Adient PLC (ADNT) 2018 Q3 法說會逐字稿

Good morning, and thank you all for standing by. (Operator Instructions) Today's conference is being recorded. If anyone has any objections, you may disconnect at this time.

And I would now like to turn the call over to Mr. Mark Oswald. Sir, you may begin.

Thank you, Sue. Good morning, and thank you for joining us as we review Adient's results for the third quarter of fiscal year 2018. The press release and presentation slides for the call today have been posted to the Investors section of our website at adient.com.

This morning, I'm joined by Fritz Henderson, our Interim Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer.

On today's call, Fritz will provide an update of the business followed by Jeff, who will review the financial results in greater detail. After our prepared remarks, we will open the call to your questions.

Before I turn the call over to Fritz and Jeff, there are 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. 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 to these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release.

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

Thank you, Mark. Good morning, and thanks to investors and analysts for joining us this morning and spending the time reviewing our third quarter results. In addition to providing an update on the business, I'll also spend a few minutes discussing my near-term priorities and initial observations since assuming this role approximately 6 weeks ago.

Looking at Slide 4, Jeff will discuss the numbers in detail for our third quarter financials, but I would just make a couple of broad comments. Our adjusted EBITDA for the quarter totaled $319 million, down $105 million year-over-year or 25%, driven primarily by performance within both our Seat Structures & Mechanisms segment as well as our Seating segment. Adjusted EPS fell to $1.45 in the most recent quarter, the lower level as a -- basically as a result of lower level operating performance dropped right to the bottom line.

Third quarter free cash flow was $252 million, this included the benefit of $94 million associated with the factoring program receivable financing program that was actually put in place in the quarter. Without that, we are $158 million, which was good progress and this was all about collecting receivables, completing [our key paths], building our tooling, getting the basics executed within our business. We also received dividends from one of our Chinese joint ventures was substantial one in the quarter. So it was good to see the free cash flow start to turn in the right direction in the third quarter.

The adjusted results exclude various items that we view as either onetime in nature or otherwise skew trends in the underlying business for the quarter, for example. The largest special item related to an impairment charge of $52 million associated with certain assets are being held for sale, specifically the Marquette building, headquarters building in Detroit was previously expected to be our headquarters and 2 planes that we're selling.

Although we made positive sequential progress within Seat Structures & Mechanisms segment, we -- I and we continue to view these financial results as disappointing. Disappointing relative to the pace at which we're improving, we can do better. And certainly on an absolute basis, they are nowhere near satisfactory. So while we -- we're encouraged to see the progress sequentially, we know this is work in process.

Another quick comment on the CEO search, it's well underway. The search committee was convened, I think, the day after I came aboard that Monday. So they were meeting on Tuesday and I would say they're doing their work, and we're supporting the process, but I'm not involved in the process because I've got my hands full working with the team, and they're doing that and I'm working with the team at Adient. Happy to answer questions about that later as well.

So Slide 5. My near-term priorities or our near-term priorities is a better way to put it. First, accelerating better operational execution to drive meaningful improvements in profitability and cash flow and it starts with eliminating waste from flawed program execution. I view that the key priority for me is to make sure the team has the resources to do the jobs properly with launches. This is an organization that has history of being superb in launch excellence, and we're not -- that has been one of the principal drivers of our underperformance this year, and so my key priority is to help the team get back to basics. We're also reviewing all facets of the business to identify additional cost opportunities. The areas of the business that aren't core to the mission of bringing business in, developing products, launching products and manufacturing products and satisfying customers and then supporting the corporation. If we're not doing one of those 2 things, then everything else is on the table, so that's how we're looking at cost. And then in capital is to make sure we're prioritizing capital in the right way for the right benefit, for the benefit of, again, our customers and our shareholders. And lastly, we're prioritizing new business wins and looking upstream to ensure that future launches are better and are properly executed. So those are near-term priorities. I would say, initial observations within the company. We have good processes. Processes existed for quite some time, but they're not always followed, not always followed either in their entirety or important parts of it. And in virtually all the cases where we've had flawed launches, we haven't followed the processes. Where there have been parts of it that have been late or have not executed the way we expect. And so we've got to get back to executing our processes. We do need to bring in some expertise within the company. We're working on that to enhance and strengthen the leadership team. My assessment is, our operational challenges can be fixed. They can, not only in Seat Structures & Mechanisms, but also Seating. This company has a history of doing things well. We're not doing things well today. We need to get back to it. And so it's not like the organization doesn't have a roadmap for how to do things well, we do. It's about getting back to that.

We're moving with a sense of urgency. I don't know, I don't have it in my DNA to be Interim. So I'm not planning -- I don't spend any time on that with the exception of 3 things, which I want to talk about at the end of my comments. And a number of actions have been executed since my appointment in June. So we're not waiting around to take action. We're taking action where we think it makes sense, and we're doing it as quickly as we possibly can.

So looking at Page 6, Seat Structures & Mechanisms. As I said, the turnaround is progressing, but not at the pace we expect and the absolute levels are still not satisfactory. The results improved for the second consecutive quarter. Our focus here is on operational excellence and commercial discipline. It is beginning to move the organization in the right direction. We've seen positive improvement in our next-generation mechanisms production output. We've seen our production stabilize for the rear-seat structures for the Ford Expedition and the Lincoln Navigator programs, which we talked about earlier this year. And therefore, we've seen a reduction in cost premiums. We've seen reductions in premium freight, another key KPI that we've been tracking and that's been declining month-over-month.

