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Edited Transcript of JASN earnings conference call or presentation 3-May-18 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Jason Industries Inc Earnings Call

Milwaukee May 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Jason Industries Inc earnings conference call or presentation Thursday, May 3, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian K. Kobylinski

Jason Industries, Inc. - CEO, President & Director

* Chad M. Paris

Jason Industries, Inc. - Senior VP & CFO

* Rachel Zabkowicz

Jason Industries, Inc. - Vice President, Investor Relations

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Conference Call Participants

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* Bradley D. Noss

ROTH Capital Partners, LLC, Research Division - Research Associate

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Presentation

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Operator [1]

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Greetings, and welcome to the Jason Industries first quarter results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rachel Zabkowicz, Vice President of Investor Relations. Please go ahead, Ms. Zabkowicz.

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Rachel Zabkowicz, Jason Industries, Inc. - Vice President, Investor Relations [2]

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Good morning, and thank you for joining us today for the Jason Industries First Quarter 2018 Conference Call to discuss our earnings results. If you have not received the slide presentation for today's call, you can access it on our Investor Relations website at investors.jasoninc.com, and following the link to our Events & Presentations page. With me today is Brian Kobylinski, our Chief Executive Officer; and Chad Paris, our Chief Financial Officer.

Before we begin this morning, please be advised that this call will involve forward-looking statements regarding the company and its businesses, as noted on Slide 2 of today's presentation. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call.

We will begin this morning with our CEO, Brian Kobylinski. Koby?

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Brian K. Kobylinski, Jason Industries, Inc. - CEO, President & Director [3]

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Thanks, Rachel, and thanks to all of you on the call for joining us this morning. It's been a quick 60 days since our last call, and during that time, I've been in front of you, our investors, met with a number of our customers and visited 10 of our facilities. I continue to be energized by the feedback we are receiving and the progress our teams are making to improve our operations and target profitable growth. We continue to be focused on value creation through margin enhancements, cash generation and leverage reduction.

The first quarter of 2018 was another step in the right direction, and we got off to a solid start in the year by delivering to our expectation. Sales were in line with our plan, and Q1 marked our fifth consecutive quarter of year-over-year adjusted EBITDA margin improvement. Each of our 4 business segments expanded margins, marking the first time that this has occurred since Jason's 2014 go-public transaction.

The gross profit improvement we achieved reinforces our efforts to address fixed costs, improve operations and manage our mix. The incremental dollars generated enabled us to invest a portion to fund commercial efforts to drive targeted growth initiatives.

We had a quiet cash quarter and as we closed our previously disclosed self-help projects and began to plan for our next wave of activities. Liquidity remained stable at $95 million and free cash flow increased from last year. All in, we've reduced our net debt leverage by roughly 0.25 turn to 5.3x.

I'll turn the call over to Chad to provide more detail relating to our Q1 results and come back later with a business update and our outlook. Chad?

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [4]

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Thank you, Koby, and good morning, everyone. I'll start with a review of the first quarter results and then provide an update on the balance sheet.

Starting on Slide 4 with a review of our results for the first quarter. Net sales of $167.3 million were 4.5% lower than prior year, which reflects an organic sales decline of 2.1% and a negative impact of 5.3% from the divestiture and exit of non-core businesses, including the impact of the sale of Acoustics Europe operations, which we completed in Q3 of 2017, and the exit of our Finishing operations in Brazil, which we completed at the end of Q1 '17. Foreign currency positively impacted sales by 2.9%, primarily due to a stronger euro as compared to the first quarter of last year.

Operating income decreased $300,000, but increased as a percent of sales to 4.4% from 4.3% in the prior year. Operating income was impacted by higher losses on disposals of equipment compared with prior year, primarily related to the completed closure of the Libertyville plant consolidation in Components. Excluding the impact of gains and losses on equipment disposals related to our plant consolidation activities in both periods, operating income increased $600,000, with operating income as a percent of sales increasing 40 basis points.

