Q3 2023 Garrett Motion Inc Earnings Call
[music].
Speaker 1: Hello, my name is Drew and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion third quarter financial results conference call. This call is being recorded and a replay will be available later today. If you require operator assistance, please press star then zero. After the company's presentation, there will be a Q&A session. I would now like to hand over the call to Eric Burge, Garrett's head of investor relations.
Hello, My name is true and I will be your operator. This morning, I would like to welcome everyone to the Garrett motion third quarter financial results Conference call. This call is being recorded and a replay will be available later today. If you require operator assistance. Please press Star then zero.
After the company's presentation, there will be a Q&A session I would now like to hand over the call to Eric Birge gear.
Gary <unk> head of Investor Relations.
Thank you drew good day, everyone and welcome.
Speaker 2: Thank you for attending the Garrett Motion Third Quarter Financial Results Conference call. Before we begin, I would like to mention that today's presentation and press release are available in the IR section of Garrett's website at investors.garrettmotion.com. There you will also find links to our SEC filings along with other important information about our company.
Thank you for attending the Garrett motion third quarter financial results Conference call before we begin I would like to mention that today's presentation and press release are available on the IR section of <unk> website at investors that Garrett motion Dot com.
There you will also find links to our SEC filings along with other important information about our company.
Speaker 2: Turning to slide two, you will 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 within 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 within our presentation represent management's expectations only as of today and the company disclaims any obligation to update them.
Turning to slide two you will 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 within our filings.
With the SEC become aware of the risks and uncertainties in our business and understand their forward looking statements are only estimates of future performance and should be taken as such.
We're looking statements within our presentation represent management's.
Management's expectations only as of today and the company disclaims any obligation to update them.
Speaker 2: Today's presentation also includes non-GAAP measures to describe how we manage and operate our business. We reconcile each of these measures to the most directly comparable GAAP measure. And you are encouraged to examine those reconciliations in the appendix to the press release and the slide presentation.
Today's presentation also includes non-GAAP measures to describe how we manage and operate our business. We reconcile each of these measures to the most directly comparable GAAP measure.
And you are encouraged to examine those reconciliations in the appendix to the press release and the slide presentation.
Speaker 2: Also in today's presentation and comments, we may refer to light vehicle diesel and light vehicle gasoline in terms of diesel and gasoline only.
Also in today's presentation and complement comments, we may refer to light vehicle diesel and light if you ever gasoline in terms of diesel and gasoline only with US on today's call is Olivier <unk> guarantee President and Chief Executive Officer, and Sean Deason Perez Senior Vice President and Chief Financial Officer, I will now hand, the call over to Olivia.
Speaker 2: With us on today's call is Olivier Revier, Garrett's President and Chief Executive Officer, and Shawn Deason, Garrett's Senior Vice President and Chief Financial Officer. I will now hand the call over to Olivier.
Speaker 3: Thank you Eric, and thanks everyone for joining GARRETT's third quarter earnings conference call. I will begin my remarks on slide number 3.
Yeah.
Thank you Eric and thanks, everyone for joining Garett sub cluster earnings conference call I will begin my remarks on slide number three.
Speaker 3: I am very pleased with our performance in Q3 and would like to thank the entire Gareth team for delivering a solid quarters with a continued focus on operational excellence and execution.
I am very pleased with our performance in Q3 and would like to thank the Ontario, Gary team for delivering a solid quarter us with a continued focus on operational excellence and execution.
Speaker 3: On top of our financial performance, we continue to build momentum with our different daily technologies in Corteurbo and Zero Emission Vehicle products. And last, we executed against our capital allocation priorities, allowing us to deliver and return value to Shell.
On top of our financial performance, we continued to build momentum with our differentiated technologies and cultural and zero emission vehicle products and last we executed against our capital allocation priorities.
And yes to de lever and return value to shareholders.
Speaker 3: Agesti de Bittal Disquater was 152 million versus 146 million in the same period of last year.
Adjusted EBITDA. This quarter was 152 million, yes, that's 146 million in the same period of last year.
Speaker 3: Strong productivity and operational performance more than offset the unfavorable product mix, increasing our adjusted EBITDA margin of 15.8% up from 15.4% into 3% of last year.
Productivity on the rational performance more than offset the I'm, sorry, the whiteboard product mix, increasing our adjusted EBITDA margin of 15, 8% up from 15, 4% in Q3 of last year.
Speaker 3: We also generated a justice regashe low of 57 million down from 121 million in the same quarter of the year prior Drivers primarily by timing a working capital.
We also generic adjusted free cash flow of $57 million down from 121 million in the same quarter prior driven primarily by timing of working capital.
Speaker 3: Shane will share more details on our financial results in the coming slides.
Shane will share more details on our financial results in the coming slides.
Speaker 3: But since our last quarter's results, we have seen a significant change in foreign exchange outlook for the euro dollar. While we continue to perform operationally in line with our prior outlook, the weaker euro is impacting our second half, and we are reflecting this in our updated 2023 outlook that Sean will take you through in more detail later in the presentation.
But since our last quarter results, we have seen a significant change in foreign exchange outlook for the Euro zone, all while we continue to perform operationally in line with about probably all the cook the weak euro is impacting our second hour and we are reflecting this you know well dated 2023 outlook that churn would get you through.
In more detail later in the presentation.
Speaker 3: We indeed continue to monitor the United Auto Workers' strike, but to date, there has been no impact on our operations.
We indeed continue to him when he tells me unites keto to walk off strike, but to date there has been no impact on our operations.
Speaker 3: During the quarter, we re-perchase $161 million stocks who approved $250 million share repair chase program in line with our capital allocation priority.
During the quarter, we rebuilt chasing 161 million doing all stuck swell approved $250 million share repurchase program in line with what kept you thought allocation priorities.
