Earnings Call Transcript - GTX Q3 2025

Operator, Operator

Hello. My name is Megan, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion Third Quarter 2025 Financial Results Conference Call. This call is being recorded, and a replay will be available later today. I would now like to hand the call over to Cyril Grandjean, Garrett's Vice President, Investor Relations and Treasurer.

Cyril Grandjean, Vice President, Investor Relations and Treasurer

Thank you, Megan. Good day, and welcome, everyone. Thank you for attending the Garrett Motion Third Quarter 2025 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's website at investors.garrettmotion.com. There, you will also find links to our SEC filings, along with other important information about the company. 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, expect, may, should, 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. These risks and uncertainties include the factors identified in our annual report 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. Please review the disclaimers on Slide 2 of our presentation as 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 we manage and operate our business. We reconcile each of these measures to the most directly comparable GAAP measure in the appendix of our presentation and related press release. 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. With us today are Olivier Rabiller, Garrett's President and Chief Executive Officer; and Sean Deason, Garrett's Senior Vice President and Chief Financial Officer. I will now hand the call over to Olivier.

Olivier Rabiller, President and Chief Executive Officer

Thank you, Cyril. Thank you all for joining the call today. I am pleased to report that Garrett delivered another set of strong financial results in the third quarter, thanks to increased sales in a more stable production environment and disciplined operational execution. Net sales for the third quarter were $902 million, up 6% at constant currency. This growth reflects outperformance over the industry in light vehicle turbo sales for both gasoline and diesel applications. In fact, our gasoline sales grew by 10% in the quarter, driven by our share of demand gains. Thanks to continued productivity and higher volumes, we achieved another quarter of very solid operating performance. Adjusted EBIT was $133 million, and our adjusted EBIT margin was 14.7%, which includes a 20 basis point dilution of the margin rate from tariff recoveries. We also delivered strong adjusted free cash flow of $107 million for the quarter. These results, combined with an improved forecast for the automotive industry for the second half of the year, have enabled us to raise our 2025 outlook midpoint. In addition, we continue to allocate capital in line with our stated framework and our commitment to delivering value to shareholders. During the third quarter, we accelerated our share repurchase activity, buying back $84 million of common stock. We also paid a $12 million quarterly dividend. Moreover, our Board of Directors just approved a 33% increase in our dividend, raising it to $0.08 per share for the fourth quarter. Now let me move to Slide 4 to share more about Garrett's continued success across our differentiated technologies. We continue to see growing interest in developing turbochargers for hybrids and range-extended electric vehicles. This quarter, we secured several additional awards for these technologies. In addition, we obtained several awards for commercial vehicles and industrial turbochargers in various regions including over $40 million for products supporting stationary power generation or gen sets. Demand for subunits continues to grow, fueled by the global expansion of data centers in which gen sets are installed for backup power generation. Sales of these products are expected to exceed $100 million in 2025 and represent an important growth opportunity for Garrett. This quarter, we also continued to make progress in developing our differentiated zero-emission products. We secured additional proof of concepts with two OEMs in Japan and China for our high-speed three-in-one E-Powertrain. In addition, on the E-Cooling side, we progressed with the development of our oil-free centrifugal high-speed compressor technology for industrial and mobility applications. We see strong momentum with customers for our E-Compressor technology, which is driving significant efficiency gains when tested against current industrial technologies. All in all, I am extremely pleased with our ability to deliver strong financial results while continuing to position the company for years of growth. I will now hand it over to Sean, who will provide more details on our financial results and outlook.