Adjusted EBITDA increased $1.2 million and adjusted EBITDA margin expanded 120 basis points. The improvements in adjusted EBITDA were driven by adjusted EBITDA growth in 3 of the businesses and all 4 businesses contributing to the year-on-year margin improvement. The improvement was driven by strategic pricing initiatives, operational efficiencies and continuous improvement projects and exiting unprofitable and dilutive business through our 80/20 initiatives and asset divestitures. This was partially offset by material inflation and higher selling and administrative expenses related to investments and commercial activity.

Sales results by segment are shown on Slide 5. Our overall organic sales decline of 2.1% was impacted by lower production levels in the automotive market for Acoustics and a delayed start to the turf care season that impacted Seating. However, industrial markets continued to be strong with organic growth in Finishing and Components, resulting in overall sales that were in line with our expectations for the quarter.

In Finishing, sales of $54 million increased $4.5 million or 9.1% over the prior year. Organic sales grew by 1.5% on continued strength in core industrial end markets.

Timing of stocking orders from distribution customers in Q1 '17 made for a challenging comparable in the quarter, which was expected. Incoming order rates remain healthy and we see more favorable organic growth comparables in the next 2 quarters. The impact of exiting non-core business in Brazil was negative 1.3% and a stronger euro resulted in a positive 8.9% impact on sales.

Components sales of $22.4 million increased $1.3 million or 6%. Organic sales grew primarily due to better-than-expected volumes in the rail industry and strategic pricing actions on low-margin business. We are encouraged by indicators of improvement in end market demand for railcars, including increased rail traffic and load activity as freight shifts from trucks to rail. While our customers in the industry now expect a railcar build of 45,000 to 50,000 freight cars, we remain cautious in the near term on the overall railcar build for the year.

Seating sales of $47 million decreased $400,000 or 0.7% with an organic sales decline of 1.6%. The organic sales decline was driven by a couple of key factors. First, the turf care selling season is off to a slow start given the unseasonably cold spring in the Midwest and late-season snowstorms in the East Coast. The delayed start to the growing season and lower retail orders for riding lawnmowers has resulted in lower production levels for our customers. While in the last few weeks, order levels have improved and the headwind faced in the first quarter may be timing, the impact on the overall season will be dependent on the timing of the start of the season in some regions, demand during the retail selling season and whether the retail selling season is extended.

Secondly, our shipments in the quarter were negatively impacted by approximately $1 million due to supply constraints for foam chemicals resulting from a force majeure event from cold weather in the Gulf region that shut down production at our chemical suppliers. While our seating team went to extraordinary lengths to successfully support our customers and not shut down their assembly plants, we ended the quarter with more backlog than normal at this time of year. The supply constraints have now stabilized and we expect to work through the backlog in the second quarter. Partially offsetting these headwinds were volume growth in heavy industry seats due to new platform wins.

Finally, Acoustics sales of $43.8 million decreased 23.4%, which was an 8.1% organic sales decline. The third quarter 2017 divestiture of Acoustics Europe negatively impacted reported sales by 15.3%. Our organic sales were impacted by lower volumes on cars, which is a higher proportion of our total volumes as compared to small trucks and SUVs.

Overall, North American light vehicle production decreased 3.3% during the first quarter, with car production down over 18% and light truck production up 5%. We believe our organic sales decline of 8% is in line with the overall market given our mix of vehicles and production levels were slightly better than what we expected for the quarter. There were a couple of notable positive indicators in automotive, including higher dealer sales, which were up 2% for the quarter, and significantly lower dealer inventory level. Car inventory days on hand was down to 65 days compared with 73 days a year ago.

Adjusted EBITDA results by segment are shown on Slide 6. Overall, adjusted EBITDA was up $1.2 million due to continuous improvement projects, pricing and plant efficiencies. Adjusted EBITDA margins expanded in all 4 segments, with overall Jason margin expansion for the fifth consecutive quarter.

In Finishing, adjusted EBITDA of $7.8 million or 14.4% of net sales, increased $700,000 or 10 basis points. The improvement was driven by strategic pricing initiatives and higher volume. During the quarter, we continued to optimize production in our Richmond, Indiana facility following the plant consolidation that we completed in the fourth quarter. And as expected, margins in the quarter were negatively impacted by approximately 100 basis points due to lower production yields and efficiency. We saw steady progress in operational improvement throughout the quarter that will continue into the second quarter.

