau here and stay at the 17 million unit level plus or minus, I would expect for those -- for that camp that our self-help initiatives are going to drive further earnings growth and margin expansion next year. So the bears out there that think we're going to have a pullback, a more aggressive pullback in North America, the additional cost actions on our self-help story will be a significant mitigating factor in terms of what you might expect to happen from just the negative contribution of margin associated with softer sale. So I'm feeling really good about where the company is positioned. We're doing exactly what we said we'd do. And with that, Jeff, I will turn it over to you.

Great. Thanks, Bruce. Good morning, everyone. Turning to our financial performance, hopefully, you've all had a chance to review our third quarter results that were posted earlier this morning. I'm pleased to report Adient in third quarter continued to build on the positive momentum established earlier this year. As you can see on Slide 9, we had a good quarter on many fronts, including our continued execution on driving earnings growth and margin expansion. As expected, our revenue was down, but I'll cover that more on the next slide. But meanwhile, our earnings were up again year-on-year and quarter-on-quarter. Adhering to our typical format, this page is formatted with our reported results on the left and our adjusted results on the right-hand side of the page. While the reported results show roughly 100% increase in EBIT and over $2 per share increase of EPS growth, we will focus our commentary on the adjusted numbers. These adjusted numbers exclude various items that we view as either onetime in nature or otherwise skew important trends in the underlying performance. Adjusted EBIT improved 3% or $10 million versus last year, which represented a 90 basis points improvement. Meanwhile, equity income was up 7% year-over-year. But if you exclude or adjust for FX, it was up 13%. Finally, adjusted net income and EPS were both up 4% year-over-year at $237 million and $2.52, respectively. Clearly, our third quarter continued to build on a strong first half performance.

I now will turn to Slide 10. Let's break down our revenue in more detail. We reported consolidated sales of just over $4 billion, a decrease of $345 million compared to the same period a year ago. The benefit of positive commercial actions, which reflect efforts by our team to collect on items such as premium price, overtime, design change by our customer, et cetera, of $50 million could not offset over $300 million of lost volume, which is primary related to the near-term investment adjustments and business run-off associated with capital constraint that existed before our announced spin in 2015. As Bruce mentioned earlier, we continue to expect top line growth return in 2019 and beyond based on our sales bookings and net backlog. In addition to lost volumes, foreign exchange also had a negative impact on our sales this quarter compared to the same period last year of approximately $60 million. The primary driver was the euro as the euro to USD rate averaged $1.10 in Q3 versus $1.13 in Q3 last year.

And finally, so much to our first and second quarter, but to a lesser degree. The lack of consolidated interiors revenue also impacted the year-on-year's results as revenues from those operations wound down over the course of last year and is effectively $0 today compared to approximately $10 million in third quarter of last year. Excluding the effect of currency, sales were down approximately 7% versus last year.

And now let's shift gears and talk about our unconsolidated revenue. Growth remained strong as the top line 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 and an out of period adjustment. Broadly speaking, this outcome significantly outpaced vehicle production in the region, which is relatively flat. 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 and added content. Additionally, our customer mix within China was quite positive as our key customer base outperformed the market. Unconsolidated interiors recognized through our 30% ownership stake in Yanfeng Automotive Interiors, or YFAI, also grew at strong pace compared to last year. Excluding the low-margin cockpit sales from both periods and adjusting for FX, interiors sales were up 15% in Q3 versus last year.

If you recall, about 50% of the unconsolidated interior sales are generated outside of China, though the results when adjusting for the low-margin cockpit sales are really quite impressive. I will point out that total sales for interiors in the most recent quarter included a larger than normal amount of cockpit sales and certain customer agreements were revised, which triggered a catch-up in sales driven by revenue recognition rules. The impact for the quarter was approximately $125 million. On a go-forward basis, this did not change the plan at Yanfeng to deemphasize the low-margin cockpit business.

