Q2 2023 Garrett Motion Inc Earnings Call
[music].
My name is Sir that'll be your operator this morning.
I would like to welcome everyone to the Garrett motion.
Financial results conference call.
This call is being recorded and a replay will be available at <unk>.
After the company's presentation there'll be a Q and a session.
I would now like to have the call.
Oh Burt too.
Get hold of.
Of Investor Relations.
Thank you Sarah.
Welcome everyone. Thank you for attending carrots motions second quarter financial results conference call before we begin I would like to mention that today's presentation that earnings release are available on the ire section of Garrett motions website at investors Dr emotion Dot com.
You'll also find links for the SEC filings along with other important information about our company.
Trying to slide too we note that this presentation contains forward looking statements within the meaning of the Securities Exchange Act.
We encourage you to read the risk factors that are contained within are filing some of the securities Exchange Commission become aware of the risks and uncertainties in our business and understand that forward looking statements are estimates of the future performance and should be taken as such.
But forward looking statements represent management's expectation only as of today and the company disclaims any obligation to update that.
Today's presentation also includes non-GAAP measures to describe how we manage and operate our business. We reconciled each of these measures. So the most directly comparable gap measured and.
You are encouraged to examine these reconciliations in the appendix with a press release and slide presentation.
Also in today's presentation of comments, we may refer to light vehicle diesel and like gasoline by using the terms diesel and gasoline only.
With us on today's call does alleviate rubber yet there as president and Chief Executive Officer, and Sean decent <unk> Senior Vice President and Chief Financial Officer.
The call over to them.
Thanks, Eric and thanks, everyone for joining Garrett chicken cloth or a news conference call.
I will begin my remarks on slide number three.
I first want to thank the Ontario.
Garrett G for delivering a very strong clutter.
Continuous focus on the upper echelon would accidents and execution that role does too outburst thumb across all key financial matrix.
Two 2023, we did he bird net sales are a little more than 1 billion do it all up 18% on the rebel two babies and a 19% on a constant currency babies.
These revenue growth was driven by the ramp up a new products restocking by many Oems in both Europe , and North America, and the end of Covid restrictions in China, when compared to last year.
I just need to be done you squatter was 170 million versus 158 million in the same period last year.
Ah well he can if he can see how your podiums coupled with continued up rational about four months gave a boost Chihuahua address TDP damar Jean.
16.8% upfront, 16.1% into two of last year.
All these factors and they told us to feed you to go after we've done that just eat free cash flow of 140 million up from 20 screaming yelling in the same go out the euro Pryor, an extremely strong performance driven by federal labeled walking capital as we successfully comes after two two revenue grows into cash.
Dc'd once again the.
The benefits of all unique low working capital needs that enabled Garrett too quickly in cash and increasing revenue.
During the call. After we also success, what do you <unk> capital structure structural transformation, which resume cheating one class of common shares as you may recall, we began that Joe may last year. When we regain all theory shares in food and then began sibling the D V than on the series a.
In cash.
The final step in this transformation was completed in queue too when we conducted all series a shares inkerman shares I.
I spotted this we also agreed to rebuild Shea is 570 millions of series a shares before the conversion funded by you and you 700 million.
Download M B.
All of this has brought that wall market job to about 2 billion dollar and an increase in the market liquidity of all come in shell by you about five times.
At the same time the company also increase its existing Sherry Buck Shades Authority addition to 250 million Dora as an additional labor to ship called the stock asked all the conviction to place.
And as of July the 25th we have already rebuilt chairs a total of 18 million dollar house of Commons chairs.
The second question was not only Mark Beowulf very strong financial performance and the Cpg's vacation of all capital structure. As we also seek killed I'll sit down predevelopment contract for ice speed E traction system and the theft Predevelopment contract fall well you know the eighties equaling compressor, we would get into.
More details regarding this on to the next slide now.
Now they.
Based on the <unk> four months of the business in the theft as well again, raising a well look for the full year, which 10 will take your sweet and more details of day during the presentation.
Considering the strength gas generation, we achieving too too. We have also made the decision to repay 200 meter depth into Sri.
Strongsville stepped in delivering too well that will target net liberate the ratio of two times.
The only now to slide fall.
During the clutter, we will well two new programs for Awhile E compressor.
Gee that combines our <unk> operation and iced tea the electric motors.
