Q3 2019 Earnings Call
Good morning, and thank you all for standing by I'd like to inform all participants that your lines will be on a listen only mode until the question and answer session of today's call.
Todays call is also being recorded if there are any objections you may disconnect at this time.
I will now turn the call over to Mr. Mark Oswald.
Thank you you may begin.
Thank you Christy good morning, and thank you for joining us as we review audience results for the third quarter of fiscal year 2019.
The press release and presentation slides for our call today have been posted to the investors section of our website at <unk> Dot com.
This morning, I'm joined by Doug Del Grosso, Adams, President and Chief Executive Officer, and jumps to file 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 Q3 financial results.
After our prepared remarks, we will open the call to your questions before they turn the call over to Doug and Jeff There are few items I'd like to cover.
First today's conference call will include forward looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties I would caution you that our actual results could differ materially from these forward looking statements 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 reconciliation to these non-GAAP measures to the closest GAAP equivalents can be found in the appendix. Our full earnings release. This concludes my comments I'll now turn the call over to Doug.
Okay, great. Thanks, Mark.
Thanks to our investors perspective investors and analysts joining the call. This morning spending time with us.
As we review our third quarter results.
Turning to slide four first just a few comments on recent developments, including certain of our key financial metrics, which are called out at the top of the slide.
Although our third quarter results are down year over year answer financial results improved sequentially for the second consecutive quarter.
As benefits related to turnaround actions implemented earlier this year more than offset significant industry weakness in China.
No doubt a good outcome.
And evidenced the turnaround is tracking in the right direction sales and adjusted EBITDA for the quarter totaled 4.2 billion.
And 205 million respectively.
Sales were in line with our internal expectations.
Continued operational headwinds within the Americas and European segments.
Combined with significantly lower vehicle production in China.
Were the primary contributors to the $113 million year over year decline in EBITDA.
Adjusted earnings for the.
Per share fell 38 cents in the most recent quarter.
The lower level of operating profit drop right to the bottom line.
We ended the quarter with just over a billion of cash on hand at June Thirtyth.
Important to note the adjusted results covered.
Excluded certain charges that were that we view as one time in nature or otherwise skewed trends in the core operating performance of the company.
Jeff will discuss these items and provide additional details.
On our segment performance cash flow and balance sheet, just a few minutes.
Outside the financial results. Other recent developments include the number of customer events that were completed across Asia, Europe and North America.
The events showcased our current and future product offerings.
And equally important highlighted a number of opportunities to increase program profitability for both the audience and our customer through innovative.
The initiatives.
Feedback has been overwhelmingly positive.
With more events planned for later this year.
Speaking of customers, adding it was pleased to have won the quality first award from PSC group at the annual supplier awards ceremony and Jim.
And it was recognized for delivering outstanding achievements in product development operations, while meeting PSC is quality requirements.
And supporting its business transformation.
And finally, we were awarded a number of product wins during the quarter.
Slide five provides a few examples of the recent wins.
As you can see from the examples highlighted.
The recently awarded programs include both replacement and new business wins.
It includes a great mix of truck SCB and luxury platforms, such as Ford Ranger portion MOCON.
You can vision.
And beat up you know mark.
To name just a few.
Given the customer mix geographic mix platform mix of these and other recent business awards.
We expect headwinds leading market positions continued to strengthen in the coming years.
Definitely one of the many reasons we're excited about.
The future as we look forward.
When rates are tracking as expected and in line with historical performance for example replacement business as being one at a greater than 90%.
Great across total audience.
If you drill down further the replacement win rates for our seating business year to date in China, and North America is running at 100%.
And Europe is also showing strong results at 90%.
Likewise, our new business wins continue to track in line with past performance and internal expectations.
Of course, winning business is just the first step once program was awarded its imperative.
To develop and launch the programs flawlessly.
Goes without saying.
This has been and continues to be a focus area for the team after falling short of our high launch standards historical levels of performance.
The increased focus.
Is translated into improving launch performance, which we experienced in Q3.
Slide six illustrates programs that were successfully launched in the most recent quarter, including Daimler eight class sedan.
The Jeep Gladiator and there were no cap tour.
On the right hand side of the slide you can see various actions the team is executing to stabilize and improve our launch performance such as.
Ensuring adequate ontime staffing increased focused on change management enhance readiness and program reviews and early escalation of potential issues.
I think you'll agree these are not new concepts, rather concentrated efforts focusing on the basics.
Although we're making progress more work is needed to ensure ongoing future launches returned to best in class standards.
Turning to slide seven I'd like to provide some commentary on the turnaround and share a few tangible proof points.
On the progress we've made over the past few quarters.
First the team has made solid progress on improving operating performance that are underperforming plants.
