Hello, my name is Michelle Fleischer and I’ll be your operator this morning. I would like to welcome everyone to the Garrett Motion Conference Call. This call is being recorded and the 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, Garrett’s Vice President of Investor Relations.

Thank you, Michelle. Good day, everyone, and welcome. Thank you for joining the Garrett Motion’s Second Quarter 2022 Financial Results Conference Call. Before we begin, I’d like to mention that today’s presentation and earnings 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 and 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 second quarter 2022 conference call. I will begin my remarks on Slide 3, where we start with highlights for the quarter. During Q2, we continued to experience the impact of the China COVID lockdown that ultimately began to ease mid-quarter. I want to thank again our employees in China and specifically in Shanghai, where we were able to maintain productions through great personal sacrifice during the lockdown period. As the supply chain began to restart in China, we successfully navigated through a series of supply bottleneck experience by our customers and suppliers by flexing our valuable cost structure, while continuing to successfully implement inflation management strategies. The semicon shortage also continued to impact our customers in Q2, but we are beginning to see gradual improvements as we enter Q3. Second quarter of 2022 net sales of $859 million were down 8% on a GAAP basis, mainly due to the weaker euro and were unchanged on a constant currency basis as compared with Q2 last year. This level of constant currency sales growth out basis estimated Q2 global auto production by approximately 600 basis points, demonstrating stronger dollar in demand for our portfolio of products, as well as the ability of garage to pass through inflationary pressures. Q2 adjusted EBITDA was $138 million and the EBITDA margin was 16.1% virtually flat sequentially with Q1, which is notable considering Q2 unit volumes were sequentially lowered by 6%, driven by the factors mentioned above. Compared to Q2 2021, adjusted EBITDA was down $30 million from $168 million half of which was due to foreign exchange driven by a weakening euro and the remainder due to lower volume, while margins still remained above 16%. This is a testimony to the operational strength of the company. More recently,…

Thanks, Olivier, and welcome, everyone. I will begin my remarks on Slide 5. Looking at the upper left hand graph, you’ll see reported net sales for the last six quarters with Q2 2022 at $859 million on a volume of $3.2 million units. As mentioned, volume was driven lower in Q2 due to China lockdowns and the ongoing industry impacts from the semiconductor shortage. Year-over-year, units were lower by 6%. The impact of the partial lockdown in China is also evidenced by the lower proportion of sales this quarter from Asia, falling to 27% from 32% last year. As Olivier mentioned, although Q2 volume was slightly lower, sales were flat at constant currency as the lower volume impact was offset by inflation passthroughs and growth and gasoline turbos. On the right hand side of the page, adjusted EBITDA remained strong at $138 million and the adjusted EBITDA margin of 16.1% was in line with or better than the last two quarters and a solid result in a volatile production environment affected by supply chain disruptions, China lockdowns, and FX headwinds driven by a weaker euro. Lastly, on the bottom left graph, Garrett generated positive adjusted free cash flow of $23 million, despite an increase in working capital due to lower volume, as well as the cash interest associated with the early redemption of the Series B preferred stock. In summary, Q2 results showed Garrett’s ability to manage through the supply chain challenges and deliver robust solid operational performance even under adverse conditions. Turning now to Slide 6. You see our year-over-year net sales bridge for Q2 by product category. In Q2, the continued impact of the ongoing semiconductor shortage and China lockdowns weighed on auto production both inhibiting gasoline growth and enhancing the diesel drop while the China lockdown cycle…

Thank you, Sean. Turning to Slide 13. Garrett delivered solid results in Q2 of 2022 with net sales of $859 million unchanged at constant currency from Q2 last year and outpacing estimated global light vehicle production estimate. We generated $138 million in adjusted EBITDA successfully offsetting inflation FX. We maintain a solid adjusted EBITDA margin of 16.1%, essentially flat with Q1 on lower volume and in an inflationary environment. We continue to target investing 4.8% of sales into R&D with more than 50% dedicated to new technology. As mentioned, we reduce debt for the third consecutive quarter prepaying the final $212 million in the Series B and completing the full repayment while maintaining a strong total liquidity of $621 million, even after the Series B redemption Overall, I’m very pleased with the solid performance that Garrett had in Q2. This demonstrates the effectiveness of the measures we have put in place to address inflation, while continuing very robust operational execution, adapting to dynamic production environment by flexing our valuable cost structure. Obviously, if supply chain bottlenecks continue to ease faster in the second half, we should see a strong volume recovery leading to improving working capital trends and therefore strong cash generation is second half of 2022. In fact, as Sean discussed on a constant currency basis, we have actually raised guidance, the benefits of which are being unfortunately offset by weaker Euro. I would like to once again, thank our employees for their dedication and residency in a very volatile environment, their contribution and flexibility drove another successful quarter of strong performance for Garrett. Operator, I think that now we are ready to start the Q&A session.

