Q3 2024 Garrett Motion Inc Earnings Call
Okay.
After the company's presentation, there will be a question and answer session.
Speaker Change: I would now like to hand over the call to Eric Birge Garrett head of Investor Relations. Please go ahead.
Speaker Change: Thank you Andrew Good day and welcome everyone. Thank you for attending the Garrett motion third quarter 2024 financial results Conference call before we begin I would like to mention that today's presentation and earnings press release are available on the IR section of Garrett motion website at investors that their motion Dot com.
Speaker Change: There you will also find links to our SEC filings along with other important information about the company.
Speaker Change: If you look at the second slide in the deck today. We note that this presentation contains forward looking statements within the meaning of the U S. Federal Securities Law. These statements, which can be identified by words, such as anticipate intend plan believe estimate expect likely may should will.
Speaker Change: <unk> or similar expressions represent management's current expectations and are subject to various risks and uncertainties that could cause our actual results to differ materially from such expectations.
Hello, My name is Andrea and I will be your operator. This morning, I would like to welcome everyone to the Garrett motion third quarter 'twenty 'twenty four financial results conference call.
Speaker Change: These risks and uncertainties include the factors identified in our annual report on Form 10-K, and other filings within the Securities and Exchange Commission and includes risks related to the automotive industry and competitive landscapes and macroeconomic and geopolitical conditions. Among others. Please review the disclaimers on slide two of our <unk>.
This call is being recorded and a replay will be available later today.
After the company's presentation, there will be a question and answer session.
Speaker Change: I would now like to hand over the call to Eric Birge Garrett head of Investor Relations. Please go ahead. Thank.
Speaker Change: <unk> is the content of our call will be governed by this language. Today's presentation also includes certain non-GAAP measures, which we use to help describe how the manage how we manage and operate our business. We reconcile each of these measures to the most direct comparable GAAP measure in the appendix of our presentation and relate.
Eric Birge: Thank you Andrea Good day and welcome everyone. Thank you for attending the Garrett motion third quarter 2024 financial results Conference call before we begin I would like to mention that today's presentation and earnings press release are available on the IR section of their emotions website at investors that their motion Dot com.
Speaker Change: The press release.
Speaker Change: Finally in today's presentation and comments, we may refer to light vehicle diesel and light vehicle gasoline products by using the terms diesel and gasoline only.
Eric Birge: There you will also find links to our SEC filings along with other important information about the company.
Speaker Change: With us today are Olivier <unk>, President and Chief Executive Officer, and Sean Deason, Garrett Senior Vice President and Chief Financial Officer.
Speaker Change: In addition, I would like to introduce introduce <unk>, Vice President and Treasurer for Derrick, who will be responsible for investor relations going forward.
Speaker Change: He will remain with tariffs through November to ensure a smooth transition I would like to thank everyone for your time and support and wish you and Gary are very successful future I will now hand, the call over to Olivier.
Olivier: Thanks, Eric and thanks, everyone for joining Garett third quarter 2020 earnings conference call before we start I would like to thank Gary for his support and wish him all the best for next steps.
Olivier: I will now begin today's remarks on slide three.
Olivier: I am pleased to report Garrett outstanding operational performance in the soft quarter, we delivered a strong adjusted EBITDA margin of 17, 4%.
Olivier: 160 basis points, although last year, despite difficult industry conditions.
Olivier: Indeed, this quarter, we have seen the impact our exposure to softness in the light vehicle industry in Europe, and China, Some global OE facing competitive pressure and some short term customer vehicle platform mix shift.
Olivier: At the same time, we continue to enjoy a strong new business win rates in a consolidating industry, which helps to ensure that our shelf demand will continue to progress.
Eric Birge: Executive Officer, and Sean Deason, Garrett Senior Vice President and Chief Financial Officer.
Olivier: I'd like to take this opportunity to remind you that approximately 70% of our revenue comes from commercial vehicle aftermarket and industrial.
Eric Birge: In addition, I would like to introduce <unk>, Vice President and Treasurer for Derrick, who will be responsible for investor relations going forward I will remain with tariffs through November to ensure a smooth transition I would like to thank everyone for your time and support and wish you and Gary are very successful future I will now hand, the call over to Olivier.
Olivier: <unk> as a source of resilience for Garrett as you can see once again this quarter.
Olivier: Our revenue in these categories were stable. Despite first of all degradation of the on highway commercial vehicle industry in Europe, and continuing weakness up some verticals like agriculture.
Olivier: Thanks, Eric and thanks, everyone for joining Garett third quarter 2020 earnings conference call before we start I would like to thank Gary for his support and wish him all the best for these next steps.
Olivier: We also encourage by the early signs of recovery in the China commercial vehicle industry.
Olivier: Let me know again highlight our outstanding operating performance in Q3.
Olivier: I will now begin today's remarks on slide three.
I am pleased to report Garrett outstanding operational performance in the soft quarter, we delivered a strong adjusted EBITDA margin of 17, 4% up 160 basis points, although last year, despite difficult industry conditions.
During the quarter, we implemented sustainable fixed cost actions and flexed, our valuable cost structure, giving us significant margin increase and a decrease in total margin of less than 6% in a soft sales environment.
Olivier: Our strong operational performance also allowed us to generate $71 million of adjusted free cash flow.
Olivier: Indeed, this quarter, we have seen the impact of our exposure to softness in the light vehicle industry in Europe, and China, Some global OE facing competitive pressure and some short term customer vehicle platform mix shifts.
