Adient PLC (ADNT) 2018 Q1 法說會逐字稿

Welcome, and thank you for joining the first quarter 2018 earnings call. (Operator Instructions) Today's call is being recorded. If you have any objections, you may disconnect at this point.

I'll now turn the meeting over to Mr. Mark Oswald. You may go ahead.

Thank you, Jen. Good morning, and thank you for joining us as we review Adient's results for the first quarter 2018. 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 and consistent with past practices, 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 will 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 feel is useful in evaluating the company's operating performance. Reconciliations of the non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release.

This concludes my comments. I'll now turn the call over to Bruce.

Okay. Thanks, Mark. And good morning, everyone, and thanks for taking the time here to go through our first quarter results.

As we mentioned a few weeks ago at the Deutsche Bank auto conference, the challenges and headwinds impacting our Seat Structures & Mechanisms business intensified during the first quarter and had a significant impact on our financial results. In addition, when you look at our GAAP numbers, you'll see that we were impacted, like many other companies, here this quarter with a large noncash tax charge associated with our remeasurement of our deferred tax assets. Although Jeff will go through our financials in more detail later on here in the call, maybe just on Page 4, I'd just comment on a few key numbers.

Our adjusted EBIT for the quarter totaled $163 million, which is down $120 million year-over-year, primarily driven by the performance within our Seat Structures & Mechanisms business. Looking at earnings per share, it's $1.06 in the most recent quarter as lower level of operating performance drops right down to our bottom line. In terms of our balance sheet and cash leverage, we ended the quarter with cash and cash equivalents on hand at about $390 million and a net debt to adjusted EBITDA of 2.07x. Now clearly, when we look at these numbers, they're disappointing and, quite frankly, unacceptable. The Adient team here is working hard to identify actions that we can implement to mitigate some of the challenges we have in our business, but also to put the resources and things that we need to put in place to get our metals business back on track.

I'll comment on some of these profit-enhancement opportunities that we've identified later on here, but first, let me comment on a few recent developments that despite the near-term challenges in Seat Structures & Mechanisms, demonstrate that we're moving the company forward in positioning Adient for long-term success. So first of all, I just like to comment on the formation of Adient Aerospace, a joint venture that we formed -- that we announced a couple of weeks ago between ourselves and Boeing, where Adient has a majority stake of the company at just over 50%. This -- the Adient Aerospace joint venture will develop, manufacture and sell a portfolio of seating products to airlines and aircraft leasing companies for both production line fit and retrofit configurations.

Expanding Adient's revenue and profit pool beyond the auto industry is a key part of the company's 5-year marker, so the formation of this joint venture is very much aligned with our long-term strategy. When we think about the size of the addressable market for commercial airline seating, it's quite large, about $4.5 billion today, and it's expected to grow to over $6 billion by 2026. We believe Adient's strong set of transferable capabilities will offer unique opportunity to create value for both companies in this joint venture.

Turning to Slide 5. Just a few comments on the North American International Auto Show. Last week, we hosted a group of investors and media at our booth at the North American International Auto Show to showcase the company's future mobility solutions, address trends in driving that we expect to change with mobility such as autonomous vehicle and ridesharing. The event included our demonstration vehicle we call the Adient I -- AI18. It's an interior seating concept book for urban, electrically powered and autonomous vehicles. For those of you who were there, the interior is highly flexible and well suited to the evolving models for mobility and vehicle usage such as car sharing with several distinct usage modes to customize the passenger experience to the occupant's needs as and when they're using the vehicle. Customer feedback from both of our traditional customers and our newer West Coast customers was extremely positive.

In addition, we showcased our products in complete seating, our specialty seating business, including RECARO. Our Seat Structures & Mechanisms technology were also on display. Really using the event to highlight the concepts and innovations that will drive our business forward in the coming years.

And then lastly, I'd just point out, at the bottom of the slide, the company took action to further strengthen our leading position in China with the formation of a new joint venture called Adient (Tianjin) Automotive Components Sales Co., Ltd. This is our first aftermarket joint venture in China, and this is a joint venture that will supply complete seats into Chinese retrofitting industry.

Turning to Slide 6 and Seat Structures & Mechanisms. The developments highlighted demonstrate the management team is committed and continues to make progress in advancing our strategy. Unfortunately and rightly so, the challenges impacting our Seat Structures & Mechanisms is casting a shadow over our whole business and calling in to question the achievability of our midterm plan. Before handing the call over to Jeff, let me just spend a few minutes talking about Seat Structures & Mechanisms in a lot more detail.

As Jeff mentioned earlier, the Seat Structures & Mechanisms business is currently experiencing headwinds much more severe than the guidance that we provided back in November. Although we identified some of the headwinds and challenges last quarter, specifically commodity prices, launch inefficiencies, steel supply constraint and the cost of customer interruptions, the severity and the impact of these headwinds have intensified. As shown in our results today, when you experience problems meeting launch curves, the costs expended to avoid customer shutdown and to minimize the impact of customer interruptions can be quite costly and can add up very quickly. We provided details on the headwinds related to specialty steel availability and launch-specific issues at certain of our plants in North America at the Deutsche Bank conference, so I'm not going to rehash those events, but I'd like to use the time to provide insights on what we're doing to move the business forward.

