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Edited Transcript of GTX.N earnings conference call or presentation 7-May-19 12:30pm GMT

Q1 2019 Garrett Motion Inc Earnings Call

May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Garrett Motion Inc earnings conference call or presentation Tuesday, May 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandro Gili

Garrett Motion Inc. - Senior VP & CFO

* Olivier Rabiller

Garrett Motion Inc. - President, CEO & Director

* Paul Blalock

Garrett Motion Inc. - IR Officer

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Conference Call Participants

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* Adam Jordan Ribakove

RBC Capital Markets, LLC, Research Division - Associate

* Aileen Elizabeth Smith

BofA Merrill Lynch, Research Division - Analyst

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* John Sykes

Nomura Securities Co. Ltd., Research Division - Analyst

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Presentation

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Operator [1]

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Hello. My name is Kate, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion's financial results conference call. This call is being recorded and the replay will be available today (Operator Instructions)

I would now like to turn the call over to Paul Blalock, VP, Investor Relations.

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Paul Blalock, Garrett Motion Inc. - IR Officer [2]

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Thank you, Kate. Welcome everyone and thanks for listening to Garrett Motion's First Quarter 2019 Financial Results Conference Call. Before we begin, I would like to mention that today's presentation and press release are available on the Garrett Motion website, where you'll also find links to our SEC filings along with other important information about Garrett.

Turning to Slide 2. We encourage you to read and understand the risk factors contained in our financial filings, become aware of the risks and uncertainties in this business and understand that forward-looking statements are only estimates of future performance and should be taken as such.

Today's presentation also uses numerous non-GAAP terms to describe the way in which we manage and operate our business. We reconcile each of those terms to the closest GAAP term and you're encouraged to examine those reconciliations, which are found in the appendix to this presentation, both in the press release and in the slide presentation. Also, in today's presentation and comments, we will be referring to light-vehicle diesel and light-vehicle gasoline products by using the terms diesel and gasoline only.

On Slide 3, please notice the additional disclaimers related to the basis of our financial presentation. The nature of our historical carve out financial information and our standalone post-spin financial results reported today. In accordance with the terms of our Indemnification and Reimbursement Agreement with Honeywell, our consolidated and combined balance sheet reflects a liability of $ 1.196 billion in obligations payable to Honeywell as of March 31, 2019, otherwise known as the Indemnification Liability. The amount of the Indemnification Liability is based on information provided to us by Honeywell with respect to Honeywell's assessment of its own asbestos-related liability payments and accounts payable as of such date and is calculated in accordance with the terms of the Indemnification and Reimbursement Agreement.

Honeywell estimates its future liability for asbestos-related claims based on a number of factors. As previously disclosed in our Form 10-K, and our consolidated and combined financial statements for December 31, 2018, our management has determined that there was a material weakness in our internal control over financial reporting related to the supporting evidence for our liability to Honeywell under the Indemnification and Reimbursement Agreement. Specifically, we were unable to independently verify the accuracy of certain information Honeywell provided to us that we used to calculate the amount of our Indemnification Liability, including information provided in Honeywell's actuary report and the amounts of settlement values and insurance receivables.

For example, Honeywell did not provide us with sufficient information to make an independent assessment of the probable outcome of the underlying asbestos proceedings and whether certain information -- certain insurance receivables are recoverable. This material weakness has not yet been remediated. In consultation with our outside advisors, we are working to obtain additional information about the Indemnification Liability through a dialogue and iterative process with Honeywell. We are still engaged in that process, and it remains a high priority for the company. Following those comments, it's now time to turn to the main purpose of today's call. With us today is Olivier Rabiller, our President and CEO; and Alessandro Gili, our Senior Vice President and CFO.

I will now hand it over to Olivier.

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [3]

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Thank you, Paul, and welcome, everyone to Garrett's First Quarter 2019 Earnings Conference Call. Garrett achieved solid first quarter results, once again outperforming the global automotive industry while preserving our high-margin profile. This strong financial performance is attributable to the high-technology content of our products and our clear track record of cost control coupled with the high variable cost structure of our business model.

I will begin on Slide 4. Garrett's results for the first quarter were overall in line with our expectations as we performed well across key metrics, and Alessandro will cover in more details in a few moments. As anticipated, net sales declined 9% on the reported basis and 3% organically primarily due to the slowdown in global production partially offset by strong growth in gasoline products and commercial vehicles. I will talk more about it in a moment, but the ongoing rebalancing of our portfolio toward gasoline products accelerated in the quarter, with gasoline products comprising 29% of net sales versus 25% in Q1 2018.

