Q3 2026 Garrett Motion Earnings Conference Call - GARRETT MOTION INC

Hello, and good day, everyone. My name is Alan, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion Third Quarter 2026 Financial Results Conference Call. This call is being recorded, and a replay will be available later today. After the company's presentation, there will be a Q&A session. I would now like to hand over the call to Cyril Grandjean of Garrett's Vice President of Investor Relations and Treasurer. Please go ahead. Thank you, Alan, and good day, everyone. We appreciate you joining us to review Garrett Motion's third 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 uncertainty. 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 measures, which we use to help describe how we manage and operate the 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 Ravier, our President and Chief Executive Officer, and Sean Deeson, our Senior Vice President and chief financial officer. With that, I'll turn the call over to Olivier. Thank you Cyril, and thank you all for joining us today. We delivered a strong third quarter with organic sales growth, margin expansion, and healthy adjusted free cash flow. Net sales were $930 million, up 3% organically, as we outperformed light vehicle industry production and grew commercial vehicle and industrial by 23%. Adjusted EBIT for the quarter was $152 million, which is a margin of 16.3%, supported by favorable product mix and strong year-over-year operating performance. We also converted this into LC-adjusted free cash flow of $136 million. In addition, we continued to return value to shareholders, repurchasing $57 million of common stock and paying $15 million in dividends. We also repaid $50 million of term loan debts, bringing year-to-date repayments to $100 million. Today, we are announcing that our Board of Directors authorized a new $250 million share repurchase program for 2027. Finally, we're reaffirming our midpoint outlook as strong operating performance is expected to offset foreign exchange headwinds, mainly in the fourth quarter. Let me now turn to slide 4 and discuss our continued progress across differentiated technologies. We made strong progress within the quarter across our differentiated technologies, both in our turbo and in zero-emission technologies. In turbo, we launched a new high-volume e-turbo with Mercedes. In addition, we secured multiple light vehicle wins, including for hybrids, and programs for both China domestic and export. We also launched several commercial vehicle programs across all regions and launched a new off-road turbo application for recreational vehicles with Polaris. In industrial, growth for existing power generation programs further accelerated and exceeds prior expectations. expectations. Based on this momentum, we now expect industrial sales to reach $230 million this year and about $300 million in 2027. In zero-emission technologies, we completed multiple e-powertrain light vehicle proof-of-concept tests, validating the value of our high-speed architecture and on the commercial side we are progressing with testing and industrialization our heavy-duty applications supporting launch in 2027 for our commercial vehicle e-powertrain testing of industrial cooling remains on track with launches in 20 27 we experience a strong momentum with a a number of customers and secured an industrial e-cooling compressor award with a new customer, Multistack. With that, I will now turn the call over to Sean, who will walk you through our financial results and full year outlook. Thanks, Olivier, and good morning, everyone. Let me begin on slide five. As Olivier noted, we delivered another quarter of strong financial performance. Net sales were $930 million, supported by continued growth in commercial vehicle, industrial, and aftermarket. Adjusted EBIT was $152 million, which equates to an adjusted EBIT margin of 16.3%, representing both a year-over-year and sequential improvement, primarily from favorable product mix. Adjusted free cash flow was $136 million, in line with full-year expectations, demonstrating a strong earnings-to-cash conversion of 89%. Turning to slide 6, this bridge highlights our Q3 net sales performance by product category compared to the prior year. In the quarter, net sales increased by $28 million year-over-year, or 3% on both a reported basis and constant currency basis. This included an unfavorable three points of impact from tariff pass-throughs. Once again, we continue to see growing demand for commercial vehicle and industrial applications, resulting in a strong 23% organic growth year-over-year. As Olivier shared earlier, we expect industrial sales to reach about $300 million in 2027, representing 30% organic grow, primarily from demand for power generation applications. Moving now to slide 7, you see our Q3 adjusted EBIT performance compared with the prior year. Adjusted EBIT was $152 million in the quarter, up $19 million, and adjusted EBit margin was 16.3%, representing an increase of 160 basis points year-over-year, including an unfavorable foreign currency impact of 70 basis points. This performance was primarily driven by favorable product mix and a year-over-year operating performance improvement of $13 million in the quarter. Now turning to slide eight, you see our adjusted EBIT to adjusted free cash flow bridge. We generated $136 million of adjusted free-cash flow in the quarter, reflecting the strong cash generation of the business. Overall, these results are in line with our expectations, with lower cash taxes due to the timing of tax refunds. Moving now to slide 9, we ended the quarter with $841 million of total liquidity, including $630 million of available capacity under our revolver and $211 million of unrestricted cash. We also made a voluntary early repayment of $50 million on our term loan in October, bringing year-to-date repayments to $100 million, further strengthening the balance sheet. Our