Hello, my name is Chris and I will 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. Sir, please go ahead.

Thank you, Chris. Good day and welcome everyone and thank you for joining the Garrett Motion’s Third 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 two, we note that this presentation contains forward-looking statements within the meaning of the Securities and Exchange Act, which 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 third quarter 2022 conference call. I will begin my remarks on Slide 3, where we start with highlights for the quarter. And I would like to start by saying I'm very pleased with third quarter results, and I would like to thank employees throughout the company for their dedication and flexibility which helped drive strong third quarter performance in what continues to be a volatile environment. I am pleased to report that third quarter 2022 net sales grew 13% to $945 million on a GAAP basis, but on a constant currency basis, sales grew 25% over the prior year. Strong operating performance in Q3 drove adjusted EBITDA of $146 million, up 9% over last year and the adjusted EBITDA margin was 15.4% versus 16%. While this strong margin is lower than the prior year, it is important to realize that the adjusted EBITDA margin this quarter was diluted by 100 basis points from FX and by 90 basis points from the pass-through of inflation costs for a total impact of 190 basis points. Sean will further discuss in a few minutes. However, taking these adjustments into consideration, this places, this quarter's margin well above last year. In the third quarter, we also generated robust adjusted free cash flow of $120 million, which was boosted by volume growth and the cash contribution from the change in working capital. As a reminder, Garrett operates with a structurally negative working capital position, which means that we generate cash when sales are increasing. Third Q 2022 volume was 3.6 million units, up 15% over the same quarter of last year and reflects gradually improving supply chain conditions as well as new gasoline launches. Importantly, we continue to successfully pass-through inflation and deliver productivity, which when combined offset…

Thanks, Olivier, and welcome, everyone. I will begin my remarks on slide five. Looking at the upper left-hand graph, you will see reported net sales for the last six quarters with Q3 2022 at $945 million on a volume of 3.6 million units. As Olivier mentioned, increased 3Q 2022 volume drove net sales up 13% on a GAAP basis and up 25% at constant currency due to improved semiconductor availability, inflation pass-through to customers, and new gasoline product launches. The impact of these items drove our geographical split of sales from Asia up to 33% and in 3Q 2022; from 27% in 2Q 2022; and nearly back to the 3Q 2021 levels when Asia was 34% of total sales. Europe declined in 3Q 2022 to 45% from 51% in 2Q 2022 and was 47% last year. Sales in North America were flat sequentially and but up from 17% in 3Q 2021. These swings geographically are mostly driven by lockdowns in China earlier this year and then the resulting increase after the lockdowns ended. Looking at the right-hand side of the page, you can see the improvement in adjusted EBITDA to $146 million in 3Q 2022 as compared with $138 million in Q2 and $134 million last year. The adjusted EBITDA margin came in at 15.4%. And while lower than a year ago, includes FX and inflation pass-through, which diluted the 3Q 2022 adjusted EBITDA margin by 190 basis points. Lastly, on the bottom left graph, you can see that Garrett generated positive adjusted free cash flow of $120 million, driven by increased earnings and a positive impact from the change in working capital. In summary, Q3 results demonstrate Garrett's ability to deliver strong operating performance as the industry continues to recover in the face of inflationary pressures. Turning to slide…

Thank you, Sean. Wrapping up with the summary slide, slide 14. I would stress once again that I'm very pleased with the performance of Garrett in Q3. We delivered net sales of $945 million, up 13% on a GAAP basis and up 25% from a constant currency basis from last year. We achieved strong operating performance, generating $146 million in adjusted EBITDA, successfully offsetting inflation effects. We maintain an adjusted EBITDA margin of 15.4%, which includes the 190 basis points of impact from FX and inflation pass-through combined that Sean explained. We declared our first cash dividend on the Series A preferred, which is supported by robust free cash flow of $120 million this quarter. We continue to have a strong liquidity position of $634 million with 80% of our long-term debt at a fixed rate, and we now have under $10 million per quarter in interest on our debt. We revised our outlook for the full year of 2022, narrowing the range for adjusted EBITDA, but maintaining the previous midpoint. In closing, I would like to once again thank our employees for their dedication and resiliency as their contribution and the flexibility that they bring growth another successful quarter of strong performance for Garrett. Thank you for your time. And operator, we are now ready to begin the Q&A session.