Sean Deason, Senior Vice President and Chief Financial Officer

Thanks, Olivier, and good morning, everyone. I will begin my remarks on Slide 5. As Olivier highlighted, we delivered strong financial performance in the third quarter. Our net sales were $902 million, driven by new gasoline launches and ramp-ups across key regions, favorable foreign currency impacts, and tariff recoveries, partially offset by continued weakness in aftermarket. We delivered $133 million of adjusted EBIT in the quarter, equating to a 14.7% margin. This represents both a year-over-year and a sequential increase resulting from ongoing operational productivity gains that help to offset an unfavorable product mix. And finally, adjusted free cash flow was $107 million as the business continues to convert earnings into cash. Now moving to Slide 6. We show our Q3 net sales bridge by product category as compared with the same period last year. In the quarter, net sales increased by $76 million versus the prior year or 9% on a reported basis and 6% on a constant currency basis, reflecting favorable foreign currency impacts. We continue to experience strong gasoline growth, outperforming the industry. This growth is driven by continued share of demand gains and new launches and ramp-ups across Europe, China, India, and Brazil. Within diesel, we experienced strong performance in both Europe and North America. This was partially offset by lower demand for aftermarket applications, primarily in North America. Additionally, we recovered $12 million of tariffs within the quarter. Turning to Slide 7. During the quarter, we generated $133 million in adjusted EBIT, representing a $16 million increase from the same period last year. This represents a margin rate of 14.7%, which is a 50 basis point improvement year-over-year. The increase in adjusted EBIT was primarily driven by increased volumes and the continued benefits of sustained fixed cost actions and variable cost productivity taken in the current and prior year. These increases were partially offset by an unfavorable mix driven by the strength in light vehicle gasoline applications. In the quarter, the impact of newly implemented tariffs drove a 20 basis point decline in the margin rate. Additionally, we benefited from a $9 million contribution or 60 basis points from favorable foreign currency impacts year-over-year. Turning now to Slide 8. I'll walk you through the adjusted EBIT to adjusted free cash flow bridge for the quarter. We delivered a strong adjusted free cash flow of $107 million. This was due primarily to increased volumes and efficient conversion of earnings into cash, which was partially offset by changes in working capital, driven by timing of payables and higher inventory due to increased volumes. Cash taxes, capital expenditures, depreciation, and cash interest were all in line with our expectations. Now moving to Slide 9. We ended the quarter with a liquidity position of $862 million, consisting of $630 million in undrawn capacity from our revolving credit facility and $232 million in unrestricted cash. I am pleased to report that during the quarter, both Fitch and S&P have upgraded Garrett's ratings by one notch for their corporate family rating considering not only our reduced net leverage but also acknowledging the substantial reduction in private equity ownership due to recent sell-downs by some of our top equity shareholders. Additionally, as announced today, we made an early voluntary repayment of $50 million on our term loan, reducing gross leverage. Moving to Slide 10. In the third quarter, our strong cash generation allowed us to repurchase $84 million worth of shares, including 5 million shares directly from Oaktree, our largest shareholder. We continue to target distribution of 75% of our adjusted free cash flow to shareholders over time through dividends and share repurchases, the latter of which will vary over time and will depend on various factors including macroeconomic and industry conditions. As Olivier mentioned earlier today, given our strong financial position, our Board approved an increase to our quarterly dividend for the fourth quarter rising 33% from $0.06 to $0.08 per share, which will be payable in December of 2025. I'll now transition to Slide 11 to discuss our 2025 outlook. We are raising our midpoint outlook for 2025 to reflect the improved forecast for the automotive industry in the second half and the impact of tariffs on sales and adjusted EBIT margin net of recovery. This revised outlook now implies the following midpoints: Net sales of $3.55 billion, flat to plus 1% at constant currency; net income of $280 million; adjusted EBIT of $510 million; net cash provided by operating activities of $415 million; and adjusted free cash flow of $385 million. With that, I'll now turn the call back to Olivier for his closing remarks.