On the commercial side, consistent with my prior comments, we've begun -- we've become more selective with quoting new business. And it's already begun to reduce our business intake to a level that we think we can effectively execute. Setting a goal to reduce business isn't, per se, a very intelligent thing to do. Setting a goal to prioritize business to that which you can execute well is the goal, and that's what we're doing within Seat Structures & Mechanisms. And really focusing on programs with higher margin potential, including programs where Adient has Seating and component responsibility.

Progress is being tracked at the highest levels of the organization, it has been for quite some time at the CEO level and with the board. So the focus on Seat Structures & Mechanisms continues within the company and it's very important for us. We do expect the trend of improvement to continue in the fourth quarter and throughout 2019. I know -- I recognize #1 question will be when can we expect the -- understand what the results are for fiscal year 2019? We've begun that planning, I want to come back and talk about that before I conclude my remarks.

So Slide 7. Few comments on the Seating segment. We saw headwinds that began to surface late in the second quarter intensified and progressed in the third quarter. North America -- we identified in the last call that we faced a fairly complex launch and we -- that's been a big launch and a complex one, and what we have seen is the costs of that have really been seen in the third quarter. I do think we are making progress in that regard but nonetheless, the cost of that launch we saw in the third quarter. That program and that launch, we have programs running concurrently within the plant, which did force expanded hiring, training of the launch [cost]. I would -- I guess the last point I'd make about that particular launch is that we're in the process of correcting our problem and stabilizing the operation. We have impacted the customer, that's obviously the last thing you wish to do. And we're getting back to making sure that plant is able to take care of customer, and then we can take the waste out of the system and they have our commitment to do that. I guess the last point I'd make about the Seating segment, while this -- the 1 launch I talked about is large. We have other launches within the segment, which have had challenges. So it's not just 1, and we know what we need to do within this segment as well to get back to the basics of launching programs well.

Jeff is going to talk about the numbers here in a minute, but as I think about it conceptually, when you're experiencing launch difficulties like we are, you not only incur the cost of those launch difficulties, but you also impede your ability to execute your own processes, whether it's continuous improvement processes, manufacturing efficiency. All the things that we can do to offset economics, to offset price reductions, all the things we can do within our plants and within our company in order to continuously improve pretty much stops when you're having launch difficulties because you need -- you have all hands on deck to correct those problems. And therefore, the resources you would have working on things like continuous improvement are not happening. And so when you see it in Jeff's numbers, I think you're going to see, not only are we incurring costs of flawed launches, but the opportunity cost of flawed launches is equal if not even more. So it again tells us what the right answer is, which is to get back to launching correctly.

So Slide 8. In summary, our financial results continued to be negatively affected by these operational challenges. As I talk to the team -- teams across the company, I view there are 2 types of problems in the industry, in the automotive industry whether you're an OEM or a supplier. One is too little business, one is too much business and not being able to handle it well. And we're in the latter not the former. And frankly, I prefer that problem than the former problem. And so it's getting -- the problems are in front of us, we know what we need to do to fix them. We just need to get at it and fix them. We're moving with a sense of urgency to accelerate the pace of improvements. Actions have been taken to stabilize Seat Structures & Mechanisms, it's getting traction. As I said, we do expect continued improvement in the fourth quarter and for the fiscal '19. And the challenges in the Seating segment are being addressed. The -- our industry and our end markets are strong. So when I look at it unconsolidated seating business in China continues to perform at high levels. Europe is tracking in line with prior year results and our expectations. So there are pockets of the company where we're seeing continued, what I would say, results that we view as satisfactory and/or in some cases quite good. So I see a lot of positives for our business, it's just correcting the areas where we've fallen short.

We're on track to meet our EBITDA outlook for fiscal '18 of approximately $1,250 million, while being on track is a start, I recognize we're down 30% from the targets that we set for coming into the year. So while it's a start, it's not satisfactory. And I think the leadership team from me on down, including the board understands that those results are not satisfactory, and we've got to get back to operations excellence within this company and do it fast.

Our free cash flow, Jeff will talk about it, we provided guidance of between 0 and negative $100 million. We expect to be in that range. And the last point I'd make is, we are finalized -- we're in the process, it's not finalized. We're in the process of developing our fiscal '19 plan. I've been here 6 weeks. Our focus has been on diagnosis, problem solving, and my personal focus has been on working with the team to get back to executing against our processes. I've had a good look at our people and the needs through the organization, at the leadership level and into some plants and in the launch teams. We owe are investors answers. We owe our customers' better performance. And as a leadership team, we owe our people better support.

We -- as I said, I don't have an interim mindset, but there are 3 things that I'm not doing because I don't think it's appropriate. One is, we're not focused on strategy. Strategy of the company is what it is. Sitting in my role on an interim basis, this is something that the strategy needs to be owned by a CEO and as -- collectively with the board. So I'm not working on strategy. Second is, we're not reorganizing the company, while we're looking at resources and bringing resources in. Again, the organization of the company needs to be owned by a CEO after collaboration with the board and in my judgment, this is not one of the biggest problems in the company at least in the short-term. So not working on that. And third and finally, while we are working on our plans for 2019, both in terms of profitability, capital and resource allocation, we're going to go through that process with our board, we're going to do that over the next several months. We would normally communicate our targets for fiscal '19 in early November. I believe -- strongly believe that those commitments need to be owned by the leadership team and the leadership team includes whoever the permanent CEO is for this company. So my view is, when we communicate those targets, they need to be communicated when the permanent CEO is in place and he or she owns those targets. And so as I -- I'm going to get a lot questions about fiscal '19 today. We will get them. We're just not going to talk about fiscal '19 because I just don't think it's appropriate before we get our full board fully engaged and bought in and before the management team, including a permanent CEO owns them.

