Garrett Motion (GTX) Q2 2025 Earnings Transcript

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DATE

• Thursday, July 24, 2025, at 8:30 a.m. EDT

CALL PARTICIPANTS

• President and Chief Executive Officer — Olivier Rabiller
• Senior Vice President and Chief Financial Officer — Sean Deason

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RISKS

• Diesel and aftermarket weakness persisted, particularly in North America, offsetting growth in gasoline turbo sales and resulting in an unfavorable sales mix in Q2 2025.
• Adjusted EBIT margin declined by 20 basis points year-over-year to 13.6% for Q2 2025, with 30 basis points of margin dilution attributed to new tariffs.

TAKEAWAYS

• Net Sales: $913 million, up 3% on a reported basis and flat at constant currency, reflecting gasoline turbo growth and headwinds from diesel and aftermarket softness.
• Adjusted EBIT: $124 million of adjusted EBIT, an increase of $1 million compared to the prior period, with an adjusted EBIT margin of 13.6% and tariff-related margin dilution of 30 basis points.
• Adjusted Free Cash Flow: Adjusted free cash flow was $121 million in Q2 2025, resulting in a 98% quarterly conversion rate and 62% for the first half of 2025.
• Gasoline Turbo Sales: Increased by 4%, outperforming the industry and partially offsetting declines in diesel and aftermarket segments.
• Tariff Recovery: Additionally, $14 million in tariffs were recovered during the quarter, with 30 basis points of margin rate dilution from newly implemented tariffs.
• Capital Return: $22 million of common stock repurchased and $12 million in quarterly dividends paid, with share count reduced by 39% since Q1 2023.
• Business Awards: Over $1 billion in light vehicle turbo program extensions were won during Q2 2025, increasing revenue visibility into 2034.
• Zero-Emission Technologies: Secured major awards in eTurbo, e-powertrain, fuel cell compressor, and non-automotive eCooling products, including a new R&D center established in Wuhan, China.
• Liquidity Position: Ended Q2 2025 with $862 million in liquidity, including $630 million in undrawn revolving credit facilities and $232 million in cash.
• 2025 Outlook: Net sales of $3.5 billion, net income of $256 million, adjusted EBIT of $500 million, $410 million in net operating cash, and $370 million in adjusted free cash flow.

SUMMARY

Garrett Motion (NASDAQ:GTX) management increased its full-year 2025 outlook midpoints, driven by a stronger euro-dollar exchange rate and confirmed full tariff cost recovery plans. The company won over $1 billion in new light vehicle turbo extensions in Q2 2025, boosting forward revenue visibility, and secured additional zero-emission and non-automotive awards, while opening a Wuhan R&D center. Adjusted free cash flow conversion reached 98% for Q2 2025, with 39% of shares repurchased since Q1 2023. Liquidity stood at $862 million as of Q2 2025, supporting ongoing capital returns and dividend increases.

• Management directly addressed unfavorable mix from gasoline outperformance and aftermarket/diesel weakness, explaining the impact on margins and remedial actions through variable cost control.
• Leadership stated, "We expect that [full tariff recovery this year]," and clarified that tools are in place to adapt if conditions change.
• New large-turbo revenue for backup power and marine is expected to build into the "hundreds of millions of dollars" annually within three to five years, with aftermarket activity as a future growth driver.
• Buybacks are not executed on a linear basis, with "dry powder for block trades" reserved, and distribution of at least 75% of free cash flow to shareholders reaffirmed.

INDUSTRY GLOSSARY

• eTurbo: Electrically assisted turbocharger technology providing enhanced engine responsiveness and efficiency.
• Genset: Engine-generator set used primarily for backup or remote power generation, often in data center or industrial applications.
• Aftermarket: The segment involving parts and services provided for vehicles after initial sale, including replacement and upgrade products.