Speaker 3: We also executed an early repayment of $200 million of debt within the quarter, a strong step delivering towards our target net leverage ratio of 2.0 times, consolidating the bid to net debt by the end of 2024.
We also executed a nobody repayment of $200 million depth within the quarter.
Strong step delevering to well don't get net leverage ratio of 2.0, Dime's consolidated EBITDA to net debt by the end of 2024.
Speaker 3: All of this contributed to GARED being upgraded by Standard & Poor to a BB- stable rating.
All of this contributed to Garrett being graded by slowing down and talk to a BBB minus stable rating.
Turning now to slide four.
Speaker 3: Let's review together some significant updates to our product portfolio.
Let's review together with some significant updates to our product portfolio.
Speaker 3: Starting with our core turbo business, I am pleased to introduce Garrett's largest turbo ever, the DT8.
Starting with our golf ball business I am pleased to introduce Gary loud, just chewable ever the deep C. A T.
Speaker 3: This product allows us to better serve our industrial and off-high weight customers with an expanded product range and reflects our strategy of continued investment in our industrial turbo business.
This product allows us to better serve our industrial and off highway customers with an expanded product range and reflects our strategy of continued investment.
Well industrial trouble business.
Speaker 3: Let me remind you one more time that the commercial vehicle aftermarket and industrial businesses account for more than 30% of ourselves and even more of our profits.
Let me remind you one more time that the commercial vehicle aftermarket and industrial businesses account for more than 70% of our upsell and even more I thought about profit.
Speaker 3: We also continue to make progress on our zero emission strategy.
We also continue to make progress on that well if you want and you shouldn't strategy.
Speaker 3: This quarter we want two additional pre-development work for our high performance equally in compressor. We know that we have a total of five pre-development wins this year in our zero emission business. Proof that our technology differentiated products address the evolving needs of our customers when it comes to developing new generations of electric vehicles.
This quarter, we want to additional pre developmental wallflower outperformance equaling compressor, we know out of a total of five pre development wins. This year, you know well zero emission business proof that our technology differentiation products address the evolving needs of our customers when it comes to developing new journey.
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Speaker 3: We remain in the committee to our target of $1 billion of annual sales of product for zero emissions vehicle by 2030 at the same or better margin profile than our financial.
We remain committed to off they'll get to $1 billion with annual sales of products for zero emission vehicles by 2050 at the same or better margin profile than our financials.
Speaker 3: I will not turn things over to shun to provide more insights into our financial results. Thank you, Lydia.
I will not tell me things over to Sean to provide more insights into our financial results.
Thanks Olivier.
Begin my remarks on slide five.
Speaker 4: Looking at the upper left hand graph, you will see a reported net sales for the last seven quarters with Q3, 2023, and $960 million up from Q3 of 2022 at 2% on a gap basis and down 1% on a constant current.
Looking at the upper left hand graph, you will see our reported net sales for the last seven quarters with Q3, 2023 and $960 million up from Q3 of 2022, 2% on a GAAP basis and down 1% on a constant currency basis.
Speaker 4: This was driven by new product ramp-ups, a small engine gasoline product.
This was driven by new product ramp ups and small engine gasoline products.
Speaker 4: and offset by unfavorable mix from softness in commercial vehicle and diesel applications.
Offset by unfavorable mix from softness in commercial vehicle and diesel applications.
Speaker 4: Looking at the upper right-hand side of the page, Q3, 2023 adjusted EBITDA of $152 million was up 4% or $6 million from $146 million last year reflecting the continued strong predictivity and operational execution allowing us to deliver an adjusted EBITDA margin of 15.8%. Up from 15.8%.
Looking at the upper right hand side of the page Q3, 2023, adjusted EBITDA of $152 million was up 4% or $6 million from $146 million last year, reflecting the continued strong productivity and operational execution, allowing us to deliver it.
Adjusted EBITA margin of 15, 8%.
Up from 15, 4% last year.
Speaker 4: And on the bottom left graph, we show the Garrett generated positive adjusted free cash flow of $57 million in Q3 of
And on the bottom left graph, we show the guarantee generated positive adjusted free cash flow of $57 million in Q3 of 2023.
Speaker 4: down from $120 million in Q3 of 2022.
Down from $120 million in Q3 of 2022.
Speaker 4: Compared to last year, this decrease is driven by a working capital, primarily from the timing of disbursements within the corps.
Compared to last year. This decrease was driven by working capital primarily from the timing of disbursements within the quarter.
Speaker 4: We continue to see our free cash flow conversion to adjusted EBITDA trend at more of about 60% which is in line with our capital allocation framework for the year.
We continue to see our free cash flow conversion to adjusted EBITDA trend at or above 60%, which is in line with our capital allocation framework for the year.
Turning now to slide six we show our Q3 net sales bridge by product category as compared with the same period last year.
Speaker 4: we show our Q3 net sales bridge by product category as compared with the same period last year.
Speaker 4: Net sales were up 2% on a gap basis and down 1% on constant currency base.
Net sales were up 2% on a GAAP basis and down 1% on a constant currency basis.
Speaker 4: Reflecting an increase of $15 million over Q3 of 2022, as stated on the prior slide.
Once you have an increase of $15 million over Q3 of 2022 as stated on the prior slide.
Speaker 4: gasoline products were up 9% at constipurrency, adding $37 million in sales. And gasoline products now comprise 46% of reported net sales, up from 43% last year.
Gasoline products were up 9% in constant currency, adding $37 million in sales and gasoline products now comprised 46% of reported net sales up from 43% last year.
Driven by product ramp ups.
Speaker 4: Diesel products decreased 9% to constant currency, a decrease of $21 million to sales, and comprising 24% of total sales.
Diesel products decreased 9% in constant currency, a decrease of $21 million to sales and comprising 24% of sales of total sales.
Slightly down one percentage point from 25% last year.
