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Edited Transcript of GTX.N earnings conference call or presentation 11-May-20 12:30pm GMT

Q1 2020 Garrett Motion Inc Earnings Call

May 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Garrett Motion Inc earnings conference call or presentation Monday, May 11, 2020 at 12:30:00pm 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

* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Brian Arthur Johnson

Barclays Bank PLC, Research Division - MD & Senior Equity Analyst

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Joseph Robert Spak

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, everyone. My name is Jamie, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion earnings conference call. This call is being recorded and a replay will be available later today. (Operator Instructions)

At this time, I'd like to hand the call over to Paul Blalock, VP of Investor Relations. Please go ahead.

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

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Thank you, Jamie. Good day, everyone, and thanks for listening to Garrett Motion's First Quarter 2020 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 contains forward-looking statements regarding our business, prospects, goals, strategies, anticipated financial performance, payments to Honeywell and the anticipated impact of the coronavirus on our business. We encourage you to read 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. 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're encouraged to examine those reconciliations, which are found in the appendix to both the press release and 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.

I will now turn to the main purpose of today's call. And with us today is Olivier Rabiller, our President and CEO; and Peter Bracke, our interim CFO. I'll 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 First Quarter 2020 Conference Call. Let me start by stressing 2 points in light of the unprecedented crisis that the world, and more specifically, our industry are getting through: First, the health and safety of our employees is a priority. We have taken very early proactive measures that sometimes are going beyond the recommendations of the government authorities where we operate. But we have also made sure to support the communities where we operate by providing protective equipment and even producing turbos to equate specific positive pressure ambulances in China. Second, the nature of the crisis have stretched the flexibility of our supply chain to a level we have never imagined before. Think about it. Our fastest-growing plant, Wuhan, was shut down for 6 weeks in Q1. The supply chain with a number of suppliers we have in China was stopped and then we saw the opposite, China restarting at full speed at the time when critical supply from Europe was interrupted. In these circumstances, I'm very proud of the efforts and the results achieved by Garrett's teams. This crisis is really highlighting how responsive they are and how flexible are our operations.

All of this gets us to the results we see on Slide 3 for the first quarter and that demonstrates Garrett's flexible operating platform and global capabilities amid the onset of the global pandemic. The crisis is obviously not over and the future remains quite unpredictable, but we continue to take proactive measures to control the coronavirus outbreak, which we will discuss in more detail later on, on the call with a priority on safeguarding the health and well-being of our employees and supporting our customers and local communities.

For the first quarter, our net sales totaled $745 million, down only 8.5% at constant currency due to lower customer volumes stemming from the impact of the COVID-19 although we continue to outperform the overall industry as global light vehicle production was down approximately 25% in Q1 versus last year. This represents about 16 percentage points of overperformance despite the shutdown of our fastest-growing plant for 6 weeks in our fastest-growing region. We also generated $108 million in adjusted EBITDA and $57 million in adjusted free cash flow, which excludes the indemnity-related payments, representing a conversion rate of 84% of adjusted net income. Our ability to quickly ramp up production in China and to restore our global supply chain from China contributed to the strong global growth in our light vehicle gasoline segment, which climbed 14% at constant currency in Q1. Despite the current crisis, we achieved positive organic growth in gasoline sales in all regions as a result of our new product launches and share of demand gains.

While we are encouraged by the resilient market conditions in China, we have seen the spread of COVID-19 around the world and are now facing significant auto industry challenges in Europe, the Americas and also Indian facilities.

We have indeed implemented numerous actions to adjust our operations, reduce our costs, optimize our cash position and strengthen Garrett's financial flexibility.

During the first quarter and into early April, we fully drew down on our $470 million revolving credit facility. Our total liquidity was approximately $665 million at the start of the second quarter, positioning us to better withstand the substantial disruption across the global automotive industry and economies worldwide. We continue to preserve capital by implementing strict cost controls and cash management actions, including significantly reducing discretionary expenses or temporarily reducing pay from Garrett's senior leadership team.

On the CapEx side, as most of our capital expenditure is related to volume growth, we are also reducing or postponing commitments for 2020 by up to 40% while preserving our new product launches over the near and the long term.

