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Edited Transcript of JASN earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 Jason Industries Inc Earnings Call

Milwaukee Jun 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Jason Industries Inc earnings conference call or presentation Thursday, May 2, 2019 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. - Chairman, CEO & President

* Chad M. Paris

Jason Industries, Inc. - Senior VP & CFO

* Rachel Zabkowicz

Jason Industries, Inc. - VP of IR

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Conference Call Participants

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* Andrew P. Casella

Deutsche Bank AG, Research Division - Director

* Ephraim Gordon Fields

Echo Lake Capital - Founder

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Presentation

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Operator [1]

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Greetings. Welcome to Jason Industries' First Quarter 2019 Earnings Conference Call. (Operator Instructions) A question-and-answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to Rachel Zabkowicz, Vice President, Investor Relations. Thank you. You may begin.

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Rachel Zabkowicz, Jason Industries, Inc. - VP of IR [2]

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Good morning, and thank you for joining us today for the Jason Industries' First Quarter 2019 Conference Call to discuss our earnings results. If you've not received the slide presentation for today's call, you can access it on our Investor Relations website at investors.jasoninc.com and follow the link to our Events and 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 presentation.

The company's actual results could differ materially from any forward-looking statements due to several form factors described in the company's latest SEC filing. The company assumes no obligation to update any forward-looking statements made during this call.

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

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

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Thank you, Rachel. I'd like to begin this call with a theme. That theme is balance. We've been working hard here at Jason over the past couple of years to maintain an even approach to running our company, balancing our bias towards action with the need to refine our strategic direction. We balance our cash generation requirements with investments in growth and operational improvements. Most of all, we resist the urge to paint our performance with broad brush strokes. When our results exceed expectations, we say we have more to do. If we take a step backward, we remind ourselves that there is a lot of good going on.

We have soft revenue quarter to begin 2019, roughly 5% below our plan. Platform sunsets, reductions in OEM-build activity and a weak European economy are the primary factors that contributed to our 10% organic sales decline in the quarter. Our EBITDA margins contracted by 60 basis points versus last year, and when combined with working capital timing, we were unable to continue our leverage reduction trend.

We mentioned on our last call that we anticipated a weaker start to the year. As you should expect from this team, we were already working on cost containment projects at that time, and we proceeded with a number of these initiatives early in the quarter in order to preserve our full year profits. Projects are already underway and restructuring began to [get] our free cash flow in the quarter.

Chad will provide more detail relating to these initiatives as well as our quarterly results later in the call. But I'd like to come back to the theme of balance and the good that is going on here at Jason.

Please turn to Slide 4. There is much to be excited about despite a soft beginning to the year. A number of talented new commercial folks joined Osborn to continue our push to drive top line performance in this, our most profitable and most diverse business. Osborn North America gained market share as measured by the American Brush Manufacturers

Association posting growth in the quarter, while our principal competitors decline. While it is still early, our investments in sales resources are starting to have an impact.

Current and prospective customers are reaching out to our Milsco business with request to solve their technical and operational challenges, many times leading to future new business like our zero-turn radius molar platform win with Scag.

Our overall operations continued their improvement trajectory. We set another record for safety, driving our lost time incident rate down to 0.34, a 50% improvement from 2 years ago. We restored high level operating performance to a few nagging areas like our Osborn Sealeze business. And we won 4 additional service delivery awards from automotive and heavy equipment OEM customers.

Finally, subsequent to the quarter, we acquired Schaffner Manufacturing Company. This highly synergistic tuck-in is consistent with our strategy to shift our mix towards industrial and together with Osborn positions us as the market leader for industrial polishing applications. I'll come back to discuss the Schaffner acquisition and our overall industrial vision. But first, let me turn the call over to Chad to provide an overview of our results. Chad?

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

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Thank you, Koby. Good morning, everyone. I'll start with an overview of the quarter, discuss results for each of our reorganized segments and then provide an update on the balance sheet.

Starting on Slide 5. Net sales of $142 million were 15.1% lower than the prior year with organic sales declining 10%. The noncore exit of the smart meter product line in the engineered components segment had a negative 3.4% impact on sales. Foreign currency negatively impacted sales by 1.7% primarily due to a weaker euro as compared to the first quarter of last year. Organic sales were lower than our expectations. And in summary, the key drivers for the quarter were lower OEM demand and softer European industrial markets.

