Hello, my name is Nichole and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion's Earnings 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. I would now like to hand over the call to Paul Blalock, Vice President of Investor Relations. Please go ahead.

Thank you, Nichole. Good day everyone and thanks for listening to Garrett Motion's second quarter 2019 financial results conference call. Before we begin, I’d like to mention that today's presentation and press release are available on the Garrett Motion website where you'll also find links to our SEC filings along with other important information about Garrett. Turning to Slide 2, we encourage you to read and understand the risk factors contained in our financial filings, become aware of the risks and uncertainties in this business, and understand that forward-looking statements are only estimates of future performance and should be taken as such. Today's presentation also uses numerous non-GAAP terms to describe the way in which we manage and operate our business. We reconcile each of those terms to the closest GAAP term and you're encouraged to examine those reconciliations which are found in the appendix to this presentation both in the press release and in the slide presentation. Also in today's presentation and comments, we will be referring to light vehicle diesel and light vehicle gasoline products by using the terms diesel and gasoline only. On slide 3 please notice the additional disclaimers related to the basis of our financial presentation. The nature of our historical carve-out financial information and our standalone post-spin financial results reported today. In accordance with the terms of our Indemnification and Reimbursement Agreement with Honeywell, our consolidated and combined balance sheet reflects a liability of $1,188 million in obligations payable to Honeywell as of June 30, 2019 in Indemnification Liability. The amount of the Indemnification Liability is based on information provided to us by Honeywell with respect to Honeywell's assessment of its own asbestos-related liability payments and accounts payable as of such date and is calculated in accordance with the terms of the Indemnification and…

Thanks, Paul, and welcome everyone to Garrett's second quarter 2019 earnings conference call. Beginning on Slide 4, Garrett's results for the second quarter were overall in-line with our expectations and they reflect our success in maintaining a solid margin profile in a challenging market environment. Net sales of $802 million declined, 9% on reported basis and 4% organically as compared with second quarter of 2018 due to the slow down in the global automotive industry and the continued acceleration of our shift from diesel to gasoline products. This obviously has to be put in perspective of the global auto production decline off about 7% in Q2. Net income was $66 million and earnings per basic and diluted share were $0.88 and $0.86 respectively. We also saw an acceleration of our portfolio rebalancing as gasoline products reached 31% of net sales, up from 25% in Q2 last year and 29% in Q1. And as anticipated and communicated earlier, we are approaching parity in revenue between gasoline and diesel products, which now stands at 31% versus 35%. I would share more detail about this on the next slide. During the second quarter, we also achieved $154 million in adjusted EBITDA and we maintain an attractive margin profile with an adjusted EBITDA margin of 19.2%, up 20 basis points from the 19% margin we achieved in both Q1 2019 and Q2 2018. This point highlights again our ability to weather negative short-term macros and the rebalancing of our portfolio towards more gasoline products by driving high-level of productivity and flexibility both internally and with our suppliers. We discussed in more depth shortly but our total debt remain unchanged from Q1 2019 and we have revised our 2019 outlook to reflect lower light vehicle production in China and more recently in Europe. The slower…

Thank you, Olivier and welcome everyone. I will start my review of the financials on Slide 7. As Olivier mentioned before, net sales were $802 million in the [second] quarter of 2019 down 9% on a reported basis and 4% organically as compared with the second quarter of 2018, primarily due to the slowdown in global auto production and the accelerated shift from diesel to gasoline products. Net income was $66 million in the quarter and was down from Q2 last year when we had a one-time tax benefit of $55 million, attributable to currency impacts for withholding taxes on undistributed foreign earnings. In addition, Q2 of 2018 had no interest expenses on long-term debt due to the different capital structure, whereas Q2 2019 had $18 million interest expenses on long-term debt. As we mentioned in our Q1 call, our effective tax rate might vary from quarter-to-quarter due to the discrete items and in Q2, it was 24%. Going forward, we continue to expect potential fluctuations in DTR. Adjusted EBITDA totaled $154 million in the second quarter of 2019 which is a decline of 8% or $13 million versus second quarter last year and a sequential decline of $5 million versus Q1. As Olivier mentioned, the adjusted EBITDA margin was 19.2% of net sales, up 20 basis points from both Q1 2019 and Q2 2018. Adjusted EBIT in the second quarter of 2019 was $138 million, down 7% from last year and represented 17.2% of net sales. Capital expenditures were $30 million in the quarter, up from last year but still tracking similar to H1 2018 and in line with our full year expectations. Adjusted levered free cash flow was $27 million in the second quarter and was impacted by the timing of tax and interest payments as well as…