debt is over 95% fixed and swapped into Euro, resulting in an all-in cash interest rate of approximately 5.5%, taking into account proceeds from cross-currency swaps. With no near-term debt maturities and a net leverage ratio of 1.66 times down from the prior quarter, we remain in a strong liquidity position. Returning to slide 10, in the third quarter, we paid $15 million in dividends and repurchased $57 million of common stock under our $250 million authorization, bringing year-to-date repurchases to $172 million. We continue to return capital to shareholders in line with our capital allocation framework returning adjusted recast flow to shareholders over time through dividends and share repurchases the amount of which can vary based on market conditions and other factors as olivier noted earlier the board also declared a fourth quarter dividend of eight cents per share payable in december and authorized a new 250 million dollar share rep purchase plan for 2027. Turning now to slide 11, we are reaffirming our midpoint outlook communicated in our Q2 earnings release for all metrics. Operational execution across the business continues to be strong, supporting higher expectations for adjusted EBIT and adjusted free cash flow. However, these improvements are offset by foreign exchange headwinds, primarily in the fourth quarter. We now turn to slide 12, where we show our updated 2026 outlook ranges. We are narrowing our guidance ranges across all measures, implying the following midpoints – net sales of $3.8 billion, or 4% growth, a constant currency, adjusted EBIT of $580 million, equating to a 15.3% margin, and adjusted free cash flow of $430 million, representing a 74% conversion. Let me now turn the call back to Olivier for his closing remarks. Thanks, Sean. Let me turn to slide 13. As we discussed at our Technology and Investor Day in May, Garrett's long-term strategy remains clear. We are leveraging our differentiated technologies and proven execution models to continue driving shareholder value. Now, let me wrap up on our final slide. We delivered a strong third quarter with significant year-over-year adjusted EBIT margin expansion and strong adjusted free cash flow. We continue to win across our core portfolio with multiple turbo wins in light and commercial vehicles across all regions. On the industrial side, sales of existing power generation applications continue to outperform expectations. In zero-emission technologies, we secured another industrial e-cooling compressor award with a new customer, Multistack, and we continue to make progress towards our industrial HVAC and e-powertrain 2027 launch milestones. Overall, despite for an exchange it wins, our year-to-date performance and ability to adapt in a still uncertain industry environment gives us confidence to reaffirm our 2026 outlook. Thank you for your time, and we are now ready to take questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then two. Our first question today comes from James Mulholland of Deutsche Bank. Please go ahead. Great. Thanks, guys, for taking my question. So I just wanted to quickly ask on industrial sales. Gen-set, again, was particularly strong. So I think it's probably fair to say it's in the long run going to be higher than that $250 million that you outlined at the analyst day. But with $300 million in industrial sales next year, how much of that is going to gen set versus some of these other verticals? And then have you reset your expectations as to what that component could actually look like over the longer term? Could you get to $500 million more if you get more supply agreements? Just some thoughts on that, if you wouldn't mind. I think you're asking a very wise question. Indeed, when you look at the $300 million that we are doing in industrial sales today, this is mostly Gen Z. So to your question, will it be more than $250 million? It is already more than 250 by next year. So indeed, we'll have to come back and probably come back to you at some point next year to give you a little bit of an updated perspective on that. Now, when you look at the outlook of industrial sales for next year, we'll be in the beginning, the ramp-up for equalling, which is the next major product that we count as part of industrial. And therefore, the impact on revenue compared to Gen Z in 2027 will just be relatively smaller. but it's true that we're also seeing a lot of traction as we said today we are signing a new customer for the cooling compressor and as I was mentioning we are getting a fantastic traction with with a number of players into that industry right that's helpful and then I guess touching on those other sort of other contracts within industrials you have the fairly significant agreements with train Ingersoll and you've never sized them specifically but I guess to get to those longer term 2030 goals deed you know a few more of a similar size maybe just some smaller contracts or you know just some extra color on that so we could help to gauge your progress towards that so first we are making very Very good progress towards that, and we are indeed accelerating our launches versus what we had in mind a few months back, especially when it comes to the new sizes that we want to introduce, the larger sizes. You remember what we presented at the Technology and Investor Day. We are having some prototypes of very large cooling compressors. This is really the piece that we are accelerating right now. I think it's a little bit too early to give you exactly the size, the size of the contracts and everything, because even at our customers, that remains in motion right now. This industry is very dynamic, and therefore it's difficult to size right away those programs. But we are planning to be, and we are having the ambition to be a significant player into that field. Great. Thank you very much, guys. Today, the feedback we get, I would just add the feedback we get from customers reinforce that view. Great. Thank