Earnings Labs

Garrett Motion Inc. (GTX)

Q1 2022 Earnings Call· Thu, Apr 28, 2022

$20.08

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Transcript

Operator

Operator

Hello, and welcome to the Q1 2022 Garrett Motion Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, today's event is being recorded. I would now hand the call over to Paul Blalock. Mr. Blalock, please go ahead.

Paul Blalock

Analyst

Thank you, operator. Good day and welcome everyone, and thank you for joining the Garrett Motion's first quarter 2022 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 two. We note that this presentation contains forward-looking statements within the meaning of the Securities and Exchange Act. We encourage you to read the risk factors contained in our SEC filings, 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.

Olivier Rabiller

Analyst

Thanks Paul, and welcome everyone to Garrett's first quarter conference call. I will begin my remarks on slide three, where we start with highlights for the first quarter. Garrett achieved strong first quarter performance in a challenging near-term environment, highlighted by a slower than anticipated light vehicle production recovery, stronger inflationary pressure and supply chain constraint impacting OEM production volume. This created numerous difficulties for our employees and supply chain partner. And I would like to thank everyone for their hard work and dedication in these circumstances. Our employees did a great job in managing through these challenges. I would like particularly thank our employees in China and specifically in Shanghai, as we maintain production near capacity through great personal sacrifice during the ongoing lockdowns. This again, demonstrate that our people are key differentiator to our performance and the long-term success of Garrett. Compared with last year, Q1 of 2022 net sales of $901 million were down 10% on a GAAP basis and 6% on the constant currency basis. The constant currency decline of 6% in Q1, 2022 sales is approximately equal to or flat with estimated light vehicle production versus Q1 of 2021. This is driven by the ongoing semiconductor shortage and also supply chain challenges impacting vehicle production globally, but even more in China. This short-term constraint do not impact the strengths of underlying pent-up demand for light vehicles or the increase base of turbo penetration. Adjusted EBITDA of $146 million and the resulting adjusted EBITDA margin of 16.2% are also down from Q1, 2021, due to the factors mentioned above, but trended upward from Q4 last year, as pricing pass-through initiatives and additional productivity offset inflation and increased supply chain cost. And this even considering our increase R&D investment into new technology for the future. Indeed, I'm…

Sean Deason

Analyst

Thanks Olivier and welcome everyone. I will begin my remarks on slide five. Looking at the upper left-hand graph, Q1 of 2021 was the strongest sales quarter over the last five quarters for two reasons. One, it was largely before the semiconductor shortage; and two, Q1 of 2021 had pent-up demand from the lifting of COVID lockdowns in 2020. As Olivier just mentioned, Q1 of 2022 net sales were down 6% at constant currency from Q1 of 2021. But as you can see here, the semiconductor shortage peaked in Q3 of 2021, which drove the lowest sales quarter for 2021. And sales had been on an upward swing since that low-point on a sequential basis. Q1, 2022 sales increased 5% from Q4 of 2021. Turning to the right-hand side of the page, while adjusted EBITDA of $146 million in Q1 of 2022 decreased 17% from Q1 of 2021, it was up on a sequential basis by 13% from Q4 of 2021. Similarly, the Q1, 2022 adjusted EBITDA margin of 16.2% is down from 17.7% in Q1 of 2021, but importantly, our Q1, 2022 adjusted EBITDA margin of 16.2% improved 120 basis points sequentially from Q4 of 2021. This performance highlights the ability of Garrett to manage core operations by flexing our variable cost structure and successfully pass-through inflationary pressures. This is a key differentiator and competency for Garrett, and we will speak more on this point later in the presentation. Lastly, in Q1, 2022, adjusted free cash flow was $38 million, driven by lower volume and continued CapEx investments, which were higher due to carryover from 2021, which is typical in the first quarter. Turning to slide six. You see our year-over-year net sales bridge for Q1 by product category. As mentioned earlier, the continued impact of the ongoing semiconductor…

Olivier Rabiller

Analyst

Thank you, Sean. In summary and on slide 12, Garrett delivered solid results in Q1 of 2022, with net sales of $901 million. While this was a decrease of 6% at constant currency from first quarter of last year, it was an increase of 5% over Q4, 2021. The current automotive supply chain challenges are not impacting the strong underlying pent-up demand for light vehicles. Additionally, the increasing turbo penetration and technology driven turbo industry consolidation paved the way for robust growth in revenue and cash generation once the automotive industry supply chain normalizes. Garrett generated an adjusted EBITDA of $146 million with margin of 16.2%. And this is a steady performance in light of the reduced production, increased inflation and overall supply chain volatility. And it gives us confidence that we have the means to address inflation and supply chain challenges. We also reduced our net leverage to 1.88, including the Series B preferred stock from 1.95 at the end of 2021. This continued improvement in our balance sheet positions, the company well for the future. And we ended Q1 of 2022 with $788 million in total liquidity up from $720 million last quarter. Indeed, we have revised our 2022 outlook to reflect essentially two macroeconomic factors, the weakening of the Euro and the most pacifistically view for the 2022 light vehicle automotive industry production that we now expect to be approximately flat to 2021. Our robust operational execution, even in these volatile times and as demonstrated in Q1, will enable us to take advantage of any improvement on these points. I would like once again to thank our employees for their dedication in volatile environments, their contribution and flexibility drove another successful quarter of strong performance for Garrett. Operator, we are now ready, I think, to begin the Q&A session.

