Hello. My name is Andrea and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion Third Quarter 2024 Financial Results Conference Call. This call is being recorded and a replay will be available later today. After the company's presentation, there will be a question-and-answer session. I would now like to hand over the call to Eric Burge, Garrett's Head of Investor Relations. Please go ahead.

Thank you, Andrea. Good day and welcome everyone. Thank you for attending the Garrett Motion third quarter 2024 financial results conference call. Before we begin, I would like to mention that today's presentation and earnings press release are available on the IR section of Garrett Motion's website at investors.garrettmotion.com. There you will also find links to our SEC filings, along with other important information about the company. If you look at the second slide in the deck today, we note that this presentation contains forward-looking statements within the meaning of the U.S. federal securities laws. These statements, which can be identified by words such as anticipate, intend, plan, believe, estimate, expect, likely, may, should, will, or similar expressions, represent management's current expectations and are subject to various risks and uncertainties that could cause our actual results to differ materially from such expectations. These risks and uncertainties include the factors identified in our annual report on Form 10-K and other filings within the Securities and Exchange Commission, and includes risks related to the automotive industry and competitive landscapes and macroeconomic and geopolitical conditions, among others. Please review the disclaimers on Slide 2 of our presentation, as the content of our call will be governed by this language. Today's presentation also includes certain non-GAAP measures, which we use to help describe how to manage – how we manage and operate our business. We reconcile each of these measures to the most direct comparable GAAP measure in the appendix of our presentation and related press release. Finally 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 on today are Olivier Rabiller, Garrett's President and Chief Executive Officer; and Sean Deason, Garrett's Senior Vice President and Chief Financial Officer. In addition, I would like to introduce Cyril Grandjean, Vice President and Treasurer for Garrett, who will be responsible for Investor Relations going forward. I will remain with Garrett through November to ensure a smooth transition. I would like to thank everyone for your time and support and wish you and Garrett a very successful future. I will now hand the call over to Olivier.

Thanks, Eric, and thanks everyone for joining Garrett's third quarter 2024 earnings conference call. Before we start, I would like to thank Eric for his support and wish him all the best for his next steps. I will now begin today's remarks on Slide 3. I am pleased to report Garrett's outstanding operational performance in the third quarter. We delivered a strong adjusted EBITDA margin of 17.4%, up 160 basis points over last year despite difficult industry conditions. Indeed, this quarter we have seen the impact of our exposure to softness in the light vehicle industry in Europe and China, some global OEs facing competitive pressure, and some short-term customer vehicle platform mix shift. At the same time, we continue to enjoy a strong new business win rate in a consolidating industry, which helps to ensure that our share of demand will continue to progress. I'd like to take this opportunity to remind you that approximately 30% of our revenue comes from commercial vehicle, aftermarket and industrial. This is a source of resilience for Garrett, as you can see once again this quarter. As our revenue in these categories was stable despite further degradation of the on-highway commercial vehicle industry in Europe and continuing weakness of some verticals like agriculture. We are also encouraged by the early signs of recovery in the China commercial vehicle industry. Let me now again highlight our outstanding operating performance in Q3. During the quarter, we implemented sustainable fixed cost actions and flexed our variable cost structure, giving us significant year-over-year margin increase and a decremental margin of less than 6% in a soft sales environment. Our strong operational performance also allowed us to generate $71 million of adjusted free cash flow. We continue to buy back stock under our share repurchase program, repurchasing $52…

Thanks, Olivier. And welcome everyone. Please turn to Slide 6. Overall, as Olivier just mentioned, we find ourselves in a softer, top line environment, but the team delivered excellent operational performance which translated into an adjusted EBITDA margin of 17.4%, a 160 basis points increase compared to Q3 last year. Consistent operational execution, in line with our financial framework allowed us to continue to increase margin this year as we flex our variable cost structure and implement sustainable, fixed cost actions, while still investing in new technologies. This can be seen in the graph on the upper right hand side, with our adjusted EBITDA margin trending higher across each quarter this year, and demonstrates our ability to deliver strong financial performance across industry cycles. In addition, we also continue to operate with our capital-light approach with capital expenditures of 2.4% of sales in the quarter, which when combined with the operational performance I mentioned earlier, resulted in a healthy adjusted free cash flow of $71 million. Turning now to Slide 7, you can see how we are experiencing some industry softness in Europe and China along with competitive pressures on some of our customers and short-term mix impacts which can be seen in gasoline and diesel. Our revenue from commercial vehicle and aftermarket, which represents approximately 30% of total annual revenue was stable despite further degradation on the on-highway commercial vehicle industry in Europe and continuing weakness of some verticals such as agriculture. We also experienced commodity deflation which is margin accretive as we continue to pass-through 100% of the impact of commodity price changes to our customers and which primarily affected gasoline this quarter. Please now turn to Slide 8 and I will walk you through our adjusted EBITDA bridge. We delivered an excellent operational performance in a soft…