As mentioned previously the number of troubled plants is limited to a handful across seeding assessing them.
However, the losses at the plants have had a significant impact on Indians finance results.
The team continues to execute against detailed work plans designed to eliminate operational waste and improve utilization rates.
One of our critical chip plants here in Michigan has made significant progress due to successful execution of variety of operational and commercial actions.
With the most recent being the ability to reduce head count to align with our customer broadcasts and production requirements.
Since October in the plant run rate has improved significantly one step that stands out.
Relates to the required production labor, which in the first quarter of this year ran at approximately 606 team members.
Today due to actions implemented and improved operating performance were running at approximately 528 team members.
Second, we're achieving significant reductions in premium freight and containing costs.
As you might expect this is very much linked to stabilizing and improving the overall operating environment.
On this front, we're driving more timely closures of issues and pursuing recoveries on supplier and customer related issues.
The benefit of reduced containment premium freight and ops way contributed to sequential quarter on quarter improvement.
In Q3.
Results reported today.
Year to date premium freight is down 65% across the company down 70% in the Americas, 50% in Europe .
And we expect this trend to continue into Q4.
Increasing program profitability is another area we've progressed.
It starts with the commercial discipline, making sure you're bidding on the right programs at the right price.
And taking advantage of change management to walk margins higher where possible.
Similar to the previous focus areas discuss progress.
Was made on the front during the quarter as we resolved backlog of open pricing issues with our final customers.
As mentioned on our last earnings call resolving these issues was the first step intended to stop the bleeding on certain programs.
Additional efforts in the area of the initiatives change management and focusing on returns through product lifecycle or.
Moving forward to improve.
Program profitability.
It is encouraging to see our efforts translating into improved operating and financial performance.
As you can see by the chart on the lower right hand side of the slide adding an EBITDA margin.
With and without equity income has improved sequentially since Q1, as a turnaround actions implemented gain traction.
A very good result, especially considering we've achieved despite downward pressure on earnings from a variety of macro headwinds, particularly weak industry conditions in China.
Two additional comments before moving on first.
Back to earnings growth driven by the company self help initiatives is not dependent on improved macro environment.
I'd point to the quarter, just completed as a good proof point.
Second despite the progress demonstrated in Q3.
We continue to stress turning around the operations and achieving acceptable levels of profitability will be a multi year journey.
Weve made good progress.
A lot of work lies ahead.
Moving on and flipping to slide eight.
We included this slide as a reminder, how we expect the pacing of the turnaround progress.
The plan is on track as efforts to stabilize the business as you're taking root and having a positive impact on our operations and financial results.
We continue to expect further stabilization reaffirmed this morning with our earnings release page to EBITDA and EBITDA margins will improve versus H. one.
Of this year despite weaker than expected.
Stage to market conditions in China.
As we exit fiscal 19 and progress through 2020 in 2022.
We expect our continued focus on operational excellence commercial discipline the reduction of overall launches in the rightsizing of set for them.
We'll drive a large improvement in margins, but more importantly.
And even greater and more tangible benefit in free cash flow.
We are currently finalizing our fiscal year 20 assumptions and plan to share our expectations once finalized.
Before turning the call over to Jeff, Let me conclude with a few comments related to the China market and overall macro environment.
Starting with China, the China economy.
Especially consumer sentiment remains weak.
Passenger vehicle sales and production continued to be significantly impacted by the overall economy.
And industry specific factors such as the pull forward of the TV six emission standards.
As caution.
On our Q2 earnings call in early May signs of stabilization, we're not materializing heading into Q3 as we originally expected.
In Q3, and deliveries were down significantly due to ingress inventory reductions at certain of our main customers.
In fact, a few of our customers experienced production declines between 30 and 40%.
Based on current production schedules, including extended down weeks that occurred in July we are expecting limited upside in Q4 fiscal year 19.
However, the lower level inventories could set the stage for fiscal year 2000 recovery.
More on our 2020 expectations wants to fiscal year 20 plan is finalized.
In addition to headwinds coming from China, other macro factors, such as tariffs and the weakening newest hour.
Place downward pressure on earnings, which as you expect the team is working hard to offset and mitigate.
And despite these added pressures we continue to expect.
Our significant so help initiatives will drive further earnings growth and cash generation.
With that I'll turn it over to Jeff. So we can take us through any of the financial performance for the quarter.
And what to expect in the remaining.
The fiscal year.
Great. Thanks, Doug Good morning, everyone.
Starting my comments on page 11.
And before jumping into the financials I'd like to point out that there were several one time non cash charges that significantly impacted audience Q3, GAAP results. The biggest charges our financing tax related items as a result of the new debt arrangements.
