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Edited Transcript of ADNT.N earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q4 2019 Adient PLC Earnings Call

DUBLIN Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Adient PLC earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas G. Del Grosso

Adient plc - President, CEO & Director

* Jeffrey M. Stafeil

Adient plc - Executive VP & CFO

* Mark Oswald

Adient plc - VP of IR

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Dan Meir Levy

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* Joseph Robert Spak

RBC Capital Markets, Research Division - Analyst

* Rod Avraham Lache

Wolfe Research, LLC - MD & Senior Analyst

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Presentation

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Operator [1]

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Welcome, and thank you for standing by. (Operator Instructions) Today's call is being recorded. (Operator Instructions) I would now like to turn the call over to Mark Oswald. Thank you. You may begin.

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Mark Oswald, Adient plc - VP of IR [2]

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Thank you, Amanda. Good morning, and thank you for joining us as we review Adient's results for the fourth quarter of fiscal year 2019. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; and Jeff Stafeil, our Executive Vice President and Chief Financial Officer.

Today's call, Doug will provide an update on the business, followed by Jeff, who will review our Q4 results and expectations for fiscal year 2020. 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. Please refer to Slide 2 of the presentation for our complete safe harbor statement.

In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations 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. Doug?

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [3]

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Great. Thanks, Mark. Thanks to our investors, prospective investors and analysts for joining the call this morning and spending time with us as we review our fourth quarter results.

Turning to Slide 4. First, a few comments on recent developments including certain of our financial metrics, which are called out at the top of the slide. Although our fourth quarter results are down year-over-year, Adient's financial results improved sequentially for the third consecutive quarter as benefits related to turnaround actions implemented earlier this year more than offset industry weakness in China and the impact of the labor strike at GM.

A good outcome and further evidence that the turnaround continues to track in the right direction, sales and adjusted EBITDA for the quarter totaled $3.9 million (sic) [$3.9 billion], $215 million, respectively. Sales were generally in line with our internal expectations, adjusting for the GM strike, lower production in China, combined with the impact of the labor strike in GM, more than explained the $35 million year-over-year decline in EBITDA.

Adjusted earnings per share fell to $0.63 in the most recent quarter as the lower level of operating profit dropped right to the bottom line.

With regard to our balance sheet, we ended the quarter with $924 million of cash on hand. Our fourth quarter financial results reported today enabled the company to deliver on our full year 2019 commitments, which were -- stabilized the business and improved the company's financial performance in the second half of the year compared to first half results. This was a significant first step for the team as we set out to reestablish our credibility with you and other key stakeholders.

Outside of the financial results, other recent developments include the reduction of the company's ownership stake in Adient Aerospace to 19.99% from 50.01% in mid-October. As you know, Adient Aerospace is a joint venture between Adient and Boeing, established to develop and manufacture seats for the airline industry. Although we continue to see future benefits associated with airline seating business, reducing our stake at this time further enables the company to focus on our core business.

Speaking of our core business, Adient was pleased to be recognized by J.D. Power in North America, with 3 awards for seat quality and customer satisfaction. Although we talked in depth about the challenges that impacted fiscal 2019, the J.D. Power awards are a good reminder that a large percentage of Adient's operations and programs continue to be executed in award-winning levels and the challenges the company faced are contained to eliminate number of plants and programs. Another significant sign of the company is laser-focused on customer launches, and it was recognized by General Motors for the successful launch of the Chevrolet Onix, GM's Global Emerging Market vehicle, initially launched in South America.

Turning to Slide 5, just a few additional comments on our launches and new business wins. As you can see from the examples highlighted on the left, Adient continues to win new and replacement business. The selected wins shown on the slide include a great mix of truck and SUV and luxury platforms, such as BMW X5, Ford Transit, Mitsubishi Triton, a very important platform for Adient in Asia, and the Tesla Model 3 in China.

Tesla's Model 3, which launches in early 2020, is a very good win for total Adient. The business win further strengthens our leading position in China and helps offset lost volume in North America. Tesla recently decided to in-source the front-row seats of their Model X and S. Jeff will provide additional color on how Tesla's decision will impact Adient's fiscal year '20 financials in just a few minutes.

Given the customer mix, geographic mix and platform mix of these and other recent business awards, we expect Adient's leading market position will continue to strengthen in the coming years.

Win rates for both replacement and new business tracked extremely well in 2019, in line with expectation and historical performance. For example, on the Seating side, replacement business in 2019 was one at a rate of 100% in China; 96% in the Americas; and 90% in Europe. More important than the rate itself is the business case for the program. If the business case doesn't make financial sense we're not afraid to walk away from various programs or customers.

I also mentioned that the rates, historically and often quoted, referred to the jet portion of the business. The team has done a great job managing the business down to the component level.

