Welcome to the Adient First Quarter Earnings Call and thank you for standing-by. At this time, all participants are in a listen-only mode until the question-and-answer portion of the conference. [Operator Instructions] Today’s conference is being recorded. [Operator Instructions] Thank you. And now I’d like to turn the call over to your host Mr. Mark Oswald. Thank you, sir, you may begin.

Thank you, Marcella. Good morning and thank you for joining us as we review Adient’s results for the first quarter of fiscal year 2019. The press release and presentation slides for the call today have been posted to the Investors section of our website at adient.com. This morning, I’m joined by 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, followed by Jeff who will review our first quarter results in more detail. After our prepared remarks, we will open the call to 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 these forward-looking statements we made on the call. Please refer to Slide 2 of our 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 equivalent can be found in the appendix of our full earnings release. This concludes my comments. I’ll now turn the call over to Doug.

Okay. Thanks, Mark, and thanks to our investors and the analysts for joining the call this morning. Let me direct you to Slide 4 first a few comments on recent developments, including certain key financial metrics, which are called out at the top of the slide. Sales and adjusted EBITDA for the quarter totaled 4.2 billion and 176 million, respectively. Sales were in-line with our internal expectations. Operational challenges were a primary contributor to the 19 million year-over-year decline in EBITDA. Adjusted earnings per share fell to $0.31 in the most recent quarter, as the lower level of operating profit dropped right to the bottom line. We ended the quarter with 406 million of cash, and net debt totaled approximately 3 billion as of December 31. Important to note, the adjusted results exclude certain non-cash charges that we view as one-time in nature of our otherwise skewed trends in core operating performance for the company. A list of adjusting items can be found in the appendix. Outside of the financial results, other recent developments include, progress related to our efforts to increase the flexibility of the company's balance sheet, which is important to turnaround. From a customer program perspective, the team continues to secure important new replacement business wins, the most notable being the complete seat business for the next-generation Ford F-150, BMW 7-Series. Last point on slide, adding strong market position and performance in China was recently validated externally with the achievement of 21 J.D. power initial quality awards in 2018 across a variety of segments and joint ventures. Turning to Slide 5, I will like to spend a few minutes discussing what I've observed during my first 100 days plus and, more importantly, what our margin potential could look like with the successful execution of the turnaround. The…

Great. Thanks Doug, good morning everyone. Turning to our financial performance. As Doug stated in his remarks, Adient’s first quarter results were in line with internal expectations and consistent to what we discussed at the Deutsche Bank conference in January. Turning to Slide 9 and adhering to our typical format, the page is formatted with our reported result in the left and our adjusted results in the right side. We will focus our commentary on the adjusted results. These adjusted numbers exclude various items that we view as either one time in nature or otherwise skew important trend in underlying performance. The adjusting items are called out in the appendix. On a high level, despite a modest decline in sales, Adjusted EBITDA for the quarter was $176 million, down $90 million or 34% year-on-year, largely explained by a decline in business performance, which I’ll cover in a few minutes. Also contributing to the decline was equity income, which was down $26 million in the quarter, compared with the same period last year. Largely explained by our $14 million decrease within our interiors YFAI business and $5 million negative FX. Finally adjusted net income and EPS were down approximately 70% year-over-year at $29 million and $0.31, respectively. Now, let’s breakdown our first quarter results in more detail starting with revenue on Slide 10. We reported consolidated sales of $4.15 billion, a decrease of $46 million, compared to the same period a year ago. The benefit from increased volume was more than offset by the negative impact of currency movement. Moving on with regard to Adient’s unconsolidated revenue, our Q1 result held up well relative to overall production in the region. Unconsolidated Seating and SS&M revenue driven primarily through our strategic JV Network in China was down 7% when adjusting for FX.…

Certainly, sir. Thank you. [Operator Instructions] Our first question comes from Colin Langan at UBS.

Great. Thanks for taking my question. Any color – you highlighted the debt refinancing. Are you done there on the debt side or is there more actions to come that you were talking about at Detroit? And any thoughts, there's a lot of chatter about an equity raise? I mean, is that something that's still on the table?