The incremental interest expense and the repositioning of our intercompany financing it became difficult to support the full utilization of our deferred tax assets in certain geographies. Therefore, we recorded valuation allowances against these balances these valuation allowances impacted our net loss by about $250 million in the quarter. It should be noted. This will result in an increase in our current and future effective tax rate, but it will not negatively impact our future cash tax payments as a result of these items, we were required to adjust our fiscal 19 effective tax rate, which resulted in an additional tax expense of approximately $15 million related to the first half of 2019.
Outside of taxes.
Restructuring charges, a UK mark to market adjustment and a deferred financing fee also impacted the GAAP results.
Total these items impacted adding a GAAP net loss by $334 million in the quarter.
Turning to slide 12.
And adhering to our typical format the pages format and with our reported results on the left and our adjusted results on the right side, we will focus our commentary on the adjusted results. These adjusted numbers exclude the onetime special items just discussed complete disclosure of the adjusting items are called out in the appendix.
Sales were 4.2 billion down about 6% year over year FX accounted for about half the decline adjusted EBITDA for the quarter was $205 million down $113 million or 36% year on year.
Largely explained by a decline in business performance in the Americas, and EMEA, along with lower volume in equity income in our Asia segment I'll cover this more detail in a few minutes.
Finally, adjusted net income and EPS were down approximately 74% year over year at $36 million.38, respectively.
Now lets break down our third quarter results in more detail.
Starting with revenue on slide 13.
We reported consolidated sales of $4.2 billion, a decrease of $275 million compared to the same period a year ago.
As mentioned just a moment ago, the negative impact of currency movements between the two periods, primarily in Europe accounted for just over half of the decline.
Lower volume mix in Europe , and Asia with a partial offset in North America impacted year over year results by approximately $125 million. While this result in North America and EMEA.
It was consistent with internal expectations, the sales and earnings in China was worse than expected.
Moving on with regard to Adsense unconsolidated revenue. Our Q3 results were significantly impacted by the much lower levels of vehicle production in China.
Unconsolidated seeding NSS announced revenue driven primarily through our strategic JV network in China was down about 17% when adjusting for FX as mentioned earlier on the call aggressive inventory reductions in certain of our main customers combined with the balance out of certain programs resulted in underperformance compared with vehicle production in the quarter.
Sales for our unconsolidated anterior segment our business.
Recognized through our 30% ownership stake in Yanfeng automotive interiors or Wi Fi were down approximately 21% year on year when adjusting for FX.
Moving to slide 14.
We provide a bridge of adjusted EBITDA to show the performance of our segments between periods.
The bucket labeled corporate represent 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 $205 million in the current quarter versus $318 million last year.
The corresponding margin related to the $205 million of adjusted EBITDA was 4.9% down approximately 220 basis points versus Q3 last year.
The primary drivers of the year over year decline is attributed to negative business performance largely launch will launch related the negative impact of lower volumes and mix, primarily within EMEA and Asia and a 23 million dollar FX adjusted decline in equity income.
Macro and micro factors, including a negative impact of foreign exchange also weighed on Q3.
I will point out that despite being down year over year sequentially compared to Q2 2019 results improved by 14.
Results improved by $14 million. This is the second consecutive quarter of improvement and demonstrates the operating.
The operating environment in Americas, EMEA has stabilized and has begun to improve albeit at unacceptable levels also worth noting assessing them progress positively versus Q2 2019 as global results improved by about $13 million sequentially.
Similar to past quarters. We've included detailed bridges for our reportable segments, which consist of Americas, EMEA and Asia on Slide 15, 16 and 17.
Starting with Americas on Slide 15, adjusted EBITDA decreased to $69 million down $30 million compared to the same period a year ago. The drivers of the primary drivers between the periods include an approximate $27 million and unfavorable business performance, including approximately $17 million of operating performance higher freight and negative net material margin.
Note that we did see improved launch and op waste performance and lower premium freight.
Also included in the business operating performance was a $9 million year over year decline within the assessing them business, primarily associated with unfavorable mix.
Other headwinds included a $14 million increase in SGN egg cost, which is more than explained by temporary SGN a benefits last year related to the elimination of the company's 2018 incentive comp accrual.
Additional headwinds related to an increase in audience aerospace spending partially offset by reduced engineering costs and a year over year decline in equity income.
Partially offsetting the headwinds just mentioned were lower commodity prices of about $9 million and benefits associated with higher volumes call it $5 million.
On a sequential basis compared with Q2 fiscal 19 results for the Americas improved by $37 million, primarily driven by improved labor and overhead decreased and operational waste and premium freight.
Definitely a positive sign and evidenced that actions taken to improve the business earlier this year are gaining traction.
One last point on Americas, our Capex for the segment was approximately $39 million in the quarter.
Turning to slide 16, and our EMEA segment performance.