Thanks Alessandro. In summary, on Slide 15, our key takeaway for the quarter is that we had successful financial results in a challenging market environment. While volumes were lower due to short-term macro conditions we maintain and slightly increase our margin profile even as we accelerated the shift towards gasoline products. The positive long-term fundamentals of our business remain intact. And as Alessandro just discussed, our outlook for 2019 has been adjusted as we now anticipate full year growth in organic sales of minus 1% to plus 1% and from $600 million to $620 million in adjusted EBITDA. We continue to target significant free cash flow generation with an adjusted conversion rate between 50% and 55% for 2019, which includes interest but exclude the indemnity and tax payment to Honeywell. I am encouraged by our strong ongoing win rates in our core turbo charger business and the continued acceleration in our electrification and connected vehicle growth vectors we discussed earlier. And we remain excited by our future prospects. This concludes our formal remarks today, I will now hand it over back to Paul.

Thanks Olivier. Before we open the line, I need to mention that we will not be taking questions today on our future course of actions related to the material weakness in our financial reporting under our Indemnification Obligation Agreement. Operator, we're now ready for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from David Kelley of Jefferies. Please go ahead.

Good morning guys. Thanks for taking my questions. I thought the margin held up pretty well on the tough macro. Can you just talk about A, the cost levers you were able to pull in the quarter? I'd love some more details there. And then also how we think about the go-forward cost opportunities, if we continue to see some lower industry volumes and if there are some inventory work down period at your customer level on the horizon here?

Well, I'll start – David, I’ll start answering the question. I'm sure Alessandro will provide a little bit more granularity. We are in an industry where you cannot invent the cost reduction on the go – into the quarter. So you need to plan for them long in advance. You need to work with your supply base. You need to work the margin of your product before they get into production. And as those multiyear contracts with the supplier that provided certainty into achieving the cost targets. So I would say within the quarter, when you look at all the valuable piece of what we are, there is obviously a lot that we are programming long before and executing long before the quarter actually starts. That's the point about sustaining those margins. I mean, we work on this program for a very, very long time. And then obviously, within the quarter, there is all the discipline you have at managing your cost. And I would say when you're managing a company that is having higher valuable costs, it's obviously easier. Although, we see the negative effect of it, but its obviously easier to adjust to the shutdown volume variation. I think some of our peers are reported that the valuations of volumes were quite important, during the quarter a lot of volatility. If you have a supply chain that is very reactive, you can adjust better. We know that we had a little bit of an impact on inventory, but overall we did quite a good job to adjust to that both from a working capital and from a cost standpoint.

Okay. Great – go ahead.

It’s okay. David, go ahead.

I was just going to ask, can I – as a quick follow-up, you mentioned the supply chain. I guess, are you seeing any change in the pricing environment either more aggressive price downs from your customers and also at any change in your ability to pass on incremental cost to your suppliers at the Tier 2, Tier 3 level?

No, we don't see – we don't see any significant change in that respect. I mean, once again those are the pricing you have for the contracts you have ongoing with your customers or even with your suppliers is the result of multiyear negotiations. So and then on the supplier side is the result of all the supplier developments you do in order to keep supply base that is into the lowest cost country and lowest cost environment possible, the lowest cost processes. As we mentioned before, we have about 70 people that are just working on developing suppliers and therefore, the result of that work pays off at some point. But I would say on the customer side, we are seeing the same trend as what we've seen for years.

Okay, great. Thank you. I'll pass it along.

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

Thanks. Good morning or good afternoon there. I guess, I wanted to maybe follow-up on the previous line of questioning. Alessandro, I think you mentioned some higher volatility impacting the supply chain. I'm not sure if you're talking to upstream or downstream there, but one of your major competitors has talked about increased supplier bankruptcies in Europe and that's weighed on cost reduction efforts. And I was wondering what you are seeing on that front because you've clearly touted the variable nature of your cost structure, right. I think like 80% of your costs are from external suppliers. And you've been able to get great productivity from them. But if the volume stays low, if diesel sort of continues to come down, is that going to be incrementally harder like, do you see risk there that you need to maybe take your foot off the gas a little bit to make sure that your supplier stay healthy?

