Q3 2026 Garrett Motion Earnings Conference Call - GARRETT MOTION INC

Financial Performance:

• Net sales for Q3 2026 reached $930 million, representing a 3% organic increase; reported growth was neutralized by a 3-point unfavorable impact from tariff pass-throughs.
• Adjusted EBIT totaled $152 million, yielding a margin of 16.3%, an improvement of 160 basis points year-over-year despite a 70 basis point foreign exchange headwind.
• Adjusted free cash flow was $136 million, reflecting an earnings-to-cash conversion rate of 89%.
• Strong year-over-year organic growth of 23% was driven by commercial vehicle and industrial segments.
• Balance sheet remains robust with $841 million total liquidity ($630 million revolver capacity + $211 million cash) and a net leverage ratio of 1.66x.
• Debt management included $100 million in year-to-date repayments, resulting in $841 million liquidity and a net debt interest rate of approximately 5.5% (95% of debt fixed/swapped to Euro).

Guidance and Future Outlook:

• Reaffirmed 2026 midpoint outlook: $3.8 billion in net sales (4% constant currency growth), $580 million in adjusted EBIT (15.3% margin), and $430 million in adjusted free cash flow (74% conversion).
• Narrowed guidance ranges for all metrics, implying confidence in operational execution despite Q4 foreign exchange headwinds.
• Industrial sales are projected to reach ~$230 million in 2026 and grow to approximately $300 million in 2027, representing 30% organic growth driven by power generation demand.
• Capital allocation framework includes a new $250 million share repurchase program authorized for 2027, alongside a Q4 dividend of $0.08 per share.
• Full-year 2026 saw $172 million in share repurchases and $15 million in dividends paid.

Business Segments and Product Lines:

• Turbo Technology: Launched a high-volume e-turbo with Mercedes; secured multiple light vehicle hybrid wins in China (domestic and export); introduced new off-road turbo applications for Polaris recreational vehicles.
• Commercial Vehicle: Expanded programs across all regions with strong momentum in industrial applications.
• Industrial: Power generation program growth accelerated beyond prior expectations; secured a new industrial e-cooling compressor award with customer Multistack.
• Zero-Emission Technologies: Completed multiple e-powertrain light vehicle proof-of-concept tests validating high-speed architecture; heavy-duty commercial e-powertrain testing is on track for a 2027 launch; industrial HVAC cooling testing scheduled for 2027.
• Light Vehicle: Experiencing slightly lower volumes in Asia/China, partially offset by global growth in commercial and industrial sectors.

Market and Competitive Landscape:

• Industrial segment is outperforming the broader light vehicle industry, with Gen-set applications driving significant revenue acceleration.
• Strong demand in commercial vehicle and industrial verticals contrasts with volatility in the overall automotive industry, particularly in Europe and Asia.
• Company is actively pursuing Chinese exports, leveraging supplier reputation to support OEMs exporting globally.
• Management notes the automotive industry mix is "fluid" and dynamic, with regional variations impacting light vehicle production.

Risks and Challenges:

• Foreign exchange volatility, particularly unfavorable impacts expected in Q4 2026.
• Tariff pass-throughs negatively impacting reported revenue by approximately 3 points in Q3.
• Uncertainty in the broader light vehicle industry, specifically regarding regional production trends in Europe and Asia.
• Rapidly shifting dynamics in the Chinese market regarding export vs. domestic sales focus.
• Potential implications of future export quotas on vehicles entering Europe from China, though details remain unclear.

Management Commentary and Tone:

• Tone was confident and resilient, emphasizing the ability to adapt to an uncertain environment while maintaining strong operating performance.
• Management highlighted "differentiated technologies" and proven execution models as key drivers for shareholder value.
• Olivier Ravier (CEO) emphasized conservatism in cost planning to ensure delivery in fluctuating market conditions.
• Sean Deeson (CFO) confirmed that capital investment plans remain aligned with the previously presented financial framework.
• Management expressed optimism regarding the ramp-up of industrial and HVAC segments post-2030.

Analyst Questions and Answers:

• Industrial Breakdown: Management confirmed the 2027 industrial target of $300 million is primarily driven by Gen-set, with e-cooling (equelling) ramping up as the next major contributor.
• Contract Sizing: Specific contract values for new agreements (e.g., Multistack, Train Ingersoll) are not yet finalized due to market fluidity; management expects to provide updates next year.
• Margin Outlook: Structural margin expansion is anticipated post-2030 as high-margin industrial and HVAC products gain share; current margins are supported by favorable mix in existing turbo products.
• China Export Market: Sales from Chinese exports are already contributing; growth depends on OEMs' ability to sustain exports and secure international suppliers.
• Gasoline Decline: Driven by a significant downturn in China's domestic market and tariff pass-throughs, rather than a global trend.

Other Key Points:

• The company remains focused on keeping critical quality processes in-house while scaling production volumes.
• Testing for the train e-cooling program has confirmed performance benefits versus existing solutions, though commercialization timelines are still being finalized with customers.
• Garrett's cost structure is positioned conservatively to maintain delivery capabilities despite industry headwinds.
• The company continues to navigate a "still uncertain industry environment" but remains on the "right side" of growth trends.