For the quarter, adjusted EBITDA was $53 million or $44 million lower compared with Q3 2018.
The primary drivers between Q3 this year and last year's third quarter include negative business performance call. It a 23 million dollar headwind, including launch related cost and inefficiencies associated with the common front seat architecture, we have discussed several times in the past.
Lower volumes and mix impacted the segment by roughly $9 million and finally FX resulted in an approximate 8 million dollar headwind in Q3 versus versus the same period last year.
I'll point I'd point out that although the assessment and business in Europe was down $12 million year over year results were $12 million better versus Q2 2019 as actions taken to stabilize the business gained traction.
Capex for EMEA was approximately $51 million in the quarter.
Finally, turning to slide 17, and our Asia segment performance.
For the quarter, adjusted EBITDA was $110 million or $36 million lower compared with Q3 2018.
Headwinds from lower volume and a decline in equity income, resulting from a significant reduction in China auto production totaled $18 million for each and were the primary drivers of the year over year decline.
In addition business performance was also a modest headwind call it $4 million driven in part by the by the lower volumes due to the higher fixed cost nature of the manufacture of man of a manufacturing business.
And finally into it but to a lesser extent macro factors, namely foreign exchange weighed on the quarter by approximately $6 million, partially offsetting the headwinds were positive contributions from lower SGN egg cost and lower commodity prices.
Asia is capex for the quarter was approximately $8 million.
Let me now shift to our cash and capital structure on slide 18.
On the left side of the page, we break down our free cash flow adjusted free cash flow defined as operating cash flow less capex was $168 million for the quarter. This compares to 250 $252 million last year.
Important to remember last year's launch an initial sale of accounts receivable financing facility provided an approximate $94 million benefit to free cash flow. Excluding the factoring program free cash flow in Q3, 2018 totaled 158 million essentially flat with our Q3 results.
Lower capital expenditures, an increase in customer tooling recoveries and a decline in restructuring cost essentially offset the lower earnings when comparing the two periods.
I'll also point out during the quarter cash dividends received from our China Jvs totaled approximately $165 million.
Capital expenditures for the quarter were $98 million compared with $138 million last year.
As you can see in the footnote we continue to breakout capex by segment.
On the right hand side of the page, we detailed our we detail our cash and debt position.
At June Thirtyth 2019, we ended the quarter with just over $1 billion in cash and cash equivalents.
As mentioned upon the completion of the debt refinancing, we intentionally increased our liquidity and capital structure flexibility to further enable the turnaround and protects to protect against uncertain macro risks such as softening end markets.
It's early days since completing the refinancing.
And gaining traction on the operational turnaround. So rest assured we will continue to monitor and assess our cash position with debt pay down being a priority.
Moving on gross debt and net debt totaled $3.777 billion and 2.752 billion respectively at June Thirtyth.
And worth mentioning no near near term maturities. Thanks to the refinancing completed in May.
Moving on to slide 19.
Let me conclude conclude with a few thoughts on what to expect for the remainder of fiscal 2019.
Based on current vehicle production plans and expected movements in foreign exchange, we continue to expect revenue to settle in the $16.5 billion to $16.7 billion range implied Q4 revenue of approximately $4 billion and consistent with what we would expect as a result of our normal seasonality.
This would result in revenue being down approximately $150 million year over year or $200 million from the quarter just completed.
With regard to adjusted EBITDA, We continue to expect second half results and margins just pass first half performance despite weaker than expected market conditions in China.
As actions taken to improve the company's operating and financial performance gain traction, especially as it relates to the self help initiatives within Americas and Europe .
Included in our EBITDA assumption is equity income of approximately $265 million down from our earlier expectations given the continued weakness in China.
In fact based on our current expectations the weaker than expected China market will likely result in equity income in age too.
Being down approximately $25 million compared with the first half.
Our assumption in early May assume flat to slightly better performance.
If we combine consolidated results.
In China.
China performance is expected to be down approximately $35 million in the second half compared to the first half.
The decline is more than explained by volume.
Combining the expected drop in sales due to normal seasonality with the expected decline in equity income, partially offset by self help initiatives in the Americas in Europe .
That are gaining traction likely translates to an adjusted EBITDA in Q4 slightly below the $205 million posted in Q3.
Moving on based on our expected cash balance in debt. We continue to expect full year interest expense to be approximately $175 million with regard to taxes. The establishment of valuation allowances in several jurisdictions over the past few quarters has had a significant impact on our adjusted effective tax rate and variability of the rate between quarters as evidenced with Q3's approximate 39% adjusted effective tax rate.
As a result, we will continue to focus more on our cash tax estimate for the year, which continues to be approximately $105 million to $115 million for the year.
