Adient plc (ADNT) Q4 2018 Earnings Report, Transcript and Summary

Thank you all for standing by. And welcome to the Fourth Quarter Earnings Call. All participants will be on a listen-only mode until the question-and-answer portion. [Operator Instructions] Today’s conference is being recorded. [Operator Instructions]. And I would now like to turn the call over to your host today, to Mr. Mark Oswald. Sir, you may begin.

Thank you, Melissa. Good morning and thank you for joining us as we review Adient’s results for the fourth quarter of fiscal 2018. The press release and presentation slides for the call today have been posted to the Investor section of our website at adient.com. This morning, I’m joined by Doug DelGrosso, Adient’s President and Chief Executive Officer, and Jeff Stafeil, our Executive Vice President and Chief Financial Officer. On today’s call, Doug will provide an update of the business, including his hundred day plan and initial observations since joining Adient in early October. Jeff will then review our financial results in greater detail. After our prepared remarks, we will open the call for your questions Before I turn the call over to Doug 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 the results 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 from these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. With that, I’ll now turn the call over to Doug.

Okay thanks, Mark, and thanks to the investors and analysts joining the call this morning to review our fourth quarter and full year results. I’m certainly excited to be here presenting this morning, and I look forward to working with you in the future. Before getting into my prepared remarks, I want to let you know there’s a few topics today that we’re not prepared to discuss -- or we’re choosing not to discuss and this is really primarily due to my short tenure here. I’ve only been on the job 40 days. I’m still in the early stages of the hundred day plan, and I thought it was premature to discuss some of the topics. So first, we will not discuss details or answer questions around our expectations for fiscal 2019, including specifics on the first quarter. Next, we will not make comments regarding the long-term structure of our business, including size, portfolio makeup, etcetera. And lastly, we will not provide details related to our customer’s commercial discussions. This is very consistent with our historical approach. I will say we’re deeply engaged on these issues, and you should expect that early next year, we’ll be prepared to have a much more detailed discussion on the future of our business. With that said, we have a lot of information to cover so let’s get started. I’ll move you to Slide 4, which gives you a brief overview of my professional experience. I’m not going to read through each and every one of those experiences. I will say the key point here is that I’ve been in the automotive supply business for 30 years plus. Most of that has been in operations, and most of my operating experience has been with seating-related products, so I’m coming into Adient with a pretty good foundation of what we do here and what success looks like. I’ve got a proven track record of turning around challenged businesses, and I’m pretty confident in my ability as we set a path forward here at Adient. In addition, I was honored to accept the appointment to Adient’s board. I look forward to being part of the team as we execute our transformation plan and our absolute focus will be on profitability, cash flow, and improving returns for our shareholders. Moving to Slide 5, let me comment on our recent developments including our key financial metrics, which are called out on the top of the slide. Sales and adjusted EBITDA for the quarter totaled $4.1 billion and $251 million respectively. Sales were generally in line with our internal expectations. Operational and commercial challenges were a primary contributor to the $139 million year-over-year decline in EBITDA. Adjusted earnings fell to $1.30 in the most recent quarter, as a lower level of operating profit dropped right to the bottom line. Fourth quarter free cash flow was $307 million or $258 million excluding approximately $48 million of benefits related to the expansion of an accounts receivable financing program initiated in Q3. Free cash flow results were in line with our earlier guidance. I’ll say the team worked really hard in the closing quarter to collect cash from our customers to lessen the impact of our lower operating profits. Net debt leverage totaled $2.7 billion, just under 2.3 times as of September 30th. It’s important to note the adjusted results excluded certain material non-cash charges that we view as one-time in nature or otherwise skewed trends in our core operating performance of the company. The largest items excluded in the quarter are associated with asset impairments of SS&M and the Interior segment, and the recording of valuation allowances against certain deferred tax assets. Jeff will provide full detail on our financial performance, including the special charges in just a few minutes. Outside the financial results, other recent developments include the announcement in our earnings release earlier this morning related to suspension of the company’s quarterly cash dividend. This action should be viewed as part of a focused effort to de-risk the company’s capital structure, essentially increasing our financial flexibility. Related to our efforts to de-risk the capital structure the company successfully amended its main credit agreement. The amendment increased the maximum total bank adjusted net leverage covenant ratio to 4.5 times from 2.5 times. This action will provide additional flexibility as we continue to execute our turnaround plan. The team also completed various asset sales to improve our cash position, including the Detroit headquarters building and company airplanes. Proceeds from those transactions totaled just over $70 million, about half of which were included in our September 30th ending cash balance. Let’s move to Slide 6. I want to spend a few minutes discussing how I’ve been spending my time since joining the company approximately six weeks ago. First, as you’d expect, I’ve developed and am executing a hundred-day plan. The early stage of this plan, which I’ve just recently completed, involves gaining clarity and a better understanding of the challenges facing the company. To start, I deep dived into the 2019 plan with the team, trying to understand the basic assumptions around the plan, but more importantly, the action plans associated with the plan to achieve the desired objective. After that, I went on the road. I’ve conducted on-site reviews at our top underperforming plants in Europe, Mexico, and the U.S. I’ve personally reviewed the status of our top five critical launches that are scheduled to occur in the next 90 days. Based on these visits and reviews, I have reallocated resource and prioritized focus to the most severe underperforming plans and future launches. In addition, I’ve had face-to-face dialogue with certain customers, initially focusing on customers where we have strained relationships, and finally, I’m very much engaged in reviewing all new business opportunities for our SS&M business -- and in fact, all businesses for our company -- to make sure everything that we’re outbidding on has an assured return on investment. The next phase of the hundred day plan that I’m just launching into will be aligning the management team on a path forward and having a relentless focus on operational and commercial execution. Despite being early in days, my initial observations within the company are encouraging, as the challenges impacting Adient have been identified and are being addressed. That said, it’s clear we have to get back to a back-to-basics approach of managing our business. When looking at the future, assured profitability and returns need to be at the forefront of every aspect of our behavior. Every business, regardless of product, customer, or reach, is expected to earn an acceptable return. Although the challenges that impacted us last year were severe, the issues were not widespread. They were isolated to a handful of plants, launches, and customers. Over time, I’m confident these issues can be fixed. I’ll also say that I’ve seen no glaring level of un-competitiveness at Adient, so I think the company is well positioned as it has been and we just need to focus on the most immediate issues we have in front of us. We know that there’s a lot of work ahead, but I can assure you we’re up for the challenge. Now, let me turn it over to Jeff so he can take us through the details of our financial performance.