Operating income of $1.8 million decreased $5.5 million primarily due to lower volumes and the timing of restructuring activities in the quarter. Selling and administrative expenses were $2.3 million lower in the quarter partially offsetting the impact of lower volumes.

Adjusted EBITDA was $14.1 million or 9.9% of net sales compared to $19.7 million or 11.8% of net sales in the prior year. Adjusted EBITDA was impacted by lower sales volumes and material inflation which were partially offset by operational efficiencies from our continuous improvement projects, savings from the Fiber Solutions Richmond, Indiana plant consolidation and price recovery.

Turning to Slide 6. Industrial, formerly the finishing segment, reported sales of $49.7 million, which were $4.3 million lower than prior year with an organic sales decline of 2.9%. The impact of a weaker euro resulted in a negative 5% currency impact on sales.

We continue to see diverging markets with flat to low single-digit organic sales growth in the Americas offset by mid-single-digit organic sales decline in Europe, which represents over 60% of our revenue for industrial. Sales volumes in Europe remained weak during the quarter in nearly all product lines as compared to the first quarter of 2018 influenced by a continued decline in overall manufacturing factory activity and automotive production, particularly in Germany. European export sales to China were also lower in select product lines.

In contrast, the Americas market continue to remain stable with mixed results among our product lines. We saw growth in polishing products mixed with lower volumes of core brushed sales and indications of distributors lowering stocking level. Organic sales growth was also impacted by a nonrecurring project in our Load Runner bearings product line in the first quarter of 2018.

Adjusted EBITDA of $6.8 million or 13.8% of net sales decreased $1 million or 60 basis points. The decline was driven by lower sales volumes and unfavorable product mix, which were partially offset by benefits from pricing actions.

Our outlook for the year are expected the European volume softness that began in the second half of 2018 to continue into the first half of 2019 with some improvement in the second half of this year. Given the trends in the overall European market that we believe are likely to continue, we now expect organic sales growth of 1% to 3% for the year.

On Slide 7, engineered components, the combined former seeding and component segment. Sales of $56.6 million decreased $12.8 million with organic sales declining 10.2% on lower overall production volumes from OEM customers. Volumes for seating products were notably lower in motorcycles and heavy industry as customers lower production to manage channel inventory in response to lower end market demand while turf care was up slightly. Volumes for rail and safety grating products were lower amid increased competitive pressures with our commercial team focused on strengthening customer relationships to recapture market share during the balance of the year. Finally, the noncore exit of smart meter product line at the end of 2018 had a negative 8.3% impact on segment sales.

In light of indicated lower demand from our customers, we now expect an organic sales decline for the segment in the range of 1% to 3% for 2019.

Adjusted EBITDA was $5.7 million or 10.1% of net sales compared to $9 million or 13% of net sales in the prior year. Adjusted EBITDA margins were impacted by lower volumes, material inflation on steel and chemicals partially offset by pricing actions and head count reductions in response to volumes.

Finally on Slide 8, Fiber Solutions formerly acoustics. Sales of $35.7 million decreased 18.7% or $8.1 million, which was slightly better than our expectations for the quarter. The decrease was driven primarily by end-of-life vehicle platforms that ended in the third quarter of 2018 with some additional impact from lower OEM vehicle production as compared to last year. North American light vehicle production declined 2.7% overall with car production down 6.4% and light truck and SUV production down 1.2%.

Sales into new nonautomotive markets, specifically packaging, grew during the quarter with new customers. And while this is a small portion of the segment today, we remain encouraged by our progress and the growth opportunities in this market.

Adjusted EBITDA was $3.6 million or 10% of net sales compared to $5.8 million or 13.2% of net sales in the prior year. Adjusted EBITDA was impacted by lower volumes and fiber material inflation partially offset by continuous improvement projects and savings from the Richmond, Indiana facility consolidations.

Jason's financial position at the end of the quarter was shown on Slide 9. Our total liquidity at the end of the quarter was $85.7 million comprised of $45.2 million of cash and cash equivalents and $40.5 million of available capacity on revolving lines of credit. Net debt to adjusted EBITDA increased to 5.7x compared to 5.1x in the fourth quarter driven primarily by lower LTM EBITDA resulting from the lower volumes and higher working capital.