So thanks very much. I'll turn it over to Jeff.

Great. Thanks, Fritz, and good morning to everyone.

Turning to our financial performance, as Fritz stated in his remarks, Adient third quarter results were significantly impacted by operational headwinds in both Seating and Seat Structures & Mechanisms. Although the SS&M business demonstrated sequential improvement for the second quarter, headwinds within the Seating segment intensified as we progressed through Q3. More on that in a minute.

Turning to Slide 10. Adhering to our typical format, the page is formatted with our reported results on the left-hand side of the page and our adjusted results on the right side. We will focus our commentary on the adjusted results. These numbers exclude various items that we view as either onetime in nature or otherwise skew important trends in underlying performance. In the quarter, the largest of these special items related to an impairment charge of $52 million. As background and as Fritz mentioned a moment ago, during the quarter, the company committed to a plan to sell the building in Detroit, previously designated to be our new headquarters as well as our corporate airplanes.

Accordingly, we have classified these as assets held for sale. As a result of this classification, we were required to write down the value of these assets to fair value, resulting in the $52 million impairment charge. Other adjustments include the becoming Adient charges, restructuring-related charges and purchase accounting amortization. These adjustments are detailed along with the bridge to our reported results in the appendix.

Moving on, adjusted EBITDA at $319 million, fell $105 million year-on-year, more than explained by a decline in operating performance. I'll cover this in detail in a few minutes. Meanwhile, adjusted equity income for the quarter was down $4 million compared with the same period last year. When adjusting for the JV consolidation, equity income was flat year-on-year. Finally, adjusted net income and EPS were down approximately 42% year-over-year at $136 million and $1.45 per share, respectively as operational challenges are having a significant impact on the bottom line.

Now let's break down our third quarter results in more detail. Starting with revenue on Slide 11. We reported consolidated sales of $4.5 billion, an increase of nearly $500 million compared to the same period a year ago. Benefits of the Futuris acquisition and the China JV consolidation amounted to $250 million. Volume and pricing added just under $100 million. In addition, foreign exchange had a positive impact of $141 million versus the same period of last year. The primary driver was the euro as it averaged $1.19 in Q3 versus $1.10 last year.

Moving on, with regards 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 and the China JV that is now consolidated, sales were up about 8%, which is relatively in line with vehicle production for the quarter. Through the first 3 quarters of fiscal '18, sales on the same basis are up approximately 9% versus the 2% increase in vehicle production. Sales for unconsolidated interiors recognized through our 30% ownership stake in Yanfeng Automotive Interiors was up 6% year-on-year. When adjusting for FX, sales were slightly down, say about 1%.

Moving to Slide 12, we provide a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operations. These core costs include our executive office, communications, corporate finance, legal and marketing.

Big picture, adjusted EBITDA was $319 million in the current quarter versus $424 million last year. The corresponding margin of 7.1% was down approximately 350 basis points versus Q3 last year.

Weakness in our Seating and SS&M business primarily attributable to negative operating performance combined with a rise in net commodity costs drove the year-on-year decline. I'll talk more about these segments in a few moments.

Positive SG&A benefits, call it $32 million more than offset approximately $23 million in growth investments, primarily related to higher engineering cost to support future sales growth.

It's important to mention consistent with comments made in previous quarters, a portion of the SG&A improvements made in the quarter should be viewed as temporary and 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 our run rate of the business going forward.

Assuming we would be at plan or target performance, anticipate that our SG&A expense would have been approximately $20 million higher for the quarter.

Interiors recognized through our 30% ownership stake in YFAI was flat versus last year's Q3. Similar to last quarter, we've included detailed bridges for both the Seating and SS&M segments on Slide 13 and 14.

Starting with Seating on Slide 13, adjusted EBITDA decreased to $344 million, down $69 million compared to the same period a year ago. The primary drivers between the periods include benefits associated with the Futuris acquisition and China JV consolidation that occurred late last year contributed about $27 million of which Futuris was approximately $15 million.

Further benefits associated with SG&A savings initiatives along with our incentive comp reduction had a $20 million impact on the most recent quarter. Currency movements had an approximate $12 million benefit in Q3 versus the same period last year, but were offset by $12 million in commodity inflation net of price recoveries.

Volume and mix benefited the quarter by about $4 million, however and unfortunately, these improvements were more than offset by a variety of factors. Most significantly, the business incurred a little over $90 million in operating inefficiencies during the quarter as it struggled with a variety of new launches. Unpacking this variance falls into 3 main categories. First, operational waste and freight accounted for just under half of the inefficiencies at approximately $40 million. Operational waste includes scrap and cost of poor quality. Second, the business incurred a deterioration in material margin or the difference between our price changes to customers versus the price changes we reached with our suppliers. This resulted in $28 million of reduced margin in the quarter.

