Garrett Motion, Inc. Q4 FY2024 earnings call

• Fourth quarter 2024: Adjusted EBITDA was $153 million with a 18.1% margin, up 280 basis points from Q4 2023. Generated $157 million of adjusted free cash flow, repurchased $296 million of common stock in 2024, reducing share count by 13%.
• Full year 2024: Delivered a 17.2% adjusted EBITDA margin, flexed variable cost structure and implemented permanent cost actions. Secured new business across all applications, demonstrating technology leadership.
• Electrification: Validated electrification solutions with key customers, won projects for fuel cell applications, E-Powertrain high speed technologies moving to production awards, and E-Cooling compression technology generating interest for various applications.

In the fourth quarter, gasoline experienced softness in China and North America, while ramp-ups in Europe (comprising 45% of net sales, flat from last year) partially offset this. Diesel declined year-over-year in Q4 mainly due to lower industry production, particularly in Europe where Garrett has a higher market share. Commercial vehicle sales saw a slight increase, reflecting the start of an industry recovery in China and North America. For the full year, commercial vehicle revenue was impacted by economic softness in Europe and North America, but the aftermarket business increased 1% at constant currency due to demand for replacement parts, primarily in China and Europe. The pass-through of commodity deflation led to a 2% sales decline, and foreign exchange was a headwind of $34 million.

• 2025 outlook midpoints: Net sales $3.4 billion (flat at constant currency), net income $232 million, adjusted EBITDA $575 million, adjusted EBIT $457 million, net cash provided by operating activities $402 million, adjusted free cash flow $345 million. Reflects improvement in commercial vehicle market offsetting light vehicle softness, and continued benefit of fixed cost actions.

• Geopolitical and tariff impacts, automotive industry weakness in Europe and China, competitive landscape, macroeconomic conditions.

Q: How are you managing the year given a lot of the geopolitics and tariffs? And how does that affect your business going into 2025 and 2026?

A: Hamed, you're asking a very, very interesting question. Quite frankly, what we are doing is to stay as flexible as possible. It's true that today it's difficult to predict exactly what will happen and when it will happen. We tend to be very fast at reacting. We have already engaged in discussions with customers and we tend to be very fast at reacting to that kind of events. For lack of a better words, we've been facing a lot of unplanned events for the past years as an industry and we tend to be much more flexible and reactive now than we were probably five years ago. But yes, we are trying to anticipate as much as we can, but it's difficult to anticipate in a vacuum. We need to understand what we face.

Q: Olivier, you mentioned in your presentation China and I wonder if you could just expand on that a little bit. I saw that – I saw on the 10-K, the revenue was down and it sounds like you have some new business with some of the local Chinese based manufacturers. Can you give a little more detail on what you're looking at in China?

A: Yes, absolutely. So China is still an important region for us. This is the biggest automotive industry in the world. And we play a significant role in China, both in commercial vehicle and in Passenger Vehicle. And what we have seen over the last few years is there has been not only a shift towards more local Chinese players, but I would say a shift towards more local new Chinese players that have come to the market sometimes through the battery electric vehicle angle and now that are pushing some other solution to the marketplace, whether it's plug-in hybrid vehicles or range extended electric vehicle that we are calling REEVs. So what we have been doing is that for some time now, we've been working with these companies that have come with new brands and new products to the marketplace. And I would say we are starting to get good traction and good success with these new players. And in some regions of the world, we tend to move from ICE to hybrid to battery electric vehicle. It seems that in China, we are seeing it moving from battery to plug-in hybrids and range extended vehicle because I think there is probably a good understanding that you need several solutions in order to satisfy the needs of the consumers. So we are very active. We are seeing a lot of pursuits on these technologies and we have been developing specific products to address the needs of those platforms. And we're trying to be quite active on the vehicle side.

Q: Sean, on two things. First, could you on the release you talked about adjusted free cash flow of $157 million. Can you define how you're getting there?

A: Sure. It's a very strong EBITDA performance, but then we did have quite a nice lift from working capital, which had been at use through...

Q: Michael Ward: Okay. So when you look at your 2025 outlook, when you're talking about adjusted free cash flow, that's what you're alluding to. You're excluding any of the repositioning or the other things that are in there? I see $157 million [ph]. So they're. Okay, so there was a factoring in P notes. That was the big number, the $39 million.

A: Right. And so with that what we do is, when we factor, we don't give ourselves the benefit for that. So if we actually sell receivables, even though it's a true sale, we don't look at that as a free cash flow benefit for that quarter. So it just gets. So we would add it back in a member versus out the number four.

Q: The second thing is on M&A, I never hear you talk about M&A and I'm just or I should say rarely. And are there M&A opportunities out there in your segment? Is it something you're just staying away from? Is, do you feel like you can build it internally just because of the strength on the R&D side? How do you view M&A on the overall capital allocation scheme?

A: So the way we look at that, first we need to get back to our organic growth strategy. We have an organic growth strategy that we think is very strong. Leveraging the two legs of the company. On the one hand, it's the strengthening of the turbo business. The turbo business. We are seeing the world consolidating, we are expanding our portfolio. You've seen the big turbos we are launching on industrial. And then the second leg of the company is the development of the zero emission vehicle solutions. With the three that I've explained today, this is where resource and this is the base of our organic growth strategies. Recognizing that there are obviously some segments that we want to push more and it's quite obvious in everything we've said so far that we want to expand further on commercial vehicle, on highway, off-highway and industrial. So if you put that together, obviously a good M&A strategy should reinforce that organic growth. So like any company, we are active, we are looking. But for the time being, we have not committed to anything on the M&A side.