U.S. Markets closed

Edited Transcript of JASN earnings conference call or presentation 5-Mar-19 3:00pm GMT

Q4 2018 Jason Industries Inc Earnings Call

Milwaukee Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Jason Industries Inc earnings conference call or presentation Tuesday, March 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Matthew Butler Koranda

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to Jason Industries Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded. I would now like to turn the conference over to Rachel Zabkowicz. Thank you. Please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, and thank you for joining us today for the Jason Industries Fourth Quarter 2018 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 Presentation 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 filing. The company assumes no obligation to update any forward-looking statements made during this call.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Rachel. We ended 2018 by delivering full year sales, adjusted EBITDA and free cash flow to our guidance and we reduced our leverage to 5.1x. We delivered to our guided EBITDA, generated $16 million worth of free cash flow and ended the year with liquidity just shy of $100 million, liquidity that provides us flexibility to further reduce our interest debt, invest in our businesses and weather inclement conditions. We accomplished all of this despite select end-market softness and more than $10 million worth of rising input costs. And the results speak to the fundamental changes we've been making to Jason.

We took a second step in Jason's journey during the past year and there's much to be excited about, as noted on Slide 4. Our team is stronger. Dozens of talented folks have joined our ranks, ranging from commercial resources in Osborn, business development talent in Janesville, and operational and functional horsepower across all of our businesses. Our operations are safer. We reduced our lost time incident rate by 50% to a record low 0.58 this year.

Our footprint is streamlined. We completed our Milsco U.K. consolidation project during the fourth quarter, adding to Janesville's action during the first half of 2018, and reduced our number of facilities to 28. We are providing better product and better service. Caterpillar, Mahindra and GM are 3 of the many customers to formerly recognize us for our quality and delivery performance in 2018.

We are winning new business. Osborn converted a $1 million oil and gas pipeline services company and Janesville won 2 new platforms for a Korean auto manufacturer during the past 90 days. Our upgraded organization, improved operations and increased level of commercial activity provide us confidence and encouragement for our long term future.

Please turn to Page 5 of our current -- for our current perspective relating to served market, which are in summary mixed. Two of the world's larger industrial economies, the same 2 regions that serve as Osborn's primary hubs, are moving in opposite directions. U.S. industrial production is up 3%, while Germany is down 3%. And our performance is generally in line with these trends. Heavy industry, agriculture and turf care markets are slowing slightly, but remain healthy and display growth ranging from low to high single digits. This strength and targeted share gains continued to help Milsco offset double-digit motorcycle market decline and aid in '20 booming.

Rail is up from the bottom last year, but the anticipated cargo level of greater than 50,000 units remains far below the 82,000 high achieved in 2015. Mix has also shifted from higher content covered hopper models to lower content car sites like tankers. Our Metalex results are not keeping up with the market and we've lost some share along the way. I'm working directly with our team to increase performance to and engagement with our key customers.

Finally, automotive channel inventory has been increasing and days supply on hand are inching up versus last year, placing a bit of pressure on OEM build schedules. Our Janesville team had a nice year, obtaining more than $30 million worth of new business awards, over 1/2 of which are light truck and SUV platforms. Janesville is accelerating mid model year share capture efforts, commonly referred to as conquest business as well as driving new applications and new market projects to augment these wins.

Markets forces in the aggregate are neutral at best, but we have activity and plans that positions Jason for longer-term success. I want to call your attention to something not noted on this slide, but it's important to understand prior to Chad's financial update, and that is an initiative aimed at simplifying our organizational structure in 2019. We are combining our 2 non-automotive OEM segments, components and seating, and renaming our finishing and acoustics segments. I'll discuss this later in detail during the call.

But now, I'll let Chad review our performance and cover guidance and then return to provide a perspective on our journey. Chad?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Koby, and good morning, everyone. I'll start with the review of the fourth quarter results and an overview of the year, provide an update on the balance sheet and cover our outlook for 2019.