Olivier: We continued to buyback stock under our share repurchase program repurchasing $52 million of common stock in the quarter, bringing our total repurchases for the year to $226 million.
Olivier: The same time, we continue to enjoy a strong new business win rates in a consolidating industry, which helps to ensure that our share of demand will continue to progress.
Olivier: All of this was while continuing to invest in <unk> and our differentiated technologies for zero emission solutions.
Olivier: I'd like to take this opportunity to remind you that approximately 70% of our revenue comes from commercial vehicle aftermarket and industrial.
Olivier: Let me now move to the next slide to share more about the increasing momentum we have with our customers.
Olivier: This is a source of resilience for Garrett as you can see once again this quarter.
Olivier: Turning now to slide four.
Olivier: Our revenue in these categories was stable. Despite first our degradation of the on highway commercial vehicle industry in Europe, and continuing weakness of some verticals like agriculture.
Olivier: This quarter, we continued to see Garrett winning across all <unk>.
Olivier: Specifically I would like to focus on the large size <unk>, where we have been dedicating a significant amount of NRG since we first introduced them a year ago.
Olivier: We also encourage by the early signs of recovery in the China commercial vehicle industry.
Olivier: We are building on the strong progress we achieved in Q2 with a number of new wins this quarter.
Let me know again highlight our outstanding operating performance in Q3.
Olivier: The demand for large <unk> is expecting to grow quickly driven in part by the booming demand for data centers, where a significant portion of all backup power generators are fitted with multiple large <unk>.
Olivier: During the quarter, we implemented sustainable fixed cost actions and flexed, our valuable cost structure, giving us significant <unk> margin increase and a decrease in total margin of less than 6% in a soft sales environment.
Olivier: And each data center requires dozens of these machines.
Olivier: I am very pleased with the speed at which we are making this progress in just one year.
Olivier: This quarter. We have also started to see an acceleration of the development activities with our customers relative to the introduction of more plug in hybrid power trains, especially in North America.
Olivier: This helps validate the trend that we will ship 18 and is a positive development for the telco industry and for Garrett.
Olivier: Now, let's turn to slide five and talk about the accelerating momentum, we see with our zero emission vehicle technology.
Olivier: It was indeed, a very active quarter for our ego of train speed technology.
Olivier: We are seeing more and more customers not only showing interest, but taking concrete steps to wealth introducing this technology in production.
Olivier: The more power our customers need the higher the benefits associated with our.
Olivier: Power density solutions, which we bring with our ice speed electric motors.
Olivier: And this is a trend that many of our customers are considering for the next generation of electric vehicles with lockout light commercial vehicles are 80 duty truck.
Olivier: We are therefore quite happy to have signed letter of intent to jointly develop a leading next generation electric powertrain with Sino truck, which contemplates a startup production as early as 2027.
Olivier: This quarter. We were also presented with the 2024th tenancy Innovation award recognizing the advanced capabilities and products that Jarrett has developed and that's a key for the next generation of electric vehicles.
Olivier: Yes.
Olivier: I am quite happy to see these tangible progress and associated recognition validates our strategic focus on bringing differentiated technologies to the electrification transition.
Olivier: Now, let's turn to slide five and talk about the accelerating momentum, we see with our zero emission vehicle technologies.
Olivier: It was indeed, a very active quarter for our Ebola train ISP technology.
Olivier: I will now turn the call over to Sean to provide more insight into our financial results and full year outlook.
Olivier: We are seeing more and more customers not only showing interest, but taking concrete steps towards introducing this technology in production.
Sean Deason: Thanks, Olivier and welcome everyone.
Please turn to slide six.
Overall as Olivier just mentioned, we find ourselves in a softer top line environment, but the team delivered excellent operational performance, which translated into an adjusted EBITDA margin of 17, 4%, a 160 basis points increase compared to Q3 last year.
Olivier: The more power our customers need the higher the benefits associated with our.
Olivier: Power density solutions, which we bring with our ISP electric motors.
Olivier: And this is a trend that many of our customers are considering for the next generation of electric vehicles with the light commercial vehicles are 80 duty truck.
Sean Deason: Consistent operational execution in line with our financial framework allowed us to continue to increase margin. This year as we flex our variable cost structure and implement sustainable fixed cost actions, while still investing in new technologies.
Olivier: We are therefore quite happy to have signed letter of intent to jointly develop a leading next generation electric powertrain with Sino truck, which contemplates a startup production as early as 2027.
Sean Deason: This can be seen in the graph on the upper right hand side.
Sean Deason: Our adjusted EBITDA margin trending higher across each quarter this year.
Olivier: This quarter. We were also presented with the 2024th tenancy Innovation award recognizing the advanced capabilities and products that Garrett has developed and that's a key for the next generation of electric vehicles.
Sean Deason: And demonstrates our ability to deliver strong financial performance across industry cycles.
Sean Deason: In addition.
Sean Deason: We also continue to operate with our capital light approach with capital expenditures of two 4% of sales in the quarter.
Olivier: I am quite happy to see these tangible progress and associated recognition validating our strategic focus on bringing differentiated technologies to the electrification transition.
Sean Deason: Which when combined with the operational performance I mentioned earlier resulted in a healthy adjusted free cash flow of $71 million.
Speaker Change: I will now turn the call over to Sean to provide more insight into our financial results and full year outlook.
Sean Deason: Turning now to slide seven you can see how we are experiencing some industry softness in Europe, and China, along with competitive pressures on some of our customers and short term mix impacts, which can be seen in gasoline and diesel.