Thank you, sir. [Operator instructions] And one moment for our first question. Our first question will come from Hamed Khorsand of BWS Financial. Your line is open.

Hi. Good morning or good afternoon.

Good morning, Hamed.

Could you please first start-off with the China recovery and the impact? Is the order flow stabilized now? I mean the headline still suggests, there's lockdowns there, so how is that impacting your order activity and also production activity in the region?

So, we are not seeing any more -- that's a very good question. We are not seeing any more of the impact of the lockdowns. I see very minimal impact of the lockdowns on the supply chain. So that's one good point versus what we saw in the first half of the year with the lockdown of Shanghai and then successive lockdowns that happened in the country. What we are watching very much is the strength of the demand in China, because as Sean was saying, obviously, we see that the commercial industry is suffering, which is something we anticipated, but we are seeing well into our numbers right now. And there is still a lot of checks that we are doing about the strength of the demand on the passenger vehicle side. So, we are more looking at the demand and the strength of the demand that's linked to the strength of the economy and new numbers were published last week than the supply chain look down a direct effect on the industry.

Okay. And then on the timing of sales from new products, when should we expect that for hybrids in the electric vehicles?

For hybrids, you already have a significant portion of that. Today, it's ramping up everywhere. And for electric vehicles, meaning battery electric vehicles, you need to wait a little bit longer so that we tell you when it reaches our revenue line. Today, we are already delivering on the fuel cell side, but we are not delivering yet on battery electric vehicle, we are developing. And we'll update you once we can share more information about when those start-up production are happening.

Okay. And then why does your updated guidance suggests Q4 sales might be down from Q3 with flat revenue because that also implies ARPU being flat to down as well?

I'm sorry, what was the last part of your question?

The ARPU, the average revenue per unit. So if you're suggesting it's 3.6 million units, it also implies it's going to be down.

There's a lot of moving parts in that number, but we are seeing – I think if you recall, when we had the call in July, we had indicated we thought the exit of the quarter would be a bit stronger to the upper end of the guidance. What we are now seeing, as we stated in the deck is a flattish Q4 and there's – there are some mix issues associated with that, that are driving that dynamic. But we are able to maintain the midpoint of our guidance at this stage in terms of adjusted EBITDA.

Okay. But is the sales impact mostly related to the less commercial or less higher-priced units, or is it FX related?

So well, we look at it without FX. But overall, on a reported basis, which is what you're looking at, yeah, there is a component of FX in the guide, it's slightly weaker in the fourth quarter, but we maintained the full year. So it's not that large of an impact when you compare it to the prior guidance. But there absolutely is a mix impact going into Q4 with headwinds for commercial vehicle and also light vehicle gasoline being off, and that's something we didn't necessarily see this quarter.

Okay. And then switching to 2023, since 98% has been awarded what does the unit volume outlook look like for Garrett and those ARPUs begin to move up again in 2023 because of more inflation pass-through?

So for 2023, we are still assessing where volumes will land. I think if you've looked at what IHS has done in the last two months, it's – they've been dropping their estimates. So it still remains a very volatile environment, and we'll give you an update on our Q4 earnings call for our full year guide. But at this stage, we're still working through all the macro dynamics and FX is a component of that as well.

Maybe in addition to that, in this business, we are living with the macros, the way they happen to the industry and since we are serving most of the customers and pretty much everywhere around the world. We are subject to these macros. The point we do control, though is what we do with winning more business. So if there is an element of macro volatility at the same time, you need to understand that 2023 will show an increase of what we call shareholder demand, which reflects the results that we had so far in winning more business. So that's a key point to keep in mind. But we will come back to you once we have a more precise view on 2023.

I guess, what I'm trying

For inflation, quite frankly, it's highly dependent on where the raw materials are trading. We've seen recently a little bit of easing on the inflation side. So the same way we are passing that up to the customers on the way -- sorry, we are passing that to the customers, and we are managing that with suppliers as well on the way down, we'll adjust for that.

Okay. What I'm trying to get to is that if Garrett is supposed to be a growth story, how assured are you that you can grow units and sales next year if it's going to come from different alternative engine sources from your turbochargers and compressors, or I just wanted to get into that a little bit more.

