Q4 2024 Garrett Motion Inc Earnings Call
Replay will be available later today.
After the company's presentation, there will be a Q&A session.
I'd now like to turn the conference over to see real Grand Jane Garrard, Vice President Investor Relations and Treasurer.
Speaker Change: Thank you good day and welcome everyone. Thank you for attending the Garrett motion fourth quarter and full year of 2020 full financial results conference call before we begin I would like to mention that today's presentation and earnings press release.
Speaker Change: Bill on the IR section of Garrett motion website at investors the Garrett motion Dot Com. There you will also find links to our SEC filings along with other important information about the company.
Speaker Change: We note that this presentation contains forward looking statements within the meaning of the U S. Federal Securities laws. These statements, which can be identified by words, such as anticipate intend plan believe estimate expect likely may should will or similar expressions represents man.
Speaker Change: Management's current expectations and are subject to various risks and uncertainties that could cause our actual results to differ materially from such expectations.
Speaker Change: These risks and uncertainties include the factors identified in our annual reports on Form 10-K, and other filings with the Securities and Exchange Commission and include risks related to the automotive industry competitive landscape and macroeconomic and geopolitical conditions among others.
Speaker Change: Please review the disclaimers on slide two of our presentation as the contents of our call will be governed by distinguish today's presentation. Also includes certain non-GAAP measures, which we use to help describe how we manage and operate our business. We reconcile each of these measures to the most directly comparable GAAP measure in the.
Speaker Change: Appendix of our presentation and our related press release.
Speaker Change: Finally, today's presentation and comments, we may refer to light vehicle diesel and light vehicle gasoline products by using the terms diesel and gasoline.
Speaker Change: With us today.
Sean Deason: <unk>, President and Chief Executive Officer, and Sean Deason, Garrett Senior Vice President and Chief Financial Officer.
Speaker Change: I'll now hand, the call over to Eddie.
Eddie: Thanks, Gary and thanks to everyone for joining to this call as you can see on slide three.
Speaker Change: <unk> strong results in the fourth quarter, Thanks to an outstanding operating performance delivering adjusted EBITDA of $153 million at all with the mounting of 18, 1% an increase of 280 basis points compared to Q4 2023.
Eddie: And we achieved that despite the continuous self softness.
Eddie: The company experience, thanks, tweets exposure to light vehicle industry weakness in Europe, and in China, as well as the competitive pressure and Oems are facing.
Eddie: At the same time, we kept winning new business across all application demonstrating the strength of our technological leadership.
Eddie: Let's get back to operational performance.
Eddie: Our strong operational performance enabled us as well to generate $157 million of adjusted free cash flow in the quarter, allowing us to buy back stock under our share repurchase program repurchasing a total of $296 million of come and go to our common stock in 2000.
Eddie: 24.
This resulted in a reduction of 17% of our share count at the end of.
Eddie: 2024, compared to the end of 2023.
Eddie: Our full year results.
Eddie: Continue to demonstrate our ability to flex our variable cost structure and productivity implement permanent cost actions, which allowed us to deliver a 17, 2% adjusted EBITDA margin for the full year.
Eddie: When you adjust for foreign exchange and the sales of our consolidated joint venture in Australia.
Eddie: We did eval and adjusted EBITDA near the midpoint of our initial 2020 for guidance and thus despite the softness we experience this is quite remarkable.
Eddie: We believe the actions we have taken in 2020 for position the company to deliver solid performance in 2025.
Eddie: Setting again, the impact of expected weak global industry production.
Eddie: Excluding foreign exchange, we also expect to deliver adjusted.
Eddie: Adjusted EBITDA to 2024.
Eddie: We also expect to generate strong adjusted free cash flow and use it to keep on returning value to our shareholders through a combination of share repurchases regular quarterly dividends.
Eddie: Our board of director as indeed authorized a new $250 million million share.