Turning to the right-hand side of the slide, we've illustrated a variety of programs that recently launched or scheduled to launch in the coming months, including Mercedes GLB, Chevrolet Onix, which I mentioned, Toyota Corolla, and Skoda Octavia. In summary, launches are going well. The team's focus around change management, enhanced readiness, program reviews and early escalation of potential issues have significantly improved Adient's launch performance as 2019 progressed and was a key component of our improved financial results in the second half of 2019 compared to the first half performance.

Heading into fiscal year '20, we expect the trend to continue to be aided by a reduction in overall launches and complexity of those launches. For example, in the Americas, the region executed roughly 72 product launches in fiscal year '19, including 11 Platinum and Gold launches.

In fiscal year '20, we expect this number of launches drops to 67, but more importantly, the number of Platinum and Gold launches has dropped to 6. Similarly, Europe is expecting the lower volume of launches and complexity for both complete seats in the SS&M business. Asia expected to see a slight uptick in the volume of launches. However, the complexity of those launches remain relatively flat. China's disciplined process around change management and launch readiness gives us confidence in their ability to execute against the plan.

Turning to Slide 6. Let me reflect for a moment on fiscal year '19 and the progress made with our turnaround plan, which is solidly on track. As you're aware, we began the year with very challenging issues facing the company. Those issues have been well-documented, so I won't repeat the narrative here. We set the priorities around in back-to-basics mindset, which was very inwardly focused and intended to stabilize the business. Key tenets included: Improving our operations, specifically, our underperforming plants; improving launch management; driving our launch costs and premium freight; getting cost reductions implemented at our plants for establishing VA/VE initiatives; and building better relationships with our customers.

To accelerate the pace of change, we reorganized our management structure and made several personnel changes, particularly in North America and Europe. I'm pleased to report, as evidenced by our financial performance in Q4 and the second half of the year, we did what we said we'd do. The business was stabilized and importantly, well-positioned to enter the improvement phase of our turnaround.

Before I move to the improvement phase and what's expected in fiscal year '20, let me provide a few specifics around our stabilization success. First, the team made solid progress in improving operating performance at our underperforming plants as they continue to execute detailed work plans designed to eliminate operational wastes and improve underutilization rates. We provided an example of the improvement achieved at our Bridgewater plant in Warren, Michigan. As you can see, a significant progress was made as we progress through the year with respect to customer disruptions, required production labor, containment headcount and operational waste. Similar results were achieved at a variety of locations across our network plants.

Launch performance, as mentioned earlier, continued to improve as the year progressed. Tangible metrics include a 40% reduction in launch costs in fiscal year '19 versus '18, and the Americas in fiscal year '19 second half launch costs decreased approximately 30% versus first half '19.

In Europe, we experienced a similar trend with year-over-year launch costs down 20% in fiscal year '19. Second half '19 improved 15% to 20% compared to the run rate for the first half of '19.

The stabilization of our plants and launches also drove reductions in premium freight and containment costs. For example, in the Americas, premium freight price declined over 70% in 2019 compared to full year 2018, a significant reduction was also recognized in the second half of 2019 versus our first half performance. Within the SS&M business, in Europe, the team did an excellent job reducing premium freight costs by just under 70% year-on-year.

Outside of the benefits achieved through operational improvements, we've made strides in improving program profitability by stabilizing our customer relations and ratcheting up our VA/VE initiatives across the globe. Being focused on returns throughout the product life cycle will be a key component in improving Adient's program stability.

Although we're pleased with our progress, we're also aware our results in fiscal year '19 were far below past levels of performance, a lot of hard work lies ahead to achieve best-in-class operations and profitability.

Moving to Slide 7. Having stabilized the business, accounting has began to transition to the improvement phase of the turnaround. During this stage of the turnaround, which covers the next 3 years plus, we expect continued improvement in specific focus areas will result in significant earnings and cash flow growth.

For fiscal year '20, specific focus areas that underpin our expected improvements in earnings and cash flow for fiscal year '19 include: launch management including better launch execution; as mentioned earlier, a reduction in the number of launches and the complexity of those launches; continued improvement within operations expected to drive significant benefits as the team focuses on lean activities; manages and better utilizes an existing asset base to ensure our footprint is aligned with where the business is today, and where we expect it to be especially as we execute the rightsizing of our SS&M business.

Cost reduction is the third pillar of the improvement plan. This includes continued focus on SG&A costs, which the team did a good job controlling in fiscal year '19 as well as going after significant opportunities and material value chain, expanding efforts within the VA/VE area will be a key enabler to drive down material costs. Group is off to a solid start. In fact, based on idea generation, executed benchmarking and customer roadshows to date, we expect to see approximately $10 million to $15 million in VA/VE's benefits recognized in both Americas and Europe region in fiscal year '20. Again, a solid start with more opportunities building in the pipeline.

Finally, commercial discipline, or said another way, focusing on returns throughout the product life cycle, rounds out the specific areas of focus in fiscal year '20. Jeff will provide further details on these efforts and how they translate into improved EBITDA and cash flow in 2020 in just a minute. But first, let me conclude my remarks with a few comments related to China and the overall macro environment.