Finally, our remaining operating conversion cost or the cost we incurred to convert base material into finished product increased $23 million versus last year. It should be noted that we would typically expect these 3 items to offset as operating productivity improvements year-over-year would be expected to offset pricing. That said, our operating teams are obviously working to reverse the current situation. The team's first priority is to eliminate the operational waste and excess freight, as these stabilize and as Fritz said a moment ago, we would expect the team to start deliver -- to deliver on our normal continuous productivity improvement actions that have stalled as we struggle to deliver products.

In addition to our operating performance, additional investments to support Adient's future growth of $20 million also impacted the year-on-year results. This is primarily increased engineering spend, including approximately $3 million in aircraft spending. And finally, but to a lesser extent, negative performance in equity income of approximately $9 million was realized in the quarter. Approximately half of the decline is attributable to the consolidation of a previously unconsolidated JV in the fourth quarter of last year. But in addition, our JV has increased engineering spend by approximately $5 million to support program launches. And finally, a small part of the decline relates to a slightly lower mix of business in higher margin products.

For example, [core] volumes in China were down approximately 20% and could not be fully offset by increased volumes of domestic customers.

One last point in Seating. One of the reasons we've moved to adjusted EBITDA is to provide more cash flow transparency and we'll continue to do that by segments. Our CapEx for the Seating business was approximately $75 million in the quarter. In addition, we've included some historical metrics by segment in the appendix for your review and modeling.

Turning to Slide 14 and our SS&M segment performance. Despite continuing to improve sequentially for the past 2 quarters, adjusted EBITDA was negative $18 million or $49 million lower than Q3 2017. The primary drivers between Q3 this year and last year's third quarter include, first the negative impact related to operating performance. These include things such as operational inefficiencies, premium freight, containment actions and a lower level of equity income. In total, this was $34 million headwind versus last year's Q3. Important to recognize, sequentially versus Q2 of this year, the team is making -- continue to progress in reducing these operational headwinds.

Premium freight within SS&M, for example, decreased $5 million compared with Q2 and operational waste improved $9 million sequentially. The team recognizes we have a lot of work ahead of us. However, these results demonstrate stabilization, turnaround, actions, implemented earlier and are gaining traction. We expect the positive trend to continue into the fourth quarter and into 2019.

In addition to the operating performance, but to a much lesser degree, commodities, FX and growth investments weighed on the quarter. In total, FX and commodities totaled about $8 million and our growth investments were approximately $3 million. And finally, the segment was negatively impacted by approximately $4 million as a result of volume and mix. Said a different may, the $50 million of higher sales compared to last year when adjusting for FX was a detriment to earnings in the quarter. Regarding SS&M's CapEx for the quarter, they spent approximately $63 million.

Let me now shift to our cash and capital structure on Slide 15. On the left-hand side of the page, we break down our cash flow. Adjusted free cash flow defined as operating cash flow less CapEx was $252 million for the quarter compared with $42 million last year. The negative year-on-year operating performance was more than offset by positive trade working capital performance, which benefited from the launch of our new accounts receivable financing facility by approximately $94 million. Also increased dividends from our joint ventures and lower cash restructuring costs. Note that the increase in dividends is largely due to the timing -- is due to timing as our largest JV in terms of both profits and dividends paid its dividend in Q3 this year versus last year were paid in Q4.

When adjusting for the newly launched financing -- AR financing facility, free cash flow for the quarter would have been $158 million as shown within the call out box.

Capital expenditures for the quarter were $138 million compared with $115 million last year. As you can see in the footnote, we continue to break out CapEx by segment.

On the right-hand side of the page, we detailed our cash and leverage position. At June 30, 2018, we ended the quarter with $378 million in cash and cash equivalents. Gross debt and net debt totaled $3,439,000,000 and $3,061,000,000, respectively at June 30, 2018. Q3 net debt was about $264 million lower compared with our Q2 net debt.

As a result of our cash balance, debt level and operating performance, Adient's net leverage ratio at June 30, 2018 was 2.29x.

Now turning to Slide 16. Let me conclude with our thoughts on the remainder of fiscal '18. As you know, we adjusted our guidance for a few figures in early June, but we did not update all our key metrics. While nothing has changed for those figures we did update, I'll provide a more complete look now.

Starting with revenue, based on our performance to date and our assumptions for foreign exchange, we continue to expect consolidated revenue of about $17.5 billion consistent with our expectations.

With regard to adjusted EBITDA, and as Fritz mentioned earlier, we are on track to achieve approximately $1.25 billion for the year. Equity income, which is included in the EBITDA guidance, was adjusted down slightly, call it approximately $380 million to account for current FX rates.

Moving on, adjusted EBIT should settle in at around $810 million. For modeling purposes, given our increased growth investments, depreciation is tracking at about $400 million.

With regard to interest, dividend increase in rates and FX, we have seen our interest expense run a bit higher and now project full year interest expense of approximately $140 million versus our prior guide of $135 million.

Moving on to taxes. Based on the geographic composition of our earnings and the lower performance, we now expect an effective tax rate of between 5% and 7% for the year. Although, lower operating performance is driving a lower effective tax rate this year, the lower level of profitability creates increased pressure to utilize certain deferred tax assets that has been established. Depending on the actual and forecast of future earnings, valuation allowances maybe warranted in the coming quarters. Regarding such a valuation allowance -- recording such a valuation allowance could significantly increase our tax expense going forward, but wouldn't have any immediate impact on our cash tax paid.

For net income and aligned with our expectations for our operating results and a lower effective tax rate, we're expecting our adjusted net income will settle in the range of $535 million and $555 million.