Moving to Slide 11. Adjusted EBIT expanded to $336 million, an increase of 3% versus the same period last year. By segment, our seating adjusted EBIT increased 6% year-over-year to $317 million, although up year-on-year, the results were negatively impacted by a decline in our North American volumes, which tend to be a richer mix of products. Within that $317 million, Adient unconsolidated seating business contributed $82 million, which was up over 20% year-over-year, excluding FX and slightly higher compared with the unconsolidated seating revenue growth that I just discussed of 18%. A positive outcome as we look to sustain our margins in the region. Adjusted EBIT for interiors was $19 million for the quarter. The year-over-year decrease is $7 million, that was primarily driven by various growth investments in our YFAI joint venture. Specifically, an investment in IT infrastructure, a West Coast office and various branding initiatives. Note -- I should note that YFAI formed only 2 years ago and many of these investments represent initial standup cost to enable and to operate independently from the foreign currency. The corresponding margin related to the $336 million of adjusted EBIT was 8.4%, up 90 basis points versus Q3 last year. The primary drivers contributing to the year-over-year margin improvements include SG&A saving initiatives, which contributed approximately $46 million of improvement year-over-year, excluding engineering; improved operational performance contributed approximately $35 million of improvement and finally a higher level of equity income, which as I mentioned a moment ago was up about 13% year-over-year after adjusting for foreign exchange. However, we did have just over $80 million of offsets to these items, namely lower volumes, commodities and FX headwinds. Despite overall steel pricing being stable to down versus Q2, prices remained elevated compared to last year's third quarter. And as Bruce mentioned, chemical pricing continues to rise quarter-over-quarter. Recoveries based on index agreements with our customers to offset price increases are providing a partial offset. However, it's important to remind you of the 1 or 2 quarter lag that exists until our price adjusts in a rising price environment. At this time, we see these inflationary pressures continue as we progress through our fiscal fourth quarter. However, the headwinds are contained within our full-year guidance range, which I will review in just a few moments.

Now let's move to Slide 12. We included a chart showing our progress towards our goal to increase Adient's margin by 200 basis points, excluding equity income. As you can see from the chart on the left-hand side of the slide, we're solidly on track and have made significant progress over the past 4 quarters. Adient's June 2017 last 12 months or LTM margin, excluding equity income of 5.2%, is up about 75 basis points compared to June 2016 LTM results, which is the starting point from which we are being measured on the 200 basis point commitment of improvement. And the most recent quarter adjusted EBIT excluding equity income totaled $235 million despite the lower sales. The corresponding margin of 5.9% was up roughly 55 basis points year-over-year. The improvements achieved in the most recent quarter was built in the progress achieved over the past several quarters. The drivers of the improved performance in Q3 include namely SG&A improvements, which as you can see from the chart on the upper right-hand side of the slide are tracking on plan to the 150 basis points of gross improvement we targeted. It's also noteworthy to point out that the improvements recognized to date have been achieved with less sales. Total SG&A reductions are approximately $160 million versus the June 2016 LTM results.

Speaking of revenue. If you hold sales constant at the June 2016 LTM level of just over $17 billion as illustrated in the lower box, you will see we've achieved about 2/3 of the gross target consistent with the guidance Bruce provided on our Q2 earnings call. While we plan to substantially complete our SG&A reduction goals by the end of next year, we will also start to invest more in various growth initiatives just for our increasing order book.

Operational performance also contributed to the margin performance in the quarter and personally offsetting these benefits as discussed earlier are unfavorable commodity, material cost and FX. Meanwhile, the metals business is continuing to execute towards the 2019 margin expansion target. The business is working to complete several restructuring projects and execute on significant new launch inventory in the system.