Thanks, Colin. We thought it was prudent to do the amendment. The debt markets are certainly pretty choppy. It gives us opportunity to refinance. That is still our goal to refinance the credit facilities, Colin. The primary reason is, while the amendment really gets us through the maturity of our term loan, that is middle of 2021. So, just from a maturity extension standpoint, we would certainly need to go out to the market sometime soon. So, this gives us flexibility on timing, gives us quite a bit more flexibility and room, but the intention here would be to still go out and look for refinancing. As it relates to capital structure comments, I'd comment that, obviously, our capital structure was sized for a different level of earnings. As we execute on the turnaround, we should be able to de-lever through improving our operations and our earnings. But we are, obviously, focused on making sure the company has flexibility, liquidity, etc. to execute the turnaround plans. The primary focus of us, at this point, is the refinancing. And the amendment just gives us a little bit more time. As it relates to equity, that's not our first focus. Our first focus is definitely on the debt markets, but I'd just say that we're obviously looking at all paths and opportunities, given sort of the uncertainties in the macro environments and some of the specifics of our internal turnaround.

Got it. And any color, you've talked in the past about mispriced business. Any update on how big of a revenue base that is and how those talks started and is there any progress there?

So, I'm sorry, Colin, which business segment were you referring to?

I think in the past, you've discussed how some of the contracts were mispriced.

Oh, mispriced.

At customers. And I don't think there's ever been a framing of was this $1 billion of business that needs to get re-discussed. Or refer to the sizing of it and how are those initial discussions going if they’ve started?

So, most of the discussion has been focused on SS&M, obviously, and to a certain degree, our Seating business in North America. I'll hold back quantifying it, specifically. I think what we've said in the past, it's a handful of customers on a handful of programs. So, it's not widespread throughout the entire business, including SS&M. We're in the midst of those talks right now. We've established what we think our – you know, a fair resolution, but until we really get clarity through our customer where we think we'll end up, we're really not prepared to get into a tremendous amount of detail on those specific discussions. As you can imagine, it's pretty confidential and I don't know if it's appropriate for us to be publicly quantifying that and mentioning it that way. And we'd say we've had some initial success. I think some of that has been reflected in Q1. I think some of that is also reflected in the performance improvement we've seen on a year-over-year basis with SS&M. But, really, to get where we want to go, we've got some more work. And I would expect later in the year, we'll have a lot better visibility on that.

Operator, can we have our next question?

Certainly, sir. Thank you. Emmanuel Rosner, your line is open.

Hi. Good morning, everybody.

Good morning.

Hello.

Hi. So, my first question is I'm curious to understand a little bit better what underpins your view of a better second half EBITDA than the first half. So, I don't know what's the best way to approach it. Maybe some of the actions that you were sort of highlighting on that Slide 6 for the first 180 plus days. What is it that you see, specifically, that would improve and also bear results as soon as in the second half? Because, arguably, in that fiscal first quarter, there was little evidence of improvement yet?

Sure. At the analyst conference in January, we attempted to shed a little bit of light on that and we broke it down by business segment. So, for each business segment, we identified what underperforming plants we were focused on, what commercial activity we had, from an uplift standpoint, where we were on material economics, what restructuring projects we had in place, what we were doing from just an overall launch standpoint. And so, for SS&M, North American Seating, and Europe and Asia, we mapped that out and we laid it out against a timeline that extended out a couple years. I think the way to think of it is, with each one of those subgroups, there's specific actions that we're executing right now. That will take place for the balance of this year. And as we get to the end of the year, we'll start to see the benefit of that and that translates into improved performance as we move into the next fiscal year.

Appreciate this, but I guess, maybe if you just want to restate that from a high-level point of view for us. I'm just – I don't have a good appreciation of, on a plant-by-plant level, the magnitude of what the promise and what the drag is, specifically, on earnings. And so, I'm just curious, when you sort of look at the second half of this fiscal year, how would you sort of rank the biggest drivers of improvement? Is it the commercial discussions you're having with customers right now? Is it the launch problems that will go away or that have already gone away? Sequentially, how would you rank the biggest drivers of improvement?

