Q1 2022 Garrett Motion Inc Earnings Call

Hello, and welcome to the Q1 2022 Garrett motion earnings Conference call.

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Thank you operator, good day and welcome everyone and thank you for joining the Garrett motion first quarter 2022 financial results Conference call.

Before we begin I'd like to mention that today's presentation and earnings press release available on the Garrett motion website as Garrett motion Dot Com, where you'll 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 forward.

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 those 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 pre.

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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.

With us today is Olivier Rabat, a carrots, president and Chief Executive Officer, and Sean Deason, Garrett Senior Vice President and Chief Financial Officer, I will now hand, it over to Olivier.

Thanks, Paul and welcome everyone to Garrett's first quarter conference call.

I will begin my remarks on slide three where we stopped with init's for the south cluster.

Garrett achieved strong first quarter performance in a challenging near term environment.

By a slow world not the speed of light vehicle production recovery.

Inflation pressure and supply chain constraints impacting OEM predictions.

This creates numerous difficulties for employees and supply chain partners and I would like to thank everyone for all the work and dedication these circumstances.

Our employees did a great job in managing through these challenges.

I would like probably.

Thanks, our employees in China, and specifically in Shanghai as we maintained production capacity through great personal sacrifice during the ongoing lockdowns.

This again demonstrates that our people our 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 a constant currency basis.

The constant currency decline of 6% in Q1 2022 cells is approximately equal to or flat with estimated light vehicle production versus Q1 of 2021.

This is driven by the ongoing semiconductor shocked de Generes, all supply chain challenges impacting the troll production globally, but even more in China.

This short term constraint do not impact the strengths of underlying pent up demand for light vehicles, all of increased base of turbo penetration.

Adjusted EBITDA of 146 medium and the resulting adjusted EBITDA margin of 16, 2% are also down from Q1 2021 due to the factors mentioned above but trended up 12% from.

From Q4 of last year as pricing pass through initiatives and additional productivity offset inflation and increased supply chain cost and this even considering our increased R&D investment into new takes energy for the future.

Indeed, I'm proud of the performance we achieved as we have managed to offset the impact of lower vehicle production due to supply chain constraints.

<unk> script trends, but more importantly of iron costs driven by additional legislation.

This is the result of candid discussions with our customers to find business solutions to recognize increasing costs, but also the result of additional productivity initiatives that we have implemented.

Garrett continues to improve its financial flexibility in the first quarter by prepaying, an additional 197 million in series B preferred stock as previously anticipated and we increase the capacity of our revolving credit facility to 575 million, adding to our liquidity position, which inquiry.

<unk> two 788 million from 720 million in Q4 of 2021.

Lastly.

Including the remaining Terry deep Prefill balance Garrett ended up the first quarter with a net debt to consolidated EBITDA coverage ratio of 188 times down from 195 times in Q4 2021.

Turning now to slide four.

I first want to reemphasize the point that the short term OEM supply chain challenges do not impact the strong underlying pent up demand for light vehicles that combined with increasing thiago penetration driven by toughening emission standouts and technology driven.

Joe go industry consolidation paves the way for robust growth in revenue and show up demand falling I E gosh generic copies nice of Garrett.

This quarter. We are also happy to see the first commercial launch of our industry first each AVO technology on the mess. It is AMG itself 43.

You said, well winning and innovative device.

Gary it's remarkable progress in developing unmatched in our capabilities in high speed Motors power electronics and controls as well as our subsequent capability in their rent in electrified power train.

This initial <unk> deployment is indeed expected to be followed by additional ones.

I am also very proud to report a very important business wins that underlines both the advances we have made in the development of critical electric systems for sure Selco, while trains and the growing focus of our customers on nitrogen electric vehicles.

In fact, we will just awarded a self generation fuel cell compressor program from a major global OEM for a light commercial vehicle program that is expected to launch within the next two three years.

The strength of the cash flow generation of our golf business enables us to continue to invest in the future of our technologies for gross offer input onshore technology differentiation in addressing the industry transformation.

As mentioned during our prior earnings release, we plan to invest 50% off our 2022 R&D spend to new non cultural technologies.

To support this it felt this quarter, we have opened additional electric lab capabilities in our main development hubs, but more importantly, we have recruited more than 150, new engineers that are experts in electrification technologies.

These hiring success confirms the attractiveness of Jared as a new technology provider, but also validates the credibility of the technology capabilities. We have developed in the eyes of the electric X built joining our company.

With that I will note on the door to <unk> to provide more insight on our results.

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 to Q1 of 2021 had pent up demand from the lifting of Covid lockdowns in.

In 2020.

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 base.

This 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.

Arjun 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.

Okay.

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 shortage weighed on vehicle production schedules and drove Q1 2022 gasoline diesel and commercial vehicle sales lower <unk>.