During the first quarter, we posted $159 million in adjusted EBITDA and maintained an attractive margin profile with an adjusted EBITDA margin of 19%. A notable accomplishment, given the slowdown in the automotive industry, which began in late 2018. As Alessandro will discuss later, adjusted EBITDA in the first quarter increased 16% on a sequential basis and the margin improved 190 basis point as compared with Q4 2018. We also maintain our focus on deleveraging our financial profile as our net debt declined $40 million in the first quarter and now stands at $1.392 billion.

Overall, Garrett is off to a strong start of 2019 despite the slowdown of the industry, and we remain confident and on track to meet our previously stated outlook for the full year. We continue to achieve important progress, helping our global customers address the challenges of meeting increasingly stringent regulatory requirements and advancing motion across the bullet train platforms.

Turning onto Slide 5. We illustrate the ongoing process in rebalancing our product portfolio. On the left-hand side of the slide you see that compared with last year we were largely unchanged in the geographic makeup of our net sales. In China, we experienced an anticipated slowdown in sales as compared with last year as Q1 2018 was very strong for Garrett in China. And in North America this quarter, we had a slight increase, thanks to the ramp-up of new gasoline platforms. On the product side, as I mentioned a moment ago, we grew our percentage of sales from gasoline products to 29%, up 4 percentage points from the first quarter of 2018.

In detail, we mentioned last quarter that we were expecting a low double-digit decline in line with industry estimate for the full year of 2019. In the first quarter of 2019, diesel products totaled 36% of net sales, representing a reduction of 6 percentage point over Q1 last year as we migrated more and more customer applications from Garrett turbo diesel to Garrett gasoline turbos. Importantly, our strong track record of robust productivity initiatives at Garrett maintain the strong margin profile despite the significant ramp-up of gasoline platforms.

Based on our successful progress to date, we remain, therefore, on track to a level of diesel and gasoline revenue to be roughly equivalent by the end of 2019. We continue to expect strong share of demand gains in light-vehicle gasoline programs going forward and a strong win performance is expected to more than compensate for the decline in diesel. The majority of our new applications are currently scheduled to launch later this year, especially in the second half of the year, and we are confident that our growth in gasoline programs will ultimately lead to higher volumes. With increased scale, combined with our differentiated technology and integrated supply chain model, we remain well positioned to maintain our strong margin profile. Lastly, the combination of our aftermarket and commercial vehicle products account for 33% of net sales, up from 30% in the first quarter of 2018. These important verticals continue to generate positive returns and generally are not correlated with the short-term auto sales.

Turning to Slide 6. Garrett is a technology company, operating into the automotive industry and our technology growth strategy depicted here remains a key priority for the long-term success of our company. This disciplined, multistage approach to our strategy is to pursue opportunities where we believe we can contribute unique, high-level -- high-value solutions for our customers and sustain our margin profiles through advanced technology on the -- and the relentless pursuit of the lowest-cost production and supply chain sourcing.

On our core turbo solution business we are driving key air-loop innovations applicable for electrified platforms, which enable the advanced combustion systems that engine makers are using to meet increasingly stringent emission standards. A clear example of this will become visible later this year in China as our accelerating launches necessary to meet the upcoming China 6 standard will be applicable for most Tier 1 cities beginning July 1 of this year. Globally, we see CO2 reduction milestones pushing the OEs to increase the technology content of their engines, whether they are directed at being used as part of pure ICE platform or the result of electrified/hybrid powertrain platforms.

In addition to the increased interest for our electric turbo-charging platform, we recently held demonstration at the Shanghai show and have seen increased activity for our cybersecurity and integrated health as management solutions. During the first quarter, we launched several new pilot programs in Europe and Asia and have maintained our momentum in the current quarter. We are also receiving considerable activity around next-generation fuel cell compressor, which I will talk about more in a few minutes. Lastly, our technology project pipeline deals on our experience in model-based control, software competency and unique high-speed motors. We are making good progress with initial feasibility studies and we are now looking forward to adding more ideas soon to our breakthrough initiatives.