Turning to Slide 4, we provide an update on the impact of the COVID-19. Starting on the left-hand side of the slide, we offer an overview of the global production landscape. I mentioned a month ago, our conditions in China have rebounded faster than we anticipated. In addition to resuming normal operations at our 2 facilities in China, our supply chain and customers in China have basically resumed normal production levels as well. Our businesses in South Korea and Japan continue to operate although at much lower levels than planned and our plant in Pune, India remains temporary closed. In Europe and North America, market conditions deteriorated towards the end of the first quarter. Beginning in March, most North American OEs temporarily closed their plants in response to the rapidly escalating coronavirus crisis. The major OEs in both Europe and North America have gradually restarted production at their factories over the last 2 weeks or announced plans to restart production later this month, although at relatively low levels.

Based on these developments, Garrett has temporarily closed or reduced production at many of its manufacturing facilities in Europe and North America during Q1 and into Q2. Our plants in this region are currently operating at low capacity in response to customer demand and local government mandates. The supply chain disruption in both of these regions has been mostly limited to date given the drop in demand. We continue to manage our advanced supply base to ensure our production levels match any changes in customer activities.

Now turning to our ongoing priorities in this crisis. We have implemented best practices to protect the health and safety of our workforce, including stringent sanitation and cleaning protocols, workplace distancing, site access restrictions and a worldwide travel ban. We have also implemented a work-from-home policy when applicable. Garrett's team members are its greatest strength and we remain committed to ensuring those deemed essential for maintaining business continuity work on site in a safe and compliant manner. We are currently in the process of phasing in a more comprehensive return to our program that adheres to WHO and CDC guidelines, local government regulation as well as our own precautionary measures. The recovery of operations at our sites will be gradual, beginning with a period of reduced capacity with certain employees continuing to work from home as appropriate. This progressive approach will enable us to fine-tune our measures wherever necessary, further ensuring we follow our commitment to keeping our personnel safe and healthy.

Our staff has been relentlessly focused on working closely with our partners and leveraging Garrett's global footprint and standardized processes to meet customer commitments. We engage in constant communication with all of our customers worldwide and we'll modify our production plans accordingly as we manage the balance of 2020. We are also flexing our organizational cost structure, in part by implementing short-term working schemes, including furloughs, reduced work schedules and state funding leaves. By taking advantage of government's assistance program, while allowing workers to safely return to their jobs at a future date, we are able to maintain our responsiveness as market conditions gradually improve.

Additional cost control measures we are executing include: reducing our temporary workforce and contract service workers, which makes up about 1/4 of our total workforce; delaying merit increases for employees; suspending discretionary spending that is not critical to our daily operations; and restricting external hiring. We also intend to optimize our working capital requirements by controlling inventory in a disciplined manner, which is the strength of our business, managing receivables and collaborating with our suppliers as we have consistently done throughout our longstanding history. And as I mentioned earlier, we are also temporarily reducing pay for senior leadership as well as Board members by 20% and postponing nonessential capital expenditures. By actively managing our cost structure and preserving capital, we expect to generate significant cash savings for the year and we are evaluating further steps to bolster our liquidity.

As the COVID-19 pandemic continues to rapidly evolve, it has become increasingly difficult to quantify the impact on our business. While our visibility is limited, we expect the current quarter to be significantly more challenging than it was in Q1. Due to the highly uncertain operating environment, we recently withdrew our full year 2020 guidance and intend to resume providing an outlook at a future date.

With that, I will hand it over to Peter to provide additional color regarding our financial results -- sorry, on Slide 5 first before I hand it over to Peter. We reiterate our long-term technology-centric growth strategy. Despite the near-term disruption in the automotive industry and global economy, it is important to bear in mind the positive long-term fundamentals of our business that are remaining intact. Garrett has excelled as an industry leader for over 65 years, delivering critical cutting-edge technologies to major automakers worldwide. Once this unprecedented situation is behind us, automakers will likely encounter even tougher regulations and technical challenges, and Garrett will be there fully engaged with them with a wide range of differentiated products and solutions. Our management team has navigated downturns in the past, and we are determined to emerge from this time of crisis as a stronger company.

We continue to benefit from higher overall turbo penetration rates, particularly in gasoline and hybrid platforms, and expect the adoption of VNT technology to drive higher content per vehicle and strengthen our long-term growth prospects.