Three components, once again, first component, macroeconomics. Second component, turbo penetration and as we are showing in the deck turbopenetration is increasing, third component share of demand increase. So the two last ones we are in control, more or less, at least the last one. The first one, which is still a question marketing for the overall industry is where do we position 2023 for the overall automotive industry around the world.

Got it. Thank you. And then last question was now that you're generating free cash flow on an ample basis here and you paid off the Series B. What's your plan for the excess free cash flow? Is it deleverage more buyback the Series A?

Well, so for the moment, as I mentioned on the liquidity slide, we plan to continue to pay the quarterly dividend on the Series A in cash, assuming the stable macro or the macro environment continues to stabilize. And then we're going to opportunistically look at potentially paying down some of the accrued amount that we're carrying, but we have to put that in perspective of still a very volatile macro environment, where we are cautious about 2023 at this point, and also if any other inorganic opportunity may present itself. So for the moment, our plans are to just pay the Series A in cash, but we evaluate that on a quarterly basis with our Board of Directors. And we'll have more information for you in the next quarter call.

Okay. Appreciate it. Thank you.

Thank you. [Operator Instructions] One moment for the next question. Our next question will come from Philipe Gaza [ph] of FactSet. Your line is open.

Hi, Philipe.

Sir, if your line is muted, please unmute your line. Mr. Gaza, pardon, Philipe Gaza if your line is on mute please unmute your line. If you are using a headset, please put one your headphones. It looks like Mr. Gaza is unable to ask a question at this time. Can you hear?

Yes. This is Brian Sponheimer from Gabelli Funds, not Felipe from FactSet. Can you take my question?

Yes, Brian.

Okay. Great. First of all, excellent job, and we look forward to seeing Paul next week. I'm just – I'm just curious, as you think about the structure of the industry now relative to maybe where you were when you were spun, has anything accelerated from an EV perspective that is changing the way you think about your own product development and moving more towards or maybe deemphasizing some programs or platforms that you were thinking to otherwise landing into three years ago, four years ago.

That's a very interesting question, Brian. So we've been reflecting on that. And for us, one more time, there are two elements to your question. The first question – the first part of the answer is to say, the turbo industry keeps on growing. And by the way, we are winning share. And it's not moving out anytime soon. So I think we are seeing in the deck that in excess of 30% of what we do comes from aftermarket and commercial vehicle and that the contribution to the bottom line of the company and to the cash generation of those two is obviously in excess of this share. So think about it, if the passenger vehicle business was to disappear, we would still do a significant business with commercial vehicle and aftermarket. That's point number one, the resilience of the company in the long run and the fact that even today, the turbo industry is growing and we are winning share. What's happening versus 2018, I think in 2018 I was alluding to the point already that this industry, the turbo industry is consolidating, and it's a technology-driven consolidation. Why? Because we had a number of challengers that came into the turbo industry about 10 years ago. And not all of the turbo players are offering the technologies that are necessary for the carmakers to have vehicles that are compliant with regulations moving forward. So if you take the example of variable geometry on gasoline, you have only three players that can provide that. If you get two-stage technology, it's only two players that can provide that. And same it should get across the different verticals. So we are seeing a consolidation that is to the favor of the incumbents into an industry that is growing. Let's keep that…

No. I think today, the biggest headwind we are facing is FX and the dilutive impact of cost pass-through on inflation, but… Q – Brian Sponheimer: Okay. Well, thank you very much for taking my questions and tire for the confusion on.

No, no problem.

Thank you.

Thanks, Frank.

[Operator Instructions] I see no further questions in the queue. I would now like to turn the conference back to Olivier Rabiller for closing remarks. End of Q&A:

Thank you. Well, once again, I'm very pleased with the great performance we had in Q3. It's -- when we put things back in perspective, it means that we are managing there were things that are in our control. And you've seen that in the way we are managing the inflation pass-through. Looking forward, we have obviously our win rate that is a good indication about our increased share of demand and the stability of the outlook of the cash flow for the company. And if anything, we have proven for the past few years is that we have the flexible cost structure that helps us address and offset some of the impact of variations in volumes. And as people look at the uncertainty of 2023, we feel well prepared to address that uncertainty and take benefit of anything that comes our direction. So with all of that, I would thank you, everyone, and we look forward to seeing you again beginning of next year.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.