Full Conference Call Transcript

Thank you, Megan. Good day and welcome everyone. Thank you for attending the Garrett Motion second quarter 2025 financial results conference call. Before we begin, I would like to mention that today's presentation and earnings press release are available on the IR section of Garrett Motion's website at investors.garrettmotion.com. There, you will also find links to our SEC filings, along with other important information about the company. We note that this presentation contains forward-looking statements within the meaning of the U.S. Federal securities laws.

These statements, which can be identified by words such as anticipate, intend, plan, believe, expect, may, should, or similar expressions, represent management's current expectations and are subject to various risks and uncertainties that could cause our actual results to differ materially from such expectations. These risks and uncertainties include the factors identified in our annual report on Form 10-Ks and other filings with the Securities and Exchange Commission and include risks related to the automotive industry, competitive landscape, and macroeconomic and geopolitical conditions, among others. Please review the disclaimers on Slide two of our presentation as the content of our call will be governed by this language.

Today's presentation also includes certain non-GAAP measures, which we use to help describe how we manage and operate our business. We reconcile each of these measures to the most directly comparable GAAP measure in the appendix of our presentation and related press release. Finally, in today's presentation and comments, we may refer to light vehicle diesel and light vehicle gathering products by using the terms diesel and gasoline known. With us today are Olivier Rabiller, Garrett's President and Chief Executive Officer, and Sean Deason, Garrett's Senior Vice President and Chief Financial Officer. I will now hand the call over to Olivier Rabiller.

Olivier Rabiller: Thank you, Cyril, and thank you all for joining today's call. I am pleased to report that Garrett delivered another set of very solid financial results in the second quarter, thanks to strong sales performance in a soft environment. Net sales for the first quarter were $913 million, which is flat at constant currency, representing outperformance over the industry in light vehicle turbo sales for both gasoline and diesel applications. In fact, gasoline turbo sales grew by 4% in the quarter, outperforming the industry. Thanks to the team's effort, we have achieved another quarter of solid operating performance. Adjusted EBIT was $124 million, and our adjusted EBIT margin was 13.6%, including 30 basis points of margin rate dilution from tariffs.

We also delivered strong adjusted free cash flow of $121 million for the quarter, placing our first half 2025 conversion at 62% of adjusted EBIT above our stated target. We are also raising our outlook for 2025 to reflect the euro-dollar exchange rate. We will indeed remain alert and ready to take measures to adapt to slowing demand should it become necessary. In addition, we continue to allocate tech capital in line with our stated framework and our commitment to delivering value to shareholders. During the second quarter, we repurchased $22 million of common stock and paid a $12 million quarterly dividend.

Additionally, our Board of Directors has just declared a third quarter dividend payable on the 16th of September 2025. Finally, Garrett was included in the Russell 2000 in the June Index reconstitution, reflecting the positive impact of our capital structure transformation and disciplined approach to capital allocation. Let me now move to Slide four to share more about Garrett's continued success across our differentiated technologies. I am very happy to share that we were awarded over $1 billion of light vehicle programming extensions in Q2, some of which will last until 2034. This achievement increases visibility on future turbo sales and is a testament to the strong demand we continue to see for our differentiated turbo technologies.

Moreover, we continue to see growing interest in the development of turbochargers for range-extended electric vehicles. We secured three additional wins to serve this technology in China this quarter. We were also awarded another major eTurbo program in Europe, which highlights our leadership in electric boosting. In addition, we won five awards for on-highway commercial vehicles and two for off-highway tractors with global OEMs. Lastly, the recent field test of our Garrett Meg Turbo demonstrated superior performance against the existing Turbo solutions for gensets. As a reminder, the Meg turbo line is the new line of products we launched at the end of 2023 to address the needs of big engines for genset and marine applications.