Components' adjusted EBITDA of $3.1 million, or 13.7% of net sales, increased $400,000 or 80 basis points. Adjusted EBITDA was positively impacted by pricing actions previously discussed in our fourth quarter call and higher rail volumes. As Koby will discuss, with the completion of the Libertyville facility consolidation during the quarter, we have exited another facility providing long-term fixed cost reduction.

Seating adjusted EBITDA of $5.9 million, or 12.6% of net sales, increased $400,000 or 90 basis points. The improvement was due to pricing actions, supply chain savings, material usage efficiencies and continuous improvement projects in our plants. We are encouraged by the steady operational progress that we are seeing in our Jackson plant, which positively contributed to the results and margin expansion, and there continues to be additional opportunity for improvement.

Acoustics' adjusted EBITDA of $5.8 million, or 13.2% of net sales, decreased $900,000, with margins improving 150 basis points despite the organic sales decline due to volume. Improved labor and material efficiencies drove the margin improvement, partially offset by material inflation on bi-component fiber.

Across our businesses, we did experience material inflation and higher freight costs. While we anticipated inflation in our key commodities such as steel, bi-component fiber and chemicals, we continue to react to a rapidly changing cost environment as some impacts were greater than expected. Freight costs in the quarter were $500,000 higher than prior year across our businesses and were impacted by a driver shortage and new regulatory requirements affecting driver hours that were effective at the beginning of the year.

We are addressing rising costs in these areas through a combination of pricing actions with our customers, continuous improvement actions to reduce material and freight usage and supplier negotiation. We continue to monitor the things we cannot control, such as the potential impact of tariffs, and are working with our customers to have mechanisms in place to address major changes in our product cost structure, should they occur.

Finally, corporate expenses of $2.9 million decreased $600,000 due to lower third-party professional services spend and reduced health care costs.

Jason's financial position at the end of the quarter is shown on Slide 7. Total liquidity of $95 million remained stable, with $48 million of cash and cash equivalents and $47 million of available capacity under revolving lines of credit. Net debt to adjusted EBITDA fell to 5.3x compared to 5.5x in the fourth quarter.

Operating cash flow for the quarter was $3.8 million, with free cash flow of $200,000, which was in line with expectations. Given the seasonality of some of our businesses, working capital usage is generally at a high point in the first quarter, and we expect a significant unwinding of working capital in the second half of the year.

The year-on-year improvement of $700,000 primarily resulted from higher adjusted EBITDA and lower restructuring. Our capital allocation priorities remain on using free cash flow and cash from asset sales to reduce outstanding indebtedness to achieve our long-term targeted leverage of 3x.

In 2017, we supported this goal by changing our preferred stock dividend from cash to paid in kind, and by using that cash to buy back second lien debt. These capital allocation priorities remain unchanged. While we didn't buy back additional debt in the first quarter given the timing of our free cash flow for the year, we did complete a transaction to simplify our capital structure. Approximately 1/4 of our outstanding preferred stock, or $12.1 million of par value, was exchanged into 1.4 million shares of common stock. Following the completion of this exchange, the company has approximately 27.4 million common shares issued and outstanding and $37.5 million of preferred stock issued.

This exchange transaction provided benefits to our exchanging preferred shareholders through providing liquidity at an exchange ratio that was favorable to the economic value of the preferred stock on a voluntary conversion while taking a step towards simplifying the capital structure to improve the valuation of the common stock at a discount with liquidation preference. We believe the exchange was in the best interest of both our common and preferred stockholders, and we will look for opportunities to continue to simplify the capital structure when it makes economic sense to do so.

Now I'll turn the call back to Koby to provide an update on the business and our outlook for 2018.

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Brian K. Kobylinski, Jason Industries, Inc. - CEO, President & Director [5]

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Thanks, Chad. Let me begin with a view of our served markets, highlighted on Slide 8. In aggregate, market conditions are best described as stable to mildly improved, particularly in the greater industrial arena. Industrial production in the U.S. and Europe grew 3% to 4% in the first quarter of 2018, and the Institute for Supply Management's Purchasing Managers' Index for both regions remained solidly above the 50 level, indicating growth.

