Adient plc (ADNT) Q3 2017 Earnings Report, Transcript and Summary

Welcome, and thank for standing by. At this time all participants are in a listen-only mode until the question and answer session of today’s conference. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point. Now I would like to turn the call over to Mr. Mark Oswald. Sir, you may begin.

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

All right. Thank you, Mark, and good morning everybody. We really appreciate your taking time out of your busy schedule here of earnings season to join us for our Adient’s third quarter results call here. So, three quarters and late to one year here in fiscal 2017 and I guess my overall comments is I think we are solidly on track in terms of delivering the commitments that we’ve made to the investment community, both here in the short-term but also the trajectory on to deliver our mid-term commitments. Our team is extremely focused on delivering earnings growth, margin expansion and if you’ll – I think that the results here in the third quarter demonstrates not only our commitment but the success that we’ve had and the positive momentum that we’ve made throughout the year here. Maybe just turning to Slides 4 and 5, I would like to touch on a number of accomplishments. First of all, starting off with our financial performance and Jeff is going to talk about these in a lot more detail in his section, I would like to just touch on a few of the key metrics. If you look at our EBIT, adjusted EBIT for the quarter here of $336 million, up 3% year-over-year, and really nice to see here despite the top-line weakness that our corresponding margin was 8.4%, up 90 basis points on a year-over-year. So, really good performance on the margin side. I am really proud of the work the team has done. Still a lot more to do going forward but off to a great start. I didn’t expect the operating performance fell through to the bottom-line like our adjusted EPS; we came in at 4% high or $2.52 for the third quarter. Just maybe talking about China and on a sort of top-line performance, so during the quarter, we were down I think if you look at our sales, it came in about $100 million lower than we sort of forecast to you for the quarter and if I sort of think about the – where we missed it here in the third quarter was really two areas. One, in China, we have one joint venture that we consolidated that joint venture as very heavily exposed to Hyundai and Kia and we saw very weak volumes in China on the Korean OEs. That cost us about $50 million in the quarter, sorry, $30 million in the quarter. Additionally, we had additional downtime at several North America passenger car plants those the time out of schedules of higher than we thought coming into the quarter here. So going to back just kind of drill the $100 million – from a revenue diverts our expectations. In terms of the balance sheet, again a lot of good progress here. We took some actions to further improve our financial flexibility and Jeff will touch on these later on, but we did borrow from the European Investment Bank a very low cost flexible interest rate loan and used that money to prepay some of our Term Loan A. Cash at the end of the quarter was $669 million. I would note we had a fairly heavy outflow from restructuring in the quarter as we completed a couple of big European plant closures on the jet side of our business. So a good outcome when you sort of think about that. In addition, we started to return cash to our shareholders for the first time. We bought back about $40 million worth of stock and we initiated our dividend. If you look at our net debt and net leverage at about 2.7 and 1.6, 0.9 times respectively at the end of the quarter. Again we think, I note there is we do have about $1.3 billion of euro-denominated debt with the euro strengthening, obviously we get the P&L benefit through our European operations, but on the balance sheet side, our debt is inflated as the euro strengthens here, and that was about an $80 million headwind for us there. So, overall, I’d also like to talk about our Chinese business. We had an investor presentation out in Shanghai this year and we showcased our not only our business, but our China management team. The market there for us even though it’s been a little bit soft, for us, the conditions are – I’d say, remain especially favorable. In the quarter, new car production was down about 1%. If you look at our business overall, we are up about 13% in our joint venture operation – in our seating joint venture operations. I think it’s important for us, China is a big part of the investment thesis for Adient and it’s important for the analysts to look beyond the headlines. So when you look at, in this fall our customers here in North America with big Chinese operations, you get sort of one picture. If you look at the overall production numbers, you get a different picture. So you really have to look at what’s happening, shifting things between SUVs, content per vehicle, the Chinese own brand share of the market, all of those things you got to take a look at and sort of understand what’s happening in that market and for us, generally speaking, it’s all favorable. So we are benefiting from new business wins and we continue to see – well, we call the grey base. So there you see their in-house over the Chinese local suppliers moving to Tier-1. We continue to see benefit of the mix shift into SUVs and we continue to see the benefit of premium brands which have more content in the marketplace and that’s what’s really driving 13% growth. So our unconsolidated seating operations are doing a great job there. We expect to continue