Both will be C. T Nonhybrid Boa trained fault major European Oems.
Follow up on a web business, we want to new programs, establishing a new position with a major truckmaker in China.
D C ship opting out growth internationally, Charles which is a very important part of our business.
And we also remain on track too long shot well first off highway.
Hydrogen ice application that we previously announced.
Moving to almost zero emission offering and as mentioned earlier, we continued to build momentum and and those of successful clutter with your world of all.
A second predevelopment contract for ice speed I thought well then C. T E bullet train these.
This again demonstrates the accelerating interest.
<unk>, well differentiated directory technology solution.
In addition during this they can go after our investment in zero emission technologies continue to show success I'm very pleased to announce that we want that well first redevelopment fawal I performance equaling compressor, which provides a differentiated solution for it agree the Joe tell management.
This product Liberal jeez, I wake stuffed eating ice speed electric motors and controls combined with our industry, leading apple pushing kept IBD teas to deliberate smarter packaging lighter weight and Ah you're quitting power needed Bayou Creek day Charles.
These unique technology brings a step change in the cooling capacity of electric Vachel and provides a game changing opportunity for Oh, he's in the way they can cool electric bullet train.
He enabler for fast charging an eye continuous buy well use.
These predevelopment wins, a proof points that the technologies, we'd be blood fall eevees differentiated and needy dialup customers in order to.
To meet the challenges of the next generation of zero emission vehicle.
We see the world and what plan Longshot five application after a while gentoo and gentry.
Hydrogen fuel cell compressors.
We remain committed to our target of $1 billion of annual sales of zero emission vehicle products by 2000 <unk>.
At or above the mountain profile, although existing business.
We know things.
Things will go up to Shun that will provide more insight into our financial results.
Thanks, Olivier and welcome everyone I will begin my remarks on slide five.
Looking at the upper left hand grasp you'll see reported net sales for the last 10 quarters with Q2, 20th twenty-three at just over $1 billion up from Q2 of 2022 by 18% on a gap basis and 19% on a constant currency basis as previously mentioned by Olivia.
This growth is driven by strong customer demand across key product lines and is the highest we have achieved in the last two years.
Regional sales breakdown continues to be stable with 49% of Q2 sales coming from Europe , 30% from Asia, and 19% from North America.
Looking at the upper right hand side of the page Q2, 20 twenty-three adjusted EBITDA of $170 million was up 23% from $138 million last year.
The adjusted EBITDA margin in the period was 16.8% up from 16.1% primarily due to increased sales and operational execution as we continue to deliver productivity and pass through inflation.
On the bottom left grass you see the garret generated positive adjusted free cash flow of $140 million in Q2, 2023 up from $23 million and Q2 2022.
Compared to last year. This favorability is driven by increased revenues and less volatile customer demand and supply chains continue to stabilize driving a positive working capital contribution.
<unk> are free cashflow conversion to adjusted EBITDA averages approximately 60%, but is higher when revenue is growing.
Our results demonstrate that over the past two and a half years in an extremely volatile macro and demand environment, our ability to execute operationally in flex our variable cost structure has enabled us to consistently deliver solid results.
Turning to slide six <unk>.
We show our queue to net sales bridge byproduct category as compared with the same period last year.
All verticals improved compared to the prior year with gasoline products up 34%, a constant currency, adding $118 million in sales.
Gasoline products now comprise 45% of reported net sales versus 40% last year driven by share of demand games as new products have launched and continue to ramp up combined with the end of Covid restrictions.
In China, when compared to last year.
Diesel products grew 9% a constant currency contributing in increments $21 million to sales compared to the prior year overall diesel now comprises 26% of sales.
Commercial vehicles grew 10% at constant currency, primarily driven by a more favorable product mix in North America, and Europe from both on and off highway platforms and represented 17% of total net sales.
And lastly are aftermarket business continues to perform growing 6% it constant currency over the last year and now comprises 11% of net sales.
As mentioned earlier, we have seen growth across all verticals this quarter compared to the prior year, but as a percentage of total sales diesel commercial vehicle and aftermarket. We're all down slightly as strong share of demand gains drove significantly more growth and gasoline compared to these other verticals.
Moving to slide seven we show our queue to adjusted EBITDA bridge compared with the same period last year.
Justin EBITDA of $170 million represented at 32 million dollar improvement over the prior period.