So, I think, consistent with comments we've made in the past, I think we've said they're roughly split operationally and commercially. I would say the operational issues are easier for us to predict because they're very much dependent on actions that we can execute ourselves. The commercial issues, I think, are a little bit harder to anticipate until we get further into the negotiations.

Okay. And then just, finally, in terms of what are the factors of uncertainty going into the second half? I think we don't have to sort of focus on the macro. I think a lot of us understand what the macro volatility is, but specifically within your guidance and your view, what are you assuming to get to a better second half? And then what are sort of still the factors of uncertainty that prevent you from giving more specific guidance?

So, without getting too specific, you said ignoring macro, I think macro has to be included in the discussion. China, certainly, an area that we're anticipating much improved performance in the second half of the year in the market, but that's not completely crystallized how that develops. We're still awaiting action on the central government to stimulate the market there. You have macro issues like Brexit. We've got a number of our customers in the UK or in Europe, in general, that could be impacted by that. We anticipated some activity there but it's not, again, crystal clear how that plays out. Tariffs are looming and could also have an impact on that. We've had a lot of commercial discussions with our customers. We've made those – the negotiations have been inclusive of tariffs, so we think we're somewhat protected/hedged on that, but it's not completely clear how that plays out. We've seen some improvements in the material economics to a certain degree, particularly in steel, but, again, you can call those macro factors, but I think those are the things that are certainly out of our control, but we're trying to comprehend as we talk to our customers on the impact to our business.

Great. Thank you.

You're welcome.

Our next question comes from Brian Johnson of Barclays. Your line is open, sir.

Yes. Hi, good morning. This is Stephen [ph] on the line for Brian. Just to follow on to Colin's and, to a lesser extent, Emmanuel's question around some of these enterprise commercial contracts. If you look at the backlog that was last disclosed, we see a decent step-up in the backlog from 2019 of about $450 million on the consolidated Seating front to about $1 billion in 2020. So, I understand that might have changed since the last backlog update, but I'm just wondering have you been able to go through the 2020 backlog, in terms of figuring out what percentage of that is potentially underpriced? As was seen here in 2018 and the first half of 2019, to what extent could some of that step-up in the backlog in 2020 be underpriced and at what point do you expect to gain greater visibility into some of those contracts and pricing?

Sure. So, we're spending a tremendous amount of time in that particular area. As we talk about things, kind of some back to basics and commercial discipline, that's kind of coded for ensuring that everything that we bring on that is not yet launched is going to earn a respectable return on capital. And where it's not, then we have to have some serious discussions about how we proceed. I'd remind you, the way I'd look at the Seating business, and I think it's true for a number of engineered products in the supply base, during the course of the development from award to start of production, the scope of the product changes. Specifications, applications to meet consumer requirements all change. And it's through that process that you have to take action and ensure that your product is properly priced. I would say if there's a flaw that we've had in the way we've operated historically as we've been reluctant to press those issues when they needed to be pressed with our customers and we waited until they accumulated and they were pretty sizable and difficult for our customer to handle. So, we've got back to a much more disciplined approach in the way we program manage and the way we commercially discuss issues through the development, so we avoid some of the problems we're dealing with right now. So, I'm feeling far more confident that we're much more aligned with our expectations on this backlog of business that's coming on to what's kind of unfolded over the last two years here. And we're not going to be creating a crisis with our customers. We're going to get back to kind of a normal way of managing our business and the returns on that business is going to be in line with our prior performance and closer to the gap performance we've talked about. And that's why we indicate, particularly on the metals and mechanisms business, that we're indifferent, if you will – we're okay to scale that business down because we want to ensure what we bring on has got the proper return. So, where we don't see that happening, where there's customers where, historically, we haven't been able to execute reasonable levels of profitability, we're just not pursuing that business and we're concentrating our efforts where, historically, we've demonstrated much better performance or we think we understand the expectation of the customer and we're pricing it at an appropriate level.