Starting on Slide 6. Net sales of $132 million were 9.3% lower than prior year, with organic sales declining 7.3%. Noncore exits had a 1.1% impact from the exit of the components' smart meter product line, which was completed at the end of 2018.

Foreign currency negatively impacted sales by 0.9%, primarily due to a weaker euro as compared to the fourth quarter of last year. Operating loss of $400,000 increased $1.9 million, primarily due to lower volumes. The loss was impacted by our restructuring activity, including $1.2 million of restructuring charges related to the Acoustics Indiana and Seating U.K. facility consolidation, $1.4 million of accelerated depreciation related to these closures, which were partially offset by a $1.3 million gain on the sale of the seating facility in the U.K.

Adjusted EBITDA decreased $1.6 million and adjusted EBITDA margin decreased 30 basis points for Jason. The overall decline was driven by lower sales volumes and material inflation, which were partially offset by operational efficiencies from our continuous improvement, lean initiatives and price recovery.

Sales results by segment are shown on Slide 7. Our organic sales decline of 7.3% was generally in line with our overall expectations for the quarter and was significantly impacted by platforms in the acoustics business that had ended earlier in the year. However, noticeably weaker industrial markets in Europe provided a headwind in finishing and components' real volumes were lower than expected due to unfavorable content mix and increasing competitive market pressures.

In finishing, reported sales of $47.2 million were $2.8 million lower than prior year, with organic sales decline of 3.1%. During the quarter, we saw diverging markets with low single-digit sales growth in the Americas offset by mid to high single digit organic sales decline in Europe.

Sales volumes in Europe weakened during the quarter with slowing economic activity in the region, particularly in Germany where we have a large presence. This contrasts with exceptionally strong markets globally a year ago, with 10% organic sales growth in the fourth quarter of 2017 creating a challenging comparable. The impact of a weaker euro resulted in a negative 2.5% currency impact on sales.

Components sales of $14.7 million decreased $5.2 million, with organic sales declining 18%, in line with the expectations we outlined in our third quarter call. Following the exit of noncore smart utility meter products, we continued to transition the business to refocus commercial efforts on the core rail and expanded metal products and recapture market share. Sales related to noncore smart meter products declined 8.1% as the business completed its wind down in the fourth quarter.

Seating sales of $33.7 million were essentially flat to prior year with declines in motorcycle products and lower heavy industry volumes following new platform launches in the prior year quarter, offset by growth in turf care volumes and price recovery of material inflation. Finally, in acoustics, sales of $36.4 million decreased 12.9% or $5.4 million. The decrease was in line with expectations and was driven by end-of-life vehicle platform, unfavorable vehicle mix relative to the platforms we're on and contractual customer price decreases.

Adjusted EBITDA results by segment are shown on Slide 8. Adjusted EBITDA margins expanded in seating, with overall Jason adjusted EBITDA margin contracting 30 basis points to 8.3% on lower volume. In finishing, adjusted EBITDA of $5.2 million or 10.9% of net sales decreased $600,000 or 60 basis points. The decline was driven by lower sales volumes and additional investments in selling and marketing resources, which were partially offset by lower incentive compensation expenses on lower results.

Components adjusted EBITDA of $600,000 or 3.7% of net sales was negatively impacted primarily by lower volumes and higher steel costs. We're actively addressing overhead costs to further right size our cost structure for the current volume level and we see improving steel cost as we enter 2019. Seating adjusted EBITDA of $3.4 million or 10% of net sales increased $1.1 million or 320 basis points. The improvement was driven by pricing actions to offset material inflation, continuous improvement savings from lien activity, and lower quality and warranty costs due to operational improvements made over the last year.