Speaker 4: Commercial vehicles decreased 14% at constant currency, primarily driven by softness in China and North America, where interest rates of risen and other macroeconomic conditions are at play.
Commercial vehicles decreased 14% in constant currency, primarily driven by softness in China, and North America, where interest rates have risen and other macroeconomic conditions are at play.
Speaker 4: Commercial vehicles represented 16% of total net sales in Q3 of 2023, down from 19% to Q3 of
Commercial vehicles represented 16% of total net sales in Q3 of 2023 down from 19% in Q3 of 2022.
Speaker 4: Our aftermarket business remains stable in the quarter, delivering black growth at constant currency over less.
Our aftermarket business remained stable in the quarter delivering lack growth at constant currency year over last year.
Speaker 4: It now comprises 12 or 7-metre sales a similar level to last.
It now comprises 12% of net sales a similar level to last year.
Speaker 4: Our Q3 net sales were supported by an increase of $21 million of foreign exchange currency impact on a year-over-year basis, but sequentially, we are seeing FX pressure. And we'll talk about this later in the event.
Our Q3 net sales were supported by an increase of $21 million of foreign exchange currency impact on a year over year basis, but sequentially, we are seeing a FX pressure.
And we will talk about this later in the presentation.
Speaker 4: Turning now to slide seven, we show our Q3 adjusted EBITDA bridge compared with the same period last year.
Turning now to slide seven.
We show our Q3, adjusted EBITDA bridge compared with the same period last year.
Speaker 4: The adjusted EBITDA of $152 million represented a $6 million improvement over the prior period.
Adjusted EBITDA of $152 million represented a $6 million improvement over the prior period.
Speaker 4: Increased volume accounted for $5 million of this and was offset by $23 million of unfavorable product mix impact, as previously mentioned.
Increased volume accounted for $5 million on this and was offset by $23 million of unfavorable product mix impact as previously mentioned.
Speaker 4: Our overall operating performance was a net positive of $16 million and we continue to dedicate over 50% of the total R&D expenditure to electrification technology.
Our overall operating performance when they net positive $16 million and we continue to dedicate over 50% of the total R&D expenditure to electrification technologies.
Speaker 4: And we had an $8 million positive foreign currency impact, primarily from the strength of the euro against the U.S. dollar when we compare to the same period last year.
And we had an $8 million positive foreign currency impact primarily from the strengthening of the euro against the U S. Dollar when we compare compared to the same period last year and 2022.
Speaker 4: Solid Third-Gurder Results continue to demonstrate that over time and an extremely volatile macro and demand environments Garrett continues to deliver solid results as we've blessed our variable cost structure to adapt to rapid changes across the industry
Our solid third quarter results continue to demonstrate that over time, and an extremely volatile macro and demand environments. Garrett continues to deliver solid results as we flex our variable cost structure to adapt to rapid changes across the industry.
Moving now to slide eight we show the adjusted EBITDA to adjusted free cash flow bridge for Q3 of 2023.
Speaker 4: We show the Adjusted EBITDA to Adjusted Free Cash Flow Bridge for Q3 of 2021.
Speaker 4: In the porter, Garrett delivered solid adjusted retached low of 57 million dollars.
In the quarter Garrett delivered solid adjusted free cash flow of $57 million.
Speaker 4: As mentioned earlier, adjusted free cash flow was impacted by use of working capital of $41 million in the quarter, primarily due to the timing.
As mentioned earlier adjusted free cash flow was impacted by use of working capital of $41 million in the quarter, primarily due to the timing of disbursements.
Speaker 4: Capital expenditures and cash taxes were in line with expectation. And cash interest increased due to...
Capital expenditures and cash taxes were in line with expectation.
And cash interest increased to $21 million cash due to the issuance of our new 700 million term loan b in Q2.
Speaker 4: cash due to the issuance of our new 700 million term loan be in Q2.
Turning now to slide nine.
Speaker 4: We ended Q3 2023 with a strong liquidity position of $732 million, comprised of $570 million of underwrung revolving credit facility capacity and $162 million of unrestricted cash.
We ended Q3 2023 with a strong liquidity position of $732 million comprised of $570 million of Undrawn revolving credit facility capacity and $162 million of unrestricted cash.
Speaker 4: We repaid $200 million of our term loan beat during the quarter and finished with a net leverage ratio of 2.3 times in Q3 of 2020.
We repaid $200 million of our term loan b during the quarter and finished with a net leverage ratio of two three times in Q3 of 2023.
Speaker 4: With our consistent cash generation, we intend to continue to reduce our net leverage ratio toward our target of two times by no later than the end of the year.
With our consistent cash generation, we intend to continue to reduce our net leverage ratio toward our target of two times.
No later than the end of 'twenty 'twenty four.
Speaker 4: During the quarter, we repurchased common stock amounting to $161 million and another $5 million so far in Q4.
During the quarter, we repurchased common stock amounting to $161 million and another $5 million so far in Q4.
Speaker 4: under our approved 250 million dollar stock repurchase program as we continue.
Under our approved $250 million stock repurchase program.
As we continue to return value to our shareholders.
Speaker 4: And our capital allocation actions in 2023 of deleveraging and transforming our capital structure have resulted in a ratings upgrade from S&P, as Olivier mentioned, to double B minus with a stable outlook during the quarter.
And our capital allocation actions in 2023 of deleveraging and transforming our capital structure have resulted in a ratings upgrade from S&P as Olivier mentioned to double b minus with a stable outlook during the quarter.
Moving now to slide 10.
Speaker 4: We continue to watch the regional macro environment and trends across all of our product verticals. However, we remain committed to delivering strong operational execution in the face of these potential.
We continue to watch the regional macro environment and trends across all of our product verticals. However, we remain committed to delivering strong operational execution in the face of these potential headwinds the outlook for foreign currency, particularly the euro to U S. Dollar exchange rate remains volatile and as a result.