Turning now to Slide 7, you will see our E-Boosting roadmap for electrified powertrains. These solutions are optimized for the Euro 7 standards and well suited for low-speed performance of small engines. We expect to be first to the mass market with the E-Turbo in 2021 with an easier packaging solution, including air loop controls. Our high-speed motor and electronic expertise are receiving continued customer interest in serving the large market opportunity, provided by the upcoming surge in the availability of high-voltage powertrains which enable these higher compound solutions. More importantly, mastering technology associated with super high-speed electric motors offers promising opportunities to a more electric innovation to our portfolio.

Moving to Slide 8 and building on our expertise in both the mechanical and the electric domains, we are increasingly excited about the future of hydrogen fuel cells. At the recent Shanghai show, a major part of the discussion with many of our customers was in the directly -- directed towards how we can help accelerate our differentiated fuel cell technology to the broader market. Today, fuel cell solutions are already regarded as a better powertrain option to power electric drives than battery-based solution, particularly for heavy-duty commercial vehicles like buses. This is due to the many fuel cell benefits such as zero emission, suitable real-world driving ranges and short refueling times. Interestingly, Wan Gang , the former Minister of Science and Technology in China and informally known as the Father of China's electric car industry, was recently quoted as saying, "The fuel cell is the future of development direction." And I am glad to report our first order win for fuel cell charger in China.

Going forward, Garrett's unique oil-free, air-bearing compressor technology will continue to evolve from our Gen 1 products to Gen 2 and Gen 3 products, which will be smaller in size, lower in cost, with much greater volume. We expect to continue to gain positive traction around our customers in Asia and elsewhere for these critical breakthrough solutions.

Turning from the long term back to the short term. I will now hand it over to Alessandro to discuss our Q1 results more in detail.

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [4]

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Thanks, Olivier, and welcome, everyone. I will start my review of the financials on Slide 9. As Olivier mentioned, net sales were $835 million in the first quarter 2019, down 9% on a reported basis and 3% organically as compared with the first quarter of 2018 and on a sequential basis were up $36 million or 4.5% as compared with the fourth quarter of 2018.

Net income grew 26% over last year to $73 million in the first quarter 2019, representing 9% of net sales. This was largely driven by onetime tax expenses in Q1 2018 or approximately $25 million, which were not repeated in Q1 2019. Our effective tax rate, which can vary from quarter-to-quarter, was 25% in Q1 2019, slightly below our 2019 outlook.

Adjusted EBITDA totaled $159 million in the first quarter of 2019, a year-over-year decrease of 10%, and represented 19% of net sales, down 30 basis points from a year ago. However, as Olivier mentioned, on a sequential basis adjusted EBITDA in the first quarter increased 16% from Q4 2018 and the margin improved by 190 basis points. This is a stronger statement -- testament to our productivity focus, which not only compensated for the slight margin impact from rise of gasoline platform launches, but also drove margin improvement in a more challenging environment.

Adjusted EBIT in the first quarter of 2019 was $140 million, down 12% from last year and approximately 17% of net sales. Capital expenditures were $21 million in the last quarter -- sorry, in the quarter, down $7 million from last year and were 2.5% of net sales in Q1. Adjusted leverage free cash flow was $53 million in the quarter and represented 33% of adjusted EBITDA. Overall, Garrett had a solid quarter in light of the current environment consistent with our expectations.

Turning to Slide 10. Our net sales decline was $80 million versus last year or $30 million at constant currency due to lower shipments. In breaking down this performance, gasoline products were $17 million, representing a 15% organic growth increase while diesel products declined by $85 million, representing a 16% organic decline. Commercial vehicles and aftermarket products were up 2% and 1%, respectively. Most of our diesel declines were industry related and the remainder were largely due to the run off of the diesel problems and the planned shift of key customer problems to Garrett gasoline turbos which Olivier discussed earlier. We believe the growth in new gasoline products this year will more than offset the decline in diesel volumes and our results for the quarter were in line with our portfolio rebalancing plans.

Turning now to Slide 11. You see our adjusted EBITDA and adjusted EBITDA walk for Q1 2019 as compared to Q1 2018. For the quarter, adjusted EBIT was $140 million, down $19 million from last year. This performance was driven by $22 million from lower volumes partially offset by $10 million positive impact due to price and productivity. Overall, our highly variable cost structure mentioned earlier, coupled with our continuous focus on productivity initiatives, contributed in total to a 19% adjusted EBITDA margin despite the product mix shift discussed earlier. The FX impact of $15 million in Q1 2018 at constant currency was driven by a 7% weaker euro dollar versus Q1 2018. Also year-over-year FX hedging impacts were favorable.