For 2020, we have adjusted our schedule of new product launches to reflect a slower ramp-up due to lower expected volumes in light of the current environment. But so far, we have not been informed of any significant launch delay. We have also maintained an unwavering focus on bringing our new electrified technologies to market and remain on track to finalize the industrialization of our E-Turbo for an initial mass market launch next year. In addition, we intend to start production later this year of our second-generation fuel cell compressor and increase the number of OE projects to develop our E-Compressor for hydrogen fuel cell vehicles. We could think that affordability may drive end consumers and car makers to reconsider how much they will stand on some advanced new technologies, but if there is a domain where we are convinced that pressure will not reduce, it is about car emissions. And this is the space where we contribute the most with our technology solutions.

And now let's turn to Peter for the long-awaited additional colors regarding our financial results.

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

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Thanks, Olivier, and welcome, everyone. I will begin my remarks on Slide 6. In the first quarter, Garrett reported net sales of $745 million, down 8.5% at constant currency. As Olivier mentioned earlier, our performance for the quarter was adversely impacted by our plant shutdown in China, both of which are currently operating at full capacity. Additionally, our Q1 net sales were impacted by lower production levels in the final weeks of March at several of our manufacturing facilities in Europe and North America due to COVID-19.

Notwithstanding these impacts, our Q1 net sales reflect higher gasoline volumes, stemming from increased turbocharger penetration in gasoline engines and new product launches, offset by lower diesel volumes and lower product sales in our commercial vehicles and aftermarket business.

Adjusted EBITDA for the quarter was down 32% to $108 million for a margin of 14.5%, which is attributable to our lower volumes stemming from the coronavirus outbreak, an unfavorable product mix and premium freight costs incurred mostly in the relation to the interrupted supply chain from China. Our year-over-year decremental margin was impacted by the mix headwinds stemming from the significant increase in gasoline growth during the second half of 2019. The sequential decremental margin versus Q4 2019 was approximately 34% despite the premium freight costs incurred in Q1, as I mentioned a moment ago, and was very much in line with our average contribution margin.

Our adjusted free cash flow, which excludes indemnity-related payments to Honeywell, increased slightly year-over-year to $57 million, representing an 84% adjusted free cash flow conversion rate. Lastly, our adjusted diluted EPS, which excludes Honeywell's indemnity obligation expenses and related litigation fees, was $0.89 per share compared to $1.22 per share in Q1 2019.

On Slide 7, you see that our gross profit was down $54 million from lower sales, mix impacts and premium freight costs, partially offset by productivity. Other expense was down $3 million, reflecting lower legal fees in relation to the indemnification agreement, and nonoperating income was up $8 million, primarily related to foreign exchange impacts, net of hedging. Lastly, tax expense was down $23 million and this includes the benefit of reduced withholding taxes. On an overall basis, net income was down $19 million versus last year despite a lower tax expense of $23 million.

Turning to Slide 8, we illustrate our net sales by region and product line. In Q1, our Asia sales as a percentage of total net sales decreased by 3 percentage points over the same period last year due to the impact of COVID-19, as previously discussed. On the product side, we grew our percentage of net sales from gasoline products to 36% in the first quarter, up 7 percentage points from Q1 2019. This segment remains our largest and fastest-growing category. This trend is consistent with the commentary we provided in our Q4 call, as we expect the transformational shift from diesel to gasoline to continue in 2020, although at a slower pace compared to 2019. To be more specific, the decline in our diesel sales for the first 2 months of the year was much lower than the decline in 2019, but this trend was reversed in March due to the rapid drop in sales related to the coronavirus, especially in Europe. Also on this slide, both of our higher-margin businesses in commercial vehicles and aftermarket declined as a percentage of net sales in the first quarter, reflecting the continued headwinds for each of these end markets which accelerated in March.

Turning to Slide 9, we provide our net sales bridge for the quarter. Gasoline products grew $34 million, representing an increase of 14% at constant currency over the same period last year, while diesel products declined by $55 million or 18% at constant currency, mainly due to the overall market decline and runoff of certain applications. Commercial vehicles declined by $29 million or 17% at constant currency and aftermarket sales decreased $16 million or 16% at constant currency as the downward trend in both of these segments accelerated in the quarter due to COVID-19. There was an impact of FX totaling $19 million in the quarter. In summary, although we continue to grow our gasoline segment in Q1, all of our product lines were impacted by COVID-19 pandemic, adversely affecting our net sales performance for the quarter.