Acoustics adjusted EBITDA of $4.6 million or 12.6% of net sales decreased $1.4 million or 170 basis points lower. The decline was primarily driven by lower volumes and fiber material inflation, partially offset by continuous improvement savings and lower incentive compensation expense. Finally, corporate expenses of $2.7 million decreased $1.1 million due to lower professional fees and incentive compensation. Our full year results for key metrics are shown on Slide 9, along with our guidance for 2018. We achieved guidance for sales, adjusted EBITDA and adjusted EBITDA margin, free cash flow and net debt-to-adjusted EBITDA leverage.

As we reflect on the year, there are a few puts and takes worth noting when comparing our results to what we expected as we entered the year. First on sales. Markets were generally in line with what we expected, resulting in organic sales that were in line or better than our segment level outlooks for 3 of the 4 segments. Overall, Jason organic sales were in line with our plan. On the profit metrics, adjusted EBITDA of $67.2 million was within our expected range, but was muted by material inflation headwinds that we managed throughout the year. We navigated approximately $10 million of material cost increases year-over-year, and while we planned for some of this, the magnitude of inflation was greater than our plan.

Our team successfully mitigated and offset much of the excess through manufacturing efficiencies and continuous improvement projects as well as pricing actions. Despite these material cost pressures, EBITDA margins improved 60 basis points. In comparison to prior year, full year adjustment EBITDA grew $1.5 million or 2.3% when excluding the $2.1 million of EBITDA related to the Acoustics Europe business that was sold in the third quarter of 2017. Our free cash flow generation resulted in 4/10 of a turn reduction of let leverage from 5.5x to 5.1x net debt-to-adjusted EBITDA at year-end. Jason's financial position at the end of the quarter is shown on Slide 10. Our liquidity of nearly $100 million at the end of the year was strong, with $58.2 million of cash and cash equivalents and $41.2 million of available capacity and revolving lines of credit.

During the quarter, we completed the closure and sale of the seating facility in the U.K., resulting in $3.5 million of net cash proceeds. Net debt was reduced by $20 million during 2018, with operating cash flow of $29.8 million and free cash flow of $16 million, which was in line with our expectations and includes $6.1 million of cash restructuring. The year-on-year free cash flow improvement of $1.8 million primarily resulted from working capital reductions and lower capital expenditures, partially offset by higher cash restructuring. With our strong liquidity, we will continue to look at opportunities to improve our capital structure.

While our term loan maturities in mid-2021 and 2022 are more than 2 years away, we will continue to monitor credit markets for improving conditions and opportunities to extend maturities during 2019. As we look to 2019, our organic sales expectations for our new segment, noted earlier by Koby, are shown on Slide 11. For Industrial, formally finishing, we continue to expect low single-digit economic growth overall, with stronger markets in the U.S. than in Europe. We expect to drive organic sales volumes slightly above the market through our investments over the last year in commercial sales resources and marketing activities particularly in the U.S., resulting in segment organic sales growth of 2% to 4%.

In Engineered Components, the combination of our former seating and components segment, we expect stable markets in turf care, construction and agriculture, with continued low to mid single-digit declines in motorcycle volumes. In the rail market, we expect an overall higher car build with an unfavorable car type mix with the industry shifting production to lower content type vehicle. Consistent with our reporting since the second quarter, changes in sales related to exited smart meter product lines will be reported as noncore in 2019 and are excluded from this organic sales growth guidance. Sales of smart meters were approximately $22 million in 2018.

Finally, in the Fiber Solutions segment, formerly acoustics, we expect overall North American lightweight vehicle production that is flat to 2018's build level of approximately 17 million vehicles, though with continued mix shift in SUVs, CUVs and light trucks. Organic sales will reflect vehicle platforms that rolled off at the beginning of the third quarter of 2018, with organic sales declines moderating each quarter as we lap the platform changes and new business awards go into production in the third and fourth quarters of 2019. In aggregate, we expect an organic sales decline of 1% to 3% for Jason.

Based on this outlook, our 2019 guidance is reflected on Slide 12. We expect net sales of $565 million to $585 million, an adjusted EBITDA of $65 million to $68 million. Our free cash flow outlook is $12 million to $16 million, which includes approximately $2 million of cash restructuring and capital expenditures of approximately 2% to 2.5% of sale. This guidance results in 4.8 to 5.0x net debt-to-adjusted EBITDA at year-end.

