Good morning, and my name is Chuck, and I’ll be your operator this morning. I would like to welcome everyone to the Garrett Motion Quarterly Earnings Conference Call. This call is being recorded and a replay will be available later today. After the company’s presentation, there will be a question-and-answer session. I would now like to hand the call over to Paul Blalock, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Chuck. Good day, everyone, and thanks for listening to Garrett Motion’s third quarter 2019 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 may contain forward-looking statements regarding our business, prospects, goals, strategies and anticipated financial performance. We encourage you to read our 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 are encouraged to examine those reconciliations, which are found in the appendix in both the press release and the 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. On Slide 3, please notice the additional disclaimers related to the basis of financial presentation, the nature of the historical carve-out financial information and our stand-alone, post-spin financial results reported today. In accordance with the terms of our indemnification and reimbursement agreement with Honeywell, our consolidated and combined balance sheet reflects a liability of $1,120 million in obligations payable to Honeywell as of September 30, 2019. The amount of the indemnification liability is based on information provided to us by Honeywell…

Thanks, Paul. And welcome everyone to Garrett's third quarter 2019 conference call. Beginning on Slide 4, Garrett's net sales for the quarter were strong at $781 million, down 0.4% on a reported basis, but up approximately 3% organically versus last year showing one, a positive change in the trend we have experienced year-to-date; and second, that we once again significantly outperformed global auto production, which was down 2.9% in Q3. Garrett growth of our global light vehicle production of more than five percentage points, reaffirms our long-term growth expectations, even in a softer global auto environment. Our strong revenue performance was driven by higher turbo penetration in gasoline engines and new product launches as gasoline products increased to 35% of net sales, up 10 percentage points versus last year. Sales from gasoline products exceeded diesel well ahead of our original expectations. The success we have achieved in rebalancing our portfolios underscores our proven track record in providing differentiated technology to major global automaker and is evidenced by our strong customer win rate. Net income in the third quarter was $38 million, and we produced earnings per share of $0.51 and $0.50 per basic and diluted share respectively. On a year-to-date basis, Garrett generated $177 million in net income, up $2.37 and $2.34 basic and diluted earnings per share respectively. For the first – for the third quarter, adjusted EBITDA was $133 million, and the year-to-date total was $446 million. Our adjusted EBITDA margin was 17% in the quarter and 18.4% on the year-to-date basis. We also posted strong adjusted leverage free cash flow in the third quarter of $102 million and improved our balance sheet by reducing net debt by $95 million. Both items, Peter will discuss in more detail in a few minutes. Based on our positive results for…

Thanks, Olivier. Welcome, everyone. I will start my review of the financials on Slide 8. As Olivier mentioned, net sales for the third quarter were down 0.4% on a reported basis and increased 2.8% organically compared with the third quarter 2018. Our ability, once again – to once again outperform global auto production reflects higher gasoline volumes, stemming from increased turbocharger penetration in gasoline engines and new product launches, which were particularly offset by lower diesel volumes and lower product sales for commercial vehicles. Net income was $38 million in the quarter and down from Q3 last year, which includes a tax benefit from an internal restructuring of Garrett's business in advance of the spin-off that resulted in an $870 million reduction to withholding taxes on undistributed foreign earnings recorded during the three months ended September 30, 2018. In addition, Q3 2019 included $18 million in interest expense on long-term debt, whereas Q3 2018 did not include any interest expense related to the debt raised at the time of our spin off. Adjusted EBITDA totaled $133 million in the third quarter, a decline of 3% or $4 million versus the third quarter last year. As Olivier mentioned, the adjusted EBITDA margin of 17.0% of net sales, down 50 basis points from 17.5% in Q3 2018. For the nine months ended September 30, our adjusted EBITDA margin was 18.4% versus 18.7% in the same period year. Adjusted EBIT in the third quarter was $113 million, down 6% from last year and represented 14.5% of net sales. Capital expenditures were $23 million in the quarter, up from last year, but still tracking similar levels as in 2018 on a year-to-date basis and in line with our full year 2019 expectations. Lastly, our strong cash generation for the third quarter included $102 million…

