Garrett Motion Inc. (GTX) Q3 2018 Earnings Report, Transcript and Summary

Hello. My name is Andrew and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion Third Quarter 2018 Financial Results Conference Call. This call is being recorded and a replay will be available later today. After the company’s presentation, there will be a Q&A session. [Operator Instructions] I would now like to hand over the call to Paul Blalock, Vice President, Investor Relations.

Thank you, Andrew. Good day everyone. Thanks for tuning in to Garrett’s first financial results conference call. I’m Paul Blalock, and I’m truly excited to be here at Garrett. Exactly two months ago today, we held our first Investor Day in New York City where we had the pleasure of meeting with many of you. Over the following weeks, we also met with many of you at your offices and in group meetings and I can honestly say we look forward to continuing to work with you and expanding the dialogue about our technology, growth prospects and new growth vectors. Before we begin, I’d like to mention that today’s presentation is available on the Garrett Motion website where you will also find links to our SEC filings as well as our Investor Day presentation and webcast along with other important information about Garrett. Turning now to Slide two, we encourage you to read and understand our risk factors contained in our financial filings, become aware of the risks and uncertainties in this business and to understand that forward looking statements are only estimates of future performance and should be taken as such. We’d also like to mention the presentation uses numerous non-GAAP terms to describe the way in which we manage and operate our business. We reconcile these terms to the closest GAAP term and you are encouraged to examine those reconciliations which are found in the appendix to this presentation both in the press release and in the slide presentation. Turning to Slide 3, please refer to additional disclaimers related to the presentation of our financial information and our previously filed form 8-K on October 22, 2018. On the call today is Olivier Rabiller, our President and CEO and Alessandro Gili, our CFO. I’ll now hand it over to Olivier.

Thanks Paul and welcome everyone. It is great to welcome you for the first earnings release of Garrett as an independent company. I saw an instance of [indiscernible] that led to the spinoff from Honeywell on October 1st, I am proud to share with you some solid results very much aligned with the long-term forecast we share with you during our first investor conference in September. So let’s get started. Garrett’s third quarter as presented on Slide number 4 highlights include strong organic growth driven by new product launches. Net sales were 784 million representing growth of 39 million and an increase of 5% on a reported basis and 7% organically. As we discussed in September at our Investor Day, Garrett is now rebalancing its product portfolio as we shift further to gasoline product. For the first nine months, gasoline is now 27 of our sales up 500 basis points from last year. All of this is based on wins we've got over the last three years and this is pretty well on track with our forecast towards gasoline turbocharging bigger than diesel in our portfolio by the end of 2019. As Alessandro will share with you later on in this presentation this rebalancing is not the result of a decrease of our diesel business. In fact, in an industry globally decreasing in first nine months of 2018 by about 7% our diesel business grew 3% in the quarter, confirming our position on the right platform and the effect on our mid sales of our very strong win rates. With that, we continue to maintain industry-leading financial results through robust cost control achieving 143 million in adjusted EBITDA and 18.2% margin excluding hedging impact and these despite the negative mix effect of gasoline turbo growth that we presented in September, highlighting the strong contribution of our productivity initiatives overall. To be comfortable, we also raised 1.6 billion in new debt in September with an average cost of 3.2% well below our estimated cost of insurance. Once that was completed Garrett was kicked off as a public company and listed on the New York Stock Exchange on October 1st under the ticker GTX. We now see our full year 2018 outlook as follows. Net sales organic growth between 5% and 6% and adjusted EBITDA excluding hedging impact between 640 million and 655 million. Turning now to Slide 5, you will see our progress in rebalancing our portfolio as we decrease our European exposure by 2% and grew our Asian exposure by the same amount. In our product mix, our weight in diesel is on 3% that's 2017 on a nine months basis, while our weight in gasoline grew by 5% versus 2017. As we said in September, we continue to expect that our net sales from diesel and gasoline will be equivalent by the end of 2019. This portfolio rebalancing with greater global geographic and product diversity is in line with our five year strategy plan. Turning now to Slide six. Again, I wanted to take the opportunity to come back on the two points about our three stage technology growth strategy. First, on our core business, more technology is needed by car makers to improve fuel economy and reduce emission while preserving driveability. And we are seeing a lot of traction on the plan value for geometry turbos to gasoline engines. In fact, while one of the larger European OEM was pioneer that launched the first high volume application in 2016, we are seeing more and more car makers adopting it whether it is for pure internal combustion engine for train or for hybrid. And I'm pleased to report that we have just formed a large global engine platform from a global OEM that will also be a cornerstone of the hybrid strategy. It is important to remember that industry projection show that by 2025, hybrid will account for about 30% of car production and be five to six times larger than battery equipped vehicle production. And there will also be higher turbo penetration on these hybrid power trains. At the same time, we are making great progress with our electrification strategy whether it is for e-turbo for which we expect to be the first to launch in 2021, or for e-compressors for hybrid of future vehicles. We have also secured additional pilots project with OEMs this quarter for our software and connected digital business. I will now hand it over to Alessandro who will cover the financials.

