Adient plc

Thank you for standing by and welcome to the Q1 FY20 earnings call. Today's conference is being recorded. If you do have any objections, please disconnect at this time. All lines will be on a listen-only mode until the question and answer segment at the end of today's conference, at which time you may press star 1 on your touchtone phone to ask a question. Again, that is star 1 if you would like to ask a question. I would now like to go ahead and turn today's call over to Mark Oswald. Sir, you may begin.

Thank you, Jacqueline. Good morning and thank you for joining us as we review Adiant's results for the first quarter of fiscal year 2020. The press release and presentation slides for the call today have been posted to the investor section on our website at adiant.com. This morning, I'm joined by Doug DelGrosso, Adiant's President and Chief Executive Officer, and Jeff DeFile, our Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business followed by Jeff, who will review our Q1 financial results in 2020 outlook. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jeff, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from those forward-looking statements made on the call. Please refer to slide two of our presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations to these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments. I'll turn the call over to Doug.

Doug? Okay. Thanks, Mark. And thanks to our investors, prospective investors, analysts joining the call this morning, and spending time with us as we review our first quarter results. Turning to slide four. Similar to previous earning calls, I'll start off with a quick review of Addium's recent developments and key highlights. First, Addium reported strong Q1 financial results. The results build on the positive momentum established in the second half of last year, and demonstrate that an improvement phase of our turnaround plan is solidly on track. Sales at 3.9 billion went in line with internal expectations. Adjusted EBITDA increased to 297 million, up $121 million year-on-year. This marked the fourth consecutive quarter of sequential improvement and the first quarter of year-over-year improvement since our fourth quarter of 2017. In addition to the benefits associated with our turnaround actions, which accounted for much of the improvement, the quarter also benefited from certain items, namely the resolution of various commercial settlements that tend to be lumpy between periods. Jeff will expand on this in just a few minutes. Moving on, adjusted earnings per share for the most recent quarter were 96 cents versus 31 cents per share last year. And finally, we ended the quarter with 960. cash on hand. Outside of our strong financial results, the team also made portfolio moves, selling its Recaro automotive seating business. The sale further demonstrates Etienne's commitment to the core business and focus on capital allocation. Besides Recaro, Etienne announced an agreement this morning with our joint venture partner, Yan Feng, to restructure the existing joint venture relationships. This includes the sales of 30% ownership stake in Youngfang Automotive interiors to Youngfang for $379 million. We also agreed to extend the term of our YFAS joint venture to December 31st, 2038. The extension demonstrates Andy's continued commitment to partnership and the region. In addition, we agreed to sell certain patents and other intellectual property used in our seeding and mechanism business to AYM for $20 million. And finally, Adiant and Yongfei agreed to amend the AYM joint venture agreement to update AYM's business scope to allow AYM to carry out its seeding mechanism business both in and outside of the People's Republic of China, PRC, for both PRC and non-PRC customers. Adiant intends to leverage AYM's expanded presence in the global seeding mechanism market as we continue to right-size our own metals business. These actions are important. Not only do they further our position for long-term success, they also demonstrate the company's commitment to driving shareholder value. From a product and innovation standpoint, earlier this month, we participated and partnered with electronics leader LG at the CES to display our AI-19 vehicle interior. The interior showcased the integration of LG's electronic technology with our feature mobility solutions that address trends in mobility, such as autonomous and semi-autonomous driving. We're pleased with our collaboration with LG and the potential opportunities it creates. Overall, the team successfully executed on many fronts during the quarter. The strong start to fiscal 2020 lays a solid foundation for the company to deliver on its full year commitments. In fact, the operation steadily improving driving earnings and cash flow growth, combined with the proceeds of the strategic actions just discussed, we're expecting to accelerate a portion of our debt pay down later this year. Turning to slide five, just a few points related to new business wins and launch status. As you can see from the examples highlighted on the left, adding continues to win new and replacement business. The selected wins demonstrate the solid mix across regions, SUVs, and luxury platforms, such as a large SUV from Toyota, a junior Jeep, the Alfa Romeo Kidd, and pictured in the middle, Ford Mustang Mach-E. Speaking of the Mustang Mach-E, it's worth noting, as we called out on the slide, the significant Number of program wins within China, EMEA, and the Americas are VEB platforms. In fact, we presently hold approximately 70% market share of the VEB market in Europe. As our customers continue to develop and launch new and alternative propulsion platforms, ADAN's leading market position is expected to strengthen given the diversification of powertrains. Turning the right-hand side, of the slide, we've illustrated a variety of programs that were recently launched or scheduled to launch in the coming months, including the Nissan LEAF, Toyota Tacoma, Cadillac CT5 program, which was launched at our PWI facility in Lansing, Michigan, and the Tesla Model 3 launched in China. Bottom line, our focus on launch management has resulted in significant In fact, the Cadillac CT5 launched in our BWI facility achieved a flawless launch scorecard. We call it 00190, which breaks down to zero safety incidents, zero customer rejects, 100% on-time delivery, 100% achievement of financial targets within 90 days from start of production. In addition, I'd like to mention certain of the launches that we called out last quarter. The Chevrolet Onyx and the Toyota Corolla in South America also achieved flawless launch scorecards and were recognized by our customers. The Tesla Model 3 launch is another success story worth mentioning. Given the compressed timing of the program, the complete seat business was awarded to Addion Joint Venture YFAS in July of 2019, with the first batch of seats delivered in late December of that year. Adding its focus on adherence to proven process needs enables a successful launch despite start of production occurring