Welcome, and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect from the conference. Now I'll hand the call over to Mark Oswald. Sir, you may begin.

Thank you, Geri. Good morning, and thank you for joining us as we review Adient's results for the first quarter of fiscal year 2017. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Bruce McDonald, our Chairman and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today's call, Bruce will provide a few opening remarks, followed by Jeff, who will review the financial results in greater detail. At the conclusion of Jeff's comments, we will open the call to your questions. Before I turn the call over to Bruce and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will also be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments. I'll now turn the call over to Bruce McDonald. Bruce?

Okay. Thank you, Mark, and good morning, everybody. This is a great day for us. It's our first earnings call as an independent company. As I'm sure everyone knows, we completed our separation from Johnson Controls on October 31. And I think when we set up to take the separation from Johnson Controls, to put that into place, one of the things that we wanted to do was make sure that we separated and created 2 strong companies. And I think if you look at our first quarter results here, it really demonstrates that we are true to our principles. And I think Adient has been really set up, spun-off from Johnson Controls to be a great success. And for that, I'm really grateful to Alex Molinaroli and Brian Stief, in particular, who really steered the separation activities and set us up to be a long-term winner here. I think if you look at the investment thesis that we talked about and coming out as an independent company, we've seen really strong acceptance for that. And the sort of key tenants are that for a long, long time, the automotive seating business was the growth engine for Johnson Controls. And we've demonstrated as our time as an independent company here that we're back on track and resuming our long history of successful growth. We also have talked about earnings expansion through a number of self-help initiatives. We have a 5 -- a 4-year goal here to get to 200 basis points improvement, and we're off to a great start. Then lastly, this is a strong free cash flow generating business. And again, we really demonstrated that here in the first quarter. As we've seen a turnover in our shareholder base in the first quarter here, rotating out of previous Johnson…

Great. Thanks, Bruce. Good morning, everyone. And turning to our financial performance. Hopefully, you had a chance to review our first quarter results that were posted earlier this morning. As Bruce said, the year is off to a very good start as the positive momentum achieved last year continued into 2017. As you can see on Slide 9, we had a good, very good quarter on many fronts, including delivering on our commitment to drive earnings growth and margin expansion. In addition, cash and cash equivalents at December 31 totaled $709 million. The solid operating performance, combined with our cash balance had an immediate positive impact on our net leverage, which was reduced by about 10% compared to the period ending December 30, 2016. I'll expand on our cash and capital structure in just a minute. But first, let me drill down into first quarter results in a bit more detail. Moving to Slide 10 and beginning with revenue. We reported consolidated sales of just over $4 billion, a decrease of $195 million compared to the same period a year ago. The decrease was primarily related to lower volume, which was largely driven by capital constraints prior to the 2016 fiscal year. The lack of consolidated interiors revenue also impacted the year-on-year results by about $50 million. As mentioned previously, Adient retained a few interior operations that didn't go to YFAI. The revenue from those operations wound down over the course of last year and is effectively $0 today compared to about $50 million in last year's Q1. In addition to the decline in volume, currency negatively impacted sales by approximately $39 million during the quarter. Excluding the effects of currency, our consolidated sales were down between 3% and 4%. And if you adjust for the runoff in interior sales,…

[Operator Instructions] Our first question comes from the line of Colin Langan from UBS.

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

Well, thank you, Colin, on the first comment. As you look at the year, I think there are some uncertainties out there. We mentioned commodity prices. Again, we think our range covers that. We also mentioned our top line sales, which we're monitoring closely, which we said are a little softer than we had initially guided towards. But overall margin improvement has been good. So I could see ourselves on a positive side to those numbers. But I think we have to see how the year develops and revenue probably being the biggest variable for us.

Yes, maybe -- Colin, it's Bruce here. I sort of -- here's how I kind of see it. And you think about the savings that we said we would set up by establishing a leaner corporate infrastructure, tick, it's done. We're getting a full, full run rate. Other SG&A initiatives, we're gaining traction throughout the year. Metals turnaround, it's beneficial to this year, but it's really a '18, '19 story, doesn't really move the needle a lot. But the thing I would point to is when I talked about some of those growth initiatives in my comments is those on the other hand will ramp up as we go through the year. And on the investment that we need to make in sort of supporting our backlog growth ramps up. So we're sort of in a nice position here in the first quarter where we get all of the sort of -- a lot of disproportionate amount of the bang for the buck is front-end loaded here. And the SG&A initiatives and the investments are a little bit of a headwind for us.