Thanks, Olivier and welcome everyone. Turning now to Slide seven, we are showing our key financial metrics. Our net sales grew 7% organically both quarter-over-quarter as well as year-over-year. Adjusted EBITDA excluding the impact of foreign currency hedging also led quarter-over-quarter and $143 million but increased 16% on a nine months basis in 2018 versus 2017 at $514 million. Adjusted EBIT at $126 million for the quarter excluding the impact of foreign currency hedging was substantially in line with our prior year performance. While for the nine months grow by 16% at $460 million versus the same period last year. Our CapEx was $90 million in the third quarter of 2018 down from $22 million a year ago. And on a nine months basis, our CapEx was 2.6% of net sales in line with our historical performance and our long-term targets. CapEx was mostly related to our growth and productivity initiatives. The income before taxes was $73 million for the quarter down 1% versus Q3, 2017 and $293 million on a nine months basis, which is 12% ahead of the same period in 2017. Finally, adjusted EBITDA minus CapEx was a $118 million in the third quarter down $1 million from last year on a nine months basis was up 3% $450 million representing an 86% conversion rate. Turning to Slide eight, our net sales bridge shows $39 million growth in Q3 net sales from $745 million to $784 million comprised of $38 million growth in net sales from gasoline products or 25% organic growth in line with our continuous focus on rebalancing gasoline products versus diesel. $5 million growth from diesel products or 3% organic growth notwithstanding global industry diesel decline of approximately 11% in the quarter and 2 million growth in commercial vehicles slightly lower than prior quarters in 2018 or 3% organic growth. Offset by 2% organic decline or 6 million lower in aftermarket and other net sales. Slide 9 shows the adjusted EBIT growth for the quarter with and without the impacts of foreign currency hedging. Adjusted EBITDA for the quarter was 18.2% of net sales excluding the impact of foreign currency hedging, a 100 basis points lower than prior year mostly driven by the acceleration in net sales from gasoline as previously communicated during the Investor Day. Margins are within the long-term range guidance and above the industry average. Volume growth in the third quarter was $13 million mostly driven by gasoline net sales growth. Price productivity and mix in the quarter was negative $14 million driven by strong growth in gasoline products and lower growth in commercial vehicles and aftermarket and other with mix partially offset by the net effect of pricing and continuous strong manufacturing and materials productivity. SG&A and R&D for the quarter were in line with the same period in the prior year. Negative impact of foreign currency for the period was minus $2 million was driven primarily by the euro weakening versus the US dollar, compared to the same period last year. And further by the impact of minus $4 million from the hedging policy in place for the quarter and the 9 months period. In September 2018, previous hedging defined by Honeywell was discontinued and Garrett will set up its own hedging strategy considering euro as its primary transaction currency. Slide 10 shows the net sales bridge for the nine months of 2018 versus the same period last year. Net sales grew by 284 million on a month-month basis to $2.576 billion. Growth in net sales was comprised of $162 million from light vehicle gasoline products was 27% organically in line with our continuous focus in rebalancing gasoline product versus diesel. $63 million growth in light vehicle diesel products or planned organic growth notwithstanding global industry negative performance of approximately 7% in the same year and 60 million on a net sales growth from commercial vehicles or 10% on an organic growth. On slide 11, we show the nine months 2018 verses 2017 adjusted EBIT and adjusted EBITDA bridge with and without the impacts of foreign currency hedging. Adjusted EBITDA $514 million for the nine months in 2018 excluding foreign currency hedging was 71 million higher than the same period last year or 70 basis points with margins reaching 20% one of the highest in the industry for this type of business. Volume impact of $68 million was mostly related to net sales growth driven by strong focus on rebalancing gasoline products versus diesel. Negative mix was driven mostly by strong gasoline products partially offset by productivity improvements for a combined total effect of minus $30 million in the nine months. Positive foreign currency totaled $39 million for the period was primarily driven by the euro strengthening versus the US dollar during the nine months versus the same period last year. In addition to that foreign currency as an impact as a result of the hedging policy in place partially reduced the positive performance of the euro during the nine months period. On July 12, we show our profit before tax for the quarter and for the nine months period. In the third quarter 2018, pre-tax profit was $73 million or 1 million lower than last year third quarter. For the nine months in 2018 pre-tax profit was $193 million and