Thanks Doug. Good morning, everyone. Turning to our financial performance, as Doug stated in his remarks Adient’s fourth quarter results were significantly impacted by continued headwinds. Starting on Slide 8 and before jumping into the financials, I’d like to point out that there were a variety of onetime non-cash charges that significantly impacted Adient’s Q4 GAAP results. The biggest drivers were asset impairments. The impairments were driven by Adient’s ongoing performance issues that are expected to persist to some degree into the foreseeable future. For SS&M, our analysis resulted in an impairment charge to write down long lived assets that were in use as of September 30th, 2018 to the values reflected by their cash flow. Note that this analysis assesses program cash flows currently in production. The fair values were determined using discounted cash flows associated with the current capital asset base. The net loss impact in Q4 was $718 million for this impairment. Note that these write downs are on long lived assets and don’t impact working capital assets. For YFAI, given our ongoing performance issues, Adient assessed whether impairment existed for our investments in JV. As a result of the analysis Adient recorded an impairment charge of $358 million, which has been recorded in equity income. The after tax net loss impact is $322 million. Fair value was determined using discounted cash flows for the YFAI business. Regarding tax as you recall, we’ve mentioned throughout the year on our earnings calls that due to our lower level of profitability, we have increased pressure to utilize certain deferred tax assets that had been established. Based on the history of earnings in certain geographic regions and forecasted future earnings, it was determined the company would be unlikely to realize the benefit of certain deferred tax assets thus resulting in the recording of valuation allowances against these balances. These valuation allowances impacted our net loss by $439 million in the quarter. As noted, this will result in an increase in our effective tax rate but it will not impact our forward cash tax payments. In addition to these performance related asset impairments, a revision was made to the provisional estimate for U.S. tax reform. If you recall, back in Q1, we made a $258 million estimate. Based on updated assumptions, we are now estimating this to be $210 million. Other adjustments, including becoming Adient’s, restructuring related charges, pension mark-to-market, and purchase accounting amortization also impacted the GAAP results. In total, combining the asset impairments, SAB 118 adjustment and other items, Adient’s GAAP results were impacted by approximately $1.5 billion. Now, let’s turn to Slide 9. In adhering to our typical format this page is formatted with our reported results on the left and our adjusted results on the right side. We will focus our commentary on the adjusted results, which exclude the items just discussed in the previous slide. Despite an approximate 4% increase in sales, adjusted EBITDA for the quarter was $251 million and declined $139 million year-on-year, primarily explained by a decline in business performance, which I’ll cover in detail in a few minutes. Meanwhile, adjusted equity income for the quarter was down $14 million compared to the same period last year, more than explained by a $15 million decrease within our Interiors YFAI business. Finally adjusted net income and EPS were down approximately 44% year-on-year and $122 million and $1.30 per share respectively. Full year results are shown on Slide 10. As mentioned throughout the year, sales were not a factor in our unsatisfactory financial performance, as revenue was up about 8% year over year and came in a bit over $17.4 billion. The business performance issues related to our difficult launches prevented us from converting the increased sales into profit. Adjusted EBITDA of $1.2 billion was down approximately 25% year-over-year. Equity income, albeit down $9 million year-over-year, was a good outcome considering the $31 million decrease in Interiors. In general, the unconsolidated Seating and SS&M businesses are performing well. And finally, as we’ve seen throughout the year the operational challenges we are facing had a significant impact on the bottom line, as adjusted net income and EPS were down approximately 40% year-over-year at $527 million and $5.62 per share respectively. Now let’s break down our fourth quarter results in more detail, starting with revenue on Slide 11. We reported consolidated sales of just over $4.1 billion, an increase of $166 million compared to the same period a year ago. Benefits from the Futuris acquisition combined with increased volume, primarily in North America, more than offset the negative impact of currency movements. The primary FX drivers are related to movements in the euro as well as the Brazilian real and Argentine peso. Moving on with regards to Adient’s unconsolidated revenue, growth remains strong relative to overall production in the region. Unconsolidated Seating and SS&M revenue, driven primarily through our strategic JV network in China, grew about 1% year-over-year. Adjusting for FX, sales were up about 3%, a very good outcome as production was down roughly 4% in the quarter. Strong mix driven by continued growth with BMW, Volvo, and with SAIC, helped drive Adient’s outperformance versus the market. Sales for unconsolidated Interior, recognized through our 30% ownership stake in Yanfeng Automotive Interiors, was down 8% year-over-year. When adjusting for FX and low margin