just six months post program award. Turning to slide six and the progress we're making on the turnaround plan. As mentioned on our last earnings call, the company began its transition to the improvement phase of our turnaround plan, having stabilized the business in 2019. Underpinning the earnings and cash flow growth reported this morning for Addion's first quarter and expected to continue through 2020 are four focus areas. Launch management, operational improvement, continued cost reduction, and commercial discipline. To complete the report, the plan is southly on track. Specific proof points include first related to launch management. The team's focus around change management, enhanced readiness, and program reviews enabled a significant improvement in launch performance over the past several quarters. The Flawless Launch Scorecard on the CT5, discussed moments ago, demonstrates the significant year-on-year improvement achieved in the Americas. The improved performance has translated into significant reduction in launch costs down in the Americas in the near approximately 40 and 15%, respectively, year-on-year. In addition to launch management, the team has made solid progress improving operating performance at several of our manufacturing locations. The improved performance resulted in significant year-on-year reduction in premium freight, dropping over 85% for the Americas, and it may have combined in Q1 2020 compared with last year. Ops waste is trending in a similar direction, declining 35% in the Americas and close to 30% in EMEA year-on-year. With in-ops waste, containment costs are also down significantly in both segments. Outside of the progress made through operational improvements, maintaining a strict focus on cost has also contributed to EDIM's improving financial results. Our VABE initiative, designed to take material costs out of the system, continues to accelerate. In fact, we increased the number of Customer engagement in the regional benchmarking center is located in our technical centers. During Q1, we completed 20-plus workshops across the Americas and EMEA, which included customers, suppliers, JIT, and metal. In Asia, over 1,000 new VAD ideas were generated from workshops and internal reviews. 129 projects moved from action to implemented. Opportunities to reduce SG&A spend remains the focus for the team. The changes made in our organization structure last year continued to provide further opportunities to right-size our above-plant structure. Point of reference, Gedeon's full-time equivalent headcount at the end of 2018 was down about 4% compared with 2018. This translates into approximately $40 million a year gross savings for the company. Lastly, having a disciplined approach to where we allocate capital, whether it be for a program or customer, is helping to drive profitability. As we look to close the margin gap with our peers, it may be necessary to walk away from certain programs and customers that are unprofitable. This commercial discipline is focused both on existing and future programs. At the very bottom of the page, we included various improvement proof points for our metals business. Since this business is being run as part of the reportable segments, whether it's Americas, EMEA, or Asia, it's not surprising to see the KPI is heading in the similar direction to those we just covered for total add-in. Just at EBITDA for total plans improved 38 million versus Q1 last year. Launch costs are down, outbound premium freight is down, and ops waste has been significantly reduced. These metrics indicate we're heading in the right direction. One final point as it relates to reporting of our metals business, since our reportable segments are being run to maximize the segment's profitability, isolating the performance of the prior's metal business has become increasingly difficult. For example, as we take actions to reduce our club plan costs, Jerome and Michelle are making decisions to improve the profitability of their overall segment. In many instances, the actions taken do not involve a person that's 100% dedicated to seeds or metals. It's likely a resource supporting the overall business. We recognize the need to continue to provide you with appropriate proof points to give you confidence the turnaround plan is progressing, and we'll continue to do that, essentially like we just discussed. Unfortunately, providing additional detail will not be possible. With that said, our commitment to bring the business to cash flow positive by 2022 remains intact, and we're on track to do just that. Turning to slide seven. I thought this slide would be a good reminder, both internally and externally, of what the company is driving for. It's simple. We're executing actions to increase shareholder value. It began last year as we stabilized the business and improved relationships with our customer. As we exited fiscal 2019, we transitioned to the improvement phase of the turnaround. This, of course, is underpinned by our specific focus areas of launch management, operational improvement, cost reduction, commercial discipline. Although it's early days, our second-hand performance in 2019 and recent first quarter results demonstrates the company is soundly on track. With the business stabilized and steadily improving, and as expected, earnings and cash flow growth are materializing. In addition, we are now positioned to execute additional actions to further enhance shareholder value, such as portfolio adjustments, levering our relationships in China, and accelerating debt repayment, to name just a few. No doubt we're off to a good start, but we realize there's a lot of work ahead. Before turning the call over to Jeff, just a few comments on how Adiant is addressing challenges presented by the serious coronavirus. First and foremost, the health and safety of our employees is always Adiant's top priority. To ensure this during the virus outbreak, we've implemented a variety of safety measures including restrictions on business travel to, from, and within China in the APAC region, closing our offices in China until February 10th in compliance with the government, extending the Chinese New Year holiday to February 9th, implementing an office sanitation program and enforcing strict hygiene protocols for employees. We continue to closely monitor the situation and we'll adapt these guidelines as appropriate. In addition, we formed a global response team to ensure a coordinated contingency plan is in place for actively monitoring any impact related to customers, suppliers, and joint venture relationships. As far as any estimate on specific impact adding in business, it's too early to forecast. We're working with our customers and suppliers to remain aware of and connected to their efforts as the outbreak continues. As more details and information become available, we'll provide updates as appropriate. With that, I'll turn the call over to Jeff so he can take us through Cadian's financial performance for the quarter and what to expect as we progress through the rest of fiscal year 20.

