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Edited Transcript of GTX.N earnings conference call or presentation 8-Nov-19 1:30pm GMT

Full Year 2019 Garrett Motion Inc Earnings Call

Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Garrett Motion Inc earnings conference call or presentation Friday, November 8, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Olivier Rabiller

Garrett Motion Inc. - President, CEO & Director

* Paul Blalock

Garrett Motion Inc. - IR Officer

* Peter Bracke

Garrett Motion Inc. - VP & Interim CFO

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Conference Call Participants

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* Aileen Elizabeth Smith

BofA Merrill Lynch, Research Division - Analyst

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* George M. Dailey

Morgan Stanley, Research Division - Research Associate

* Joseph Robert Spak

RBC Capital Markets, Research Division - Analyst

* Steven Michael Hempel

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and my name is Chuck, and I'll be your operator this morning. I would like to welcome everyone to the Garrett Motion quarterly earnings conference call. This call is being recorded and a replay will be available later today. After the company's presentation, there will be a question-and-answer session. I would now like to hand the call over to Paul Blalock, Vice President of Investor Relations. Please go ahead, sir.

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

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Thank you, Chuck. Good day, everyone, and thanks for listening to Garrett Motion's Third Quarter 2019 Conference Call.

Before we begin, I'd like to mention that today's presentation and press release are available on the Garrett Motion website at garrettmotion.com, where you will also find links to our SEC filings along with other important information about Garrett.

Turning to Slide 2. We note that this presentation may contain forward-looking statements regarding our business, prospects, goals, strategies and anticipated financial performance. We encourage you to read our 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. The forward-looking statements represent management's expectations only as of today, and the company disclaims any obligation to update them.

Today's presentation also uses numerous non-GAAP measures to describe the way in which we manage and operate our business. We reconcile each of those measures to the most directly comparable GAAP measure, and you are encouraged to examine those reconciliations, which are found in the appendix in both the press release and 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 financial presentation, the nature of the 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 sheets reflect a liability of $1.120 billion in obligations payable to Honeywell as of September 30, 2019.

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 insurance receivables are recoverable.

This material weakness has not yet been remediated.

In consultation with our outside advisers, we are working to obtain additional information about the Indemnification Liability through a dialogue and iterative process with Honeywell. That process continues, and we and our advisers remain in communication with Honeywell on these issues.

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 Peter Bracke, our interim 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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Thanks, Paul, and welcome everyone to Garrett's Third Quarter 2019 Conference Call.

Beginning on Slide 4, Garrett net sales for the quarter were strong at $781 million, down 0.4% on a reported basis, but up approximately 3% organically versus last year, showing one, a positive change in the trend we have experienced year-to-date; and second, that we once again significantly outperformed global auto production, which was down 2.9% in Q3.

Garrett growth of our global light vehicle production of more than 5 percentage points reaffirms our long-term growth expectations, even in a softer global auto environment. Our strong revenue performance was driven by higher turbo penetration in gasoline engines and new product launches as gasoline products increased to 35% of net sales, up 10 percentage points versus last year.

Sales from gasoline products exceeded diesel well ahead of our original expectations. The success we have achieved in rebalancing our portfolios underscores our proven track record in providing differentiated technology to major global automaker and is evidenced by our strong customer win rate.

Net income in the third quarter was $38 million, and we produced earnings per share of $0.51 and $0.50 per basic and diluted share, respectively.

On a year-to-date basis, Garrett generated $177 million in net income of $2.37 and $2.34 basic and diluted earnings per share, respectively. For the first -- for the third quarter, adjusted EBITDA was $133 million, and the year-to-date total was $446 million.

Our adjusted EBITDA margin was 17% in the quarter and 18.4% on a year-to-date basis. We also posted strong adjusted leverage free cash flow in the third quarter of $102 million and improved our balance sheet by reducing net debt by $95 million. Both items, Peter will discuss in more detail in a few minutes.

Based on our positive results for the third quarter and year-to-date, we reiterated our 2019 guidance for organic net sales and adjusted level free cash flow conversion and revised slightly our full year outlook for adjusted EBITDA to reflect the effect of a faster rebalancing of our light vehicle activity to gasoline and softer commercial vehicle end markets. We'll discuss these points in more detail later on in the call.