cockpit sales, revenue was relatively flat versus last year. Now 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 $251 million in the current quarter versus $390 million last year. The corresponding margin related to the $251 million of adjusted EBITDA was 6.1%, down approximately $370 basis points versus Q4 last year. Weaknesses across our Seating and SS&M, primarily attributed to negative business performance combined with continued downward macro pressures from commodity costs and FX, drove the majority of the year-on-year decline. Compared with our guidance provided last quarter, headwinds within SS&M and Interiors were more than expected, and represent the reason for our shortfall. Important to note the performance for our unconsolidated Seating and SS&M business remains strong, as equity income was up about $2 million compared to the same period last year. Interiors, recognized through Adient’s 30% ownership stake in YFAI, weighed on the fourth quarter results as operational challenges outside China combined with lower volumes had a significant impact on the year-over-year results. Similar to the past few quarters, we’ve included detailed bridges for both Seating and SS&M segments on both Slides 13 and 14. Starting with Seating on Slide 13, adjusted EBITDA decreased to $301 million, down $102 million compared to the same period a year ago. The primary drivers between the periods include: First, the positive benefits associated with the Futuris acquisition and increased volume contributed approximately $23 million. However, these improvements were more than offset by a variety of factors. Most significantly, the business incurred just over $80 million in business performance headwinds during the quarter, many of which were launch-related. Before explaining the components of business performance, let me say that we would generally expect these components to net to zero or to be slightly positive. In short, we would expect that the price reduction for our customers would be offset by cost reductions from our suppliers and improved operating productivity. That said, these components unfortunately netted to our $80 million of negative performance. The $80 million performance headwind can be bucketed into a few distinct categories. The company gave approximately $52 million price reductions to its customers, which is common for our industry. Although we offset a portion of that call it $32 million benefit from material performance the net result was a negative $20 million net material margin, thus, in normal times, we would have expected operating efficiencies to net at least $20 million positive. However, launch related inefficiencies more than offset our operating productivity and efficiencies. These headwinds are associated with Adient’s heavy and complex launch load -- items such as additional freight, operational waste, and scrap within the network. In total instead of providing the net improvements we would normally expect, operations ended up a negative $62 million hit. One point I’d like to highlight at the bottom of the slide is our quarterly seating performance. Note that the first half results approximated 2017 performance, but the back half has experienced significant declines that have increased quarter-over-quarter. While Doug indicated that these issues are being addressed, they will take time, and it’s reasonable to forecast these will carry forward into 2019. In addition to the negative business performance just described, increased commodity costs primarily chemical prices, combined with currency movements resulted in an approximate $19 million headwinds in Q4 this year versus the same period last year. SG&A efficiencies were more than offset by changes related to insurance and workers comp’s accruals and a reduction in service fee recoveries from YFAI. One last point on Seating, our CapEx for the seating business was approximately $76 million in the quarter. Turning to Slide 14 and our SS&M segment performance. For the quarter, adjusted EBITDA was negative $34 million, or $38 million lower than Q4 2017. The primary drivers between Q4 this year and last year’s fourth quarter include the impact of negative business performance, which was primarily driven by Adient’s heavy and complex launch load, the launch inefficiencies similar to what we discussed for the Seating segment burdened SS&M with approximately $25 million of operational headwinds. Pricing and material performance essentially offset each other, as shown on the bridge. However, the burden associated with launches prevented the operations from achieving the required level of efficiency to make the business equation hold. Macro factors such as FX and commodity costs also weighed in the quarter. In total, FX and commodities totaled about $14 million. After reaching a high of about $900 per metric ton in North America in July, we’re hopeful the recent pullback in steel prices continues. In addition to increased steel prices though, and the higher launch activities, the impact of tariffs specifically on electric motors coming out of China was another factor in the segment’s inability to deliver a third consecutive quarter of sequential improvements. Going forward, based on today’s landscape, the annualized impact of tariffs is estimated to be approximately $15 million. I’ll also mention the unfavorable SG&A primarily driven by changes related to insurance and worker’s comp accruals placed approximately $11 million of downward pressure on earnings during the quarter. Partially offsetting these headwinds were lower costs associated with future SS&M growth of about $12 million and increased equity income of $7 million. Regarding SS&M’s CapEx for the quarter, the business spent roughly $56 million. Clearly the absolute level of performance and the fact that our performance took a step backwards versus Q3 is disappointing, and is reflected in the impairment charge taken in the quarter. Let me now shift our focus to cash and capital structure on Slide 15. 