Thanks. Thanks, Doug, and good morning, everyone. I'll start my comments on slide nine. In adhering to our typical format, The page is formatted with the reported results on the left and our adjusted results on the right side of the page. We will focus our commentary on the adjusted results, which exclude special items that we view as either one-time in nature or otherwise skew important trends and underlying performance. For the quarter, the biggest drivers of the difference between our reported and our adjusted results relate to an asset impairment related to the write-down associated with the expected sale of Adyen's 30% stake in Wi-Fi, a loss associated with the sale of our Recaro automotive seating business, purchase accounting adjustment or amortization, and to a lesser extent, restructuring cost. Details of these adjustments are in the appendix of the presentation. Sales were 3.9 billion, down 4% year over year, excluding the impact of FX. Adjusted EBITDA for the quarter was $297 million, up $121 million, or 69% year-over-year, and is more than explained by improved business performance across Americas, EMEA, and Asia. Included in the results are roughly $30 million of commercial settlements from various customers that tend to be lumpy across quarters, and another, call it $10 million in tax credit, at various GVs in China. I'll have more on these items as we walk through the segment results. Finally, adjusted net income and EPFs were up significantly year over year at $90 million and 96 cents, respectively. As you can see, the improved operating results were partially offset by a higher tax rate in this year's first quarter versus a year ago. As we've discussed, our tax expense is higher in the current year due to booking valuation allowances several geographies in the second half of fiscal 19. Now let's break down our first quarter results in more detail, starting with revenue on slide 10. We reported consolidated sales of $3.9 billion, a decrease of $222 million compared to the same period a year ago. Lower volume and mix across North America, Europe, and Asia impacted the year-over-year results by approximately $179 billion. As a side note, in North America, the impact of the GM labor strike impacted results by about $55 million. In addition, the negative impact of currency movements between the two periods, primarily in Europe, impacted the quarter by $43 million. Worth noting, the callout at the bottom of the slide, consolidated sales in China were up 6% year-on-year, well ahead of vehicle production in China, Unfortunately, for the line with internal expectations discussed with you in November, significant volume declines in Thailand, Japan, and South Korea more than offset China's performance in the APAC region. With regard to Adian's unconsolidated seeding and SS&M revenue, driven primarily through our strategic JV network in China, sales were up about 4% when adjusting for FX, again outpacing the 1% increase in China's vehicle production over the same period. Sales for unconsolidated interiors, recognized through a 30% ownership stake in Yanfang Automotive Interiors, were down 3% when adjusted for FX. Important to note, about half of this business is conducted outside of China. Moving to slide 11. We've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operation, such as executive office, communications, corporate finance, legal, and marketing. Big picture, adjusted EBITDA was $297 million in the current quarter versus $176 million last year. The corresponding margin related to the $297 million of adjusted EBITDA was 7.5% off approximately 330 basis points versus Q1 last year. Excluding equity income, as noted at the bottom of the slide, our margin increased 260 basis points year-over-year to 4.8%. Although the team made significant progress during the quarter, as demonstrated by the year-over-year improvement, these results do not reflect the desired level of profitability for the business. The team remains focused on executing the turnaround plan to drive Addy's margins to best-in-class. The year-over-year improvement in adjusted EBITDA is largely driven by improved business performance in the Americas and EMEA. In addition, lower SG&A costs in America and EMEA, combined with an increase in equity income in Asia, benefited the quarter. On a side note, this is the first quarter of year-over-year improvement since the fourth quarter of 2017. Consequentially, with the fourth quarter of 2019, AddieM's Q1 performance improved by $82 million, the fourth consecutive quarter of improvement, and further evidence that operating environment in Americas and EMEA continues to improve. Finally, Americas and EMEA SS&M business progressed in a positive direction with plant manufacturing results improving just under $40 million versus last year's Q1, and approximately $14 million better compared with the fourth quarter of 2019. Similar to past quarters, we've included detailed bridges for our reportable segments, which consist of Americas, EMEA, and Asia on slides 12, 13, and 14. Turning to slide 12 and the Americas, adjusted EBITDA increased to $94 million up $51 million year-on-year. The corresponding margin of 5.1% was up 290 basis points versus last year. Business performance led the way, improving $40 million year-over-year. The key drivers within this bucket included improved launch, ops waste, and freight, which together totaled about $18 million, and commercial, which also improved by $18 million year-over-year. A component of commercial would include various routine customer settlements, which tend to be lumpy in nature between quarters. During the quarter, we resolved a backlog of open issues with a variety of customers. These settlements are common, especially towards the end of the calendar year as our customers close out their own year. SG&A was another strong contributor in the