Turning to Slide 7. On the left-hand side, you can see there are a number of actions that are being executed immediately to improve our cost performance. These include a further reduction in SG&A. I think since Adient spun off from Johnson Controls, we've been highly successful at achieving our SG&A target reduction. And as a result of that, we've identified several areas within the organization that we can streamline further. Obviously, we need to continue to make the investments that we've talked about to get the business back on a growth trajectory. We still see lots of opportunity to further reduce our SG&A levels. We also intend to undertake a thorough review of our planned investments to make sure we have the right balance between allocating capital here in the short term and pushing some of those investments for longer-term growth out. And then we'll obviously do basic blocking and tackling such as things like limiting discretionary spending such as travel and expenses and things like that.

In addition, we recognized fundamental changes needed to be made in our Seat Structures & Mechanisms business. As several of you have written, for too long, this is a business that, as organized and is currently run today, has destroyed shareholder value. The changes that we are implementing are pretty broad-reaching. First, let me comment on personnel and oversight of the business. For starters, we're asking Byron Foster -- Byron, one of our Executive Vice Presidents, he will be assuming, effective immediately, the day-to-day operate -- responsibility for our Seat Structures & Mechanisms business. This will be his sole focus on a go-forward basis, and Byron will have the full authority and responsibility of bringing to bear the best talent that we have in Adient to improve the operation of this business and to make sure the turnaround and transformation of this business is successful.

Secondly, Jeff Stafeil will lead a weekly Seat Structures & Mechanisms steering committee, which we'll be forming. And that oversight committee, which will meet weekly and will report results to our board on a monthly basis, will make sure that our turnaround initiatives is properly staffed and we have the appropriate leading KPIs and that we are fully onboard in tracking all the actions necessary to get this business back on a proper shareholder value-creating trajectory. I also noted earlier this month that we've moved and we intend to move even more of our A-team to the Seat Structures & Mechanisms business. The individuals that are moving into this business will be highly compensated, with specific metrics that they control 100% around the profitability of this business, basically ensuring that the goals and their success are highly aligned with the interest of our shareholders.

The second fundamental change that we're introducing is we're going to organize this business as a complete stand-alone operation. Going forward, SS&M will be 100% able to pull all the levers that they need to pull to control their own destination. Those resources we'll report directly on a solid line basis into Byron. And then finally, we're undertaking a full strategic review of the business, which we've already kicked off. Elements of this review will include which parts of this business do we need to be in -- we're very vertically integrated, and I think we have some opportunities to look at what we make versus buy. We also need to improve the commercial disciplines that we have in this business and look to derisk the business with better mechanisms for recovering commodity costs.

We expect the fundamental changes that are being rolled out will drive the necessary culture and business change within Seat Structures & Mechanisms and get it back on its proper -- profit improvement trajectory. In the near term, recovery plans that we've introduced will help mitigate the current challenges. Each recovery plan that will gain traction are expected to create positive momentum as the quarters progress throughout the year. Unfortunately, despite the recovery plans, the continued growth from our unconsolidated -- and the continued growth from our unconsolidated seating operations, overall margins are expected to be down year-over-year, and Jeff will discuss our outlook here just in a minute.

With regard to our midterm plan, we certainly are not backing away from our commitment to deliver 200 basis points of consolidated adjusted EBIT margin improvement by the end of 2020. With that said, we're currently examining the composition of these 200 basis points. So for example, if SS&M, our Seat Structures & Mechanisms business is incapable of delivering 100 to 200 basis points of improvement by 2020, we'll look to execute other parts of -- other things within the rest of our organization to offset the shortfall. As promised, we will provide you with an update of the midterm plan towards the end of April, as shown on Slide 8. Later in the year, we will target the deep-dive investor event to go through our Seat Structures & Mechanisms business in a lot more detail.

So with that, I'll turn it over to Jeff to go through the financial details. Jeff, over to you.

Thanks, Bruce. Good morning, everyone. Turning to our financial performance. As Bruce stated in his remarks, Adient's first quarter results were both disappointing and unacceptable. The team is working with a sense of urgency to reignite our positive momentum. As you can see on Slide 10, the headwinds within Seat Structures & Mechanisms had a significant impact on our results. In addition, the onetime charge primarily associated with the remeasurement of our deferred tax assets also impacted our GAAP results for the quarter.

Adhering to our typical format, the page is formatted with our reported results on the left and our adjusted results on the right side. We will focus our commentary on the adjusted results. These adjusted numbers exclude various items that we view as either onetime in nature or otherwise skew important trends in underlying performance. For the quarter, the newly enacted U.S. tax legislation was the largest special item, primarily related to the remeasurement of Adient's deferred tax assets, resulting in a provisional $258 million charge. Other adjustments include the coming Adient restructuring-related charges and purchase accounting amortization.