Okay. And then a somewhat related question, just around the current pricing environment and margins for future business, call it business that you will be launching in the 2021-2022 and beyond timeframe. I understand you think there's no real structural reason why Adient's margin shouldn't be comparable to peers, but just trying to think through, as you go out and price new business with OEMs, is Adient potentially at a disadvantaged position, just given current operational issues and having to renegotiate current contracts or contracts that are about to launch? And then, also, in light of Adient's leverage relative to competition, e.g., you might have to kind of take contracts that are slightly lower margin relative to competition to gain back some business or gain back the trust of customers.

Yes. We tried to hit on that point in our formal comments at the beginning of the call. Jeff pointed to a couple of awards, namely the F-150 and BMW 7-Series that we successfully won that business in a competitive environment. We're very confident in the returns at the level we priced that business, although we have to go through a two-year development so there's still a lot of work to be done. But I think we have a much better handle on how we progress through that development cycle. We weren't able to be specific, but there was a Japanese customer who awarded us a major mid-size SUV program that we're pretty excited about. So, it's a balancing act. We understand that. I understand that. But we have to have fairly priced products, period. And we're pretty determined to get there on our existing book of business. My experience has been, if you're prepared, if you're having intelligent discussions with your customer, you can navigate through this without having a significant impact or any impact, if you will, on your backlog. So, that's not a huge concern on my part. I think we can navigate those waters effectively. The comments about structural aspects of our business and not seeing competitive gaps. I think that's just more a function, if I look at our manufacturing footprint, if I look at the fact that we have locations in the proper regions of the world, we've got great scale in those regions, be it China, Mexico, Eastern Europe, so we're very capable of operating in those regions. I look at the competitiveness even in the SS&M, on our mechanisms business, and I look at the performance aspects, whether it's strength, weight, cost on those components, and all of the benchmark data that I've seen since I've been here is very favorable. I just keeping going back, a lot of our problem right now is execution. So, it's clearing distractions away from the team, getting us focused on being very passionate about execution in every form of it, and I think if we do that, again, we can get back to a level of performance that we enjoyed just a few years ago. And I think we can outperform that, but it's going to take some time to get it back on track.

Okay. Thanks for taking my questions.

Thank you. Our next question comes from John Murphy from Bank of America. Thank you, sir.

Good morning, guys, and good to hear from you, Doug. I guess a first question. When you think about Seating and SS&M, what do you think are the adequate margins that will generate adequate returns? I mean, kind of on the Seating side, mine has been 5% to 6% operating margins return mid-teens invested capital. I'm just curious, as you're looking at this, Doug, and going through it, where you think the adequate level is? I mean, we could talk about peer levels and stuff like that, but I mean, where do you think the adequate level is?

Yes, I don't think we've formally come out with a number. First of all, it's nice to hear from you, too, John. Thanks. You know it's a capital intense business. So, we should be demanding a higher level of return on the invested capital. Without getting too specific, on an EBITDA level, we'd like to see that business get back to something in the double-digit range, but we're a long way away from that. But I would categorize that with a lot of proprietary technology, capital intense business, if you want to stay in that game, then that's kind of the level of returns you should have. And if you can't see a way to get there, then we probably want to minimize that as a segment of our business. But, right now, I don't see a reason why we shouldn't be holding that up as an objective for ourselves.

Okay. And then maybe sort of a second question that's sort of a follow-on and related. When you're saying there's no reason that you couldn't get to peer margins, we are looking at peer margins that, on a fully loaded basis, are in the 7% EBIT or operating range, plus or minus, depending on the quarter and the year. Do you think that as you get more competitive in the market and the business gets healthy, that's the level that their margins should be at? Or has there been this run, and I think you're probably understanding who I'm getting at, where, as Adient's been a little bit down and out as part of JCI and now, sort of more recently, with some missteps, that they may have sort made hay and maybe over-earned a little bit for some period of time? Or is that too extreme a read across?