While we have made steady progress in leverage reduction over the last 2 years, the increase in leverage in the first quarter was expected with our plan for the year given the timing of volumes and platforms that rolled off last year. We expect our leverage to peak in the second quarter and then decline sequentially in the third and fourth quarters and LTM EBITDA improves with an expected leverage range of 5.0 to 5.2x by year-end.

Operating cash flow for the quarter was negative $7.2 million with free cash flow of negative $10.7 million. Given the seasonality of some of our businesses, working capital usage is 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 decline of $10.9 million primarily resulted from lower adjusted EBITDA, increased working capital and higher cash restructuring. Capital expenditures and investments in the business were in line with our expectations and the prior year and are generally heavier in the first half of the year as we kick off new projects.

Turning to Slide 10. In response to lower OEM demand and softer markets in the first quarter, we actioned several cost reduction plans that will impact the balance of the year. These activities include the consolidation of 1 of the 2 Redgranite, Wisconsin seating manufacturing facilities in the engineered components segment with production transfer into other facilities. We will also consolidate certain offsite warehouses in our primary manufacturing plants to reduce both fixed overhead costs and inventory levels. This lean activity is made possible through the lean initiatives that we have undertaken over the last 2 years, including a focus on freeing up space in our plants and exiting noncore products and manufacturing processes.

Finally, we actioned head count reductions in response to lower demand in Europe. We believe these actions are prudent given the trends and some of the markets we serve and provide a counter-measure to maintain our EBITDA outlook for the year despite top line pressure. These actions, ongoing restructuring activities and Schaffner integration costs are expected to result in approximately $5 million of restructuring charges in 2019.

Now I'll turn the call back to Koby to provide an update on the Schaffner acquisition and our industrial strategy.

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

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Thanks, Chad. We cover Slide 11, a summary of our industrial business on last quarter's call and the key elements are worth repeating. We have a strong brand in Osborn and a long history of serving blue chip customers. Our energies are focused leading us to innovative solutions like our new top brush product as well as our roller technology solutions for process industry and Sealeze line of environmental containment strips. Our broad line is available globally and now augmented by an enhanced delivery program we call Core in 24. Multiple reasons driven by the market and our customers to be excited about Osborn.

Now let me add a few additional factors to consider. The diversity of our sources of revenue reduced cyclicality. We are flexible to adjust and improve our operations as we see fit without the approval of external constituents. Our elongated processes, our negotiations over sharing the benefits of our hard work are necessary in our industrial business. Capital requirements are minimal bringing up precious cash to deploy immediate growth initiatives. Osborn offers steady returns, lacks volatility and generates cash.

In addition to these features, Osborn also presents many avenues to grow, as illustrated on Slide 12. We possess the ability to drive growth in multiple dimensions by focusing on end markets, geography and our offering. Our team's activities relating to the heavy infrastructure market is a good case study on how we bring these elements all together. Welders are heavy users of finishing product, many of which work in the oil and gas sector. Osborn invested in an [end user] specialist, [Kitty Davan] and targeted the Southern US. We leveraged this direct access to end users to incorporate feedback into our product offering and develop our new tough brush line, the best in the industry. At the same time, we work to gain admittance to the Association of Independent Welding Distributors to gain or to continue to access influencers. The results: better product, value-added solutions and wins with market-leading companies like [Technoweld] and [T. D. Williamson]. We will leverage these experiences and replicate the success in other target markets and regions.

The illustration at the right depicts how we look at inorganic opportunities. We structured our Osborn organization around the core, primary lines of products and solutions. Polishing, abrasives, brushes and specialty solutions all have paths to expansion. In fact, we have 225 industrial tuck-in opportunity ideas in our funnel relating to this core. We put the list through a number of filters relating to strategic fit, synergistic potential, cultural alignment and financial impact to come up with a prioritized list of 30. We then work the list.

Well, Schaffner was one of those 30 prioritized targets. And fortunately, we were able to successfully acquire the business and roll it into Osborn. I welcome to Schaffner team to our Osborn and Jason family.

Turn to Slide 13 to understand what we look for in general with our acquisitions and why we like Schaffner in specific. Schaffner is an approximately $20 million manufacturer of polishing [box], compounds and abrasive flat wheels. The Schaffner family created and ran a good business. One was the -- One that was a formidable but rational competitor to Osborn, but also one that lacked a clear long-term succession plan. Our discussions led to a true understanding of the power of bringing our businesses together and summarizes all that we look for in an acquisition. It's of an appropriate size, $10 million to [$50] million in revenue.