Slide 13 provides a bridge from our 2018 adjusted EBITDA to the 2019 outlook. Volumes will be lower due to negative net platform changes in acoustics that will impact the first half of the year. The lower volume also includes the impact of nonrecurring EBITDA earned in 2018 as we exited smart meter product line. We expect inflation to be more than offset by operational improvements in our plans, pricing action and savings from the cost reduction program. As we look at our outlook by quarter throughout the year, the pacing follows more in line with our historical seasonality with approximately 50% to 55% of both revenue and adjusted EBITDA expected in the first half of the year. Additional information on the year-over-year revenue bridge is available in the appendix to today's presentation.

Now I'll turn the call back to Koby to provide an update on our plans for the future.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Chad. I want to take us back to the journey we outlined 2 years ago, represented on Slide 14. We committed to simplifying our business, improving our operations and focusing on free cash flow. This focus on execution enabled us to expand margins, increase cash flow and reduce our leverage for 2 consecutive years. I am going to spend a few minutes to review the core elements of our turnaround as they provide the foundation for our future.

Please turn to Slide 15. Our team followed through on commitments made in 2016 to reduce our cost structure by $25 million. We consider this project complete. The progression to true structural simplification is illustrated in the chart on the right. These are projects that meaningfully alter the composition of our footprints and fixed cost structure. We are building competency in this area, as demonstrated by the on-time and on-budget nature of our Janesville Indiana and Milsco U.K. projects. Working on our templates, reviewing past projects for lessons learned and identifying clear project leaders are a few of the many ways our Janesville and Milsco teams were able to successfully complete plant moves and not disrupt their demanding OEM customer base. Our work is not over and look for us to communicate additional projects in the future.

Slide 16 contains 12 photographs of our core manufacturing locations. I can talk about this slide for an hour as it represents an area of passion. Tidy facilities, good housekeeping, visual cues as to performance, inventory Kanban, single piece flow, first article inspection, total preventative maintenance, automation, all of these concepts are evident in our operations and in these photos. I can honestly say that all of our sites look and perform better today than in the past and I would not hesitate to have customers or family members come to think of a visit. Here are some facts relating to our 12 core plans to put the improvement into perspective. 2/3 of our 12 core sites have upgraded leadership. 10 of the 12 have expanded margins. And keep in mind, we had a supplier force majeure that impacted 2 of these locations here.

75% of the sites improved on-time delivery performance and 4 of these 12 are Janesville sites, and the improved quality and on-time delivery is dramatic. Our aggregate quality metric of defective parts per million, also known as PPM, now sits in the mid-20s and we provide product on-time 99.97% of the time. These and other statistics are impressive, but consider this final fact. These 12 sites produced 60% of our aggregate revenue in 2016 and today they represent 85%. That's $100 million more revenue generated from these same 12 facilities. Think about what this means? Every improvement, every enhancement we make to these operations has that much more impact on our overall results. Every percentage point of improvement across these 12 sites represents $1 million in more profit than in the past.

Now that our operations have improved, our teams are shifting from a defensive to offensive posture in the markets, as noted on Slide 17. Osborn is generating growth where we focus. Our national account customers and distributors are up double digits and profitable lines of business like loadrunners and roller technologies are up in excess of 20%. Milsco continues to gain share in heavy industry and 0-turn radius smaller market segments and Janesville won 13 platforms throughout the year. The photos on the right of this slide are symbolic of the increased commercial presence we are making in all of our businesses. We are presenting ourselves like the industry leaders that we are and investing $2 million worth of SG&A embedded in the 2019 guidance that Chad covered earlier to drive future growth.