across the China, enhancement story but we continue to expect to deliver strong margin performance and strong cash flow generation as we move forward. I would like to quote out for those that weren’t able to attend our Investor Meeting in China, we do have the materials on our website and I think it’s a lot of really dramatic relation of and I encourage you to look at that. Moving on to Slide 5, the teams have made great progress in terms of gross sales booking and in terms of growing our backlog and we will talk more about our backlog in January, but the pace of us winning new business is accelerating as we roll our backlog out for 2020 also increasingly encouraged that the acceleration that we are going to see in terms of organic growth, especially at our consolidated seating operations. Also worth noting is the diversity of wins in our sales bookings from not just our traditional manufacturers, but from emerging West-Coast layered and Luxury brands. So it’s great news and it really shows the diversification that we really lead the industry in terms of sales mix. We continue to see that diversification in our backlog. If you look at Slide 7, we talk about a number of different products – or sorry, Slide 6, we talk about number of different products that we launched in the quarter here. Again, a large diversity here you will see a good mix of trucks, crossover vehicles, SUVs, luxury vehicles and a global mix of platforms. This really highlights, just from – showing this slide really highlights I think the trend around higher content, luxury vehicles, obviously the trucks has more content versus passenger cars. Also of note here, a number of these are replacement wins. So things like Chevrolet Traverse, the Volvo XC-90, the Honda CRV. Our new business wins, others like the VW Tiguan, the A-8, the BMW, sorry the Chevrolet Traverse, the Volvo XC-90 and the Honda CRV would be replacement program for us. New wins for us would be the Tiguan, the A-8 and the BMW 5 series Station Wagon. It’s also worth pointing out that our metals content is growing. So things like the Camry, the A-8, the Tiguan was launched with our seat structures and that going to move. Lastly before I turn the call over to Jeff, I mean, I think it’s important we will spend a few minutes on the general operating environment. Here in the U.S., sales have softened a little bit. We are struggling here with some gallon time on the passenger side of the business. We expect that to be update a little bit here in the fourth quarter. But overall, the first half SAAR is around 17 million units, which is robust. When we look at the growth in our Chinese business, we continue to be very encouraged that we can continue to outperform the market and grow in excess of the market pace here. We are making good progress on our growth initiatives. Our backlog is growing and we remain on track to kind of come out the year where you had expected to. In terms of the non-auto side of our business, things like growing our aircraft, our end solution in aircraft seats, growing our business in the commercial vehicle sector. Those initiatives are proceeding as planned. As you cans see from our financial results that we posted today, we continue to make progress – solid progress towards our margin expansion initiatives and we remain committed to delivering the SG&A reductions that we talk to here in 2017 and 2018. As we mentioned last quarter, rising commodity prices are a slight headwind for us right now. We tend to have indexing arrangements, but they operate a little bit in arrears, but the things that are sort of headwinds for us and we had incorporated in our guidance last quarter were high with steel and chemical prices. Steel, we are starting to see some benefits here. It’s trending down a little bit, but if you look at on a year-over-year basis, it’s really elevated especially in the Europe. And chemical prices are rising really driven by tight global supply and we are looking for some incremental capacity to come on-stream here in North America, sorry in the Europe and the Middle East and that allowed us sort of help balance supply and demand and hopefully get us a little bit of noise there. So, again, the commodity picture is not really much changed versus last quarter on a net-net basis. And we are not changing our guidance at all with respect to that. Just sort of stepping back here, before I turn it over to Jeff, I am really pleased with where we are here in the third quarter and feel pretty good about where we are sitting right now. I have no doubt in my mind that we are going to deliver here on our 2017 commitment despite the fact that we’ve seen some headwinds in terms of top-line pressure. I think we are really well positioned and we’ve laid a great foundation for Adient as we enter into 2018. And maybe just lastly, speaking of 2018, I think, we are right now just putting the final touches on our plans for next year and I think the self help story that we’ve laid out, you will continue to see that next year. So for those of your that I’d say are on the bullish side of things and think that the U.S. industry is kind of going to plateau here and stay at the 17 million unit level plus or minus, I would expect for those – for that camp that our self help initiatives are going to drive further earnings growth and margin expansions next year. For the bears, I’d say, or to think we are going to have to pull back, more aggressive pull back in North America, the additional cost actions in our self help story will be a significant mitigating factor in terms of what you might expect to happen from just the negative contribution of margin associated with softer sales.