On Slide 12, we provide more detail regarding to our income before taxes. As you can see the year-over-year comparison reflects the pre-spin Q1 2018 period to the debt issuance, whereas Q1 2019 reflects the $15 million higher interest expense as a result of our capital structure after the spin-off. It is also important to note that the asbestos expenses to Honeywell of $41 million in Q1 2018 prior to the spin versus the lower indemnification expenses of $19 million of a post -- on a post-spin basis reflected in Q1 2019. On a net basis, income before taxes declined to $97 million in Q1 2019 due to largely higher interest expense in the quarter.

Turning to Slide 13. We show the improvement in our liquidity and capital resources reflecting an $11 million increase in cash and $40 million decrease in net debt. We also have no significant new maturities in the near term. Importantly, our net-debt-to-consolidated-EBITDA ratio was 3x, and our available liquidity remained strong at $690 million. We remain focused on utilizing our cash generation to deleverage our balance sheet.

Turning to Slide 14. We provide a graphical depiction of our net debt walk since Q4 2018. As I mentioned a moment ago, we reduced our net debt to $1.39 billion as of March 31, 2019. For the quarter, we generated $53 million of adjusted leverage free cash flow, which represent our core cash generation from ongoing operations. Q1 free cash flow was impacted by typical seasonality in working capital, which was minus $81 million in the first quarter, largely driven by the timing of receivables. Our receivables balance typically drop significantly towards the end of the year, following relatively low shipments during the last 2 weeks in December. This result in very strong cash conversion from working capital in the fourth quarter, which is partially offset by an increase in working capital in the start of the next year. In addition to that, our cash taxes of $12 million in Q1 were lower than average, our quarterly cash taxes are nonlinear and can fluctuate significantly on a quarterly basis. The level of free cash flow in Q1 was $50 million positive, net of our total payment obligation to Honeywell for the indemnity obligation. There were no payments this quarter to Honeywell for the mandatory transition tax. And in summary, our net debt declined by $40 million in the first quarter 2019 as compared with December 31, 2018.

On Slide 15, we note the March 31, 2019 balance sheet items related to Honeywell. Our liabilities were reduced by $52 million since December 31, 2018, as a result of $38 million indemnity payment in Q1 2019 and updated claims experience provided by Honeywell as well as the impact of FX. As a reminder, the indemnification obligation, which now stands at $1.2 billion is kept at $175 million of cash payments with respect to any given year. And while there was no mandatory transition tax payment in Q1, we did make a $19 million entity payment in April to Honeywell. This is the same amount that was paid in Q4 2018. Our 8-year MTT payment schedule remains the same, it is 8% of the total in each of the first 5 years and then it's 15%, 20%, 25%, respectively, in the last 3 years.

Overall, I'm pleased to confront with our first quarter results and believe we are well positioned to achieve our previously provided targets for 2019 and in our long-term strategic outlook. That concludes my comments today.

And I will hand it back to Olivier.

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [5]

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Thank you, Alessandro. In summary, on Slide 16, our Q1 results provided a solid start to 2019 and were in line with our expectations. Although the softer macro conditions led to lower volumes, we maintained our attractive margin profile and further reduced net debt. As discussed, the positive long-term fundamentals of our business remain intact. Our outlook for 2019 remains unchanged as we anticipate full year growth in organic sales of 2% to 4% and $630 million to $650 million in adjusted EBITDA.

We continue to expect softer H1 and stronger H2 demand, with Europe and North America being relatively stable and China improving, based upon new platforms launches scheduled for H2 for Garrett. Of course, we are not forecasting a major negative impact from Brexit or U.S.-China trade negotiations. We continue to target significant free cash flow generation with 55% to 60% adjusted levered free cash flow conversion ratio, which includes interest but excludes the indemnity and tax payment to Honeywell.

I am encouraged by our strong ongoing win rates in our core turbo charger business. Again, we believe our global share of demand gains in gasoline products particularly in Europe and Asia will more than offset the decline in diesel, which is expected to stabilize over time. In addition, we continue to accelerate the progress in our electrification and connected vehicles growth vectors and remain excited by our future prospects. This concludes our formal remarks today.

