Ladies and gentlemen, thank you for standing by, and welcome to the Garrett Motion Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to your host, Paul Blalock. You may begin.

Thank you, Kevin. Good day, everyone, and welcome, and thank you for joining Garrett Motion's Fourth Quarter and Full Year 2021 Financial Results Conference Call. Before we begin, I'd like to mention that today's presentation and earnings press release are available on the Garrett Motion website at garrettmotion.com, where you will also find links to our SEC filings, along with other important information about our company. Turning to Slide 2, we note that this presentation contains forward-looking statements within the meaning of the Securities Exchange Act. We encourage you to read the risk factors contained in our filings with the SEC, become aware of the risks and uncertainties in our business and understand that forward-looking statements are only estimates of future performance and should be taken as such. The forward-looking statements represent management's expectations only as of today, and the company disclaims any obligation to update them. Today's presentation also includes non-GAAP measures to describe the way in which we manage and operate our business. We reconcile each of these measures to the most directly comparable GAAP measure and you're encouraged to examine those reconciliations, which are found in the appendix to both the press release and the slide presentation. Also in today's presentation and comments, we may refer to light vehicle diesel and light vehicle gasoline products by using the terms diesel and gasoline only. With us today is Olivier Rabiller, Garrett's President and Chief Executive Officer; and Sean Deason, Garrett's Senior Vice President and Chief Financial Officer. I will now hand it over to Olivier.

Thanks, Paul, and welcome, everyone, to Garrett's fourth quarter and full year 2021 results conference call. I will begin my remarks on Slide 3, where we start with highlights for the year. 2021 was a remarkably challenging and successful year for Garrett. Various waves of COVID, combined with the semiconductor shortage, created numerous difficulties for our employees, supply chain partners and customers. Even in this volatile environment, Garrett delivered strong results across all key metrics. I would like to thank our employees for their hard work and dedication in these extreme circumstances as they successfully executed in the face of fluctuating demand, component shortages, COVID-related disruptions, and emerging cost pressures. Our employees are key differentiator and critical for the long-term success of Garrett. This past year was easily one of the most dynamic years in the automotive industry. Even with all the headwinds I mentioned earlier, the strength of our leadership position across light vehicles, commercial vehicles and aftermarket, combined with robust execution, allowed us to deliver net sales of $3.6 billion, an increase of 15% at constant currency, outpacing global auto production by approximately 12.5 percentage points. Global light vehicle production was up only slightly from 2020, with an estimated growth of only 2.5%, historical low for the past 10 years. And in this environment, Garrett is well positioned for prolonged growth as turbo technology continues to penetrate on internal combustion engines and hybrid powertrain, and we continue to grow our share of demand through new business wins. Obviously, pent-up demands from customers for vehicles will drive global industry volumes higher in the coming years and our increasing share of demand will remain a major growth catalyst for Garrett. This slow recovery in 2021 of light vehicle production was enhanced by a 25% net sales growth in our commercial…

Thanks, Olivier, and welcome, everyone. I will begin my remarks on Slide 5. Starting with our Q4 2021 results, a challenging production environment, hampered by continued semiconductor shortages, depressed volumes compared to Q4 2020. Net sales declined 14% to $862 million at constant currency. Adjusted EBITDA also declined 13% to $125 million in the fourth quarter. However, the adjusted EBITDA margin increased 20 basis points to 15%, primarily driven by an improved product mix from higher-margin commercial vehicle and aftermarket products. We will discuss this in greater detail in a few minutes. Adjusted free cash flow in Q4 2021 was $151 million and increased sequentially from Q3, driven by improved volumes and working capital releases, but down from last year's Q4 figure of $236 million due to volume reductions. Lastly, adjusted net income was virtually unchanged from 2020 at $78 million versus $77 million as compared to Q4 2020. Overall, Garrett improved our Q4 2021 adjusted EBITDA margin even in the face of reduced production and sales. Turning now to Slide 6. You will see our net sales bridge for the quarter by product category. As you may remember, Q4 of 2020 had a record volume of 4 million units produced, primarily driven by gasoline program launches in China and North America. The 14% net sales reduction versus Q4 of 2020 reflects decreases in gasoline and diesel products, primarily due to semiconductor shortages on passenger vehicles where gasoline sales were down 15% and diesel down 29%. However, for the quarter, the higher-margin businesses of commercial vehicles and aftermarket products were up 3% and 18%, respectively, at constant currency. This resulted in a favorable mix for the quarter and contributed to a margin improvement, which we will see on the next slide, and is driven in part by commercial vehicle and…