Turning to Slide 5. We illustrate our net sales by region and product line. On the left-hand side, you see the geographic makeup of our net sales that remain unchanged in Europe as compared to last year. North America declined by 1 percentage point and Asia was up 1 percentage point despite the continued industry slowdown in China mainly due to strength in Garrett's new gasoline product launches.

On the product side, as I mentioned a moment ago, we grew our percentage of net sales from gasoline products to 35%, up 10 percentage points from the third quarter of 2018. On a dollar basis, gasoline product sales exceeded the sales by approximately 10%.

We anticipate further share of demand gains in light vehicle gasoline programs going forward and, expect that ongoing launches and ramp-ups will drive gasoline sales to exceed diesel by approximately 15% in the current fourth quarter.

As you can see, our higher-margin commercial vehicle products totaled 18% of net sales in the third quarter, down from 20% in the third quarter last year, reflecting continued softness in Europe, Asia and North America, both in on-highway and off-highway industries.

The faster than expected acceleration towards gasoline is a positive long-term trend for Garrett as it provides us with greater revenue resilience at a time when the industry is slowing down. At the same time, when combined with lower commercial vehicle activities and an overall industry with softer volumes than originally forecasted, we expect margin pressure to continue in the fourth quarter of 2019, and at this time into 2020, as we'll see the shift from gasoline to diesel continuing, although at a slower pace, and the commercial vehicle industry that will remain challenged. To mitigate this shift as well as more adverse end market environment, our playbook remains the same, driving productivity and organization efficiency to deliver top-tier margins within the industry.

On the Slide 6, we highlight Garrett's differentiated technologies in the core turbocharging business. In the Light Vehicle Gasoline segment, we continue to expect to benefit over time from the industry's transition towards higher dollar content per vehicle based upon variable geometry technology, a technology that Garrett pioneered over the last few decades in diesel engines. Garrett introduced the industry's first mass market variable-nozzle turbine or VNT Turbo on the gasoline platform in 2016, and we are currently engaged with top OEMs worldwide to deploy this technology on a broader basis.

It means that we estimate that approximately 40% of light vehicle gasoline turbos are expected to be VNT on a global basis by 2025, and up to 60% in Europe alone, including both pure internal combustion engine platform and emerging electrified hybrid powertrain.

Importantly, our next-generation gasoline VNT should add 30% to 50% greater content per vehicle over time, providing significant long-term growth potential as we continue to expand our gasoline sales and increase the technology content per vehicle.

We believe Garrett's strong position on gas VNT and the increased content these applications will provide will have a positive impact on our margin as we launch more and more of these programs going forward.

In the diesel and commercial vehicle segment, we also see CO2 reduction mandates, pushing automakers to increase the technology content of their engines. Garrett's 2-stage and Double Axle VNT product solutions enable emissions reduction while improving fuel economy as mandated by Euro 7 and China 6 regulations.

In short, Garrett remains well positioned to benefit from the positive long-term macros as we continue to provide advanced technology to the global auto industry to help it meet more stringent regulations and set new benchmarks in vehicle performance.

Turning to Slide 7. We highlight our continued progress in new growth sectors. In September, we unveiled at the Frankfurt Auto Show, the industry's first electric turbocharger for mass market passenger vehicle to be launched in 2021, meaning tomorrow.

Our innovative E-Boosting solutions have the ability to improve fuel efficiency up to 10%, while delivering added responsiveness and performance. These products are designed for use in higher voltage hybrid platforms and will ultimately provide a potential for generating electricity by recouping energy from [exos] gas. Garrett is well positioned to capitalize on the electrification of the powertrain. In fact by 2023, IHS forecasts that approximately 25% of light vehicle production worldwide will be in hybrid or electrified vehicle.

As for Garrett, we expect it to be over 35% of our light vehicle sales, meaning on hybrid platforms. It means that the portion of Garrett's sales coming from hybrids will be significantly outpacing the overall industry and benefiting from the increased content that I mentioned earlier.

We are also seeing strong interest in Garrett's unique fuel cell compressor applications, particularly in Asia, where we plan to start local production for our Gen 2 Fuel Cell products in 2021.

