Earnings Call Transcript - GTX Q1 2026

Operator, Operator

Hello. My name is Cindy, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion First Quarter 2026 Financial Results Conference Call. This call is being recorded, and a replay will be available later today. As per the company's presentation there will be a Q&A session. I would now like to hand over the call to Cyril Grandjean, Garrett's Vice President, Investor Relations and Treasurer.

Cyril Grandjean, Vice President, Investor Relations and Treasurer

Thank you, Cindy, and good day, everyone. We appreciate you joining us to review Garrett Motion's first quarter 2026 financial results. Our presentation and press release are available on the Investor Relations section of our website. Today's discussion includes forward-looking statements that involve risks and uncertainties. Please refer to our SEC filings, including our most recent annual report on Form 10-K for a discussion of factors that could cause our results to differ materially from these forward-looking statements. Today's presentation also includes certain non-GAAP metrics, which we use to help describe how we manage and operate our business. Please review the disclaimers on Slide 2 of our presentation as the content of our call will be governed by this language. With me today are Olivier Rabiller, our President and Chief Executive Officer; and Sean Deason, our Senior Vice President and Chief Financial Officer. Olivier will begin by sharing highlights from a very strong quarter, both in terms of financial performance and strategic wins. Sean will then review our first quarter financial results and updated 2026 outlook. With that, I'll turn the call over to Olivier.

Olivier Rabiller, President and Chief Executive Officer

Thank you, Cyril, and thank you all for joining the call today. We started the year by delivering another very strong set of financial results in the first quarter, driven by growth in a muted industry and disciplined operational execution. Net sales for the first quarter were $985 million, up 6% at constant currency. We delivered growth across all verticals, including commercial vehicles and industrial. Considering that light vehicle production was down in Q1, Garrett's growth reflects share of demand gains in passenger vehicles as well as continued strong performance in commercial, off-highway and industrial. Through continued productivity actions and disciplined execution, we have been able to convert this growth into a very solid operating performance. Adjusted EBIT was $151 million, and our adjusted EBIT margin was 15.3%. In addition, we generated an adjusted free cash flow of $49 million in the quarter. Together, the strong results support our decision to increase the upper range of our 2026 full year outlook. Lastly, we continue to allocate capital in line with our stated framework and our commitment to return capital to shareholders. During the first quarter, we maintained our share repurchase activity, buying back $87 million of common stock, and we also paid $16 million in quarterly dividends. With that, let me now turn to Slide 4 to share more on Garrett's continued success across our differentiated technologies. Indeed, we continue to win across our turbo portfolio with multiple gasoline awards, including VNT turbo for hybrids and range-extended electric vehicle applications. At the same time, we kept on the successful trend we have seen in industrial as we secured additional wins, including for large power generation applications. Turning now to our zero-emission technologies. We have made solid progress in Q1 2026 as we secured our second commercial vehicle E-Powertrain production award in China with start-up production planned again for 2027. We also won a major production award for our industrial cooling compressor with TONFY in China, a leading supplier for battery energy storage system cooling solutions. Overall, I'm very pleased with our progress. These wins demonstrate customer adoption of our differentiated technologies across a broad range of applications, supporting both portfolio expansion and growth while continuing to deliver strong financial results. I will now hand it over to Sean, who will talk you through 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 first quarter. Our net sales were $985 million, driven by sequential growth across all verticals. This was driven by share of demand gains in diesel and gasoline applications, recovery of commercial vehicle volumes and continued demand for industrial applications. We delivered $151 million of adjusted EBIT in the quarter, equating to a 15.3% margin. This represents both a year-over-year and a sequential improvement driven by strong volume conversion and favorable foreign exchange. Finally, adjusted free cash flow was $49 million as the business continues to convert earnings into cash in line with expectations. Now moving to Slide 6. We show our Q1 net sales bridge by product category as compared with the same period last year. In the quarter, net sales increased by $107 million versus the prior year or 12% on a reported basis and 6% on a constant currency basis. Double-digit growth in commercial vehicle, industrial and aftermarket contributed significantly to the strong performance. We also benefited from continued gasoline share of demand gains and new launches in diesel. This sales growth occurred across all key regions. In North America, the key drivers of sales growth were off-highway, industrial and aftermarket. In Europe, we saw share of demand gains in light vehicle gasoline and diesel as well as a recovery in off-highway applications. And in China, growth was driven primarily by industrial and on-highway applications. Turning to Slide 7. During the quarter, we generated $151 million in adjusted EBIT, representing a $20 million increase over the same period last year. Our margin rate of 15.3% reflects a 40 basis point improvement year-over-year, 20 basis points of which are due to favorable foreign exchange currency impacts, partially offset by tariff pass-throughs. The increase in adjusted EBIT was primarily driven by volume and favorable mix from our strong growth in commercial vehicle, industrial and aftermarket. In the quarter, year-over-year operating performance was slightly negative, largely as a result of timing and in line with our expectations as we begin to execute on our productivity measures. We expect to generate positive operating performance through the balance of this year, continuing to benefit from sustained fixed cost actions and variable cost productivity. Turning now to Slide 8. I'll walk you through the adjusted EBIT to adjusted free cash flow bridge for the quarter. We delivered positive adjusted free cash flow of $49 million, aligned with our full year expectations. The working capital used in the quarter was primarily driven by our strong sales and is expected to be recovered throughout the year. All other bridging items were also in line with expectations. Now moving to Slide 9. We ended the quarter with a liquidity position of $772 million, consisting of $630 million in undrawn capacity from our revolving credit facility and $142 million in unrestricted cash. We have ample liquidity with no near-term debt maturities, and our net leverage ratio remains unchanged versus the prior quarter at 1.92x. Moving to Slide 10. During the first quarter, we repurchased $87 million of common stock under our $250 million share repurchase program, further reducing our outstanding share count to approximately 188 million. We continue to target returning approximately 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 depend on various factors, including macroeconomic and industry conditions. As mentioned by Olivier earlier, the Board declared our quarterly dividend for the second quarter of $0.08 per share, which will be payable in June. I will now transition to Slide 11 to discuss our 2026 outlook. Following our first quarter performance, we anticipate demand across all verticals to be strong through the first half of the year. Although our industry assumptions remain unchanged versus our initial outlook, we expect to continue to benefit from share demand gains in light vehicle, continued recovery in commercial vehicle and growth of industrial applications, particularly for stationary power generation. As a result, we've increased our high end and midpoint outlook across all metrics to reflect the stronger performance to date. Given macroeconomic uncertainties and geopolitical events, we are maintaining the low end of our outlook range at this time. Our updated outlook implies the following midpoints: net sales of $3.75 billion or 2% growth at constant currency, adjusted EBIT of $560 million, implying a 14.9% margin and adjusted free cash flow of $415 million. With that, I will now turn back the call to Olivier for closing remarks.