Thanks, Peter. In summary, on Slide 17, Garrett results for the quarter were led by strong organic sales growth, significantly exceeding global auto production and reaffirming our long-term growth outlook. Our accelerated portfolio shift efforts and strong customer win rates have produced gasoline sales, which now exceeds diesel sales. We also maintained strong momentum in new growth vectors with new customer wins during the quarter Intrusion application, Intrusion detection system and electrification technologies such as eboosting products, as well as gasoline VNT programs. We believe our broad and balanced portfolio positions Garrett well to drive long-term value for shareholders. Garrett produced solid cash flow generation in the South quarter and we maintain our focus on deleveraging our balance sheet, making notable progress in reducing net debt. Although global short term macros remain challenging, we will continue to focus on controlling cost and leveraging our integrated supply chain model to ensure our long-term business fundamentals remain intact throughout the market cycle while we have our customers to address the challenges of advancing motion across all powertrain platforms. This concludes our formal remarks today and I will now hand it back to Paul.

Thank you, Olivier. Before we open the line, I need to mention that we will not be taking questions today on our future course of actions related to the material weakness in our financial reporting under our indemnification obligation agreement. Operator, we are now ready to open the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from David Kelley of Jefferies. Please go ahead.

Good morning guys. Thanks for taking my questions. I guess just to start on the margins, can you remind us of the margin gap between gas and diesel today and you have a fair amount of back half gas launches as we think about those beginning to scale and also the rising penetration of variable geometry content. Can you walk us through your view of the progression and timing of gas margins ultimately closing the gap with diesel?

So Dave, that's a very interesting question, indeed. When you remember everything we've said about the margin difference, we've always said that there is a mid-single-digit difference between gasoline and diesel products. Now that can be exacerbated some time if the growth is primarily driven by China, where the averaging price is lower. So that’s what we are seeing today. We expect that this trend will continue in 2020. But as you pointed out, we are expecting the VNT penetration to increase, there are significant number of launches that will happen within the next two, three years. And as we said before, the additional content per vehicle on the VNT is about 30% to 50% and they will account for 40% of the production worldwide by 2025 and 60% of the gasoline production in Europe by the same date. So all these ramp-ups will happen over the coming years. Little bit difficult to give you an exact date when you will start to see the improvement on the margin. But clearly, the improvement of the margin will come in part from this increase of VNT penetration.

Okay, got it. I appreciate it. Appreciate it. And maybe as a follow-up, if we're kind of holding in the changes in the commercial vehicle landscape, I guess, could you walk us through, I know we're not guiding to 2020 yet, but it sounds like you're expecting some headwind related to underlying market volumes in commercial vehicles. How should we think about that impact on volume as well as margins?

So when you get back to the commercial vehicle industry, we've seen a significant weakening of the commercial vehicle industry in Q4 – Q3, sorry. And you know we are not anyone to see that. CD was down minus 1% organically in the first half, and in Q3, it was down 9%. So it's a little bit too early to give you where we see because there are a lot of moving pieces between on-highway, off-highway and the different regions. And I know some of the commercial vehicle customers have started to give a little bit of some view for next year. But quite frankly, we think that the trend that the trend that we are seeing in Q4 will probably remain the same next year. And that's our working hypothesis right now.

Okay thank you. That’s helpful. And then last one from me and I’ll pass along. The gas ramp, it's definitely exceeding your expectations that, you referenced the launches in China. It's obviously been a tough underlying market there. Can you provide some color on some of the drivers of the upside surprise and your views on China heading into year end?