Turning to Slide 10, you see our adjusted EBITDA walk for Q1 2020 as compared to Q1 2019. For the quarter, Garrett's adjusted EBITDA was $108 million, down 32% compared to the same period last year. Higher premium freight expenses and lower volumes were largely due to COVID-19, as we already discussed. The unfavorable mix in the quarter was partially offset by productivity gains. We believe our Q1 productivity gains represent a notable accomplishment considering the significant supply chain disruptions that we experienced in the quarter. SG&A was essentially flat to Q1 last year, and RD&A expenses decreased $4 million while preserving our core R&D to build for the future. The FX benefit on adjusted EBITDA in Q1 2020 versus prior year was $5 million. Lastly, our sequential decremental margin was approximately 34% in Q1 versus Q4 2019, largely in line with our variable contribution margin for the quarter despite the incurred premium freight cost in the first quarter and the inefficiencies resulting from the plant shutdowns in China.

Turning to Slide 11, we provide our net debt walk for the first quarter. In Q1, we reduced net debt by $26 million to $1.23 billion, including a $15 million benefit from working capital. Capital expenditures for the quarter on a cash basis totaled $39 million, which mainly represents Q4 2019 capital expenditure commitments paid in Q1 2020. As mentioned earlier, we have started to postpone all nonessential capital expenditures, which should generate cash benefits for the remainder of the year. In addition, our cash taxes of $3 million in Q1 were lower than average, mainly due to some reimbursements received in Q1. As a reminder, our quarterly cash taxes are nonlinear and can fluctuate significantly on a quarterly basis. For the first quarter, our adjusted free cash flow totaled $57 million, including indemnity-related payments of $39 million. Our free cash flow was $18 million compared to $15 million in the same period last year. Going forward, we will maintain our focus on preserving capital and improving our cash balance during these challenging times.

Turning to Slide 12, we ended the first quarter with available liquidity of $658 million, including cash and cash equivalents and funds available under the revolving credit facility. Total gross debt excluding cash and cash equivalents increased $41 million during Q1 to $1.484 billion as of March 31, driven by a drawdown on the revolver of $66 million in the first quarter. On April 6, we fully drew the remaining funds available under our revolving credit facility, supplementing our cash position of $254 million at March 31. As a result, we started the current second quarter with $658 million in cash and cash equivalents.

Our net debt to consolidated EBITDA ratio was 3.01 as of March 31, and we have no significant debt maturities before September 2023. Based on our current projections, we expect we will not be able to comply with one of the financial covenants in our credit agreement as early of June 30, 2020. This covenant compares outstanding debt to our trailing consolidated EBITDA and those financial metrics are being impacted as the market responds to the coronavirus crisis. We are currently in discussions with our lenders on potential modifications to our covenants as well as waivers. This process will pursue its course during the coming few weeks and we have made significant progress to date.

On Slide 13, we note our balance sheet items related to Honeywell. In the first quarter of 2020, we reduced our Honeywell liabilities by $47 million to $1.304 billion, primarily due to payments of $35 million to Honeywell in January 2020. As a reminder, the indemnification liability, which is recorded at $1.50 billion approximately as of March 31, reflects a capped $175 million in cash payment per year and is paid to Honeywell in euros at a fixed exchange rate. Our estimated payments for 2020 remains approximately $108 million or $67 million below the annual cap of $175 million. For the second quarter, any payment will reflect the deduction of approximately $34 million, stemming from overpayments made in 2019 as we disclosed on our previous call. The Q2 payment has been deferred at this point to May 31, and we are evaluating our obligations with respect to Honeywell as to when any payment must be made. Additionally, we have also deferred the annual mandatory transition tax payment to Honeywell of $18 million for the first 2 months to May 31.

With that, I will now turn the call back to Olivier.

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

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Thanks, Peter. On Slide 14, we summarize our Q1 performance and year-to-date actions. During the first quarter, we drew upon our flexible operations and global capabilities amid the coronavirus outbreak. While our Q1 results were significantly impacted by the COVID-19, we quickly ramped up our operations in China and restored the supply chain, contributing to our strong growth in light vehicle gasoline sales. I am proud of the dedication and resolve our employees have shown during this difficult period, and I am confident that we will emerge from this global pandemic in a position of strength.