Great. Thanks, Bruce. Good morning everyone. Turning to our financial performance, hopefully you’ve all had a chance to review our third quarter results that were posted earlier this morning. I am pleased to report Adient’s third quarter continued to build on a positive momentum established earlier this year. As you can see on Slide 9, we had a good quarter on many fronts including our continued execution on driving earnings growth and margin expansion. As expected, our revenue was down, but I’ll cover that more in the next slide, but meanwhile, our earnings were up again year-on-year and quarter-on-quarter. And getting to our typical format, this page is formatted with our reported results in the last and our adjusted results on the right-hand side of the page. While the reported results show roughly a 100% increase in EBIT, an over $2 per share increase of EPS growth, we will focus our commentary on the adjusted numbers. These adjusted numbers exclude various items that we view as either one-time in nature or otherwise skew important trends in underlying performance. Adjusted EBIT improved 3% or $10 million versus last year, which represented a 90 basis point improvement. Meanwhile, equity income was up 7% year-over-year, but if you exclude or adjust for FX, it was up 13%. Finally, adjusted net income and EPS were both up 4% year-over-year at $237 million and $2.52 respectively. Clearly our third quarter continued to build on our strong first half performance. Now let’s turn to Slide 10 and let’s breakdown our revenue in more detail. We reported consolidated sales of just over $4 billion, a decrease of $345 million, compared to the same period a year ago. T he benefit of positive commercial actions which reflects efforts by our team to collect on items such as premium freight, over time, design changes by our customer et cetera of $50 million did not offset over $300 million of lost volume, which is primarily related to the near-term investment adjustments and business run-offs associated with capital constraints that existed before our announced spin in 2015. As Bruce mentioned earlier, we continue to expect top-line growth to return in 2019 and beyond, based on our sales bookings in that backlog. In addition to lost volumes, foreign exchange also had a negative impact on our sales this quarter compared to the same period last year of approximately $60 million. The primary driver was the euro as the euro to USD rate averaged $1.10 in Q3 versus $1.13 in Q3 last year. And finally, similar to our first and second quarters, but to a lesser degree, the lack of consolidated interiors revenue also impacted the year-on-year results as revenues from those operations wound down over the course of last year and is effectively zero dollars today, compared to approximately $10 million in the third quarter of last year. Excluding the effect of currency sales were down approximately 7% versus last year. And now let’s shift gears and talk about our unconsolidated revenue. Growth remains strong as the top-line has not been impacted by the same capital constraints that are affecting our consolidated business. Unconsolidated seating revenue, driven primarily through our strategic JV network in China grew approximately 13% year-on-year, excluding the impact of foreign exchange and an out of period adjustment. Broadly speaking, this outcome significantly outpaced vehicle production growth in the region which is relatively flat. Adient continues to capture the benefit of our position in the market plus an improving vehicle mix, mainly the switch from passenger cars, SUVs and CUVs, and added content. Additionally, our customer mix within China was quite positive as our key customer base outperformed the market. Unconsolidated interiors recognized through our 30% ownership stake in Yanfeng Automotive Interiors or YFAI, also grow at a strong pace compared to last year. Excluding the low margin cockpit sales from both periods and adjusting for FX, interior sales were up 15% in Q3 versus last year. If you recall, about 50% of the unconsolidated interior sales are generated outside of China, so the results when adjusting for the low margin cockpit sales are really quite impressive. I’ll point out that total sales for interiors in the most recent quarter included a larger than normal amount of cockpit sales and certain customer agreements were abide we’ve triggered a catch-up in sales driven by revenue recognition rules. The impact for the quarter was approximately $125 million. On a go forward basis, this has not changed the plan at Yanfeng to deemphasize the low margin cockpit business. Moving to Slide 11, adjusted EBIT expanded to $336 million, an increase of 3% versus the same period last year. By segments, our seating adjusted EBIT increased 6% year-over-year to $317 million although up year-on-year, the results were negatively impacted by decline in our North American volume which tend to be a richer mix of products. Within that, $317 million Adient’s unconsolidated seating business contributed $82 million, which was up over 20% year-over-year excluding FX and slightly higher