[Operator Instructions] Our first question comes from [indiscernible] Your line is now open.

Hi, can you hear us? Hello?

We can hear you.

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So we’re in the market trying to repurchase the Series A, but obviously within parameters dictated by the liquidity and the availability of the shares on the market. But in terms of individual activity I can’t really comment on that. We are – obviously, we have a repurchase program in place. And we can do block sales if we so choose, but I think we really need to focus on the industry stabilization and recovery in the second half. We’re very, very pleased with the redemption of the Series B. We thought that was the right decision. It’s in a very important milestone to normalize our capital structure. But as we look forward, as I said, it’s really about seeing how things materialize in the second half in particular through September. And we’re hopeful that as we see stabilization and increasing volumes, the working capital recovery and additional EBITDA generation will flow down to our cash flow. And then it’ll give us some more optionality.

I appreciate that. Apart from China, what do you see as the – are there maybe two or three speed bumps that could lie ahead as far as getting back to production levels that are a little bit more normalized in your specific markets? Is it chips? Is it Ukraine? Is it anything else that maybe the market isn’t understanding?

So – this is Olivier speaking. I would say that so far, if you remember in Q1, I was worried a little bit by the potential consequences of the shutdown in China on some elements of the supply chain for the automotive industry. This has so far not materialized to the extent I was fearing, because we are seeing that stabilization in programs from customers. I guess, even if semicon is recovering as the volumes are increasing, there should be obviously still a little bit of uncertainty on that. I’m less worried about the China lockdown than I was as well [indiscernible] lockdowns. Because situation has shown that China was able to manage much better, the latest ones that have happened for the last few months. The only thing that everybody thinks about, especially in Europe is consequences of shortage of energy by the end of the year, beginning of next. But it’s far too early to understand it will be an impact. So overall, quite frankly, today, I mean the stabilization of demand and the fact that there is still a strong pent up demand, that’s turning the automotive market in something that we’ve never seen before, before it was driven by production, now it’s driven by demand and that’s a unique situation.

I appreciate the color. Thanks and best of luck for an excellent second half.

Yes, sure.

One moment please for our next question. Our next question comes from Chris McIntyre with McIntyre Partnerships. Please go ahead.

Hey guys, is the sound working?

Yes.

Yes. Good, good. Just on commercial, can you talk a little bit about where you see it trending in the back half? And I don’t know if I missed it in the slides, but where was the overall mix on commercial in the first half or how much was it down…

Yeah, it’s down. We’re down from a mid-standpoint on commercial vehicle. And then the second half, we see – we didn’t actually guide to what we see if we’re commercial in particular, but we do see the volume recovery in the second half, but that’s going to be driven by smaller gasoline and diesel engines primarily with hopefully commercial staying flattish.

Okay. Got it. All right. And then your customer win rates, like, you’ve been talking about how you’re over 50 and remind me like three years ago you were talking about over 40%, is that right?

We are talking about 50% over 60%.

Yes. But you have been previously talking about over 40, I was just trying to get a sense for like how you guys are thinking, you’ve historically guided to 400 to 800bps, let’s say, above market performance, right, and done quite well. And so I was kind of thinking, like, where are you thinking about your current win rates projected out a couple years? Is it thinking that range should be moved up over time or…

I think we are very pleased with the win rate we have, we said over 50%. I think we said that also in Q1. Because we know, there is no – it’s difficult to have a direct formulas that would give you exactly the cell demand from there, because there are some programs that are smaller, some program bigger as they materialize some considerations, some programs that are adding a longer life. But all in all, what we know is that when we win at this level, we’re increasing our cell demand. And by consistently winning at this level, we’ve shown the direct impact on our cell demand increasing. And you see that in the other industry growth rate that we have. So it’s a little bit of – comparison, but the above 50% enables us to increase our cell demand and that’s why we are monitoring that very closely. And we are very pleased with seeing that what we think about it, it’s translating into numbers, which is the primary point for us, and we are not seeing that trendto change in the future. Q - Chris McIntyre Okay, great. And then one final question. On R&D, should we expect that number to sort of stay flat as you ramp or you expecting to, I say, it’s got better, try to keep it closer to 5% going forward.