Speaker 4: outlook for foreign currency, particularly the Euro to U.S. dollar exchange rate, remains volatile, and as a result we are revising our midpoint outlook and tightening the ranges to adjust for anticipated currency headwinds.
We are revising our midpoint outlook and tightening the ranges to adjust our anticipated currency headwinds in.
In the second half.
Speaker 4: On this slide, you can see the updated Euro to U.S. dollar exchange assumption.
On this slide you can see the updated euro to U S dollar exchange assumption and financial ranges imply that following mid points still within our previous ranges.
Speaker 4: and financial ranges that imply the following midpoints still within our previous.
Speaker 4: Net sales of $3.86 billion. Net sales growth at constant currency of 8%. Net income of $264.
Net sales of $3 $86 billion net sales growth at constant currency of 8%.
Net income of $264 million.
Speaker 4: Adjusted EBITDA of $630 million, implying an adjusted EBITDA margin of 16.3% for the full year.
Adjusted EBITDA of $630 million, implying an adjusted EBITDA margin of 16, 3% for the full year.
Speaker 4: net cash provided by operating activities of $438 million, and adjusted free cash flow of $375 million.
Net cash provided by operating activities of $438 million and adjusted free cash flow of $375 million.
Speaker 4: Again, I want to reinforce that operationally, we have not deteriorated from our outlook as discussed in July , and the only adjustment to the midpoint of our full-year outlook is for the weaker euro versus the U.S. dollar. I'll now
Again, I want to reinforce that operationally, we have not deteriorated from our outlook as discussed in July and the only adjustment to the midpoint of our full year outlook.
Weaker weaker euro versus the U S dollar.
I'll now turn it back to Olivier for his closing comments.
Thanks Shannon.
Speaker 3: Wrapping up summary of Q3 on slide 11, we delivered solid financials in the quarter with earnings expansion and continued cash performance.
Wrapping up summary of Q3 on slide 11, we delivered solid financials in the quarter with earnings expansion and continued cash performance.
Speaker 3: We also executed on our capital allocation priorities with the early repayment of 200 million of debt and the repurchase of 161 million of shares, returning value to our shareholders.
We also executed on our capital allocation priorities with the early repayment of 200 million of depth and the rebuilt chaise $161 million of shares returning value to our shareholders.
Speaker 3: Our continued differentiated technologies during the quarter have kept up on track with our goals as we introduce our largest turbo yet the GKE.
Our continued differentiated technologies joined the cluster I kept us on track with our goals as we introduce our largest jumbo yet the G T H E.
Speaker 3: We are expanding our product range for customers in industrial and off-highway with this product.
We are expanding our product French for customers in industrial and off highway with these products.
Speaker 3: We also continue to build momentum towards achieving $1 billion of revenue from zero-emission vehicle products by 2030 with the award of two new pre-development awards in e-cooling.
We also continue to build momentum towards achieving 1 billion not all revenue from zero emission vehicle products by 2050 with you well the two new pre developmental wells equaling.
Speaker 3: This is again proof that our strategy and differentiated zero-emission vehicle technologies are recognized by our customers.
This is again proof that our strategy and differentiated zero emission vehicle technologies are recognized by our customers.
Speaker 3: Last, we are revising our 2023 full-year outlook for foreign currency impacts, as Sean stated earlier, while continuing to execute operationally.
Last we already revising our 2023 food you all took for foreign currency impacts as Jim stated earlier, while continue to execute operationally.
Speaker 3: I am very pleased with the quarter and I want to thank the entire team again, the Garrett team, for their hard work and dedication that has been instrumental in achieving our goal.
I am very pleased with the cluster and I want to thank you don't die of team again, yeah Garrick team for their hard work and dedication that has been instrumental in achieving our goals.
Speaker 3: In closing, I would also like to mention that today is a very important day for us, as we are hosting our investor and technology day. This is a fantastic opportunity to have a better view of the strengths of the company that we have been transforming for the past five years and understand our trajectory for the future. If you are not participating, I would invite you to review a material that will be available on our website.
In closing I would also like to mention that today is a very important day for us as we all listing our investor Technology day. This is a fantastic opportunity to have a bit of view of the strength of the company that we have been transforming the best five years and understand our trajectory for the future you shall not debating I wouldn't.
<unk> to review method, you all that could be available on our website.
Speaker 3: Thank you for your time, and Operator, we are now ready to start the Q&A session.
Thank you for your time, and operator, and we all know ready to start the Q&A session.
Speaker 1: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Drew: Hello, my name is Drew, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion 3rd quarter financial results conference call. This call is being recorded, and a replay will be available later today.
Speaker 1: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
If you are using a speakerphone please pick up your handset before pressing the keys.
Any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
Drew: If you require operator assistance, please press star than zero. After the company's presentation, there will be a Q&A session.
Speaker 1: At this time, we will pause momentarily to assemble our roster.
At this time, we will pause momentarily to assemble our roster.
Eric Birge: I would now like to hand over the call to Eric Birge, Garrett's head of investor relations. Thank you Drew, good day everyone and welcome. Thank you for attending the Garrett Motion 3rd quarter financial results conference call. Before we begin, I would like to mention that today's presentation and press release are available in the IR section of Garrett's website at investors.garretmotions.com. There you will also find links to our SEC filings along with other important information about our company.
Speaker 1: The first question comes from Hamid Khorsand with BWS, please go ahead.
The first question comes from Mohammed correspond with B W. S.
Please go ahead.
Speaker 5: Good morning. Apologies if there's background noise. First question is, what's the inflection point or, you know, an event that would create a risk for you related to this UAW strike?
Good morning, apologies, if there's background noise.
First question on soup.
What's the inflection point or.
And then that that would create.
Create a risk for you related to the UAW strike.
Yeah.
