Garrett Motion Inc. Common Stock 2026 Q3 Earnings Call

Please go ahead. Thank you, Alan, and good day, everyone.

We appreciate you joining us to review Garrett Motion's third quarter 2026 financial results. Our presentation and press releases are available on the investor relations section of our website. Today's discussion includes forward-looking statements that involve risks and uncertainties. Please refer to our SEC filings, including our most recent annual reports on Form 10-K, for a discussion of factors that could cause our results to differ materially from these forward-looking statements. Today's presentation also includes certain non-GAAP measures, which we use to help describe how we manage and operate the business. Please review the disclaimers on slide 2 of our presentation, as the content of our call will be governed by this language. With me today are Olivier Rabiller, our President and Chief Executive Officer, and Sean Deason, our Senior Vice President and Chief Financial Officer.

With that, I'll turn the call over to Olivier.

Thank you, Cyrille, and thank you all for joining us today. We delivered a strong third quarter with organic sales growth, margin expansion, and healthy adjusted free cash flow. Net sales were $930 million, up 3% organically as we outperformed light vehicle industry production and grew commercial vehicle and industrial by 23%. Adjusted EBIT for the quarter was $152 million, which is a margin of 16.3%, supported by favorable product mix and strong year-over-year operating performance. We also converted this into healthy adjusted free cash flow of $136 million. In addition, we continued to return value to shareholders, repurchasing $57 million of common stock and paying $15 million in dividends. We also repaid $50 million of term loan debt, bringing year-to-date repayments to $100 million. Today, we are announcing that our board of directors authorized a new $250 million share repurchase program for 2027.

Finally, we are reaffirming our midpoint outlook as strong operating performance is expected to offset foreign exchange headwinds, mainly in the fourth quarter. Let me now turn to slide 4 and discuss our continued progress across differentiated technologies. We made strong progress within the quarter across our differentiated technologies, both in our turbo and in Zero-Emission Technologies. In turbo, we launched a new high-volume E-Turbo with Mercedes. In addition, we secured multiple light vehicle wins, including for hybrids and programs for both China domestic and export. We also won several commercial vehicle programs across all regions and launched a new off-road turbo application for recreational vehicles with Polaris. In industrial, growth for existing power generation programs further accelerated and exceeds prior expectations. Based on this momentum, we now expect industrial sales to reach $230 million this year and about $300 million in 2027.

In Zero-Emission Technologies, we completed multiple E-Powertrain light vehicle proof-of-concept tests, validating the value of our high-speed architecture. On the commercial side, we are progressing with testing and industrialization of our heavy-duty applications, supporting launch in 2027 for our commercial vehicle E-Powertrain. Testing of industrial cooling remains on track with launches in 2027. We experienced a strong momentum with a number of customers and secured an industrial E-Cooling Compressor award with a new customer, Multistack. With that, I will now turn the call over to Sean, who will walk you through our financial results and full-year outlook.

Thanks, Olivier, and good morning, everyone. Let me begin on slide 5. As Olivier noted, we delivered another quarter of strong financial performance. Net sales were $930 million, supported by continued growth in commercial vehicle, industrial, and aftermarket. Adjusted EBIT was $152 million, which equates to an Adjusted EBIT margin of 16.3%, representing both a year-over-year and sequential improvement, primarily from favorable product mix. Adjusted free cash flow was $136 million, in line with full-year expectations, demonstrating a strong earnings to cash conversion of 89%. Turning to slide 6. This bridge highlights our Q3 net sales performance by product category compared to the prior year.

In the quarter, net sales increased by $28 million year over year, or 3% on both a reported basis and constant currency basis. This included an unfavorable 3 points of impact from tariff pass-throughs. Once again, we continued to see growing demand for commercial vehicle and industrial applications, resulting in a strong 23% organic growth year over year. As Olivier shared earlier, we expect industrial sales to reach about $300 million in 2027, representing 30% organic growth, primarily from demand for power generation applications. Turning now to slide 7, you see our Q3 Adjusted EBIT performance compared with the prior year. Adjusted EBIT was $152 million in the quarter, up $19 million, and Adjusted EBIT margin was 16.3%, representing an increase of 160 basis points year over year, including an unfavorable foreign currency impact of 70 basis points.

This performance was primarily driven by favorable product mix and a year-over-year operating performance improvement of $13 million in the quarter. Now turning to slide 8, you see our Adjusted EBIT to adjusted free cash flow bridge. We generated $136 million of adjusted free cash flow in the quarter, reflecting the strong cash generation of the business. Overall, these results are in line with our expectations, with lower cash taxes due to the timing of tax refunds. Moving now to slide 9. We ended the quarter with $841 million of total liquidity, including $630 million of available capacity under our revolver and $211 million of unrestricted cash. We also made a voluntary early repayment of $50 million on our term loan in October, bringing year-to-date repayments to $100 million, further strengthening the balance sheet.

Our debt is over 95% fixed and swapped into EUR, resulting in an all-in cash interest rate of approximately 5.5%, taking into account proceeds from cross-currency swaps. With no near-term debt maturities and a net leverage ratio of 1.66 times, down from the prior quarter, we remain in a strong liquidity position. Turning to slide 10. In the third quarter, we paid $15 million in dividends and repurchased $57 million of common stock under our $250 million authorization, bringing year-to-date repurchases to $172 million. We continue to return capital to shareholders in line with our capital allocation framework, returning adjusted free cash flow to shareholders over time through dividends and share repurchases, the amount of which can vary based on market conditions and other factors.

As Olivier noted earlier, the board also declared a fourth quarter dividend of $0.08 per share, payable in December, and authorized a new $250 million share repurchase plan for 2027. Turning now to slide 11. We are reaffirming our midpoint outlook communicated in our Q2 earnings release for all metrics. Operational execution across the business continues to be strong, supporting higher expectations for Adjusted EBIT and adjusted free cash flow. However, these improvements are offset by foreign exchange headwinds, primarily in the fourth quarter. Please now turn to slide 12, where we show our updated 2026 outlook ranges. We are narrowing our guidance ranges across all measures, implying the following midpoints: net sales of $3.8 billion or 4% growth at constant currency, Adjusted EBIT of $580 million, equating to a 15.3% margin, and adjusted free cash flow of $430 million, representing a 74% conversion.

Let me now turn the call back to Olivier for his closing remarks.

Thanks, Sean. Let me turn to slide 13. As we discussed at our Technology and Investor Day in May, Garrett's long-term strategy remains clear. We are leveraging our differentiated technologies and proven execution model to continue driving shareholder value. Now, let me wrap up on our final slide. We delivered a strong third quarter with significant year-over-year Adjusted EBIT margin expansion and strong adjusted free cash flow. We continue to win across our core portfolio with multiple turbo wins in light and commercial vehicles across all regions. On the industrial side, sales of existing power generation applications continue to outperform expectations. In Zero-Emission Technologies, we secured another industrial E-Cooling Compressor award with a new customer, Multistack, and we continue to make progress towards our industrial HVAC and E-Powertrain 2027 launch milestones.