quarter as America's benefited from a reduction in net engineering, increased efficiencies, and the deconsolidation of Adiant Aerospace. Partially offsetting these benefits was the negative impact of lower volume and mix, which can be largely explained by the temporary impact of the GM strike. Now turning to slide 13 and discussing EMEA's results. Overall, adjusted EBITDA increased to $49 million with a corresponding margin of 3.1% of $47 million while margin improved 300 basis points, respectively, year over year. Again, good progress, but significantly below optimal levels. Like Americas, substantial improvements in launch, ops waste, and freight, combined with positive commercial actions drove a $44 million improvement in business performance. The media team also worked hard to reduce SG&A costs, which improved $12 million compared with Q1 of last year. Lower volume and mix partially offset these benefits. Finally, turning to slide 14 in our Asia segment performance. For the quarter, adjusted EBITDA was $177 million, or $23 million higher than compared with Q1 2019. Equity income increased $26 million, driven by an approximate $10 million benefit associated with tax credits at various GEDs and $5 million of commercial settlements. In addition, improved operational performance both at the seating JVs and Wi-Fi contributed to the increase in equity income. Important to remember, equity income is historically strongest in Q1, our fiscal Q1, mirroring the seasonality of China's vehicle production pattern. We continue to expect a significant reduction heading into fiscal Q2, primarily driven by lower vehicle production, surrounding the Chinese New Year holidays, as well as the developing impact of the coronavirus. More on our outlook in just a minute. In addition to equity income, business performance increased by about $9 million year over year, driven primarily by improved material margin. Lower volume and mix, combined with higher engineering costs associated with the current launch schedules were partial offsets. Now, let me shift to our cash and capital structure on slide 15. On the left-hand side of the page, we break down our cash flow. Adjusted free cash flow, defined as operating cash flow less capex, was $148 million for the quarter. The $121 million improvement in adjusted EBITDA, improved trade working capital, and a $53 million reduction in capital spending between the two periods explain the vast majority of the increase in free cash flow versus last year. Trade working capital, as mentioned on several of our past calls and noted on the slide, tends to be quite volatile throughout each quarter. However, over the course of the year, the impact generally tends to balance out. Also note that our AR factoring in Europe was approximately $50 million higher at December 31st than at September 30th. For capital spending, the year-over-year decline is partially related to the timing of our customers' launch plans as well as an increased scrutiny over spending. The teams are working closely to identify opportunities to reuse capital where appropriate. As a result, we're expecting to spend less in CapEx this year versus prior expectations. More on that in a minute. As you can see in the footnote, we continue to break out CapEx by segment. On the right-hand side of the page, we detail our cash and debt positions. At December 31st, 2019, we ended the quarter with $965 million in cash and cash equivalents. Gross debt and net debt totaled $3,754,000,000 and $2,789,000,000 respectively on December 31st. It's worth mentioning there are no near-term maturities thanks to the refinancing completed last May. And speaking of the refinancing, At that time, we intentionally increased the company's liquidity to ensure the team had appropriate funding to execute the turnaround plan. With our turnaround plan firmly rooted in gaining momentum, and as evidenced by the several quarters of improving operating and financial results, we're confident we can continue to execute the plan with a lower level of liquidity. As we move through the next couple of quarters, we'd expect to pay down between $100 to $200 million of debt using the excess liquidity residing on our balance sheet. Now, moving to slide 16, and just a few comments on the strategic transactions that we've recently announced and how those actions offer additional opportunity to strengthen Addi's balance sheet. First, the divestiture of Recaro Automotive Seating. As you know, Recaro served a niche market, providing low-volume specialty seating. The business would essentially break even Realizing we'd need to make significant investment in next-generation product and incur restructuring costs to improve its profitability, we elected to divest the business, which is very consistent with our commitment to our core business and focus on capital allocation. With the strategic actions with Yanfeng announced earlier this morning, major components of the agreement include the sale of Alliant's 30% ownership stake in Wi-Fi to Yanfeng, Although the partnership we have with Yantang is highly valuable and strategic, the interiors business is not core to Addiance. We've said in the past that we'd be open to monetizing the investment if the opportunity arose, and we have now found such an opportunity. The sale price was $379 million, and if you recall, we were expecting equity income from Wi-Fi to total approximately $45 million for fiscal 2020. of which $17 million was included in our Q1 results. By the way, we expect little to no tax leakage on this transaction. We also agreed to make amendments to the AYM joint venture agreement. As a reminder, AYM is a 50-50 joint venture with Yanfeng that was formed in late 2013 to produce mechanisms such as recliners, tracks, height adjusters, and locks. The amendment to the JV agreement includes sale of mechanism patents and