Starting with China. The latest economic data suggests the economy is beginning to stabilize, essentially no signs of worsening or improving. Recent headlines, such as the potential for a partial trade deal between China and the U.S. are being viewed as positive and should help improve overall consumer sentiment. We expect the China auto industry to mirror the overall macro environment, initially stabilizing, followed by modest growth in the later part of the fiscal year. Normal seasonality is also factored in to our China assumptions. Specifically, we expect the deal to close sales and production to increase in the first quarter of our fiscal year as manufacturers look to finish the year strong.

Heading into our fiscal second quarter or the first quarter of calendar year 2020, sales and production will likely decline versus first quarter levels due to the Chinese New Year holidays. Thereafter, we expect a modest level of improvement as the year progresses.

Outside of China, consumers remain cautious to this year's global economic slowdown and geopolitical concerns. These macro concerns are expected to place downward pressure on industry sales and the production in North America and Europe. Our current outlook is based on a more conservative view of vehicle production in both North America and Europe compared to leading third-party forecasting services. Our view is primarily based on customer release schedules that have not been fully incorporated into third party estimates.

In Asia, specifically outside China, we're also expecting certain of our major markets, such as Thailand and Korea, to be down versus last year. In addition to lower production assumption, the strengthening dollar is an additional headwind that must be overcome in fiscal '20. Despite this challenging macro environment, we expect the self-help initiatives, discussed moments ago, will more than offset these headwinds resulting in earnings and cash flow growth in 2020.

With that, I'll turn it over to Jeff, so he can take us through Adient's financial performance for the quarter and what to expect in fiscal year '20.

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [4]

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Good morning. Thanks, Doug. Turning to Slide 10. Adhering to our typical format, the page is formatted with our reported results in the left and our adjusted results on the right hand of the page. We will focus our commentary on the adjusted results, which excludes special items that we view as either onetime in nature or otherwise skew important trends and underlying performance.

For the quarter, the biggest drivers of the difference between our reported and adjusted results relate to our pension mark-to-market, purchase accounting amortization, restructuring and an asset impairment associated with an engineering center in India being held for sale. Details of these adjustments are in the appendix of the presentation.

Sales were $3.9 billion, down 4% year-over-year, excluding the impact of FX. Adjusted EBITDA for the quarter was $215 million, down $35 million or 14% year-on-year, more than explained by the impact of lower volumes in the mix within the Americas and Asia. Included in the Americas region was between $7 million and $10 million of headwind related to the labor strike at General Motors. I'll also note that last year's results included about $20 million of temporary SG&A benefits each quarter that did not repeat this year.

Finally, adjusted net income and EPS were down approximately 52% year-over-year and $59 million and $0.63, respectively. As you can see, most of this difference relates to tax expense. As we've discussed, our tax expense is highly volatile due to booking valuation allowances in several geographies.

Full year results are shown on Slide 11. Sales of $16.5 billion finished the year in line with our expectations. FX accounted for over half of the $900 million year-over-year decline in 2018. In addition, significant weakness in the China market and lower sales in our European complete seat business also impacted 2019 results. Business performance issues discussed at length throughout the year, combined with lower sales, more than explain the approximate $400 million decline in EBITDA. Although down year-over-year, earnings improved sequentially as the year progressed. More on our second half versus first half performance in just a minute.

And finally, as we've seen throughout the year, the operational challenges, lower volume and changes in the tax rate has a significant impact in the bottom line as adjusted net income and EPS were down approximately 71% year-over-year at $153 million and $1.63, respectively.

Now let's break down our fourth quarter results in more detail starting with revenue on Slide 12. We reported consolidated sales of $3.9 billion, a decrease of $224 million compared to the same period a year ago. Lower volume mix, primarily in North America and Asia, impacted the year-over-year results by approximately $160 million. In addition, the negative impact of currency movements between the 2 periods primarily in Europe, impacted the quarter by $64 million.

Moving on with regard to Adient's unconsolidated revenue, our Q4 results were significantly impacted by much lower vehicle production in China. Unconsolidated Seating and SS&M revenue driven primarily through our strategic JV network in China, was down about 11% when adjusting for FX. Sales for unconsolidated interiors, recognized through our 30% ownership stake in Yanfeng Automotive Interiors, were relatively flat year-on-year when adjusting for FX.

Moving to Slide 13. We provided a look at Adient's second half 2019 adjusted EBITDA performance compared to our first half results. As you can see, driven by turnaround actions implemented throughout the year, the combined Americas and EMEA operating performance improved by just under $100 million. Total Adient improved by over $50 million or 78 basis points as the improved results in the Americas and EMEA were partially offset by significant volume headwinds in China.

Speaking of China, the team did a good job of flexing headcounts and costs in our consolidated entities to mitigate the weaker-than-expected industry headwinds. This can be seen in the margin performance, which was held close to 11% in the first half and just under 10% in the second half despite the steep drop in volumes that impacted both the first and second halves.