Slide 18 covers another form of simplification we are announcing for 2019. We're combining our non-automotive businesses, the components and seating segments, and renaming as Engineered Components. The demands of our customers and heavy equipment market exposure in both Metalex and Milsco are similar and leveraging the same leadership responsible for Milsco's improvement will yield positive results in our Metalex business. Additionally, we are renaming our other 2 segments. Finishing will be known as Industrial and acoustics is now Fiber Solutions. Our former names were myopic. Osborn does more than finishing surfaces and Janesville is no longer only about acoustics. These changes have been in the works for a while and the larger segments help us attract stronger leaders and the broadened definition of our laneways opens up growth opportunity.

So where are we heading? Turn to Slide 19 for a vision for our Industrial segment. We have a franchise business in Osborn, a long history with blue-chip customers served both directly and through national distribution. Our footprint is global, enabling us to satisfy customer requirements to one standard no matter where the work is being conducted. Osborn's product range is unmatched and our increasing end user focus has resulted in innovative new solutions like our roller technologies, process industry rollers and services, to our new tough brush product that delivers more performance and lasts longer than any other product in the market.

Finally, we kicked off a new program that we call Core in 24, essentially an example of using 80-20 principles for growth, guaranteeing shipment of our core products within 24 hours. We have a vision of building a $350 million to $500 million global brand of products that clean, cut, prepare and finish surfaces. Sounds ambitious. But if we can grow 3% to 5% organically and supplement with synergistic tuck-in acquisitions in the range of 10% to 15% of the prior year's revenue, we will get there in 3 to 5 years.

Please turn to Slide 20 for highlights relating to 2 of our other businesses. Our OEM business is Milsco and Janesville. Similar to Osborn, each possesses long-tenured relationships with best-in-class customers and the progress we made with our operations has facilitated an expansion of our growth funnels. We are transforming our portfolio, shifting our mix to higher growth market niches. Milsco tripled its commercial activity in the last year and currently maintains an aggregate $60 million of identified business that we are attacking with innovative solutions. As the photos illustrate, we are leading an industry preference shift from foam in place to more dynamic cut and so designed for heavy equipment and turf care. Janesville is altering its customer base and platform exposure, penetrating global OEMs, better balancing light truck and SUV mix and positioning for an early mover advantage in vehicular mobility. In fact, Janesville has development agreements with 4 of the top 8 AV or autonomous vehicle manufacturers.

We are also moving from core acoustical fiber to more intricate finished panels that not only provide a quieter cab experience, but reduce weight and form thermal protection. Our latest venture is to use recycled fiber to reduce styrofoam use in packaging applications. We are in the top of the first inning with this last initiative, but already generating revenue and excited by the prospects. So we made progress during the past 2 years and we are clarifying our vision for the mid to long term. Where does that leave us today? As you can see from Slide 21, we were able to deliver guidance despite well over $10 million of inflation in the year, tariff and logistic headwinds as well, and we managed to accomplish this due to our simple mantra of acknowledge, quantify and act.

It is in that spirit that we acknowledge 2019 will be a smaller step of progress than the past 2. Full year 2019 results will closely resemble the year we just concluded and the over $10 million worth of input cost increases, combined with a need to invest in core growth that extended our timeline to hitting our $75 million EBITDA target by an additional year. We continue to remain enthusiastic about our future despite this push. We rarely mention the stages of our transformation, illustrated on the lower right-hand side of this slide, but our progression thus far provides us confidence. We moved quickly in 2016 to generate cash and began to reduce debt, while kicking off actions to make meaningful and lasting improvements to our operations. An ever-expanding organizational capability is required to sustain this momentum and investments are now being made in frontend resources to not just maintain, but grow our customer relations.

2017 was a year of building credibility. 2018 was a year of improving our foundation. We've demonstrated the ability to transform our performance and customer relationships over the past 2 years and we will leverage these skills and experiences to enhance the mix of our revenue in 2019 and beyond.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from the line of Matt Koranda with ROTH Capital.