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 was a positive $42 million for the quarter compared with $24 million in last year's Q3. Capital expenditures for the quarter were $115 million compared with $126 million last year. The timing of expenditures between quarters continues to evolve. Based on our current line of sight, it's likely we will finish the year towards the low end of our previous guidance. I'll have more to say on how the year is expected to finish in just a minute. And finally, consistent with our cash planning, the majority, call it, 80-plus percent of the dividends from our equity affiliate are scheduled to be paid in our fourth quarter. For those of you who looked at our financial statement this morning, you likely noticed last year's results continued a higher level of dividends from our equity affiliate. The primary driver of the year-over-year difference related to our largest JV, which paid us dividend in June of last year versus the scheduled Q4 payment this year. On the right-hand side of the page, we detail our cash and leverage position. At June 30, 2017, we ended the quarter with $669 million in cash and cash equivalents. A solid outcome and consistent with our internal plan as we balance out our cash needs to support our capital expenditures, prepayment of debt, quarterly dividends and share repurchases.

Speaking of share repurchases and as Bruce mentioned, are excited to report that during the quarter and under the approved $250 million share repurchase program, the company repurchased and retired approximately 600,000 shares of common stock for roughly $40 million. We also paid out the company's first quarterly dividend in the quarter totaling about $26 million. In total, between those 2 actions, the company returned roughly $66 million to its owners, a great first step as we are committed to enhancing shareholder value.

Moving on to debt. Gross debt and net debt totaled $3,399,000,000 and $2,730,000,000, respectively at June 30, 2017. As mentioned in Bruce's opening comments, currency movements during the quarter had a negative impact on our euro-denominated debt. This is especially noticeable when making a comparison between our Q3 ending gross debt and the gross debt reported at the end of our fiscal second quarter. At the March 31st rate, gross debt in Q3 would have been approximately $80 million lower. Adjusting for FX and the $40 million of buybacks during the quarter, our leverage ratio would have been comparable to last quarter, call it about 1.63x. As you would expect, opportunities to lower the cost or improve the strength and flexibility of our capital structure are routinely reviewed. As such, during the most recent quarter, the company prepaid $200 million of our term loan, primarily replacing it with a lower cost European Investment Bank loan. The floating rate EUR 165 million EIB loan has the term of 5 years and is expected to save the company between 1% to 2% per year in interest. The prepayment covers the required loan amortization payment through mid-2020 on our term loan. As a result of our cash balance, debt level and operating performance, Adient's net leverage ratio at June 30, 2017, was 1.69x, down about 13% from the 1.95x at September 30, 2016. We expect the strong operating performance and cash generation to continue as we progress through the year. Although we previously guided to a year-end net leverage ratio of approximately 1.5x, we currently expect the ratio will fall between 1.5 and 1.6 due to the share repurchases and the movement in the foreign exchange rate.

Turning to Slide 14. Let me wrap up with just a few comments related to the remainder of the year and our guidance. Starting with revenue. We continue to monitor near-term production adjustments made by our customers primarily related to passenger cars in North America. At this time, based on our currency and production assumptions, it appears full-year consolidated revenue will likely land around the low end of our range at just over $16.1 billion. Although we've been very successful at winning new business, the increased bookings will not start to have a positive impact on our consolidated revenue until the 2019 fiscal year. Despite the soft revenue guide, we continue to execute on earnings growth and margin expansion. Given our year-to-date performance, we continue to expect adjusted EBIT to range between $1.24 billion and $1.26 billion. Depreciation and amortization is tracking in line with our previous guide of $375 million. Given the composition of our debt and cash forecast, interest expense is running just under $140 million for the year. Taxes as discussed in depth on our second quarter earnings call are running higher versus our original plan, given the geographic composition of our earnings, namely the higher proportion of U.S. 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 tax planning initiatives underway and current tax laws. The 14% to 15% includes taxes at just over 20% on our consolidated operations, and our joint venture equity income is shown in our financial statements net of tax and thus driving down our consolidated tax rate. As a bottom line, the range for our adjusted net income continues to range between $875 million and $900 million. Capital expenditures are tracking towards the low end of our guidance, given the timing and calendarization of certain expenditures.