Sean Deason: Thanks, Olivier and welcome everyone.
Sean Deason: Please turn to slide six.
Sean Deason: Overall as Olivier just mentioned, we find ourselves in a softer topline environment, but the team delivered excellent operational performance, which translated into an adjusted EBITDA margin of 17, 4%, a 160 basis points increase compared to Q3 last year.
Sean Deason: Our revenue from commercial vehicle and aftermarket, which represents approximately 30% of total annual revenue was stable. Despite further degradation on the on highway commercial vehicle industry in Europe, and continuing weakness of some verticals such as agriculture.
Sean Deason: We also experienced commodity deflation, which is margin accretive as we continue to pass through 100% of the impact of commodity price changes to our customers.
Sean Deason: And which primarily affected gasoline this quarter.
Sean Deason: Please now turn to slide eight and I'll walk you through our adjusted EBITA Bridge.
Sean Deason: We delivered an excellent operational performance and the soft macro environment, which we achieved by leveraging our variable cost structure and delivering fixed cost productivity.
Sean Deason: Demonstrating our ability to quickly adapt to industry volatility.
Adjusted EBITDA was $144 million in Q3, representing an $8 million decrease over the same period last year with reported net sales decreasing $134 million.
Sean Deason: This equates to a decremental margin of less than 6% and highlights the strength of Garrett across industry cycles.
Sean Deason: Overall operating performance contributed $32 million to adjusted EBITDA versus the prior year driven by the actions I just mentioned.
Sean Deason: This resulted in a strong 17, 4% adjusted EBITDA margin, which represents a 160 basis point improvement when compared to the same period last year and a 50 basis point sequential improvement over the last quarter.
Sean Deason: As I mentioned on the last slide commercial vehicle industrial and aftermarket represent approximately 30% of our annual sales and were stable this quarter contributing not only to revenue stability, but also help to offset adjusted EBITDA declines as these tend to be higher margin businesses.
Please turn to slide nine and I'll walk you through our adjusted EBITDA to adjusted free cash flow bridge.
Sean Deason: Once again Garrett delivered a healthy $71 million of adjusted free cash flow in Q3.
Sean Deason: Adjusted EBITDA was $144 million in Q3, representing an $8 million decrease over the same period last year with reported net sales decreasing $134 million. This equates to a decremental margin of less than 6% and high.
Sean Deason: <unk> 2024 in line with our updated full year outlook, which I will talk about later in the presentation.
Sean Deason: Although we experienced a negative working capital impact in Q3 of $28 million, primarily due to decreased sequential sales as mentioned previously we expect that working capital will stabilize in the fourth quarter and reverse once industry macros and global production recovers.
Sean Deason: Delights, the strength of Garrett across industry cycles.
Sean Deason: Overall operating performance contributed $32 million to adjusted EBITDA versus the prior year driven by the actions I just mentioned.
Sean Deason: Capital expenditures came in well within our financial framework.
Sean Deason: This resulted in a strong 17, 4% adjusted EBITDA margin, which represents a 160 basis point improvement when compared to the same period last year and a 50 basis point sequential improvement over the last quarter.
Sean Deason: At two 4% of sales and all other items were in line with full year expectations.
Sean Deason: Turning now to slide 10.
Sean Deason: We continue to generate cash and execute on our capital allocation priorities.
Sean Deason: As I mentioned on the last slide commercial vehicle industrial and aftermarket represent approximately 30% of our annual sales and were stable this quarter contributing not only to revenue stability, but also help to offset adjusted EBITDA declines as these tend to be higher margin businesses.
Sean Deason: We ended the quarter with a strong liquidity position of $696 million comprised of $600 million of undrawn capacity under our revolving credit facility and $96 million.
Sean Deason: Unrestricted cash.
Sean Deason: Our continued focus on profitability and cash generation contributed to an improved outlook by Fitch from stable to positive.
Sean Deason: Please turn to slide nine and I'll walk you through our adjusted EBITDA to adjusted free cash flow bridge.
Sean Deason: Our cash generation also enabled us to return significant value to our shareholders in the quarter as we repurchased an additional $52 million of common stock for a total of $226 million repurchased through Q3 under our $350 million stock repurchase program.
Sean Deason: Once again Garrett delivered a healthy $71 million of adjusted free cash flow in Q3.
Sean Deason: 2024.
Sean Deason: In line with our updated full year outlook, which I will talk about later in the presentation.
Sean Deason: Although we experienced a negative working capital impact in Q3 of $28 million.
Sean Deason: Compared to a year ago, our share count has been reduced by approximately 28 million shares or 12% of shares outstanding in Q3 2023.
Sean Deason: Primarily due to decreased sequential sales as mentioned previously we expect that working capital will stabilize in the fourth quarter and reverse once industry macros and global production recovers.
Sean Deason: Our cash performance also allowed us to maintain our net leverage ratio at two six times at the same level as the previous quarter.
Sean Deason: Capital expenditures came in well within our financial framework.
Sean Deason: At two 4% of sales and all other items were in line with full year expectations.
Sean Deason: Moving to slide 11.
Sean Deason: You can see our updated 2024 outlook with the following implied midpoint net sales of $345 billion.
Sean Deason: Turning now to slide 10.
Sean Deason: Constant currency net sales decline of 11% net.
Sean Deason: Net income of $248 million.
Sean Deason: Adjusted EBITDA of $595 million, implying an adjusted EBITDA margin of 17, 2%.