compared with the unconsolidated seating revenue growth that I just discussed of 18%, a positive outcome as we look to sustain our margins in the region. Adjusted EBIT for interiors was $19 million for the quarter. The year-over-year decrease of $7 million that was primarily driven by various growth investments at our YFAI joint venture, specifically an investment in IT infrastructure, our West-Coast office and various branding initiatives. You should note that YFAI is formed only two years ago and many of these investments represent initial stand up costs to enable and to operate independently from the former parents. The corresponding margin related to the $336 million of adjusted EBIT was 8.4%, up 90 basis points versus Q3 last year. The primary drivers contributing to the year-over-year margin improvements include, SG&A saving initiatives, which contributed approximately $46 million of improvement year-over-year excluding engineering, improved operational performance contributed approximately $35 million of improvement and finally, a higher level of equity income, which as I mentioned a moment ago was up about 13% year-over-year after adjusting for foreign exchange. However, we did have just over $80 million of offsets to these items, namely lower volumes, commodities and FX headwinds. Despite overall steel pricing being stable to down versus Q2, prices remain elevated compared to last year’s third quarter and as Bruce mentioned, chemical pricing continues to rise quarter-over-quarter. Recoveries based on index agreements with our customers to offset price increases are providing a partial offset. However, it’s important to remind you of the one or two quarter lag that exists until our price adjust in a rising price environment. At this time, we see these inflationary pressures continue as we progress through our fiscal fourth quarter. However the headwinds are continuing within our full year guidance range which I will review in just a few moments. Now let’s move to Slide 12. We included a chart showing our progress towards our goal to increase Adient’s margins by 200 basis points excluding equity income. As you can see from the chart on the left-hand side of the slide, we are solidly on track and have made significant progress over the past four quarters. Adient’s June 2017 last 12 months or LTM margins, excluding equity income of 5.2% is up about 75 basis points compared to June 2016 LTM results, which is a starting point from which we are being measured on the 200 basis point commitment of improvement. In the most recent quarter, adjusted EBIT excluding equity income totaled $235 million despite the lower sales. The corresponding margin of 5.9% was up roughly 55 basis points year-over-year, the improvements achieved in the most recent quarter was built in the progress achieved over the past several quarters. The drivers of the improved performance in Q3 include, namely SG&A improvement, which as you can see from the chart on the upper right-hand side of the slide are tracking on plan at a 150 basis points of gross improvement we targeted, is often noteworthy to point out that the improvement tracking at the date has been achieved with less sales. Total SG&A reductions are approximately $160 million versus the June 2016 LTM results. Speaking of revenues, as you hold constant at the June 2016 LTM level of just over $17 billion, and those traded in the lower box, you will see we’ve achieved about two-thirds of the growth target consistent with the guidance Bruce provided on our Q2 earnings call. While we plan to substantially complete our SG&A reduction goal by the end of next year, we will also start to invest more in various growth initiatives to support our increasing order book. Operational performance also contributed to the margin performance in the quarter and partially offsetting the benefit as discussed earlier are unfavorable commodity, material cost and FX. Meanwhile, the metals business is continuing to execute towards 2019 margin expansion targets. The business is working to complete struggled restructuring project and execute on the significant new launch inventory in the system. Let me now shift to our cash and capital structure on Slide 13. On the left side of the page, we break down our cash flow. Adjusted free cash flow defined as operating cash flow, less CapEx was a positive $42 million for the quarter compared with $24 million in last year’s Q3. Capital expenditures for the quarter were $115 million compared with $126 million last year. The timing of expenditures between the quarters continues to evolve based on our current line of sight; it is likely we will finish the year towards the low end of our previous guidance, although more to say on how the year is expected to finish in just a minute. And finally, consistent with our tax planning, the majority, call it, 80 plus percent of the dividends from our equity affiliates are scheduled to be paid in our fourth quarter. For those of you who looked at our financial statements this morning, you will likely notice last year’s results contained a higher level of dividends from