And I'll now hand it over back to Paul for Q&A.

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Paul Blalock, Garrett Motion Inc. - IR Officer [6]

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Thanks, Olivier. Before we open the line, I need to mention that we will not be taking questions today on our future course of actions related to the material weakness in our financial reporting under our Indemnification Obligation Agreement.

Operator, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from David Kelley of Jefferies.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [2]

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I -- just looking at Slide 11 here, it looks like productivity helped to offset some lower volumes, and it sounds like price and mix as well. Can you talk about some of your productivity initiatives, the levers you were able to pull? And maybe how we should think about productivity offsets through the balance of the year, production remains weak?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [3]

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Well, David, I would say there is nothing new that we've implemented in Q1 versus the recipe we have in the business, which is basically we are developing even further our low-cost base, when it comes to softening. And you may remember that we've explained that it's a long-term effort. It's not something you do from one day to the other.

And then the deployment of formerly -- our newer operating system that now has been recast to our company and it's called the Garrett Excellence Model in our factories. We used the usual discipline we've acquired around -- across the years to maintain our fixed cost as low as possible.

So nothing special in Q1, just pushing on the same initiatives we had and these initiatives are usually long-term based. And that's the reason why we can proceed the benefits of them this way.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. Perfect. And then if you could just update us on your outlook for global production for the year. I think previously you were expecting a minus 2%. And maybe getting a little bit more granular, are you seeing any changes in the European market conditions, given your exposure there?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [5]

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Well, what we are seeing on the European markets is pretty much aligned with what we had at the beginning of the year. We were not very bullish on the European market, if you remember the last discussion we had. Quite frankly, it's difficult. If I give you a data point about Europe, a data point about China, you would probably get another data point from all the data points that have been conveyed for the last few weeks. But we are not betting on a strong recovery in China, obviously. We are saying that most of the recovery is coming from launches that we will have with the customers that linked to the implementation of the China 6 emissions.

All in all, quite frankly, the focus of our company is to remain the more flexible we can in light of those macro variation soft down and that's the reason why we are having a low CapEx percentage, 3% to 3.5%. That's the reason why we are having low-fixed cost and high-variable cost, and that's the reason why we've been leveraging over the years to push our supply base to a level where we can ensure that continuous productivity. So all in all, I would say nothing new versus some of what you got for the last week versus what we've said in Q1, except probably the confirmation that Europe remains weak and that China is not recovering yet.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [6]

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Okay. Got it. And then last one for me and I'll pass along, and it's a quick one. Just the Slide 10 on the net sales bridge, I think there was a big swing in other revenues, could you elaborate on the impacts to the other line?

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [7]

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I don't think it's necessarily a big swing compared to what we had reported last year in $6 million in total, considering the size of the business in other, which is not so particularly relevant for the company. It's nothing to be concerned about, could be timing of -- specific timing of revenues that we had in Q1.

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Operator [8]

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The next question is from Aileen Smith of Bank of America Merrill Lynch.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [9]

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First question, your prior outlook that you gave in the 4Q '18 slide deck targeted first half organic sales is down 2% to flat, and then second half of up 6% to 8%. Obviously, the first quarter came in a little bit below that first half range in total. So perhaps, if you could remind us where the first quarter came in relative to your initial expectations within that guide? And does this imply a more pronounced acceleration on organic growth in the back half of the year, if 1Q did come in a little bit weaker?

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [10]

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No. Actually the Q1 is absolutely in line with the -- what we were expecting. I think we were clear as a result of more visibility we had in Q4 that we would have had January and February already very weak. I think we have actually seen some recovery in March. We are monitoring second quarter since April for what we have now, and obviously it's not yet consolidated, doesn't look exceptionally good. So we are still monitoring Q2. But we are not seeing any change in our overall outlook for the year in terms of organic growth.

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [11]

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I think -- and Aileen, just to add, everybody was expecting based on the result at the end of March that China would be signaling the recovery. We did not have this recovery in our outlook when we explained Q1. And that's why now that we are seeing that April doesn't consume March, we are confirming -- we are just confirming overall Q1 and Q2.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [12]

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So when we think about the cadence of first half versus second half and relative to what you provided, even though you're not explicitly updating it in the slide deck, is it fair to assume they hold? Or is it on -- is the balance a little bit different?