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

Yes, Colin, it's a good question. For one, we were very happy with the 50 basis points improvement, especially being down a couple hundred million dollars in revenue, because it's obviously a variable there. So one of the -- as we move forward a couple of things. We are, as Bruce mentioned -- the first step of separating from the corporate structure and seeing what Adient's corporate structure is compared to that, that Johnson Controls had. That's in place. That's done, and that's reflected in the numbers. There are a number of initiatives, as we talked about, that are going on, multiple, multiple ones across the company of driving down those numbers further. Those should be steady really through this year and next year to drive us to those performance numbers side. Really expect by the end of fiscal '18, you should start to see those numbers flow through. And the good news here, too, is we think we'll get down to a number in our margin will -- or our -- I guess, our SG&A percent as a percent of sales, will get there. But as sales comes back up with our order book and as that order book starts to launch, we don't see ourselves having to really add to that. So that will also help our margin too as the sales improves.

And just last question. You kind of highlight you feel -- it sounds like you feel somewhat comfortable with the border tax. I mean, any numbers around the percent of content that is imported or exported out of the U.S.? Sort of frame the exposure? And you mentioned the cut and sew is where you see the biggest risk. How about the structures business or those other large capital-intensive businesses, is the footprint there actually a bit better from a U.S.?

Yes, maybe I'll go in reverse a little bit on that one. If you think of our supply chain, the JIT side of the business has to be collocated effectively with our customer. So you'll send -- if our customer is in Mexico, our customer is in the U.S, you'll generally see our JIT plant right next door. So not anything moving over the border in that regard. As you look at our metals and our foam business, it's generally regional sourced. It doesn't ship terribly well. But generally, you'd find those in region or in country. There are a couple you might see right over the border but fairly easy to adjust because we have foam and metal plants on both sides of the border. And those things should be fairly reasonable. So as we mentioned, the cut and sew side of the business is really the more complex one because the -- it's so labor intensive. And it's just never been economical. And it's a question of whether those jobs would be the ones desired back in the U.S. anyway. But as you look at the border tax in general, or I guess the numbers, let's just talk about numbers. We have about $0.5 billion of net purchases from third parties, Colin. That $0.5 billion, a lot of it's directed by our customers. I mentioned we'd obviously work with our customers if a border tax is actually in place there. And then from a net export standpoint -- and this isn't just to Mexico, this is really globally -- there's about another $500 million of intercompany movements that we would have, which would mostly be that cut and sew business on top of that.

Imports.

I'm sorry, imports, a net import of about $500 million intercompany.

Got it. The total of a billion -- well it'd still be...

Yes.

Half of it is your exposure, half is in through supplier.

Supplier, yes, correct.

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

Correct.

That's where the major is.

On the second part of it, the intercompany side.

And our next question comes from John Murphy of Bank of America.

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

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

It's a little less.

And we're working -- and I'd say some of the components we paint [ph]. So I'd say the net impact right now is less than that. In terms of the other investments that are going into Mexico, we got 2 other foreign customers that are looking to expand or introduce capacity into Mexico. And we feel like those programs, if a decision is made not to invest in Mexico but somewhere else, that we will retain that business. They're with customers that we have the global programs or where we don't really have a lot of competition. So I don't think we have any further risk other than the Ford issue.

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

Well, I mean, there's a -- I'll comment that there's a whole bunch of great questions in there. But a few comments. So first of all, because we are Irish domiciled, we don't have on overseas trapped cash issue. That doesn't exist for us. In terms of -- I mean, I'd hate to sort of speculative about what might or could happen in China. But what I would tell you is, we continue to get payments, dividends, management fees, things like that, that there has been no change whatsoever. We don't have any frustrated payments or anything like that, that have been held up here. Obviously, we continue to keep an eye on things. But I would say, right now, it's business as usual. The dividends that we get out of China are -- our partners in our joint ventures are state-controlled entities. And they obviously know -- they need the dividends out of them as well. In terms of our cash balance in China, I mean you can probably comment on that, Jeff. I don't have that on my fingertips.