Achieving our commitment to deliver an improved performance in the second half versus the first half provides a couple of important takeaways: first, the turnaround plan is on track and continues to gain traction; second, and probably more important, when looking to the future, it signals that Adient's numerous self-help initiatives can offset significant macro headwinds, which we expect to enable continued earnings and cash flow growth going forward. More on our outlook in a few minutes.

Switching back to the quarter, we've provided a bridge of adjusted EBITDA on Slide 14 to show the performance of our segments between periods. The bucket labeled, "Corporate", represents central costs that are not allocated back to the operations, such as executive office, communications, corporate finance, legal and marketing. Big picture, adjusted EBITDA was $215 million in the current quarter versus $250 million last year. The corresponding margin related to the $215 million of adjusted EBITDA was 5.5%, down approximately 50 basis points versus the fourth quarter of last year. The year-over-year decline is more than explained by the impact of lower volumes in Asia and the $20 million of temporary SG&A benefits in 2018. In addition, the Americas decline includes the impact of the labor strike at GM.

Important to point out, our positive business performance, largely driven by lower launch costs, reduced freight and ops waste had a positive impact in the quarter and partially offset the headwinds I described earlier.

On a side note, the month of September was the first month in fiscal '19 where we exceeded prior year EBITDA performance. In addition, despite being down year-over-year, our Q4 performance exceeded Q3 results by $10 million. This is the third consecutive quarter of improvement and demonstrates that the operating environment in Americas and EMEA has stabilized and has begun to improve, albeit, still at unacceptable levels.

Finally, SS&M positive -- progressed positively versus Q3 2019 as global results improved by about $17 million sequentially. Similar to past quarters, we've included detailed bridges for our reportable segments, which consist of Americas, EMEA and Asia on Slide 15, 16 and 17. To ensure adequate time is allocated to our 2020 outlook and the Q&A portion of the call, I do not plan to review these slides in depth. The bridges illustrate the key drivers of the year-over-year variance.

I would summarize by saying the following. The Americas continues to progress in a positive direction as our turnaround actions continue to gain traction. The quarter benefited from positive business performance consisting of lower ops waste, launch costs and premium freight. Unfortunately, lower volumes and increased SG&A costs driven primarily by the temporary benefits recognized last year that did not repeat, offset the benefits.

In EMEA, similar to Americas, the region is benefiting from turnaround actions implemented as demonstrated by its second half versus first half performance. Year-over-year, the region continues to be impacted by containment costs associated with certain of our SS&M plants, call it $3 million out of the $10 million negative business performance shown. In addition, there were approximately $5 million-plus of customer tooling recoveries that benefited last year's fourth quarter that did not repeat in the most recent quarter. Worth pointing out, SS&M, as noted at the bottom of the slide, improved $12 million year-over-year and $5 million versus the third quarter.

In Asia, volume continues to be the primary driver of the lower year-over-year performance.

Let me now shift to our cash and capital structure on Slide 18. On the left-hand side of the page, we break down our cash flow. Adjusted free cash flow, defined as operating cash flow less CapEx, was a negative $116 million for the quarter. Timing differences in trade working capital explain the vast majority of the decline in free cash flow versus last year. Capital expenditures for the quarter were $118 million compared to $132 million last year. As you can see in the footnote, we continue to break out CapEx by segment. For the full year, capital expenditures totaled $468 million, approximately $30 million below the expectations provided to you on our Q3 earnings call, and $68 million below last year's spend. Free cash flow was a negative $160 million, better versus the guidance provided on our last earnings call.

On the right-hand side, we detail our cash and debt position.

At September 30, 2019, we ended the quarter with $924 million in cash and cash equivalents. Gross debt and net debt totaled $3,738,000,000 and $2,814,000,000, respectively, on September 30. It's worth mentioning, there are no new -- excuse me, there are no near-term maturities, thanks to the refinancing completed in May.

Moving on to Slide 20 to 23, let me conclude with a few thoughts on what to expect for fiscal 2020. On the right-hand side of Slide 20, we've laid out our initial planning assumptions for production and FX compared to fiscal '19. As Doug mentioned earlier, we made an overlay to the IHS production assumptions for known and customer release schedules that have not been fully reflected in the third party estimates. This has resulted in our industry volume assumptions being more conservative versus IHS' forecast. FX, namely movements in euro and Chinese RMB is an additional macro headwind included in our assumptions.

Although overcoming these headwinds will be challenging, we expect that the benefits of our self-help initiatives, focused on operational improvements, launch management, cost containment and commercial discipline will more than offset these macro pressures, resulting in earnings and cash flow growth in 2020.

I'll review how these assumptions impact our 2020 outlook, beginning with sales on Slide 21.