To me, that's a little bit too extreme. I think it's about execution. If you just look at what's been happening to us, I mean, the launches have been brutally painful. They've extended far beyond the normal launch window of 90 days. We're carrying a tremendous amount of labor and freight penalties associated with that poor performance. There's an element, as I said, of commercial discipline, not pricing the product when changes occur. And we're having to go back now and have those discussions post-launch. That's not the time to do it. From my observations, I would say the other guys have just been executing really well. I don't know that it's necessarily been a result of any failures on our part. I think they've just done well, making sure that they're pricing products right, they're pricing it through the development cycle, and they're very focused on launch execution. That's my visibility I can say on their performance.

Okay. That's helpful. And then just lastly – and I apologize, I got on the call late. I mean, it sounds like you got reaffirmation from Ford and BMW on the F-150 and the 7-Series and you just mentioned, presumably, one of the J3, you've got a program with on a crossover. So, it sounds like the Seating business is going well. I mean, you kind of alluded to SS&M potentially shrinking strategically because it might make sense. But on the Seating side, is there any rational reason to think about shrinking the business over time as you go out there and bid on new programs? Or is that really just something that we should think about as isolated to SS&M and then Seating, as you get your ducks in a row here, get everything set, that there's no rational reason to be really thinking about shrinking the Seating business over time? You would want to grow. Is that kind of a fair statement?

It's more of an SS&M statement. That's why we specifically point to it that way. I think a lot of that has to do with the capital nature of the business and why we need to be far more selective. I would say commercial discipline applies to all elements of our business. So, the Seating business is not immune. But I think, on the Seating side, we've done a pretty effective job, with the exception of launch management, and that's hurt us. If you go back and you look at some of our other presentations, typically, in the Americas, there's been a real uptick in launch activity that we haven't managed all that well. But I wouldn't say the scaling down of the business applies on the Seating side right now.

Okay. Very helpful. Thank you, guys.

Thanks, John.

Thanks, John.

Next, we take a question from Joe Spak of RBC.

Thanks. Good morning. I wanted to maybe follow on a little bit about the right-sizing SS&M, and you had this comment about cash flow-neutral for that business by 2021. And since it sounds like you're shrinking it, obviously the CapEx comes down. But does that also imply – that statement, you could sort of read into it that maybe you get back to a positive EBITDA before that timeframe. Is that how you're thinking about the cadence of that and the cash flow neutrality is maybe a little bit later?

I think that's a way you could look at it. As Jeff mentioned, we're still spending a fair amount of capital on that business right now because those are programs that we're committed to launch. We're contractually obligated to launch. So, I would think about it, from a cycle standpoint with SS&M, that in 2018, and to a certain degree in 2019, we suffered through a lot of launch-related, commercial-related issues that we're trying to unwind and address. That requires a tremendous amount of resources as we do that. As we look to scale down the business, that means our revenues will come down. You should think about that in a two-year timeframe. And that began about a year ago so we're a year out. As we fix issues, we get our commercial issues behind us, launch activity comes down, if you don't have the capital expense, you don't have the launch-related expense, even if the launch goes well, and you can take a lot of those resources that have historically been running around trying to fix problems and you can point them inward and drive a lot more productivity into the business, which, quite frankly, we haven't done and you could argue that's part of the reason we're struggling in the Seating business in North America is we diluted our resources to solve launch-related issues and we haven't been taking steps to drive productivity, activities like BABE and improve margins. So, it's kind of – you look at SS&M as we, at a macro level, said this is kind of a 2, 3-year process to get the business right, in the scope of scaling it down as well. I don't know if that's helpful or it necessarily answers your question.

I guess the other – maybe you could just shed some light, because it's a little bit unclear, to me, anyway, in terms of the new recliner series and I think also the common architecture that you talked about in Europe, it sounds like that has weighed on profits. It probably didn't come on as profitable as you imagined. And it seems like what you're saying is you actually need – there's definitely some improvements you can do internally, but you also sort of need the volumes higher. So, I mean, I guess I don't understand exactly what the turning point is for those businesses from a volume perspective. And how should we think about a wide time range for when you can sort of turn those new products, I guess, around?