Sean Deason: Net cash provided by operating activities of $375 million and adjusted free cash flow of $325 million.
These updates reflect softer industry production in light vehicle and stable commercial vehicle, implying a flat sales outlook in the fourth quarter compared to Q3.
Sean Deason: Additionally, our outlook also incorporates the impact of sustained sustainable fixed cost actions implemented throughout the year and the benefits of our highly variable cost structure, which allows us to deliver an updated outlook for adjusted EBITDA margin of 17, 2% at the midpoint.
Sean Deason: Although our industry is experiencing a softening macro environment, we continue to dedicate over 50% of our research and development spending in 2020 420 emissions technologies, while still investing in turbo.
Sean Deason: Lastly, our adjusted free cash flow is expected to remain healthy with a midpoint of $325 million or approximately $125 million in the fourth quarter.
Speaker Change: With that I will turn the call back to Olivia.
Olivia: Thank you Shannon turning now to slide 12, as the remainder of the ways in which we are well positioned for long term success.
Olivia: We continue to expand our <unk> offerings, not only to sell the expected growth in hybrids, but also to develop our larger offshore bolus for industrial applications.
Olivia: Our operational framework is highly cash generative over cycles, allowing us to invest in new technologies, while reducing debt and returning cash to shareholders.
Olivia: Our priority remains to identify and focus on unmet customer needs, where we can leverage our innovation capabilities to develop differentiated and efficient solutions at scale.
Olivia: Turning now to slide 17.
Olivia: I want to say the only thing of Garrett team for driving outstanding operating performance in the quarter we.
We have proven once again, the resilience of our financial framework, delivering solid financial results and achieving a 17, 4% adjusted EBITDA margin.
Olivia: We continue to return capital to shareholders, which we believe makes it Garrett IV attractive investments.
Sean Deason: With free cash flow is expected to remain healthy with a midpoint of $325 million or approximately $125 million in the fourth quarter.
Olivia: We secured several significant commercial wins in trouble and are expanding our portfolio to sell industrial and marine applications with our newest and largest total offering.
Sean Deason: With that I will turn the call back to Olivier.
Olivier: Thank you Sean turning now to slide 12, as the remainder of the ways in which we are well positioned for long term success.
Olivia: And finally, our recent to wealth and customer recognition across our differentiated solution.
Olivia: Four zero emission platform are proof points that we are developing the right set of solutions for the next generation of electric vehicles.
Olivier: We continue to expand our <unk> offerings, not only to sell the expected growth in hybrids, but also to develop our largest <unk> for industrial applications.
Olivia: Thank you for your time, operator, we are now ready to begin the Q&A.
Olivier: Our operational framework is highly cash generative over cycles.
Speaker Change: We will now begin the question and answer session.
Olivier: Boeing is to invest in new technologies, while reducing debt and returning cash to shareholders.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Olivier: Our priority remains to identify and focus on unmet customer needs, where we can leverage our innovation capabilities to develop differentiated and highly efficient solutions at scale.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Olivier: Turning now to slide 17.
Speaker Change: I want to thank the entire of Garrett team for driving outstanding operating performance in the quarter. We have proven once again, the resilience of our financial framework delivering solid financial results and achieving a 17, 4% adjusted EBITDA margin.
Yeah.
Speaker Change: Yes.
Speaker Change: And our first question will come from Hamzah <unk> of Dws financial. Please go ahead.
Hamzah <unk>: Hi, Good morning, So first question.
Speaker Change: Given your.
Speaker Change: Performance in Q3, and the commentary you gave in Q2.
Speaker Change: We continue to return capital to shareholders, which we believe makes garrett highly attractive investments.
Speaker Change: What's changed that surprised you in Q3 that.
Speaker Change: We secured several significant commercial wins in <unk> and are expanding our portfolio to sell industrial and marine applications with our newest and largest travel offering.
Speaker Change: Glad to you to readjust your guidance with Q4.
Speaker Change: That's that's a good question.
Speaker Change: And finally, our recent of wealth and customer recognition across our differentiated <unk> solutions for zero emission platform are proof points that we are developing the right set of solutions for the next generation of electric vehicles.
Speaker Change: Let me try to address that.
Speaker Change: At the end of the day is the softness of the automotive industry.
Speaker Change: It's a little bit longer I don't think its a surprise by the way because I've seen that pretty much everyone has seen the same way.
Speaker Change: Thank you for your time, operator, we are now ready to begin the Q&A.
Speaker Change: And this is this is the main driver because further risks quite frankly, the performance of the company is.
Speaker Change: We will now begin the question and answer session.
Speaker Change: Quite quite nice and.
Speaker Change: Potentially I would even say even bid on and what we anticipated when it comes to margin standpoint.
Speaker Change: Okay are you are you seeing any changes in China.
Speaker Change: As far as your customers are concerned and the startup of production for what you've won.
Speaker Change: Is there any impacts there.
Speaker Change: What we are seeing in China is that there is we keep on adding softness into the passenger vehicle industry.
Speaker Change: And we keep on adding a huge viability of <unk>.
Speaker Change: What we could share the amount of participation of additional until makers on the marketplace.
Speaker Change: That is not only limited to the global ones by the way some of the legacy state owned.
Speaker Change: Enterprises.
Speaker Change: Also lost some shares to Wilson.
Speaker Change: Some new.
Speaker Change: Faisel.