Eddie: Share repurchase program for 2025, and we expect to pay $50 million in dividends throughout the course of the year with the first quarterly dividend of 6% per share already paid in January.
Eddie: Let me now move to slide four so that we can share the momentum we experienced with our customers.
Eddie: Looking at full year 2024, we continue to expand our position in <unk>, maintaining our strong business win rate of more than 50%.
Eddie: We secured new light vehicle gasoline wins across all geographies reinforcing our position in the U S and growing in China, especially with new Chinese players.
Eddie: These wins covered all powertrain types, including plug in hybrids and range extenders for which we see a growing push from carmakers.
Eddie: Also kept on making significant progress in commercial vehicles across the world more specifically we are pleased with the progress we have been making in China, winning several natural gas on highway applications that we launched as early as 2026.
Eddie: Lastly, we seek your newer work for marine and backup power obligation with our largest turbo Chargers as we expand our portfolio and we expect production to soft also in 2026.
Eddie: Turning now to slide five.
Eddie: I'm very proud of the significant progress we made in 2024.
Eddie: <unk>, our electrification solution with key customers recognize the benefits of our differentiated technologies.
Eddie: We indeed continue to win with our extensive fuel cell compressor portfolio. The broadest in the industry with best in class efficiency and we continue to win new project for fuel cell applications.
Eddie: With our IBO train ISP technologies, we are seeing several passenger and commercial vehicle customers embracing and 15, our advanced three in one ISP technology solution.
Eddie: During the year, we have been moving from prototyping to <unk> labs and on vehicles to first production. There was expected to launch as early as 2027.
Eddie: This validates again the benefits of the ISP the differentiated electric powertrain solutions that Garrett is focused on.
Eddie: Leveraging on the significant progress we expect much more to come in 2025.
Eddie: Finally, our equally compression technology is generating significant interest for both automotive and nonautomotive applications.
Eddie: The automotive side, it's a very good fit for battery uncap, including four commercial vehicle and for industry or application, we see significant interest for residential office building rooftop coding as well as cooling solutions for data centers and battery farms.
Eddie: I'll now turn it over to Sean to provide more insight into our financial results and outlook for 2025.
Sean Deason: Thanks, Olivier and good morning, everyone I'll begin on slide six <unk>.
Speaker Change: As Olivier highlighted once again, we delivered strong financial results in a soft industry environment, driven by our continuous focus on variable cost management and the implementation of structural cost productivity actions.
Sean Deason: Fourth quarter net sales were $844 million.
Slightly up sequentially stabilizing after declines over the past four quarters as new program ramp ups offset continued softness in Europe and declines in gasoline and diesel light vehicle production.
Sean Deason: We recorded fourth quarter, adjusted EBITDA of $153 million up $8 million from $145 million last year.
Sean Deason: This improvement was driven by variable and fixed cost productivity deflation and favorable product mix, partially offset by lower volumes and an unfavorable foreign exchange impact.
Sean Deason: The performance this quarter once again demonstrated our ability to deliver strong financial performance across industry cycles as can be seen in the upper right graph.
Sean Deason: Adjusted EBITDA margin was 18, 1% for the quarter up from 15, 3% last year and up sequentially benefiting from the actions just mentioned.
Sean Deason: We generated very strong adjusted free cash flow of $157 million in the quarter up from $137 million in Q4 2023, as we converted our adjusted EBITDA into cash and benefited benefited from a positive working capital contribution.
Sean Deason: We expect to continue to deliver 60% of adjusted free cash flow conversion on adjusted EBITDA annually in line with our capital allocation framework.
Sean Deason: Moving now to slide seven we show our Q4 and full year net sales bridge by product category as compared with the same period last year for Q4, we continued to experience gasoline softness in China and in North America, which was partially offset by ramp ups in Europe, comprising 45% of net sales flat.
Sean Deason: From last year.