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 $307 million for the quarter compared to $286 million last year. The negative impact of lower earnings was more than offset by positive trade working capital performance. Capital expenditures for the quarter were $132 million compared with $160 million last year, and as you can see in the footnotes, we continued to break out CapEx by segment. For the full year, capital expenditures totaled $536 million, approximately $40 million below the expectations provided to you on our Q3 earnings call. Free cash flow in 2018 was $143 million. When adjusting for the benefits associated with the accounts receivable financing facility initiated in Q3, free cash flow for the year was $1 million, or in line with the previous guidance. On the right hand side of the page we detail our cash and leverage position. At September 30th, 2018 we ended the quarter and year with $687 million in cash and cash equivalents. I’ll note that included in the balance roughly $35 million of cash proceeds generated from the sale of certain company assets Doug mentioned earlier on the call. The remaining proceeds, call it another $35 million were collected after the quarter closed. Gross debt and net debt totaled $3.43 billion and $2.743 billion respectively at September 30th, 2018. As a result of our cash balance debt level, and operating performance, Adient’s net leverage ratio at September 30th, 2018 was 2.29 times. Our leverage is pretty much equal to our third quarter 2018 result. The company recognizes the importance of reducing our current debt level, and is initiating actions to de-risk our capital structure. That said, we’re taking steps to do just that. The board’s action to suspend our quarterly cash dividend beginning with Q2 fiscal 2019 will increase our financial flexibility and debt paydown efforts. In addition and turning to Slide 16, let me comment on a few other financial matters, including the successful amendment to our credit agreement. We view the amendment as part of a focused effort to de-risk the balance sheet. The maximum total bank adjusted net leverage covenant ratio was increased to 4.5 times from 3.5 times. This gives the company additional flexibility as we navigate and execute our turnaround plan. Just a reminder, our credit agreement calculates leverage using a different formula than what I just explained on our reported leverage. That bank leverage totaled just over 3 times at September 30th. The company will continue to look for opportunities and remains focused on de-risking capital structure in 2019. Taxes are another subject I’d like to spend a moment to discuss. First, our effective tax rate for the year was significantly impacted by the lower year-over-year earnings, geographic distribution of profits, and reduced U.S. tax rate. Going forward, it’s likely our effective tax rate will increase materially year-over-year, primarily driven by the valuation allowance, as discussed earlier. Important to note, the valuation allowances will not impact Adient’s cash taxes going forward. Moving on to Slide 17, let me conclude with a few thoughts on what to expect in the coming months. To begin with, Doug will continue to execute his hundred day plan. He’s approximately 40 days into the process. As he solidifies his plan on the path forward the team will be working hard to improve our operating performance within both the Seating and the SS&M businesses. Resources have been prioritized on our most severe underperforming plants and future launches. The fiscal 2019 plan will be refined in the coming weeks. As mentioned earlier, all facets of the business are under review to identify further profit improvements and cash generation opportunities, and although we are still finalizing elements of the plan, including regional production assumptions, its clear the challenges faced in 2018 both company specific and macro will continue to impact our results in 2019. Drivers that should be considered when updating your 2019 models include; First, the challenges within our Seating operations. As noted earlier, these intensified later in 2018, and thus on a year-over-year basis, will impact our first half of 2019 vis-à-vis 2018. Next, business performance issues that are expected to continue within the SS&M business, albeit they are expected to improve over the headwinds experienced in 2018. Next, our continued operational challenges impacted the Interiors business and the reversal of the approximate $80 million of temporary SG&A savings, as called out during 2018. And, in addition to those company-specific headwinds, several macro influences, such as commodity cost, increased freight cost, labor economics, and the full-year impact of tariffs, will place added downward pressure on the business. As you’d expect, we’ll work to identify opportunities to help mitigate these negative influences, especially operating commercial improvement actions. We expect to share our fiscal 2019 expectations with you in January, after Doug has had time to complete his bottoms up review. With that, let’s move to the question and answer portion of the call. Operator, can we have the first question, please?