Compared to the same period in the prior year gasoline product sales decreased 5% at constant currency and were 40% of total net sales diesel product sales decreased 14% in constant currency and were 28% of sales in commercial vehicles decreased 7% and represented 19% of sales.

On the positive side strong aftermarket off highway demand, particularly in North America, and Europe allowed this vertical to grow 19% year over year at constant currency and represented 12% of total sales.

The strength of aftermarket and the fact that 32% of our first quarter sales were due to the more profitable vertical as a commercial vehicle and aftermarket demonstrates the benefit of Garrett well diversified and broad portfolio of products.

Lastly, the overall FX impact hurt Q1 2022 sales.

$36 million and is reflective of a weakening euro.

Yeah.

Turning to slide seven.

You see our Q1 to Q1 adjusted EBITDA Bridge Q1 of 2022, although Q1 2022 volumes of $3 4 million units were up 4% sequentially from Q4 of 2021. They were down 10% from Q1 of 2021, primarily driven by a $43 million volume and FX related.

<unk>, partially offset by product mix the decline of which is due primarily to semiconductor shortages. It is important to note that we still see a very strong underlying demand for light vehicles, which we expect to result in sustained future demand once the semiconductor and supply chain issues are resolved.

While these macro headwinds presented challenges, we successfully flexed our variable cost structure to adapt to volatile production schedules continues to deliver material and production productivity and pass through inflationary pressures, resulting in a strong margin even in an increase even with an increased investment into R&D spending as planned.

So in summary, Q1, 2022 adjusted EBITDA of 146 million led to a 16, 2% adjusted EBITDA margin as we successfully offset inflationary pressures and a higher iron ore and the higher R&D spend through productivity Patti referenced despite lower volumes and foreign exchange headwinds.

On slide eight you can see our adjusted EBITDA to adjusted free cash flow walk for Q1 looking at the right hand side of the slide you will see that Garrett is high working capital turnover has historically provided a source of cash on an annual basis, assuming a stable and increasing volume and sales environment. However.

In Q1 of 2022, working capital was a slight use of cash of $7 million after being a source of $84 million of cash in Q4 of 2021 and $38 million in Q1 of 2021.

Lightly negative working capital result, this quarter was due to supply chain constraints, limiting OEM production, which drove inventories higher.

Shifting to the left hand side of the slide you will see the Q1 2020 to bridge from adjusted EBITDA to adjusted free cash flow deducting the change in working capital cash taxes capital expenditures, including carryover spend from 2021 projects cash interest, which includes factoring peanuts and $11 million of Siri.

Series B accretion related to the early retirement of $197 million of series B shares.

And the $20 million and employee bonus incentives related to 2021, all resulted in adjusted free cash flow of 38 million for Q1 of 2022.

Overall Garrett delivered positive adjusted free cash flow and then in a challenging environment, while increasing capex and R&D spending as planned.

Turning now to slide nine we ended Q1 2022 with expanded revolver capacity, increasing our available liquidity to $788 million, including $315 million in unrestricted cash and approximately $473 million in undrawn commitments.

We also redeemed $197 million in series B preferred stock, helping to further improve our leverage ratio. Following the Q1 2022 payment the present value of the remaining scheduled redemption payments on the series B shares is $204 million as of March 31 2022.

Importantly, including the series B preferred stock <unk> net debt to consolidated EBITDA ratio declined to a coverage level of 188 times from 195 times in Q4 of 2021.

Lastly, during the quarter, we also repurchased 50000 common shares and 197000 series a preferred shares bringing the total equity repurchased since the plan was adopted during Q4 of 2021 to 21 million, leaving $79 million of available capacity under our buyback program.

In summary, Garrett continuing to deleverage and enhance our financial flexibility through an expanded revolver and positive free cash flow generation.

Turning now to slide 10, we provide our revised 2022 outlook as compared with our prior outlook issued in mid February .

For the full year of 2022, we are lowering our outlook to reflect supply chain constraints, which are driving lower global light vehicle automotive production for 2022, two as well as FX rates in particular, a weaker euro.

For global light vehicle auto production, our planning assumption is now flat to 2021 light vehicle production or approximately 77 million engines to put our updated 2022 assumption of 77 million engines in context, the latest IHS low estimate for 2020 to $77 6 million engines.

And the average for 2018 in 2019 was $91 8 billion engines.

As such our new 2022 outlook calls for the ranges you see on the slide that imply the following mid points.

Net sales of $3 6 billion net income of $273 million adjusted EBITDA of 560 million net cash provided by operating activities of $455 million and adjusted free cash flow of $380 million.

This guidance also assumes continued disruptions in Q2, possibly into early Q3, and then a recovery in the second half with a strong finish in the fourth quarter of 2022.

For greater detail I point, you to the reconciliations of each of these metrics to the nearest GAAP figure as shown in the appendix of this presentation.