We've included a bridge that walks our fiscal 2019 sales of $16.5 billion to our expected 2020 sales range of between $15.6 billion and $15.8 billion. Volume and mix are expected to have the greatest impact on our 2020 performance. It is important to understand the drivers within this bucket. First, as mentioned on the previous slide, overall industry volumes will drive a large portion of this year-over-year decrease, as we expect actual production to be worse than current IHS outlook. In addition to specific customer release schedules tracking below industry estimates, we've also adjusted for end markets negatively impacting our sales mix. Thailand is a good example where Adient enjoys a leading market position. Unfortunately, we expect volume in Thailand to be down more than the global average.

In addition to these volume headwinds, Adient is also facing pressures unique to fiscal 2020 that are expected to reverse in fiscal 2021. For example, extended downtime for some of our top platforms, such as the Ford F-150, driven by a new model changeover and the Ram, which is scheduled to have significant downtime in fiscal 2020. And as you know, lost volume related to the GM labor strike -- we'll continue to monitor and assess potential upside as GM attempts to make up lost production. We expect the volume decline will have more -- a more significant impact in the second half of fiscal 2020 than the first half. Outside the volume, and to a much lesser extent, customer pricing and FX are expected to have a negative impact to the year. Partially offsetting the volume headwinds are positive contributions expected from Adient's backlog. You'll see we called out Tesla's decision to in-source Model S and X as negatively impacting our backlog for the year.

Turning to Slide 22. We've also included a high-level bridge illustrating our expectations for adjusted EBITDA. Walking from fiscal '19 results of $787 million, we expect several factors will influence Adient's performance in 2020, many on the positive side, including benefits driven by the continued execution of the company's turnaround plan, specifically focused on operational improvements, launch management, cost containment and commercial discipline. As mentioned on previous calls and as evidenced by Adient's second half 2019 results, these self-help initiatives are not dependent on improving macro conditions.

Beyond benefits driven by our turnaround plan, Adient's reduced ownership stake in Adient Aerospace will also contribute to earnings growth in 2020 as the debenture will no longer be consolidated in Adient financial results. The investment has shifted to a cost method. Meaning, Adient's financials going forward will be impacted when dividends are paid or if the investment is impaired. For fiscal '19, Adient's adjusted EBITDA absorbed just under $30 million of investment in this business. Future Adient funding is not expected.

Moving on, these positive influences are expected to be partially offset by just under $200 million of headwinds, the most significant being lower volume and FX, which I discussed on Slide 20 and 21. Bottom line, when sifting through the puts and takes, we expect adjusted EBITDA to increase to between $820 million and $860 million in fiscal '20. Now that we've covered our fiscal '20 expectations for sales and adjusted EBITDA, let me quickly comment on our expectations for 2 other key financial metrics on Slide 23.

Starting with equity income, based on our assumption of stabilizing production in China and current FX rates, we expect equity income to range between $265 million and $275 million, including YFAI of approximately $45 million. Important to note, we're expecting equity income to mirror China's overall seasonality production pattern, increasing in quarter 1 fiscal '20 versus quarter 4 of fiscal '19, as vehicle production improves by a decline in our fiscal second quarter, impacted by the lower production surrounding the Chinese New Year holiday.

Interest expense based on our expected cash balance and debt should be approximately $200 million. Cash taxes in fiscal '20 are expected to range between $100 million to $110 million, similar to last year's levels. And important to remember, net operating loss carryforwards can offset income as profits increase, so cash taxes on Adient's operations should remain low even as profits are increasing.

With regard to Adient's effective tax rate and for modeling purposes, we're expecting of a rate in the high 30% range. We'd expect that rate to fluctuate on a quarterly basis due to valuation allowances and our geographic mix of income.

Capital expenditures are forecasted to range between $465 million and $485 million, essentially in line with fiscal '19 results. Although we see opportunity to reduce capital expenditures further in the out years driven in part by a smaller SS&M business, the current year expenditures are supporting current launch plans.

And finally, one last item for your modeling, we expect our improved operating performance, operating profit and reduced level of cash restructuring will result in breakeven free cash flow for the year.

With that, I'll have the operator turn it over to the Q&A portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Armintas Sinkevicius with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [2]

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Great. As we think about the operational improvements, and I think you did a nice job highlighting them, what do we have to think of going forward? I know common front-seat architecture was a concern last year. Previous to that, it was the SS&M transition to next-generation mechanisms. That seems to be behind us. But maybe you could talk through some of the puts and takes into fiscal 2020, and where you see operational improvement, and maybe areas of where you still have to improve operationally?

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [3]

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I appreciate the question. I guess I look at it this way. I think when we walked through -- we're overcoming $200 million negative EBITDA headwinds with -- to get the projected guidance, earnings growth on a year-over-year basis. That really is made up of improved launch performance, operational improvements, commercial activity, the reduction of activity in SS&M. So I guess, at a macro level, that's how you should think of -- that really is the pillars of the improvement on a year-over-year basis.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [4]

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Okay. And then a common front-seat architecture, how is that trending? Just trying to get a sense of the operational stamp that you've been able to put on the business in the last year.