Yes, sir. The first question comes from Colin Langan, UBS. Your line is open.

Hey, guys. Good morning. This is Gene Vladimirov on for Colin. Doug, thanks for all the color on the hundred-day plan. I know it's early days. Just wondering if you could give us some color on what would have been the biggest surprises for you thus far, and what gives you confidence in the competitiveness of the business?

Well, I went through a pretty detailed process before coming on board, so, many of the issues that were out there, I had a chance -- either talking with the board of directors or some of the management team on what the company was facing. I would say I haven't seen anything I'm particularly surprised by. I think what perhaps we've been struggling with is more the speed of corrective action and how fast we can implement it. I think that's been a reflection of some of our performance in the fact that we haven't been exactly spot on with guidance, which, quite frankly, is why we thought we thought it was inappropriate at this time to talk about the first quarter or the full year, because that's where I'm really spending my time, is to make sure we've got that locked down and we've got a plan that we can execute and that the team is absolutely committed to. With regard to competitiveness, when I say there's no glaring issue, I think about it in terms of -- you can start at a very macro level. Do we have a competitive footprint? Do we have operations in competitive, low-cost regions? You can think about it in terms of our customer base. Do we have a diverse mix of customers so there's not an over-concentration of that from a competitive standpoint? You can think about it in terms of the products that we're in. We don't necessarily have an over-concentration. We run JIT plants, we run urethane foam plants, we have trim operations that are competitive against the set. And, I think the key question then becomes the metals and mechanisms where, with the size of the business that we have, we should be much more competitive, and that's where I need to spend some really serious time understanding what we do in that business as we move forward. Certainly, the numbers would suggest that what we're doing today is not something we're interested in doing as we go forward. And so, I've spent a lot of time just understanding that, how fast we can redirect that business and get it back on track.

Got it, OK. Very helpful, thank you. And then, could you give us some color on what you guys are seeing in China? I think a lot of suppliers are calling out that as a source of pressure. Your numbers seem to be holding up OK. So, just curious what you're seeing in the business there, and anything you can give us on your view for the rest of the year and into '19.

Colin, I'm going to let Jeff answer that. Quite frankly, I've been spending my time in the U.S., Mexico, and Europe, as you would expect, based on our results. Jeff has been handling China and is much closer to it. Certainly, he's been here much longer, but I just haven't spent the time there, though I will say I'm spending time later this month to go meet with our partners and get a better understanding of what's happening.

Overall in the China market, there's certainly been a very soft end sales set of numbers recently. Production was a bit better. I'd caution probably all numbers in China right now just because inventory levels have built a bit. Production was down only 4%. With that being said, as we've always said, we have the ability to outperform the China market due to our footprint, customer concentration, and the base trajectory of our products. We're on good customers, we're on good programs. As those OEMs that we're on have generally helped market share, they generally increase content in Seats as well. All those have existed in the performance. So, we're still optimistic that we can outperform the market. As we look forward, I think a real correct -- what's going to happen on China inventory levels and China sales? If there's a stimulus, maybe that will help bring back the inventory in line. If there's not, there might be some soft production, maybe in Q2. I would expect the year to end reasonably well -- calendar year -- and we'll see what they do as far as stimulus goes, but at some point, they're going to have to address the inventory issue.

Got it, OK. Thanks for taking our questions.

Thank you.

Thank you. The next question comes from John Murphy, Bank of America Merrill Lynch. Your line is open.

Good morning, guys. This is Aileen Smith on for John. You cited in the press release that many of the issues you're facing across both your Seating and your SS&M businesses are related to launch inefficiencies. Given that you guys have worked diligently to try and regrow your backlog after the spin from JCI and that 2019 should mark an inflection point on this front -- at least, as you've discussed it -- how do you get confidence that you can rectify some of these launch issues, and they're not more structural in nature?