grew $31 million versus the same period of ’17 or 12% and was largely driven by the growth in adjusted EBIT. Profit before tax includes the impact of asbestos and environmental related charges of $51 million in Q3, 2018, versus $43 million in Q3, 2017. And a $132 million for the nine months 2018 versus $129 million in the same period last year as well as other charges related to the non operating expenses repositioning charges stock compensation and FX gains and losses on our financial debt. On a net income basis, both the quarter and the nine months ended September 2018 are still reflecting the impact of the restructuring of Garrett's business in advance of the spin off. And therefore are not indicated of Garrett’s future performance on the standalone basis. For the same reason, we are not providing at this stage an EPS metric. Net income as presented was $919 million in the appendix was $929 million for the third quarter 2018 an increase of $872 million from the $57 million on net income in the third quarter of 2017 and include an $856 million tax benefit. The third quarter 2018 tax benefit was primarily from an internal restructuring of Garrett’s business in advance of this spin off, attributable to currency impact for withholding taxes on undistributed foreign earnings partially offset by adjustments for the provisional tax amount related to the US tax reform. For the first nine months of 2018, net income was $1.137 billion an increase from $237 million in the nine months in 2017 and was driven by onetime tax benefit attributable to undistributed foreign subsidiaries earnings. Turning to Slide 13, we show our debt and liquidity position and its maturity profile. On September 27, 2018, we enter into an credit agreement for senior secured financing of approximately the euro equivalent of $1.254 million consisting of a seven year senior secured first lien term loan B facility which consist of a tranche denominated in euro of 375 million and a tranche denominated in US dollar of 425 million. A five year senior secured first lien term loan A in aggregate principal amount of €330 million and a five year senior secured first lien revolving credit facility in an unrated principal amount of €430 million. On September 27, 2018, we also completed the offering of €350 million approximately $400 million in aggregate principal amount of 5.125% senior notes due 2026. The amount of spending on September 30, 2018 were $382 million for the term loan A, $859 million in the term loan B and $406 million in senior notes for a total of $1.647 billion. We achieved our funded targets at an average of 3.2% and total interest is now estimated to be around $52 million per year down $12 million or 19% lower from the frontend previously this estimated interest of $64 million annually. The senior notes were placed at par and we accommodated stronger European demand at lower cost. Total cash at the end of the period was $197 million or $99 million net, $98 million related but not in place with Honeywell, which was fully repaid during the month of October. As a reminder, targeted cash after the spin will remain at $90 million as a result of $9 million cash distribution post being to Honeywell as presented in our pro forma financial information in the following page. On Slide 14, we show certain elements of our pro forma balance sheet with specific focus on our targeted cash flow spin as well the obligations to Honeywell post spin off. The asbestos related reimbursement obligation is $1.353 million and substantially [indiscernible] unchanged from the Form-10. The MTT tax obligation was reduced from $350 million shown in the pro forma balance sheet in our Form-10 filed with the SEC in September to $240 million as a result of the revised allocation provided by Honeywell following the filing of its 2017 tax return. As a result, the revised cash payments to Honeywell for the MTT tax related obligation will be 8 million annually lower for the first 5 years and 110 million lower in total for the over, over the 8-year period. The contingent tax liabilities have been slightly updated to $71 million based on certain additional tax costs of 4 million paid by Honeywell in anticipation of the spin. Turning to Slide 15, we are providing a summary of Garrett’s Q3 and 5, and first nine months performance. These results confirm the fundamentals of our business model. We provide a strong net sales growth driven by new product launches and focus on gasoline rebalancing versus diesel products. Our strong margin for 5 continues to be driven by our strong technological position and our focus on productivity and flexibility of our cost structure. Our product portfolio rebalancing is accelerating. Our cash flow from operations, which is including $130 million of asbestos and environmental related payments minus capital expenditures was $174 million for the first nine months of 2018. And based on these, we are providing for the first time our full year 2018 outlook as follows. Net sales organic growth between 5% and 6% and adjusted EBITDA, excluding hedging impacts between $640 million and $655 million for the year. With that I will hand over to Olivier for his final strategic remarks as presented on Slide 16.