The business activity directly relates to our core. Actionable cost synergies in the form of bundle commodity spend, operational improvement and fixed cost reduction exists. The combination results in an expanded product line, the broadest in the industry. Our technical and customer-facing resources are greater. And we are able to agree to a reasonable valuation, one that we believe will deliver a leverage reduction within the first year.

Combining the 2 largest industrial polishing companies in North America places Osborn in the lead position in the market. I’ve had the opportunity to work with the Schaffner team as we began integrating the businesses, and Slide 14 covers how we are ensuring that we maximize the value of our investment. We are working to create a single polishing line of business and leverage many of our lean tools to improve operational performance and simplify the combined business.

Our formal integration process consist of 5 teams. The first 2 teams, communication and HR, and finance and IT, are prescriptive in nature. They are responsible for connecting the companies, implementing policies and reporting requirements and merging the organization. The next 2 teams, sales and marketing and operations, supply chain and safety are responsible for creating value. We are targeting $1.5 million worth of synergies in the form of supply chain, lean initiatives and fixed cost reduction. Finally, the strategy team will establish a long-term plan for our newly combined business.

We have roughly 20 key folks together at Pittsburgh on the second day. Attendees were evenly split between Schaffner, Osborne and Jason corporate folks. We came away impressed by the Schaffner talents and has already begun to expand select individuals' responsibilities. We are also more confident in our opportunities. There is real value creation for all constituents, customers, employees and investors. Schaffner's off to a good start and as the beginning of our meaningful shift to Jason's portfolio and the first step in achieving our vision of a $350 million-plus industrial business.

Turn to Slide 15 to see our guidance. In light of softer demand in some of our markets, we still expect net sales of $565 million to $585 million and adjusted EBITDA of $65 million to $68 million. But these ranges now -- are now inclusive of the partial year impact of the Schaffner acquisition. Our free cash flow outlook is now $8 million to $12 million compared to our previous outlook of $12 million to $16 million due to higher restructuring cost to fund our cost reduction and integration efforts. This guidance results in a 5.0 to 5.2x net debt to adjusted EBITDA leverage at year-end.

In summary, the first quarter was a bit weaker than expected, however, we remain balanced. Jason is much improved. Our operations are hitting on all cylinders. We are winning new business. We took our first strategic step to build industrial by acquiring Schaffner. And finally and most importantly, our upgraded talent and improved team is the same team that delivered 9 quarters of improved results, the same team that navigated many other challenges, the same team that will deliver to our guidance this year.

I'll now open up the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Matt Koranda with Roth Capital Partners.

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Unidentified Analyst, [2]

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This is [Mike] on for Matt. So sticking with the guidance, just curious, what are you factoring in for Schaffner's revenue and EBITDA contribution in 2019?

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [3]

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Yes. So it's a $20 million business on an annual basis, and so it's basically [pro rata] in there for 3 quarters on a revenue basis. We're not going to get into specific product line or EBITDA profitability for that during the period that we're going to own it. But I would say, this year, out of [the $1.5 million] of synergies on an annual basis that we expect to get, we should be able to capture about $0.5 million of synergies within the year. So the business is a bit dilutive to our overall industrial segments on an EBITDA margin basis, but its synergies by the end of the year should get it in line with where the rest of our polishing business is.

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Unidentified Analyst, [4]

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Okay. Great. That's helpful. And then looking at the -- I'm looking at the 2019 EBITDA bridge you provided in Q4, and I see about $10 million to $11 million in operational improvements and $10 million to $12 million in inflation. And I was just wondering, have those numbers changed at all since Q4?

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [5]

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No, no. I mean I think our internal continuous improvement activities that we have going on are on track and we have candidly we now, with these cost restructuring activity, layer on some more initiatives, now that's not incremental to the guidance. It's really to retain the guidance for the year, but the cost for the improvement activities that we had on that bridge are intact and I would say on the material inflation still too early to declare whether for the full year that ends up being something different than that range. I think Q1 year-over-year was the headwind that we thought it would be. The back quarter of the year or so might have some benefit that would take us to the lower end of that $10 million to $12 million range, but I think right now we're sticking with the range.

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Unidentified Analyst, [6]

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Okay. That's helpful. And then I also saw -- so you -- lowering free cash flow by about $4 million. I believe $3 million of that is restructuring. And is the remainder just working capital?