Based on year-to-date performance and actions to scale back expenditures, CapEx is now expected to come in at approximately $575 million in 2018. This is down about $25 million from previous expectations.

Finally, with regard to cash flow, we continue to expect free cash flow between 0 and negative $100 million for the year. Important to note, this excludes the impact of the recently launched accounts receivable facility.

Before moving into the Q&A portion of the call, let me make a few comments on certain of the macro influences that are impacting the business, which had been factored into the guidance just provided. Starting with the positives. Global automotive demand remains strong and as a result appears to be supportive of current production levels and forecast. A good environment as we execute our self-help initiatives.

Unfortunately though, we continue to experience downward pressures from rising commodity prices, rising freight cost, uncertainty related to trade and volatility in foreign exchange.

First in commodities, steel prices continued to escalate. As we mentioned on our last call for Adient specifically imposed tariffs [in] the country exemptions from Canada and Mexico that expired on May 31, are not the big risks as very little of our North American steel is sourced offshore.

Our primary risk is the rapid escalation of prices at the U.S. mills. To put this into context, prices have increased close to $300 per ton or 40% since January. Although, we have escalators [and] contracts in place to help offset these price movements, it's important to remember a time lag, call it a couple of quarters, exist between the time we experience the price increase and the reimbursements we received from our customers. Our team is working to mitigate this impact and revise some of our agreements, but their ultimate success and associated timing cannot be certain.

Sticking with commodities, some good news is beginning to surface in regard to TDI prices, which have fallen off their highs with the startup of BASF's facility in Germany, our excitement is tempered though as other chemicals that go into our foam operations such as MDI and polyols remain at a tight supply.

In addition to commodities, we are also managing freight -- we are managing rising freight cost, driven by driver shortages and the full impact of recent legislation. Unfortunately, this does not appear to be temporary. As such, the team is focused on operational logistics and inventory management to limit and mitigate our exposure.

And finally, we continue to monitor trade negotiations that are currently taking place. We're hopeful the U.S. and China can avoid the implementation of additional U.S. proposed duties, which if implemented would negatively impact the industry including Adient. The impact today of 301 Duties is minimal, however, if the next round of proposed duties is implemented, it could result in the $5 million to $6 million annual headwind.

[Outside to] China, we're also monitoring potential retaliatory duties that may be imposed on the U.S. by various countries that ultimately could have a negative impact on the industry and Adient.

As we gain clarity on the potential outcomes, including the potential for any additional actions taken in the U.S., we'll provide updates as appropriate.

With that, let's move on to question-and-answers portion of the call. Operator, for the first question?

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

I guess I'll start off, I mean, Fritz, can you just clarify based on your comments, are you considering being the permanent CEO? Or are you kind of content with just sort of being a bridge CEO? And then in your comments, you also mentioned you're looking to strengthen the leadership team, any color there? And what kind of people you're looking to bring in?

So Colin, in the first question, I made a comment I'm not involved in the search process. Two reasons for that; one, I'm really busy. And then two, if I do want to be considered, I don't want to be involved in that process. So I have not ruled myself out. I'm just really focused on the company today. So hopefully that helps you understand where I am and working hard not to behave as an Interim. Then the second thing is in terms of the team, I've seen where we've got shortages in manufacturing, some in engineering, manufacturing engineering, quality. I mean, most of -- and it's not as I look through whether it's in Seat Structures & Mechanisms or in seats that we just got some holes we need to fill. And we're busily filling them. I mean, some of them are -- all of them are important obviously, but most of them are in the operating side of the business. Some of it actually, Colin, was -- I mean, when I look back, when the problems surfaced in the Seat Structures & Mechanisms business within the company, many people volunteered to go where the problems were. One of the great parts and it's a great company with a lot of really fine people, people raised their hand and said we're -- we want to be -- we want to go help, and we want to be part of the turnaround in Seat Structures & Mechanisms, we did create some vacuums in the Seating side of business. And so we need to back fill those. And so that's the type of talent we're looking for.

Got it. And if I look at Slide 13, that $91 million of operating performance, I mean is that the main driver for the recent cuts? Because it looks like the SS&M business while it's still struggling actually has been kind of in the right direction. I mean, is that sort of the latest surprise that drove the cut in June?

I would say, when we cut it the guidance in June, we said it was in part Seat Structures & Mechanisms, in part Seating. And Seat Structures & Mechanisms is going in the right direction, but not at the pace that we had outlined for ourselves. So while we're encouraged by the -- getting the trajectory, we're just behind where we thought we'd be. And then the second part of it was the pretty significant pressure we saw in the quarter in seats. Jeff, anything you want to add to that?

No. I think you've got it.

I mean, and then just lastly, where do you stand right now on the launch issues? Any quantification in the number of plants that are facing issues? And any sense of the timing both in SS&M of getting rid of all of this (inaudible) over time? Same thing now I guess on the Seating side?

Colin, we'll have more to say about that when we communicate our 2019 target. I mean, we like the trajectory we're on, but we're not satisfied with it. So I do think we have a continuing opportunity in front of us. And not just in Seat Structures & Mechanisms, we have in seats too.

Any sense though on maybe the number of plants impacted right now? I think in the past you had like a map of the plants that are underperforming, does that come down at all? Or any directional color?