Thank you, Alessandro. So all-in-all a pretty good quarter with significant organic growth driven primarily by gasoline launches, and the rebalancing of our sales as expected, but not at the expense of a decrease of our diesel business, that’s kept growing in a very much of a declining industry. All these confirms our strong win rates and positioning on the right [indiscernible] platforms. I am also very encouraged by the continued progress we made in both electrification and connected vehicles as we move to securing more pilots and preparing for mass production launches. And that concludes our formal remarks today. And I will hand it back to Paul.

Thanks Olivier. Before we begin the Q&A session. I’d like to remind everyone that Garrett filed an 8-K regarding Honeywell's disclosure of their own SEC enforcement action. Garrett was unaware of that action prior to Honeywell's disclosure in its 10-Q. The company’s indemnification and reimbursement agreement with Honeywell filed with the SEC on September 14, 2018 has not been amended and otherwise remains unchanged. As such, we would ask you to refrain from asking questions regarding these issues or regarding the company’s restated carve out financials in the Form 10, which already contemplated those revisions and are consistent with Honeywell’s previous disclosure in its Form 8-K filed with the SEC on August 23, 2018. Operator, we’re now ready for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Aileen Smith of Bank of America. Please go ahead.

Good morning guys. Thanks for taking my question. If I look at your regional mix and specifically exposure to Europe and Asia and broader production terms in the quarter, I get to industry volume growth weighted by your market mix of down roughly 3% to 4% and yet you were able to drive organic revenue growth of 7% which was impressive and it implies potentially double-digit growth above market. Is this above market growth something that we should expect to persist going forward or where there particular product launches and other factors in the third quarter that would equate to outsize growth that you would expect would moderate over the next few years to get to your 4% to 6% revenue CAGR?

Before I answer that question I will get back to what we’ve disclosed so far and I think we laid it out quite well in our Investor Day back in September highlighting that our win rate and the launches that are coming up driving most of the revenue growth that we see. We have never said that we are immune to the macroeconomics, but as you can see those launches are enabling us to as you’ve highlighted yourself quite outperform the macros.

Okay. That’s helpful. And your housekeeping items the 17.5% adjusted EBITDA margin that you reported in the quarter, should we think about that as relative to the 18% to 20% adjusted EBITDA margin target you outlined in your financial goal for 2022. Or is the 18.2% adjusted EBITDA excluding hedging loss is the better mechanism?

We, you should consider the adjusted number we hedging that is consistent with the way we presented during the Investor Day. Our consolidated EBITDA metric, we’re now using our adjusted EBITDA just to be consistent with the way we provided information since the beginning in the Form-10 in our selected financial information, adjusted EBITDA and adjusted EBIT will be the key metrics going forward to be recorded, but we are keeping providing the adjusted elements of FX hedging just to clean to a certain extend the previous hedging policy that was something that was in place until the end of September. We are detaching from that policy going forward and we will have our own policy in place for hedging starting from the beginning of next year.

Okay. Great. And last question on the forward outlook. Can you give us any additional color on some of the puts and takes behind your longer-term revenue CAGR 4% to 6%. What are the underlying volume assumptions we should be thinking about in that outlook. Are they similar to IHS projections and if at all possible can you breakout your assumptions for growth above market during that timeframe?

So, when you look at provider for the year, we obviously very much aligned with what we’ve disclosed as the long term targets. When we project our sales out and this is back to what we said again in our Investor Day in September, we are obviously looking at the industry macros that are provided by companies like IHS, but we tend to base on our plan on something that is usually more conservative.

Great. That’s very helpful. Thank you.

Whether it is by the way for the cash production or for the triple penetration or for the diesel penetration.

So, your penetration estimates are also coming from IHS to an extent with some levels of conservatism and also your own underlying assumptions based on what is the incremental cost are?