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [5]

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Yes. In our formal comments, I think Jeff reflected on the year-over-year improvement as well as I did, particularly in Europe, which that common hardware was a pretty significant burden to us in '19 particularly in the first half of '19. And then if you walk it into '20, that comes down significantly when we look at launch expense and what we call operational [unhampered] cost, cost of poor quality.

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [6]

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Maybe, Armintas, too, just to give you some numbers, perhaps, that might aid you on some of that. Slide 31, I believe, the last page of the Appendix section, we have a supplementary section on the old SS&M business. So we don't report it as a segment, but we continue to give you some of that detail.

And as you know, as we started fiscal '19, we were kicking off that front-seat architecture in Europe. And while we had some improvements in fiscal '18, when we ran into the second launch and really a more challenging and bigger launch in Europe, you can see our numbers kind of regressed at the beginning of fiscal 2019. But as you look through the year, we went from -- and I just -- the numbers went from minus 72 in the first quarter to minus 51 to minus 38 to minus 21 -- starting to see a bigger improvement and the fourth quarter really represents the first quarter where we had beat the prior year.

And I think as we go forward, we have seen stabilization in that. We're still working a number of fronts. I would say, we're nowhere near done. And as you look, one of the big opportunities for us that we're laser-focused on, that's just going to take some time to improve, is that simplified free cash flow you see on the page, where, last year, we were at minus $168 million of EBITDA with $255 million of CapEx. This year, $182 million of EBITDA, so a little worse in total, but trending much better as the year progressed. With $222 million of CapEx, we're seeing big improvements on the EBITDA line and opportunities to take more CapEx as we move out in the future [period]. And that's -- we'll continue to show the scorecard at least for a while as we stabilize this business, but it's really one of the fundamental areas that -- there's no real fire burning. We have customers taken care of here. But from an overall P&L impact to Adient, we expect to have continued improvement in this area.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [7]

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Yes. Okay. And then just one more here. Adjusted EBITDA is better, but cash interest, taxes and CapEx is a bit lower. How are we getting to breakeven free cash flow? Is it just working capital? Or are there other some puts and takes to think about?

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [8]

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Yes. I mean I think if you look at working capital for the year, back to that slide, if you look at, essentially to -- I always say that the working capital piece is pretty heavily driven by timing. In 2018, we had a benefit of $174 million for the year. If you look to 2019, we essentially get it back, right? So the combination of those 2 years is pretty stable. So we assume -- and we're planning for a more stable working capital swing for the year as one component to get ourselves to breakeven.

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [9]

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It's probably the big one in addition to just earnings improvement.

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Operator [10]

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Our next question comes from Rod with Wolfe Research.

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Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [11]

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Just wanted to ask, first of all, on the EBITDA bridge to 2020. It looks like you're assuming consolidated EBITDA goes from $501 million to somewhere between $555 million and $585 million, and you talked about the $200 million roughly impact volume mix and FX. So you presumably are assuming business performance improves by $250 million to $280 million, which is quite a bit better than the run rate we're seeing in Q4. So I was hoping you can give us a little bit more color on how that's coming through? What's -- the launch comments that you made, Doug, in your prepared remarks, what does that actually mean in terms of dollars? And what are you expecting in terms of restructuring savings? And will we presumably see this in SS&M, mostly in the near term?

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [12]

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Yes. There's a few components to unpack. I'll maybe start a little bit, Rod. The SS&M business is one that I think, from a continuing[improvement -- I just read through the chart and I'd have you focused on that, we continue to see improvements, but it's a business that did $20 million negative in the fourth quarter but had $182 million negative for the year. Continuing to stabilize that is going to be probably the biggest component of those improvements. But we're seeing -- and we showed the second half versus first half, and you start to think of some of those improvements, especially on our consolidated business.

We had over 100 basis points of improvement in the operations in the second half in Europe and the Americas. We continue -- and we're continuing to see improvements as we go forward, better commercial discipline, as we have resurrected and improved a bunch of the commercial issues we had with our customers, and I'd say we have a much more stable relationship.

The VA/VE opportunities, Doug has mentioned, the collaboration between ourselves and our customers has increased greatly, and we're seeing more of those type of opportunities come to us in collaboration between ourselves and the customer, which gives us both opportunities to have win-win and improve operating performance.

So it's a lot of little things. There's nothing by itself here, but we're starting to see a lot of this momentum build and the improvements are coming through really in all areas.

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [13]

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Yes. So maybe the way I would look at it is if you chunk it into 2 pieces, you have what I would call off-place and launch-related activities going back to the number that is offsetting the $200 million headwind and then you have commercial activity, and it's roughly -- it's always about equally split, and there's a lot of gray -- what you want and what -- and how you bucket between off-switch and launch in commercial activities. But if you think about that improvement to the offset is roughly equally split.

The biggest piece on the upside is just driving productivity in our plants, and that is -- definitely a big component of that is the metal and mechanisms business. On the commercial side, I think there's a lot of typical activity that you would have to -- commercial discipline -- the big piece that we're expecting to significantly help us on a year-over-year basis is VA/VE activity and how we bring that activity forward and how we can utilize that vehicle, if you will, to reduce customers' expectations on LTAs and how we blend those 2 activities together.