Speaker 3: That's a good question. What we do is that we are currently monitoring the factories that are impacted by the UAW strike.
That's a good question what we do is that we are currently.
Eric Birge: Turning this slide to, you will note that this presentation contains forward looking statements within the meaning of the Security and Exchange Act. We encourage you to read the risk factors contained within our violence with the SEC, become aware of the risks and the certainties 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 within our presentation represent management's expectations only as of today and the company disclaims any obligation to update them.
Monitoring the factories that are impacted by the UAW strike.
Speaker 3: So far we've seen a limited impact to the turbo.
So far we've seen a limited impact too.
To do jumbos, because jumbos aguila on engines, and then down into vehicle plans.
Speaker 3: Turbos are going on engines and then they are going into vehicle plants. We've seen limited impact on the turbos that we are delivering to some engine factories because those engine factories keep on running because they are feeding some vehicle plants that are not stopped.
We've seen limited impact on the jumbos that while delivering to some engine factories, because those engine factories keep on running because the outfitting some vehicle plants that dominant stopped yet so that's the point, we're monitoring and we are monitoring that on a daily basis.
Speaker 3: So that's the point where I'm monitoring and we are monitoring that on the daily basis.
Eric Birge: Today's presentation also includes non-GAT measures to describe how we manage and operate our business. We reconcile each of these measures to the most directly comparable GAT measure, and you are encouraged to examine those recommendations and appendix to the press release and the flight presentation. Also, in today's presentation and comment, we may refer to light vehicle diesel and light vehicle gasoline in terms of diesel and gasoline only.
Speaker 3: So it doesn't mean that we'll not see an impact so far. In Q3, we had zero impact.
So it doesn't mean that we would not see any bucks will fall in Q3, we had zero impact.
Speaker 5: And then, could you just talk about this foreign currency impact? How are you able to offset it in any way? Are you able to capture new sales or new customers to help you offset that? Or what's the strategy there?
And then could you just.
Talk about this foreign currency impact are you how are you able to offset it in any way or are you able to capture new sales with new customers to help you offset that or.
Eric Birge: With us on today's call is Olivier Revier, Garrett President and Chief Executive Officer and Sean Deason, Garrett Senior Vice President and Chief Financial Officer.
What's the strategy there.
Speaker 3: So first point on that, we are obviously a global business.
So south point on that we I'll, just give a global business.
Olivier Rabiller: I will now hand the call over to Olivier. Thank you Eric, and thanks everyone for joining Garrett's short quarter earnings conference call. I will begin my remarks from slide number three. I am very pleased with our performance in Q3 and would like to thank the entire Garrett team for delivering a solid quarter through the continued focus on operational excellence and execution. On top of our financial performance, we continued to build momentum with our differentiated technologies in Corteurbo and zero emission vehicle products.
Speaker 3: And as you know from the split we have across the region.
And as you know from the splits we are across the regions.
Speaker 3: We have a strong part of ourselves in Europe , we have a very strong part of ourselves also in Asia.
We have a strong.
Off of our sales in Europe , we have a very strong Buffalo L. Also in Asia.
Speaker 3: and relatively lower part of our cell in North America.
And a relatively low wealth both of ourselves in North America.
Speaker 3: What primarily dictates our cells is the turbopenetration that you see in the different constraints around as empathetic path.
What primarily dictates ourselves is the turbo penetration that you've seen in the different regions. The size of the industry first and then the total penetration.
Speaker 3: the size of the industry first, and then the turbo-penetration.
Speaker 3: China and Europe are both markets that are bigger than North America.
China and Europe are both scale market, that's bigger than North America.
Olivier Rabiller: And last, we executed against our capital allocation priorities, allowing us to deliver and return value to shareholders. Adjusted EBITDA's quarter was 152 million versus 146 million in the same period of last year. Strong productivity and operational performance, more than offset the unsavable product mix, increasing our adjusted EBITDA margin of 15.8% up from 15.4% into 3 of last year. We also generated an adjusted shrinkage load of 57 million, down from 121 million in the same quarter of the year prior, driver primarily by timing a working capital.
Speaker 3: and on which there is higher top of penetration and our exposure.
And on which there is a higher turbo penetration and our exposure.
Speaker 3: What we are seeing in North America is that we are more and more successful with customers on the light vehicle side. We are already very successful on off-highway and industrial vehicle. But on the light commercial vehicle side, on the light vehicle side, sorry, cars, pickup trucks, we are seeing both increasing success for our product and at the same time, an increasing turbo penetration that is linked to emission standards that are getting the front.
What we are seeing in North America is that we are more and more successful with customers on the light vehicle side, we were already very successful on off highway and industrial H L.
On the light commercial vehicle side on the light vehicle side, sorry jobs.
Pick up trucks are we are seeing both increasing success of our product and at the same time and increasing turbo penetration that is linked to emission stand out that are getting tougher and tougher.
Speaker 3: So as we are monitoring the emissions regulation moving forward, as they get tougher, as the saver turbo penetration think about the next to be decided, careful or the next to the implemented, careful regulation, we are expecting that our exposure to North America will...
We are monitoring the emissions regulation windfall well as they get a tougher as they favor turbo penetration seem to bump. The next to be decided just for Oh. The next to implement it just for regulation.
Olivier Rabiller: Sean will share more details on our financial results in the coming slides. But since our last quarter of results, we have seen a significant change in foreign exchange outlook for the euro dollar. While we continue to perform operationally in line with our prior outlook, the weaker euro is impacting our second half and we are reflecting this in our updated 2023 outlook that Sean will take you through in more detail later in the presentation.
We are expecting that our exposure to North America would increase.
Speaker 5: Okay, and then on the, the A to even introduce, does that, it going to be a new customer potential lens for you? Or is that really just, just expanding what you already have on the block line?
Okay, and then on the <unk>.
<unk> been introduced does that going to be a new customer potential wins for you or is that really just.