Oil and gas and other heavy fabrication sectors are showing signs of life at surplus received, the price per barrel approaches $70 and active rig counts increased roughly 10%. Heavy equipment manufacturers are enjoying a long overdue tailwind as leading companies like Caterpillar and Kubota replenished channel inventory and see year-over-year sales growth in the multiple double-digit level.

While rail market conditions remain challenging, they are benefiting from a shift of freight back to alternate transportation. More tightly enforced limits on operator hours is causing shortages of long-haul truck drivers, creating an opportunity for more rail use.

Our Finishing and Components business segments posted growth, as you would expect given this backdrop. Osborn extended its streak of organic growth to 3 consecutive quarters and the modest 1.5% level was largely in line with our expectation. A combination of ongoing 80/20 activity and short-term shipment delays relating to our Sealeze Virginia to Indiana consolidation, suppressed our organic growth in the quarter by 200 basis points. We remain positive in our ability to grow this business and our 1.1 book-to-bill ratio in the first quarter provides support heading into quarter 2.

Metalex benefited from improved rail market conditions, and our 6% growth was a bit better than expected. We anticipate mid-single-digit organic growth to continue through the first half of 2018, moderating in quarters 3 and 4.

The original equipment market sectors remain mixed. North American light vehicle dealer sales were up to 2% overall during the first quarter, at 4.2 million units, and channel inventory positions improved. However, the shift of end user preference away from sedans is real as car sales receded high single digits while trucks and SUVs grew low double digits.

New model launches helped reduce sales declines in the motorcycle market. And finally, an inclement spring delayed or muted the normal seasonal turf care demand. It's too early to tell if this will result in a prolonged season.

Our Seating and Acoustics business segments were as expected. Milsco's heavy equipment Seating solution sales were strong at double-digit year-over-year organic growth rates, driven by market share gain and underlying market conditions. But this improvement was offset by soft revenues in the motorcycle and turf care markets. Janesville improved sequentially from last quarter, down 8% core.

I want to remind you that we anticipate our Acoustics business to decline further in the back half of 2018 as we see platforms roll off, both due to 80/20 activity and platform sunset. Our funnels remain strong and we continue to win new business that will begin to come online in the back half of 2019. This is built into our current plan and guidance.

Moving to Slide 9, let me give you our perspective on how we think about input costs and the rising pressures of inflation. We contemplated inflationary pressures as we built our fiscal plan for 2018. Currently, we feel there's $170 million worth of key commodity and freight spend that is impacted by inflation, with a blended average impact of 7% to 10%. 80% of this pressure is already included in our guidance.

The actions we are taking to mitigate the remaining 20% fall into the same 4 sets of activities we use to enhance our margins. The first is our cost-reduction program that we began over 2 years ago. The second is our lean transformation, and I'll cover these 2 in a bit. The third lever we've been focused on is strategic pricing. Our actions take varied forms by business, ranging from indexed agreements in areas where our offerings contain a heavy material content, to targeted increases for less profitable customers and products to more standard market-based increase. Roughly half of our business possesses pricing flexibility. An additional 15% is covered by index pricing or surcharge arrangements, and we are working to increase the percentage of our revenue covered by such agreements. The remaining 1/3 of our business is more challenging and requires offsets via the other activities noted on this slide.

The fourth area of impact relates to our mix. We've said it before, and we'll continue to reinforce that not all sales are good sales. Our teams are focused on profitable revenue and, as such, run regular reviews of our product ranges and customers. In fact, Components Metalex is in the midst of one of these currently.

If you look at Jason's mix of business by segment over the past year, we have made meaningful progress towards shifting our reliance to less cyclical sources of revenue. We have reduced our automotive Acoustics exposure from 35% of our revenue at the end of 2016 to 32% by the end of 2017 and are targeting a further reduction to 27% by the end of 2018. It should be no surprise that our most profitable business, our Finishing business, Osborn, has increased in this same time frame, growing from 31% of revenue in 2016 to 32% at the end of 2017 and will be somewhere in the range of 34% by the end of 2018. When you look at this mix by EBITDA, it makes even more sense that we want to grow Finishing faster. This segment now generates over 40% of our annual EBITDA.