Longer term, we see Fuel Cell application moving from commercial vehicle platform into mass market, light vehicle applications as costs decline and technological solutions are deployed near the middle of the next decade.

In addition, we continue to make important strides in bringing our software solution to market. We are proud to have recently won one of the first industry contract for Intrusion Detection and prevention software for a major Asian car maker. We are now also in production for advanced control for Engine Management System and in pilot production for our first diagnosis service bay tool application. These wins demonstrate that our global customers rely on Garrett to bring to market advanced technologies that are not purely linked to our legacy car turbo business. In summary, we remain focused on collaborating with our global customers and advancing the auto industry's transformation towards more electrified and connected vehicle.

I will now turn over to Peter to discuss the financials in more detail.

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [4]

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Thanks, Olivier. Welcome, everyone. I will start my review of the financials on Slide 8. As Olivier mentioned, net sales for the third quarter were down 0.4% on a reported basis and increased 2.8% organically compared with the third quarter 2018.

Our ability, once again -- to once again outperform global auto production reflects higher gasoline volumes, stemming from increased turbocharger penetration in gasoline engines and new product launches, which were particularly offset by lower diesel volumes and lower product sales for commercial vehicles. Net income was $38 million in the quarter and down from Q3 last year, which includes a tax benefit from an internal restructuring of Garrett's business in advance of the spin-off that resulted in an $870 million reduction to withholding taxes on undistributed foreign earnings recorded during the 3 months ended September 30, 2018.

In addition, Q3 2019 included $18 million in interest expense on long-term debt, whereas Q3 2018 did not include any interest expense related to the debt raised at the time of our spin-off.

Adjusted EBITDA totaled $133 million in the third quarter, a decline of 3% or $4 million versus the third quarter last year. As Olivier mentioned, the adjusted EBITDA margin of 17.0% of net sales, down 50 basis points from 17.5% in Q3 2018.

For the 9 months ended September 30, our adjusted EBITDA margin was 18.4% versus 18.7% in the same period prior year. Adjusted EBIT in the third quarter was $113 million, down 6% from last year and represented 14.5% of net sales. Capital expenditures were $23 million in the quarter, up from last year, but still tracking similar levels as in 2018 on a year-to-date basis and in line with our full year 2019 expectations.

Lastly, our strong cash generation for the third quarter included $102 million in adjusted leverage free cash flow, which includes interest expense, but excludes payments to Honeywell. Including payments to Honeywell, our levered free cash flow was $65 million for the quarter. Overall, Garrett continues to generate strong financial results amid challenging market conditions.

Turning to Slide 9, we break down our net sales performance for the quarter. Gasoline products grew $77 million, representing 44% organic growth. While diesel products declined by $61 million, representing a 17% organic decline, driven by the overall market decline and the runoff of certain applications. Commercial vehicles declined $16 million or 9% organically due to softer market conditions globally. Aftermarket and other decreased by $1 million and $2 million, respectively. Overall, net sales increased 2.8% at constant currency versus last year primarily due to higher gasoline volumes.

Turning to Slide 10. We highlight that Garrett is significantly outperforming the global auto industry. As you can see on this slide, our organic growth in net sales on a year-over-year basis has outperformed the global LV production each quarter since we went public last year. This outperformance, despite the significant decline of our diesel business, has been largely driven by our new product launches in the Light Vehicle gasoline segment.

Turning now to Slide 11. You see adjusted EBIT and adjusted EBITDA walk versus Q3 -- for Q3 2019 as compared to Q3 2018. For the quarter, adjusted EBIT was $113 million compared to $120 million in the prior period. Adjusted EBIT was up $15 million from higher volumes, and this increase was primarily offset by negative $10 million in price, productivity and mix, which is related to the accelerated shift towards gasoline products and lower commercial vehicle sales and an $8 million increase in SG&A, mainly due to nonlinear corporate allocations prior to our spin-off from Honeywell, and also in part to severance-related expenses.

R&D were slightly higher in Q3 compared to 2018 period, but down year-to-date and consistent with our full year expectations. Also the negative currency impact in Q3 2019 was mostly driven by a weaker euro-dollar exchange rate versus last year, and was basically offset by FX hedging losses included in the prior period.