Speaker Change: Rising companies, that's one but at the same time, that's probably the trend we've seen on that visual that remains but what we've seen more than that is a weakening industry in Europe and you may have seen that and also I would say some positive signals to me to get done.
Speaker Change: The commercial vehicle industry. The on highway business in China for US is a sign of recovery into interest rates.
Speaker Change: And certain signs of recovery.
Speaker Change: Cause of the underlying trend of the industry and also because we are starting to see a significant benefit of a number of applications that we won especially on the gas.
Speaker Change: <unk> powered.
Speaker Change: Trucks, the natural and guests that will trucks.
Speaker Change: Which is a place where we are developing our position.
Speaker Change: Okay.
Speaker Change: My question was are you in a position to talk about.
Speaker Change: What's happening in the light vehicle market as far as.
Speaker Change: Mix is concerned a lot more.
Speaker Change: Hybrid vehicles are being considered and you you're talking about.
Speaker Change: When this will benefit you on the sales side and by what magnitude.
Speaker Change: Wow.
Speaker Change: <unk> that's operating so the first one as we said the consolidation.
Speaker Change: Our industry.
Speaker Change: Drives some more programs to the direction of the main players we are not the only one there.
Speaker Change: But we see that happening and we see that as a positive trend.
Speaker Change: For the for the demand in the years to come on.
Speaker Change: On top of that is the point, we were alluding to or during our next call which is <unk>.
Speaker Change: That <unk>.
Speaker Change: Busy reviewing there.
Speaker Change: Our strategy portfolio for the long term taking into account a bigger share of plug.
Speaker Change: Plug in hybrid vehicles is happening at the same time and this is a goodness for the total industry.
Speaker Change: The natural gas that will trucks.
Speaker Change: She is goodness for Garrett as well those two trends combine outflows.
Speaker Change: Which is a place where we are developing our position.
Speaker Change: Okay and my other question was.
Speaker Change: And my last question is are you seeing.
Speaker Change: Are you in a position to talk about the what's happening in the light vehicle market as far as product mix is concerned a lot more.
Speaker Change: Customers adopt more of your <unk>.
Speaker Change: Higher priced higher margin or more on the lower end.
Speaker Change: New products.
Speaker Change: Hybrid vehicles are being considered and you talk are you talking about.
Speaker Change: What we see is that.
Speaker Change: When it comes through.
Speaker Change: When does well.
Speaker Change: Benefit you on the sales side and by what magnitude.
I would say I would be specific because.
Speaker Change: In Europe, we are already adding a lot of what we would call valuable geometry, Turbochargers also on hybrid vehicles.
Speaker Change: Well sure things that's operating so the first one as we said the consolidation of our industry do.
Speaker Change: I would say in the U S.
Speaker Change: Drives some more programs to the direction of the main players.
Speaker Change: Uh huh.
Speaker Change: The next tier four.
Speaker Change: Not the only one there.
Speaker Change: Emission.
Speaker Change: Regulations drive.
Speaker Change: But we see that happening.
Speaker Change: <unk> on the total charter, which is a good trend for us.
Speaker Change: And we see that as a positive trend.
Speaker Change: Our fault.
Speaker Change: For the demand in the years to come.
Speaker Change: And whether it's applying to pure ice.
Speaker Change: On top of that is the point, we were alluding to or during our next call which is that <unk>.
Speaker Change: Powertrain all hybrid powertrain.
Speaker Change: Okay. Thank you.
Speaker Change: Busy reviewing their desk.
Speaker Change: Our strategic portfolio for the long term taking into account a bigger share off.
Speaker Change: The next question comes from Michael Ward of Freedom Capital. Please go ahead.
Speaker Change: Plug in hybrid vehicles is happening at the same time and this is goodness for the total industry.
Speaker Change: Good morning, everyone.
Michael Ward: Two things on the interest expense side.
Speaker Change: Goodness for Garrett as well those two trends combine outflows.
Michael Ward: Why wasn't the benefit from the rehab and May reflected in the quarterly interest expense number.
Speaker Change: And my last question is are you seeing.
I mean, you are seeing an effect in the run rate if youre looking at cash, though remember we do have bonds outstanding and May pay twice a year.
Speaker Change: Customers adopt more of your higher priced higher margin or more on the lower end.
Speaker Change: New product spectrum.
Speaker Change: But in terms of interest expense you are starting you are starting to see it.
Speaker Change: What we see is that.
Speaker Change: I'm looking at 37, I'm looking at $37 million versus 35 in Q2.
Speaker Change: When it comes true.
Speaker Change: I would say I would be specific because.
Speaker Change: In Europe, we are already adding a lot of what we would call valuable geometry, Turbochargers also on hybrid vehicles.
Speaker Change: Right, but.
Speaker Change: So I think I can walk you through that Rec, Mike offline.
Speaker Change: I think we are.
Speaker Change: We absolutely are seeing the benefit on interest expense.
Speaker Change: And I would say in the U S.
Speaker Change: It's just not showing up on the income statement.
Speaker Change: The next CFO.
Speaker Change: There is some accounting back and forth of the some of the feed flowed through.
Speaker Change: K three from Q2 refi.
Speaker Change: There were so there were some one time fees in there.
Speaker Change: That and you've got some interest rate swap activity with market movements.
Speaker Change: And what were the onetime fees.
Speaker Change: Oh, I think it's probably a million or $2, but.
Speaker Change: Again, let me give you the details on that I think more importantly, it's more of the activity on the market against our interest rate swaps that are mark to market.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Let me on page five you kind of go through some of you have a lot going on on the electrified solutions a lot of it seems to be targeted towards the commercial side are larger vehicles is that fair to say and it looks like.