Increase sales accounted for $46 million, which was partially offset by the impact of unfavorable product mix a smaller engine gasoline products continued to ramp up.
Our overall operating performance was a net positive of $9 million as we continue to deliver productivity and pass through inflation, while dedicating over 50% of our R&D expenditures to new technologies consistent with prior quarters.
Are strong second quarter results reflect our significant operating momentum along with strong industry volume in key regions. We continue to monitor specific regional industry Rex risks such as the ongoing U a W. U a W negotiations in North America.
Backwardness of potential economic stimulus in China.
Turning to slide eight we show the adjusted EBITDA, two adjusted free Cashflow Bridge, where Q2 2023.
Garrett delivered strong adjusted free cash flow of $140 million in the quarter.
Justin free cash flow and cute you benefited from working capital as a source of $32 million as revenues improved and customer demand and supply chain continued to stabilize.
As mentioned earlier are free cashflow conversion to adjusted EBITDA averages approximately 60%, but it is higher when revenue is growing.
Capital expenditures and cash tax were in line with expectations for two two that are expected to be higher in the second half and this is reflected are updated fool your outlook I will discuss later.
Cash interest increased to $14 million due to the issuance of our new 700 million dollar terminal.
Overall this was one of the best cash flow generation quarters in a volatile, but improving environment that allowed garrett to improve liquidity, which I will discuss in more detail on the next slide.
Turning to slide nine.
I want to briefly walk through the changes to our share count and our capital structure that occurred in Q2.
As illustrated in the chart on the upper left you can see how we work from our previous common market capitalization of almost $500 million in Q1 282 billion dollar market capitalization at the end of Q2, driven by the conversion of the series a shares into common shares.
Part of this transaction, we also repurchased $570 million a series a shares and increased our share repurchase program to $250 million of which we have utilized $80 million as of July 25th.
We ended the quarter with only one class of equity outstanding totaling 264 million common shares.
Moving to the table on the upper right. We ended Q too with a strong liquidity position just over $1 billion comprised of $570 million of Undrawn revolving credit facility capacity, which we increased during Q2 by $95 million.
And $478 million unrestricted cash.
Which increased $187 million sequentially, driven by cash flow generation as discussed earlier and the net inflows from the term loan b after executing the conversion of the series a shares.
Given the strong operating performance in Q2, and our increased outlook for 2023, which I will discuss on the next slide we also plan to pay down our outstanding debt by $200 million. The first step towards achieving our target that leverage ratio of two times by the end of 2024.
Moving now just slide 10 or.
A stronger volumes and robust operational performance are driving better than expected financial results you to date.
As a result, we are updating our full year 20 twenty-three outlook to reflect the strength of our performance.
On this slide you can see the updated macro assumptions and financial ranges that imply the following at the midpoint net sales of $3.93 billion.
Net sales growth in constant currency of 8%.
<unk> income of $273 million <unk>.
Suggested EBITDA of $645 million, implying a margin of 16.4%.
And that cash provided by operating activities $460 million and adjusted free cash flow of $390 million, which reflects the expected better operational performance, partially offset by higher interest expense from the new term loan b.
For greater detail I point, you to the reconciliations of each of these metrics to the nearest GAAP figure as shown in the appendix to this presentation.
Turning out a slight 11th we bridge or primary your results to our updated outlook.
Wrong volume and revenue conversion are partially offset by unfavorable mix as revenue growth as many driven by sheer of demand gains a small gasoline engine applications continue to ramp up throughout 2023.
We continue to work with our customers to pass through inflationary pressures and deliver productivity well still investing in new technologies.
We are also planning for a struggle your euro versus the U S. Dollar at an exchange rate of 111 in the second half.
In summary, or updated 20 twenty-three outlook reflects strong operational execution as we continue to grow from sheer demand games and convert revenue into earnings and cash flow and a volatile but improving macroeconomic environment.
I will now hand, it back to Olivier for his closing remarks.
Sanction.
Wrapping up a summary of Q2 onsite it and then we.
<unk>, the best Coiffed audio rather new into yours, and <unk> old key financial metrics with our strong earnings and cashback four minutes.
We also completed a transformation of a capital structure was the <unk> of all series a shares into common shares increasing our market job to about $2 billion with five times the liquidity.
And we know plan to pay down 200 million that all depth into self cluster.