Yes. Well, I think I gave you the cash balances in China at Deutsche Bank. So our seating business as a net, at the end of December, has something around a $1.1 billion net cash position across all the JVs. And YFAI has something around a net $300 million of net cash. What we're told, and what we -- to Bruce's earlier comments, we have seen dividend flows continuing uninterrupted. We've been told to continue to expect that as we go forward during the year. As far as our ability to extract a large amount of that net cash balance I just mentioned, sort of right away. I guess I wouldn't anticipate that in the short term. But we'll obviously look to continue working with our partners. The good news is our partners in China enjoy those cash dividends as well. And we expect those flows to continue and the, really, strength of their balance sheet gives us further optimism to support that those flows will continue into the future.

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

Yes. So a lot of what those -- good question, John. What that was, was we set a bunch of pegs up with Johnson Controls as we were -- as you can imagine, as we were preparing to spin-off. And as our systems were being converted and all the noise around the year-end and our separation, there was a variety of, we'll say, AP, accounts payable, that slipped from -- that should've really fallen into fiscal '16, that slipped into fiscal '17. And the big part of that mechanism we had with Johnson Controls is just truing up for those amounts. So it's -- for the most part, you can think of those things as really should have been included in the 2016 cash flow. So the reality is, 2017 should be better by those amounts.

So it's not -- it's that $228 million is not included in the $250 million?

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

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

Yes, I mean, if you look at it regionally, there's very little in-house seating left here in North America. Virtually none. There's still -- and I don't have the exact shares. I mean, maybe that's something we can follow-up. But there's still an element of seating that's in-house at some of our German customers. And if you sort of go into Asia, there's even more. So we've sort of talked in -- if you sort of think back to a slide that we had in our investor deck, we had a regional, sort of a snapshot of the global industry. And we kind of showed some gray space, which was the available market that's either in-house or a traditional -- a smaller but regional players. And that number in North America was about 10%, that number in Europe is 23%, and that number in China is 43%. I don't -- what I don't have, John, in front of me here is, what's the split between smaller regional players and in-house. But why don't we give that to Mark, here, as a takeaway.

And our next question comes from Emmanuel Rosner.

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

Yes, Emmanuel, I think you can think of, at today's rates it's a couple hundred million dollars of exchange pressure that we have for the year. And then we've also seen some volume softness as well. So I'd say it's a mix between the 2.

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

Understood. And then, I guess, on the equity income line. So again, in guidance I think we're looking for $380 million. That's fairly flat versus the $377 million, I think, from fiscal 2016, despite, obviously, incredibly strong dynamics you have there with your backlog. And so, I was curious what are sort of like the puts and takes in terms of this year's expected equity income?

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

And plus the $20 million for the amortization, so $377 million.

$377 million, going to $400 million, is what I'd guided to.

Yes, right. Yes, and that's with some weaker exchange, too, Emmanuel. So we -- as Bruce said, we've now started 2017 after a very good 2016 calendar year in China. They're coming back off their holiday. We'll see how incentives and other things play out. But with the RMB where it is, we definitely see growth. But we've hedged that. So about $25 million growth, give or take, in equity income reflecting exchange.

Yes, maybe in terms of the China and our guidance, I mean, we guided to a number of 3% to 5% type growth in China. Now what you -- which maybe sounds a little high. But what you need to sort of factor in is, we're looking at our fiscal year, and so the strength that we saw here in this quarter, obviously is much, much better than 3% to 5%. And I talked in my opening comments about the fact that, look, we see IHS production numbers sort of moving up. So we would say there's an upward bias in our equity earnings guidance, given how we performed here in the first quarter and changes to IHS. But sort of balancing that it's kind of a little bit of a wait and see on the reduction of vehicle incentives for small cars there.

That's very helpful. And then just a follow-up on that one. So in China, specifically, the automakers seem to be under a fairly similar [ph] of cost and margin pressure. Even some of the U.S. ones that we're looking for. Flat margins for the foreseeable future have changed their outlook to margins coming down. Are you seeing any sort of erosion in margin in China? I know you're launching a lot of business, which is good for operational performance. But generally speaking, in the discussions, are things getting tougher there?