So that's really how I think about piecing that overcoming the headwinds. And if you want to bucket it that way.

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Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [14]

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Okay. That's helpful. And just 2 housekeeping things. At one point, you had talked about, I think it was $100 million decline in CapEx, mostly from SS&M. Is that still the case? And should we expect CapEx to kind of return to a downward trajectory as we go beyond 2020? And can you quantify how big these -- the Ram and F-Series temporary disruptions are that you cited in your prepared remarks?

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [15]

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Sure. Let me just -- point to make on SS&M, too, that should have been addressed, I should address in a couple of other questions. If we project SS&M sales over the next 3 years, it's coming down approximately $400-ish million. Obviously, there's a huge component of capital that comes down that's aligned with that volume drop and are better asset utilization of our existing asset base today.

So yes, capital will be coming down in that segment. It's been a big part of the drop in capital on a year-over-year basis from '18 to '19, and we expect to see that continue. The only really significant capital investment that we have coming into this year, that SS&M business is a less phase of our recliner capacity in Europe. And we're not particularly concerned about that because that's just incremental volume that products that are in production now well over a year. From a manufacturing standpoint, it's been thoroughly debugged, so this incremental spend won't come with some of the same burden that the initial investments had associated with it. And then relative to F-Series and...

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [16]

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Yes. Call it, $125 million, give or take, maybe a $125 million to $150 million in that range.

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Operator [17]

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Our next question comes from Dan with Crédit Suisse.

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Dan Meir Levy, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [18]

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First, I wanted to just talk to your long-term targets. I just want to get a mark-to-market for what you're ultimately playing for. Earlier this year, I think you highlighted the opportunity to close the gap in margins versus your peers. I think it was like a 400 basis point gap using the fiscal year '18 margin. And since then, obviously, margin compressed in '19. But could we just get an update on that target, that 400 basis point improvement versus '18? Is that still in play? And I think you had talked to -- in the past something like 200 to 250 bps from core JIT and 100 to 150 from SS&M. Just trying to get a sense if that's still ultimately what you're aiming for down the road.

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [19]

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Yes. That has not changed. I would say we are -- when we spoke, we were pretty open that, that was something that was going to take multiple years to achieve, and that we were looking out in the '22, '23 time frame to get there. I think we're on pace to achieve that. I think our quarter-on-quarter improvement reflects that. So our expectation has not changed at all, and that being our target in that time frame being the time frame we plan to achieve it.

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [20]

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Yes. And I'd say the target is probably loosely defined as just making sure we're at least at our competitor level of profitability. And that you're right, that spread has probably increased, but the goal here of closing the gap between ourselves and our peers is certainly still the goal and the expectation over the next few years.

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Dan Meir Levy, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [21]

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Great. And then just again, I know we spend a lot of time on SS&M for obvious reasons, sort of along the way, sometimes it feels like, on our end, the core JIT seating business, which is really your much larger business gets deflected. And I know over the past couple of years, we've seen a wide variety of launch headwinds dragging it down. I mean you can do some math and back it up to your sort of that an EBITDA margin of, call it, in the 7% range there that's down a few points versus what you've been posting a few years ago and a few hundred million dollars of sort of business performance headwinds along the way.

Could we just talk about, specific to the core JIT seating business, how we should think about the reversal of those business performance headwinds? When we see a lot of your initiatives here for operational improvements and launch headwinds, can those be applied similarly to SS&M and JIT seating? Or is there a different approach that you're applying to a JIT seating along the way something that's a bit more nuanced to that particular business?

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [22]

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I would say the -- from a launch operation, we're applying the same discipline. And in fact, we've consolidated those groups because, in many cases, we've got both JIT and hardware on a program. And we talk about that in unison and not separate when we had it as a separate business unit.

Certainly, the business is -- the fundamentals, from an operation standpoint, is slightly different. JIT is labor-intense light-assembly, for the most part, and the metals business is kind of the opposite. It's more automated, capital-intense with a lighter portion of labor. So we're applying a different level of operation discipline in the way we operate that business. We've done a lot of work to look at our manufacturing footprint and combine both plants instead of separating them so we can utilize logistics locations better than historically, we've done.

I would say what's significantly different on the JIT side compared to the metal side is the value chain from a material standpoint, and that's where we're spending much more activity on the JIT business, finding ways to drive down material as a percent of sales, and I think that really underpins our improvement on the JIT side. So when we talk about VA/VE activity, when we talk about tightening our activity in our purchasing environment to drive down material costs, I think that's where it's more difficult to do in the metals business because you just don't have the same number of components. It's very much material economic base on metals, where the JIT, you can look for opportunities in the trim covers, in foam, in metals, included in that, in option content within a complete seat to drive cost reduction or offset customer productivity.