Where we go with our forecast, we are big enough in this industry, our view on pretty much all the engine programs that are gone around the world we have a very comprehensive data base with each of the programs, each of the volumes that we track and maintain of the key around the year. And then we adjust with the macro. So that gets us a view of the industry that is quite accurate in the long run.

The next question comes from Brian Johnson of Barclays. Please go ahead.

Hi. This is Stephen [indiscernible] on for Brian Johnson. Just want to drill down on the implied outlook for 4Q organic growth. The 5% to 6% for full year ’18 here versus the 7% you've been running 3Q year-to-date. Just wondering what the drivers of that step down for organic growth in 4Q?

That changes you’ve seen too far is primarily driven by slowdown that we started to noticing China, that really the primary driver both on the OEM side and also including in our commercial vehicle market.

Do you have rough estimate of how much exposure you have to China?

Our exposure to China is visible in the deck, you see those lines, that is providing the split on our regional basis for Asia, as well as for the other regions. On the nine months period, if you go back to the Slide 5, there's 28% in total for Asia, a large part of that is driven by China.

And then just quick housekeeping on that. I think, IHS has China volumes down like low-single-digits. Is that what you guys are assuming for 4Q or you guys hair cutting out a bit based on what you’re seeing from a production schedule standpoint?

I think that’s substantially in line with the industry overview.

And then looks like you guys did a good job on R&D costs control in the quarter. R&D was actually down year-over-year ditto for CapEx and SG&A. Just wondering what the driver of that R&D expense basically being held flat year-over-year, because normally we’d see kind of R&D going up. Just wondering if there was higher reimbursement from the quarter from engineering recovery standpoint or if it’s just kind of especially considering, there’s generally higher launch activity in 3Q and 4Q. Just wondering, how you guys were able to hold in R&D and SG&A in the quarter?

Let me clarify something. This is not us managing our EBITDA to make the quarter so that we are very clear, that would not be something very smart to do. So we're obviously investing in our R&D all year along according to the target we have for the full year that can vary a bit one quarter to the other quite frankly. When we look at the R&D expense the comparison to the previous quarter over quarter is nothing like either way we look at it. But we think about this as being pretty well on track is what we said in spend for the year and the guidance we did give in terms of percentage of R&D spend for the next 5 years. R&D is a mix and extremely important part of our strategy. We are a technology company. We are investing differentiated technologies. We have a number of launches, but more than launches we are funding very well our growth vectors that will drive the company not only for the next 5 years but the next 10 to 15 years.

And then just lastly on, as we think about kind of the 50% new order intake rate, you guys have been able to achieve since 2015, which is obviously pretty strong overall. Just wondering, just in terms of the implied about market growth here moving forward. You guys have a sense of what Garrett’s current market share is overall. Just trying to get a sense of how much of that 50% the order intake rate would imply for above market growth here moving forward?

Yeah. The good market share are growing. On the position our impact on the industry, so we can assume that our demand is growing.

Was there a follow up Mr. Johnson?

No, that’s it. Thanks.

The next question comes from Colin Langan of UBS. Please go ahead.

Great. Thanks for taking my question. I just want a maintenance question I mean how should we think about adjusting your tax from the quarter and will you be giving adjusted EPS in the future, trying out so we can model these things out.

I think we said that we are not providing EPS at this stage for two main reasons. That the first one is, Q3 in particular is still part of the -- the quarter that was under [indiscernible] financial statement structure. So, all the metrics that you see that are coming from our preparation under the structure what is required under SEC U.S. [indiscernible] financial statement. And we say it is not indicative of our future performance on the upper part of the income statement obviously, there are no relevant changes but as we are progressing in becoming a standalone public company those numbers might slightly change as a result of the overall structure. So, that’s the reason why we are planning a pro forma today just to provide also some visibility on what is changing, the main changes are going to be driven by the debt is coming into our books at the end of September which will provide additional profile from the interest standpoint. So, interest expenses as we said are going to be better than what we have estimated in our Form-10, but are not yet visible in the quarterly information. Taxes, they are not a one key element that is going to be changing substantially going forward. That’s the reason why we are not providing EPS at this stage, we will provide EPS in the future. One other element which is actually the second one is driven by the debt structure, we’ve been describing you on our Investor Day that we have a target to delever the company, so until we get to a normalized capital structure that we believe is the optimal one our EPS might not still be significant indicative of our outgoing standalone performance. So that is the primary reason why we’re not providing at this stage.