Thank you, Sean. Turning now to Slide 12, as a reminder of the ways in which we are well-positioned for long-term success. We continue to expand our turbo offerings not only to sell the expected growth in hybrids, but also to develop our larger turbos for industrial applications. Our operational framework is highly cash generative over cycles, allowing us to invest in new technologies while reducing debt and returning cash to shareholders. Our priority remains to identify and focus on unmet customer needs, where we can leverage our innovation capabilities to develop differentiated and highly efficient solutions at scale. Turning now to Slide 13. I want to thank the entire Garrett team for driving outstanding operating performance in the quarter. We have proven once again the resilience of our financial framework, delivering solid financial results and achieving a 17.4% adjusted EBITDA margin. We continue to return capital to shareholders, which we believe makes Garrett highly attractive investments. We secured several significant commercial wins in turbo and are expanding our portfolio to sell industrial and marine applications with our newest and largest turbo offering. And finally, our recent awards and customer recognition across our differentiated high speed solution for zero emission platform are proof points that we are developing the right set of solutions for the next generation of electric vehicles. Thank you for your time. Operator, we are now ready to begin the Q&A.

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Hamed Khorsand of BWS Financial. Please go ahead.

Hi, good morning. So, first question is, given your performance in Q3 and the commentary you gave in Q2, what's change that surprised you in Q3 that led to you to readjust your guidance for Q4?

That's a good question. Let me try to address that. At the end of the day, it's the softness of the automotive industry. It's a little bit stronger. I don't think it's a surprise, by the way, because I've seen that pretty much everyone has seen that the same way. And this is the main driver, because for the rest, quite frankly, the performance of the company is quite nice. And potentially, I would even say even better than what we anticipated when it comes to margins on that.

Okay. Are you seeing any changes in China as far as your customers are concerned and the startup of production for what you've won? Is there any impacts there?

Well, what we are seeing in China is that there is, we keep on having softness into the passenger vehicle industry and we keep on having a huge variability of what we call share of demand, of participation of different car makers on the marketplace. That is not only limited to the global ones, by the way, some of the legacy state-owned enterprises have also lost some shares towards some new, fast rising other companies. That's one. At the same time, that's probably the trend we've seen on that vehicle that remains. But what we've seen more than that is a weakening industry in Europe and you may have seen that. And also, I would say, some positive signals to mitigate that. The commercial vehicle industry, the on-highway business in China for us is a sign of recovery in Q3. And certain sign of recovery because of the underlying trend of the industry, and also because we are starting to see a significant benefit of a number of applications that we won, especially on the gas powered trucks, the natural gas powered trucks, which is a place where we are developing our position.

Okay. And my other question was, are you in a position to talk about what’s happening in the light vehicle market as far as product mix is concerned? A lot more hybrid vehicles are being considered. And you’re talking about when this will benefit you on the sales side and by what magnitude?

Well, there are a few things that are happening. So the first one, as we said, the consolidation of our industry drives some mock programs to the direction of the main players. We are not the only one there. But we see that happening, and we see that as a positive trend for the months and the years to come. On top of that, the point we were alluding to during our next call, which is that car makers are busy reviewing their strategic portfolio for the long-term, taking into account a bigger share of plug-in hybrid vehicles, is happening at the same time. And this is goodness for the turbo industry, and this is goodness for Garrett as well. Those two trends combined are a plus.

And my last question is, are you seeing customers adopt more of your higher price, higher margin, or more on the lower end of your product spectrum?

What we see is that when it comes to – and now, I would say, I would be specific, because in Europe, we are already having a lot of what we would call variable geometry turbochargers, also on hybrid vehicles. And I would say in the U.S., the next Tier 4 emission regulations drive, obviously, more technology on the turbocharger, which is a good trend for us, and whether it’s applying to pure ICE powertrain or hybrid powertrain.

Okay. Thank you.

The next question comes from Michael Ward of Freedom Capital. Please go ahead.

Good morning, everyone. Two things. On the interest expense side, why wasn’t the benefit from the refi in May reflected in the quarterly interest expense number?

I mean, you are seeing it affected in the run rate. If you’re looking at cash, though, remember, we do have bonds outstanding and they pay twice a year. But in terms of interest expense, you are starting – you are starting to see it the benefit though and we can…

I’m looking at $37 million versus $35 million in Q2.