Overall, Garrett's adjusted EBITDA for the third quarter was down 2%, excluding FX, despite challenging market conditions and the transformational shift in our product mix.

On Slide 12, we provide more detail related to income before taxes. As you can see, the year-over-year comparison reflects $16 million in higher interest expense due to the different capital structure, pre- and post-spin off.

It is also important to note that asbestos expenses to Honeywell were $50 million in Q3 2018 prior to the spin versus the lower indemnification expense of $18 million on a post-spin basis in Q3 2019.

On a net basis, our Q3 income before taxes of $70 million was in line with the prior year period. As we mentioned in our previous call, our effective tax rate can vary from quarter-to-quarter due to discrete items. And in Q3 2019, our tax expense of $34 million resulted in an effective tax rate of 47%. This compares to 31% effective tax rate in Q3 2018. The higher tax rate in 2019 is mostly driven by some changes in geographic proportional earnings as well as historical pre-spin items that we are working through in consideration of U.S. tax reform. We believe we are still tracking to a full year effective tax rate of approximately 27%, excluding items such as Swiss Tax reform, and we continue to work on our business operating model and uncertainties around U.S. tax reform.

Turning to Slide 13. We provided geographical depiction of our net debt walk for the third quarter. In Q3, we reduced net debt by $95 million to $1.321 billion as a result of $65 million in levered free cash flow and an additional FX benefit of $30 million. The $65 million in levered free cash flow is resulting from $133 million of adjusted EBITDA and a $38 million reduction in working capital, partially offset by $18 million in cash taxes, $23 million of CapEx, $20 million other, mainly related to other assets and liabilities, $8 million of cash interest and $37 million paid as indemnity obligation to Honeywell.

Turning to Slide 14. We ended the quarter with available liquidity of $658 million, including $190 million in cash and cash equivalents and $468 million available under our revolving credit facility, which is down slightly from Q2 due to changes in exchange rates.

Also on the slide, you see that we deployed cash to make a $40 million early repayment on our term Loan A, which prepaid 2020 and also first half 2021 amortization.

Our net debt to consolidated EBITDA ratio was lowered from -- was lowered to 3.01x as of September 30 from 3.20x as last quarter, and we continue to have no near-term debt maturities. We remain focused on utilizing our strong cash generation to deleverage our balance sheet.

On Slide 15, we note our balance sheet items related to Honeywell. Year-to-date, our total obligations or liabilities were reduced by $151 million to $1.375 billion primarily due to our year-to-date indemnity obligation payments of $113 million and a Q2 payment of $18 million for mandatory transition taxes as well as a $20 million benefit from foreign exchange related to the indemnity obligation. As a reminder, the indemnification obligation, which stands at $1.120 billion, is capped at $170 million of cash payments with respect to any year.

Turning to Slide 16. We provide our current outlook for 2019. For the full year, we have reiterated our previously stated guidance of organic net sales growth between minus 1% and plus 1% and adjusted leverage free cash flow conversion between 50% and 55%.

Our full year outlook for adjusted EBITDA has been revised from a range between $600 million and $620 million to a range between $580 million and $600 million. Our previous outlook for 2019 global auto production was at the midpoint between minus 4% and it's now minus 5.5% or approximately 1.5% lower, but partially offset by a faster ramp-up in gasoline growth, particularly in China.

The change in adjusted EBITDA is primarily due to a faster mix between our diesel and gas sales than previously anticipated as well as a lower production number for commercial vehicles, as we discussed earlier. Both of these factors had an adverse impact on margins in the third quarter, and are expected to continue into the fourth quarter and 2020 as we anticipate some additional mix shift between gasoline and diesel, although at a slower pace, and a commercial vehicle environment that will remain challenging.

I will now hand the call back to Olivier for final remarks.

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

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Thanks, Peter. In summary, on Slide 17, Garrett results for the quarter were led by strong organic sales growth, significantly exceeding global auto production and reaffirming our long-term growth outlook. Our accelerated portfolio shift efforts and strong customer win rates have produced gasoline sales, which now exceeds diesel sales. We also maintained strong momentum in new growth vectors with new customer wins during the quarter in (inaudible) application, Intrusion Detection System and electrification technologies such as our E-Boosting products as well as gasoline VNT programs.