Moving on. Adjusted EBIT and adjusted EBITDA fell $120 million and $103 million, respectively, in the quarter versus last year, driven in a large part by the operating performance within the SS&M business. Meanwhile, adjusted equity income for the quarter was up $10 million compared with the same period last year. Although overall growth is solid, there is a divergence emerging between the operating results of our unconsolidated seating JVs and YFAI, which I'll dig into in just a minute. Finally, adjusted net income and EPS were down just under 50% year-over-year at $99 million and $1.06 per share, respectively. While sales have come in on plan, we have faced unexpected operational and execution challenges, namely in our Seat Structures & Mechanisms business. I'll elaborate more on this in a moment.

Now let's break down our first quarter results in more detail, starting with revenue on Slide 11. We reported consolidated sales of $4.2 billion, an increase of $178 million compared to the same period a year ago. Benefits of the Futuris acquisition and China JV consolidation more than offset the negative impact of lower volumes, primarily in North America. In addition, foreign exchange had a positive impact on our sales this quarter compared to the same period last year by approximately $127 million. The primary driver was the euro as the euro to USD rate averaged $1.18 in Q1 of this year versus $1.08 in Q1 2017.

Moving on. With regard to Adient's unconsolidated revenue, growth remained strong. Unconsolidated seating revenue, driven primarily through our strategic JV network in China, grew about 11% year-on-year. Adjusting for FX in the China JV that is now consolidated, sales were up about 12%. Broadly speaking, this outcome significantly outpaced vehicle production in the region, which was down slightly. Unconsolidated interiors, recognized through our 30% ownership stake in Yanfeng Automotive Interiors, also experienced year-on-year sales growth. Adjusting for FX and the low-margin cockpit sales from both periods, interior sales were up approximately 3% in Q1 '18 versus a year ago.

Moving to Slide 12, an adjusted EBITDA bridge is provided to show the key drivers between periods. If you recall from our Q4 earnings call, given the amount of growth investments and capital expenditures planned in the coming years and the resulting difficulty of predicting the exact timing of depreciation, we view EBITDA as a more meaningful short-term measurement than EBIT. With that said, we'll continue to provide the status of our margin progression using both measures. Big picture, adjusted EBITDA fell $260 million in the quarter versus last year. The corresponding margin related to the $267 million of adjusted EBITDA was 6.4%, down approximately 280 basis points versus Q1 last year.

The primary drivers of the movements between periods include: further benefits associated with the SG&A savings initiatives, which contributed approximately $51 million of improvement year-over-year, excluding engineering: our Futuris acquisition and the China JV we were able to consolidate late last year performed well and better than planned during the quarter. In total, they contributed about $26 million; and a higher level of equity income, which, as I mentioned a moment ago, was up year-on-year. The $6 million shown on the slide is adjusted for FX. Important to note, mixed results existed between our consolidated -- unconsolidated seating and unconsolidated interiors business, specifically YFAI.

On the seating side, adjusting for FX, equity income was up $15 million year-on-year. I'll point out last year's Q4 consolidation of the China JV negatively impacted equity income by $3 million versus Q1 last year. Unfortunately, YFAI did not keep pace with sales growth as equity income adjusting for FX declined $6 million in Q1 of this year compared with last year's first quarter. The year-on-year decline was driven by a combination of factors such as mix, investment in growth initiatives, certain customer pricing headwinds and operational issues. Currently, we expect these factors will continue to impact YFAI results, especially in Q2 where these headwinds are expected to intensify. We continue to work with our partner to identify areas to improve profitability, but unfortunately, with only a 30% ownership stake, the amount of influence we have is limited.

Despite the positive EBITDA drivers just mentioned and as the chart illustrates, we did have approximately $190 million of offsets to these items, primarily headwinds related to the SS&M business, which totaled just under $100 million on a year-over-year basis. As Bruce mentioned and as discussed in detail at the January auto conference, a number of factors contributed to this outcome, the biggest by far related to launch inefficiencies, driven by launch complexity, press-room capacity, demand outpacing our ability to produce, premium freight and steel availability, to name a few. The team is working hard to stabilize the business. I'll share our expectations on how we expect the business to progress throughout the rest of the year in a few minutes.

As mentioned on the revenue bridge earlier, volume, pricing mix negatively impacted revenue by approximately $200 million, and this flowed through with just under $40 million reduction to profit. Investments in our future, captured under growth, accounted for $33 million of the year-on-year variance. Spending has increased as engineering resources, program managers and increased launch activity to support our new business wins. As you know, these costs are incurred about 2 to 3 years in advance of production.