our equity affiliates. The primary driver of the year-over-year difference relates to our largest JV which paid a dividend in June of last year versus scheduled Q4 payment this year. On the right-hand side of the page, we detail our cash and leverage position. At June 30, 2017, we ended the quarter with $669 million in cash and cash equivalents. Solid outcome and consistent with our internal plan, as we balance our cash needs to support our capital expenditures, prepayment of debt, quarterly dividends, and share repurchases. Speaking of share repurchases, and as Bruce mentioned, we are excited to report that during the quarter and under the approved $250 million share repurchase program, the company repurchased and retired approximately 600,000 shares of common stock for roughly $40 million. We also paid off the company’s first quarterly dividend in the quarter totaling about $26 million. In total, between those two actions, the company returned roughly $66 million to its owners, a great first step as we are committed to enhancing shareholder value. Moving on to debt, gross debt, net debt totaled $3,399 million and $2,730 million respectively at June 30 2017. As mentioned in Bruce’s opening comments, currency movements during the quarter had a negative impact on our euro-denominated debt. This is especially noticeable when making a comparison between our Q3 ending gross debt and the gross debt reported at the end of our fiscal second quarter. At the March 31 rate, gross debt in Q3 would have been approximately $80 million lower. Adjusting for FX and the $40 million of buybacks during the quarter, our leverage ratio would have been comparable to last quarter, call it, about 1.63 times. As you would expect, opportunities to lower the cost or improve the strength and flexibility of our capital structure are routinely reviewed. As such, during the most recent quarter, the company prepaid $200 million of our term loan primarily replacing it with a lower cost European investment bank loan. The floating rate $165 million euro or EIP loan at the term of five years and is expected to save the company between 1% to 2% per year of interest. The prepayment covers the required loan amortization payments through mid 2020 on our term loan. As a result of our cash balance, debt level and operating performance, Adient’s net leverage ratio at June 30, 2017 was 1.69 times, down about 13% from the 1.95 times at September 30, 2016. We expect the strong operating performance and cash generation to continue as we progress through the year. Although we previously guided to a year end net leverage ratio of approximately 1.5 times, we currently expect the ratio will fall between 1.5 and 1.6 due to the share repurchases and the movements in the foreign exchange rate. Turning to Slide 14, let me wrap up with a few comments related to the remainder of the year and our guidance. Starting with revenue, we continue to monitor near-term production adjustments made by our customers primarily related to passenger cars in North America. At this time, based on our currency and production assumptions, it appears full year consolidated revenue will likely land around the low end of our range at just over $16.1 billion. Although we have been very successful at winning new business we see increased bookings will now start to have a positive impact on our consolidated revenues until the 2019 fiscal year. Despite the soft revenue guide, we continue to execute on earnings growth and margin expansion given our year-to-date performance, we continue to expect adjusted EBIT to range between $1.24 billion and $1.26 billion. Depreciation and amortization is tracking in line with our previous guide at $375 million. Given the composition of our debt and cash forecast, interest expense is running just under $140 million for the year. On taxes, as discussed in depth on our second quarter earnings call are running higher versus our original plan given the geographic composition of our earnings, namely the higher proportion of U.S. earnings. For modeling purposes plan on our rate of 14% to 15% this year with the expectation that we will be back to our original estimate of between 10% to 12% in fiscal 2018 based on the tax planning initiatives underway and current tax loss. The 14% to 15% includes taxes of just over 20% on our consolidated operations as our joint venture equity income as shown on our financial statements net of tax and that’s driving down our consolidated tax rate. At the bottom-line, the range for our adjusted net income continues to range between $875 million and $900 million. Capital expenditures are tracking towards the low end of our guidance given the timing and calenderization of certain expenditures. Finally, with regard to free cash flow, we still expect to generate proximately $400 million in free cash flow for the year. And in closing, our solid third quarter results combined with our strong first half performance provide a firm foundation for us to achieve in 2017 and beyond. And with that, let's move to the question-and-answer portion of the call. Operator, first question please?