Speaker Change: Yes several.
Speaker Change: 20 programs that are starting to kick off and I'm just curious about what that means structurally for the industry are you seeing some of these manufacturers go towards a respected name like Garrett and engineering expertise.
Still is that part of the market just starting to develop what are you seeing now.
So.
Speaker Change: It's a good question.
Speaker Change: Let me let.
Speaker Change: Let me answer your question into two parts. The first one is that.
Speaker Change: We are talking about commercial retail.
Speaker Change: But we're also talking about passenger vehicle on that page you may have.
Speaker Change: We are nonetheless.
Speaker Change: <unk> dominated by commercial that I just saw the one blip on the passenger okay, but I mean, there is always in this industry things that you can say publicly about programs and nuts.
<unk> is a big deal for us okay.
Speaker Change: I would even say, it's not very often.
Speaker Change: Thats Youll get overwhelmed with you being given by carmakers in this industry.
Speaker Change: For a technology that is not yet in production. So that tells you about the magnitude of the change that we are bringing.
Speaker Change: Okay. So that's four passenger all the HR, what I am saying also is that obviously diminish it.
Speaker Change: Sure dense solution increase with the power of the powertrain the more horsepower the more benefit you get from our solutions, which is true for passenger vehicle and is even more true for commercial vehicles and we wanted to highlight that you could commercial the HR as you've seen through the deck and through many presentations we did it.
Speaker Change: An industry that we like very much it's an industry, where the end consumer.
Speaker Change: For the technology that is adding on these veto.
Speaker Change: If you save a few percent of analogy a fleet manager would pay for that.
Speaker Change: And thats good.
Speaker Change: And you can see that obviously, we are dealing with high power on those solutions and we are highlighting in the presentation that on some specific axles versus some competitive up.
Speaker Change: Solutions that are existing that we bring benefits up to 300 kilograms on onex, so of the 80 duty truck.
Speaker Change: So the big deal as well.
Speaker Change: <unk>, we've been working at that for some time commercial vehicle, we started a little bit later.
Speaker Change: And I would say I am very pleased to validate that obviously there is a need for our technology on passenger the HL, but there is a need on commercial the HL on quite frankly sticking up very very fast and that's the reason why you wanted to highlight that.
So if you look out five or 10 years longer term and you look at that.
Speaker Change: Sure.
Speaker Change: Passenger vehicle and then the commercial vehicle segments and your mix of revenue.
Speaker Change: What percentage do you think will be electrified.
Speaker Change: Today.
Speaker Change: With the targets, we have and that we have.
Speaker Change: Disclosed is that.
For 2017.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: Targeting $1 billion of revenue.
Speaker Change: None.
Speaker Change: Both businesses, so and then <unk>, which is.
Speaker Change: And some of.
Speaker Change: In terms of product for us fuel cell compressor hydrogen electric vehicle.
Speaker Change: Yeah.
Speaker Change: The Fuller.
Speaker Change: <unk> solution.
Speaker Change: Gal.
Speaker Change: Light duty vehicles on trucks.
Speaker Change: So electric.
Centrifugal compressors.
Speaker Change: <unk> electric vehicles. These are the three products that we have in mind. There is obviously a significant portion of that that would be driven by your electric powertrain.
Speaker Change: To date that obviously, there is a need for our technology on passenger on the HR, but there is a need on commercial the HR and quite frankly sticking up very very fast and that's the reason why you wanted to highlight that.
Speaker Change: Okay. So if you take a $5 billion type revenue number youre talking about 20% of revenue. So it's not like you are being pushed out of the market with <unk> being included.
Speaker Change: But as you go forward.
Speaker Change: So if you look out five or 10 years longer term when you look at that.
We are not just pushed out of the market on the turbo side.
Speaker Change: When you look at when you look at we gave this forecast by the way at the time when.
Speaker Change: Sure.
Speaker Change: Passenger vehicle and then the commercial vehicle segments.
Speaker Change: Your mix of revenue.
Speaker Change: And we've been public about that we were expecting a 41%.
Speaker Change: What percentage do you think will be electrified.
Speaker Change: Battery electric the HL.
Speaker Change: Well today.
Speaker Change: On light vehicle by 2017.
Speaker Change: With the targets we have.
Yes.
Speaker Change: <unk> disclosed is that.
Speaker Change: And you know thats, probably the loss trends are far below that so the data that we see on our core business is a long tail and is that payout is fed by a few things first there is a consolidation happening in our industry that goes to the benefit of people that are being the widest portfolio.
Speaker Change: For 2017.
Speaker Change: <unk>.
Speaker Change: Targeting $1 billion of.
Speaker Change: Of revenue.
Speaker Change: None.
Speaker Change: Both businesses.
Speaker Change: Global businesses, which is.
Speaker Change: In terms of.
Speaker Change: The most solid position into the industry when it comes to portfolio development, but also the financials to ensure that transition.
Speaker Change: From a product for us fuel cell compressor hydrogen electric vehicle.
Speaker Change: <unk>.
Speaker Change: The full.
Speaker Change: <unk> train solution.
Speaker Change: Gal.
Speaker Change: And at the same time, we are adding plug in hybrids that are coming out of new technologies, we are talking about that with that with them.
Speaker Change: Light duty vehicles and trucks.
So electric.
Speaker Change: Centrifugal compressors.