other intellectual property to AYM for $20 million. AYM will license such IP back to Adiant on a royalty-free basis and a change in AYM's business scope to allow AYM to carry out its mechanisms business both inside and outside of China. This change in business scope is significant as Adiant intends to further leverage AYM's expertise going forward. Sourcing a larger portion of Adiant's metals to this high-quality, low-cost business should allow us to accelerate the right-sizing of our metals business. And finally, Adiant and Yanfeng agreed to extend the JV agreement with YFAS to December 31, 2038. This extension demonstrates a strong commitment to the partnership in this region. In summary, these actions strengthen our valuable relationship with Yanfeng, demonstrates our continued commitment to the core seeding business and disciplined approach to our capital allocation, especially as we pivot to become less capital intensive with the right sizing of our metals business. As noted on the slide, we expect to use the approximate $400 million in proceeds to deliver the balance sheet. This amount is incremental to $100 to $200 million of debt pay down discussed on the previous slide. Now turning to slide 17, I'll continue with a few comments on what to expect as we progress through the remainder of 2020. I know many of you may be tempted to take our Q1 results and multiply by four to get a revised full year estimate. I wish it were that easy, but unfortunately there are several or certain macro factors and adding a specific headwind that prevent that from being the case. Let's break down the specifics. Starting with revenue, we expect the full year to settle between $15.6 billion and $15.8 billion. Although the range has not changed from our previous estimate, certain of the components have shifted, namely related to the divestiture of Recaro for the balance of the year, but is largely offset by an increase in production expected at GM as they work to make up lost volume associated with the labor strike. Also important to note, as previously communicated, Second half 2020 revenue is expected to be $400 to $500 million lower compared with the first half, driven by lower industry volumes and the impact of several product launches, including the Ford F-150, Ram, various Nissan programs in North America, Volkswagen's ID.4, various Daimler programs, and the PSA Citroen C4 Picasso in Europe. For adjusted EBITDA, the solid start to the year combined with further benefits expected from our turnaround plan underpin the upward revision to between 870 to 910 million versus our previous expectations of between 820 to 860 million. The new adjusted EBITDA range reflects a $30 million decrease to equity income resulting from the announced sale of Wi-Fi as we do not plan to record equity income for Wi-Fi on a go-forward basis. Thus, the midpoint of our guide is approximately $80 million higher than the previous guide on an apples-to-apples basis. Important to point out the planned decline in revenue in the second half of 2020, both in our consolidated and unconsolidated JVs, is expected to partially offset continued operational improvements in both America and EMEA. Further impacting our balance of year earnings is our launch load in the second half of the year, which is biased towards programs that carry relatively high decremental margins. Speaking of equity income, we now expect equity income will range between 235 and 245 million, factoring in our Q1 results and announced sale of Wi-Fi. As a reminder, we continue to expect equity income will mirror seasonality patterns of China's vehicle production strongest in Q1, followed by a substantial decline in Addion's fiscal second quarter, which tends to be impacted by lower production surrounding the Chinese New Year holiday. In fact, we're expecting an approximate $70 million reduction in equity income in our second quarter compared with the quarter just completed. A forecasted $500 million reduction in sales in China in Q2 versus Q1 is the primary driver. In addition, we will not record Wi-Fi income, equity income, as I previously mentioned. One more point on China. The macro environment is very uncertain at this time, given the coronavirus. The impact of the virus on the economy is currently unclear, and our guidance, therefore, does not include any prolonged or significant impact. However, we continue to monitor the situation closely and will update our planning assumptions as appropriate as we better understand its impact to the industry and add-ins. Moving on, interest expense has been revised lower to approximately $190 million. This estimate does not take into consideration the accelerated debt pay down discussed earlier, as a large majority of the pay down will be dependent on the closing of the Wi-Fi transactions, which we expect will take place before the end of our 2020 fiscal year. Cash taxes in fiscal 20 are still expected to range between $100 to $110 million, similar to last year's level. Important to remember, net operating loss carry-forwards can offset income as profits increase, so cash taxes on Addion's operations should remain low even as profits are increasing. With regard to Addion's effective tax rate, and for modeling purposes, a rate in the high 30% range is still appropriate. We'd expect that rate to fluctuate on a quarterly basis due to the valuation allowances in our geographic mix of income. Based on our first quarter performance, and given our intense focus on cash flow, we now expect capital expenditures to settle in the $440 to $460 million range. And finally, one last item for your modeling, we expect our improved operating profit and reduced capital expenditures will result in positive free cash flow for the year. With that, let's move on to the question and answer portion of the call. Jacqueline, if we could take the first question.