Joseph, this is Olivier. I will start the answer and maybe Alessandro will complete that. There are two things to keep in mind, in my view at first, the supply base that we are using for gasoline versus diesel is not that much different at the end of the day. So the shift is not that relevance in that respect. The second point is that we've been doing for years a big push to source our products from what we are recording internally so far high growth regions so thinking about China, thinking about India, Eastern Europe. It is true that if we had stayed in being significantly exposed to Western Europe supplier, we would suffer much more. But the point is that we've been moving away already for a long time and the farther result of that, we don't see any significant impact from those bankruptcies. And we are obviously monitoring very, very closely the financial health of our supplier base.

Okay. Thank you.

And maybe just to add the comment, the comment on volatility was focusing on that cash generation. And the reason why we revised guidance by 5% compared to the previous one. So certainly short-term demand volatility is creating some additional tension in the supply chain and our ability to manage inventory level at the best it could be. So that is translating some higher inventory levels, which then translates into potentially lower cash flow.

And just to add on that, it's true that when you operate at such a high level as where we are operating in term of rotation of the working capital and it's more biased and obviously its visible.

Thank you for that. The second question I have is really sort of just more on the regulatory front as we come up here with RDE in the back half, if you have any sort of color about how your customers are thinking about it. And then I guess more importantly, as we think about CO2 compliance in Europe next year, how you see that playing across your portfolio. And again, I think there's a thought out there that this could be pretty disastrous from a cost perspective for the OE. So just broadly, how do you think about potentially supporting your customers to make sure they can navigate through the transition?

So to your first point about RDE, I know we had the same discussion in Q1, quite frankly, I'd like to be much more smart in Q2 about it. But unfortunately, the element of answers are the same, we did not get any negative feedback so far from the customers. We are all expecting that, they've learned their lessons from the difficult situation of last year. And we know that the ones that are having the most complex portfolio of in/vehicle platform, obviously the ones that are susceptible to potentially safety issues, but at the end of the day, quite frankly, we don't have any news on that front so far. So I think the industry is usually quite good to adapt to these challenging conditions. So we’ll see how far it has been adapted to the rate each this year. So that’s the first point. So for the CO2 points you have, there is just so much you can do within the timeframe of a year or so. Let's step back a bit. I mean, when we bring new technology to the marketplace, you are usually working two years in pre-development and then you're developing the engine platform for three years before it reaches production. So, about one year before the start of anything there is just not that much you can do by providing a new technology to the customers. The only thing you can do is make sure that you're flexible enough with your cost and your supply chain, so that you can adapt to some product portfolio movements that they would have as a consequence of the market movements. And this has always been our focus.

I'll pass on. Thank you.

Our next question comes from Aileen Smith of Bank of America Merrill Lynch. Please go ahead.

Good morning everyone. First question, can you provide a little bit of color around the slower ramp-up of light vehicle gas launches in China? Was this a function of the pull forward of China 6 emissions standards? I would've thought that China 6 might have driven more OEM customers to use some fuel efficient products like Turbos and therefore maybe drive a faster ramp-up of launches. So are you seeing customers opt for different technologies or is this just more a function of the macro-environment deteriorating in the quarter?

No. It's obviously creating a little bit of air into the forecast to use some of your words. So, true, when you look at H2 the question is more how much the car makers have in inventory and how much more cautious, they are planning their ramp-up. And the China 6, quite frankly, doesn't change that much with that, into the way they are forecasting the second half to the first half. So they're forecasting a second half that is lower. This is right in the middle of the ramp-ups and therefore the ramp ups is a consequence of that (0:35:15) as well.

Okay. And as a fob to the question, and apologies if I missed this in your prepared remarks, does this slower ramp-up of gas launches in China change in any way, your outlook to reach revenue parity between diesel and gas by year-end? Or is it more of a 2020 story at this point?

Not really because when you look at it, we are the, when you at the geographic exposure we had in fact a decrease in Asia by 2%, compared to the previous point of comparison. And obviously we know that the gasoline penetration is higher in China. For example what it is in North America. So, in all things being equal, you would have expected that the slowdown in China would have impacted, the speed at which we are ramping-up on the gasoline. But as we said before, we are in fact accelerating faster on the gasoline inside. So, that doesn't change the point of parity that we're expecting by the end of the year.