Expanding what you already have on the bottom line.
Olivier Rabiller: We indeed continue to monitor the United Auto Worker Strike, but to date there has been no impact on our operations. During the quarter, we re-purchased $161 million of stocks through our approved $250 million share repair chase program in line with our capital allocation priorities. We also executed an early repayment of $200 million of debt within the quarter, a strong step delivering toward our target net leverage ratio of 2.0 times consolidated EBITDA to net debt by the end of 2024. All of this contributed to Garrett being upgraded by standard and poor to a BB-stable rating.
Speaker 3: Well, that will do both. There is an increase in increasing need for technology, for big engines. Think about these engines being used in power gene application, locomotives, marine application.
Well that will do that we do both.
There is an increase increasing nida, a false technology for big and jeans I think about these engines being used in a broad.
Jane application.
Locomotives are marine application.
Speaker 3: There is a quest also in those applications to go for new energy. We are talking about different fuel engines, but not only more gas.
There is a request also in those application to go from U N LNG and we are talking about.
DJ I'll shoot engine, but not only more and more gas.
Speaker 3: natural gas and therefore there is a need for technology.
Natural gas and therefore, there is a need for technology.
Speaker 3: We like these industries because obviously some of our customers are strong and need our product but we are also seeing new customers that would like to get something new in those areas.
We like these industries because you see some of our customers are strong and need our product, but we are also seeing new customers, that's would like to get something new in those areas.
Olivier Rabiller: Turning now to slide four, let's review together some significant updates to our product portfolio. Starting with our core turbo business, I am pleased to introduce Garrett's largest turbo ever, the BT18. This product allows us to better serve our industrial and off-highway customers with an expanded product range and reflects our strategy of continued investment in our industrial turbo business. Let me remind you one more time that the commercial vehicle, aftermarket and industrial businesses account for more than 30% of our sales and even more of our profits.
Speaker 3: Those areas are not always for the, I'll think about Gen-set or Power Gen equipment for data centers. More and more data centers need backup power. They want that backup power to be open running in a fraction of a second. They are ready to pay for technology. And this is obviously very interesting for us to introduce new technologies on those big...
Those areas I'm, not always falls H O cinch amounts Gen sets off boil Gen equipment for data centers more and more data centers need backup power they want that backup oil to be up and running in a fraction of a sitcom.
They are ready to pay for technology and this is obviously very interesting for us to introduce new technologies on those onto a deep troubles.
Speaker 5: And on the zero mission side, how fast before it becomes, you know, a material contributes to sales. I know you've set about 20, 30, versus from like six years away from that. So there's some, some sort of momentum that you'll start showing in your numbers before then.
And then on the zero emission side.
How fast before it becomes a.
A material contributor to sales I know you've said about 2030.
Olivier Rabiller: We also continue to make progress on our zero emission strategy. This quarter, we want two additional pre-development hours for our high performance equaling compressor. We now have a total of five pre-developments wins this year in our zero emission business, proof that our technology differentiated products address the evolving needs of our customers when it comes to developing new generations of electric vehicles. We remain in the committee to our target of $1 billion of annual sales of product for zero emissions vehicle by 2030 at the same or better margin profile than our financials.
For some six years away from that so is there some sort of a momentum that you're you'll start showing in your numbers beforehand.
Yeah.
Speaker 3: We are sticking to what we said before, but let me give you a little bit more colors. When you think about fuel cell compressors.
We all.
We are we are sticking to what we said before but let me give you a little bit more colors, when you're seeing about fuel cell compressors are we are in the full ramp up now and Nextgen will start to see the the stop of production that civil programs. So to give you a flavor on that industry that is.
Speaker 3: We are in the full ramp up now and next year we'll start to see the start of production of several programs. So to give you a flavor on that industry that is still emerging, we are expecting in 2024 to be doing nearly $20 million of sales.
Still MLG.
We are expecting in 2024 to be doing nearly $20 million of self <unk>.
Sean Deason: I will note that it seems overall to shunned provide more insights into our financial results. Thanks, Olivier.
Speaker 3: just on fuel cell compressors. And fuel cell compressor is obviously a product that is already getting mature in our portfolio. So that's a little bit in advance versus what we see with the two other products that we have. But as we said before, we are currently pre-development.
Just on Schuh set of compressors and fuel cell compressor is obviously a product that is already getting mature portfolio. So that's a little bit in advance versus what we see with the two other products that we have but as we said before we are trying to see pre development.
Sean Deason: I will begin my remarks and slide five. Looking at the upper left hand graph, you will see our reported net sales for the last seven quarters with Q3, 2023 at $960 million up from Q3 of 2022 by 2% on a gap basis and down 1% on a constant currency basis. This was driven by new product ramp-ups in small engine gasoline products and offset by unfavorable mix from softness in commercial vehicle and diesel applications.
Speaker 3: You need to have in mind that between prediablofment and production there is about four or five years before you start in production.
You need to have in mind that between development and production.
There is about four five years before you stop in production.
Speaker 3: And therefore, that's the reason why we said initially that we would look at 2027, 2028 to be the inflection point for revenue growth. But the point I'm giving you today, and I think this is the first time we share that, is that already next year, on the fuel cell compressor side, will be nearly $20 million.
And therefore, that's the reason why we said initially that we would look at 2027 2028 to be the inflection point for revenue growth, but to the point that I'm, giving you today and I think the first time, we've shown that that's already next year are on the silicon for sell side will be nearly 20 million at all.
Sean Deason: Looking at the upper right hand side of the page, Q3, 2023 adjusted EBITDA of $152 million was a 4% or $6 million from $146 million last year reflecting the continued strong productivity and operational execution allowing us to deliver an adjusted EBITDA margin of 15.8, on the bottom left graph, we show that Garrett generated positive adjusted free cash flow of $57 million in Q3 of 2023, down from $120 million in Q3 of 2022. Compared to last year, this decrease is driven by working capital primarily from the timing of disbursements within the quarter.