Turning now to slide 11, we show the adjusted EBITDA walk for our prior outlook versus our revised outlook as we have discussed earlier on a full year basis and similar to our performance in the first quarter. We plan to continue to flex our variable cost structure to adapt to volatile light vehicle production schedules and mitigate Curt.

Inflationary pressures through productivity and contracted pass throughs.

We said on the last slide two main macro pressures that drive our lowered adjusted EBITDA outlook, our supply chain constraints at the Oems, resulting in lower auto production volumes and a weaker euro.

We expect these factors will persist in Q2, and possibly part of Q3 before beginning to improve.

Operationally, we are delivering on our commitment to mitigate inflation and plan to spend 18 million more on R&D related to investments in new technologies. When you compare the prior adjusted EBITDA guidance, the macro factors of lower supply chain related production.

Production drives a $40 million reduction in FX, mainly a.

Weaker euro now seen at 1.08 U S dollars to the euro for the full year versus the prior assumption of 1.13 resulted in a reduction of $28 million.

As we noted earlier, we also see significant pent up demand for light vehicles, which we believe will result in sustained growth for Garrett one supply chain constraints are resolved in the automotive industry and with that I will now hand, it back to Olivier for his concluding remarks.

Thank you Sean in summary 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 the southwest with first quarter of last year. It was an increase of 5%, although Q4 2021.

The current automotive supply chain challenges I'm not impacting the strong underlying pent up demand for like the Angels.

Additionally, the increasing turbo penetration and technology, driven total industry consolidation.

<unk> 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 a margin of 16, 2%.

And this is a solid performance in light of the reduced production increased inflation and overall supply chain voted GDT and it gives us confidence that we have the means to address inflation and supply chain challenges.

We also reduced our net leverage to 188, 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 to macroeconomic factors.

The weakening of the Euro and the most pessimistic view fold in 2022 light vehicle automotive industry production that we know expect to be approximately flat to 2021.

I will 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 that contribution and <unk> drove an adult successful quarter of strong performance for Garrett.

Operator, we are now ready I seem to begin the Q&A session.

Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you're using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

And the first question comes from I bet Prasad with Gws financial.

Hi.

Sean I had a housekeeping question was could you disclose.

Closed how many units were sold this past quarter.

We didn't disclose but it was it was approximately $3 4 million turbos as what we saw at the tower sale Brian .

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 'twenty one or is it are they just held back completely just given the macro factors going on.

That's a very interesting question because I think we will I think a huge level of good NTT, let's say Q3 Q4 2021.

Then.

When 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 the Lula volatility we see today now while demand is very close to what we had in Q3 last year and very close to what we are.

I still the first one.

Wave of Covid.

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

And and have it just you know on slide eight.

The working capital side can you disclose the quarterly volumes of the turbos.

Okay.

Given that the 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 are going on right now.

Yeah.

Uh huh.

What we see is that.

Obviously, the Lockdowns in China, and that's improving the situation, but overall the main driver for the village at each of demand that we see remains a semiconductor shortages.

From what we see from our customers and the impact it has on them adjusting that protection.

Okay.

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 .

When it comes to our investments in R&D, we are.

Yeah.

Senior U can business in Europe by the way is getting weaker so at the end of it.

It makes it cheaper.

But we have not changed the way we are spreading our.

We're a long term investments in R&D across the globe because what we are looking for primarily these capabilities.

Expertise. So we have not we have not done 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.

Sure on R&D.

Yeah.

Okay. Thank you.

Thank you and once again. Please press Star then one if you would like to ask a question.

Okay.

Hi, I'm weird.

Chris Mcintyre with Mcintyre partnership.

Yes.

Hey, guys I was wondering if you just kind of 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 on blah blah blah.

Okay.

Sure well one of the reasons, we were a bit slower 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 of designation and the credit agreement that allows for greater flexibility.

Again in these volatile times, we are we want to see what cash flows look like in the coming quarters.

And we will be making decisions on the level of buyback.

And then we will that we will take based on how the macro has developed here in the next coming weeks.

Okay and.

Are you guys thinking about that in Investor day at all or what you know.

We still don't really have like a commitment to our capital levels and things like that so I'm, just getting a sense of timing there.

That's true we are considering in some.

We are reviewing a few options so we.

We'll get back to one of our investors as soon as we have made is by whine about it.

Okay, great appreciate it.

Yes.

Thank you once more please press Star then one if you would like to ask a question.

Alright, Oh, we have no more questions I would like to transport the management for any closing comments.

Well. Thank you very much to everyone that has joined the call today are indeed.

The industry is facing some of those 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 <unk>.

Macro economic levers.

The levers that we have to adjust to in Q1 and for the back end of the year. So with that thank you all.

We'll keep you just boost T developed further.

So those are instances if we do.

Later on this year on 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.

Thank you.

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

Okay.