Finally, we did experience some additional operational margin miss in the quarter of approximately $23 million as the lower volumes drove inefficiencies throughout the organization. FX and commodities, for the most part, had a minor impact in the quarter. Gross commodity headwinds of about $21 million were mostly offset by recoveries totaling $17 million. As mentioned at the DB presentation earlier this month, we do anticipate that commodity headwinds will mount in the coming quarters mostly in the film chemical market.

One final point in the slide. To provide you with a perspective on how the business is running excluding SS&M, we noted on the bottom of the slide the EBITDA margin for our consolidated business excluding SS&M for the current quarter versus last year's first quarter. As you can see, our most recent quarter at 6.1% is down about 70 basis points year-over-year. The uptick in our growth investments accounts for a majority of the variance as well as the stronger euro, which had an approximate 20 impact -- 20 basis point impact by itself. And as just mentioned, volume and its impact on other performance contributed but to a lesser degree.

Given Q1's performance, we've heard and read a lot of commentary about the achievability of the 200 basis point margin improvement target. You can see our progress towards that goal on Slide 13. Our Seat Structures & Mechanisms business stands out on the page as our negative outlier performance with 120 basis points reduction from our starting point. No doubt the headwinds impacting this business have significantly offset the approximate 143 basis points of improvement we've achieved in SG&A and makes achieving our goal that much tougher. As noted at the DB conference, we will provide an update on our plans to achieve the 200 basis point of margin enhancement towards the end of April.

Despite the progress made to date in achieving the SG&A targeted savings, the team is still -- is not standing still. We continue to expect further improvements as recent headcount reductions and mitigation actions we're executing to offset performance headwinds take hold. It should be noted certain of the near-term actions we're taking, such as extremely tight control over discretionary spending or taking down our bonus accruals, will not be part of the run rate of the business going forward. That said, we're comfortable meeting and likely exceeding our 150 basis point target for SG&A reductions.

With regard to the third bucket, growth investments, spending has progressed as planned in support of our backlog. Future spending will be reviewed and monitored to ensure the correct balance is struck between near-term program needs and long-term growth. And finally, we continue to look for efficiencies and improved performance from our business outside of our Seat Structures & Mechanisms. Through December 31, we've picked up just under 40 basis points of margin improvement in this area. Meanwhile, our unconsolidated business, as shown through our equity income and accounting for roughly 45% of our net income in 2017, continues to experience strong growth. In fact, the margin expansion associated with our equity income is roughly 47 basis points over our baseline starting point.

Let me now shift to our cash and capital structure on Slide 14. 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 negative $270 million for the quarter. The outflow reflects the negative year-on-year operating performance combined with normal seasonality. Capital expenditures for the quarter were $143 million compared to $207 million last year.

On the right-hand side of the page, we detail our cash and leverage position. At December 31, 2017, we ended the quarter with $390 million in cash and cash equivalents. Gross debt and net debt totaled $3,501,000,000 and $3,111,000,000, respectively, at December 31, 2017. As a result of our cash balance, debt level and operating performance, Adient's net leverage ratio at December 31, 2017, was 2.07x. Important to note that the Futuris acquisition and the Q4 JV consolidation in China are providing minimal benefit to the LTM EBITDA as only 1 out of the 4 quarters of their last 4 quarters are in our numbers, whereas the entire purchase price has come out of the net debt numbers.

Turning to Slide 15. Just a few comments on the tax legislation in the U.S. Overall, I'd say it's roughly neutral. The legislation is going to be slightly beneficial to 2018 rates as some of the negative influences do not kick in this year due to the timing of our fiscal year-end. However, we will enjoy the benefit of a lower rate. As we think about the negative influences, there's 2: the limitations on interest deductibility; and the base erosion anti-avoidance minimum tax, most commonly called BEAT tax. Absent any kind of changes to our structure, we would likely incur an estimated 1% increase in our global effective tax rate, again, if left unmanaged, but we continue to review opportunities to manage that going forward. As most of the detrimental changes do not impact us until fiscal 2019, we have a bit of time to evaluate options. We'll continue to provide updates going forward, but for now, the main takeaway is a neutral outcome for Adient.

Turning to Slide 16. And as we think about the progression of fiscal 2018 earnings, we wanted to provide some insight on how our Seat Structures & Mechanisms business has performed since the June '16 LTM period and, more importantly, what we expect going forward through 2018. The operating performance shown on the slide isolates the SS&M business and includes the allocation of approximately $100 million of annual costs associated with certain central activities such as IT, purchasing and commercial resources. In addition, we provided the unconsolidated contribution at the bottom of the page so you can get a better feel of how our consolidated SS&M business has and is expected to perform.

As you can see, the operations were just above breakeven at the June '16 LTM period. If you adjust out the $26 million of earnings related to our unconsolidated businesses, the consolidated operations were running at a slight loss. You can see the operating performance hovered around breakeven until Adient's fiscal Q4 '17 results. As previously mentioned, the headwinds related to launch inefficiencies and commodities drove the business to a significant loss, about $55 million in Q4 of 2017 for the consolidated operation. The losses in our most recent quarter became more severe as the headwinds intensified.