I think about it in a couple ways. So, I think the company's been pretty open and direct. There's a process in place, and they follow through the two years of development on a new business launch, and to a certain degree, with a couple of these key programs, we've deviated outside that process, and that's impacted us as we've gone into launch. The point I was trying to make in the hundred-day plan is on those programs that have not launched yet, immediately getting engaged on those, and addressing those issues, and then working upstream on launches that are further out to get us that kind of traction. So, the mantra of "back to basics" -- we've had a number of communications with the team -- is let's get those problems exposed early so we can focus on them. It's not impossible to have good launches. I've done it many times throughout my career. It's really just exposing what those issues are well in advance of starting production so you're not fixing them when you're in volume production, you're addressing them well before you launch. The second part is some of the expense that we're incurring associated with launches is outside of our control because our customer is having a hard time launching their products. In the case of a just-in-time seat supplier, if they're not making late with vehicle production, there's still an expectation that you're manned to build at the contractual rate. That drives a lot of inefficiencies in our plant. I call that launch-related. Or, they have a lot of volatility in their build rate, so they don't build exactly what they forecast to build, and that can be on a daily basis. When that happens, it creates a lot of disruption in our system that equates to our standard labor cost, that can equate to premium freight to get alternative product in place that wasn't in their initial release, and that also drives over time. And, many of our customers are working six-day or seven-day weeks to get to their volume projections that they have committed to their marketing groups. That's launch-related, but it's also promotion related, so I imagine some of the conversations I've had with customers is to say, "This needs to be addressed. We cannot sustain that inefficiency in our operation." And, again, some of the plans that have been in place that we would get that addressed pretty quickly with our customers -- that's taken much longer to get done, and since coming here, I've just made that a much higher priority to drive that, personally meeting with the customers, personally communicating that message, and demanding a timeline to get some of that fixed.

Great. Thank you very much for the color. Second question around commodity costs that you guys continue to cite as a headwind. Can you remind us what of your raw materials complex ultimately gets passed through to your customers with some lag and what you are on the hook for in terms of price changes? And, the commodity headwinds that you're seeing right now -- are they more so on the metals side or on the resin side?

Great question. Just going in reverse order, most of what we've experienced recently has been more in the steel. When the tariffs were put in place earlier this year on steel, even though we don't import much of our steel so the tariff doesn't directly impact as much, it drove up the cost of domestic steel pretty dramatically. The way our contracts went in, a lot of that hit us over the summer as far as the increases. From a recovery -- and, I say the chemical side is a little bit more of a mixed bag. Some of the chemicals we have -- there's one particular one called TDI, which is a chemical we use in our foam process. We had mentioned a reactor that had gone offline a couple years ago and came back online this summer, and TDI prices have adjusted downward, and that's been helpful to us. But meanwhile, oil prices have driven up some of the other chemicals directly linked to petro prices, and that's hardest, so I'd say maybe a little bit of tailwind, but probably more neutral on the chemical side. As it relates to recoveries, we generally expect to get as close to 100% as we can. We have a fair amount of our recoveries that are mechanical, and then, some that have to be negotiated on an annual basis or on a regular basis with our customers, but we would generally expect to receive most of that back, but definitely with a time delay. We have a portion of our customers that take a year or re-measure that every year -- some that do it automatically, some that are every quarter, and some that are every two. So, what we typically say is we have about a six-month lag on average. It can be a little bit longer. Especially if prices have as much volatility as they've had recently, it can take a little bit longer at times.

Great. And, last question, on the suspension of the dividend, longer down the line, what would you need to see with respect to financial performance or leverage in order to reinstate the dividend? Should we be thinking about a net leverage target level after which you'll reinstate it, or alternatively, is it really just a function of the business finding its footing again and results in your various segments improving?

Great question. As the board looks at the dividend, it's obviously not an easy thing to make that decision. We felt that it was prudent given the performance, given the current market we think we're entering into, to suspend it. We don't have a specific mark of when we'd reinstate it, but clearly, one of the criteria is to get our footing back operationally as Doug executes his plan, as we have -- we would expect to turn around this business. We still have... The business fundamentals are still there. The cash flow fundamentals of what we believe the Seating business represents are still there for this to be a cash-making, quite profitable enterprise as we move forward and get past some of these current issues that have plagued us, and as we complete that cycle, we definitely will revisit the dividend question.

Great. That's very helpful. Thanks for taking the questions.

You're welcome.

Thank you. The next question is from Brian Johnson, Barclays. Your line is open.

Hi. Welcome, Doug. I just want to follow up and drill down on that last comment, particularly around the process deviation and those five critical launches. What part of the process -- two questions. What specifically deviated, and second, when you look at those problem areas, how much is remediable in terms of the dollar headwind from manufacturing, supply chain, cost save, self-help -- that is, efficiencies, things you can control in the four walls of your factory and supply chain -- versus how much were the contracts coming in and/or change orders as they piled up, just fundamentally underpriced, and you're going to be stuck, absent charity from OEMs?