[Operator Instructions] Our first question comes from Colin Langan. Langan, I am sorry.

Yes thanks for taking my question. I guess, the first question, just a clarification, I’ve gotten several questions about commercial settlements which you highlight on Slide 10. That’s a pretty big $50 million benefit and I think that’s been the case if you look at the Qs the last few quarters, I mean how should we think about that going forward? Is that going to be a headwind as we move forward as you had benefits this year that maybe aren’t sustainable or how should we think about that number going forward?

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

Yes, and Colin, I wouldn’t – it’s Bruce here. I wouldn’t read into that because we are showing it on the sales side of $50 million that it is $50 million bottom-line benefit. These are things like the content change, maybe the customer how the - a vinyl seat that they change to leather. Those kind of items not like the price increases fall to the bottom-line.

Usually things that – good point, usually things that drive our own cost base out and this is a recapture.

Yes.

Got it. And when I am looking at Q4, I am not sure whether my number is right, but it seems to imply that margins are maybe flat or even slightly down year-over-year in Q4, is there any – and you had such great progress every quarter year-to-date, I mean, is there any challenges that we should be thinking about in Q4 that make at all the margins start difficult?

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

And just lastly, you mentioned SG&A, I think the original target was 150 within the first two years. How much of that is completed and I was sure on the slides and in the Ks anything on the sales base maybe more challenging, do you think you could still get to 150 without – with the sales coming at a bit lower and do you think you could get it within the two years?

I mean, when we say – just let me clear, 150 basis points in both terms, or any time $50 million, two-thirds will have done this year and the one during next year and yes, we are absolutely confident we can get it. The fact that actually is sales are dropping here, because we haven’t backed away for the 250, from a basis point value it be a little bit better but we are very comfortable with the – two-thirds of the way done. If you just look at annualizing what we’ve done, that’s sort of in the bag we have some work to do to get to next year, but we’ve got roadmaps and we are continuing to work those. So, very constantly, I mean, the self help part of ourselves is cutting SG&A 100% within our control and the improvements that we need to make in the metals operation are 100% within our control and then there is nothing that the market influences those two initiatives.

Great, thank you for taking my questions.

Thanks, Colin.

Thanks, Colin.

Thank you. Our next question comes from Mr. Joseph Spak. Mr. Spak your line is now open.

Thanks. Good morning everyone. Just to be clear on the commercials, I mean, you said it’s a recovery but that’s an intra-quarter recovery. So it’s not a recovery from an expense experienced in the prior quarter?

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

Okay. And then just on the guidance, within the adjusted EBIT, should we still be thinking about equity income of about 400 because, the – and correct me if I am wrong. But I don’t know if that sort of interiors investment was sort of always plan. So, I don’t know if there is a little bit of an offset there and then currency has obviously changed as well. So I just wanted to get some of the guts there.

Yes, I think the 400 is still a good number. Some weakness on the YFAI with some of those investments, but then constraints on the unconsolidated seatings. So, I think it’s still a good number, Joe.

And then, what about – just from a straight translation perspective it looks like the currency has moved in your favor on China and then even on the consolidated results, shouldn’t – is there – what was your prior euro assumption and what is it now?

Well, yes, it’s a good point. So, our prior euro assumption for the year was probably something closer to 110-ish or may even a little inside that. So it definitely will help us a little bit on – we’ll say the sales and the nominal EBITDA - on EBIT in the fourth quarter versus our original assumption. Meanwhile, though, we have on the debt side from the leverage we’ll have a higher debt number just due to the exchange on the guidance.

Yes, I think.

It’s not terribly material though, Joe. It’s not like…

And I think Joe on the…

$2 million.