In addition, as the headwinds intensified and new issues rose, such as mandatory containment actions required by our customers and the availability of certain specialty steel, it also became apparent that the original time period we estimated to resolve the issues was optimistic given the current state of the business. As the many -- or as the company executes its containment plans and rolls out the fundamental changes Bruce mentioned earlier, we expect the operating results will improve sequentially and be essentially at the same run rate as last year's Q4 when we exit fiscal '18. That said, even though sequential improvement is expected as we move into Q2 this year, the year-over-year variance will still be quite negative as last year's Q2 was a relative high point for the Structures and Mechanisms business.

Analyzing the changes since the LTM June 2016 time period shows approximately $225 million of the forecasted decline related to 7 plants in our network. These are all structure facilities. Additionally, our mechanisms facilities are projected to decline approximately $50 million in part due to inefficiencies related to the conversion to the 3000 product line. The remaining reduction from the baseline is scattered across the over 15-or-so remaining facilities in our network as well as also related to commodity inflation. The SS&M midterm plan review presently being conducted is a bottoms-up plant-by-plant, program-by-program review that will enable us to better understand where this business will be in 2019 and 2020. As you would expect, the results will also lead to a road map of options that will be executed to ensure the company is earning an appropriate cost of capital on the business.

Finally, turning to Slide 17. Let me wrap up with our thoughts on the remainder of 2018. One point as you refer to Slide 18, the guidance provided today includes the impact of our aircraft investments, which we pointed out at the January auto conference is expected to be about $30 million, of which Boeing will reimburse us for their share. As noted in our auto conference materials, both Boeing and Adient are initially contributing approximately $28 million each to fund the venture.

Okay. Starting with revenue. Our current projection for our consolidated revenues continues to be $17.0 billion to $17.2 billion. With regard to adjusted EBIT, after factoring in our Q1 performance, our profit mitigation plans, expenditures related to Adient Aerospace and expected rise in chemical prices, we're expecting fiscal '18 will settle into a range between $975 million and $1.025 billion. As the year progresses and the mitigation actions within SS&M gain traction, we'd expect to see positive earnings momentum build.

Included in the revised full year adjusted EBIT estimate, we now expect our equity income will be approximately $400 million, down $35 million compared to our earlier guidance. The revised outlook is more than driven by challenges at YFAI. As mentioned just a few minutes ago, we continue to work with YFAI to identify profit improvement plans. Important to note, the challenges facing YFAI are not impacting our unconsolidated seating business. In fact, that business is running stronger than original expectations. Year-over-year equity income growth for unconsolidated seating is now forecasted to grow 10%, adjusting for the China JV that was consolidated in Q4 of last year.

Moving on. Adjusted EBITDA is expected to range between $1.40 -- or $1.40 billion and $1.45 billion. The implied margin at the midpoint excluding equity income will be down about 140 basis points versus fiscal '17. For modeling purposes, given our increased growth investments, depreciation is still tracking our initial guide of $385 million. With regard to interest, no change to our $135 million forecast.

Moving on to taxes. Based on the geographic composition of our earnings and factoring in the recent tax reform in the U.S. and our reduced guidance, we expect an effective tax rate of between 8% and 9% for the year. When our business recovers, we would anticipate to be back at the normalized rate of between 10% to 12%. At the bottom line, the range for our adjusted net income is expected to be between $700 million and $740 million. Although current expectations for capital expenditures are consistent with previous guidance at $575 million and $600 million, the team continues to assess various opportunities that may reduce or re-calendarize the planned spend.

Finally, with regard to free cash flow, based on our revised operating performance and the elevated calls for cash mentioned at the start of the year, which includes cash restructuring, the coming Adient costs and, to a lesser degree, Futuris integration costs, we now expect free cash flow to settle in around $225 million for the year. In closing, this is not the start we intended for 2018. However, the team is moving with a sense of urgency to mitigate the headwinds and execute profit recovery plans.

With that, let's move on to the question-and-answer portion of the call. Operator, first question, please.

(Operator Instructions) And our first question comes from the line of Colin Langan from UBS.

Let me just start off. It sounded like the metals issues initially were somewhat onetime in nature, things like expedited freight, your outsourcing components to get them produced. And now the forecast, as the slide shows, has headwinds going through all the way to the second half of the year. What has changed in the business? Is there something structural now? And should we expect these to persist into 2019 and 2020? I mean, it sounded like a lot of your initial issue was more onetime in nature related to a particular plant.