Based on our expected earnings and composition of those earnings this outcome would be about $30 million less than fiscal 18.
One additional point on cash taxes important to remember.
More than 50% of our cash tax payments relate to consolidated jvs and withholding taxes on dividends from Jvs.
One last item for your modeling based on our performance through the first nine months of 2019 and given our intense focus on cash flow. We now expect capital expenditures to settle in the $500 million to $525 million range.
At the lower end of the range Q4 capital spending would be about $150 million. This level of spend combined with the reversal of temporary working capital benefits experienced through the first nine months of the year essentially.
Driven by quarter end timing will result in a free cash outflow for the year likely in the range of $200 million and somewhat better than earlier internal forecast as a reminder, and as we called out on slide 18, one factor that can influence the cash outcome is adding trade working capital, which is highly sensitive to quarter end dates.
Before opening the call to your questions just a quick comment on the tariffs as this topic resurfaced last week.
As a reminder, we had anticipated a headwind of about $20 million for fiscal 19. This was primarily associated with section 301 duties impacting our electric motor drives and to a lesser extent section 232 duties impacting certain of our steel and steel tubes.
The elimination of Mexico, and Canada steel tariffs in late May was positive news, however, last week's tweet, calling for a 10% on all other goods beginning September onest will partially offset the benefit.
Based on what is known today. It appears add ins total exposure or headwind in fiscal 19 will be approximately $15 million. We'll continue to monitor the situation and provide you with updates as potential outcomes become clear the team will continue to focus on customer recoveries and additional mitigation actions to help lessen the impact going forward.
With that let's move to the question and answer portion of the call.
Operator can we have our first question.
Thank you to indicate that you wish to ask a question. Please press star one and record your name and company name to cancel or withdraw your question simply press Star two.
Our first question comes from Brian Johnson of Barclays.
Ask your question.
Yes, good morning.
Couple of questions first.
Just.
We should be the pace of customer discussions given the Oems are having their own issues.
When you say increased program profitability, you've talked in the past about five.
Critical launches that were sounds like money, losing.
Last quarter, you indicated that those who are perhaps on the path to become breakeven is that still your goal or because they actually get to a point, where they are contributing profitability.
So.
First of all good morning, Brian .
Let me take a shot at answering it maybe not the most direct way because I think about it not so much in terms of breakeven I think what you're referring to we said.
A couple of customers, where we had a backlog of open commercial issues and we were trying to get to a.
And immediate cash neutral position with those customers on those issues and that's what we refer to as stopping the bleeding.
We essentially achieved that.
This quarter with those particular customers I wouldn't characterize that as you know.
All of the customers that we had open issues certainly.
Our objective is to.
Far exceed a break even settlement that was I think unique to that particular situation.
And to that particular situation I think no.
Sets us.
In a position that allows us then to.
Use a number of say.
Commercial tactics to then enhance the performance of that business and I think what we're seeing with all of our customers right now, particularly with.
The sensitivity of volume and.
The situation in China is there much more open and Thats why we keep underscoring emphasizing.
Our activities around.
Value engineering.
Just.
Cost reduction proposals and we've had some really good discussions.
On a wide base of customers and that's.
Accretive to our performance some of which you're now seeing reflected.
Our Q3 results.
Okay second question sort of building on that in prior slide decks you talked about.
The margin gap to the peers, which is a fiscal 18 was about.
Basis points.
Since now we've combined the business and yes, I guess, we can do the work backout assets for them, but how can you give us an update on how much of that cap spending close so far and then.
Given the timing you're talking about on page eight.
How that cap would close over that time period.
Yes.
We haven't specifically spelled out how much of the gap is.
As closed arguably its open slightly since when compared to fiscal year 18 results and we've said deterioration in our fiscal year 19.
That being said, what we've tried to outline.
Is this is a multiyear plan and this year has been really focused on.
Yes, stabilizing the business stopping the bleeding and.
Arguably going after low hanging fruit, but really attacking.
Operational inefficiencies.
Premium freight containment.
With a level of.
Commercial resolution mixed in on that.
So we looked at it and so this is a multi year program weve laid out that 2022 timeline that says when.
We have high confidence, we could completely close that gap.
How we step through it.
I think you'll have to wait until we start to provide some vision 2020, which we're now just starting to finalize.
As to what the next increment improvement is it.
Today's call really not prepared to.
To target a specific number.
Yes.
Okay. Thanks.
You're welcome.
Thank you Emmanuel Rosner.
Deutsche Bank you May ask your question.
Good morning, everybody.
Good morning, good morning.
So first question on the.
Operational improvements and so obviously nice to see a overall.
EBITA traction on the on the sequential basis would you be able to point us to.
The more specifically where.