Finally, with regard to free cash flow, we still expect to generate approximately $400 million in free cash flow for the year. And in closing, our solid third quarter results combined with our strong first half performance provide a firm foundation for us to achieve our commitments in 2017 and beyond. And with that, let's move to the question-and-answer portion of the call. Operator, first question please?

(Operator Instructions) Our first question comes from Colin Langan.

I guess my first question, just clarification. I've gotten several questions about commercial settlement that you highlighted on Slide 10 as a pretty big $50 million benefit. How should we -- and I think that's been the case if you look at the Qs the last few quarters. How should we think about that going forward? Is that going to be a headwind as we move forward as we had benefit this year that maybe aren't sustainable? How should we think about that number going forward?

Yes, Colin, good question. They tend to, I mean, part of our business is commercial settlements, I'd say. There's a lot of commercial activity as design changes happen to the products that we make. A lot of times, there is changes and design characteristics driven by the customer or whatever requirements, and we go and capture that in additional price, and we call that out in these financial bridges. I'd say it's generally pretty consistent year in, year out. The quarterly mix of them can be a little different, sometimes they're a little higher, sometimes they're a little lower. Probably a little bit of a higher mix this particular quarter, but I'd say in total year it probably averages out to be above normal.

Yes, I would -- it's Bruce here. I wouldn't read into that because we're showing it on the sales side of $50 million, that it is a $50 million bottom line benefit. These are things like the content's changed, maybe the customer had a vinyl seat that they changed to leather. Those kind of items, not like a price increase from top to the bottom line.

Yes, usually things like -- good point. Usually things that drive our own cost base up and this is a recapture.

Got it. And when I'm looking at Q4, I'm not sure if I'm doing my numbers right. But it seems to imply that margins are maybe flat or even slightly down year-over-year in Q4. Is there any -- and you had such great progress every quarter year-to-date. I mean, is there any challenges that we should be thinking about in Q4 that may get a little bit more difficult?

I think one thing to focus on a little bit is on July 1 last year, we were essentially internally set free from Johnson Controls from a financial standpoint. So we've been able -- a lot of our SG&A savings and others as we've gotten out of that structure and built our own environment. So the first quarter -- the fourth quarter of last year is a better comparable point or a harder comparable point because we had certainly a good quarter last year as we were able to benefit from some of that. And then hopefully, here with the environment, Colin, we're able to perform better, but as we look here today, little cautionary on where sales and the environment set, but we still feel comfortable with that overall guidance. We'll obviously look to beat it.

And just lastly, you mentioned SG&A, I think your original target was 150 within the first 2 years. How much of that is completed? And I wasn't sure on the slide, it seemed to indicate that depending on the sales base, it may be more challenging. Do you think you can still get the 150 with the sales coming in a little bit lower? And you think you can get it within the 2 years?

Yes. So, I mean, when we say, just to be clear, 150 basis points is worth $240 million, $250 million. 2/3 will have done this year and 1/3 next year. And yes, we're absolutely confident we can get it. The fact that actually the sales are dropping here because we haven't backed away from the 250, from basis points 5 years, it will be a little bit better. But we're very comfortable with only 2/3 of the way done. If you just look at annualizing what we've done, that's sort of in the bag. We have some work to do to get to next year. But we've got road maps, and we will continue to work those. So very -- I mean, the self-help part of our story, look SG&A is 100% within our control and the improvements that we need to make in the metals operation are 100% within our control and there is nothing that the market influences those 2 initiatives.

Our next question comes from Mr. Joseph Spak.

Just to be clear on the commercial segment. You said it's a recovery, but that's an intra-quarter recovery. So it's not a recovery from an expense in the prior quarter?

It would be really more likely on current production. So it's stuff that we generally would be shipping quite often, and we would come up with some sort of an adjustment. Usually sometimes in retro area, sometimes with some delay, but it's usually on current production, Joe, and you'd see that we generally have it quite a bit period-over-period.

Okay. And then just on the guidance. Within the adjusted EBIT is -- should we still be thinking about equity income of about $400 million because, and correct me if I'm wrong, but I don't know if that sort of interiors investment was sort of always planned. So I don't know if there is a little bit of an offset there and then currency is obviously changed as well. So just wanted to get some of the guts there?