It's changed a little bit, Colin. One of the -- there are some nice things that have happened. We had highlighted, for instance, Clanton plant we have in Alabama that has been a huge part of our problem in the first quarter of the fiscal year, fourth quarter of last calendar year. That plant was hugely negative. It was a big problem launch. That problem has turned into the -- the plant has turned into the black. It's now above breakeven and improving. We have experienced some other launches. So the problems have shifted around a little bit. And I think to Fritz's point, it's the processes and the people and making sure we adhere to these processes and make sure we have all people, especially the operations and engineering community tied together on launching those programs successfully.

The next question comes from John Murphy with Bank of America Merrill Lynch.

As you're looking at this there's another component to this other than sort of the near-term sort of restructuring, it's sort of the long-term in bidding on business. I'm must curious as you're going out and quoting on seating business, what kind of margin requirements you need to hit to hit your return requirements? Really more simply, can you bid business at a 5% to 6% margin and still make good returns or do you need to do something a lot higher? I'm just curious how aggressive you can be in the market to rebuild the book?

So John, thanks for the question. I would say my focus here started on Seat Structures & Mechanisms. And what's interesting to me is, we think we now have a good handle on what our capacity is, whether it's the capacity and I'm not talking about just physical capacity in the plants, but also people capacity to launch programs effectively. And that capacity is less than the business that's been brought in. So in part that created the challenges we've had. In a number of components, John, we're full -- and -- so we're -- this basically -- to the extent we're going to be quoting in those areas where we're full, we've got to get a good return on that investment. And to be honest, in the past, when I look at it, we probably didn't get the return. We have absolutely, not probably, most assuredly have not. So I do think in Seat Structures & Mechanisms, as I said in my comments, we already are being more selective. We're full in the number of areas, and we're going to be disciplined about really focusing on areas where we have both seats as well as components. On the seat side, capital intensity per program is less per dollar of revenue. On the other hand, to me, your material margin is half of what you might see in a Seat Structures & Mechanisms program. So you're -- you've got to make sure that you can launch them well because when you have issues like premium freight and cost of product quality and you're disrupting customers, there's no room in a program for that. So again, my focus is really about what is the capacity of the organization to execute? And as we think about bidding, are we doing it strategically? Are we managing, I call it the front end of the funnel within the company that's referred to as [TBL]. But are we looking at programs, strategic customers? Where we have the capability. Obviously, replacement business generally is lower risk than new business. New business can be very strategic. I wish there was an algorithm I could apply, but I do think that when I look at Seating programs, they have the ability to have a good return on investment because of the lower level of capital intensity per program, but there is really -- there's no room for inefficiency in launch and waste. And so I just want to make sure that the bidding -- business we're bidding on that we're going to be able to execute and not have problems for whoever is sitting in this chair 2 years from now.

Okay. And then just to kind of follow up on that on the near term. If you look at Slide 13, Jeff when you went through sort of the 3 buckets there in that $91 million, kind of 2 questions, in the operating waste of -- and premium freight of $40 million. I mean, is that usually sort of the inverse and a good guy? If we were to think about normal terms of a positive $40 million to offset the material and the other cost increases?

Yes. Great question. I'd say -- I wouldn't say it's a good guy. Because there's always some element of launch that goes in, but on a quarter-over-quarter basis, you would expect it to be relatively neutral, right? So depending on -- if you have a little bit more launch activity in 1 year than the next, maybe you'll have a little bit more operational waste floating through. But the part that was really off on those 3 equations was the third one. Our operations really need to have -- part of this industry is we give price downs to customers. That's a part of our industry unfortunate that's been there for a long time. We get a little bit of that recovered from our supply base, but where we really need to do it is by improving efficiency on our floor. And as we run units, as we start to get in the second, third, fourth years of production, we need to find those efficiencies improve and that's the key element of the trade-off between what we give from a pricing perspective. In this quarter, not only did we not make those improvements, we actually went backwards in the improvements and performed at a worse productivity level than we did in the previous year. All that really exacerbated the problems that you see here in these numbers.

Got it. And sort of the second factor there, you kind of mentioned material margin. I am sorry, I kind of missed the language, but I mean it sounded like the spread between what you're charging customers versus what you're buying from suppliers shrunk and that created a $28 million headwind. Is that sort of subcomponents that you're buying? Or -- I'm just trying to understand that.

Yes. Let me be more clear. So I was just mentioning a part of our business is we generally give reduced prices to our customers in the second year and the third year of a program being in production. And that's to really reflect the fact that we should be getting more efficient on our factory floor. That's fairly normal. That $28 million which I mentioned, which is the price reductions we give to our customers on a total basis, less the price reductions we're able to get from our material vendors and we really need to go and offset that. So the bogey if we would've done this right is we wouldn't have had operational waste or we wouldn't have had any net increases. We would have -- still had that $28 million and we would have delivered $28 million or more of operational improvements from a productivity standpoint, which would have offset that whole equation. Had they done it in what I say is the operating typical or the way that we intend to operate the business.

Got it. And then the Chinese JV equity income, I think it's been guided down a couple of times? Is that all FX? Or is there something else going on there in the JV?

So when we -- I mean, the biggest piece relating to equity income has been YFAI, which was our Interiors operation. And mostly or almost exclusively due to production on programs in North America and Europe, a real shortage of labor in Eastern Europe. So that has been sort of the earlier guides related to that business. Sales are there for the most part, but getting people and having from an operating standpoint that business has struggled a bit, particularly in Europe, but a little bit in the U.S. too. The most recent, sort of, movements as we've done it has really just been FX. The RMB raises, you've seen, went from 6.3 and has moved quite a bit as the RMB has weakened. That is a big hurt to us just in general as that RMB weakens.