So it's just a more fertile product segment for us to drive. What I mainly look at is material to sales ratios.

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Dan Meir Levy, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [23]

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So the reduction of sort of launch complexity, it seems like that, that's almost a little easier on the JIT side than it is in metals, am I interpreting that correctly?

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [24]

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Yes, to a certain degree. It's -- I would look at it this way, a bad launch JIT is easier to fix than a bad launch, on metals. And that's why some of the problems we've had on metals has lingered because with metals, a bad launch usually involves having to fix tools, having to fix automated lines, where the JIT business, again, light assembly and driving engineering change and improving repeatability from a build standpoint. It's just easier to get to. But they both can be very expensive if not properly executed.

So the discipline from a launch management standpoint that we put in place is very much the same, and I think that discipline has really fundamentally changed launch costs particularly in the second half of this year and as we move into 2020. We have a much better handle on our launches. We are much more proactive with our customers driving resolution of issues well in advance of any kind of volume production. That's really where, on both products, problems have to be solved. If you wait until you're actually in production, it's not going to turn out very well.

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Operator [25]

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Our next question comes from Joseph with RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [26]

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I just wanted to maybe talk about the EBITDA bridge one more time. As was pointed out earlier, on a consolidated basis at the midpoint, it looks like you're guiding it almost $70 million higher. I think just the unconsolidation of Aerospace is $30 million, so you're talking about another 40 bps or $440 million or 25 bps of improvement. And I think Aerospace was in Americas. So -- but maybe ex that, can you just talk about how you expect some of the performance regionally? Because it sounds like you're talking about some poor mix in the Americas. We saw some improvement in the Asia consolidated margin, and then Europe still seems challenging. So any color there regionally would be helpful.

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [27]

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Yes. The -- I guess first of all, as it relates to Aerospace that will be, effectively, call it, $30 million of tailwind for the Americas. You're right, it was in the Americas numbers. And effectively, it won't be there next year. And obviously, a big piece of the improvement. Sales are the biggest driver, Joe, as you look through the whole numbers. I think based on where we're kind of pulling through from where the SS&M business is improving, underlying these numbers, fixing a lot of those operational things Doug talked about, on a consistent sales base, we could do, I think we'd certainly turn in a higher result, I believe. But we have built in a little number of macro pieces here.

So I'd say in Asia, kind of thinking through that, I think we probably have a little bit more headwinds and tailwinds as we look through the macro pieces and some of the specific pieces we have. I mentioned Thailand, the Thai business is very important to us. We've seen a reduction in exports in Thailand. We've seen a tightening of credit in the market, too, which has brought down the market a bit.

But overall, I'd just say we see a little bit more headwind in the Asia region. In general, I'd say, both in Europe and in the Americas, I think we have opportunity to outperform 2019 levels. And it's going to -- the whole result here will depend probably more on sales and the regional mix of those sales.

But fundamentally, operating wise, from a cash flow and from just a -- all the metrics Doug talked about, just conversion ratios, that significant performance you saw in the second half of the year, we don't think we're done yet. We're still seeing improvements on a monthly basis. So we'd expect those things to aid and sort of offset a lot of that sales headwind.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [28]

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Okay. And then just back to the free cash flow walk. If we use sort of the helpful bridge you provide for '19, but then think about your guidance for '20 on that front, if we have EBITDA, again, sort of at the midpoint of [8 40], the interest in cash taxes, and then if we make an assumption about you getting, I guess, 70% of prior year JV income back and but then, netted against the -- what's in the EBITDA, that seems like another $70 million, which -- and then you add in the $475 million CapEx, that -- I know that's a lot of numbers right there. But that seems to get you basically to the free cash flow breakeven.

And so I just want to get back to the working capital comment because it would seem like it would have to be positive to offset the cash restructuring that you're planning for. So I just wanted to understand your working capital comment from earlier?

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [29]

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Yes. I mean I think right now, we're seeing a bit of a reduction in global sales. We're seeing a reduction in the SS&M piece of those sales as we think there is some opportunity or that, that business will go down a little bit. That is somewhat of a working capital user in our structure here. But net-net, if you look over the course of the 2 years, in total, our working capital was essentially 0. I would say we're probably assuming somewhere around the 0 number in our 2020 assumptions.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [30]

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Okay. And then you actually state cash restructuring expectations for next year or just lower?

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [31]

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It's going to be a little bit lower. We didn't give you an exact number.

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Mark Oswald, Adient plc - VP of IR [32]

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And Amanda, it looks like we're at the bottom of the hour. So again, I think that concludes the earnings call this morning. If anybody has additional questions, please feel free to reach out to Doug and myself throughout the day. Again, thank you for your time this morning.

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Douglas G. Del Grosso, Adient plc - President, CEO & Director [33]

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Thanks, everyone.

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Jeffrey M. Stafeil, Adient plc - Executive VP & CFO [34]

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Thank you.

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Operator [35]

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That concludes today's conference. Thank you for participating. You may disconnect at this time.