They're kind of two different product lines, quite frankly. The recliners are part of our mechanisms business. That's truly proprietary technology. We have a good understanding of what the market price is. And the problems we had, specifically at Rockenhausen, were all related to our launch of that new series. And I think we've talked in past presentations that 2018 was the year we launched and converted from this 2000 Series to the 3000 Series of our mechanisms business. That was an expensive undertaking, a lot of capital. Some of that capital is still being employed this year and a lot of launch expense. In Rockenhausen, we talked about the manual lines that we needed to put in place to address our backlog and that the backlog led to a lot of premium freight. And we've slowly worked through those issues. The common architecture is a slightly different problem, in that it's not as much proprietary technology, it's a joint development that we've had with a couple of customers that was originally intended to be a common design that was going to be deployed across a number of different platforms. What's happened through the development is it's proliferated into many different designs. That's made it more expensive from an investment standpoint. It's made it more difficult to launch. We certainly had our share of issues there. And that scope change has created a big commercial discussion with our customers. That activity is impacting us in the first half of 2019. So, as we solved our problem on the recliner side, we are now grappling with a new issue on this common architecture and that's why you're not seeing a significant improvement on a year-over-year basis. It's offset a lot of the improvement we achieved on the metal and mechanisms side. So, we think we're out of the woods on the mechanisms side. We still have work to do but we're in a far better position than we were a year ago. It's now really getting our arms around this common architecture, which is a huge program that we're in the final stages of launching and addressing the issues I've pointed out.

So, it's not necessarily a volume issue on the common architecture. It's a commercial issue and getting the pricing for the different variants that evolved that you didn't initially expect.

It's volume from the perspective that we're launching and volume's increasing as we go through the launch, but it's not a volume issue in the traditional definition.

Okay. Thank you.

Thanks, Joe. Marcella, it looks like we have time for one last question.

Thank you. That will come from Armintas Sinkevicius, Morgan Stanley. Go ahead, sir, with your question.

Great. Thank you for taking the question and congratulations on the wins with the Ford F-150 and the BMW 7-Series. Just curious, as you think about the capital structure of this business and the refinancing activity here, maybe it's early, but has leverage or balance sheet even remotely come up in conversations with the OEMs? And at what level do you think that that would become a question or a conversation that you would have as it relates to new business?

That issue has not come up with our customers. Certainly, we've had discussions with our customers around our declining share price and our financial performance. We've been pretty transparent with them. Quite frankly, a lot of the materials you see in our earnings deck are information we share with them, not just the financial side, but what our anticipated road to recovery is. Those discussions have included me. I know Jeff has had discussions with them just to give them the clarity that they'd like to have on us financially. But that's not been a barrier for us to win business.

Okay. And maybe the flip side of that question is, what are customers focused on, given sort of the recent launch issues, and how are you providing them with comfort and anything else that they've been asking about?

Our customers are really focused on the same thing they're always focused on. They want us to be cost-competitive. They want us to execute. They want us to focus on quality and delivery. They want us to have candid conversations with them. They want a level of transparency on what's happening in our business. They want to understand what our strategy is. We're a pretty valuable asset to our customers. We do a lot of things extremely well. We, obviously, have stumbled most recently, but when you look at our technology, when you look at our capability, when you look at the way we've got diversification within region and within customer and not overconcentration, our fundamentals stand up against anyone, certainly, in the seating business and, arguably, in the supply business. So, we have a lot to offer them. We just have to get better at executing, get back to what, historically, we, quite frankly, had done extremely well. And, again, maybe this is an oversimplification, but I don't think so – it's taking distraction out of the way for the team, allowing them to focus and deploy where we need to operationally focus, and not being overly eager to win every business to necessarily promote backlog growth but to have good, strong commercial discipline and have candid, intelligent discussions with our customers, which we do all the time. And, to varying degrees, it seems to make sense to them. But our top priority, and this is what I communicate to our customers all the time, is we have to get back to a level of profitability that's right for this business. This is not sustainable. And we'll correct our problems, but we'll engage with you where we think there's issues on both sides.

Unfortunately, we're out of time, so that will conclude the call this morning. Again, thank you very much for participating. If you have any follow-up questions, please don't hesitate to call.

Thank you.

This does conclude today's conference. Thank you all for your participation and you may disconnect your lines at this time.