These products represent the largest turbo we have ever engineered at Garrett, and they serve an industry that is seeing significant growth mostly driven by data centers backed to power. This quarter, we continued to make significant progress across our differentiated zero-emission products. In our high-speed e-powertrain business, we secured an additional proof of concept award with a major European passenger vehicle OEM, and in addition, we have seen growing interest from commercial vehicle OEMs for our offering since announcing our award with Andy Axel earlier this year. On the eCooling side, we are happy with the traction we get for industrial, non-automotive cooling.

We have demonstrated our ability to outperform existing compressor technology and exceed targets shared by existing players in that field. This is very promising for this venture outside of the automotive space. Additionally, we secured one of our largest awards to date for our fuel cell compressor from a leading Asian OEM, which again demonstrates the significant value of our product and our industry-leading portfolio in this area. Given the momentum we are seeing across our zero-emission technologies, we have also integrated a new state-of-the-art R&D center in Wuhan, China, reinforcing our presence in this fast-moving region. I will now hand it over to Sean Deason to provide more details on our financial results and outlook.

Sean Deason: Thanks, Olivier, and good morning, everyone. I will begin my remarks on Slide five. As Olivier highlighted, we delivered solid second quarter financial performance. Our net sales were $913 million, driven by favorable foreign currency impacts, tariff recoveries, and new gasoline launches and ramp-ups in Europe and North America, partially offset by continued weakness in diesel and aftermarket. We delivered $124 million of adjusted EBIT in the quarter, which equates to a 13.6% margin. A sequential decline resulting from continued unfavorable sales mix tariff dilution, which was partially offset by favorable foreign currency impacts.

Finally, adjusted free cash flow was $121 million, representing a marked increase over the prior quarter as we converted earnings into cash and released working capital, resulting in a free cash flow conversion of 98% for the quarter and 62% for the first half. Moving now to slide six. We show our Q2 net sales bridge by product category as compared with the same period last year. In the quarter, net sales increased by $23 million versus the prior year, or 3% on a reported basis and flat on a constant currency basis, reflecting favorable foreign currency impacts. We continue to experience strong gasoline growth, outperforming the industry, driven by continued share of demand gains and new launches.

This is partially offset by diesel softness resulting from lower industry production in Europe as well as lower demand for aftermarket primarily in North America. Additionally, we recovered $14 million of tariffs within the quarter. Turning to slide seven. We show our Q2 adjusted EBIT bridge as compared to the same period last year. Within the quarter, we delivered $124 million of adjusted EBIT, representing a $1 million increase over the same period last year and a margin rate of 13.6%, a 20 basis point decline. Those softness demand for aftermarket and diesel applications drive unfavorable product mix, which we continue to benefit from the impact of sustained fixed cost action and variable cost productivity.

In the quarter, the impact of newly implemented tariffs drove 30 basis points of margin rate dilution. Additionally, we benefited from $11 million or 80 basis points of contribution from favorable foreign exchange impacts year over year. Turning now to Slide eight. I'll walk you through the adjusted EBIT to adjusted free cash flow bridge for the quarter. We delivered strong adjusted free cash flow of $121 million. This performance was due to higher sequential sales, the conversion of earnings into cash, complemented by the release of working capital.

Cash taxes, capital expenditures, depreciation, and cash interest were all in line with our expectations, and this strong Q2 result equates to a free cash flow conversion of 62% for the first half of 2025. Moving now to slide nine. We ended the quarter with a liquidity position of $862 million, comprised of $630 million of undrawn revolving credit facility capacity and $232 million of cash. In the second quarter, our strong cash generation enabled us to pay our second $12 million quarterly dividend and repurchase $22 million of common stock in Q2 for a total of $52 million in the first half under our $250 million share repurchase program.

It's important to note that since Q1 of 2023, we have reduced total outstanding shares by 39% through our share repurchase programs, demonstrating our commitment to return capital to shareholders. In line with our capital allocation policy, we continue to target a distribution of at least 75% to shareholders over time through dividends and share repurchases. As Olivier mentioned earlier today, a third quarter cash dividend payable in September 2025. I will now transition to Slide ten to discuss our 2025 outlook. We are raising our 2025 outlook to reflect the impact of a stronger euro-U.S. dollar exchange rate, reaffirming our commitment to deliver operating performance consistent with our prior outlook.