We also announced product Queens in three areas of differentiated technology that the positioning us to be on the target <unk> from the technology zero emission vehicle technology by 2000 <unk>.
At your at your library, setting price and the same all <unk>.
Ah what kind of business.
As we continued to win new business, we are seeing that in the areas of Chewables and zero emission vehicle.
We are seeing the proof that technology is needed by <unk> customers.
We used the success we have had so far the sure we are raising the 2023 food y'all outlook as <unk> to the following points off net sales at three point 93 billion there at all.
<unk> of 645 million.
I, just eat free cash flow of 319 million.
I am extremely pleased with the strong cocteau yard and I want to <unk> do you want that you'll get a team for the art work and dedication that that'd been instrumental cheating I won't goals.
Now I see we get down to the queue any station.
Yeah.
We will now begin the question and answer session.
Can I ask a question you may <unk>, Alright, then one I'll need to authenticate that.
If you're using a speaker phone please pick up your handset before pressing Mickey.
Anytime your question has been addressed and you would like to withdraw your question. Please.
Thank you.
At this time.
<unk> Sir.
My first question comes from <unk> <unk>.
The last financial please go ahead.
Good morning.
First question I had was.
Looking at your performance in queue to which.
Which was great, but when you're looking at the Guy didn't see you're providing if I just looked at it from a balanced perspective, you you're not really expecting much of a sequential increase in.
Sales. So I'm just wondering what your expectations are on that front is it really just product mix because gasoline that's resulting in sales not you know going up that much sequentially from here.
That's that's an accident question when when you look at what we've said huh.
This is already just speaking when you look at what we said at the beginning of the year.
And especially when we <unk>, we would explain that signature can both of it will all.
Although the apartments in Q1 that seemed the same today is due to faster ramp up <unk> on some of the key applications that we have one and that we are launching.
<unk> you go into a into the <unk>. The mall our forecast is close to I wasn't sure if I'll cast as close to what we had any <unk>. So there is in the amount of that accelerated ramp up that W. She doesn't continue to ramp up flavor.
And then I would say, we all like everyone monitoring the situation of what's happening around the world for the second half.
Okay, and the product mix shift gasoline.
It's obviously going to result in EBITDA margin being lower than what you've previously reported in prior years is this a permanent change in your margin profile or how do you just go back to that 17 per cent EBITDA margin.
So.
I would say that you're seeing mixed dynamics quarter to quarter, but this should not detract from our longterm margin target and back I believe it's spin we had said we expected margins in a corridor of 17% to 19%, but that was under different macroeconomic circumstances. If you would just for foreign exchange.
Change with the Euro back closer to 120, which was where it was at the time and you would just for commodities down to pricing at that point in time, you see actually that were in that corridor. Additionally, there was a lot of concern that we would be able to win gasoline business and we have and we've taken.
Sure of demand and we continue to have a wind rate of greater than 50%. So long story short Hamad, we don't see this affecting the margin profile on a on a medium to long term basis, yes. It can affect as we launch products the margin profile ordered a quarter, but.
Our gasoline business will be performing at the margins that we have said in the past.
Okay and my other question was regarding zero emissions.
You're winning a lot of Ah deals here is that translating into any revenue or sales in this fiscal year or is this more of a 24 that.
Oh, what we're saying is that we are winning a lot of early developments.
As you May remember and <unk> industry, you I'll, usually predevelopment I mean, I'm I'm simplifying a bit for about two three years before you get into development and then you'll go to <unk>.
So I seem to.
Back to what we said when we published I walked I'll get to <unk> by 2017.
We are expecting a lot of these applications to launch between 2027 2070 <unk>.
<unk>, although I was Taylor smaller on those <unk> compressors, because we're already setting in <unk>.
And you would see a progressive boost on that and then once we transform those are very important predevelopment programs into <unk>. It's gonna reach revenue so that <unk> to be time with the the sequence of do with things happening in our industry.
Okay. Thank you.
This concludes that question any police action I would like to turn the conference back at me too.
<unk>.
Yeah. So one more time, we had a fantastic water I'm very proud of their resolve that we achieved I'm very proud of the results that we are starting to see on all the Sri technologies that we push to address the challenges that top road by zero emission vehicle.
And I would say <unk> come see you soon.
Oh.
Thank you for attending.
<unk> you may now disconnect.