Olivier Rabiller, President and Chief Executive Officer

Thanks, Sean. Let's now turn to Slide 12. As we announced during our Q4 earnings call and in our subsequent press release, we will host our 2026 Technology and Investor Day in person in New York City on May 20. We will outline the next phase of the company's strategic evolution, including progress across turbo, zero-emission vehicle and industrial technologies. Beyond the presentation, it is a fantastic opportunity to interact with management, see and touch new hardware and better understand the way Garrett is expanding its technology differentiated portfolio, both in auto, commercial vehicle and industrial. Let me wrap this up on our final slide. We delivered a strong first quarter, driven by share of demand gains in gasoline turbo and growth in commercial vehicle, off-highway and industrial. Adjusted EBIT reached $151 million, and we generated $49 million of adjusted free cash flow. In zero-emission technologies, specifically, we secured our second series production award for commercial vehicle high-speed E-Powertrain, further validating the long-term potential of this technology. In parallel, progress continues with our new industrial compressor offering as we secured a production award in battery energy storage systems. Alongside this operational and technology execution during the quarter, we returned more than $100 million to shareholders through share repurchases and dividends, reaffirming our commitment to disciplined capital allocation and shareholder return. Lastly, based on the strong start of the year, we also raised our full year 2026 outlook, reflecting the strength of our execution and confidence in our trajectory. So thank you for your time. And now operator, we are ready to take on questions.

Operator, Operator

Our first question comes from Nathan Jones of Stifel.