Right. But – so I think I can walk you through that rec Mike offline. But we absolutely are seeing the benefit on interest expense.

Okay. It’s just not showing up on the income statement.

There’s some accounting back and forth of the – some of the fees that flowed through in Q3 from Q2 refi.

So there were some one time fees in there.

That and you’ve got some interest rate swap activity with market movements.

Okay. And what were the one-time fees?

I think it’s probably $1 million or $2 million. But again, let me give you the details on that. I think more importantly, it's more the activity on the market against our interest rate swaps that are market-to-market.

Okay, Olivier, on Page 5, you kind of go through. Some of you have a lot going on, on the electrified solutions. A lot of it seems to be targeted towards the commercial side or larger vehicles. Is that fair to say? And it looks like you have several joint programs that are starting to kick off. And I'm just curious about what that means structurally for the industry. Are you seeing some of these manufacturers go towards a respected name like Garrett in engineering expertise? Is it still, is that part of the market just starting to develop? What are you seeing there?

So that's a good question. Let me answer your question in two points. The first one is that we are talking about commercial vehicle, but we are also talking about passenger vehicle on that page. You may have notice that we are…

No, no. I see it dominated by commercial. I just saw the one blip on the passenger.

Okay. But I mean, there is always in this industry, things that you can say publicly about programs and not…

Oh, I see.

Penalties is a big deal for us. Okay. And I would even say it's not very often that you get awards being given by carmakers in this industry for a technology that is not yet in production. So that tells you about the magnitude of the change that we are bringing. Okay? So that's for passenger vehicle. What I'm saying also is that obviously the benefit of a power dense solution increase with the power of the powertrain. The more horsepower, the more benefit you get from our solutions, which is true for passenger vehicles and is even more true for commercial vehicles. And wanted to highlight that, because commercial vehicle, as you've seen through the deck [ph] and through many presentations we did, is an industry that we like very much. It's an industry where the end consumer pays for the technology that is having on his vehicle. If you save a few percent of energy, a fleet manager would pay for that. And that's good. And you can see that obviously we are dealing with high power on those solutions. And we are highlighting in the presentation that on some specific axles versus some competitive solutions that are existing, we bring benefits up to 300 kilograms on one axle of the heavy-duty truck. So a big, big deal as well. Passenger vehicle, we've been working at that for some time. Commercial vehicle we started a little bit later. And I would say I'm very pleased to validate that. Obviously, there is a need for our technology on passenger vehicle. But there is a need on commercial vehicle, and quite frankly, it's taking up very, very fast. And that's the reason why I wanted to highlight that.

So if you look out five years or 10 years longer term, and you look at that, your passenger vehicle, and then the commercial vehicle segments and your mix of revenue, what percentage do you think will be electrified?

Today with the target we have and that we've disclosed is that for 2030, we are targeting $1 billion of revenue in non-turbo businesses. So, non-turbo businesses, which is in terms of product for us, fuel cell compressor for hydrogen electric vehicle. It's the full e-powertrain solution for cars and light duty vehicles and trucks. It’s also electric centrifugal compressors for cooling electric vehicles. These are the three products that we have in mind. There is obviously a significant portion of that that will be driven by electric powertrain.

Okay. So if you take a $5 billion type revenue number, you’re talking about 20% of revenue. So it’s not like you’re being pushed out of the market if anything you’re being included in it.

We are not just pushed out of the market on the turbo side. When you look at we gave this forecast by the way, at a time when, and we’ve been public about that, we were expecting 41% of battery electric vehicle on light vehicle by 2030. And that probably the last trends are probably lower than that. So the tail that we see on our core business is a long tail. And that tail is fed by a few things. First, there is a consolidation happening in our industry that goes to the benefit of people that are being the widest portfolio, the most solid position into the industry when it comes to portfolio development, but also the financials to ensure that transition. And at the same time, we’re having plug-in hybrids that are coming up new technologies we are talking about that with Hamed minutes ago. And on the commercial vehicle side, we know that the transition will be longer. And on the commercial vehicle side, we learn that with our industrial turbo with the new segment that we are now developing. That’s not for the HRs [ph] that’s for genset. Most of the use of that is for backup power. Genset for data center. This is booming and I don’t see that slowing down anytime soon. So our turbo business is extremely resilient long term. We disclosed a year ago that we are expecting that by 2030 the revenue that we were expecting on the turbo side would be at the same level as 2023. And this was anticipating a BEV percentage that is probably higher than what people have in their latest forecast.

Very helpful. Thank you.