Operator

Operator

Yes. Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand

Analyst

Hi. So, just -- Sean, I had a housekeeping question was, could you disclose how many units were sold this past quarter?

Sean Deason

Analyst

We didn't disclose, but it was approximately 3.4 million turbo is what was talked about.

Hamed Khorsand

Analyst

Okay. Thank you. And then, the question I had was, are you seeing anything different from the ordering habits of customers, or is it still volatile like it was in 2021? Or is it -- have they just held back completely just given the macro factors going on.

Olivier Rabiller

Analyst

That's a very interesting question, because I think we were having a huge level of volatility. Let's say Q3, Q4, 2021. Then, we started the year with something that was a bit more stable. And then, we had increased volatility into the quarter. And I would say all of volatility we see today in our demand is very close to what we had in Q3 last year and very close to what we had after the first wave of COVID.

Hamed Khorsand

Analyst

Okay.

Olivier Rabiller

Analyst

We are back into the same and quite frankly, that's what I'm hearing, not only from us, from everyone in the industry.

Sean Deason

Analyst

And Hamed, just on slide eight, the working capital slide, we do disclose the quarterly volumes of the turbos.

Hamed Khorsand

Analyst

Okay. Just given that volatility comment, do you feel like it's different this time versus last year, or is it similar just given that -- some of this is with China lockdowns going on right now?

Olivier Rabiller

Analyst

What we see is that obviously the lockdowns in China are not improving the situation, but overall the main driver for the volatility of the demand, we see remains semiconductor shortages from what we see from our customers and the impact it has on them addressing their production.

Hamed Khorsand

Analyst

And my last question is, given the stay of the weaker Euro, is that changing your plans and how you spread out your investments in R&D, or is it still remaining mostly in Europe?

Olivier Rabiller

Analyst

When it comes to our investments in R&D, we have a significant business is in Europe, by the way, it's getting weaker. So at the end of the day, it makes it cheaper. But we are not changed the way we are spreading our long-term investments in R&D across the globe, because what we are looking for primarily is capabilities and expertise. So, we have not -- and did our strategy on that. And as you can see from our results, we have not changed our mind about the level of investment that we are planning to do this year on R&D.

Hamed Khorsand

Analyst

Okay. Thank you.

Operator

Operator

Thank you. [Operator Instructions] And we do have a question from Chris McIntyre with McIntyre Partnership.

Chris McIntyre

Analyst

Hey, guys. I was wondering if you just give a comment on how you guys are thinking about timing of buyback and sort of -- it seemed like you maybe slowed on the buyback pace during the quarter. So, just any question -- any comments that would be helpful. Thanks.

Sean Deason

Analyst

Sure. Well, one of the reasons we were a bit slower is because we reported Q1 earnings and then we went -- and then we got into the blackout period quite quickly. And we were under some limitations in the blackout period in terms of the volumes we could buyback based on regulation. But we did make several amendments to the Series A certificate designation and the credit agreement that allow us for greater flexibility. But again, in these volatile times, we want to see what cash flows look like in the coming quarters. And we'll be making decisions on the level of buyback, that we will take based on how the macro is developed here in the next coming weeks.

Chris McIntyre

Analyst

Okay. And are you guys thinking about like an Investor Day at all or what -- we still don't really have like a commitment to like capital levels and things like that. So, I'm just getting a sense of timing there.

Olivier Rabiller

Analyst

That's true. We are considering it and then we are reviewing a few options. We will get back to all of our investors as soon as we have made up our mind about it.

Chris McIntyre

Analyst

Okay. Great. Appreciate it.

Operator

Operator

Thank you. [Operator Instructions] All right. As we have no more questions, I would like to turn the floor to our management for any closing comments.

Olivier Rabiller

Analyst

Well, thank you very much to everyone that has joined the call today. Indeed, the industry is facing some difficult time. As we've demonstrated today, we've executed quite well in Q1, giving us the confidence about our plans for execution for the backend of the year, and to adjust to the external macroeconomic levers that we had to adjust too in Q1 and for the backend of the year. So, with that, thank you all. And we will keep you obviously posted about further instances if we do, or later on this year an investment day. We have a lot of things to share with everyone, that we've shared today with new business, new initiatives. And we, obviously, very happy to share more about that.

Operator

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.