And then just lastly as you think about total liquidity, just curious what your thoughts are there? And why you put the AR facility in place now? Or is there something just sort of a measure of safety? Or was there something else specifically that motivated you to do that?

Yes. One, it's cheap financing. It's cheaper financing than our revolver and it's pretty stable financing. It's a good form. We have a very big pool of receivables. So it's cheap. It's diversified risk for creditors, so they like it. And it does give us a little extra liquidity. So it's kind of a win-win in [those 2 markets].

The next question comes from David Tamberrino with Goldman Sachs.

Just a couple of follow-ups on the operational, I guess performance for the quarter. From a seating perspective, taking a step back from where you were and the trajectory looks a little bit worse. Are you expecting improvement quarter-over-quarter as you head into the fourth quarter? Or could this be similarly a longer time period to kind of right the ship on what are now Seating issues and not just the SS&M side?

Yes. Good question, David. I -- as you look through the whole year, we had guided for the $1,250-ish million EBITDA. You can kind of look through our quarterly progressions and see we're not expecting a whole lot different in the fourth quarter at least within those numbers recognizing that it does take some time to drive those improvements. And as Fritz mentioned earlier on the call, we have all hands on deck, working our 2019 plan and improvement actions, et cetera. And we'll give you more color around post that as we get a little farther. But for the fourth quarter, some of those problems and what's really built into our guidance is kind of continuing that environment through the fourth quarter.

Okay. And then maybe just switching gears when we think about going to market and some of the unprofitable programs from an SS&M perspective. Fritz, as the company is looking to have these high-level conversations with OEMs, do you think that it's possible to price up with what the level of costs have been historically from the significant amount of requests or changes that happened throughout the process from a structures perspective? Or in the event that you're not able to are you prepared to potentially walk away from some of that unprofitable business as it comes back up for bid?

So for many years, I was looking at this equation from one side of the lens. Now I'm looking at the equation from the other side of the same lens. I would say couple of things with respect to Seat Structures & Mechanisms. First obviously, as Jeff talked about, you have the actual commodity escalation, we have recovery mechanisms in our contracts. They do lag. The question we have is can we improve the efficiency of those recovery mechanisms? But they are -- they do exist and they are there. Second is when there are engineering changes made and there are costs that are put into the operation as a result of that, we as a general rule as do any suppliers, we approach our customer. And I do think that we will -- not think, I know, we will continue to do that because as programs change, we need to -- if you quote on a particular program and you have a certain expectation of the changes, you need to have a realistic discussion with your customer early I actually think in some cases. We didn't have the discussions early enough in a number of the programs that we have going on. We -- what you try not to do, obviously, is, and the company has got a history of this, of not walking away from business and not leaving customers stranded and not impacting customers. Unfortunately, we have impacted customers this year as a result of a number of our launch difficulties, which is exactly what you don't want to do. What you described is what I would call an ultimate escalation, which you try to avoid by having intelligent discussions with your customers about the factors that are influencing your business. I don't rule anything out, but I just think that from a practical perspective, we do business with virtually every OEM around the globe. That is one of the best parts of the company is the diversity of our customer base, and our tight focus as a Seating supplier including Seat Structures & Mechanisms. We have business with customers in multiple regions. So I think it's -- as I look at that ultimate question would you walk away from business, would you give business back to customers? That's a premature question. I mean, it's -- ultimately, you could get to that point, but we've historically not gotten to that point. You find an answer and then you move on and then you have new programs. So it's just the nature of the business.

That's fair, but as we think about the progression for SS&M and some of headwinds that you've gotten or the company is seeing, I should say, over the last couple of quarters, it doesn't appear that, that has fully transpired from coming back to your customers and kind of extracting that price for the value that you're providing.

It's definitely fair to say that it's been slow relative to what our requests have been without a doubt, this is in part why our recovery's been slower, our progression has been slower. I think my own view is, continue to work on the programs that we have in the plants today, focus on the programs that we have in development with our SDT teams to make sure that we're not making the mistakes we've had in the past. And then be much more disciplined on how we quote the future. That's how I think about it rather than at one point do we just give business back to customers because that's really a very extreme step. So our focus is really on each of those 3 steps to try to improve the situation. In some of the cases where we have programs that are underwater with capital sunk, I can't do anything about sunk capital. I learned a long time ago, I don't worry about sunk capital, just learned from it and get the business back and corrected so that you generate a margin and then not repeat the mistakes of the past.

The next question comes from Brian Johnson with Barclays.

So a couple of questions. First and especially given where you were a decade or so ago, you've talked about both going back to the customers around some of the programs where frankly, it sounds like you misquoted. Second, you kind of talked about material recoveries, which will require some compensate or some of which may be in the indexes, some of which might require discussions. So just putting on your hat as a CFO as a major OEM given the Detroit 3 kind of were 3 up 3 down yesterday with missed profit expectations. How will those conversations go? And maybe as a predicate to that, how much of the commodity recovery is just locked in [as a] percent of timing? And how much do you have to go begging for?