Yes, I think the $400 million is still a good number. Some weakness on the YFAI with some of those investments, but then constraints on the unconsolidated seating, so I think it's still a good number, Joe.

And then what about -- just from a straight translation perspective, looks like the currency has moved in your favor on China. And then even on the consolidated results, what was your prior euro assumption? And what is it now?

Well, yes, good point. So our prior euro assumption for the year was probably something closer to 110-ish or maybe even a little inside that. So it definitely will help us a little bit on, we will say, the sales and nominal EBITDA and EBIT, and the fourth quarter versus our original assumption. Meanwhile though, we have on the debt side and from the leverage, we will have a higher debt number just due to the exchange on the debt. It's not terribly material though, Joe. It's not like [a Honda one], Joe.

And I think Joe, on -- I think as we -- if you look at kind of where the Chinese currency is, it's kind of come back to where we started the year. So throughout the year, I think we're kind of getting a little bit to where once we started to see this revenue handle, but we are trying to come back to where we thought it was going to be.

Okay. And then -- sorry, just one more quick one on the commercial settlement, so that's helping the top line, you're saying it doesn't really help the EBIT. So like what -- does that fall under the broader scope of operational performance or volume? Or where is it in the EBIT [block]?

Yes, on Page 11. It's just going to fall in the operational performance line.

And some would be in volume line, too. So...

Our next question comes from Mr. David Leiker.

I wanted to try and dig through some of what you're seeing on the bookings here over the last year since -- like you were since you've been set free. Can you give us some characterization of those bookings of how much is replacing existing business versus client request kind of relationship?

Yes, I mean, we tend to update our backlog, which is the new incremental, not a lot, David, in January at the Deutsche Bank conference. So that's what we are planning to do. If you recall, the last year we came out and said we had a backlog number of $2.4 billion, which is up from, I think, $2.1 billion a year before. And when you kind of looked at the kind of undertones of that, what you saw is '17 and '18 -- or sorry, '17, we had no growth in our consolidated seating business and as you look to '18 and '19, you saw growth in the consolidated operations picking back up. When we sort of rolled the clock here like [lap off] '17, which is a negative to '17 and we replaced it with '20. We expect to see acceleration in the upward trajectory in terms of the consolidated. So if you looked at '19 -- I'm sorry, '18, '19, our consolidated seating business was growing and the backlog for those years was increasing. '20 will accelerate really that increase. So I don't really want to get into what it is right now, but it's accelerating. So I would say the mix of new is higher than the past.

Okay, great. And then on metals, you had talked about a number of launches. Can you talk a little bit about what the timing and magnitude of that is? And presumably those are products that are coming in with better margins on than some of the old stuff you had?

Yes. Yes. Yes. I mean, it's a combination of some things like our old -- like our recliners for instance, our T3000 we replaced with our -- sorry 2000 we replaced with our 3000. Because there are so many -- like especially on the recliner side, so many launches that we have in metals, it's kind of hard to pinpoint like some big ones. But we do have some fairly -- another sort of key driver is kind of getting some of these mega launches that we talked about, things like our Volkswagen Gen 2 launch, which is a $300 million, $400 million program, our BMW-Daimler combined [IKB] launch is underway right now. So those things are sort of getting (inaudible). So it's a combination of some improved margins on materials economics that I think you were sort of referring to, some old business [we look] to do. There is a margin enhancement on old to new product. I talked about some restructuring being done here in Europe. So there was big migration in metals around west to east in Europe. And then there is a tampering down of the launch activity. Those are all the drivers that was kind of happening. But I would say if you look at sort of some of these new programs that we talked about in my comments like on the Camry and the A-8 and Tiguan and those of things, I mean, they're helpful but it's a whole bunch of those things.

(Operator Instructions) Our next question will be coming from Mr. Brian Johnson.