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [13]

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It's too early to say based on what we have in terms of visibility from April. But for the moment, we haven't seen any major deterioration.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [14]

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Okay. And second question on the adjusted EBITDA and margin commentary, you stated in the press release that the decline in EBITDA on a year-over-year basis was really due to lower revenue offset by some of the productivity elements you mentioned. Is it possible to bracket what the mix impact was on margin in the quarter? Is it no longer a significant issue for you? Or was it just compensated by productivity efforts, as you've alluded to?

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [15]

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We would have liked that mix to be positive but it's still not. So we still have negative mix, it's just consistent with the shift from diesel to gasoline that we've been mentioning multiple times. But I think we had a very strong productivity of more than offsetting it.

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [16]

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But that's also confirming, Aileen, if I may, that what we've said from the beginning that there was a shift, that shift was driving some mix pressure. But that we're realizing the productivity initiative in the company to offset that even in light of variations in the short-term macros. I think, in Q1, we are confirming that.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [17]

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Okay. Great. And one last question, if I may. Switching to the aftermarket business, historically, we've perceived the aftermarket business as less cyclical than the OE market. But your aftermarket sales came under pressure in the quarter and even in 1Q '18 declined. Can you remind us what's driving that development? Is it also a shift away from diesel to gas in the market overall? And at what point would you expect aftermarket might be a better ballast to sales growth, if global OE markets remain volatile?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [18]

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I think, Aileen, if you get back to some numbers that have been published by some of our peers that, that significant aftermarket businesses, a lot of them were posting some results in the quarter that we are not as good as our results in aftermarket. So I don't see any cyclicality there.

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [19]

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And we actually grew in aftermarket organically. So don't see necessarily the point of aftermarket being soft in Q1.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [20]

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I may be missing something in the press release but the organic sales change was down 3% year-over-year?

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [21]

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No. It's actually up 1%.

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Operator [22]

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The next question is from John Sykes of Nomura.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [23]

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Just wanted to ask a question on free cash flow, just given your conversion rates, and I realized the MTT payment and the indemnity payment aren't subtracted afterwards. But I have -- based on my calculation, I have you around $100 million of free cash flow for the year. What would you do with that? Is that -- was your plan to reduce debt right now? Or is it something else?

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [24]

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Yes. I think we've been public since the beginning that our key target is to deleverage. You've seen Q1 being softer in terms of conversion but as we said, it's mostly and substantially due to seasonality and it's typical in Q1. So we are consistent with prior year. Actually we've been better than prior year in terms of conversion. And we are -- I think, it was visible already from Q4 last year, we are generating a large portion of our cash flow at the end of the year as part of our Q4. So you will see similar seasonality trend as part of the year.

Just a minor, of the delevered free cash flow is including the MTT and the indemnity, this quarter is only including the Indemnity Obligation payment. As we mentioned during the call, we paid the entity at the beginning of April. So it will be part of our Q2 results.

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [25]

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And overall, no change there. First priority for the business is to deleverage, and then we'll look at bolt-on acquisition opportunities if the opportunity occurs.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [26]

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Okay. And just -- can you remind me where do you feel comfortable with leverage? Like when you -- or you said when you get to 2x, you're going to look for bolt-on acquisitions

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [27]

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In terms of the -- what we -- in terms of consolidated EBITDA, which is basically our adjusted EBITDA less the capped amount of the indemnity obligation at $175 million.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [28]

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Okay. And then the other question is just, it's more of a -- like a technical market-type question. But why hasn't -- I know people have been working on fuel cells for quite a long time, what is it with that technology that unlike batteries hasn't really taken off yet?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [29]

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That's a very good point. Because as you rightly so say, fuel cells have been around for a long time, these are the fuel cells that made the -- possible the first flight to the moon. The point is that it was very, very low volume. There was not a lot of investment into it and therefore, it remains. But keep in mind, I mean, the battery-electric vehicle that existed for more than 100 years and we are just starting to think and talk about it. So that's a little bit of the same issue that happens there.

Where we see that people have pivoted in our mind is, especially when it comes to a country like China, people have realized some of limitation of a battery electric. So we are not saying that battery electric is not important, battery electric will be important. But they realized the limitation of them when it comes to range, when it comes to cost, when it comes to recycling. And our introducing the fuel cell is a way to offset some of the negative, especially when you think about agile vehicles.