Absolutely, and again, as a reminder, if you would like to ask a question, it is star 1 and record your name. Our first question comes from John Murphy of Bank of America. Your line is open.

Good morning, guys, and congrats on getting a lot done this quarter. Just first on the Yang Feng transactions, I'm just curious why you're pulling the trigger on this now. Is it something, Doug, that you kind of started working on? you know, once you got there and it just took some time to get it done? Or what was really the impetus for doing this right now?

Okay, John, just so, first of all, good morning. Thanks for calling in. Which transactions specifically?

The Yang-Fang transactions on the JVs.

Sorry, I just wanted to make sure. It's a little... So, you know, as Jeff mentioned, you know, The opportunity arose as we looked to renew our YFAS joint venture in China. That's been a tremendous asset for the company. We were in talks with YF and we were looking to find a way to take that relationship to the next level. We felt that that was best served as we built the relationship, not only extending in China, but also looking towards our mechanism business to see how we could globally leverage that business. As part of that discussion, we've been looking for opportunities to extract cash out of China to our advantage. Wi-Fi became an opportunity for us. And because that's not really a core business on the interior side that we participate in, we just felt that the timing made sense to go after it. So that's generally how the stars aligned, if you will. And we're really excited about that. I don't know, Jeff, any other comments?

No, I think you hit it well. Just as you look at Wi-Fi, we've talked about that being non-core and finding that opportunity, but John, as you look here, it was very important for us to extend the joint venture with YFAS, highly successful, and expanding that relationship with AYM just dovetails right in with the plan Doug has outlined to improve the cash flow of this business by emphasis off of the mechanisms business that's historically used a lot of capital and hasn't necessarily had a great return. AYM has really done it the opposite. They've had great returns. We own 50% of that business. So this allows a nice harmony and it all kind of came together. It took a while to get together. So it's not like we just worked on it this quarter, but it's been in the making for a while.

And maybe if I can follow up on the AYM side, I mean, it sounds like this is allowing you to maybe rationalize your core consolidated structures business a bit faster. Is there the potential there could be asset sales from your core business into the AYMJV that might raise more cash, or is that kind of a, you know, sort of a no-no?

No, that's not a no-no. That's something we'll look. You know, this is the first step. We think there's more that can be done. Nothing to announce today, but that's something we'll absolutely be looking at.

Okay. And then, Doug, just as we think about the margins, I mean, you know, you got a ways to go to grind to sort of peer or quote-unquote normalized margins, but this quarter kind of showed you're making some real, you know, definitive progress on some of the issues of premium freight, excess cost, and launch issues. I mean, what is kind of your thought process as to when you might be able to get to, you know, quote-unquote normalized peer, you know, margins? Is it something that's still going to take you know, two to three to four years as you're rolling off some of the old bad contracts, or is there something you'd get to maybe sooner than that?

Well, we take, you know, some of the macro environmental issues out of the equation. To answer your question, I think we've made good progress. I still think this is a multi-year journey. We're not changing that time horizon as a result of our Q1 performance. But it's clearly demonstrating, you know, when we focus on the basics from a launch in operational performance and meet our customers' expectations, that we've really changed the environment with our customers and we can get a lot more done. So that's always been our approach, you know, stabilize, meet our customers' expectations from, you know, a delivery performance quality, and then that opens the door for us to engage with them, I'll say commercially and also on a cost side of the equation. So still multi-year, but we're pretty satisfied with the performance that's reflected in Q1.