I think as we – if you look at kind of where the Chinese currency is, it’s kind of come back to where we started the year – throughout the year, I think we are kind of getting a little bit – starting to see us handle. But which is going to come back to where we thought it would going to be.

Okay, and then, sorry, just one more quick one. I guess, on the commercial side, I mean, so, that’s helping the top-line you are saying doesn’t really help the EBIT. So, what – like what does that fall under the broader scope of operational performance or volume or where is it in the EBIT?

Yes, on Page – it’s going to fall in the operational performance line.

Okay.

And some would be in the volume side too.

Okay, thanks.

Okay.

Thank you. Our next question comes from Mr. David Leiker.

Good morning. How are you all?

Hi, David.

Hi, David.

I wanted to try and dig through some of what you are seeing on the bookings here over the last year, it’s – since you were interest free. Can you give us some characterization of those bookings of how much is replacing existing business versus conquest kind of relationship?

Yes, I mean, we tend to update on our backlog which is the new incremental is not as a lots to say, but in January at the Deutsche Bank Conference, so that’s what we are planning to do. You – if you recall, last year we came out and said we had a backlog number of $2.4 billion which is up from I think, $2.1 billion in the year before. And when you kind of looked at the under that, what you saw in 2017 and 2108 – I am sorry, 2017, we had no growth in our consolidated seating business and as you look to 2018 and 2019, you saw growth in the consolidated operations picking back up. When we sort of move the clock here and I lock of 2017, which have been a negative to 2017 and we replace it with in 20. We expect to see an acceleration in the upward trajectory in terms of the consolidated, so if you look at 2019, sorry, 2018, 2019, our consolidated seating business was growing. And the backlog for those years is increasing. 2020 will accelerate the rate of that increase. So I don’t really want to get into what it is right now, but it’s accelerating. So, I would say, the mix of the new is higher than the past.

Okay, great. And then on metals, you had talked about a number of lines. Just can you talk a little bit about the timing magnitude of that as – presumably those are products that are coming in with better margins on and then some of the yield stuff you had?

Yes, I mean, it’s a combination of some things that – our own – like our recliner, for instance, our T 3000 replaces – I am sorry 2000 replaced by our 3000. Because there are so many like – cushion recliner side, so many launches that we have in metals. It’s kind of hard to pinpoint like some big ones. But we do have fairly significant – another sort of key driver is kind of get to some of these mega launches that we talked about things like for Volkswagen Gen 2 launch, just $300 million, $400 million program. Our BMW, Daimler combined IKD launch is underway right now. Those things are sort of getting behind us. So it’s a combination of some improved margins on metal economics that I think you sort of referencing, all been the…

Yes.

There is a margin enhancement on old to new products. There is I talked about some restructuring being done here in Europe. Some big, big migration in metals from west to east in Europe. And then there is a tampering down of launch activity. Those are all the drivers that are kind of happening but, I would say, if you look at sort of some of these new programs that we talked about in my comments like, on the Camry, and the A-8, the Tiguan, sort of things. I mean, they are helpful. But it’s a whole bunch of more things.

Yes. Great. Thank you very much.

All right. Thanks David.

Thank you. [Operator Instructions] Our question will be coming from Mr. Brian Johnson. Mr. Johnson, your line is now open.

Yes. I want to talk a little bit about just kind of bridging kind of the backlog to bookings. You mentioned strong bookings, but can you give us a sense with the roll-offs and sort of that backlog level you came into existence with how – what that means for the revenue this year and especially next year there?

Yes, maybe, make up has been little bit overly confident. On our bookings, because some of our – some of the auto sector, talk to those bookings, and some people talk about bookings over like life time awards and things like that. So maybe just could be clear, so when we talk about bookings, we are talking about annual revenue for one year of both new and replacement. When we talk about and that’s what obviously also at the net of a loss. So if we had a $200 million replacement business, that we re-won and $100 million new contract that we won, we would call that $3 million in orders. For backlog purposes, anything that we move on replacements are negative. So if we just win our current book of business, we would have a zero backlog. So backlog is entirely not incremental to new business. So that’s kind of the methodology here. Is that we were looking for Brian?