I mean, they're always tough and I...

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

And our next question comes from the line of Brian Johnson.

Just a couple questions. One more, just kind of on the outlook in the second, just around the cash flow. On the outlook, when we looked at your 3-year guide you presented in Detroit on -- we see there's a falloff between year 2 and year 3, 2018 versus 2019, in the unconsolidated revenue. We don't have a good feel for that historically because this is kind of greater disclosure. Can you give us a sense of just historically how the Chinese market has quoted? And then what's the typical, kind of, year 2 versus year 3, what's yet to come in year 3? And then just comment in particular on what seems to be a rather sharp drop from 2018 to 2019.

Yes, I would say, Brian, the -- in China, I would say the quoting cycles are shorter than here. And so I would say we still have the opportunity to fill in '19 and '20 for sure. But it's shorter quoting window.

And it can be a bit erratic, too. I mean, you noticed even '17 had -- there's a big jump between '17 and '18 in that chart and then it comes back. I do think we can still influence '19, as Bruce mentioned. But the point here is, those are net growth numbers in the joint ventures and they have certainly a good growth outlook for this year and next year, and we can still influence '19 now.

Yes. And keep in mind like that's not incremental new volume. That's not replacement in there. And it doesn't have industry growth.

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

I mean, I would just say, make a general comment. I mean, we're #1 in the market by a long shot. We continue to do extremely well. If you look at the numbers here in the short term, we're gaining share. And we've got the pedal to the metal out there. And I don't expect to lose or even give up any of the edge that we have versus our peers in that market.

Which gets to a question, just to drill down on that. We also heard in Detroit, at one of your competitors, I think, it was gaining share as well. Question we get from investors, are both leaders gaining share, and where is it coming from? Is it coming -- back to John, more of these questions -- was it more in-house, especially in China, that's coming for? Or are people -- or perhaps, there's different metrics of accounting to that.

Well, here is I think the best way to think about it, Brian, is like we show on that way, if you sort of dig that one chart out again. 43% of the seating market in China is with local players, regional players, or it's in-house. And so when we talk about our market share, if I said our market share is 44%, it's more like 70% of the market that's with global players. And so as that 43% that's with local or in-house continues to migrate to global players, I would -- I don't have an expectation that we're going to be the only one that benefits that. But I think we just proportionally benefit. So I think it's the gray box shrinking benefits all of us. And I think we'll disproportionately win as that trend on plays here.

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

Okay. And final question, just what is your pace of cash flow conversions this year with what you sought? Is there any -- what's the pace of those noncash expenditures you exclude from the non-GAAP numbers? And then do you have kind of visibility into sort of when that free cash flow conversion starts improving.

Yes, good question. The first quarter had a lot of noise into it for the cash we received from Johnson Controls to really true up from -- really some of the cash that should have outflowed in fiscal 2016, didn't come out until this year and was reimbursed by them. So as you look forward, I think, generally, there was a lot of things in the first quarter. The becoming Adient bucket for some -- a lot of those things relating to separation expense were elevated in our Q1. We wouldn't see the same pace. Although they will continue through the year, they should continue at a lower rate. Restructuring was probably fairly consistent, should be fairly consistent through the year. We talked about an elevated level of restructuring as really part of our whole investment thesis. And the first couple of years of our existence, elevated levels of restructuring. So becoming Adient expenses are probably higher than first quarter but will continue through the year. Really shouldn't be too much that floats into 2018. The restructuring should be a 2017 and '18 event. As those 2 things go away and you start to get the benefit of the margin enhancements, really seeing the pickup of that -- pace of that cash flow conversion accelerating a little bit next year, but much more in 2019.

And just to be clear, Brian, the $250 million guidance is -- there's no add backs for that.

Right, yes.

That's inclusive of those things. And so I think we've talked about the fact that, roughly speaking, that free cash flow triples here over the next 3 years with the unwinding of some of those things. And we're still -- we have -- the other one we have is a step up in dividends associated with getting the full year of YFAI dividends than just the first year. So those 3 things sort of triple it here in the next couple of years.