Yes. Colin, it's Bruce here. So I think a couple of things that I'd just note. It takes some time to work through the containment costs that we have. So once we experience a difficulty, there's a number of milestones the customers make us -- quite rightly, make us demonstrate before we can sort of peel those resources away. I think we've tried to be realistic here. I mean we talked about continuing to experience problems on specialty steel, and that's driving a lot of inefficiencies. And I -- on the guidance that we're giving here today, I would say we're being realistic in terms of what we think the usual and unusual items that we're going to face. I mean we came into Q1 with a view that we're going to be down $60 million, and we were down $120 million. And so if you think about some of those things going away overnight, it's -- hopefully, that will happen, but I think we tried to put a better realism here in terms of what we think we -- is going to happen. As it relates to your comments about '19 or sort of going into '19, clearly, we're pretty comfortable that the launch-related problems that we have are -- we're going to get behind us. With the resources that we're putting in place, we certainly feel good about avoiding a reoccurrence in '19. And so if you think about -- especially when you look at the hits that we've taken in Q1 and Q2, we ought to have significant year-over-year improvements in the first half of next year. In terms of specialty steel, we're working on bringing in an additional supplier or 2. That's going to take us through the next couple of quarters, and then there's a question of how long it takes for us to get testing done with our customers. But I think we'll get that issue behind us here in 2018. And then we do have a fairly elevated -- high level of engineering expense that's going through metals associated to some of these big global programs and finishing up of our track 3000 and recliner 3000 investment. So again, the expectation is that we would have pretty significant reductions in engineering expense in the business next year. So I think kind of a long answer but I think we tried to be realistic so that we don't disappoint here in the next few quarters in terms of the challenges that we face from an operational perspective. But I think we feel that we can get this business certainly back to the run rate that we had going into this year in a few quarters from now.

And when you look at the Q4 number, is there an assumption that you're still having to do expedited freight and additional labor cost? Or is that just...

It's fairly minor, but the main reason for the sort of loss in the fourth quarter is really, Q minus September, end quarter for us is really the impact -- like this business is pretty large in Europe, and it's the impact of the summer shutdown. So that's our weakest quarter. So Q4 is not really a good proxy for the run rate.

Got it. And just to clarify from your comments, so you're still reaffirming the 2020 target, which would imply like a 6.5% margin ex JV income? Because your -- it looks like the guidance this year ex JV income is about 3.5%, so you'd have 300 basis points by the end of 2020. And what are the major levers that you could get if metals still not there?

That's what we're talking about, is coming back here sort of in the April time frame with what the bars are to get there, Colin. I mean we're not walking away from our commitment. What we want to do here is, over the next quarter or so, rebuild the metals plan up. And there's things -- like you saw in Jeff's chart, things like operational improvement, which we've made across the organization. It was not a lever that we had planned on when we sort of built it up. So we'll come back in the April time frame with the new ways to get there. But it'll -- it's likely going to involve some operational improvement elsewhere in the business, perhaps a better number -- bigger improvement in our SG&A structure because we're looking to take cost out that's structural and stay out. Metals will definitely be something. Not sure if it will be the 100 to 200 at this point in time. And then same thing with the size of the investment bar. We'll sort of have -- now that we've I'll say, we've kind of got in our cost base the investments that we need to get the business growing again, now that we have the aircraft investment in our cost base, I think the size of the bar that we put in for investments likely are going to be lower.

And our next question is from the line of John Murphy from Bank of America.

First question, it seems there was some allusion to some potential customer disruption along with sort of the seats and mechanisms business. Just curious if there are any real customer disruptions. Or is there any sort of perception from customers that may impact sort of the ability to win new business or impact the backlog at all?

Yes. It's a good question. I mean, why don't I let Jeff talk about the customer disruption side, and I can maybe talk about the backlog implication and the relationship with our customers.

Yes, John. The customer disruption side of things, there's definitely charges. And going back to some of the earlier questions, the things that kind of took us offguard, the abrupt turn of this business into sort of where we're sitting today did take us by surprise. There was -- and as we react to that, there are certain other surprises, of course, that sort of mounted. In the topic of what impacted our numbers, to some degree, were customer stoppages. We did stop a few lines and certainly had a variety of rework as we struggled to get up to production rate on a bunch of launches. I guess the good news is we didn't necessarily have that focused in one particular customer. We did it with a few different customers. It's not uncommon that, in our space, we would have a launch challenge or that our OEMs would experience a launch challenge on some of these types of products. We just happened to have a number of them all sort of at the same time. And as far as customer disruption, I guess, Bruce can attest to it. But as a result, since we didn't necessarily have one customer that was singled out, the customer reaction has been -- they've been focused getting through these issues, but I don't think it's impacted our long-term ability to win business.

Yes, correct. I can confirm that.

Okay. And then sort of as you think about the actions outside of the seat business, I mean, you sure have mentioned potentially thrifting CapEx either in total or in timing. I'm just curious what magnitude you can think about there and if there are other sort of major cost initiatives that ultimately may be more sort of cash thrifting or cash conservation or savings that you think you could put in place as a result of this. You kind of alluded to that as well, but didn't really dimension it.