Yes. I wanted to talk a little bit about just kind of bridging kind of the backlog, the bookings. You mentioned strong bookings. But can you get us a sense with the roll-offs and sort of that backlog while you came into existence with how -- what is the minimum sort of revenue this year, especially next year, if you're already there?

Yes. Well, I -- maybe we would make (inaudible) our bookings -- because some of our -- some of the auto sector talks about bookings and some people talk about bookings over like lifetime awards and things like that. So maybe just to be clear. So when we talk about bookings, we are talking about annual revenue for 1 year of both new and replacement business. When we talk about -- and not what obviously also have to be net of a loss. So if we had a $200 million replacement business that we rewon and $100 million new contract that we won, we would call a $3 million in order. For backlog purposes, anything that we lose on replacements are negative. So if we just win our current book of business, we would have a 0 backlog. So backlog is entirely net incremental new business. So that's kind of a methodology here. Is that you were looking for, Brian?

Well, I guess, kind of within that. Then the tenor of the conversations with customers level completion you've had, couple of competitors, especially some of the smaller ones talking about big wins. Is it getting more competitive? Could it put pressure on future margins? And then, I guess, this runs along the kind of the competitive environment. Your main competitor talked a lot yesterday about the synergies between wiring harnesses in these systems and seats, particularly in China, become more complex and laden with electronics features. How do you see that in terms of competition for seat awards?

Well, first of all, I've never lost a piece of business because we didn't have a wire harness capability. So I'll start with that one. But, I mean, In China, I think it's fair to say that Adient as well as our global competitors are all beneficiaries of this -- the Chinese suppliers and in-house seating move into the big global players on the seating side. So I think we're all in the same boat. That's a positive for all of us. What I would tell you there is we are winning more than our fair share. I'm confident that our market share, which is already significantly stronger than all of our competition, almost combined, that we are continuing to win share in that market. If you then look at the -- if I then looked at, okay, tell me a little bit more about what's in your backlog. We have significant business in there with some of the customers that we have lost share with over the last 3 or 4 years' time at Johnson Controls. So we're recapturing business that was ours previously. We have a good book of incremental new business with Japanese customers and so there our competition for that business is not the people that you follow by, and it's more like your (inaudible) Hitachi, F&K, those types of players. We have metals, incremental metals program in our backlog. And again, if you look at our vertical integration versus, again, the folks that you cover were much stronger on the metal side. And then I would say some of our competitors here in -- some of the Tier 1 competitors have had some launch issues, and we've been a net beneficiary of picking up replacement our custom -- and competitors' replacement programs, which are essentially share gains for us. So they've had some performance issues that have translated into a positive for us. And I think when we talk through our backlog in January, I think, we'll do a deeper dive and kind of go through how we're doing because it's not -- look, we're going in with a lower margin so that we can get this business growing again. We're committed to the margin expansion that we talked about in our investment thesis and taken on a bunch of business that's going to be below that when it launches in 2 or 3 years' time as a full game tour. And so that's not what it's about.

Okay, great. And just final question since I have a car now with your massage sheets, which are amazing.

Thank you.

In the showrooms. And as you go through these bookings, are you seeing on the one hand any positive mix in terms of just features like that or on the other hand just kind of interest rates and trading go up, trading values go down? Any evidence of the consumer saying, I'll skip the massage on my next car?

I can't really answer that question because I don't -- we don't sort of see it, but I'd say overall though...

Fully loaded seat versus a fabric manual slider seat.

Maybe you said something slightly different than being able to answer that specific areas. We've seen increases in content per vehicle in seating, which would suggest that people are looking for more features, more comfort, more premium stuff, more safety-related items in their seat.

Yes, when we quote...

And then take them into the mix shift, Jeff?

Correct.

Yes. So you within the sedan, it's going up. Within a SUV, it's going up.

Yes.

Our next question comes from Mr. John Murphy.