Speaker 5: And the last question was, is it too early to talk about what the margin profile of the company would look like in 24?
And then last one my last question is it too early to talk about what the margin profile of the company will look like in 'twenty four.
Yeah.
Speaker 4: Yeah, I mean, we have our financial framework common and we're going to, we're going to target hopefully around 16%. That's our financial framework. We try to hold to that. It can deviate when you have commodities moving around like we've seen in the past and foreign exchange, but we're still working through all of those assumptions at the moment.
Yeah, I mean, we have our financial framework common and we're going to we're going to target hopefully around 16%. That's our financial framework, we try to hold to that it can deviate a when you have commodities moving around like we've seen in the past and foreign exchange.
But we're still working through all of those assumptions at the moment.
Sean Deason: We continue to see our free cash flow conversion to adjusted EBITDA trend at more above 60%, which is in line with our capital allocation framework for the year. Turning out to slide six, we show our Q3 net sales bridge by product category, as compared with the same period last year. Net sales were up 2% on a gap basis and down 1% on a constant currency basis, reflecting an increase of $15 million over Q3 of 2022, as stated on the prior slide.
Yeah.
Okay. Thank you.
Yeah.
Okay.
Yeah.
Speaker 2: Okay, thank you everybody. I appreciate it to join in the call and we will hopefully see several of you at the investor day later today.
Okay. Thank you everybody I appreciate you joining the call and we will hopefully see several of you at the Investor Day later today.
Speaker 4: The conference has now concluded. Thank you for attending today's presentation. You may now have just collapsed.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Sean Deason: Gasoline products were up 9% at constant currency, adding $37 million in sales, and gasoline products now comprise 46% of reported net sales, up from 43% last year, driven by product ramparts. Diesel products decreased 9% at constant currency, a decrease of $21 million to sales, and comprising 24% of total sales, slightly down 1% at a point from 25% last year. Commercial vehicles decreased 14% at constant currency primarily driven by softness in China and North America, where interest rates in Brazil and other macroeconomic conditions are at play.
Speaker 6: .
Speaker 6: We.
Sean Deason: Commercial vehicles represented 16% of total net sales in Q3 of 2023, down from 19% in Q3 of 2022. Our aftermarket business remained stable in the quarter, delivering black growth at constant currency over last year. It now comprises 12% of net sales, a similar level per last year. Our Q3 net sales were supported by an increase of $21 million at foreign exchange currency impact on a year over your basis. But sequentially, we are seeing effects pressure, and we'll talk about this later in the presentation.
Speaker 6: Mar.
Sean Deason: Turning now to slide 7, we show our Q3 adjusted EBITDA bridge compared with the same period last year. Adjusted EBITDA of $152 million represented a $6 million improvement over the prior period. Increased volume accounted for $5 million of this and was offset by $23 million of unfavorable product mix impact as previously mentioned. Our overall operating performance was a net positive of $16 million, and we continue to dedicate over 50% of the total R&D expenditure to electrification technologies.
Sean Deason: And we had an $8 million positive foreign currency impact primarily from the strength of the year against the US dollar when we compare it compared to the same period last year in 2022. Our solid third quarter results continued to demonstrate that over time, and an extremely volatile macro and demand environments, Garrett continues to deliver solid results as we flex our variable cost structure to adapt to rapid changes across, the industry. Moving now to slide eight, we show the adjusted EBITDA to adjusted free cash flow bridge for Q3 of 2023.
Sean Deason: In the quarter, Garrett delivered solid adjusted free cash flow of $57 million. As mentioned earlier, adjusted free cash flow was impacted by a use of working capital of $41 million in the quarter, primarily due to the timing of disbursements. Capital expenditures and cash taxes were in line with expectation, and cash interest increased to $21 million dollars, cash due to the issuance of our new 700 million term OMB in Q2. Turning now to slide nine, we ended Q3 2023 with a strong liquidity position of $732 million, comprised of $570 million of under-on-revolving credit facility capacity, and $162 million of unrestricted cash.
Sean Deason: We repaid $200 million of our term OMB during the quarter and finished with a net leverage ratio of 2.3 times in Q3 of 2023. With our consistent cash generation, we intend to continue to reduce our net leverage ratio toward our target of two times by no later than the end of 2024. During the quarter, we repurchased common stock, amounting to $161 million, and another $5 million so far in Q4, under our approved $250 million stock repurchase program, as we continue to return value to our shareholders.
Sean Deason: And our capital allocation actions in 2023 of deleverging and transforming our capital structure have resulted in a ratings upgrade from S&P, as Olivia mentioned, to double B minus with a stable outlook during the quarter. Moving now to slide 10, we continue to watch the regional macro environment and trends across all of our product variables. However, we may remain committed to delivering strong operational execution in the face of these potential headlines. The outlook for foreign currency, particularly the Euro to US dollar exchange rate, remains volatile, and as a result, we are revising our midpoint outlook and tightening the ranges to adjust or anticipated currency headlines in the second half.
Sean Deason: On this slide, you can see the updated Euro to US dollar exchange assumption and financial ranges that imply the following midpoints still within our previous ranges. Net sales of $3.86 million, net sales growth at currency of 8%, net income of $264 million, adjusted EBITDA of $630 million, implying an adjusted EBITDA margin of 16.3% for the full year. Net cash provided by operating activities of $438 million, and adjusted free cash flow of $375 million.
Sean Deason: Again, I want to reinforce that, operationally, we have not deteriorated from our outlook as discussed in July, and the only adjustment to the midpoint of our full-year outlook is from the weaker Euro versus the US dollar.