you. Our next question comes from Nathan Jones of Stifel. Please, go ahead. Good morning, everyone. Good morning. Good morning to everyone. I guess following up a little bit, um you know you're making another announcement of an agreement with multi-stack here um chillers are obviously a product that are in pretty high demand right now i'm wondering if you can provide any more color on you know the magnitude of this opportunity uh when it goes into into production for you guys um and how that ramps up over the next few years so uh the deal with multi stack we cover a number of different products meaning a number of different use cases. It starts with the products that we already announced are ramping up from 2027 so we plan to start delivering them next year. It's indeed a customer that we have been working with in the background for quite some time and What I would say is that, indeed, as we mature our relationship with more customers, indeed, we'll keep all the investors informed about those wins. I would take a little bit premature to give you exactly the size of this. One more time, for the same reason I might answer before, it's a very fluid marketplace. we are getting into a new technology that new technology will have an adoption curve we are very optimistic about it but we need to have all of that the startup production integration into the system and then the market and the market adoption so that we are more precise on the on the outlook fair enough I guess the follow-up question to this for me is on the margin side obviously your bridge has a tailwind for 2026 EBIT from a more positive mix as you're seeing faster growth in these new products. That should be structural over the next few years as they continue to grow faster than maybe you previously had planned. Can you talk about the positive impact that'll have not just for growth on the top line, but for margin expansion as well? Thanks. Sure. Certainly, you're seeing a favorable margin with our existing products in the big turbos for industrial. That capacity is in place, and for us, we know how to do it. We've done it for many years. That absolutely is very favorable when it comes to mixed impact on margin. That will continue as we have a bigger percentage of our sales coming from industrial. The same can be said for HVAC, as you all know. Margins there are also very good. We have a very differentiated product that produces real total cost of ownership results for our customers and their end customers. And as those sales grow, and I believe I said this at Investor Day, certainly post-2030 when we really see it start to ramp, you should start to see some additional margin expansion. If that comes earlier, you shouldn't see that, but we also do have to put all the capacity in place to begin that production. We're also very cautious as to what we invest in. we're not going to be outside of our financial framework we will be keeping the critical quality quality critical processes in-house and as we step into it once we start producing it larger volumes yes you would see some margin expansion as it becomes a bigger portion of our sales yeah make sense I mean one more time just reinforce what the shun said we are very much aligned with the financial framework that we've presented in May and we have and all that growth was part of the framework we presented in terms of taking the questions in terms of margin and also in terms capex The next question comes from Jake Scholl of BNP. Please go ahead. Hey, guys. Congrats on the new HVAC award, but I also wanted to circle back on your program with trained, so you had units in the field doing testing over the summer. So I was wondering if you could share some of what you've learned about the system, about its efficiency, and then also if you have a clearer idea of what the revenue trajectory will look like after the testing. Thanks, guys. So the first thing I would say is that the tests have really confirmed all the expectations we were having in terms of performance benefits versus existing solutions. So we are extremely pleased with that. Unfortunately, I will tell you a little bit the same, is that we are really circling with our customers now to understand how quick we can introduce those products, which application, which of their customers, which of the programs. We have different size of product as well to launch. So all of that is still a little bit in flux, and we'll keep you updated as we progress. But the tests were really positive. We are very pleased with that. Thank you. And then as we all try to model out the ramp curve from here, At what sales level would you guys expect to start to see some material margin uplift from both industrial business as a whole and specifically HVAC? Thank you. Well, if we were just producing that product, the more we sell, the better. But obviously, you've got light vehicle volumes as well that are off slightly, and you've get all those factors. So you're going to have to also model out that mix. If we think that light vehicle, total light vehicle volumes are going to increase over time, and as we stated before, turbo will increase as a technology penetrating, and we continue to win share of demand. I mean, we love turbo across all verticals, and then we'll continue to produce it. But certainly, look, the more we start to see sales drop through and ramp up our lines, the better it is. And you're seeing that already, so, yeah. All right. Thanks, guys, and congrats on the great quarter. Thank you. As a reminder, if you have a question, please press star, then 1. Our next question comes from Rajit Gupta of J.P. Morgan. Please go ahead. Hey, thanks for taking the questions. You know, good to see the execution here, you know, shows like the strength of the diversity in your exposure. I wanted to, you now, maybe just, you know, look into 2027 a bit. I appreciate the color on industrial expansion, you know, from 230 to 300 million. Can you give us