Speaker Change: <unk> electric vehicles. These are the three products that we have in mind. There is obviously a significant portion of that that would be driven by electric powertrain.
Speaker Change: It's a go.
Speaker Change: And on the commercial vehicle side, we know that the transition will be longer.
Speaker Change: And on the commercial vehicle side, we learned that with our industrial our industrial trouble with the new segment that we all know leukemia, that's not for the HOS, thus far Gen sets.
Speaker Change: Okay. So if you take a $5 billion type revenue number youre talking about 20% of revenue. So it's not like you are being pushed out of the market with <unk> being included.
Speaker Change: Most of the use of that is for backup power.
Speaker Change: But as you go forward.
Speaker Change: We are not just pushed out of the market on the turbo side.
Speaker Change: Gen set for data center is booming and I don't see that slowing down anytime soon so our <unk> business is extremely resilient long term.
Speaker Change: When you look at when you look at we gave this forecast by the way at the time when.
Speaker Change: And we've been public about that we were expecting a 41% of battery electric the Ito.
Speaker Change: We disclosed a year ago that we are expecting that by 2030. The revenue that we were expecting on the turbo side would be at the same level as 2023.
Speaker Change: On like the <unk> by 2017.
And <unk> BV.
Percentage that is probably higher.
Speaker Change: When people are.
Speaker Change: In their latest forecast.
Speaker Change: Very helpful. Thank you.
Speaker Change: Hey, Mike I, just want to clarify one thing it really is all driven by the interest rate swaps.
Speaker Change: The step up in interest interest expense.
Speaker Change: And does that.
Speaker Change: To the interest rate swaps tail off or the.
Speaker Change: Are they less necessary.
Speaker Change: We do we do like to hedge.
Speaker Change: Our interest rate to be about 80% fixed but they do they are layered in over time. So we dollar cost into them. So they do trail off over the coming years, but we would also be layering new ones on.
Speaker Change: Okay.
Speaker Change: It's also they're also being mark to market and so it can ebb and flow and there's also cross currency swaps in there as well, okay I'm Joe substantially less.
Speaker Change: Your balance sheet now you have more than half of your debt is fixed.
Speaker Change: Yes.
Speaker Change: If we look back compared to May.
Speaker Change: Today, you should have less of a need for these swaps.
Speaker Change: Correct.
Speaker Change: Well interest rates swaps, yes, but we swap all of our U S dollar debt into Europe. So we have cross currency swaps as well because the majority of our cash flows in Europe are in euro so we'd like to match up our our debt flows to our cash flows.
Speaker Change: It's always been that way you have gone from $1 seven down to $700 million of debt.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: That is correct. So we have less of a need for swaps that is correct on an interest rate basis. So Kevin hundred thousand of the term loan B is also swapped into fixed while not smoke not also 700, but a fair amount.
Speaker Change: So some of what we saw in Q3.
Speaker Change: It was just because that was tailing off and knowledgeable powered you're going to have less of a need to swap is that correct.
Speaker Change: I would say, yes, but we unwound the swaps that were associated with the debt that we thought <unk>. So we are we.
Speaker Change: We are hedged and we're not we're not speculating with they.
Speaker Change: They don't have an underlying and.
Speaker Change: When did that unwinding take place in Q2, okay.
Speaker Change: Alright, thanks, very much Youre welcome.
Speaker Change: The next question comes from Brian Manheimer of Gabelli funds. Please go ahead.
Brian Manheimer: Hi, good morning, everyone.
Speaker Change: The top line here is.
Brian Manheimer: Obviously, something that you are going to be dealing with from an.
Speaker Change: An end market perspective.
Brian Manheimer: The durability of which we can maybe talk to talk about later, but the 17, 4% EBITDA margin. Despite the softness begs the question of whether you all have found.
Brian Manheimer: A higher floor for.
Brian Manheimer: Profitability.
Brian Manheimer: And.
Speaker Change: How sticky.
Speaker Change: That sort of really excellent performance can be assuming Europe, and China remained soft so if im looking at this.
Speaker Change: The way that I'm seeing it.
Speaker Change: Are you maybe structurally.
Speaker Change: More profitable entity than you otherwise would have thought.
Speaker Change: Or are there potentially some cost that could layer back in if softness.
Continue in these end markets.
Speaker Change: Brian Nice to have you on the on the call today.
Brian: Pointing at a very interesting point for us.
Brian: Which is the profitability of this company.
You've been following guide for quite some time, you know that we have a high degree of valuable costs.
Brian: And we work on that.
Brian: In the dominant way.
Brian: Every day, we work on improving our cost position and when we improve our cost position. That's obviously something we improve for the long run meaning we are always working on structural faults in order to make this company more agile.
Brian: And therefore, some people call that the breakeven points, but for us it's improving the flexibility of the company to the short term shock that we can find on the marketplace, which I think is the key to success into the automotive industry because long run we know where we will and usual legions of fans is coming from the short term.
Brian: So today.
Brian: It's the result, not only have one console. This fault we've been working.
Brian: Diligently for the last two years, even more on that because we were seeing we weren't anticipating that there could be some softness we at <unk> identified pockets of inefficiencies.
Brian: And we are always working on these things so it's not like a one quarter delay fault.
Brian: We will add.
Brian: Making our factories more flexible work at decreasing our fixed costs.
Brian: Into the factories as an example, and we had a big plan going on for the last year on these things.
Brian: So.
Brian: It's like getting to the Jim that's the analogy I'm, making with the team you need to do that.
Brian: On a daily basis.