Nathan Jones, Analyst (Stifel)

I guess I'll start with some questions on the oil-free compressor side. I don't know how much of that you want to answer today and how much you want to say for the Analyst Day next month, but I'll ask them. Any updates that you can give us on the progress with shipping the first units to test? Any updates you can give us on the interest levels that you're seeing from other potential customers and how that's progressing?

Olivier Rabiller, President and Chief Executive Officer

Yes, indeed. I think we alluded to it a little bit last time because we are fresh from the big congress that's happening every year in Vegas about air conditioning systems. Since then, we've confirmed a lot of inbound interest from many people in the industry. To your point about shipping units, shipping the first units for testing will happen in the coming weeks. And then what we said is that we would be in production from 2027. So it's on a fast pace. The win we just reported is in a different system, which is a battery energy storage system. You need a lot of cooling to cool these batteries. These modules are supplied by, by the way, the biggest battery makers in the world. It's a very important one as well because it validates that our technology is not only for the scope that we expressed last time in our agreement with Trane, but it ranges beyond that into other applications. So we'll share more during the Investor Day, but a lot is happening, and you may have seen a lot of communications already from us, whether it's on the BESS or our exhibition that we had in China at the leading show for air conditioning. All of that validates the interest that we see from the broad industry that's involved in cooling.

Nathan Jones, Analyst (Stifel)

Is there any update you can give us on — I know there's some exclusivity with Trane on some products in some markets for some period of time. Is there any update you can give us on what that is? It's certainly been a focus area from investors that we've spoken to.

Olivier Rabiller, President and Chief Executive Officer

I've told you that we are having discussions. And by the way, we are announcing a new project with a new customer. That shows we are talking to a broad industry scope with broad industry applications. More to come when we present all of that with real hardware and you can feel and touch it because it's not PowerPoint when we are all in New York. But clearly, the interest goes beyond what we've announced with Trane, although we are working extremely well with Trane and cooperating very well. It goes beyond that.

Nathan Jones, Analyst (Stifel)

And then could you say another E-Powertrain win? Is there any details you can give us on that? Talking about the size of it, potential revenue out of it. I think you said start of production in '27, but just any color you can give us on the scale and scope of this award?

Olivier Rabiller, President and Chief Executive Officer

The first point, I would say it's not exactly for the same application. The first application was heavy duty. So we are talking about trucks that are more on the medium-duty side. But we are extremely proud because it really reflects that even in the most competitive market in the world, that is China when it comes to electric, our technology is validated by customers as being a way to differentiate for themselves. We've announced the first partnership with HanDe. HanDe is a leading player in the industry when it comes to transmissions in China and E-Axle. So that gives you a little bit of a scale. We will not share numbers today, but it's a very significant win for the company overall.

Operator, Operator

Our next question comes from James Mulholland of Deutsche Bank.

James Mulholland, Analyst (Deutsche Bank)

So I just want to double-click on your industrial sales for the year. Last year, you had guided to about $100 million in sales related to power gen with double-digit growth for this year. Could you give us an update on that progress? And since double digits is a pretty wide range, would you be able to put a bit of a finer point on that?

Sean Deason, Senior Vice President and Chief Financial Officer

Yes. So with industrial, sequentially, we saw it flat, but we expect that it is going to grow significantly. And I believe we said low double-digits, and so that's where we would remain, low double digits. That is very significant anyway. And you see that when you look at the revenue growth bridge that we published today, it is clear that there is significant growth in commercial vehicle. Not everything is industrial indeed, but a significant portion of it. So yes, it will keep on growing.

James Mulholland, Analyst (Deutsche Bank)

And then—

Sean Deason, Senior Vice President and Chief Financial Officer

And we are—

Olivier Rabiller, President and Chief Executive Officer

No, I'm just saying we are very happy with it.

James Mulholland, Analyst (Deutsche Bank)

Great. And then since you brought a broader commercial vehicle, recognizing that North America is more off-highway and Europe is more indexed to Class 8. We've seen some trucking manufacturers come out with pretty good numbers on orders. So could you maybe unpack a bit of what you're seeing in both of those geographies? And is there maybe a little bit of conservatism in that 1% to 2% growth for the year?