any problem color and how we should expect the rest of the business to perform any preliminary review and put some takes around just a commercial vehicle opportunity and just any regional light vehicle production related trends that you're seeing that might govern the outlook and have a quick follow-up. Yeah, that's a good point. I'm not sure I'm having a crystal ball that is more accurate than anyone else to predict what will happen to the automotive industry in 2027. First, at Garrett We are always planning in a way to position our costs in a conservative way so that we can deliver. That's something to keep in mind, and we have the cost structure to do that. But the point is today, when you look at it, we had a lot of variations this year across the regions. I would not say that the situation is stabilized. So we are adapting. So far this year, we are growing, and We are already on the right side, which means that if you're growing on the dollar market, it means that you pick up share of demand which is what we've explained we would do for quite some time. We have a number of also launches into next year that should help us keep on that trend. But the underlying industry today remains a bit of a question mark and I hope we get a little bit more clarity before the end of the year. Situations in regions like Europe or Asia are really fluid. You're tracking mid-single-digit organic growth year-to-date. Assuming a pretty similar overall backdrop uh you know next year i mean do you think you can sustain at least mid-single digit uh growth you know given what you're seeing on the industrial and just you know what we're seeing on just like commercial recovery uh in north america in particular well what we see is clearly and the one the part that we understand the best the part we control the best uh is indeed industrial because you're less subject to an overall and the the movement of an overall industry right now. Therefore, it's a lot about the ramp-up of the programs and everything else, so this is probably why we're having the highest level of certainty, and that's the reason why today we've said that next year we should be around $300 million. For the automotive industry, I think it's just too early, and to see the way all of that will play with the mix. You've seen that the mix of our customers, and I think we are not an exception to that, is moving in all kinds of directions in Europe and in Asia. So we are highly careful about all that. We are highly careful about the new flows. And at this point in time, the focus of the company is to be positioned from a constant point at the right way so that we keep on delivering into next year. Maybe just the last one there. Given some of the recent news around potential for an export quota you know, for vehicles, you know coming into Europe for China I would assume that that would be like a good outcome for Garrett, right? You know, given your legacy European exposure and just like the content makes like in some of your China exposure. Just curious like how we should think about the implications of that if those do come into place. I think anything, any news that can stabilize a little bit the situation that I've said before is very fluid and impacting the mix into our customers is welcome. Now, I would say that it's a little bit too early to comment on something where we've not seen the details of either the implementation or the magnitude of that quota. We need to understand the way it's impacting our customers. We want to understand those details. But I would say we are also working with Chinese car makers that are exporting. We've made a significant stride over the last two years, two, three years on that front. So we are working both ways. Understood. Great. Thanks for all the color and good luck. Thank you. Our final question today comes from Amit Corson of BWS Financial. Please go ahead. Hi. The first question I had was talking about the Chinese export market. When do you expect to generate sales from there as now you're gaining traction here with the product ones? Yeah. Well, we're already generating sales. We know that our turbos are going on to engines and Chinese vehicles that are being exported today. and as Olivia mentioned we continue to make progress with business wins so the more China exports as we continue the win the more that will become part of our sales but I think it's an interesting question we've been doing a good job I think in working with our Chinese customers to identify exports it's true that when they export they want to really rely on suppliers that have the reputation and the rest to support them outside of China. And I think we are well positioned there. Now, the point is that in China, the situation just among the car makers varies very, very quick in terms of export versus their domestic market, how much they export versus what they do locally. And the life of programs is, I would say, much more dynamic than what we have in the rest of the world so it can it can go quick one direction or another but we are working and my other question was just can you give a little bit more insights as to what drove the decline in gasoline this past quarter and is that going to continue or how are you seeing that shape out for Q4 in 2027? When you look at it today, for us, it's much more movements that we've seen in Asia and especially in China. When you look at the way the domestic market has evolved in China, it has been very much down on the domestic one. And that's the part that's driving that, quite frankly. Okay. Thank you. Thank you. I would just add to that that some of that negativity is driven by tariff pass-through as well. Yeah, I'm talking about the number of turbos, but then Sean gives you the color of the revenue. Indeed, we have the negative pass-thru of tariff that's impacting the revenue Great. Thank you Thank you for joining Garrett's Q3 earnings call. This concludes today's session. You may now disconnect.