Sean Deason: The diesel decline we saw in Q4 year over year was mainly due to lower industry production, primarily in Europe, where we have a higher share of demand.
Sean Deason: We also saw a slight increase in commercial vehicle sales, which reflects of the beginning of a recovery in industry recovery in China and North America.
Sean Deason: As mentioned for the full year, we experienced both industry declines in demand softness from specific global Oems due to competitive pressure in the auto space and some cases, forcing them to accelerate platform consolidation.
Sean Deason: Revenue from our commercial vehicles throughout the year was impacted by economic softness in Europe, and North America.
Sean Deason: Our aftermarket business increased 1% at constant currency due to the continued demand for replacement parts, primarily in China and Europe.
Sean Deason: Finally on a full year basis, the pass through commodity deflation across all verticals resulted in a 2% sales decline and foreign exchange was a headwind of $34 million.
Sean Deason: And Japanese yen volatility and a weakening in Europe.
Sean Deason: Moving now to slide eight we walk you through our fourth quarter, adjusted EBITDA of $153 million, representing again and $8 million improvement over the same quarter last year. We achieved this strong performance by delivering fixed cost productivity coupled with strong.
Sean Deason: Long pricing inflation recovery.
Sean Deason: This execution drove significant quarterly margin improvement year over year, allowing us to deliver a strong adjusted EBITDA margin of 18, 1%.
Sean Deason: Overall in the quarter, we delivered $37 million in operating performance improvements year over year, offsetting both volume declines and a negative foreign exchange impact.
Sean Deason: For the full year 2024, we delivered adjusted EBITDA performance of $598 million, representing a $37 million decreased from the prior year driven by sales declines and foreign exchange, partially offset by operating performance.
Sean Deason: Our full year adjusted EBITDA margin was 17, 2% up 90 basis points compared to the prior year.
Sean Deason: If you adjust for the impact of foreign exchange and divestiture activity during the year.
Sean Deason: Fact of the volume decline is almost completely offset by our operational performance of more than $100 million.
Sean Deason: And reflects the impact of structural fixed cost productivity actions in our ability to flex our variable costs in a volatile industry environment.
Sean Deason: While the industry environment was challenging in 2024, we continue to increase investments supporting the development of differentiated technologies in both turbo and zero emission applications, increasing spending on R&D by $12 million as compared to the prior year.
Sean Deason: And turning now to slide nine.
Sean Deason: I'll walk you through the adjusted EBITDA to adjusted free cash flow bridge for the full year 2024.
The company's adjusted free cash flow of $358 million.
Sean Deason: It represents a 60% adjusted free cash flow conversion of adjusted EBITDA in line with our financial framework.
Sean Deason: Had minimal working capital usage on a full year basis with a strong recovery in Q4 as the industry stabilized.
Sean Deason: Cash taxes and cash interest were in line with expectations and our capital expenditures of two 6% of sales were within our financial framework.
Sean Deason: Moving now to slide 10, we ended 2024 with a strong liquidity position of $725 million. This is comprised of $600 million of undrawn capacity on our revolving credit facility and $125 million of unrestricted cash.
Sean Deason: Overall, we significantly improved our financial flexibility in 2024, finishing the year with total debt of $1 5 billion down from $1 $7 billion the prior year.
Sean Deason: Using our total debt by $203 million in the year and representing a net leverage ratio remained relatively flat at 221 times.
Sean Deason: During the fourth quarter and throughout 2024, we continued to deliver on our commitment to return significant capital to shareholders, we repurchased $70 million of common stock in the fourth quarter and a total of $296 million during 2024.
Sean Deason: Compared to a year ago, our share count has been meaningfully reduced by 32 million shares or 13% of shares outstanding compared to the end of 2023.
Sean Deason: As Olivier mentioned earlier, our board authorized a new share repurchase program of $250 million and we are planning to pay $50 million in dividends in 2025 to be paid quarterly.