Olivier Rabiller: I'll now turn it back to Olivier for his closing comments. Thanks, Sean. Rapping up summary of Q3 on slide 11, we delivered solid financials in the quarter with earnings expansion and continued cash performance. We also executed on our capital allocation priorities with the early repayment of 200 million of depth and the repair chase of 161 million of shares, returning value to our shoulders. Our continued differentiated technologies during the quarter have kept up on track with our goals as we introduce our largest turbo yet, the GT80.
Olivier Rabiller: We are expanding our product range for customers in industrial and off-highway with these products. We also continue to build momentum toward achieving $1 billion of revenue from zero-emission vehicle products by 2030 with the world of two new pre-development awards in equalling. This is again proof that our strategy and differentiated zero-emission vehicle technologies are recognized by our customers. Last, we are really revising our 2023 full-year outlook for foreign current team backs as Sean stated earlier while continuing to execute operationally.
Olivier Rabiller: I am very pleased with the quarter, and I want to thank the entire team again, the Garrett Wright team for their hard work and dedication that has been instrumental in achieving our goals.
Olivier Rabiller: In closing, I would also like to mention that today is a very important day for us, as we are hosting our investor and technology day. This is a fantastic opportunity to have a better view of the strengths of the company that we have been transforming for the past five years and understand our trajectory for the future. If you are not participating, I would invite you to review material that will be available on our website.
Drew: Thank you for your time and operator, and we are now ready to start the Q&A session. We will now begin the question and answer session. To ask a question, you may press star than one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star than two. At this time, we will pause momentarily to assemble our roster.
Hamed Khorsand: The first question comes from Hummed Corson with BWS. Please go ahead. Good morning, apologies if there is background noise.
Olivier Rabiller: First question, what is the inflection point or an event that would create a risk for you related to the UWAW strike? That's a good question. What we do is that we are currently monitoring the factories that are impacted by the UAW and we will just try it. So far, we've seen a limited impact to the turbos because turbos are going on engines and then they are going into vehicle plants. We've seen limited impact on the turbos that we are delivering to some engine factories because those engine factories keep on running because they are feeding some vehicle plants that are not stopped yet. So that's the point we are monitoring and we are monitoring that on a daily basis. So it doesn't mean that we're not seeing an impact so far into three. We are zeroing back.
Olivier Rabiller: And then could you just talk about this foreign currency impact? How are you able to offset it anyway? Are you able to capture new sales or new customers to help you offset that or what's the strategy there? So first point on that, we are obviously a global business and as you know from the splits we have across the regions. We have a strong part of ourselves in Europe. We have a very strong part of ourselves also in Asia and a relatively lower part of ourselves in North America.
Olivier Rabiller: What primarily dictates ourselves is the turbos penetration that you see in the different regions, the size of the industry first and then the turbos penetration. China and Europe are both car markets that are bigger than North America and on which there is higher turbos penetration and our exposure. What we are seeing in North America is that we are more and more successful with customers on the light vehicle side. We are already very successful on off-highway and industrial vehicle.
Olivier Rabiller: But on the light commercial vehicle side, on the light vehicle side, sorry cars, pickup trucks. We are seeing both increasing success for our product and at the same time an increasing turbos penetration that is linked to emissions standards that are getting tougher and tougher. So as we are monitoring the emissions regulation moving forward as they get tougher, as they savor turbos penetration, think about the next to be decided careful or the next to be implemented, careful regulation, we are expecting that our exposure to North America will increase.
Olivier Rabiller: Okay, and on the data even introduced, does that is going to be a new customer potential lens for you? Or is that really just expanding what you already have on the product line? Well, that will do both. There is an increasing need for technology, for big engines. Think about these engines being used in power gene application, locomotives, marine application. There is a quest also in those applications to go for new energy.
Olivier Rabiller: And we are talking about diesel fuel engine, but not only more and more gas, natural gas. And therefore there is a need for technology. We like these industries because, obviously, some of our customers are strong and need our product, but we are also seeing new customers that would like to get something new in those areas. Those areas are not always for the, I'll think about gen-set or power gen equipment for data centers, more and more data centers need backup power.
Olivier Rabiller: They want that backup power to be up and running in a fraction of a second. They are ready to pay for technology and this is, obviously, very interesting for us to introduce new technologies on those big troubles.
Olivier Rabiller: And on the zero mission side, how fast before it becomes, you know, a material contribute to sales. I know you've said about 20, 30 years away from that. So there's some some sort of momentum that you'll start showing in your numbers before then. We are sticking to what we said before, but let me give you a little bit more colors. When you think about fuel cell compressors, we are in the full ramp up now and next year we'll start to see the start of production of several programs.
Olivier Rabiller: So to give you a flavor on that industry that is still emerging, we are expecting in 2024 to be doing nearly 20 million dollars of sales just on fuel cell compressors. And fuel cell compressor is obviously a product that is already getting mature in our portfolio. So that's a little bit in advance versus what we see with the two other products that we have. But as we said before, we are currently pre-development.
Olivier Rabiller: You need to have in mind that between pre-development and production, there is about four five years before you start in production. And therefore, that's the reason why we said initially that we would look at 2027, 2028 to be the inflection point for revenue growth. But the point I'm giving you today, and I think this is the first time we share that, is that already next year on the fuel cell compressor side will be nearly 20 million dollars.
Olivier Rabiller: And the last question was, is it too early to talk about what the margin profile company would look like in 2024? Yeah, I mean, we have our financial framework common, and we're going to target hopefully around 16%. That's our financial framework. We try to hold to that. It can deviate when you have commodities moving around, like we've seen in the past and foreign exchange. But we're still working through all of those assumptions at the moment.
Olivier Rabiller: Okay, thank you. Okay, thank you, everybody. I appreciate it to join in the call, and we will hopefully see several of you at the investor day later today. The conference has now concluded. Thank you for attending today's presentation. You may now just collect. Thank you for joining us today. Thank you for joining us.