There is something important -- I think, it's a leader of Toyota that was mentioning that recently saying that when you look at a battery electric vehicle, especially when you look at the battery, a lot of the price today is into the raw materials. Indeed, when you look at our store -- our study, by 2025, when we get to the flat part of the curve, the cost curve, we think that 90% of the price will be in raw materials. Well, when you look at the cost structure of a fuel cell vehicle today, a lot is into value added. And if you look at the 3 generations of products we've put on the presentation today, so we are planning to decrease by the factor of 10, the cost from the first generation to the subgeneration just at our level with the fuel cell compressor, which is a significant top of the fuel cell but doesn't represent the full equipment.

So the progress we are seeing, obviously, from a volume cost endpoint are higher when you have a higher level of value added and this is what we see on the fuel cell. I think some of the car makers now are targeting to get to a fuel cell vehicle that would be of the cost of an hybrid. So not a battery electric but an hybrid.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [30]

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Okay. Yes, I guess, the tie in to the call is just, let's say, 10 years from now -- I'm not saying this is going to happen, but let's say, 20% of all new car sales are fuel cell or battery, okay? Would that -- what kind of an impact does that have on the business? Is it -- are you well positioned enough, such that -- and with the aftermarket...

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [31]

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Quite frankly, on the fuel cell side, we are extremely well positioned. The fuel cell charger is more important to a fuel cell than a turbo is to an engine. That's what we have realized for the past 2, 3 years. Meaning the more air you can put into the fuel cell, the more efficient you can be. The more hydrogen you can push and the better is the overall efficiency of the stack. So we have even customers today that are telling us that they want to see our product before they design the stack, just to give you an idea.

So we are extremely well positioned. We have proprietary technology. Obviously, into the bearing system you cannot put oil or grease on a fuel cell charger because there's a light companionates the membranes of the stack. We have specific airfoil bearing technologies that we've been developing for years, that is a very strong advantage for us. This combined with our advantage at designing and manufacturing super high-speed electric motors that are needed when you get to -- when you want to get to higher efficiency. So that's the reason why we are seeing a lot of traction and now we are pursuing not only some major carmakers that I -- that got into the business but also with the strong growth that we see in some region.

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Operator [32]

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(Operator Instructions) The next question is from Joseph Spak of RBC Capital Markets.

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Adam Jordan Ribakove, RBC Capital Markets, LLC, Research Division - Associate [33]

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A.J. Ribakove on for Joe. Missed one of the earlier questions, so sorry if this was asked. But looking at Q1 EBITDA, previously commentary indicated that from a margin perspective, it was supposed to come -- or it was expected to come in close to 4Q results. But given the sizable beat, were there any one-off factors? Or just the longer-term initiatives like you said?

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [34]

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No. No one-offs at all. I think we mentioned that as expected, mix was negative but more than offset by strong productivity in Q1. That's the primary reason.

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [35]

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I know it was your concern. To understand it, there was a one-off, but quite frankly, we have nothing to report.

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Adam Jordan Ribakove, RBC Capital Markets, LLC, Research Division - Associate [36]

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Okay. But in -- and then bridging that to full year guidance. Commentary on the last call indicated Q1 was likely the weakest of the year, but at 19% for EBITDA margin, it seems roughly at the high end of implied margin guidance. So how should we think about cadence for the year? And any initiatives that may offset the benefit from increased volume in the second half? Or what might cause volumes to come in within that guidance range?

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Alessandro Gili, Garrett Motion Inc. - Senior VP & CFO [37]

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No. I don't think you should take Q1 as indicative of the full year performance. I think we are reaffirming guidance, as we said before we keep on monitoring the market evolution quarter-over-quarter. We are expecting second half to be stronger in terms of overall growth, but you need to remind that, that is also largely driven by gasoline growth, which is keeping all the margins very tight in terms of the impact from the shift from diesel to gasoline. So long term, for the year, still in the range. We believe we are going to be there. We keep on monitoring the quarter evolution.

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [38]

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But true, that was very important to for us to make sure that what we said from the beginning we had an independent company, which is a valuable cost structure that translate into result, it's obviously, what you can see on the conversion when you get to a lower volume because of the macros, because this is what we wanted to achieve for years, and this is where we are.

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Operator [39]

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This concludes our question-and-answer session today and today's conference call. Thank you for attending today's presentation. You may now disconnect.