Olivier Rabiller, President and Chief Executive Officer

Thanks, Sean. Now let's turn to Slide 12. Our strategic priorities remain clear and consistent. We aim to identify and deliver on customer needs by leveraging our capabilities to develop differentiated, high-speed, and highly efficient technologies. In doing so, we generate robust returns for our shareholders. Let me wrap this up on our final slide, Slide 13. First, we delivered strong Q3 results, fueled by share of demand gains in gasoline outperforming the industry, and this coupled with disciplined operational execution. We also generated $107 million of adjusted free cash flow in the quarter and $264 million year-to-date. This strong cash flow generation allowed us to invest in growing our turbo and zero-emission technologies. To date, we continue to win greater than 50% of our new Turbo business awards as we have done over the last five years. Additionally, we see increased interest in stationary power generation, and we are expecting over $100 million of sales this year from these industrial applications. I am also very pleased with the progress we have made this year on our zero-emission technologies with the first series production award for our high-speed E-Powertrain, which demonstrates the substantial potential of this technology. Momentum and interest continue to build for our high-speed oil-free E-Cooling centrifugal compressor with customer testing, demonstrating significant efficiency gains compared to current technologies. This year, we refinanced and repriced our term loan, lowering our interest by 75 basis points and repaid $50 million of this debt this month. We also initiated a quarterly dividend of $0.06 per share in Q1 and announced an increase to $0.08 per share for Q4. In addition, we repurchased $136 million of our common shares through Q3. These actions demonstrate our continued commitment to return capital to shareholders. I am very proud to highlight these achievements, positioning us extremely well for the remainder of 2025 and beyond. Thank you for your time. And operator, we are now ready for Q&A.

Operator, Operator

Our first question comes from Edison Yu with Deutsche Bank.

James Mulholland, Analyst

James Mulholland on for Edison. Congrats on the good quarter. Just looking at the volumes for the quarter, they were good, but they were fully offset by the mix. I was wondering if you could double-click on what you're seeing in there? Is it geographic-based? Or is it something you're expecting to continue as diesel penetration falls relative to gas? Is there anything we should be specifically thinking about there?

Olivier Rabiller, President and Chief Executive Officer

That's a great question and an opportunity for us to clarify. The impacts we are experiencing primarily stem from two factors. First, the growth in commercial vehicles compared to gasoline and gasoline turbos, and second, ongoing weaknesses in the aftermarket. Let me elaborate. We have observed significant growth on the gasoline side, around 10%. It's worth noting that products from China, particularly those aimed at the Chinese market, do not yield the same margins as the rest of our business. This is the first factor affecting our mix. We continue to see some weakness in commercial vehicles in certain regions, though there are signs of stabilization and some encouraging trends, which gives us greater confidence for the future. Additionally, the aftermarket has also experienced some weakness this year, particularly in the commercial vehicle off-highway sector, where some of our customers are undergoing destocking. We anticipate this trend will persist for a while before recovering as activities stabilize. These are the three key drivers. The first one is actually a positive for us since it indicates our success compared to the broader industry, particularly in a highly competitive market. The other two factors are more cyclical and will, like any cycle, eventually recover.

James Mulholland, Analyst

Got it. Okay. And then just as a quick second question, and then I'll hop back in the line. On that commercial vehicle green shoots comment, is that going to be geographic-based? Are you seeing some strength in certain areas or on off-highway versus Class 8? Is there any more detail that you can give there? Or is the outlook still pretty soft broad-based? Just some high-level thoughts on that, if you wouldn't mind.

Olivier Rabiller, President and Chief Executive Officer

It's pretty broad-based. But we have seen some signs of stabilization in China, which is a big region for us. And we should expect some stabilization, although at a low level. And then at some point, I guess it's marking the bottom of the cycle on off-highway, and when I say off-highway, it's mostly agricultural and construction equipment.

Nathan Jones, Analyst

I'd like to talk a bit about the zero emissions technologies and the progress there. I know you guys have targeted $1 billion of revenue in 2030. Obviously, that number is quite low these days or today as you're in development. Can you maybe talk about the path that you're expecting to take from here to that $1 billion of revenue in 2030? And how we should think about kind of you announcing project wins that actually turn into the platform revenues and just kind of how we view the path of that over the next few years?