Segments or sub segments, where we should we should be able to no track them in the numbers, obviously Americas improved quite a bit assessing them as well I guess where were sort of like the pockets where.
The strongest.
More noticeable operational improvement is happening and where we could expect more is to come in the quarters.
Quarter is coming.
Yeah. Good question I think weve seen improvements.
In particular in North America.
In Europe .
North America more pronounced this quarter.
There's been a number of launches that as you know have have caused us problems and.
Some degree as those launches have.
We've worked to pass some of the initial issues.
It's been harder to bring back to the margins we had on the programs that they had replaced so that's been one of the primary focus of the team they've been chipping away at it I think if you look at just our overall operational waste our launch cost.
Premium freight metrics are all improving in those regions and we're definitely seeing and the numbers. The things that are kind of coming against us a little bit obviously, China is such a big important portion of earnings all of Asia is a big portion of earnings with that being down as much as it was it's masked a lot of it.
As well as you've seen some elements of sales and mix pressure and the U.S. and in particular, but also in Europe .
Some of our higher profitable most profitable vehicles have had.
Some reductions in their volume but.
I'd say overall and the things that we can control.
We're seeing.
Significant improvements and I'd say more importantly building momentum that that gives us some promise that.
There is more opportunity to run as we go forward.
Yes, Thats helpful. And then I guess zeroing in specific on the fourth quarter. So I think youre mentioning maybe it shaking out a little bit.
Software sequentially than than the third quarter can you speak a little bit about the puts and takes over here from from a high level I could see thats youre.
Equity income expectation is quite a bit weaker into the fourth quarter, if you're curious what you're seeing there obviously the normal seasonality of revenue as well, which is down but I would also have expected offsetting these to see further progress in the operational turnaround maybe for the benefit can can you maybe just a little bit of a final point of home.
These are expected to shake out.
Yeah. It's good question and obviously, it's there's a lot of volatility that can happen and the numbers as we go forward as were still sort of early days of a turnaround here but.
You know I would say a couple of things one is revenue is going to be highly impactful to us.
Q3, our calendar Q3, our fiscal Q4 is the time of volatile production schedules.
And it's even more volatile and these days.
So we've seen a lot of downtime and the customers from a normal perspective, and then there has been some downtime that hasn't been necessarily planned or contemplated.
Which is played.
Hi, the difficulty here because you can imagine that are.
Margin is roughly two times or I should say our contribution margin is roughly two times, our EBITDA margin. So.
That revenue falls has a bigger impact.
We are still seeing improvements. So we are still seeing all those things I just talked about an operational waste line performance et cetera.
But its counteracting some some uncertainty in the market and that really is what drove our numbers as it relates to China.
Q our fiscal Q3, we think was probably the low water point.
From a production schedule, primarily due to the emissions change.
As of them.
The market was close to a 20% down in production, but we still are seeing roughly a 15% down production environment in China in Q in our fiscal Q4.
That will drag our numbers and that has been contemplated in the numbers I talked about earlier.
So just to be clear that that's very helpful. Just a weekly or theres.
Should we expect further benefits from operational improvement in the fourth quarter beyond what was seen in the sort of.
I, maybe I didn't catch your question amendments as he said again.
Just curious if is offsetting these headwinds that you spoke about.
So.
Step function increase in operational improvement between the sort of yeah. Yeah, I think we're still seeing all those things we talked about it's just that's what they're fighting against I guess is the point here.
So.
The improvements in what we're seeing and launch performance and premium freight and just all across the board a better execution I would say.
Better relationship with the customer finding more opportunities where the customer and also can have win win situations are.
VA Ve.
Group essentially Doug formed when he came here.
And in a much more meaningful way than had existed is really starting to gain traction all those things are helping offset some of those headwinds I just articulated.
Great. Thanks for the color.
Thank you Collin Lang of UBI S. You may ask your question.
Oh, great. Thanks for taking my questions.
I'm not sure.
Similar to the Brian's question earlier, but I think in the past that you had mention renegotiating.
Oh, Wow commercial Nick renegotiations of about 40% of the the issues that you're facing impacting March and I think it was 60% 40% pricing I mean are where are you, saying that the pricing negotiations are completed and if not where do you stand on I'm trying to kind of that new pricing on certain contract.
Sure.
First of all thanks for the question Com.
So when I think about my initial comments when it when it first.
Yeah, right did add Ian.
HM.
I was characterizing things is a renegotiation.
I think as high.
Spend time and.
Got more engaged with the team what what turned into a renegotiation really was more a backlog of open commercial issues.
So I would I would characterize it different assessment business that was.
Under bid and we had to go in and in completely re price.
You know as is.
Products like seating that are.
Engineered products has to go through the development cycle, there's a number of scope changes that.
We have commercial impact.