Okay. I think in your Investor Day, you said it was 27% tax rate going forward is that still the right rate and I know there was some changes on that…

The implied tax rate, if you were to back out of the LMN coming from the tax reform from the restructuring as a result of the spin for the quarter itself would be close to 24% as well as for the full year, 24% to 25%. Clearly, again we’re not providing that elements on an adjusted basis, because these basis itself is prepared under different structure for current financial statement. But you can consider the reference point at tax rate, an implied tax rate including the fact that the indemnity obligation once that will be on our books as a result of the spin will be non deductable for taxes. The implied tax rate would be at around 25% to 26%.

That’s a little bit better than what you said at the Investor Day.

It is. Slightly better, mostly because of the interest itself and deductibility or the interest expense on organic.

Okay. And then the margins were down, I think on adjusted EBIT 150 basis points. How should we think puts and takes on that is there? Is that all just the shift from gas, diesel to gas, there are other issues in there? And is there, in particular any issues from the China tariff, is that impacting you at all?

No, nothing on China. For the quarter itself there’s a combination of the three elements that we are calling out one is the certainly the acceleration into gasoline that will be any fact that will you will see also going forward. We’ve been already providing that as reference element as we progress into our acceleration on gasoline basis and rebalancing gasoline versus diesel, so there is a per unit lower impact amount from a gasoline margin standpoint. So that is included in the quarter, it was already visible in Q2 and is a going to be visible also going forward. Until, we are rebalancing completed the portfolio. And then as the technology will evolve also from the governing perspective that will be out of the door in terms of compiling information from a margin standpoint. The other factors are specific for the quarter are driven by commercial vehicle on one side, it is slightly lower in terms of overall impact compared to how it was in the first six months of the year. If you look back at the first half, commercial vehicles have being growing at 10% on an organic basis, while they are 2% on inter quarter. So there is largely slowdown on that side, which means there’s any, but also the means perspective. And then after market in the quarter, again is slightly lower compared to the prior period of the same year. This is a temporary situation it will be recovered going forward. So nothing, no particular issue, I think there is everything we’ve been already communicating [indiscernible].

And I just wasn’t sure if I got my math, right. But it seems like Q4 margins will those also be down sequentially or is that wrong?

No, it should be substantially in line with the low-end of the range that we provide.

The next question comes from Joseph Spak of RBC Capital Markets. Please go ahead.

I guess the first question would just be on the gross margin some of the commentary you provided. There were down 110 basis points year-over-year. In the commentary you said mix was minus 270, and then your productivity 250 and then volume at 50. So what are the other factors to help bridge that gap to bring the gross margins back down on a year-over-year basis?

There are no other particularly elements. The overall margin is described on a nine month basis. Volume is driven by, as I said before is mostly driven by the acceleration on our top-line and the growth mix is negative for the nine months for 30 million. And that is driven by a combination of the acceleration in gasoline as well as the additional elements that I just covered for the quarter. And then the change in SG&A and R&D is visible again on a comparative basis. And there is a particular fact on effects if you look at the metric on an adjusted basis to be considered, because of the US dollar strengthening in the period.

And then maybe just in the quarter specifically, I think you said productivity was plus 250 basis points. Can you just give us a little bit of detail about what drove that, how much of that is sort of really sustainable whether there is anything unusual either in this quarter or the comp quarter that drove productivity. Or is that roughly what we should think about in terms of what you can do going forward?

The way we look at productivity is, as that we have a plan which we follow there--, it’s quite clear in the way we -- productivity because seem to amount what we said, already. We have significant portion of our cost that is coming from the suppliers. This is the result of the continuous negotiations we do with the suppliers that’s up during the year. And pretty well on track because we are buyers and it's coming to our factories there is not a big one off that drives that productivity it’s quite continuous. [Indiscernible] formally what we call the Honeywell braking system. And now our own system will follow.

Yeah. And just to clarify we didn’t call out productivity separately. So, the comment was on the combined effect of price, productivity and mix to being negative in the quarter for $14 million. So, mix was offset by productivity partially.

Okay. Maybe just a couple of other ones and I know you -- within China I know you said the good portion of your Asia is China. Can you give us any sort of color is to sort of your mix within China. How much is global OEs versus the domestic OEs and what within domestics maybe how much is with the top 10 any sort of texture there I think would be helpful.