Although market conditions in China continue to show signs of stabilization, the near-term outlook remains challenging, especially in Europe and North America. We will continue to take advantage of our flexible and resilient business model by actively drawing upon our highly variable cost structure and advanced supply based management, enabling Garrett to adapt quickly to short-term market disruptions. We have also implemented aggressive cost control measures and cash management actions to increase our liquidity, and we are actively evaluating further steps to strengthen our financial flexibility and maximize our free cash flow in response to this crisis.

We also maintain our focus on developing our new technologies around electrification and software by collaborating with our global customers, as we have done for decades. Therefore, we remain well positioned to accelerate our cutting-edge technologies to the market and drive long-term success. Even in unprecedented challenging circumstances like the ones the global economy and the automotive industry is facing, the performance achieved in Q1, both on the revenue line, on the profit and the cash line, highlights the strength of Garrett, a technology leader poised for above-market growth in the short, mid- and long-term as well as an efficient operator that can flex its operations to maximize its performance.

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 begin the Q&A portion of the call, I need to mention that we will not be taking questions related to the existing lawsuit with Honeywell. 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) Our first question comes from Brian Johnson from Barclays.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [2]

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I know you don't want to talk about the Honeywell lawsuit, but you did put a page in there about the indemnification payments to Honeywell. And my reading of your filings would seem to say that if you do trigger an event of default, the Honeywell payments get subordinated. I'm not sure if it's deferred here. I'm not sure if there's interest incurred. So could you take us through that mechanism? And maybe comment on where that could be going?

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Paul Blalock, Garrett Motion Inc. - IR Officer [3]

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Yes. You're right. The credit agreement says that as you would breach -- as the company would reach the leverage covenant, which we expect to happen, as we said, at the end of the second quarter, the deferral mechanism for any payments to Honeywell with respect to the indemnity obligation kicks in, till we are back in compliance with the covenant. So we expect that to happen as soon as Q1 till they're back, so to say, and we'll take it from there.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [4]

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And just a follow-up, many other auto parts companies gained some covenant relief coming into their calls. The banks generally seem to not want to foreclose on what could just be a temporary downturn. Is there something different about your lending relationships that prevented that?

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

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Well, I'll let -- Brian, I'll let Peter comment on where we are into this. But I would probably do a comment before that. As you remember, we have spun out from Honeywell only 6 quarters ago, which is very specific. Our former parent imposed on us rigid capital structure that wasn't earnable unless Garrett executed perfectly in a highly favorable macroeconomic and industry environment, meaning that was really unsustainable that way unless everything was perfect. With insight, it is clear that our capital structure was ill-suited to cope with any meaningful operating challenges, much less those we face in the current environment. So now that's probably the specifics of Garrett.

And now I'll let Peter comment on what we do currently with the banks.

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [6]

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Well, there are a few options open. As you can understand, we cannot go into the specifics about how we are going to potentially get into waivers or amendment of our credit agreements. What I can say, though, is that we have started the process, we expect it to close realistically before the end of the month and there are still a few elements of the agreement between us and our agents in discussion. I think we should get a light on a few of these outstanding potential changes in the amendment agreement in the coming few days, honestly, and then we are going to get into a process of reaching out to our lenders, probably as soon as later this week.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [7]

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When you say agreements, do you mean with your former parent? Or do you mean with the banking group?

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [8]

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With the banking group.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [9]

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Okay. Okay. I'll go back into the queue. I do have some questions on incrementals -- decrementals, but I want to pass the torch.

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Operator [10]

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Our next question comes from Joe Spak from RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [11]

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Maybe just a little bit on sort of the decremental margins. I know it's sort of highly unusual times and I think you have even sort of talked about that maybe sort of sequential sort of better to look at here. But the bridges you provided were on a year-over-year basis and if we look at the mix factor, which was large obviously, continuing with the continued shift from diesel to gas. But so -- even if we back that out, like the volume price factor on what you indicated where you are on the decline, it seems like 45% decrementals. And I know plants were closed, et cetera. But I guess I was just wondering if you could provide a little bit more color and maybe something you wouldn't normally want to get into, but just a sense of the decrementals in China versus sort of the rest of the world, and just so we could get a little bit of a better sense for how the decremental margins or the margins in general hold up as we move to the second quarter when the regional mix clearly changes.