We made progress in the past quarter on our cost reduction and self-help actions noted on Slide 10. We are on track to hit our $25 million savings goal and continue to check off self-help projects. We concluded the Metalex Libertyville project, combining our 2 plants into 1. Though this project took a quarter longer to complete than anticipated, we did learn from it and have incorporated improvements on how we will manage future special projects.

We kicked off a new project during Q1 that removes $1.8 million worth of annual costs by consolidating our Janesville Acoustics Richmond operations into other existing facilities. We are progressing smoothly and anticipate wrapping up the project by the third quarter.

Our work is not done and we have a couple additional footprint-related projects identified. We are well underway with planning and resource allocation. Look for an announcement during our next quarterly earnings call.

We are working across Jason to improve our operations, and have highlighted the significant improvements made in our Janesville, Acoustics business during 2017. Slide 11 contains additional examples of our lean transformation, specifically relating to Metalex and Milsco. We are building market-leading operations for metal components, as you can see by the photos on the far left. The 3 photos on the far right capture our first true Single Piece Flow cells proceeding. The improved housekeeping is evident, but there's so much more: visual management, [FISA] standards, hour-by-hour performance boards, safety enhancements, foolproof manufacturing systems and Kanban inventory pull systems are but a few of the additional concepts implemented at the locations highlighted on this page.

Additionally, we rolled out a formal plant assessment process and quarterly lean reviews across our corporation to kick off 2018. We are driving these operational improvements hard for a number of reasons: our customers deserve quality product delivered on time; our employees deserve to work in positive environments; and our investors deserve improved profits, cash flow and financial returns. We continue to make progress, and much opportunity remains here at Jason.

Our fiscal 2018 guidance is listed on Slide 12. Our Q1 results met our expectations with sales, EBITDA and free cash flow coming in as expected and net debt leverage already within the full year range. We affirm our guidance and stand behind our commitments.

In closing, on Slide 13, we began the year on solid footing delivering quarter 1. Our ongoing efforts to enhance our margins resulted in the fifth consecutive quarter of overall margin expansion. The varied activities our teams are working on are improving our operations, building our customer relationships and creating value. We continue to make progress each day, each month and each quarter.

With that, I will open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Mr. Matt Koranda, ROTH Capital Partners.

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Bradley D. Noss, ROTH Capital Partners, LLC, Research Division - Research Associate [2]

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This is Brad Noss, on for Matt. Just wanted to, first, start by looking at your net working capital. It looks like there was a significant use of cash for the quarter, stepped up about $11 million or so sequentially. But can you just talk again about some of those -- what specifically, I guess, drove that step-up in working capital? Is there anything one-time or anything sort of out of the ordinary that drove that?

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Brian K. Kobylinski, Jason Industries, Inc. - CEO, President & Director [3]

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Well, I'll start then Chad can follow in behind me. I mean, we typically have a bit of a working capital build in the early part of the year as we build inventory to support the seasonality of the business. If I look at where we are right now, the opportunity for us moving forward really is in the form of that -- of the inventory. And we feel we've got a meaningful change over the next couple of quarters that we'll be making here. Chad, I don't know if you want to quantify it a little bit more, but...

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [4]

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Yes. I mean, the other piece I'd point out is we've got a couple of discrete items going on in the quarter related to, one being the plant consolidation. So we've got some inventory bank builds that are happening as we move the production from Richmond to other Acoustics facilities, and we're building safety stocks to support our customers during that transition. So that will be out, as Koby said, by the third quarter. And then we also did have some increased inventory as a result of the supplier issue within Seating that impacted our ability to get product out. We mentioned $1 million worth of backlog associated with that event, and that's certainly driving it in the quarter as well. Again, that gets recovered in the second quarter as we work through that backlog.