We believe our broad and balanced portfolio positions Garrett well to drive long-term value for shareholders. Garrett produced solid cash flow generation in the third quarter, and we maintain our focus on deleveraging our balance sheet, making notable progress in reducing net debt. Although, global short-term macros remain challenging, we will continue to focus on controlling cost and leveraging our integrated supply chain model to ensure our long-term business fundamentals remain intact throughout the market cycle, while we help our customers to address the challenges of advancing motion across the all powertrain platforms.

This concludes our formal remarks today, and I will now hand it back to Paul.

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

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Thank you, 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 are now ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question will come from David Kelley of Jefferies.

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

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I guess just to start on the margins. Can you remind us of the margin gap between gas and diesel today? And you have a fair amount of back half gas launches. As we think about those beginning to scale and also the rising penetration of variable geometry content, can you walk us through your view of the progression and timing of gas margins, ultimately closing the gap with diesel?

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

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So Dave, that's a very interesting question, indeed. When you remember everything we've said about the margin difference, we've always said that there is a mid-single-digit difference between gasoline and diesel products. Now that can be exacerbated some time if the growth is primarily driven by China, where the averaging price is lower. So that what we are seeing today. We expect that this trend will continue in 2020. But as you pointed out, we are expecting the VNT penetration to increase.

There are significant number of launches that will happen within the next 2, 3 years. And as we said before, the additional content per vehicle on the VNT is about 30% to 50%. And they will account for 40% of the production worldwide by 2025 and 60% and of the gasoline production in Europe by the same date. So all these ramp-ups will happen over the coming years. Little bit difficult to give you an exact date when you will start to see the improvement on the margin. But clearly, the improvement of the margin will come from -- in part from this increase of VNT penetration.

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

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Okay. Got it. Appreciate it. And maybe as a follow-up, if we're kind of folding in the changes in the commercial vehicle landscape, I guess, could you walk us through -- I know we're not guiding to 2020 yet, but it sounds like you're expecting some headwind related to underlying market volumes in commercial vehicles. How should we think about that impact on volume as well as margins?

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

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So when you get back to the commercial vehicle industry, we've seen a significant weakening of the commercial vehicle industry in Q4 -- Q3, sorry. And you know, we are not the only ones to see that. [CD] was down minus 1% organically in the first half. And in Q3, it was down 9%. So it's a little bit too early to give you where we see because there are a lot of moving pieces between on-highway, off-highway and the different regions. And I know some of the commercial vehicle customers have started to give a little bit of some view for next year. But quite frankly, we think that the trend that we are seeing in Q4 will probably remain the same next year. And that's our working hypothesis right now.

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

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Okay. That's helpful. And then last one for me, and I'll pass along. The gas ramp, it's definitely exceeding your expectations. You referenced the launches in China. It's obviously been a tough underlying market there. Can you provide some color on some of the drivers of the upside surprise and your views on China heading into year-end?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [7]

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Well, it's all driven by launches. And you know we were -- when you get back to the discussions we had in Q1 and also in Q2, we were having -- from the beginning, we knew that we had a year that was back-end loaded. And we were having uncertainty initially about whether all those launches would happen. And we said at the end of Q2 that they would happen and potentially at a slower rate than what we anticipated.

So I would say they are probably coming up a little bit higher than what we are expecting at the end of Q2, which is a good offset for us when you look at the weakness we see on the commercial vehicle. And what we see also on passenger vehicle in the other regions. But it's not miles away from what we are having in mind. And it's all related to share of demand gains that we have as a consequence of wins we [scope] for the last 2, 3 years.

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Operator [8]

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Our next question will come from Joe Spak of RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [9]

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Also a couple of questions just on the margin profile. If I'm doing the math right, it looks like on your implied fourth quarter guidance, the margins would actually be a little bit higher than the third quarter. And you noted in the slides, obviously that the gas versus diesel mix is supposed to be even more favorable for gas. So is there something else offsetting it in the fourth quarter or maybe some R&D reimbursements or something that would drive that?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [10]

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Joe, maybe it's a good opportunity to take that question offline with Peter after the call, but that's not what we implied with our guidance.