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [12]

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Yes. Now we said before, the margins in China are not that different compared to the global average margins of the company. So the fact that Q1 was proportionally and significantly impacted by China or by decline in sales in China, not necessarily has an out-of-proportion hit on the decremental margins. And we also expect there's a rebound in China that we currently expect in the second quarter not necessarily to have significant impact on the same decremental margins that we will see in Q2. I think the way -- that's how we basically said it, the way to look at it is that, obviously, versus Q1 last year, the impact is significant. But if you go back to 2019 and our quarterly financials, there was a significant difference between our adjusted EBITDA margins first half, north of 19%; and second half, 17%, 16.5%. This has to do with the fact that our gasoline business ramped up so significantly in the second half of the year, specifically in Q4, you remember, when we had (technical difficulty) organic growth, all driven by high-volume gasoline programs. So we had 2 different worlds basically in 2019. Therefore, it's more meaningful to look at it, we believe, sequentially. And there, the math gets you to 34%, which is close to the variable margin of the business. What is it going to mean moving forward, for Q2, we believe that we can improve this decremental margin trend because of all the cost actions that we have deployed obviously and that Olivier explained including obviously reducing our temporary resources, contract service workers, implementing reduced work schedules across all of our plants basically -- across all of our sites, I should say, including SG&A and RD&E. So obviously, there are going to be benefits coming through from this, which should overall reflect in some favorability in the decremental margins in the second quarter. When it gets to the second half of the year, it's -- the year-over-year story is going to be different because of the dynamics that I explained. The savings from all the incremental cost actions is going to depend to a significant extent to what extent -- to a significant extent to how the state-funded leave programs in the different countries in the world are still going to be applicable, and honestly, also, to what extent we will still need them at that time and that will depend, of course, to the business dynamics at that point. That all depends still forecasted in a pretty wide range, as you can imagine. But I guess it gets you something about how we think about it.

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Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [13]

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I guess, secondly, I know you're pretty variable as you've sort of indicated and so much shown. But I think your sort of historic EBITDA margin range, 18% to 20%, assumes some higher volumes. And if we're entering this period over the next couple of years where volumes might be a little bit lower for longer than thought, is there more you can do on the cost out? Is there some more restructuring you can do? And how should we think about your ability to pay for that just given maybe some of the financial constraints?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [14]

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So Joe, let me pick up this one, and Peter will add some color to that. The first point is that in this company, we have never been doing cost actions by waves. We are doing that constantly. And we are always optimizing along the way. So it's not very often. I think it's difficult to see any press report or stuff except factory closures we did in the past where we are highlighting the repositioning staff. It's part of a discipline that we have every year, which is adjusting our cost and driving the necessary actions if we need to. And we always have the space to do that. So it's not big news. Usually, it's a continuous process, which smoothens the need obviously for big bank capital needs.

The second point is that, for us, the question is how fast the industry is obviously recovering post-2020. So 2020 as a year, we know it's almost a year that is dead. So the question for us is really where is 2020, '21, 2022? And there is one thing that I would like to share with you is that it's not only about the automotive industry. We have won significant programs. We are, as you've seen, doing better from a dynamic standpoint than the industry. This will remain in 2021 and '22. So that will come back. The real question, which is the one you have, which is how quick are we getting ourselves back on the trajectory that we are in a precrisis, keeping in mind the mix impact, I would say it's just too early to say. We need to have better visibility on the industry before answering that. But quite frankly, we are not planning to have a business after the crisis that is less performing from a cost standpoint versus entering the crisis.

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Operator [15]

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And our next question comes from Armintas Sinkevicius from Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [16]

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Just wanted to get some visibility into the supply chain. I know it's been uniquely constructed by you. And how we should think about that, the health of the Tier 2 supply chain that you've effectively constructed?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [17]

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Well, as you know, we are spending a lot of energy, resources and money at developing our suppliers. And this is something we've been doing for a long time. So that's a little bit of the secret source behind our supply chain model. At the same time, it means that we are very close with our suppliers. And even in times of crisis, we are trying to help that supply chain to be as efficient as possible. If you want an example, today, what we see from the car maker, that it's taking a lot of time for them to adjust their forecast. You will not believe the forecast we are still receiving from the carmakers. It's a little bit like ignoring that there is a crisis. So what we do with our suppliers, not only are we monitoring very closely the financial strength and this is something we've been learning in 2008, 2009, and we keep on doing so. We are also making sure we reshuffle the program so that it's not putting them in a difficult position from a cash need standpoint. And that's something that we take pride of doing in our -- in the way we are managing them. So it's staying close to the Tier 2 supply base wherever they are around the world. Good news is that we have a lot of them in China, and China is recovering as a country faster. And the second point is really making sure we adjust our supply chain needs even if we need to second-guess because of lack of information what we get from our customers.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [18]