--------------------------------------------------------------------------------

Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

--------------------------------------------------------------------------------

So just wanted to start out on the components segment. I think you have mentioned some increasing competitive pressures there. Just wanted to get a little bit more color on sort of what you're seeing at the ground level?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. I think just to start off, you've got a market that is compressed, some of our end markets. So between that and the increases to the raw material cost bases, it's gotten a little bit more competitive there. What we're seeing is a bit more price competition. And the other thing that has occurred is we have a small competitor or 2 that have been essentially purchased and put it into a bigger portfolio. So we're battling it out down in the trenches. We still maintain good relationships. I've been to a handful of these customers over the last 90 days. It's just a little bit more competitive than we've seen in the past.

--------------------------------------------------------------------------------

Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

--------------------------------------------------------------------------------

Okay. And then on the seating segment, any color on the construction equipment and material handling market for you guys in Q4? I mean, I just assumed some new program launches would have been a driver of growth for you guys there, but is there a bit of a pause before we launch additional programs?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, I think it's more than the heavy equipment things. There's -- you've got a turf care season that goes into heavy season and you end up in this build cycle and there's a bit of timing that always comes in at the end of a year and beginning of the next. Within our heavy equipment, we've been very bullish and done very well. We're seeing a bit of a sell-through issue at the retailer on this with -- in particular one of our customers that has kind of suppressed their build schedules a bit. So they're trying to bleed off a bit of the inventory in the channels. It doesn't give us any concern for the mid to long term, but it certainly has hit us in the fourth quarter. And then you know the market, that's under a bit of pressure there with the power sports area.

--------------------------------------------------------------------------------

Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

--------------------------------------------------------------------------------

Got it. I wanted to look at the adjusted EBITDA bridge that you guys provided on Slide 13 in a little bit more detail. On the pricing bar that you've got $10 million and -- wanted to see sort of how much of that price has already been enacted? And I'm assuming that basically acoustics obviously not really taking price that would suggest around a 2% or so roughly price increase across the other segments. So what segments and/or products I guess are sort of driving the bulk of that price increase assumption?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Matt, within that $10 million of price, there's -- actually, there is some anticipated or known price down within the acoustics business, you're right. And in the other businesses, I would say we've got about 40% of that that's been actioned with things that went into place either during the course of 2019. And there's a carryover impact of that or things that had been effective with pricing increases on price list on January 1st. As you know, there's a fairly large piece of the business that really is spot orders throughout the course of the year. Those are -- that's the balance of it that we're getting as those orders come in. But based on our historical experience and what stock in the rising material cost environment during 2018, I think we feel good about getting that $10 million.

--------------------------------------------------------------------------------

Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

--------------------------------------------------------------------------------

Okay. Fair enough. And then in terms of the operational improvement and the cost reduction bucket, can you remind us again sort of the difference between those? And is there any reliance on facility closures in 2019 to go get any of the cost reduction that's embedded there?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. So on facility closures, that's essentially what the cost reduction program $2 million represents. It's the impact of the U.K. and the carryover impact of the Acoustics Indiana closures that happened during 2018, plus some synergies or cost savings that we anticipate getting within SG&A. Those things have been enacted, so we don't have concern around execution on them. And then in operational improvements, that's really improvements from activities within the plants. So manufacturing lean type activities with specific projects that we've got underway not related to facility closures, just base improvements in the operations.

--------------------------------------------------------------------------------

Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

--------------------------------------------------------------------------------

Okay. Very helpful. And then I guess last one on the inflation bucket there. It seem that that was the -- I think you alluded to it in the prepared remarks, but that was sort of the bucket that may have gone against you guys in 2018. So just curious to get your take on sort of where are the incremental headwinds coming from in that inflation bucket in 2019 and are we comfortable that we backed then enough I guess just given what is knowable at least at this point in the year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Yes. So just reflecting on 2018 for a moment on inflation, I mean, we had about 60% of the $10 million that we encountered in actual inflation baked into our plan and we were able to offset the balance of that. But what really evolved during the course of the year is some of the continuous improvement and operational improvements that we had in our plan that were there to drive margin expansion ultimately were there offsetting material inflation. So that's really the difference between the high-end of the guidance range for the year and where we landed.