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [11]

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We believe that the margin in the fourth quarter can be slightly below -- will be slightly below what we have reported for the third quarter.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [12]

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Okay. I'll follow up and recheck that math. And then I guess just continuing on then, sort of, now that we've seen gas overtake diesel and some more returns that may be normally expected in some of the commercial vehicle markets. Do we need to reevaluate the long-term 18% to 20% margin range? Or do you think we're just, sort of, in this period here in the back half and maybe into 2020, where we are temporarily below it but then scale and other efficiencies get you back in that range?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [13]

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I think you have it in the second half of your question. Today, we are confident that we are seeing the same consolidated EBITDA margin corridor of 18% to 20% long run. The 2 impacts that we are really having today are really the combination of gasoline going faster than anticipated. At the same time, when you have commercial vehicle being lower. And let's keep in mind, our overall industry results this year are much lower overall as an industry than what we are expecting. So we are -- 3 things playing in our disfavor: Commercial vehicle being lower, gasoline being higher and the overall volumes being lower.

Meaning that you are not absorbing the same way the cost of the company. So that are the 3 drivers. They are temporary, in our view, except if we will feel that we get into a difficult situation that will stay on for both commercial passenger vehicle and everything else, negative for the last 3, 5 years, which I don't think any anyone is anticipating right now. So longer term, back to your question, we are still shooting for the corridor of 18% to 20%. Obviously, we are having pressure right now that we say is continuing in 2020, but the fundamentals of the business, what we have in our books for the future, doesn't change.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [14]

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But just to be clear on that last point, let's assume that global vehicle production stays at around these levels for the next couple of years and the mix shift to gasoline from diesel continues. That -- then that 18% to 20% is still valid or are you saying you actually need a rebound in global vehicle production as well to get back to the range?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [15]

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It's difficult to think that China will remain as low as that for 3, 4 years in a row. It's difficult to think that the commercial vehicle industry, looking at by site by cycle, will stay very much done for a longer time period when you look at the fundamentals [bullets] on on-highway and off-highway. The point we are making, and today is about 2019 and 2020, reading on (inaudible) and assuming that everything will stay as soft as what we see in 2020 is a little bit premature. But let's keep in mind that no matter what the economy is doing, we are still seeing an increased penetration of turbochargers and an increased level of technology, back to the earlier comment we were making with Dave on the VNT penetration.

So we have seen that are specific to our business that will help put back the margins where they should be.

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Operator [16]

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Our next question will come from Armintas Sinkevicius of Morgan Stanley.

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George M. Dailey, Morgan Stanley, Research Division - Research Associate [17]

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This is George Dailey on for Armintas. So first one is, just given you reiterated your guidance in September, was it something you saw in September or really after that, which drove the negative revision to the full year guide today?

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

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Well, as you know George, we are trying to be as straightforward as possible in everything we say. So the main change that we have seen is really the 2 that we talked about: the increased weakness on the commercial vehicle side coming across the 2 verticals that we are serving on-highway and off-highway that have been confirmed, by the way, recently by the commercial vehicle company. I mean not a lot of people were expecting that in September. And second, the increased volume that we are seeing in China, slightly above what we are expecting in July.

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George M. Dailey, Morgan Stanley, Research Division - Research Associate [19]

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Okay. And then one more, if possible. So one of your peers recently sold its asbestos liability. And if you can give any color on this, what are some reasons as to why you would not be able to maybe do something similar to that?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [20]

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Very simple answer. We don't have asbestos liability. We have an indemnity obligation towards Honeywell that is having an asbestos liability, which is a little bit of a different animal, but maybe Peter wants to build up on that?

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [21]

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No. That's exactly right. So definitely, it would be something we could -- we would consider, but we don't own the asbestos liability. It's just an obligation to Honeywell.