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And then how do you think about the operations in Mexico and how those resume?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [19]

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Well, Mexico has been quite at the center of our focus for the last few weeks. As you know, in Mexico, we have the rights to serve essential businesses and we have been able to do that for some time. We are still to close the factory for about a couple of weeks, and then we have restarted the factory to supply those essential verticals that we are serving. So think about the oil industry, the agriculture, which represents a significant piece of our activity in Mexico. For the passenger vehicle side and the commercial vehicle side, we are obviously waiting to see what the authorities will decide, we are in the middle of the discussions with them. So we cannot tell you. It's a matter of days versus a matter of months, obviously.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [20]

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Okay. And then my last one here. With -- you mentioned that the capital structure is ill-suited to cope with any significant challenges. But if you make it out of this crisis as it appears you're progressing, in some ways, that justifies the capital structure that was created at the onset. What are some other things that the current capital structure prevents you from doing?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [21]

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Well, the analogy I would take is that just imagine you have Usain Bolt running and you put on the back of Usain Bolt something like a 10-tonne container. It could potentially run, but you will run much slower. So that's the way to think about our capital structure today.

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Operator [22]

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Our next question comes from David Kelley from Jefferies.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [23]

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My line cut out earlier, so apologies if either of my questions were addressed. But I guess how should we think about the productivity impact of social distancing, PPE, staggered shifts, the various changes to plant work as you ramp back up? And particularly, impact on decrementals potentially going forward would be great.

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

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So we are obviously very careful about the social distancing and all the measures that we have into the factory. Quite frankly, the worry we have is much more about people -- getting people onto the lines and getting people off the lines. So think about all the places in a factory where people can interact with each other. And that's where we've put a lot of focus. Because, quite frankly, on the lines, we have the right things in place to protect the employees. It's all about limiting the social distancing in all the interaction areas of our factories. And this is where we spent a lot of time over the last few weeks.

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [25]

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But it's more a matter of implementing discipline than the costs that will come with it. We really believe that the additional cost and the impact on decremental margins will be completely immaterial. Obviously, there are going to be some more supplies that you have to buy to make sure that we do what we have to do. But I think in the big picture, it shouldn't have any significant material financial impact.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [26]

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Okay. Great. And then a couple of segment-related questions. Peter has discussed stronger-than-expected diesel sales in the quarter. Just curious as to how diesel tracked relative to your expectations here?

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Olivier Rabiller, Garrett Motion Inc. - President, CEO & Director [27]

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Well, there is a pre-COVID-19 and a post-COVID-19 view on this. The pre-COVID-19 is that diesel was doing better than expected, and you heard that from other peers as well. And we do confirm that. The question mark, and there are all kinds of reasons for that, I mean, people optimizing -- car makers optimizing their CO2 balance early in the year versus what they were shooting for, for the end of the year. So we saw the beginning of the year, diesel is down versus prior year, obviously, but better than anticipated. The question is with the big disruption that's happening to the market today, we don't know what will be the mix post-COVID-19. We don't know yet the extent of the government incentive. We don't know yet the way car makers will recompute their average emission, CO2 emission for what refers to Europe, in light of the full year compliance that they need to achieve. And we don't know what the crisis will do on the mix of vehicles that car makers will sell. And to know that, we need to have car makers starting to sell vehicles. And so far, in Europe, as you know, I mean, it's difficult to buy a car. You cannot even get to a shop. So that's the point. The post-COVID-19 mix will tell us if what we saw precrisis is still happening postcrisis. But we have question marks.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [28]

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Okay. Great. I appreciate the color there. And then just one quick segment follow-up. Just curious if you could talk about the aftermarket outlook in this environment. I would assume it would be somewhat more defensive, but clearly, as you mentioned, this is not a normal market downturn-type scenario either. So any color on the aftermarket would be great?