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Bradley D. Noss, ROTH Capital Partners, LLC, Research Division - Research Associate [5]

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Okay, that's helpful. And just in terms of thinking about the impact of working capital as it relates to your free cash flow guidance. Can you just talk about what your assumptions are for the full year for cash generated or used in working capital and sort of what we should expect, I guess, over the next few quarters.

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [6]

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Yes. So I think in the next quarter, you won't see a huge unwind of the working capital. With the way our plan lays out this year, you'll see most of that come back to us in the third quarter. And so for the year, our assumption is that we'll have roughly $7 million worth of favorable working capital that will be part of our free cash flow.

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Bradley D. Noss, ROTH Capital Partners, LLC, Research Division - Research Associate [7]

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Okay, got it. And then just in terms of restructuring, can you talk about how much cash restructuring was incurred during the quarter and just what your expectations may be for the full year for cash restructuring, and if that's already built into your guidance?

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Brian K. Kobylinski, Jason Industries, Inc. - CEO, President & Director [8]

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Yes, I'll start. For the full year, I mean, we're running typically here $4 million to $5 million each year. If you look at last year, and what we contemplate for this year, it is kind of lumpy as the projects roll in and out for the quarter. Chad, do you want to...

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [9]

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Yes. I think, in terms of pacing, it will be fairly even throughout the course of the year. The $1.5 million was the number in the quarter. And there may be a little bit of a tail on it in the fourth quarter in terms of the burn rate on that. But $4.5 million is what we expect for the year.

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Bradley D. Noss, ROTH Capital Partners, LLC, Research Division - Research Associate [10]

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Okay, that's helpful. And then just maybe if I can look at Seating. So you mentioned some of the challenges of turf care end market due to the, I guess, delayed spring weather, but can you just talk about if in the past, if you've experienced sort of similar dynamics, if you expect to be able to make up that -- those, sort of, lost sales from Q1, and so it's more of a catch-up later in the year, or we should expect a certain amount of those delayed sales to just be lost then for the year?

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Brian K. Kobylinski, Jason Industries, Inc. - CEO, President & Director [11]

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Yes. So just to start to put some numbers around it, we kind of expected the first quarter to be relatively flat in turf care specifically, and we were down anywhere from $2.5 million to $3 million in that quarter because of the delayed start. And essentially what you're seeing is many of the dealers and big boxes have delayed their take for their inventory given the inclement weather and all the snowfall that we're seeing in different regions. So that's been an issue.

We've offset that with some positive activity with the heavy equipment. As for the elongation of the season, we've seen it both ways. We've seen a couple of months added in the past, but there's no guarantee that the dealers are going to want to extend. So we're really kind of playing it by ear. We don't view it as lost necessarily, but this $3 million, the hope that, that becomes incremental in the future quarters. I'll probably bank on 50% of it, if I were to bet on it.

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [12]

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Yes. And on your question, Brad, on relative to what we've seen in the past, I think that the length of the delay to the season is definitely longer than what we've seen. The seasonal move, 2 to 3 weeks on the retail sell-through in any given year, this year, it's 6 weeks later. And so this is a bit abnormal. Certainly, the weather pattern has been, and that's impacted how much, what we've seen in releases from our customers and they're looking at what the orders are coming in from the big box stores. So as Koby said, I think it's tough for us to understand will the retailers extend the selling season in the stores and pull that through and do you make it up. It's to be determined. It's too early to tell. But like I said in my comments, the last couple of weeks here in April, we have seen some improvement in those order rates. So the rate at which the orders go out will need to be heavy in the second quarter to make it up.

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Brian K. Kobylinski, Jason Industries, Inc. - CEO, President & Director [13]

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And if you just triangulate between the 2 responses off the cuff there, when Chad talked about the number of weeks, that's how I'm coming up with the half of the -- $1.5 million of the $3 million. So that's kind of what they were.

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Operator [14]

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(Operator Instructions) Gentlemen, Ms. Zabkowicz, we have no further questions.

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Rachel Zabkowicz, Jason Industries, Inc. - Vice President, Investor Relations [15]

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Okay. Thank you. This concludes our call this morning. Thank you for your interest in our company and we look forward to updating you on our future progress when we report again.

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Operator [16]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.