Brian: And this is the price of excellence when it comes to margin.
Brian: I would say that obviously a few points that are helping us.
Brian: On top of that that are probably a little bit more minor when it comes to their contribution but interesting.
Brian: We've seen her.
Brian: The deflation best true and you may remember some of the quarters, we did earlier.
Speaker Change: A year ago, when our west question. When you guys that you are getting back to the corridor margin that you add indicated five years ago that you would be closer to 18%.
Speaker Change: And we were mentioning that ethics west part of it well if <unk> been pretty much stable. So it's not the driver for that but thats, obviously, the inflation, especially on raw material.
Speaker Change: It was a point for us because when we get compensated for $1 of cost we get 100 off price and this is dilutive to our margin that we had given a little bit of an idea of what it meant for us. So there is obviously as we got on deflation on some specific raw materials.
Speaker Change: The impact of the deflation into the improvement of these.
Speaker Change: These margins and that could fluctuate.
Speaker Change: Obviously on that but most of the asphalt is coming from.
Speaker Change: I should not say up call costing measures but.
Speaker Change: Adapting the structure working on efficiency, developing new systems, new processes and everything across the company.
Speaker Change: On a daily basis.
Speaker Change: And this is the price of excellence when it comes to margin.
Speaker Change: I would say that obviously a few points that are helping us.
Speaker Change: Okay.
Speaker Change: I appreciate that.
Speaker Change: Color there one concern I have across the industry is that given that.
Speaker Change: On top of that that are probably a little bit more minor when it comes to the contribution but that are interesting.
Speaker Change: We've seen.
Speaker Change: Pressure that automakers are seeing and you know to date yourself.
Speaker Change: The deflation pass through and you may remember some of the calls we did earlier.
Speaker Change: Whether yearly price downs or.
Speaker Change: A year ago, when our west question. When is it guys that you are getting back to the corridor margin that you add indicated five years ago that you would be closer to 18%.
Speaker Change: Effectively price performance.
Speaker Change: It is going to become increasingly more challenging for the supply base is that something that you're anticipating on the light vehicle side.
Speaker Change: And we were mentioning that FX was part of it well. If you followed our story has been pretty much stable. So it's not the driver for that but thats, obviously, the inflation, especially on raw material.
Speaker Change: Is it already here.
Speaker Change: And I'll, let you take it from there.
Speaker Change: Yeah.
Speaker Change: There is there is indeed.
Speaker Change: What's the point for us because when we get compensated for $1 of cost we get $1 off price and this is dilutive to our margin that we had given a little bit of an idea of what it meant for us. So there is obviously as we got on deflation on some specific raw materials the impact of the deflation into the improvement of that.
Speaker Change: Price pressure quite frankly, <unk> seen that price pressure going down sawgrass.
Speaker Change: Five years.
Speaker Change: So and I don't think it does E staff.
Speaker Change: The point is that we've been demonstrating that we could get our share of shelf price.
These margins and that could fluctuate.
Speaker Change: Obviously on that but most of the effort is coming from.
Speaker Change: At the time, when we need it when it came to inflation, whether it was inflation about raw materials, but also some other type of inflation transportation energy and everything else.
Speaker Change: I shouldn't say up call costing measures, but.
Speaker Change: Adapting the structure working on efficiency, developing new systems, new processes and everything across the company.
Speaker Change: And price fall customers is always relative to the next best alternative that can accelerate the connection.
Speaker Change: Okay.
Speaker Change: I appreciate the color there one concern I have across the industry is that given that.
Speaker Change: At the end of the day as long as.
Speaker Change: We bring the right performance, whether it's the performance of our products.
Speaker Change: Pressure that automakers are seeing and you know to date yourself.
Speaker Change: To our customers.
Speaker Change: It makes it we see that arbitrage.
Speaker Change: Whether yearly price downs or.
Speaker Change: A little bit more complex.
Speaker Change: Effectively price performance.
Speaker Change: It doesn't mean that we are noticing our customers to reduce their costs we do.
Speaker Change: Is going to become increasingly more challenging for the supply base is that something that you're anticipating on the light vehicle side.
Speaker Change: And this is this is a way for us.
Speaker Change: To help them and to help our sense at the same time.
Speaker Change: Is it already here.
Speaker Change: So price pressure.
Speaker Change: And I'll, let you take it from there.
Speaker Change: In all fairness.
Speaker Change: It exists it has existed at not seen that.
Speaker Change: Yes.
Speaker Change: There is there is indeed.
Speaker Change: Going down any way of other last five to 10 years.
Speaker Change: Price pressure quite frankly in all fairness is not seen that price pressure going down sunrise.
Speaker Change: But I've not seen a complete change and at the end of the day. There is what you can asphalt and there is what the industry can deliver.
Speaker Change: Five years.
Speaker Change: So and I don't think it does it does E staff.
Speaker Change: Understood. Thank you very much I'll pass it along.
Speaker Change: The point is that we've been demonstrating that we could get our fair share of price.
Speaker Change: This concludes the question and answer session. The conference has now also concluded.
Speaker Change: At the time, when we need it when it came to inflation, whether it was inflation about raw materials, but also some other type of inflation transportation energy and everything else.
Speaker Change: Thank you for attending today's presentation and you may now disconnect.
Speaker Change: And price for customers is always relative to the next best alternative they can accelerate the connection.
Speaker Change: At the end of the day as long as.
Speaker Change: We bring the right performance, whether it's the performance of our products with the support to our customers.