Yes, and just to give you some numbers behind that. We have approximately $300 million of restructuring in our cash flow and $100 million of those separation, becoming Adient expenses. So that's $400 million as a pool that should really come away as margins expanding, et cetera, to really kickstart that $250 million upwards of free cash flows.

And our next question comes from the line David Tamberrino.

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

Yes, the price performance during the quarter was pretty good. I would say we did a good job in a few areas. And you just think of margin, so let's talk about material margin in general. We were able to maintain material margin such that the pricing, the net pricing, that we had to our customers was essentially recaptured through commercial actions we were able to do, some mix element that was beneficial to us, as well as savings from our purchasing group. So that was probably even slightly positive equation for us in the quarter. As you look at the operational performance, very strong globally, Bruce mentioned that. Really, all of our operations contributed to the improvements. So it's a bit of a mix. But I would say it's heavier on the operational side. Places like South America did a nice job. Our North America operations did a really nice job of converting during the quarter.

Got it. And then as you were talking about earlier, some of your indexation clauses with your customers. Is there any formal lag time that we should be thinking about where maybe a quarter or 2 is a little bit more of a headwind, as we see raw materials coming up?

Yes, I mean, there's almost as many arrangements as we have customers I would say. But generally speaking, there are lags. But what I would tell you is though, that we hedge our commodity buy as well. And so some of the increases are lagged with our hedges. So but it's -- like I said in my comments, it terms of headwind. Steel and some of the rapid increases that we're seeing, as associated with some tariffs and anti-dumping legislation, stuff like that, that's come in. It's created some pretty dramatic swings. And so we do anticipate having some short-term headwinds associated with those.

And that's going to hit FY -- 2Q and 3Q?

It should, yes.

I'd say -- or 2, 3 and 4.

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

Understood, understood.

Yes, and as those prices settle, we'll -- the pricing will catch up from our customers. Because your point, it's somewhere between a quarter is probably the most common. But as Bruce said, every customer has their own flavor to it. And sometimes, we have longer-term contracts with how we buy our steel too. So we don't -- those timings, there can be some timing gaps there. But net-net, we will recapture those in price. It just can be a little bit noisy for a couple quarters.

Understood. Last one for me. On level 3, level 4 autonomy, we've been hearing a lot from you as well some of the other competitors through the industry from a seating perspective. Wondering what you're hearing from your OEM customers today? Are they looking for concepts? Are they looking to start quoting for business in the next couple of years? And what are they spec-ing out, if anything? Are they looking for increased mechanization through swivel chairs, and really, redefining the interior of the vehicle? Or are we not there yet with the OEM customers?

It's all over the map. I mean, I would say we have customers that you could think of on the sportier end of cars that have no interest in autonomy. And we have other customers that are really, I would say, the thought leader. But a few sort of comments I would throw here. Some of our customers are deciding, do they want to focus on a level 3 vehicle or a level 4 vehicle as sort of an entry, kind of into things here. No, I don't -- I would say it's an area that we're all learning. And I'd sort of -- I mean, we don't have like swivel feet or long rail seats or -- we don't have any orders. We're talking with the designers, some of the advanced engineering folks, it's kind of at that stage. And those are comments around the mainline players. Out on the West Coast, small of these smaller, niche players, it's much more well-defined. And we do have orders in hand for some of the technologies that we've showcased, but I can't really talk about which customer or what product because we have NDAs with them. Maybe just -- in terms of before we sign off here, I guess a few things I'd like to just close out with. First of all, and again, we certainly want to thank, on behalf of everybody here at Adient and Johnson Controls, for really giving us this once-in-a-lifetime opportunity to set up a great new company. Secondly, I'd like to thank and recognize our employees all around the world here for their dedication, their commitment, and their hard work for getting us off to a great start. And thank you for everybody on the call here. Thanks for your continued interest in Adient. We're highly focused on delivering our investment commitments and really focused on delivering on our mission, which is improving the experience of a world in motion. So with that, thank you, everybody.

Great. Thank you.

Thank you.

And that concludes today's conference. Thank you for participating. You may now disconnect.