Thanks, Brian, for the comments. I would think most of it is locked-in. I mean, in other words, our customers have pretty clear policies with respect to metals escalation for example. And it differs though. I mean, it's interesting I've been through program reviews where every customer's program -- just about every customer has 1, some of them you have to have a dialogue, most of them you actually have in index and every index is different. And some lag a year, some lag a quarter, some lag 6 months, some average, they are all over the map. But the reason as I think about it intuitively now if I compare my former position with this one, business like ours, you quote, you provide LTAs with price reduction, business like Seating has gotten actually tighter margins and you're doing price downs through the life of the program. There is no room actually. I mean, if you think about the margins in the business, there is no room for substantial absorption of material cost escalation for a supplier like us or frankly, for any other supplier. Ultimately an OEM can make a decision about how they price their product in the market. Our prices are generally going down as a result of negotiations with our customers. So as I think about it relative to my former position or this one, that risk, if you will, is really concentrated at the OEM level. That's how I think about it. And [it sounds a lot about it] before actually, because they can actually do something about it we're -- our prices are going down. So -- and you quote Seat Structures & Mechanisms program 3 years before start of production, if you didn't have escalation provisions, I don't know how you would run this business. Because you quote 3 years before, you've got a substantial amount of materials in your cost and then it runs for 6 years. So I don't know how you would actually effectively run the business without having those sorts of mechanisms in place or have the ability to have a dialogue with your customer.

All right. But then the pushback is, well supplier margins are often higher than OEM margins and everyone is going to have to share in this commodity burden.

I can guarantee you that's not the case in our case.

That's good news, bad news about where your margins are.

Well, but I would also say I know -- I knew what the contribution margins were per car or per truck or per SUV and in the end, they have -- in OEM, I can't speak for them today, but they have levers they can pull. Our levers are price goes down, in terms of our value add. So I don't know, that's my perspective.

Okay. And the second question on China. I mean the equity income has been a little bit mushy. How do you get confidence? And how do we get confidence at an even greater distance that there aren't; A, operational issues over there? B, customer issues? Or C, an erosion just as the competitors target your 40% share and how do you -- in terms of how you're spending your time work with the Chinese JVs?

Okay. Brian. So what I would say is this is week 6 for me -- week 7 I'm in China and I'm actually that's where I'm going for next week. What I would say is, when I look objectively at the performance of our ventures in China, obviously we had pressures at YFAI, which Jeff talked about. We had pressures at one of our ventures that has been impacted by one OEM's volume. The rest of our businesses, other than FX, has performed well actually, and relative to the operational difficulties, (inaudible) just make a comment. I made the comment in my presentation that the company has good processes, but when we've had flawed launches, we haven't followed them. Those processes are -- have been shared and have been ingrained in our ventures over time in China. They follow the processes. They don't have the same launch problems. It's not like it's perfect, but it's nowhere near the issues we're facing, in either the metals business over there or the seat business over there. To me it's as good a case study as I've seen about what happens when you follow your processes, good things happen. That's what happened over here. So we've not had the operational issues, and I won't say it's perfect, because they've been, for example, in one of our ventures over there, we're tooling up a substantial amount of components, but we've not had the operational issues there we faced in the U.S. or in Europe for that matter, and it's because they generally follow the processes with far more discipline.

Our last question comes from Joe Spak with RBC Capital Markets.

Jeff, just -- you talked about some challenges that popped up late in the quarter and I guess I just wanted to get your view or comfort with some of the European production schedules related to WLTP. It seems like some of those issues came more to head after that June announcement?

Yes. I would say (inaudible) anything that is going to hurt revenue isn't our problem, Joe. To be honest, we probably could have used a little less volume in places in our business and I would say those are not the challenges. I'd say the bigger issues that we've been fighting with is exchange definitely has moved a little bit fast since we gave that, but we're working to offset that. And that's going to have a bigger impact just on bringing the money back or the equity income we have in China.

Okay. And then I guess related to China and maybe building off the prior question, you talked about some moves you made including asset sales to improve cash flow, have you had or are you planning to have conversations with some of those JV partners to try to improve the cash flow situation via those ventures?

Do you mean dividend flow, Joe?

Well, either dividends or potential monetization or sale.

Yes. And I think the last one is really hard to comment on, but we are -- Fritz is going over there next week.

Yes, week 7.

Yes. And I spent a fair amount of time over there and with our partners and they come over here. So we have lots of dialogue. The good news is they like cash out of these ventures as well. One of the big things we are building and we've talked to you before is our metals operation there has been going through a bit of new facility and some expansion. That business is mid-teen EBIT, it has grown up to $0.75 billion or so. It's got big potential to grow. It can probably help offset some of our issues as it sort of goes up. That's a big source of activity there, and they've done it as Fritz says, they've done it really well. We talked to them about all those ventures. We talked to them about what's going on in each of the 19 or so ventures we have. I would say we're very connected, always looking to maximize cash and always talking about the future as well. It's just hard for us to -- a lot of those...

It's a joint venture.

It's a joint venture, right? And we've got to jointly agree on whatever we do.

I think just wrapping it up. Again, thanks very much for joining the call with us this morning for both the analysts that cover us, appreciate very much your support and your questions and the dialogue. And for our investors, thank you very much for being an investor in Adient. It's been a tough ride and we understand that and we understand our responsibility to fix our problems and get back to the kind of operational performance that you should expect. So thanks very much for the time this morning. That's all we have. Goodbye.

Thank you.

Thank you, and that concludes today's conference. Thank you all for participating. You may now disconnect.