Sean Deason: In early 2025, it's also important to note that we also refinanced our term loans, which should generate interest savings of $3 million annually. The new term loan will mature in 2030 to extending the maturity of the company's existing term loan by approximately four years.
Sean Deason: We also refinanced and Upsized, our revolving credit facility to $630 million with a maturity in 2030.
Sean Deason: Now as we turn to slide slide 11.
I'd like to take the time to introduce that for 2025 and in the future we will be using adjusted EBIT as a new financial metric.
Sean Deason: This will provide additional insight into our financial performance and profitability.
Sean Deason: To align with our peer group reporting practice and highlights the strength of our asset light operating model.
Sean Deason: For the full year 2024, our adjusted EBIT was $485 million, achieving an interesting industry leading margin of 14%.
Sean Deason: Now, let's move to slide 12 to see our 2025 outlook for adjusted EBIT and our other financial metrics.
Sean Deason: You can see our 2025 outlook, which implies the following mid points net sales of $3 4 billion.
Sean Deason: Net sales growth at constant currency.
Sean Deason: Minus 1%.
Sean Deason: Net income of $232 million.
Adjusted EBITDA of $575 million.
Sean Deason: Adjusted EBIT of $457 million.
Sean Deason: Net cash provided by operating activities of $402 million and an adjusted free cash flow of $345 million.
Sean Deason: This outlook reflects an improvement in the commercial vehicle market.
Sean Deason: Both on highway and off highway, which will partially offset the continued softness expected in the light vehicle industry.
Sean Deason: It also includes the continued benefit of the sustained sustainable fixed cost actions, we mentioned earlier, which were implemented in 2024.
When we exclude the negative effect of foreign exchange, our adjusted EBITDA is flat in 2025 compared to 2024 and our adjusted EBIT is down only 10 basis points due to a slightly higher stock compensation and depreciation.
Sean Deason: In this relatively flat revenue environment, we plan to execute productivity gains and pass through pricing at.
Sean Deason: At the same time, we remain focused on increasing customer interest across all regions and verticals for our zero emission products and we expect a slight increase in our R&D spending to four 6% of sales up 10 basis points from 2024.
Sean Deason: We expect to dedicate dedicate greater than 50% of the spend in 2020 520 emissions technologies, while still meaningfully investing in turbo.
Sean Deason: On Slide 13, you can see the walk of adjusted EBITDA from 2024 to 2025 outlook.
Sean Deason: As mentioned on the previous slide our 2025, adjusted EBITDA outlook midpoint is $575 million.
Sean Deason: A decline of $23 million versus 2024, while keeping margins flat year over year at 17, 2%.
Sean Deason: The decline is driven by the impact of unfavorable foreign exchange, mainly driven by U S dollar appreciation versus the euro as previously mentioned, excluding foreign exchange, our adjusted EBITDA is expected to be flat versus 2024.
Sean Deason: We expect to continue to execute on our productivity actions and deliver operational performance, which will offset projected product mix and volume headwinds in 2025.
Sean Deason: The actions taken in 2024 for improved productivity performance will also continue to benefit the companys performance and perverse preserve strong margins in 2025 without sacrificing investments in new technologies, which as previously mentioned, we will remain a priority.
Olivier: And with that I will turn it back over to Olivier for closing remarks.
Olivier: Thanks, Sean let's still now to slide number 14.
Speaker Change: Garrett continues to be well positioned for long term success, we are strengthening our leadership position in the total industry, while developing new technologies and expanding into industrial applications.
Speaker Change: Our operational framework is highly cash generative, allowing us to invest in new technologies, while reducing debt, reducing returning cash to shareholders.
Speaker Change: Okay.
Speaker Change: Let's now turn to slide 15.
Speaker Change: In 2020 fall, we have proven once again, the resilience of our financial framework delivering strong.
Speaker Change: Financial results and achieving a 17, 2% adjusted EBITDA Mountain.