Well, I think with where we are today, we are quite happy currently. We have enough to do what we want to do, because we are benefiting, as we said before, from and as of trend, it’s not only that the revenue of the company is growing. And therefore, if you have a certain percentage, it’s more driven at the end of the day, you can spend on RD&E, is that the intensity of our RD&E effort on our core business is going down not so much that we trim that down is just that the engine programs are getting bigger and bigger. And since the RD&E you spend is a function of the number of programs you get, if for a certain volume, you develop less programs, you need less RD&E on the car business. That’s specific to the turbo industry, which is very good for us because this is what has enabled us to channel significant amount of money to add new growth vectors, new things that we do outside of the car business. And quite frankly, this is really the result, partly of the slight increase we add in RD&E spend as a percentage, the revenue increase of the company, but even more importantly of the decrease we’ve seen in RD&E intensity for the car business. Without by the way, sacrificing any advance or any push we do on the car business, which is important to keep in mind. We are planning I mean, this is a great industry, the turbo industry, and we are not planning to decrease ours efforts down.

Okay, great. Thanks. Can we – do we have the operator?

I apologize. There was an issue there. I do apologize. [Operator Instructions] And now our next question comes from Hamed with BWS Financial. Your line is open.

Hi, good morning. So the – just wanted to start off with the return of business or production in China. Were you able to meet that demand with inventory that was already built or did you have to start ramping up production and how much ramp up cost was there in doing so?

That’s a great question, Hamed. What we have done in fact has been – we’ve been able to maintain a significant portion of our employees into the factory in Shanghai for the entire lockdown. So we’ve been producing at quite of a high rate compared to the capacity of the site during the entire lockdown. So we did not start from a cold position there. We kept on producing during the lockdown easy can trade. At the same time, the lockdown was only as a team Shanghai if you look at the volume we have in China Yuan represents more than 50% of what we do there in term of volume. So when the lockdown as is at the end, we were already running. So we did not have – we were not relying on inventory that would’ve been very dangerous to rely on inventory for two months lockdown. And we did not explain, I mean we had a friction cost, as you can imagine, organizing a few emergency shipments as part of the lockdown, but it’s not like we had the super big start up cost to restart all operations again.

Okay. And then as far as sales are concerned, the – your slides, you’re talking about contracted revenue for 2022, 2023 and 2024, is that on a capacity basis or is that predetermined pricing per unit?

No, that, that is booked business. The prices are set because we quoted, we won the business and really, and that business comes online. And the point is, it’s all about the volume. If this volume of the industry comes back, we’re 94% certain the – of the revenues associated with that volume.

So there is something important to keep in mind for Garrett is that when you look at our revenue forecast four years, five years out, we tend to be very consistent with something we explained that five years out. We have two-third of the oil business, and then you can add the aftermarket business on top. ,: The only unknown we have in this industry is the impact of the macros and potentially sometime the model success of our customers. On the volume that we’re part of those contracts, but all the rest is preset, I mean, which puts us in a position where we have a very high visibility on the long run, long range volume forecast of the company, and that’s the only uncertainty being driven by macros and that’s the reason why we’re spending so many efforts at keeping the fixed cost as valuable as possible, so that’s the company is set in a way that you can absorb as best as you can the macroeconomic valuation.

And could you just talk about the macro given that the – what we’ve seen with supply chain, but if you look forward, it’s now the macros turning into more of a demand question, uncertainty and how well prepared do you think the industry as the OEMs are for consumer demand, not showing up as much as reports and estimate suggest, and how prepared are you to for the any kind of variability that could create.

First of all, let’s start with macros. What we see is that usually in this automotive industry, it has been supply driven – demand driven, sorry. In the sense that customers who are pushing sales, our customer were pushing sales and people buying cars where eyes are buying or not buying. This market is changing because today we are constrained on the production side. So customers are buying whatever the car makers are able to produce. And in the deck, the small graph we add on the Slide number 10 is showing that we have accumulated of over the last two years, an enormous amount of pent-up demand because on a regular basis the light vechicle production around the world is between 90 million to 95 million units. But we’ve been as low as 74 million units in 2020, 77 million last year and our forecast says 78 million this year. So if you compare to 95 million, we have accumulated massive gap between the needs of the customers and what the industry was able to supply. And to our point about pent-up demand, since we know that semicon constraint will not ease before mid-2024, it means that the automotive industry will stay supply constraint at least up to 2024, which is a very specific situation that this industry has never been into – to getting into that supply constraint for a long amount of time. So today, we are thinking that and we are not the only one. I mean we are into a very specific position that in the past, we would’ve looked at customer demand as being the real way to look at the future of the volume of this industry. And right now, we are more looking at supply constraints. So even if you reduce supply or demand by 5%, that’s what it could use otherwise that’s not enough to impact the backlog that has been accumulated for the last two, three years. So if obviously everything’s crashing, but quite frankly, that’s not the scenario we are looking at, and we are looking at the automotive industry is change stronger, even if there is a potentially a crisis that’s impacting the rest of the economy.

Okay. Thank you.

At this time, there are no more questions. This concludes today’s conference call. Thank you for participating. You may now disconnect.