Olivier Rabiller, President and Chief Executive Officer

That's a good question and gives me an opportunity to one more time to explain what we do there. First, we have three technologies that are counting towards that goal of the zero-emission technology revenue. The first one is fuel cell compressors. So although the fuel cell compressor industry is impacted by the slowdown that we've seen on fuel cell compressor in terms of ramp-up, that's already something that we are doing. Quite frankly, it was not the major part of the $1 billion that we had announced and therefore, the slowdown that we have seen so far is just having a marginal impact on that. Most of the $1 billion is coming from the two other technologies, the first one, E-Powertrain. As you have seen, we have announced wins, the biggest being Hande, a commercial vehicle player that belongs to the Weichai Galaxy. It's the biggest maker of axles and electric axles, not only for China but also for exports. In China, the industry already exists for electric trucks and is growing. So we are not subject to the slowdown of BEV passenger vehicles that we have seen in North America, and the slowdown of the growth that we have seen in Europe. So we are pleased with that. It keeps on growing. We have more to come for both passenger vehicle and commercial vehicle, knowing that the first launch, which is associated with the first award, will come in 2027, ramping up from there. From the beginning, we've said that on E-Powertrain, we would start in 2027 and ramp up from there. So we are fully aligned at this stage with the trajectory that we had laid out. Obviously, we are monitoring very closely the developments of penetration in countries subject to obviously the end markets in which we are playing. And then the last one, which is E-Cooling compressors, which we are quite positive about. At the beginning, we were really betting a lot on what we call mobile applications, which equals compressors for electric vehicles, mostly commercial vehicles for both battery cooling and also vehicle cooling. When you think about buses, we are still seeing a strong traction there. But what we have seen over the last few months, that's what we wanted to highlight in our earnings today, is that we have seen increasing interest from the industrial world. So think about air conditioning systems that are on rooftops, up to some of the systems that are used in some data centers, where we have demonstrated that the technology we bring is having superior performance to what is existing and is using some innovations that are quite unique for us because we leverage the maturity that we have achieved on fuel cells to address fuel cell compressors to address a new vertical. So we are coming with the strength of the size of the auto industry and we are coming from the strength of the maturity that you need to achieve in the auto industry when you start production. So I'm extremely positive about this one, which is getting us into the industrial world out of the automotive world. And we cannot say much more than that at this stage, but results are extremely promising, and the interest of customers is quite high.

Nathan Jones, Analyst

In terms of the predevelopment contracts that you've got going on there, is there any color you can give us on timing of when you expect those to become actual awards and what the timing might be on the start of production on those kinds of things?

Olivier Rabiller, President and Chief Executive Officer

Usual timing, when you start on preproduction, yes. It's about, I would say, it depends on the customer, but it can be a few months to one and a half years, two years before we decide to go into production. You may remember that we've already announced some preproduction awards some time ago. So obviously, there are some of them that are getting now much more mature. Although we are not ready to announce any yet. And obviously, for the rest, it will come later on. What's important is that when customers get into these programs with you, they are already committing energy, resources, and money to help you assess and develop the technology. So that's already first, a very good sign.

Nathan Jones, Analyst

And then maybe just one more on that. The margin profile for these products as they ramp up, do they start off maybe below corporate average and as volume improves, you get them to a higher level? Or will they be immediately accretive to the company? Just any color you can give us on the margin profile of the zero-emission products.

Olivier Rabiller, President and Chief Executive Officer

So the way we measure that is what we call material margin. So the margin we make between the material cost of the products and the price. And what we have always said and we'll keep on repeating that because we have more and more proof points around it, that on average, it's about the same or accretive to what we have on the turbo side.

Hamed Khorsand, Analyst

Could you just elaborate on the recovery you saw in diesel, please?

Sean Deason, Senior Vice President and Chief Financial Officer

So yes, that was a year-over-year recovery, mainly in Europe and North America. But again, diesel overall is trending down slowly over time, but not nearly to the magnitude we saw back a few years ago. So diesel still is a very strong business for us. And again, we will be last man standing on the turbos for diesel. It's a vertical that has basically 100% penetration on turbo. And it's a business we like very much.

Olivier Rabiller, President and Chief Executive Officer

But let me add to what Sean is saying. The big decrease we've seen on diesel was basically linked to the shift on passenger vehicles from diesel to other technologies like gasoline and hybrid. We have been more and more as we have been reducing that share of the business. We have been more focused on what I would call light commercial vehicle application. So think about delivery vans, pickup trucks, especially in Asia, all these vehicles are diesel, even in China. And today, the trend is that most of it will stay in diesel for the long run due to the specifics of diesel, which are associated with range and gas consumption, as well as the trucks that you need to move diesel.