Yes. John, you can imagine that a few things that we've done over the last couple -- I guess, we've been in sort of that mode for several weeks, months -- or month or so. Now as these results have kind of become -- are coming to our view of what we can do to offset our overall capital needs, we've got to be careful, on one side, to make sure that we're not saving capital that will cause us similar launch issues as we go forward. So that's probably the first priority for us, to make sure -- as we're looking at those CapEx plans, to make sure that nothing puts us into jeopardy in a future launch. But then beyond that, I think we have opportunities. There's definitely -- we have -- as we spun off from Johnson Controls, we don't have -- our people are sort of scattered around a bit. And from a facility standpoint, we certainly need some space -- slowing down or sort of modifying some of that investment is one, but looking at areas where we can take some things that aren't program-related, for instance, and move them. And that's something we're doing. And then as you just look at all the other things, we have a fair amount of opportunity, I'd say, in our working capital metrics. We have some long-running issues where some people have paid us late and some systemic issues there where we're pushing. So really pushing hard on working capital and some of those things that have plagued us for a while as well as just any kind of discretionary capital or discretionary expense and being very brutal on all of them.

And then just maybe lastly on raws. I mean, obviously, we understand what you're alluding to on steel and specialty steel. You did mention also foam and chemicals being a headwind. And should we be thinking of them as effectively oil derivatives? Or if you could sort of outline sort of relationship you have with the automakers as far as indexing and pass-throughs and other sort of coverage that you have for foam and chemical raws.

Yes. It unfortunately hasn't -- it doesn't move as much towards the base oil price. It's an oil derivative, but I got the -- what I'm told is the production capability of it globally. There's been a big facility that came offline, I think, in Europe and as a result -- and this is like TDI and chemicals that go into foam. And while they're petroleum derivatives, the supply issues have been more on production capacity of those particular chemicals that have shot up prices. As far as the dynamics of recapturing, it's similar dynamics to what we have in steel. We have a mix of straight indexing arrangements that go from 1 quarter to up to 4 quarters, and those are mechanical. And then we have other customers that require negotiations. But generally, we're able to get recovery from them. It's just always in a lag. So that $35 million that we projected at Deutsche Bank of commodity headwinds was primarily relating to foam and chemicals, although we have seen some elements of steel sort of increases. And as we look in the European market in particular, that's a place where we could have some additional steel inflation if the market continued to move in that direction.

And just any visibility on that facility coming back on? Or is that something that's just offline and closed capacity?

I don't have a view. I ask our purchasing folks that all the time. I do understand that it is something that can happen this year, but I don't have any kind of time attached to it, unfortunately.

And our next question is from the line of Emmanuel Rosner from Guggenheim.

Your Slide 16 is helpful in terms of understanding your current expectations for the metals business over the next few quarters. Can you maybe talk about what those expectations would have been as part of the previous outlook? The thing that, I guess, puzzles me a little bit is your first quarter was amiss by only about $60 million versus your own guidance, but the outlook for the year is cut by about $300 million. So can you maybe talk about the before and after in terms of expectations for metal?

Yes. So Emmanuel, great question. And from where we sat when we gave the November 2 earnings call and this data came to us, we obviously have seen -- if you just kind of focus on this chart for a moment, we had been sort of relatively around flat line through -- up until the fourth quarter, where -- meaning we hadn't changed too much versus our performance from the LTM June period. It got very negative in Q4. We were incurring -- and we could see on a daily basis and obviously knew, we were experiencing enormous amounts of premium freight in particular. We were putting airplanes to deliver most of the parts. We thought our production capacity and other activities would have a quicker recovery than they did, so we built in $60 million of essentially those types of costs into our Q1 and then really assumed we kind of follow the same curve that you see that we had for the first 3 quarters of 2017 and maybe even marginally a little bit better. We actually thought there would be some improvement in this business, and the team in that business have been projecting improvements on it as well. Obviously, especially as November continue to go and November results came in, in early December, we could see that the issues were more serious. We thought that the time to correct them were longer, and thus, that drew the additional, I guess, losses that you see for the rest of the year here. We do see it getting better. We are seeing improvement, but just those improvements aren't getting it back to the 2017 levels quite yet. And that's what the team's obviously working incredibly hard, to get that path and get to the -- I guess, the number of structural and different moves we're going to need to do to recover from this business.

Okay. That's good color. And then just one follow-up on the metals business as well. I look at your Slide 7 and some of the fundamental changes that you're planning on making, and so one of them being setting it up as a stand-alone operation. So I understand how that would obviously be helpful to fix it going forward. Is that also -- does that also provide you with an option to dispose of the asset? Is that something that you would look as a plan B?