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Operator [22]

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Our next question will come from Aileen Smith of Bank of America Merrill Lynch.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [23]

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Following up on Slide 6 and David's question earlier asked if gas versus diesel, can you remind us of the content per vehicle between a gas VNT turbo versus a diesel VNT turbo? I appreciate the increase in [CPV] from gas wastes to VNT. But if we had to think about where the growth in gas VNT is going to come from over the next few years, could it be more at the expense of diesel VNT than necessarily gas wastegate or is it more just net new penetration?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [24]

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Thanks, Aileen. That's an interesting question. But I would say I would probably answer your question in 2 steps. The first point of your question is what is the content? So what we said in the past, and we are still sticking to that obviously is that when you look at the content per vehicle, diesel variable geometry is equivalent more or less to a gasoline wastegate. Why? Because on the one hand, in diesel, you're having a lower exos gas [temperature] but you're adding the technology of the VNT. And on the gasoline, you don't have the technology of the VNT.

But since you have higher exos gas temperature , we have more exotic materials into the turbo. And then what we are saying is that VNT is coming on top of that for gasoline with an additional content of 30% to 40% versus the wastegate gasoline. The point that you are seeing right now is obviously it's a little bit more exacerbated because our sales growth on gasoline in the quarter and to go on in Q4 is a lot driven by the launches in China, which we know are happening on smaller vehicles, smaller engines, and therefore, at lower average selling price compared to other gasoline application.

Now that's the answer to your -- the first part of your question. The second part of your question is to say, do we have a shift from VNT diesel to VNT gasoline? As you have a shift between diesel to gasoline, is happening in Europe. We know that diesel engines are still having a significant advantage in terms of CO2 emissions versus gasoline ones, and therefore, carmakers have the pressure to mitigate the impact on CO2 emission that's linked to the shift from diesel to gasoline by putting more technology on the gasoline engines in order to reduce CO2 emission further.

Hence the movement from wastegate to variable geometry and then to some other technologies, like Electric Boosting. So in the grand scheme of things, the overall shift of the market that we have seen between diesel to gasoline is favoring the variable geometry penetration on gasoline platform when it comes to reaching the emission targets of the European and Chinese carmakers mostly at this stage.

So this is where we see the shift. It's not exactly directly shift from diesel VNT together in VNT, but it's a shift from diesel to gas and then pushing carmakers to put more technology on gas in order to mitigate the impact of that shift on their CO2 emissions. Overall, that's very good news for us.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [25]

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Okay. That's very helpful color. And to follow-up on that in terms of the commentary around Europe and sort of discussions with your customers heading into next year with the higher compliance costs and emissions targets, has the interest and engagement around traditional combustion powertrain solutions like turbochargers changed in any ways as OEMs are aggressively pushing to hit the 95-gram target next year. And within Europe, specifically, has the shift from -- and I think you answered this, from diesel chargers been met with a one-for-one replacement on gasoline or are customers pursuing a broad range of different solutions?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [26]

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In fact, it's -- there is an increasing interest, but it's not too recent. We've seen that for the last 2, 3 years. That's not only linked to what's happening next year because pretty much with what's happening next year, everything is casted already. Carmakers, we cannot launch 50% new vehicles in the next year. Pretty much, a lot of the vehicles that will be available for sale next year are already into the market. So it's not so much the reaching the target of next year that's driving the discussions, but then, the trend that the carmakers are anticipating for 2025 and beyond that.

As you know, this industry -- this automotive industry is having a cycle time. Sometimes when we want to push for innovation, that cycle time we feel it, too slow. And -- but at the same time, it provides long-term view for where the technology is going. And people need to work in advance of those milestones to convert their engines. So I would say when you look at it, your point is absolutely right. There are increased interest, whether it's for hybrids or pure internal combustion engine, but I would say hybrid, the interest is driving a lot more technology on the turbocharger side pretty much driven by post-2021 moves whether in Europe and China.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [27]

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Great. That's very helpful. And last question. We've heard anecdotally from some Tier 1 suppliers instances of distress in the Tier 2 supply base that have made it harder to push price or cost from the OEMs down through their supply chains. Obviously, you've got a much more integrated supply chain than some other suppliers. Is there anything you're seeing among your supply base lately that corroborates and some of the things that we're hearing from others? Or asked another way, are you getting the same level of productivity gains and efficiencies with your supply chain that you would be expecting?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [28]

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I think I got a similar question last quarter. And I think I will give a similar answer. We are not seeing any change so far on that. If anything, the volume increase that we are seeing is driving a lot more business for our suppliers. And therefore, it's favoring scale opportunities with them. The way we manage our supply base is a long-term one. We negotiate with them the contracts in a long-term way. We develop our suppliers. And we are maintaining as much as we can the right, I would call it, liquidity within our supply base. And that's why we are investing so much on supplier development. So -- and probably a point to keep in mind, we've been exiting a lot of the legacy western suppliers already a long time ago.