Well, I guess, kind of within that the tenor of the conversations with customer level of competition you’ve had, couple of competitors especially some of the smaller ones talking about big wins, is it getting more competitive? Could it put pressure on future margins? And then, I guess, as – kind of the competitive environment, your main competitor talked a lot yesterday about the synergies between wiring harnesses in these systems as seats – especially in China become more complex and laid in with electronic features. How do you see that in terms of competition for seat awards?

First of all, I have never lost a piece of business because we didn’t have wire harness capability. So I will start with that one. But I mean, in China, I think it’s fair to say that, Adient, as well as our global competitors, are all beneficiaries of the Chinese suppliers and in-house seating move into the big global players on the seating side. So, I think we are all in the same boat. That’s a positive for all of us. What I would tell you there is, we are winning more than our fair share. I am confident that our market share, which is already significantly stronger than all off our competition, almost combined, that we are continuing to win share in that market. If you then look at the – if I then look, tell me a little bit more about what’s in your backlog. We have significant business in there with some of the customers that we have lost here with over the last three or four years time at Johnson Controls. So for recapturing business that was ours previously, we have a good book of incremental new business with Japanese customers and so there our competition for that business is not the people. They do follow buying and it’s more like you are talking about – Hitachi, F&K those types of players. We have metals, incremental metals program in our backlog and again if you look at our vertical integration versus again the key focus, that you cover we are much stronger on the metals side. And then, I would say, some of our competitors here in some of the tier-1 competitors have had some launch issues and we’ve been in that beneficiary of picking up replacements, our custom – and competitors’ replacement program which are essentially share gains for us. So we have some performance issues that have translated into a positive for us. And I think when we go – when we talk through our backlog in January, I think we will do a deeper dive and kind of go through how we are moving, because it’s not – we are going in with a lower margin, so that we can get this business growing again. We are committed to the margins expansion that we’ve talked about in our investment thesis and taken on a bunch of business that’s going to be below that when it launches in two or three years time and that’s a little gain for us. So that’s not what it’s about.

Okay, great. And just final question, you can say have a car now with your massage sheets which are amazing.

Thanks for that.

Thank you.

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

I can’t really answer that question, because we don’t sort of, I’d say overall though…

Fully loaded seat versus a fabric manual sliding seat?

Maybe that’s something slightly different than being able to answer that specific area. We have seen increases in content per vehicle with the seating which would suggest that people are looking for more features, more comfort, more premium stuff, more safety-related items in their seat. Yes. When we quote a program…

And that need to be getting at the mix shifts there?

Correct.

Yes, yes.

Yes, that’s again, it’s going up within a SUV it’s going up.

Yes.

Yes.

Okay, thanks.

Thanks, Brian.

Thanks, Brian.

Thank you. Our next question comes from MR. John Murphy. Mr. Murphy, your line is now open.

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

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

Yes. So, the China market, as I mentioned in the remarks has been – there has been a pull back in some areas of production, but it’s been largely targeted at particular brand. For instance, Hyundai and Kia is way down in the quarter and there is a few other brands, some of the local brands, some of the Japanese brands have also seen some softness in their sales and production over the course of the first half of calendar 2017. Fortunately, that mix of customers were actually fairly underrepresented on. The growth that we are – I guess, more aligned to actually we had a pretty good first half of the year. We benefited from that. We also continued to benefit as I mentioned, just from some of the content per vehicle and some of the other growth initiatives, we’ve been able to put in the region. So, while it’s been a challenging market, this is – our partner has worked very well with us. We obviously have tie-ins with our customers, as they are also our partners and we’ve been able to manage through and the teams have been able to manage to that environment fairly well. We actually saw a slight uptick in net margin on the whole group. It’s somewhat of a mix element, but as we’ve always said, we are intending to keep that market relatively stable from a margin standpoint as we continue to grow it and we’ve been very pleased with how the first half of the year, I guess the first three quarters of this fiscal year has gone.

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

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

Thanks everyone.

Great, thank you.

That concludes today’s conference. Thank you for your participation. You may disconnect at this time.