Great. Thank you very much. Thank you, John.

Thank you. Our next question comes from Joseph Spack of RBC Capital Markets. Your line is open.

Good morning, everyone. Thanks for taking the question. I guess just to start on the commercial settlements, it sounds like what you're saying is this is lumpy. This is based on some, you know, recoveries and sort of – contractual recoveries. Is that right? And this is not a result of some of, you know, the other sort of commercial settlements you've talked about and going back to customers and trying to sort of reprice some of the contracts?

It's both. As we've always said, there's been a backlog of issues that were difficult to close out with our customer because we had, you know, performance issues that were in our control standing in the way. So as we've addressed our performance issues, that's allowed us to come in and engage with our customer and resolve some of that backlog, if you will. The other element is a function of the way the calendar and fiscal years end. And we get a lot of things done at the end of our customer's calendar year that benefit us in our first quarter fiscal year. So it's both, if you will.

Okay. In the remaining China JVs, your guidance, I think on an apples-to-apples basis, it's kind of steady, but You know, one quarter was much stronger than expected, and there was sort of that 10 million tax credit. So it implies some significantly lower implied margins in the exceeding JVs over the course of the year. What's driving that, and is that sort of a more new normal rate to think about in China?

It's a little bit of the latter. So, you know, we align our forecasts with what our customers provide us, for the immediate, and then we look at IHS to give us an idea of what we can expect beyond the releases that we have with our customers or what our stated customer's volume are projected to be. Part of it is mixed. We have customers like SGM and Ford who have been struggling in the market that take that number down. But that really defines most of it. FX aside, I don't know, Jeff, any additional comments?

Yeah, Joe, I'd say, you know, for the most part, as we look at China, it's got pretty high detrimental margins. It's a strong business. So as we predict weaker sales environment, that's going to drive has been a volume story and not really a margin story, but to some degree there's a mixed story within that margin. SGM, Doug mentioned, is a key customer. It's also significantly, presumably could be impacted pretty heavily, about 20% of their productions in Wuhan in China. So as we look at going forward, that's an important customer for us, but in general, What we've projected here is mostly driven just by volume expectations in the market.

Okay. And quickly on the AYM portion of the JV actions, how long will it take for them to get set up on mechanisms? And can you offload or, I guess, like outsource business to them, or is this more for go-forward contracts? Yes.

Yes, yes, and yes, probably. Well, you know, they essentially provide all of our mechanisms in the China market today.

So they're set up today? They are set up today.

In fact, they're incredibly well set up today. They have a plant in China that is world-class, that not only supplies the majority of our product in region, also exports to Europe and North America quite well.

Okay, thank you.

Thank you. Our next question comes from Dan Levy of Credit Suisse. Your line is open.

Hi, good morning. Thank you for taking questions. Just wanted to follow up again on the commercial settlements here. How should we think about how many more contracts you have that really need to be repriced? And just, you know, what's the, you know, if If they're repriced, is this just for like a one-time annual benefit or is this for the duration of the contract? Just trying to get a sense of the sustainability of these benefits into out years and, you know, how much more you have to reprice within your contracts and programs.

Dan, before Doug talks, you know, talks about some of those other points, let me just maybe get a little bit of a primer on sort of commercial settlements for us. We have, obviously, an enormous number of contracts with our customers that have volume components, that have all kinds of different components that impact the price our customer pays to us. And we also have productivity or price reductions that we estimate that we'll give to them through the year. What we're talking about here for the most part in this commercial settlement is routine activity of the company that happens year in, year out. If I go back and I look at history, we've had these since the beginning of time. But they tend to be lumpy, and we're trying to basically emphasize that in the comments here. We tend to make an estimate, let's say, of what productivity number we might give to a customer. And as we get to the end of the year with a mix of all the other commercial issues, We either overestimate or underestimate where that is. What we tend to be is we tend to be a bit conservative as a company on this. So we generally, as we reach the final conclusion, which each of these customers, which typically happens at the end of the calendar year, we tend to have a bit of a benefit. So in our first quarter fiscal year, historically, and our accruals would we get a similar type benefit. You just can't annualize it through the period, and that's what we're trying to really emphasize here in calling it out. And maybe if I can just further that.

What I would add to it is a year ago, we had a lot of unresolved contractual issues with our customer. For the most part, those have been addressed. What I will say as we move forward, and it's somewhat the nature of our business, is quite a bit, and that creates opportunity for us to engage with our customers and offer solutions that can benefit our bottom line. That's just the nature of the seeding business. That's something we've recommitted our activities to support. So when we talk about VABE, that's not just necessarily running workshops to find ways to take real value in the product based on our assessment of the market and in benchmarking their product to what we think is most valuable and then offering mid-cycle solutions that otherwise they wouldn't be investigating. And that's really our focus as we move forward is continuing to drive value. Many of our customers are looking for ways to take out of the seeding product to address some of their needs. Many of our customers are looking to move away from controlling that value chain and giving us the opportunity to control it if we can offer a better commercial proposal for them. So it's kind of a continuous activity that we recommitted ourselves to that our regional groups understand and our customer groups understand. And so being more commercially savvy with our customers.