This outlook maintains our prior industry view and reflects the impact of newly implemented tariffs on sales and adjusted EBIT margin, net of recovery. This implies the following midpoints: net sales of $3.5 billion, net sales growth at constant currency of minus 1%, net income of $256 million, adjusted EBIT of $500 million, net cash provided by operating activities of $410 million, and finally adjusted free cash flow of $370 million. Turning now to slide eleven, this bridge illustrates our updated midpoint outlook of adjusted EBIT compared to the prior outlook. We anticipate continued gasoline strength and incremental operating performance will offset unfavorable product mix, slightly improving our margin rate before foreign exchange and tariffs.

Foreign exchange is expected to drive 70 basis points of rate improvement, and the impact of full tariff recovery is expected to drive 20 basis points of margin dilution for the year. I will now turn the call back to Olivier for his closing remarks.

Olivier Rabiller: Thank you, Sean. Turning now to Slide twelve. Our strategic priorities remain clear and consistent. We aim to identify and deliver on customer needs by leveraging our capabilities to develop differentiated high-speed and highly efficient technologies. In doing so, we generate robust returns for our shareholders. Let me wrap this up on our final slide, which is the next slide. First, we delivered very solid results with an adjusted EBITDA of $124 million and adjusted free cash flow of $121 million, with gasoline sales outperforming the industry, share demand gains, and new product launches. Second, we continue to return capital to our shareholders.

This quarter, we paid our second quarterly dividend and completed $52 million in share repurchases in the first half. Overall, we have reduced our share count by 39% since Q1 2023 through our repurchase program. Now, this quarter, we also secured significant business wins, including awards for over $1 billion in light vehicle turbo program extensions. These wins reinforce our position and provide strong revenue visibility moving forward. In terms of innovation, we are making steady progress on zero-emission technologies. This includes a new proof of concept partnership on an e-powertrain, strong test results for our oil-free cooling solutions, and the significant fuel cell program award. Finally, we increased our 2025 outlook to reflect a stronger euro-dollar exchange rate.

I am proud to highlight these achievements and the promising start we have had this year. With these strong first-half results, it's positioning us very well for the rest of 2025 and beyond. Thank you for your time. And operator, we are now ready for Q&A.

Megan: We will now begin the question and answer session. If at any time your question has been addressed, you would like to withdraw your question, our first question comes from Hamed Khorsand. Please go ahead.

Hamed Khorsand: Hi. So my first question was could you just talk a little bit about this unfavorable sales mix and how you're adjusting the business for such an environment.

Olivier Rabiller: That's a very good question, Hamed. What we call unfavorable sales mix is basically driven by two things. On the one hand, there is a very positive thing that's happening to us, which is we are growing very fast, and we are growing very fast on the gasoline side all over the world, whether it's in Asia, Europe, and to a certain extent in North America. So we are very pleased with that. But as you know, the margin rate on gasoline turbochargers is a bit lower than what we have on the rest of the business. So this unfavorable mix is a good thing to us.

Where we are seeing, on the other hand, a little bit of softness that is impacting us. That's the second aspect of that mix. It's more on aftermarket off-highway, and that's basically more in North America. Well, we have not seen the traction yet on the aftermarket that would reflect demand recovering. Usually, the demand is recovering first on the aftermarket before it gets into a week. And I think our customers are probably still suffering from the fact that they have sales channels that have been having a lot of inventory in or have built up a lot of inventory for the past few years. So these are the things.

Adjusting the business for us, do we adjust the business with the same receipt as we usually have? We have a high variable cost structure. And therefore, for us, it's working on the fixed cost like we do earlier. But more than that, it's adjusted on the variable adjusting on the variable cost side, and this is something we know how to do very well in the company.