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [7]

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Yes, a little bit of working capital. And I would say it's also a little bit of the change in our performance on volumes. You've got sort of a corresponding offset relative to incentive compensation that doesn't end up providing cash benefit in the year and so that would be the other piece.

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Unidentified Analyst, [8]

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Okay. And then just last one for me. In the engineered components segment, can you just talk a little bit about what kind of changes you saw in the end markets and maybe which end markets had the biggest change?

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Brian K. Kobylinski, Jason Industries, Inc. - Chairman, CEO & President [9]

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Yes. I think -- this is Koby. I think when we look at the quarter, it was largely where we thought it would be for the rail piece of the business. The areas that we had a little bit of push-out related to heavy industry, as we talked about on the last call, we have a customer that had inventory in the channel was pretty heavy. That ended being a little bit more severe. Certainly, motorcycle continues to be a bit of a challenge. So it was more related to our seating product category.

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Operator [10]

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Our next question is from Andrew Casella with Deutsche Bank.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [11]

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I guess can you talk a little bit about some of -- I guess your kind of strategy with the capital structure. Clearly, you still have the first and second lien due in '21 and '22. And then the Schaffner acquisition, I think you had said you would run a process where 30 candidates showed up. I mean what kind of was the catalyst to go out and grab that asset? Was it something where it came to market and it was being auctioned? Just how you're balancing the 2...

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Brian K. Kobylinski, Jason Industries, Inc. - Chairman, CEO & President [12]

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Yes. We certainly -- when we go through our list of people that we’re interested in, as I mentioned, we go through a number of strategic levers of points of leverage that we can get that we believe. When you look at this, it met all the criteria we look for and it was a reasonable evaluation one that, as I mentioned, we can get to leverage reducing by the end of the year, and that was what's encouraging for us. There's no auction. I mean at the end of the day to buy quality business in an industrial space at those types of levels, you’re really working privately held businesses in that $10 million to $50 million range, usually family-owned or there is a succession planning issue.

And we end up knowing the customers, the operations, the way the businesses run and it's something that I've done in the past with the former [life] and our team, we've got other members that have done it as well. So we're really excited about. So we think there is more there, but we are not going to go crazy and try to do it really quickly work, very paced and very balanced this activity as well.

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [13]

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Yes, it's in line with our goal really to improve leverage overall and get it done. It's something that's slightly leverage increasing on day one but delevering by the end of the year. And so to your capital structure question, we talked a little bit in the fourth quarter call about this continuing to be a priority for 2019, and I don't think that that's changed. What will make it a bit challenging in the first half of the year is just what we see going on with activity in the businesses and some platforms that roll off and a new business that comes on later in the year. I think that likely as the second half of the year activity, but we remain committed to it and we'll -- we'd like to get something done, get this year, not carry that into 2020.

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Andrew P. Casella, Deutsche Bank AG, Research Division - Director [14]

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Okay. That's helpful. And then just a follow-up on the guidance. I think in your prepared remarks, you had said that first quarter came 5% below plan. As you guys kind of thought about your guidance for the year or kind of ignoring the Schaffner acquisition, how are you guys kind of think about building that up? Were you kind of extrapolating that 5% below budget into the rest of the year? Are you assuming that it's -- you'll see that little bit of variation in the first quarter then kind of back on track for kind of the back 9 months?

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [15]

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No, I'd say that there -- it’s not quite as linear is taking the [miss] in the first quarter and pulling it across the year. Really, it was driven by European softness. Our change in assumption there is that, it's going to continue at a similar level to what we saw. And then on the OEM side of the business, it really gets down to specific activity with certain customers and what they are guiding us towards in terms of build levels and production levels for the year and that creates some timing changes in the back 9 months of the year. So it's not -- that portion of it really isn't linear. I would say overall if the change in the guidance excluding Schaffner was a combination of what we saw in Q1, that by itself probably wouldn't have had us move the guidance. But then when you kind of look forward at the rest of the year and what we're seeing from customers, that was the driver.

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Operator [16]

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Our next question is from Ephraim Fields with Echo Lake Capital.

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Ephraim Gordon Fields, Echo Lake Capital - Founder [17]

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My question was answered.

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Operator [18]

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Thank you. This concludes the question-and-answer session. I would like to turn the conference back over to Rachel for closing remarks.

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Rachel Zabkowicz, Jason Industries, Inc. - VP of IR [19]

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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 [20]

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Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.