Hamed Khorsand, Analyst

Okay. And then, Olivier, if I heard you right, you said there's about $100 million this year from industrial use. Is that going into data centers? If not, when does that get implemented and helping your sales?

Olivier Rabiller, President and Chief Executive Officer

That's a good one because we introduced that information for this quarter. So let me explain what we mean by that. Even before we launched the main line of turbochargers, the big line that we launched about one year or one and a half years ago, we were already doing a lot of very big turbochargers according to our range that we are fitted on gen sets. And what we've isolated this quarter is this number to give people a little bit of a view that already today, even at the start of the GEM ramp-up, we are already doing $100 million in that field, supplying those turbos that are ingested that most of them are going already today to the backup power for data centers. So we are not just venturing into something from scratch. We are extending our range with bigger turbos, but we are already doing a significant business in that field to our customers, whether in China, Europe, or the U.S.

Thomas Scholl, Analyst

Congrats on a great quarter. I appreciate you guys providing the color on your stationary power revenue. So as that business continues to ramp for you guys and especially as we see more demand in things like data centers and you roll out the potential industrial applications of E-Cooling compressor, what could that business look like if we out to 2030 or even 2035?

Olivier Rabiller, President and Chief Executive Officer

That's a very good question. I may not give you right away and I'll start with the number on this one. But let's keep in mind that first, it's growing and it's growing fast, obviously, from a smaller base. We've mentioned the $100 million for stationary power applications. It's already a significant increase. It's already a double-digit increase versus last year and more to come. And including that's also a little bit premature to tell you exactly the numbers as we are really working on that with our customers. But if we were estimating, we expect it to be significant. I don't think it will represent 50% of the sales of the company by any means, but that will be significant in the long scheme going forward.

Sean Deason, Senior Vice President and Chief Financial Officer

Yes. As I mentioned in my prepared remarks, we remain committed to maintaining a return of 75% or more over time. However, this will vary from quarter to quarter, particularly regarding share buybacks, depending on macroeconomic and industry conditions. Our focus continues to be on returning the cash we generate to shareholders, which is a fundamental aspect of our financial framework.

Olivier Rabiller, President and Chief Executive Officer

Yes, Eric, I'll answer your first question, and I'm sure Sean will answer your second one. So back to the E-Cooling question, what makes our product differentiated versus what already exists? A few things. First, we are using high-speed electric models. We are compressing at a high speed. With high speed in compression, we enhance efficiency. We have expertise in high speed, and our concept shows an extremely low level of noise. So at the end of the day, weight, efficiency, and noise are key factors. We are leveraging a technology where the system rotates on a cushion of air that we call air foil bearing, which we have developed for the automotive industry. We have developed that for fuel cell compressors, and we are uniquely positioned in the industry because we have the scale of the automotive industry. We have the maturity from a manufacturing standpoint. It's a very complex, high-volume manufacturing to achieve. So from a design and manufacturing standpoint, we have an edge with the system. So if you think about the capabilities of the company, high speed, high-speed electric motors, and everything that revolves around rotating technology, in this case, this famous air cushion bearing are key points for our product that has to provide the benefit to our customers at the end. In addition, it's weight; sometimes these systems are on the roof of buildings. So weight is important. More importantly, efficiency; any kind of percentage you can save on energy consumption, especially nowadays with the pressure that everybody has to reduce their energy consumption is relevant.

Sean Deason, Senior Vice President and Chief Financial Officer

So look, as everyone knows, it's a volatile industry that we're in right now with new news every day, both from governments and the supply chain. But we are committed to returning capital to shareholders. But we're not going to commit to any specific number. But again, we've just raised our dividend; we had a very strong quarter of share buyback, and we repaid a little bit of debt. So those are our three levers, and we expect to continue to use them going forward over time.

Operator, Operator

Thank you for joining Garrett's Q3 earnings call. This concludes today's session.