This is Aileen Smith, on for John. If we think about how production schedule has trended in the quarter, it looks like there was some tempering of production relative to expectations at the beginning, particularly for China and North America. How disruptive was this slowdown and the cadence on your business? And how far in advance do you need notice from your automakers of production downtime to adjust your cost structure and production accordingly?

Yes. Let me touch on North America, and then Jeff will sort of give a little bit more color on China. But in North America what we're seeing here on the passenger car side, there's too much inventory, and our customers are extending or taking weeks out of their schedule. And so when they do that, that's the best scenario for us because then when we can -- our plants are 100% dedicated to our customer. And so if they want to take a week out, like close their plants for a week, we close our plants for a week. In North America, labor is 100% variable, and we can respond very quickly. It gets more difficult if they slow their line speed down. One of our customers in particular is slowing their line speed down because it's a lot more difficult to say flex your labor down if they slow their assembly line down, let's say, 10%. So the issue that hit us in this quarter specifically was North American customers taking more downtime than we've expected. And that tends to -- they obviously watch their inventory and sales level. And if you listen to their calls yesterday and the day before, they're all coming to get their inventory in good shape up by the end of the year, and we're just going to have to keep our eye on things. Jeff, why don't you talk about China?

Yes. The China market, as I mentioned in the remarks, there's been a pullback in some areas of production, but it's been largely targeted at particular brands. For instance, Hyundai and Kia is way down in the quarter. And there are some few other brands, some of the local brands, some of the Japanese brands, have also seen some softness in their sales and production over the course of the first half of calendar '17. Fortunately, that mix of customers we're actually fairly underrepresented on. The group that we're, I guess, more aligned to actually had a pretty good first half of the year. We benefited from that. We also continued to benefit, as I mentioned, just from some of the content per vehicle and some of the other growth initiatives we've been able to put in the region. So while it's been a challenging market, this is -- our partner has worked very well with us. We obviously have tie-ins with our customers as they're also our partners, and we've been able to manage through and the team's been -- have been able to manage through that environment fairly well. We actually saw a slight uptick in net margin of the whole group. It's somewhat of a mix element. But as we've always said, we are intending to keep that market relatively stable from a margin standpoint as we continue to grow it, and we've been very pleased with how the first half of the year, I guess, the first 3 quarters of this fiscal year are going.

Great. That's very helpful. And then a few suppliers this quarter have called out automaker price downs as a pressure point and more so that they are not being offset through operating leverage or their own cost efficiencies. Are you guys seeing anything from your side to suggest if the automakers are getting incrementally more aggressive with respect to price downs, especially as production is slowing in some of the major regions?

I would say that we're always aggressive. And I wouldn't know anything abnormal. And that's our business, right? This industry, we have to take out cost in line with our customers' aspirations. And if we don't, we're going be facing significant margin deterioration. Quite frankly, if you can't do that year in, year out, you're going to go out of business. So if you look at our numbers here, we have cost pressure like everybody else. We're growing our margins. That's just -- that's the price of being in the game. But when in good times, there's a lot of pressure for our customers to show great numbers, and there's a lot of pricing pressure. At bad times, there's a lot of pressure from our customers to mitigate the volume shortfall and there are lot of pricing pressures. So I don't -- I wouldn't talk about, hey, this quarter's something is abnormal on the positive or negative side. So anyway, I think we've kind of run up against the end of our call here. And so maybe just a few comments before we sort of hang up. We're 3/4 of the way through our fiscal year, and I really do feel good about our ability to deliver on our commitments, especially given the softness that we've seen in the top line. I mean, it would have been pretty easy, I think, for us to come out and talk about our top line challenges and using that for excuse, but I really think our employees have stepped up their game here, and I really want to thank them for their dedication and hard work, serving our customer, delivering these great numbers and sticking with us through us at a time of significant change. And so I couldn't be prouder of our global team. And I'd like to thank everybody on the call for their continued interest in Adient. Thank you.

Thank you, everyone.

Great. Thank you.

That conclude today's conference. Thank you for participation. You may disconnect at this time.