Thank you, Sean. In summary, Garrett delivered strong results across all of our key metrics, while continuing to launch new differentiated technologies and to develop new capabilities to support our deployment in the powertrain electrification. We increased net sales by 15% at constant currency to $3.6 billion, significantly exceeding global auto production by approximately 12.5 percentage points and even with numerous disruptions in the global auto supply chain, which significantly impacted 2021 volumes and led to a dynamic macro environment. This strong growth was primarily led by our commercial vehicle and aftermarket businesses, which combined accounted for over 30% of 2021 net sales and which commend higher returns. Second, Garrett generated $607 million in adjusted EBITDA, even with our significant R&D spending focused on key investments into initiatives for the future. Third, we increased our adjusted EBITDA margin by 220 basis points to 16.7%, even in an inflationary cost environment, a testimony to the proven execution and operational excellence that is a key focus for the company. Fourth, we reduced our net leverage below 2, reaching 1.94x, including the Series B. Fifth, we instituted a $100 million stock buyback program, resulting in 19 million of repurchases in Q4 2020. Lastly, we ended 2021 with $720 million in total liquidity, and we expanded our revolving credit facility in January by $124 million and it now totals $424 million in undrawn availability. In conclusion, our Garrett team continues to build upon the strong track record of accomplishing our strategic objectives as we deliver strong results across our portfolio in 2021. And as we move on to 2022 and beyond, we will remain our focus on developing our new technologies around turbo, electrification and software, collaborating closely with our global customers as we have done for decades. Operator, we are now ready to begin the Q&A session.

[Operator Instructions] Our first question comes from Hamed Khorsand with BWS Financial.

The first question I had was -- are you seeing any of the disruptions in your order flow as you were in the prior quarter? And if not, how is it improving? Are you seeing increased order flow? Or is it just a constant order as far as what you're seeing from customers?

That's a very good question indeed. What we have seen in Q4 is that the industry was suffering from a lot of last minute cuts in the demand we are seeing from customers. In fact, and we mentioned that in the past, we had severely undercut the demand forecast we were receiving from customers. Obviously, this is not something easy to do. But in order to protect our supply chain, protect our suppliers as well. And I think we've been very successful to do that because when I look at the numbers that we ended up with in Q4, they were very close to our initial forecast, which is clearly below what customers were forecasting. So the first sign of recovery for us would be a stabilization of the demand signal from customers. And indeed, this is what we see in the beginning of this year, which is not uncommon with some of our -- what our peers have said, stabilization of the demand signal. It remains a little bit too early to our view to understand if the recovery is happening at the pace at which we are forecasting it. If it's happening faster than that, far too early to know. We will need probably a few more months to confirm that.

Okay. And then the other question I had was looking out into 2022. Is it your VNT and E-Turbo that's going to drive the unit growth? Or are you relying more on the commercial and aftermarket?

Well, we are expecting everything to keep on growing in 2022, in fact. And by the way, not only VNT, I mean, we had wins in gasoline, even in the Wastegate, which is the nonvariable geometry technology. So all of that will contribute to the growth we expect in 2022, all verticals.

And my last question is what does this do as far as your average unit price? It went down in Q4. So I'm just looking at what happens in '22?

Yes. The ASP -- this is Sean, Hamed. The ASP would come under some pressure just because of the mix. And as we see the industry restarting, as you know and as we talked about this past year, there was a prioritization for larger engines in more profitable vehicles. And -- but there is a lot of pent-up demand for some of the smaller vehicles. They still have turbos and we still make margin on, but it is at a lower level. So ASP, and that's part of the mix, the product mix, the headwind of $40 million you see on our bridge. ASP could come under a bit of pressure. But again, we need to see how the whole of recovery unfolds.

But even though ASPs could come under pressure, when will the increase in production allow you to absorb a lot more operating expenses and so forth?

Correct. Yes, absolutely. But overall, if you -- as you see revenue increasing along with units, some of the units we're adding this year are going to be at a lower ASP on average than this past year.

Understood. Okay, great. Thank you.

Our next question comes from Josh Taykowski with Credit Suisse.