Okay. Great. And then last question as a follow-up to Joe's line of questioning earlier, I think it's pretty well understood that you have a sophisticated management of your supply base and you've already worked pretty diligently to make sure you are partnered with the right suppliers to mitigate some of the industry pressure. But as we think about the global macro environment remaining tough in the future, is there substantial more opportunity for you to shift around suppliers that you see right now is maybe not being fit for the future? And kind of asked another way, how sticky is your supply base and how quickly can you shift suppliers in the event that things change?

Well, it's, now I will need to be a little bit more technical into dovetailing them and supply based management. Supply based management is just to shift from one supplier to another supplier at some point. It's not the most efficient way to get to the lowest cost with your vendors because if you've seen as a partner that is shifting all the time, then, they will never give you the best because they would always keep some level of margin for themselves and they will give the best performance to someone that sticks with them. So our sourcing strategies are obviously more complex and just shifting from one supplier to another there is an element of preserving some level of what we call healthiness meaning competitiveness into the commodities, so that we have enough suppliers, into a, given commodity because there is an element of competition, but it's more than that. It is getting into understanding their cost, optimizing their cost, optimizing their supply chain, optimizing the design to cost and giving them some visibility on the forecast. So that then they can engage in some productivity actions, that are medium-to-long term ones. So, I would say to a certain extent, we are not just betting on shifting from supplier A to supplier B, because it's true that if we are only doing that, we would run off ammunition very quick. But on the other end, there are still a number of suppliers that are interested with – to do investment into an industry that's presenting extremely survivable macros compared to the rest of your industry.

Great. I appreciate the detail. Thanks for the questions.

[Operator Instructions] Our next question comes from Colin Langan of UBS. Please go ahead.

Oh, great. Thanks for taking my question. Just kind of follow-up on the competitor comments. Competitors have been talking about on new business, that there is a very challenging pricing environment, Turbos. I mean, are you saying that, should we expect margins on new business to come down or is that the dynamic of the product being more established and there's low R&D involved, how should we think about that?

Well, quite frankly, the Turbo has always been, if not the most expensive, one of the top two most expensive function that you have on an engine. So, it has always attracted a lot of attention from the customers in order to make sure that the level of price would be optimized so that that doesn't change. They have many that have risen in the past pushing some new competitors on everything that they've been using. So, quite frankly, I don't see that, environment, changing that much. And by the way, we just, completed our, we are reviewing every year program by program. Our recruit not obviously not on a one-year horizon basis, but what's important for us is a five horizon basis and today, we’re pretty much in-line with the view we had at the same time last year, both, really in term of [indiscernible]. And so that we had the competitive pressure on to the industry in that respect is about stable. And by the way, when you look into new technologies and that's something we've shared with you in the past, you’ve probably seen that for some of the technologies, you have less suppliers today than you were having three to five years ago. I mean you came to valuable geometry gasoline, two stage in diesel, there is only a very small number of suppliers that can deliver that. I’m not even talking about electrification and electric boosting and everything else. And to your question, I'm not sure I would see a significant change.

Okay. What is your current full-year outlook for China? I thought your prior guidance already reflected sort of low-double digit decline in the region. Is it now much worse than that or?

Well, probably our forecast was around minus 8% for the full-year and our new forecast is around minus 10%. But we have adjusted our forecast down and with minus 10%, I think we are little bit more pessimistic than, the consensus of the industry. But we are just reflecting on Q2 that was mature. And here we see sustainable change into the demand coming from the customers. I think the minus 10% is a cautious one.

And when I look at the full-year sales guidance, is at the midpoint is about flat, you're down organically around 4% year-to-date or 3.5%. I mean, what is driving the improved, growth in the second half organically.

It's mostly launches, as we said before, mostly launches of new products. So those launches are coming lower, as we were expecting, and that's one of the reason of the guidance as being reviewed into an all macro environment that is lower. But it's primarily launches, that are running that. And these launches when we are in July, we start to have a good idea of the fact that they are happening on time. The only uncertainty that we're having so far with the mainly [indiscernible].

Got it. All right. Thanks for taking the question.

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.