Olivier Rabiller, President and Chief Executive Officer

Today, commercial vehicle is a mixed bag of several things. We have off-highway, and you've seen that the off-highway industry is starting to recover. There are other companies publishing results that give hints about that recovery. I would say beyond that, and we think that once recovery starts, if there is no crisis, it will be for a longer period because today, when you look at on-highway and off-highway, we are pretty much at the low point that we reached in 2024, and the industry has not yet recovered much from that. So we are optimistic that this trend will continue. The growth we are seeing is not only driven by Europe on-highway; it's also driven by a recovery that we are seeing on on-highway in China, which is probably more linked to share of demand gains and a significant introduction of new products that we have in that region. So your analysis is good. I'm just adding China in the mix on top of the rest.

Operator, Operator

The next question comes from Jake Scholl of BNP.

Thomas Scholl, Analyst (BNP Paribas)

First, profitability in the quarter finished towards the high end of your guidance range for the year. Could you just discuss some of the puts and takes that you see going forward?

Olivier Rabiller, President and Chief Executive Officer

The puts and takes for the full year outlook? Quite frankly, we are very pleased with what we see in Q1. At this point in time, we have not seen a material impact of the consequences of the war in the Middle East on what we see in the company. But we are very mindful that on the one hand, we have a very nice trajectory with organic growth that we highlighted in Q1, and on the other hand, we are having a world out there that everybody is watching to understand where it goes. So one more time, we have not seen anything specific. But it would be a little too bullish to give you an outlook that is disconnected from what's happening around us.

Thomas Scholl, Analyst (BNP Paribas)

And then could you talk a little bit more about what's driving some of your success in China? You guys have obviously seen some pretty significant wins, both through e-powertrain and e-compressor in the last few quarters. And then specifically within the e-compressor, can you talk about if there's any difference from your perspective for a liquid-cooled application like this battery storage system with HanDe or air cooling like a traditional HVAC?

Olivier Rabiller, President and Chief Executive Officer

So a few dynamics. First, when it comes to specific applications linked to commercial vehicle electric mobility — think e-powertrain for trucks and the announcement we made last quarter about cooling compressors for buses — China is the biggest place in the world that committed to very high numbers of electric trucks, and that drives a lot of development and demand from customers. For the specific point of battery energy storage systems, the two biggest battery makers in the world are in China. They rely on global suppliers and local fast-growing companies to help supply what they need to develop battery businesses and battery energy storage systems. The battery cooling we are delivering is clearly linked to that growth. Indeed, it's happening in China a little faster than anywhere else in the world because those major players are in China. But we should not think that all of that comes from China. It's just that China usually works faster and currently has a higher technology adoption pace than the rest of the world. Remember, the first award we presented for a cooling system was with Trane. We are working with many more customers around the world on e-powertrain for passenger and commercial vehicles. It's just that the speed in China is faster.

Operator, Operator

Our next question comes from Hamed Khorsand of BWS Financial.

Hamed Khorsand, Analyst (BWS Financial)

So first off, these design wins that sparked this increase in sales, when did you win them? And how are you positioned in design wins now for future quarters?

Olivier Rabiller, President and Chief Executive Officer

For the wins, we usually win businesses before they translate into volume production. When you look at the trend we have, we have been consistent: on average, every year we win about 50% of what's available. We know that the math between the business win rate and share of demand doesn't go exactly 1:1. But when we win consistently at that level, the company's share of demand increases. This was a little hidden three or four years ago because other factors affected the top line at the same time, such as diesel decline. We have been doing a massive rebalancing and transformation in this company, moving from revenue at the time of the spin-off that was about 42%–43% diesel to what it is today, with more balance on the gasoline side and a significant portion in variable geometry. That rebalancing probably dampened the top line a bit. But now you see growth coming, and it's driven by the success of the wins and the programs we have with customers. The trend continues.

Hamed Khorsand, Analyst (BWS Financial)

And my other question is on zero emissions. Is it still too early to break it out as to what the composition of that is to total sales?

Olivier Rabiller, President and Chief Executive Officer

If you are a little patient for a few weeks, you will know much more about it. We will disclose more information in three weeks.

Operator, Operator

The conference has now concluded. The question-and-answer session has concluded. Thank you for attending today's presentation. You may now disconnect.