Just a quick one for me. I may have missed this in the prepared remarks, but I just wanted to ask about CapEx during the quarter. Because it looked like a net inflow during 4Q. So I guess what was driving that? And how should we think about CapEx going forward into the first quarter and the remainder of '22?

Yes. We see CapEx definitely up next year. You had -- we were managing our cash flow and our CapEx, but primarily driven by programs that were delayed because of the pandemic-related disruptions. And the dynamic in the fourth quarter, a lot of the development we do also does get reimbursed by the customer. Some of it's lump sum, some of it is piece price. And just the way the mix of cash flows happened in the fourth quarter ended up being better -- the better inflow than expected. But overall, our free cash flow came in slightly more positive, but in line with guidance on the upside. So there are some dynamics there, but we expect CapEx to get back to normal operating levels that you've seen historically going forward, and that's factored into our cash flow as well.

Got it. Fair enough. Okay, thank you very much.

Our next question comes from Prateek Gupta with Goldman Sachs.

Great. So first question from me is just on the 2022 outlook. So I'm just looking at your outperformance related to like, with the production in FY '21, which is around 12.5. But based upon your guidance, it looked pretty muted from outperformance perspective for 2022. So can you please just talk a little bit about what are the various puts and takes going behind that in terms of how we're thinking about your varied end markets and how you expect it to perform related to that?

So it was a little bit difficult to get. Maybe I rephrase a little bit what you got on the question. So your question is pretty much about the way it develops into 2022, and what's behind the 7% growth that we anticipated for the light vehicle industry. In fact, what we see coming up is no surprise, a little bit the same as everyone. We have the benefit on our side to work with pretty much all the carmakers around the world. So that gives us a little bit of a balanced view into the way they are recovering, between some groups of customers that are extremely optimistic and some others that may be more on the pessimistic side. We also compare ourselves with big consultancy companies to understand the way they see it as well. But that broad reach gives us usually not so bad of a good view as we experienced in Q4. I would say beyond the 7% that you see, for us, it's a gradual recovery, primarily in the back end of 2022. We'd like to be surprised, but we are not anticipating, and this is getting confirmed, as we speak, by some of our customers. We are not anticipating a huge or fast recovery in the first half of the year. And then that recovery will take different forms depending on the regions. So we'll monitor very closely what's happening in China. There is a point that Sean was mentioning about the mix in Europe because in Europe there is a need to produce -- there is a huge pent-up demand for smaller vehicles. But by the way, some of our customers need to reach their CO2 targets imposed by the European Commission. So we are monitoring all that. But we are not seeing -- so far, we have not changed our plans for the last couple of months, and we are seeing that it doesn't develop faster than what we anticipated. Sean, do you want to add anything?

Sure. I think that answers your question, but I also think you had a part -- you were just asking why our outgrowth was not as -- is slowing down a bit? And again, that is part of the industry restart and part of the shift in mix. And so -- but as the industry begins to normalize and if we see higher volumes, you could see a stronger outgrowth

Okay. Okay. And second question from me is from a capital allocation perspective. So we are in another payment on the 100 Series B preferred pretty soon. So what should we expect going forward from your usage of cash because you have strong liquidity, you're reading good amount of free cash flow as well? So if you could talk about that from a broader perspective?

Well, I would say right now, we are on track to normalize our capital structure and automatically convert the Series A next year in April 30. But in the meantime, we are still seeing headwinds from COVID-related disruptions and semi-con. So until we see some stabilization, and we have a clear view of a strong second half of the year, we're going to keep our capital structure as is, and focusing on execution. And I would say stay tuned until next quarter.

[Operator Instructions] Our next question comes from Chris McIntyre with McIntyre Partnerships.

Just a quick question. When can we expect like guidance around what level of like gross and net debt we're thinking about for capital structure post conversion of the preface?

Again, there are a lot of factors that go into that. I think the first and most important thing is that you need to see the industry stabilize. We are planning on doing some investor communications later in the year. And so again, depending upon how quickly we see a stabilization we could -- you can expect further communication. But right now, we're just really focused on trying to keep our interest expense as low as we can and also move towards execution so we can convert to Series A and normalize our capital structure, the 1 class of common and 1 class of debt in the given time frame currently.

And I'm not showing any further questions at this time. So I will conclude today's presentation. You may all disconnect, and have a wonderful day.

Thank you.