And because the company was experiencing.
You know distress launches the customers really werent, particularly.
Interested in having any commercial discussions until we resolve their operational issues, so just adding a little bit more color.
I think the characterization of 60 40 is a at a macro level a pretty good assessment.
Though I would say.
How you resolve the issues.
You can capture them as operational or not the one.
Example, we illustrated in earnings deck today.
It was a way to solve a commercial issue.
Through operational improvements and that is kind of getting with the customer recognizing what real run rates are going to be out of his operation there are different than the contractual.
Agreement that were forced to support from a.
Capacity standpoint.
Once they.
Essentially relieve us from that contractual obligation. We can then flex down our labor.
And and pull that cost out do you call that commercial or do you call. It operational you can bucket it either way the way.
It buckets in our numbers internally that shows up more operationally because.
Pricing didn't change but labor.
Against pricing has gone down significantly.
So some real great progress made there.
Going back to the first question.
Yeah, I think about some of the commercial issues in terms of ways, we had some really tough issues.
On a on a global assessing them project.
We had a huge backlog of.
Open issues.
We will solve that through.
You know kind of waves of commercial and operational activity.
We had a huge success in the first wave, which.
On a.
Kind of a normalized run rate got us too.
A cash.
Neutral position, that's that's a big step up for us on a program of that magnitude in the us and them group.
And it sets the stage for us to.
Due to have for further discussions with the customers and introduce.
Kind of value win win opportunities form.
One of the ways that we do that is just completely changing.
I'll say the environment with our customer so by executing on future launches with them that that.
Creates a completely different relationship with them, where we are now allowed to bring in.
Our ideas to further take cost out so there is a second wave.
That you'll start to see that comes forward in Q4 and in what we think will do in fiscal year 2020.
So.
And again I'm I'm trying to provide you more detailed.
In how I think about the business today versus my initial impression when I first got here.
Got it that's helpful.
Any color on the operational issues I mean is it can you boil it down to the ones that are purely operational where there's no contract fraud issue I mean, it is it a hat I think in the past you said, a handful of plants or you're down to two or three plants that are driving some of that on how quickly can those pure operational issues.
Yeah, I think what we've done is we've got.
We've now changed the approach initially it was.
Really a handful plants in a few regions that were deeply distress and they were in the midst of launch that to certain degrees stabilized I would say.
Just by.
You know approach to the way we run the business in every region. We will always have a top high focus plant initiative.
Plants that we think are underperforming operationally.
And so each.
Americas, Europe , and Asia have a top five we'll constantly be working those.
I I think you can see some of the performance gains we're making in premium freight.
Containment costs, which is on the line inspection.
Good progress there the the real.
I'll say inflection point in the in our performance will be as we go through our next phase of launch activity.
And.
The way we capture launch is really all inefficiencies.
SLP plus 90 days.
If those inefficiencies are still in place it moves into recapture with operational waste containment and and things like that.
The launches that we're having now are going quite well and what I'm I'm anticipating is that as we transition those.
Projects out of the launch phase into.
Standard production pace will be operating with a lower level of cost structure.
Inefficiencies that.
Have been really killing us over the past couple of years.
So again as you as we come out with our 20 numbers.
We will probably put.
Brackets around that so you can anticipate the year over year improvement in those areas.
Got it all right. Thanks for taking my questions.
You're welcome thank you.
Thank you John Murphy of Bank of America Merrill Lynch, you May ask your question.
Good morning. This is alien stats on for John on your first question you've commented in the past that your China joint ventures that have largely been self funding in nature and we understand that this is Ben a reason why that business had been holding up better than the consolidated business until more recent quarters as the market has deteriorated how much control does adding it had on pulling cost out of its jvs is it tougher than the consolidated business to be decisive in surgical on cost reduction given the JV partners.
I'll I'll start out a answering the question Jeff can certainly provide some more detail.
I.
I think less about us.
I mean indirectly it's our JV partner, it's really our relationship with the government that.
If there's anything that presents a barrier to our ability.
To flex on the cost side.
It's maybe what the government's position within the region the city that that plant operates.
I would say for the most part of the vast majority.
We.
We have a lot of influence consolidated obviously unconsolidated at driving that down I would say our partners have huge vested interest in those operations remaining.
Profitable and conserving cash I've been.
Actually quite impressed to see that reaction in China.
Considering that's not been the mode of operation for the last whatever you could argue 20 years.
And so we've we've really flex down our costs.
Aligned with volume it in and if you look at the performance.
Of the region.
Against that volume drop you can see basically they're maintaining.
A level of profitability and Theres, a small footnote that even if you look at the Nonconsolidated.
That performance is pulling through so.