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [29]

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If I may add, the key to driving productivity with suppliers is winning new business so that you can offer future growth to them and bring that into negotiation to generate productivity with your supply base. And I think on that front, we are doing well this year.

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Operator [30]

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And our next question will come from Steven Hempel of Barclays.

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [31]

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I just want to take a look at the diesel light vehicle, diesel, in particular, in isolation here as we think about the margin trajectory, obviously that's a little bit higher structurally right now relative to gasoline. But as we think about that business over time, call it over the next 3 to 5 years as that business potentially stabilizes in the 20% range, would you expect that business to kind of remain neutral-ish in terms of the margins or potentially go down as R&D is reallocated outside of the business, potentially goes down long term? We see some other suppliers that generally reallocate R&D out of certain businesses and actually get margin boost from that. So just wondering what your take is on the diesel business margin profile. Can you treasury up that over the coming years?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [32]

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So there are a few questions that are -- 3 points that are interesting into your question, maybe I'll answer them one by one. The first one is the trajectory of the diesel business worldwide. First, when you look at the relative growth of the regions in terms of business and when you look at the same time at -- although it's going at a slower pace but a decrease of diesel in Europe. We have a forecast that positions that will probably drop another 6.6% diesel penetration worldwide between now and 2025. This is what we anticipate.

Okay? So volume is still going down in diesel worldwide as a percentage because most of the growth will be driven by gasoline vehicles or gasoline hybrid vehicles. On that front, it means that, I mean first, diesel is not dead. I think there is the head of another much bigger Tier 1 than us that has said that diesel have solved the emission challenge for 2025. But we all know that diesel will remain strong, where the sweet spot is, which is on heavier vehicle, which drives me to the second point of your question. What is happening on margin for diesel moving forward? Since a lot of the applications that are disappearing from the marketplace are the one with small displacement engines, and therefore, lower content. The content in diesel as a result of that, is increasing. And therefore, we expect the margin to stay quite stable in diesel.

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [33]

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Okay, that's helpful. And I guess just specifically as you think about the North American diesel base...

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [34]

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Maybe, also -- I take your benefit of your question, Steven, to add one more point. When I read very often that carmakers are allocating out R&D to specific technologies, and they do not bet on the rest. That would mean that allocating money to one technology specifically would be enough to have them reach their emission targets with a perfect compromise in terms of technology and cost. That's not what we see today. For carmakers to reach their 2025 CO2 targets, they need to work on everything at the same time. So they need to work on the electrification.

And they need to work on improving the efficiency of the combustion engines that are on those hybrid platforms. And then they need to work on optimizing the energy of this overall powertrain architecture. And then to have architectures that from a cost standpoint are optimized versus the segments in which they are working. And just give you additional color on that because if it was as easy as I can reach the 2025 target by putting all the engine with just an add-on on electric, believe me carmakers would not work on internal commission engines anymore, and this is not what we [think].

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [35]

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Okay. So I mean net-net, kind of over the mid to long term, you still expect the diesel margins to remain relatively stable?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [36]

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Yes. We are expecting ourselves, as we said, to remain slightly down over the next 5 years but not at the pace we've seen for the last few years.

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [37]

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Okay. And then maybe just on China in terms of the regulatory change over there. In terms of your specific customer mix, where do you see kind of inventory levels standing right now and then the benefit potential from new China 6 production ramp-up?

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

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Well, we are seeing a lot of the launches that we are seeing of China 6. So we are pretty happy with that. As I mentioned for -- in a few conferences we did in September, we were expanding the move to China 6 to be a little bit more disruptive than what it has been. And I think the carmakers in China have done quite a good job at managing their inventory level on China 5 and then pushing the shift to China 6. Quite frankly, the China market is volatile. We all know that. So I think the range of outcome for next year is wide.

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Operator [39]

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(Operator Instructions) The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.