As I look at the $10 million to $12 million in 2019 in this outlook, we've got carryover impact of material price increases that we have visibility to. Fair amount of that is fiber in the acoustics business that we know is coming. And then you've got some steel products and steel derivatives, things like steel wire and other commodities in general where we've seen that 2% to 3% type increases during the course of the year. I think within this $10 million to $12 million, we feel like that's the right range. There is -- there are some indications that there could be some moderating of that in the back part of the year. But we're not assuming that. That's not in this outlook.

--------------------------------------------------------------------------------

Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

--------------------------------------------------------------------------------

Okay. Yes, that's helpful. And then lastly on the free cash flow guide, I guess if I use just sort of the midpoint of cash flow and the adjusted EBITDA guidance, it implies maybe a slightly lower conversion of free cash flow from adjusted EBITDA. Is that just higher interest expense and is there any cash tax headwind in there that's embedded? Just maybe a little bit of the underlying puts and takes.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, it's Koby. I'll start. Chad will jump in at the backend because -- due to the topic. But just -- the other thing is just the way our year plays out. At the back half of the year with what we intend to see on the top line, we're building a bit of working capital as well. We had a favorable impact of working capital in the back half of this year, which really helped our cash flow this year. So you got a little bit of phasing there outside of the items that you describe. Chad, I don't know if...

--------------------------------------------------------------------------------

Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [14]

--------------------------------------------------------------------------------

Yes. I mean that's really the driver year-over-year, is the working capital benefit this year. And as we look to drive growth -- although not growth in the aggregate for the year -- with working capital going in, in the fourth quarter very late in the year for new business that's launched and we do anticipate that there will be some consumption of working capital in the year. So it really flips around year-over-year.

--------------------------------------------------------------------------------

Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15]

--------------------------------------------------------------------------------

Okay. Very helpful guys. Maybe one more. Just in terms of condensing seating and components into the Engineered Component segment, I guess seemingly it doesn't really offer much simplification I guess from your perspective. But I guess are there any savings that could be associated with that -- rolling those 2 segments into 1 that we're not factoring into the outlook in 2019? Just kind of curious about how that may turn out.

--------------------------------------------------------------------------------

Brian K. Kobylinski, Jason Industries, Inc. - Chairman, CEO & President [16]

--------------------------------------------------------------------------------

Yes. There are a couple of reasons for it. I mean first of all when you look at our business, that at a $600 million business to have 4 reportable segments and 4 different distinct business leaders for those segments, a little bit too fragmented for even hiring really solid people. There is some savings. It's in our guidance. It's not great because we're redeploying some of that into commercial activities. But essentially what you have at the segment level for the Engineered Components is a segment leader and a finance leader. The people that are still talking to the customers, the operations, those report directly. When you think about the 2 businesses, 5 to 10 customers in each drive the vast majority of the revenue. So it's a very focused 2 businesses, easily handleable in scope by the business leader we've got.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Thank you. This concludes our question-and-answer session. I would like to turn the floor back to Rachel Zabkowicz for closing comments.

--------------------------------------------------------------------------------

Rachel Zabkowicz, Jason Industries, Inc. - VP of IR [18]

--------------------------------------------------------------------------------

Thank you, everyone. Before we end the call, we wanted to provide an update on our upcoming investor event that's seen on Slide 23. We'll be holding one-on-one meetings at the 31st Annual Roth Conference on March 18 and 19 in Newport Beach, California.

In June, for the first time, we'll be at the Deutsche Bank Global Industrials & Materials Summit in Chicago. Finally, we'll be at the Deutsche Bank Leveraged Finance Conference in September in Scottsdale. Please visit our Investor Relations website at investors.jasoninc.com for additional information on events and material.

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.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

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