Okay, great. Thank you. Second question. Your organic revenue growth in a quarter was minus 4%, but that's actually a couple points better than what light vehicle production did in the quarter. And you've now had a couple of quarters, a handful of quarters of organic revenue outgrowth versus the market. It's lumpy, but it's still outgrowth. And this is even with what should be downsizing of SSM. So can you just give us a sense of what's happening in your organic growth or the incremental content? Is it just better platform exposure? And what might this tell us about how to think of, in the future, your relationship of organic growth versus LVP? Call it the outgrowth. Setting aside what's going to be the likely impact of future downsizing of SSM, which I suspect we haven't really seen yet in the revenue results.

Okay. So it's certainly – a lot of it has to do with mix. One of the great things about our revenue portfolio products is we have great mix to – SUV, light truck, luxury customers, and as that mix, as the market mix turns in that direction, that certainly gives us benefit. That's particularly true in the Americas where we're well positioned in the light truck market. I think that's part of the answer. If we look at, you know, we're not But because our relationships with our customers have significantly improved, our performance has improved, we've resolved commercial issues, we feel very confident about our backlog. The numbers we typically talk about is incumbent business that we continue to win. And we're operating 90s everywhere else in the world. So we feel good longer term that that backlog continues to come on. I think that really covers, you know, I think answers your question. Any additional comments to that, John? No. I guess that's how I would look at it.

And there's no sort of, you know, backlog air pocket or anything like that. You know, when we've heard of Some of your competitors talk about conquest business. It sounds like you're saying that you're winning all the JIT business. The backlog is intact. There's no future air pocket that may occur between now versus when these re-wins that you've talked about occur. Is that a fair assessment?

That's a fair assessment. The only disclaimer I'd put on that is the comments we made in our formal remarks that You know, there are businesses that we're taking a hard look at, and if we can't put together a, you know, a thoughtful financial projection that gives us a return on investment, you know, then we're prepared, you know, to walk away from that. And at this stage, nothing to announce, but, you know, that's, again, a different attitude I think we have when we look at new business opportunity. Nothing sacred. and we weigh each opportunity, each customer in each region for each product different. They're not weighted equally, and we take that all into account before we decide whether we want business or not.

Okay.

Thank you. And, Jacqueline, can we take our last question from Brian?

Yes. Our last question comes from Brian Johnson of Barclays. Your line is open.

Two questions. First on the SSNM licensing and arrangement with Yangfeng. Does this open up the possibility to engage in value engineering discussions with North American and European customers about moving sourcing mechanisms to China?

In fact, we're already doing that. That was happening independent of this. We just think bringing these businesses closer together allows us to make by decisions, even within our existing SFAs, to decide where it's best to put business. I think we're more aligned today in the way we think about that, engaging our purchasing organization than historically we've been. So we're making those moves as we speak and have been making them over the last year or plus.

And in terms of the impact on supply chain logistics, just the smoothness of the jet factories, what's the customer's reaction to those suggestions?

You know, typically, well, first, our operations in China with AYM are outstanding operations. Many of our customers know them either from their relationship through China or as a result of the products that we shifted them through our jet plants. So there are no editing. For certain products, they're very cost effective. And so that's taken into consideration. We always take into consideration extending supply, our supply chain and the logistics cost currency risk, et cetera, associated with that. So that's all baked into the cake, if you will. And when we can bring forward an attractive business proposal, taking all those issues into account, we're pretty transparent with our customers. They understand the benefit that they'll receive, and they're usually very much aligned with the decision and support it.

And effectively, they're producing the same parts that we are. We designed these together. Remember, it's RGB, so it's common. We both produced the same recliner, 3000 series. They've just been able to do it at a lower cost, but the output of the product is the same.

So for the customer, it's... One additional point. We also operate a technical center through AYM, so this is not just the traditional localization they can support the customers in region beyond just the manufacturing side of things.

Great. Thank you, Brian. And Jacqueline, it looks like we're at the bottom of the hour, so this will conclude the call this morning. If anybody did not get their chance to ask a question, please feel free to reach out. Jeff and I will be available today. Thank you. Thanks, everyone. Thanks, everyone.

Thank you for your participation in today's conference. You may now disconnect at this time. Have a wonderful day.