Hamed Khorsand: Okay. And my other question was you ended the quarter with significantly more cash. Any reason why you didn't buy back more stock?

Sean Deason: Hi, Hamed. This is Sean. Our buyback is not linear. As I mentioned in my prepared remarks, we're committed to returning 75% or more of cash over time to shareholders. So, you know, we believe the buyback is a very important tool to return value to our shareholder base. And we'll continue to do so. But it's not linear.

Hamed Khorsand: Okay. Thank you.

Megan: Our next question comes from Brian Sponheimer with BNP. Please go ahead.

Brian Sponheimer: Hey, guys. Congrats on a great quarter. I just want to ask if you could help us understand some of the drivers of your stronger operating performance in the second half, especially with the volume assumptions roughly unchanged.

Sean Deason: Sure. We will continue to benefit from cost control, and I would say, the other point I wanted to make is that right now, we've maintained our prior view. I think the latest S&P estimate might be showing a bit more favorability. So depending upon how the second half works out, more importantly, is that could give us an opportunity to trend toward the upper end of our range if we start to see volume stabilize. But at the moment, we felt it prudent to be a bit more conservative in our guide from a volume and revenue standpoint as the impact of tariffs starts to work its way through the system.

Brian Sponheimer: Got it. Thank you. And then just a smaller one, if you could provide an update on the tariff recovery situation. Do you guys still expect to be able to fully recover your tariff cost this year?

Olivier Rabiller: Absolutely. Absolutely. We expect that. Not only do we expect that this is what we've achieved, but, obviously, the situation changing will adapt to the changing tariffs. We have the tools in place. And since we've been recovering everything since the beginning, there should not be a change moving forward.

Megan: Our last question comes from Eric Burge with Four Tree Island Advisory. Please go ahead.

Eric Burge: Thank you. And to the Garrett team, just excellent results. Great to see all this communication on multiple levels. Two questions. In terms of these large turbos for backup data center, AI, and whatnot, can you give us a sense of when you think that business or if you think that business will ever get to as much as 10% of revenues or I don't want to limit you there, but how big do you think that business can grow and how's it Garrett?

Olivier Rabiller: It's a very substantial business. It's a big business for us because it's coming when you get into very large turbo. I'm not talking only about the genset one, but more widely all the applications. There are a lot of genset, and there are some marine. And a significant part of the revenue once you've established a position is coming from aftermarket. And we love that. We love aftermarket. We have a very strong brand in aftermarket. We have a very strong net of distributors on aftermarket, and that's an additional activity that we will develop with them. Before we get there, obviously, we need to establish our installed base.

I'm not saying that it should reach 10% of the activity just on the genset that backup power. Because today that would be a big number. We would talk about $400 million a year. And I'm not sure that there is any player out there that's doing $400 million a year on the job of business. I don't even think that the industry is that big to allow that. But it will be in the hundreds of millions of dollars anyway. And that should come within the next three to five years.

Eric Burge: Great. And then the second question is really digging a little bit further on the linearity comments of stock repurchase. You know, you probably did almost twice as much free cash flow this quarter. You had some of your sponsors who were more active on the sales front. Your valuation is incredibly low. Just, you know, and you did almost 30% less stock repurchase this quarter. So you give us a better kind of just sense of how you know, it's nonlinear, but you know, why you didn't dig in further this quarter and do you think you'll be more aggressive throughout the rest of the year?

Sean Deason: You know, like I said, it's not linear. And we had a very busy quarter. But what I would say is we also recognize that we have some dry powder for block trades as well if they happen to come up. But, again, I would just reiterate the company's commitment and the board's commitment to deliver to our capital allocation framework, which is 75% or more of free cash flow to our shareholder base.

Eric Burge: Well, great quarter next year. Thank you.

Megan: This concludes our question and answer session.

Olivier Rabiller: This concludes our call.

Megan: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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