Fair question, complicated answer, so I'll have to split it into two pieces. So, some of the problems are emanating from our "complete seat" side of the business. When Jeff spoke about Seating America, that's more complete seat. And then, obviously, we've talked about SS&M in the past, and I'll have to say that's got some different characteristics. What is common between them is from award to start of production, I think what's inherent to Seating and Mechanisms is the product is constantly evolving. What you quote and what you launch at SOP is typically different than what it was envisioned to be. So, you have a lot of changes, and there's a lot of negotiation throughout that process of who's responsible for the change. In Seating, it's -- in complete seats, it's pretty grey because Seating tends to be less objective in what is good and bad, and in SS&M, it's more objective, it's more quantifiable, and so, the discussion is a little bit more direct. As you go through that process, there's certain times that are reflection points, like "I'm about ready to release tools," "I'm about ready to release capital," and I would say at those points in time, you have a very sobering conversation with your customer and you have to have a very good idea of what your profitability projection looks like. Those are the times that you decide whether you're prepared to go forward or not, and if you're not, what needs to happen. I would say on the commercial side -- and, where I think the program derails a little bit -- is much of that discussion was left to be had during start of production, and that's the worst time to have the conversation with the customer because at that time, the numbers probably amounted to something significant, and it's difficult for the customer to comprehend. I would say the other comment is in the quest of growing the backlog, there is an inherent lack of interest, sometimes, to have the conversations prior to launch because you're constantly trying to win new business, and you don't want to disrupt the relationship that might throw you into an uncompetitive light. So, all that being said, on the SS&M side, although easily quantified, the customers that we're launching that product with have, I'll say, standard specifications that are outside the normal distribution of what's acceptable in the market. They have high specifications for the vehicles that reflect the type of vehicles that they produce, and so, it's been a very difficult discussion as to what's acceptable and what's not. On the Seating side, because it's so subjective, to begin, you have to be diligent in your approach, and really drive through the message, and really put some boundaries of what's going to be acceptable and what's not. This is where we get back to the message that the bottom line with the customer is you can debate all this philosophically, but we expect to have a reasonable return on our investment, and if we're not getting one, that's completely unacceptable. There's nothing strategic about that in our minds, and that's where we're driving that discipline as we go forward. As far as recoveries go, our conversations with the customers have been very direct, very open, very transparent. Where we see the book of business is unsustainable, we're telling them it needs to be fixed. There's lots of ways to fix business. We can engage on the ABD -- that's one path -- we can demand that they pay their fair share for commercial issues that we clearly see as our responsibility, or we can say, "This business is just unacceptable and we need to talk about an exit of the business." So, everything is on the table. Like I said, it's across a small cluster of customers that we're having that discussion. Much of the business is performing well, but those are pretty significant issues, and that's why I'm personally engaged in those discussions. Again, one of the reasons we've said we're not prepared to talk about Q1 is we have to get some good indication of what those customers are prepared to do, and in parallel with that, we've got plenty of issues we need to fix ourselves. I would say in the short time that I've been here, we've had one good success story. I can't get into the details on it, but it's a product that launched a year ago. We've cleaned up our side and got our process under control. We went back and negotiated with the customer what we thought was a market-reasonable resolution. And, because we have so many transactions with the customer, we have an annualized discussion on how we go forward with the business, and we were able to get that back on track. That probably took 12 months to do. I'm not saying anything about what's out there right now, but again, we've got to put that timeline together, I have to be confident that it can be executed, and then, at the end of this year or early next year, we'll come in with confidence and say, "Here's what we think we can do."

Okay. And, just two follow-ons around that. First, over the last quarter or so -- and, certainly, the 39-ish days you've been there -- do you have enough confidence that the operations -- whether it's SS&M or Seating -- are delivering, whether they're making money or not to the customer's satisfaction, hence your nod at risk of business holds? Or, certainly, you have a very aggressive set of competitors out there -- one I know you're quite familiar with -- who smell blood in the water and are going to go hard at you. So, are you comfortable with the basic OEM relationships you're delivering to hold on to the existing and grow the new business?

At this stage, I'm not uncomfortable. I've been in situations in the past -- and, that's not a reflection here -- where the company with every single one of its customers was on new business hold. That can change over time. I would say, though, that there's a bit of an indifference that we have addressing our most critical issues first. We're telling the customer, "Look, these issues need to get fixed, and new business is not necessarily a commodity for the negotiation. We want to fix the business we have first. We'll talk about new business aside from that." And, I would say that is the case for some customers that are severely distressed. We have many customers that we like a lot, we like the products they make, they like the products we make, where business is pretty stable, and we've got a stable team that has a mature relationship that's managing that business day in and day out. It doesn't require a lot of oversight by someone like myself. That's done in a different way, and we're on solid ground there, so we don't see our clients vulnerable from the competition.