Speaker Change: Our financial performance positions us well to continue to deliver strong margins and free cash flow in similar industry conditions in 2025.
Speaker Change: These financial results enabled us to return value to our shareholders through share repurchases totaling $296 million at all and we expect to continue returning significant value to shareholders in 2025 through a combination of additional share repurchases under our new $250 million share repurchase pro.
Speaker Change: Graham and $50 million in dividends paid quarterly.
Speaker Change: In addition, the structural cost actions that we drove in 2020 phone in anticipation of a software industry outlook for 2025 will enable us to continue to deliver strong margin and free cash flow.
Speaker Change: Once again, we made significant progress, especially across existing and new differentiated technologies seeking this stage fund those off successful year, our recent wells in customer recognition for our ice speed solutions for zero emission platforms.
Speaker Change: That we are developing the right solution for the next generation of electric vehicles.
Speaker Change: Lastly, obviously I wanted to take the opportunity to thank the entire Gary team for delivering an outstanding performance in the fourth quarter and the full year and positioned well the company for success in 2025.
Speaker Change: Thank you for your time and look for.
Speaker Change: Further we are now ready for Q&A.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you were using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: At any time your question has been addressed and he would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Amit <unk> with T. W. S financial Please go ahead.
Speaker Change: Hi, So I just wanted to ask you was how are you managing the year given a lot of the geopolitics and tariff how does that affect your business.
Speaker Change: And 225 and 26.
Speaker Change: <unk>.
Speaker Change: Are you asking.
Speaker Change: Very very interesting question.
Speaker Change: Okay.
Speaker Change: A quite chunky.
Speaker Change: What we are doing is to stay as flexible as possible.
once again
Speaker Change: It's true that today, it's difficult to predict exactly what will happen and when it will happen.
We made significant progress this past year across
existing and new differentiated technologies setting the stage for another successful year. Our recent awards and customer recognition for our high-speed solutions for zero-emission platforms prove that we are developing the right solution for the next generation of electric vehicles.
Speaker Change: We tend to be very fast ACH react team here.
Speaker Change: We are already engaged in discussions with customers and we tend to be very fast that reacting to that kind of.
Speaker Change: Events.
Speaker Change: For lack of a better wells, we've been facing a lot of Anthony events for the past years as an industry.
Speaker Change: We tend to be much more flexible and react here now that we were probably five years ago, but yeah. We are trying to anticipate as much as we can but it's too difficult to participate in a vacuum we need to understand what we face.
Speaker Change: The next question comes from Michael Ward with Freedom Capital. Please go ahead.
Thank you good morning, everyone.
Speaker Change: Olivia you mentioned in your presentation, China, and I Wonder if you could just expand on that a little bit.
Speaker Change: I saw that I was talking in the 10-K the revenue was down.
Speaker Change: It sounds like you have some new business with some of the local Chinese based manufacturers can.
Speaker Change: Can you give a little more detail on what youre looking at in China.
Speaker Change: Yeah, absolutely so China is a pillar an important region for us this year.
Speaker Change: The biggest automotive industry in the world and we play a significant role in China.
Speaker Change: Both in commercial retail and in passenger Ava H L.
And what we have seen Oh gosh. The last the last few years is that there's been a not only ashish will to more local Chinese players, but I would say a shift towards more low quota new Chinese players.
Speaker Change: That have come to the market, sometimes through the battery electric vehicle NGO and now that are pushing some solution to the marketplace with its plug in hybrid vehicles.
Speaker Change: The Orange Extender electric vehicle that we are quoting breaths.
Speaker Change: So what we have been doing.
Speaker Change: Is that for some time now we've been working with these companies.
Speaker Change: That have come with the new brands and new products to the marketplace and I would say we are starting to get good traction and good success.
Speaker Change: Are these new players.
Speaker Change: And in some regions of the world, we tend to move from.
Speaker Change: Ice to hybrid to battery electric vehicle it seems that in China.