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

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Well, the thing I can tell you is that if I put aside the off-highway segment that we have, which serves gen sets and data centers and all the rest, and if we look mainly on the vehicle side, which are passenger vehicles and commercial vehicles, all these measures of lockdowns in the countries, especially in Europe and to a certain extent in the U.S., have drastically reduced the traffic on the road. So as a result of that, people are using less their cars, the cars are less subject to failures. And therefore, that's probably a point that is not the same as what we saw in the crisis of 2008, 2009. And this drop in activity is just a drop of miles driven, and therefore, could directly lead to the aftermarket. So you see less than what we would see in production for new cars, but -- and you just need to go to a shop in Europe that the car dealers are really struggling to get people to come and repair their cars, although this is an activity that is authorized. Selling cars is not authorized in many countries but repairing cars is. And believe me, it's not difficult to get an appointment. I'm speaking by experience.

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Operator [30]

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(Operator Instructions) Our next question comes from Aileen Smith from Bank of America.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [31]

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Can you remind us what your current expectations are for production restarts across major regions, particularly Europe? Specifically, what percentage of your Europe plants have restarted with customers? And what does the ramp in China inform you about production ramps potentially in other regions?

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

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So in China, we are back to precrisis levels. So we are very much aligned. It's like if there was no COVID-19 in (inaudible). It's very impressive, by the way. Although we are worried that China may be getting into a W-shaped recovery, and that's why we are very careful about the way we are managing our cost on the ground. For Europe, all of our factories have restarted. We are producing in all of them. The point, though, is that some of our customers have not restarted yet. So that's why we are in very low volume of production in Europe, and we expect that ramp-up not to be very fast over the coming weeks.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [33]

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Okay. And in terms of the cost reduction actions you've been able to execute on, is it fair to characterize more of these as staunched the bleeding efforts with the volume drop-off and costs that you would actually add back with volumes? Or has some of this been more structural? I'm just trying to think about the possibility for incrementals on the other side of this.

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [34]

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In the short term, technically, for Q2, it's less structural. If you think about what we have just explained, it's what the actions are, short scheduled work weeks for many -- almost all of our employees worldwide basically, reducing discretionary spend, basically reducing contract service workers and temporary employees. All of that is, to a significant extent, less structural. I think when it comes to structural cost discussions and decisions, we probably need to be a little bit more thoughtful about what could be the potential recovery in the second half of the year and 2021, what is the potential payback on some of these actions because, as it was mentioned before, these actions typically come with some cash outflows as well. So we want to make sure that we make the right decisions from a payback point of view as we manage through the crisis here in the coming few quarters. But that doesn't mean that we are not considering structural cost takeouts to protect the second half of the year and to be prepared for 2021. That's something that is part of our DNA as we always do, as Olivier said before, probably the need is higher now. But at the same time, we want to make sure that it's cash very well spent.

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

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And Aileen, let's keep in mind something that I mentioned today, which is the fact that we are still a temporary workforce and contract survey workforce that makes up something like 1/4 of the total workforce. So it's giving us clear flexibility, obviously, on the way down, but it's giving us flexibility as well on the way up.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [36]

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Great. That's helpful. And one last question on the capital structure. Do you believe that recent revolver draws are sufficient to withstand the current market crisis? Or would you look to proactively augment your liquidity potentially with additional capital? And are there any constraints in the Honeywell indemnification that would prohibit you from doing so?

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Peter Bracke, Garrett Motion Inc. - VP & Interim CFO [37]

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Well, we can't give you the final answer on this. That's ultimately going to depend on how badly and how long-lasting the crisis is going to be. We truly believe that even today, middle of May, we still have a very substantial liquidity position starting from the $658 million that we started the quarter with. We are very, very closely watching our cash forecast on a weekly basis for the coming few months actually to make sure that we have a very close handle on this. For the time being, we believe that we are okay with the liquidity that we have, but who knows how the crisis is going to develop from here. I think in our base scenario, there is no need to what you just referred to. If there would be potentially a scenario of another economic lockdown across the world and the second wave of coronavirus spreading, then that could be a different scenario that we need to look into to add liquidity to the company. So it is -- there is no firm answer to this. I think the only thing we can say is that for now, we believe that should be okay, but this can definitely change depending upon how the crisis develops.

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Operator [38]

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And ladies and gentlemen, at this time, I'm showing no additional questions, I would like to turn the conference call back over to management for any closing remarks.

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Paul Blalock, Garrett Motion Inc. - IR Officer [39]

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Thank you, Jamie. That concludes our call for today. We appreciate your time.

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Operator [40]

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Ladies and gentlemen, that does conclude today's presentation. We do thank you for joining. You may now disconnect your lines.