Okay. And then, when you looked at the processes for these deviations, you identified who or how the decisions were poorly made, and then either replaced the people or redesigned the process to get the right people involved?

On a process side, what we've done short-term is tightened the leadership's engagement on those decisions. So, from a...delegation of authority, we've temporarily lowered that so guys like myself and Jeff are much more actively engaged in some of those decisions. It's fairly early on. So, we're overcorrecting right now just to make sure we get back on track. As far as the people go, I would say the one thing I'm not doing is coming in and making a lot of organization structure changes. I don't see that as a good thing to do at this time. I've never seen it particularly helpful in the midst of challenging issues, so we're leaving the organization as is, we've put some corrective action in to make sure we're getting more eyes on some of those key decisions, and I'd also say we're bringing in some folks to bolster the organization. Just prior to my arrival, two key individuals -- one for North America, one for Europe -- were brought in to help the organization. They happen to be people that I've worked with in the past. One came out of Lear, the other one came out of TRW. We just brought in a new head from Norlock to run our purchasing organization. He came out of that after he ran global purchasing there. Most recently, he was at Aftails running North American operations. Not announced yet, but will be soon. We'll bring another key individual in to help us with your European business, came out of Zataftiardofteyu, that I've worked with in the past. So, kind of a combination of some short-term actions and longer-term.

Thank you.

And, with that, can we move to our last question, please?

Yes. The final question is from Joe Spak, RBC. Your line is open.

Thanks. I guess the first question is -- if we think about SS&M more sequentially, where it sort of took a step back, would you attribute that more toward the macro factor, as you mentioned, or did something else take a step back operationally as well?

Joe, I would say a couple of things. Macro factors didn't help -- things like the steel prices I mentioned, tariffs, and the like. But, I would say as they entered into launch season -- and, our fourth quarter is really launch season -- some of the expectations that the group had on the performance of it were a bit optimistic or proved to be a bit optimistic based on the experiences they had. So, I'd say it was more launch-related and season of launches as they went into some fairly difficult ones, primarily in Europe this time.

Okay. And then, Jeff, on the credit amendment, I understand getting more balance sheet flexibility. I was wondering, though, if you could comment -- is the covenant something you think you are in danger of crossing, or is this really a function of you're not quite sure of the depth yet, so you just want to give yourselves a little more cushion?

Well, Joe, given the performance of the business over the course of the last year, while we had all the revenue, which is usually one of the better barometers to forecast in the automotive business, the operational issues have really driven down market. So, there was an element of making sure from financial flexibility we were strong. I mentioned that the bank's leverage calculation was a shade over 3x. Our previous covenant was 3.5x. We thought it was prudent to move it up to 4.5x and give ourselves extra room considering the environment that we've been on a micro basis in our business, and then, as you start to factor in some of the other macro factors -- what happens in China, what happens with commodity prices, what happens with production, what happens with our turnaround efforts individually. So, all of that factored in to say that was a prudent thing to do to adjust the covenant level.

And then, maybe finally, housekeeping -- I know you're not talking about '19, but is there any indication you could at least help us understand where the tax rate goes to? Does it go to something north of 20%, or is it still too early to figure that as well?

Let me come back to that one. I guess I would just focus -- our effective tax rate will be less meaningful because as you look at it, we've put a lot of valuation allowances in place, so it will definitely drive up our book tax rate. I would say our cash tax rate, though -- like I said, it won't impact. We'll give some more guidance on that as we -- I need the full-year plan before I can really give you a full-year tax rate.

Fair enough. Thanks.

Thanks, Joe.

Thank you. And, for final remarks, I'm turning the call back over to Doug.

Okay, thank you. Just in closing, I just want to make a couple comments. First, I appreciate everyone's participation today. I do personally look forward to working with you in the future. I want to be clear: We're driving a very strong message in the company. It's not intended to be a tag line, but I think "back to basics" really is a good summary, and I think it resonates with the team here because this company has had a lot of success historically, and it's a lot of the same people that have had that success that are here today, so when we say, "Let's get back to basics, let's focus on the task at hand, let's prioritize, isolate our problems, we'll fix them," all the feedback I've got is that that's been well received and people are excited about approaching our situation that way. And then, the other message that we are really driving here is this expectation that everything we do and everything that the team does is driven around getting our financial performance back in line, and if you're doing something that's not focused on that, you're probably not working on the right thing. Back to the question "Is there anything that surprised me?", to date, I have not seen anything that's happening in some of our tougher situations that I haven't seen before and I haven't been involved in addressing and fixing, and I'm fully confident that's the situation here. It's a function of time, and determining what that timeline is when we'll be back to you and provide you a lot more transparency in how we see our future. Thank you.

Thanks, everyone.

Thank you.

Thank you. And, this does conclude today's conference. You may now disconnect.