We have very strong results posted in the we're not going to quote in China. We are proud by the way to be strong with our quotes which is not the case of forward that the international competitors different set of customers that you need to sell differently. And we've been differing that the customers close to five years in what we are quoting is first, and this is the reason why we are quite strong with, we of course not only the best under a vehicle side by the way but also in the commercial vehicle side. And you probably know that on the commercial vehicle side that of course represents very significant share of the market there.

Okay. Maybe to follow up on I think it was Colin's comps question before. I just want to get make sure I have the number straight. So, the 640 to 655 EBITDA you're guiding to it looks like the year-to-date number you're sort of comparing that to is I think the 515. So, it does look like there is a at least a sequential step down in margins if you look at sort of implied EBITDA. Is that just seasonality and some lower sequential volume or is there something else?

I don’t think it is sequential low value margin, just the acceleration of our gasoline mix that is driving the quarter as well as the full year to the lower up to the range in terms of the margin guidance. And as we said it is temporary that is not going to be there forever, it’s just the transition to get into a rebalance structure with the portfolio between where we are today, and where we will be at the end of '19. And then as we’ve been mentioning during the Investor Day, also the gasoline technologies to a certain extent once that behind the diesel one, which means that we will clearly be providing some better margins and improve margins going forward just as a result of the evolution of the technology itself.

And just bidding us on whether it's what we think about the next generation of technology it may have seen in our comments today that we are sharing with small valuable geometry as a second major, which is one of time as you know that what we said a few weeks back is retranslating iit to reality for the future.

One, just quick one on the cash. The MTT, I think previous you’re saying was about $35 million payment a year or so, it’s not and you frankly say now that’s about 27 million. Is that right?

No. Actually the MTT has a specific schedule that is 8 years and is the 8% in the first 5 years and then it’s 15, 20 and 25 in the last three years under the schedule. So what changes is that we had 350 million in total before and now it’s 240. So over the 8-year period this is 110 million less. For the first 5-year is just the adjusting elements of 8% calculated on 350 versus 8% calculated on 240.

So the 8% or…8 million. I thought that…

8 million lower for the first 5 years.

So that’s about high-20s a year?

8% of 350 versus 8% of 240 in the first 5 years.

[Operator Instructions] The next question comes from Richard Smith of Muzinich. Please go ahead.

Hi there. Just a quick one on cash flow I don’t know if I’m looking at this the right way given with some of the historic data is kind of pro forma. But if I back out the first half ’18 free cash flow from the nine months year-to-date. So have you absorbing reasonable amount of working capital in Q3.

We shouldn't really do that. That's the reason why we didn’t provide a quarter number. The first six months of that are provided in the Form-10 are actually including a certain number of other transactions coming from the structure that we had in place within the Honeywell carve out financial structure including marketable securities, as well as cash flow in mechanism and other elements that are unrelated to the business itself. So what we have provided is the nine month cash flow metric, which is a proxy to the free cash flow. As soon as we will get to same stage structure we'll be able to provide a free cash flow metric, which means 2019. Free cash flow metric for the quarter, for the any period in 2019 compared to the starting point of our net debt structure. Sorry for that, but there was no other way to do it. There is not a mechanism to be able to do a pro forma cash flow structure, which is compliant with the SEC requirements. So we ended up with providing what we could provide at this stage.

Okay understood. Just I guess, a quick follow up. Then in terms of what you would expect to see, for working capital is often related to Q4. What, is it likely to be a net contributor to the operating cash flow?

Normally positive contribution, because we get, we operate normally with negative working capital. And that is the structure of the type of business we're in.

The next question comes from Pratik Gupta of Goldman Sachs. Please go ahead.

Thanks for taking my question. Just had one clarification around your adjusted EBITDA guidance. So I’m looking at Slide 22, where you provide a detailed bridge around adjusted EBITDA. So if I’m looking at the LTM '18 number that’s mentioned as 614. And am I right to assume that the full year guidance that you have provided is comparable to this line item. Is that correct?

Not precisely. That guidance is excluding the October hedging. So you should got few lines below, backed that out which would drive you to something closer to $650 million on a net gain basis.

Okay. Understand. Thank you. That’s all I have.

You’re welcome.

This concludes the question-and-answer session and the Garrett Motion third quarter 2018 financial results conference call. Thank you for attending today’s presentation. You may now disconnect.