Speaker Change: We are seeing it moving from battery too big and hybrids and range extended vehicle because I think there is probably a good understanding that you need several solutions in order to satisfy the needs of the consumers. So we are very active we are seeing a lot of pursuits on these technologies.
Speaker Change: We have been developing specific products to address the needs of those platform.
Speaker Change: And with regard to me.
Speaker Change: And on the vehicle side.
Speaker Change: Okay are there any customers you can point to where it sounded like you were alluding to some new business. That's kicking in in 'twenty six 'twenty seven did I hear that correctly.
Speaker Change: You'll hear that correctly and I will not mention names of customers yesterday.
Speaker Change: That's usually another practice, we have in the industry, it's confidential with the customers.
Speaker Change: But I would point out a successful new brands in China.
Speaker Change: Okay.
Speaker Change: Perfect.
Speaker Change: Sean on two things first could you.
Speaker Change: In the release, you talked about adjusted free cash flow of $157 million.
Speaker Change: Can you define how youre getting there.
Sure. It's a very strong EBITDA performance, but then we did have quite a nice lift from working capital, which had been a use.
Speaker Change: You'll see that.
Speaker Change: How are you defining it.
Speaker Change: It is an operating cash flow less capex.
Speaker Change: Yes, sorry, you have a rec table in the back of the deck Big wails lays that out but in and very high level terms its operating cash flow less capex and then we exclude the repositioning and other one time charges, but that can all be found on the rec table.
Speaker Change: Okay. Okay. So you are at a high level, but at a high level.
Speaker Change: At a high level that with us.
Speaker Change: Okay. So when you look at your 25 outlook. When you were talking about adjusted free cash flow Thats, what youre alluding to you're excluding any of the repositioning of the other things that are in there.
Speaker Change: I see that went up to 7%.
Speaker Change: Okay. So there was a factoring in peanuts that was the big number of the $39 million.
Speaker Change: Alright, and so with that what we do is when we when we factor we don't give ourselves the benefit for that so if we sell receivables even though it's a true sale. We don't look at that as a free cash flow benefit for that quarter. So it just gets so we would add back in and then reversed out.
Speaker Change: Yes for the year, it's nothing so okay.
Speaker Change: The second thing is on M&A I never heard you talk about M&A.
Speaker Change: Gesture I should say rarely are there M&A opportunities out there in your segment or is it something you're just staying away from his do you feel like you can build it internally just because of the strength on the R&D side, how do you view M&A on the overall capital allocation scheme.
Speaker Change: So the way we look at that first we need to get back to our organic growth strategy.
Speaker Change: We have an organic growth strategy that we see we think is very strong.
Speaker Change: Leveraging the two legs of the company on the one hand, it's the strengthening of the <unk> business. We are seeing the world consolidates <unk> ER, we are expanding our portfolio you've seen the detail we are launching on industrial and then the second leg of the company the development of the zero emission.
Speaker Change: The eco solutions with the three that I've explained today. This is where our resource and this is the base of our organic growth strategies.
Speaker Change: Recognizing that the I'll just see some segments that we wanted to push more and it's not it's quite a Jewish and everything we've said so far that we want to expand further on our commercial vehicle on a weighted off highway and industrial so if you put that together, obviously, a good administrated G should reinforce.
That's organic growth so like any company. We are active we are looking.
Speaker Change: Both trials in <unk>.
Speaker Change: We have not committed to anything on the M&A side.
Speaker Change: And I would just add that we are active but you don't hear us talk about it that often just because we have a very high bar, we do not want to take an action that will be dilutive to our shareholders. So the bar is quite high.
Speaker Change: And the best.
Speaker Change: We obviously are always looking at opportunities.
Speaker Change: Perfect.
Speaker Change: Thank you very much.
This concludes our question and answer session.
Speaker Change: France has now concluded. Thank you for attending today's presentation you may now disconnect.