No theres really not huge barriers to us to influence that right and Fortunately our JV partners are very aggressive with it we were somewhat concerned as we went into this because China had an experienced a downturn.
You know of any significance in a in a long time.
And you know as a result.
We are working with them closely but they were quite aggressive if you look at our margin performance in the quarter year to date.
We have adjusted extremely well in the region to to the sales environment.
If you think that contribution margins are roughly two times EBITDA margins they've held margin.
Despite the sales decline and despite is pretty significant sales decline, so I would say that.
They've performed extremely well and should be poised when the market recovers.
To to probably have a little bit of a rebound or a pickup in margin as that happens.
Great. That's very helpful commentary on and then a bit of a follow up question I had just on that have been asked already on pricing dynamics, Doug and the nine to 10 months that you've been on the job. If you could perhaps qualitatively comment have commercial discussions with customers been more or less challenging in recent months as the industry environment remains really tough and and asked another way are you seeing your customers push back more so now than they perhaps did earlier this year. When I think there was an assumption that some of the industry pressure might be more transitory.
You know, it's always pretty challenging and I can't think of any time that pricing discussions with our customers have not been challenging.
And expectations high win.
When volumes strong Theres theres high expectations when.
Volume flow there's high expectations.
Or a sense of desperation.
I think what's really changing right now and.
And this is very much specific to the seating business.
In a.
They make these comments get them against the backdrop and not being in the business for a while and coming back to it I think over the last few years, our customer moved to controlling a lot of the supply chain and controlling a lot of the.
The engineering of the product.
In in when the market was strong that worked relatively well I would argue there was a lot of inefficiencies with it but.
The strength of the market overcame the inefficiencies what we're seeing right now.
Is is the market weakens or there is concern that the market's weakening.
Our customers.
Or not really equipped to find ways to reduce costs as effectively.
As they have had in the past and its in every single customer that I've met with Hudson initiative right now.
To engage with the supply base to find ways to reduce costs.
I I consider that a great opportunity and one that didnt exist.
Over the last few years because.
There was a sense that they could control that more effectively than the supply base.
We're not going back to the days of full service supplier and things like that but.
Over the course of the last I'll say two months we've had.
Executive level meetings with four of our major customers that I'm expecting to have with all of our major customers.
Where they they really opened up the door and said look bring us our ideas we need.
To find ways to benchmark our vehicles against our competition to look for value creation opportunities.
And.
And what I like about it as well as because it's happening at a high level, we're not bumping into the normal for accuracy of and resistance to change that.
The those executives are taking it on their directing the organization to go. After these ideas if you bring them forward and you've really done your homework.
And you can present them with.
All of the inside of why this is a good thing for them to do and what the risk assessment is.
I see a window of opportunity here for us to get some things done that up until recently, we have been able to do it. So always a lot of pressure always high expectations, but if we can link it to actually pulling cost out and then sharing some of that and then it's a win win.
Great. That's very helpful and last one if I may for Jeff in terms of threats, saying Amen 10 actions taken to reduce capex spend that you cite on slide 19 can you detail where this is coming from is it maintenance capex and restructuring actions that you are getting a bit more efficient on or is it growth capex that you're pulling back on in anyway.
I wouldn't characterize it as growth Capex at all.
I think it's smarter.
Utilization of our capital I mean, there's examples of reusing equipment and so the buying new welding lines looking for opportunities there.
We.
I'd say lots of efficiencies in how our program teams are going about capitalizing on new programs. So that's one the timing of its too. We also I think compared to some previous years, we've really thrifty down on let's say the the unnecessary capex that had been in the business or stuff that really wasnt focused on the business.
You know, an example might be our our old headquarters building on that.
We had spent a fair amount of money on.
Weve directed really our capital towards things that really provide the best returns and making sure we do not jeopardize any programs or any launches.
As a result, so thats another thing just in the sequence of Thrifting. We've also made sure that we don't leave any programs in disarray.
As we thrift that capital so I'd say, a good balance just a lot of discipline.
A lot of team members really thinking creative ways and remembering we do have a pretty substantial.
Asset mix in the company I also which will drive our capex down in the future just to kind of give forward look on this one doesn't impact too much in 19, or even 20, but as we.
Take a little bit of focus away from growth in the assassin end business that is where a large majority or a large portion probably half of our capital has been dedicated in the past.
Some significant opportunities to reduce the spending in that area.
Great. That's it that's very helpful. Thanks for the questions.
Yes, I think claiming Christie it looks like we're at the bottom of the hour. So so that will conclude the call today again I know, we do not get to a couple of the questions that were in Q I'm available. This afternoon. This morning for follow up calls. So please feel free to give me a call and reach out.
Thank you everybody for participating thanks, everyone.
Thank you. This does conclude today's conference you may disconnect at this time and have a good day.