Not really. I mean, I would -- it's Bruce here, by the way. I mean this is a business that -- certainly, there's a lot of commentary out there around the business and the fact that we'd have these problems before, and I acknowledge that. But this is a -- the capability that we have in this business are differentiating. And so the challenge for us is to make this business -- is to get paid for it, which is, quite frankly, to get paid for the technology. Our customers need and want lighter seats. They want and need more complex mechanisms in the second row, particularly around -- in the CUV side of things right now. As we look at some of the trends in technology around new mobility, we see longer rails, we see swiveling seats and things like that. So these are things that we need to have to be a complete seat supplier. We've just -- and there is no point in sugarcoating it. I mean we've just really screwed it up in terms of the way we've managed this business. I would tell you that we don't have the proper disciplines in place. Like if you think about the rest of our business, our seating business, our just-in-time business, the foam and trim, I mean, we can accommodate changes -- rapid changes from the customers and duck and weave, and the impact of that is relatively minor. We need to get back to the basics here in terms of this highly engineered part of our business, where, 1 and 2 years before production, we need to have the design signed off and the production design validated and run at rate demonstrated much, much further before launch than the rest of our business. And I think one of the things that we've historically not done a good job of doing here is having those discussions with our customers much further back from job 1 and saying, "Hey, we can't accommodate any more changes to the design. We can't accommodate some of these feature set changes." Or if we are going to make them, then we have to have a discussion on how we're going to launch this product. And that's where we've said we try to be customer-friendly but where we end up shooting ourselves in the foot, and we just can't keep doing this. So it's a business that's core to us that we need to fix. Does it need to be the same size? That's a good question. Do we need to do everything that we do today? That's a good question. Do we need to sell metal components that are directed to our competitors? That's a good question, and we're going to answer and ask ourselves all 3 of those things. But whether we need to have the capability in-house, I think that's something that we're convinced we need it.

And our last question comes from the line of David Tamberrino from Goldman Sachs.

I got one question and a couple of follow-ups for you. At the Detroit auto show, you basically said half of the business -- of SS&M, roughly half is internal. The other half goes to third parties. Which part is the larger headwind today? Because it sounds like it's your internal SS&M business that kind of gets vertically integrated ahead of your customers. Is that correct?

Our 2 big launch issues, David, we're actually -- we were supplying the Tier 2 effectively to one of our competitors.

Got it. So as we think about that business and some of the comments that Bruce just made, what type of rundown in years or runoff would it take to exit some of that external third-party business, where you're a Tier 2 supplier? Are we talking a 2- to 3-year lead time?

Yes. I mean, look, you can imagine that pretty much all of our business is sourced with a 2- to 3-year lead time to begin with. So as we start to make some of those adjustments, there will be a bit of a tail for us to have it out of our network. But in the meantime, what we're going to be doing, because that's not going to be the only lever, obviously, we can pull here, is going to be looking hard on some of the pricing and making sure we've been disciplined on change management. Bruce mentioned here on the just-in-time side of our business, we're very good as there's change orders, that we're able to get pricing for it. But what we haven't had the best discipline here as well -- there's actually many more change orders that tend to happen on these programs. We haven't gone in with the same level of discipline because where you really need to get that price is right as your -- as the customer's making the change. We really can't do it a year after the fact. And that's an area where we're making sure we're set up to succeed here. And that's going to be a part of -- as we're looking at all of our future launches and programs that are coming down the pipeline, to make sure we're keeping that discipline or putting that discipline into the system.

Got it. And just lastly for me, how critical to your aerospace investment and the buildup of that business is the SS&M part of your equation right now? Because -- is this something where you could transition this kind of Tier 2 supplier position away and into that aerospace investment, if you are able to win business, over a period of time? Or is it not as important for the aerospace market versus auto?

Well, it's -- I'd say it's fairly important. I think the thing that's a little bit different -- I mean, I would think we have a substantial -- I don't know if you were able to see our product. We have a substantially different -- especially our fold flat business class seat, it's a substantially different product. And part of our differentiator is the structure. So in that regard, I would say it's quite critical. But in the aerospace side of our business, we're not -- this isn't something that would be tailored by customers. So we would look to have one seat structure, then the tailoring would be around the trim and the foam. So we wouldn't have like we have in the market today. If you went into a pickup truck or an SUV and you went -- looked at -- you took it apart, you would find that it's a different structure and mechanism portfolio depending on what the customer application is. And on the aircraft side, it would be a standard frame. So when we talk about all these launch difficulties and engineering changes, it's kind of a one and done from an engineering perspective.

Okay. I think, with that, we're up against the top of the -- the bottom of the hour here. So maybe just a few concluding remarks. I mean, thanks again, everyone, for dialing in to our call.

Clearly, this isn't the way we intended to start 2018, our second year as an independent company. We know, the management team, myself, we have a lot of hard work to do to sort of deliver a set of numbers that are better than we're laying out here today. I can tell you that the team is going to work with a sense of urgency to get the metals business back to a stable position and -- so that we can regain positive year-over-year momentum as quickly as possible. And we look forward to providing you with an update on our progress as we announce our second quarter numbers towards the end of April.

So with that, thank you, everyone.

And that concludes today's conference call. Thank you all for joining, and you may now all disconnect.