Hey Mike, I just want to clarify one thing. It really is all driven by the interest rate swaps, the step up in interest expense.

Okay. And does that, do the interest rate swaps tail off or are they less necessary?

We do like to hedge our interest rate to be about 80% fixed, but they do – they are layered in over time. So we dollar cost into them. So they do trail off over the coming years. But we would also be layering new ones on.

Okay.

But what it’s also, they’re also being marked-to-market and so it can ebb and flow. And there’s also cross currency swaps in there as well.

Okay. But substantially left – your balance sheet now you have more than half of your debt is fixed.

Yes.

So if we look back compared to May as we are today, you should have less of a need for these swaps, so, correct?

Well, interest rate swaps, yes. But we swap all of our U.S. dollar debt into euro. So we have cross currency swaps as well because the majority of our cash flows are in euro. So we like to match up our debt flows to our cash flows.

But it’s always been that way. You’re going from $1.7 billion [ph] down to $700 million of debt, that’s volatile.

That’s correct. So we have less of a need for swaps. That is correct on an interest rate basis. So 700,000 [ph] of the term loan B is also swapped into fixed. Well, not all 700,000 but a fair amount.

So some of what we saw in Q3 was just because that was tailing off. And now as you go forward, you're going to have less of a need to swap, is that correct?

I would say yes. But we unwound the swaps that were associated with the debt that refi. So we are hedged and we're not speculating with swaps. They don't have an underlying.

And when did that unwinding take place? In Q3 or Q2?

Q2.

Beautiful. All right. Thanks very much.

You're welcome.

The next question comes from Brian Sponheimer of Gabelli Funds. Please go ahead.

Hi. Good morning, everyone. The top-line here is obviously something that you're going to be dealing with from an end market perspective, the durability of which we can maybe talk about later. But the 17.4% EBITDA margin, despite the softness, begs the question of whether you all have found a higher floor for profitability and how sticky that sort of really excellent performance can be, assuming Europe and China remain soft. So if I'm looking at this the way that I'm seeing it. Are you maybe structurally a more profitable entity than you otherwise would have thought? Or are there potentially some costs that could layer back in if softness were to continue in these end markets?

Brian, nice to have you on the call today. You are pointing at a very interesting point for us, which is the profitability of this company. You've been following Garrett for quite some time. You know that we have a high degree of viable cost, and we work on that in a permanent way. Every day we work on improving our cost position, and when we improve our cost position, that's obviously something we improve for the long run. Meaning, we are always working on structural efforts in order to make this company more agile. And therefore, some people call that a breakeven point. But for us, it's improving the flexibility of the company to the short term shock that we can find on the marketplace, which I think is the key to success into the automotive industry, because long run, we know where we go, and usually the uncertainty is coming from the short term. So today it's the result not only of one quarter of efforts, we've been working diligently for the last two years, even more on that, because we were seeing. We were anticipating that there could be some softness. We had identified pockets of inefficiencies, and we are always working on these things. So it's not like a one quarter effort. We work at making our factories more flexible. We work at decreasing our fixed costs into the factories, as an example. And we had a big plan going on for the last year on these things. So it's like getting to the gym. That's the analogy I'm making with the team. You need to do that on a daily basis, and this is the price of excellence. When it comes to margin, I would say there are obviously a few points that are helping…

Okay. I appreciate the color there. One concern I have across the industry is that given the pressure that automakers are seeing, and you noted it yourself, whether yearly price downs or effectively price performance is going to become increasingly more challenging for the supply base. Is that something that you're anticipating on the light vehicle side? Is it already here? And I'll let you take it from there.

There is indeed price pressure, quite frankly in all fairness, I have not seen that price pressure going down for the last five years. So, and I don't think it has eased off. The point is that we've been demonstrating that we could get our fair share of price at the time when we need, when it came to inflation, whether it was inflation about raw materials, but also some other type of inflation, transportation, energy and everything else. And price for customers is always relative to the next best alternative they can action. At the end of the day, as long as we bring the right performance, whether it's the performance of our product, whether it's the support to our customers, it makes obviously that arbitrage a little bit more complex. It doesn't mean that we are not helping our customers to reduce their cost. We do, and this is a way for us to help them and to help ourselves at the same time. So price pressure, in all fairness, it exists. It has existed. I've not seen that going down anyway over the last five to ten years, but I've not seen a complete change. And at the end of the day, there is what you can ask for and there is what the industry can deliver.

Understood. Thank you very much. I'll pass it along.

This concludes the question-and-answer session. The conference is now also concluded. Thank you for attending today's presentation and you may now disconnect.