Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Garrett Motion Inc (GTX, Financial) reported a strong adjusted EBITDA margin of 16.9%, up 40 basis points sequentially.
- The company issued $800 million of senior unsecured notes at favorable interest rates, generating annual cash interest savings of approximately $15 million.
- Garrett Motion Inc (GTX) repurchased $65 million of common stock in Q2, bringing total repurchases in the first half of 2024 to $174 million.
- The company secured its first series production contract for its largest fuel cell application to date, indicating significant progress in zero-emission vehicle technologies.
- Garrett Motion Inc (GTX) ended the quarter with a strong liquidity position of $698 million, including $600 million of an upsized undrawn revolving credit facility.
Negative Points
- Reported net sales are continuing to trend down due to softer global industry trends across light and commercial vehicles.
- The company experienced a 12% decrease in net sales on a GAAP basis and 10% at constant currency, driven by industry softness across all verticals and regions.
- Commodity deflation resulted in an additional $30 million reduction in sales compared to Q2 last year.
- Garrett Motion Inc (GTX) saw an unfavorable impact of $80 million due to foreign exchange on a year-over-year basis.
- The company updated its 2024 outlook to reflect lower production in both light and commercial vehicle industries, implying a sales outlook of flat to slightly down in the second half of the year.
Q & A Highlights
Q: Could you provide more details on the demand dynamics between Europe and China? Is it related to consumer behavior, production, or geopolitical factors?
A: The demand dynamics are influenced by a mix of factors. In China, there's a strong price war affecting both global and local brands, leading to volatile volumes. Additionally, global issues such as weak production in Korea and the off-highway commercial vehicle sector also impact our business. Europe is also experiencing production challenges.
Q: Given the drop in sales, how quickly can you offset this with hybrid and zero-emission technologies?
A: We are already participating in the hybrid market, with a significant portion of our sales going to hybrid platforms. For zero-emission vehicles, we are in pre-development stages with customers and have secured production contracts for fuel cell compressors. However, the full impact will take time as new hybrid programs typically take about three years to reach production.
Q: Are you still seeing the same weakness in demand now as in Q2?
A: Yes, we do not expect significant changes in the medium term. We are focusing on setting up the company to perform well despite revenue drops, as evidenced by our strong Q2 EBITDA margin of 16.9%. We have adjusted our guidance to reflect the softer industry demand but remain confident in our operational strength.
Q: Is most of your revenue in China coming from US and European-based manufacturers?
A: We work with both global and local players in China. The content is similar for both, but there are fewer global players and more local ones. The swings in market share among local players significantly impact us.
Q: Are US-based manufacturers expanding their hybrid output, and do you have more content on hybrids than on traditional ICE vehicles?
A: Yes, US-based manufacturers are reinforcing their hybrid programs. Hybrids typically use more advanced engines, leading to higher turbo penetration and more valuable geometry. However, it takes about three years for new hybrid programs to reach the market.
Q: Can you walk through the impact of lower commodity costs and FX on your revenue?
A: FX impacts are mainly from the Korean WON, Japanese YEN, and Chinese RMB. The Euro has been stable. Commodity cost reductions impact sales but result in higher margins. We are on about a one-quarter delay in passing through these costs, and most of it is contractual.
Q: Do you have any exposure to commodity cost fluctuations, or is it 100% pass-through?
A: We can safely say it's 100% pass-through. The vast majority is contractual, and we effectively negotiate one-offs where needed. We have successfully passed through freight and labor increases as well.
Q: Are you seeing any improvements in the market dynamics that could positively impact your outlook?
A: We remain conservative in our planning and do not expect significant improvements in the short term. However, we are confident in our ability to perform well through operational efficiency and cost management.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