Well, it's all driven by launches. And you know we were – when you get back to the discussions we had in Q1 and also in Q2, we were having – from the beginning, we knew that we had a year that was back-end loaded. And we were having uncertainty initially about whether all those launches would happen, and we said at the end of Q2 that they would happen and potentially at a slower rate than what we anticipated. So I would say they are probably coming up a little bit higher than what we are expecting at the end of Q2, which is a good offset for us when you look at the weakness we see on the commercial vehicle, and what we see also on passenger vehicle in the other regions. But it's not miles away from what we are having in mind. And it's all related to share of demand gains that we have as a consequence of wins we scope for the last two, three years.

Okay, got it. Thank you. I appreciate all the color.

Our next question comes from Joe Spak of RBC Capital Markets. Please go ahead.

Hey good morning. Thanks for the question. Also, a couple of questions just on the margin profile. If I'm doing the math right, it looks like on your implied fourth quarter guidance, the margins would actually be a little bit higher than the third quarter. And you noted in the slides, obviously, that the gas versus diesel mix is supposed to be even more favorable for gas. So is there something else offsetting it in the fourth quarter or maybe some R&D reimbursements or something that would drive that?

Joe, maybe it's a good opportunity to take that question offline with Peter after the call, but that's not what we implied with our guidance.

We believe that the margin in the fourth quarter can be slightly below – will be slightly below what we have reported for the third quarter.

Okay. We'll call up and recheck that math. And then I guess, just continuing on then, sort of, now that we've seen gas overtake diesel and some returns that may be normally expected in some of the commercial vehicle markets. Do we need to reevaluate the long-term 18% to 20% margin range? Or do you think we're just, sort of, in this period here in the back half and maybe into 2020, where we were temporarily below it but then scale and other efficiencies get you back in that range?

I think you have it in the second half of your question. Today, we are confident that we are seeing the same consolidated EBITDA margin corridor of 18% to 20% long run. The two impacts that we are really having today are really the combination of gasoline going faster than anticipated. At the same time, when you have commercial vehicle being lower. And let's keep in mind, our overall industry results this year are much lower overall as an industry than what we are expecting. So we are – three things playing in our disfavor. Commercial vehicle being lower, gasoline being higher and the overall volumes being lower, meaning that you are not absorbing the same way the cost of the company. So those are the three drivers. They are temporary, in our view, except if we will feel that we get into a difficult situation that will stay on for both commercial passenger vehicle and everything else, negative for the last three, five years, which I don't think any anyone is anticipating right now. So longer term, back to your question, we are still shooting for the corridor of 18% to 20%. Obviously, we are having pressure right now that we say is continuing in 2020, but the fundamentals of the business, what we have in our books for the future doesn't change.

Just to be clear on that last point. Let's assume that global vehicle production stays at around these levels for the next couple of years and the mix shift to gasoline from diesel continues then that 18% to 20% is still valid? Or are you saying you actually need a rebound in global vehicle production as well to get back to the range?

It's difficult to think that China will remain as low as that for three, four years in a row, it's difficult to think the commercial vehicle industry, looking at side by cycle, will stay very much done for a longer time period when you look at the fundamentals bullets on on-highway and off-highway. The point we are making, and today is about 2019 and 2020, reading on [indiscernible] and assuming that everything will stay as soft as what we see in 2020, is a little bit premature. But let's keep in mind that no matter what the economy is doing, we are still seeing an increased penetration of turbochargers and an increased level of technology back to the earlier comment we were making with Dave on the VNT penetration.

Thank you very much.

So we have things that are specific to our business that will help put back the margins where they should be.

Thanks again.

Our next question will come from Armintas Sinkevicius of Morgan Stanley. Please go ahead.

Hey good morning. This is George Dailey on for Armintas. So first one is, just given you reiterated your guidance in September, was it something you saw in September or really after that that, which drove the negative revision to the full year guide today?

Well, as you know George we are trying to be as straightforward as possible in everything we say. So the main change that we have seen is really the two that we talked about, the increased weakness on the commercial vehicle side coming across the two verticals that we are serving on-highway and off-highway. That have been confirmed, by the way, recently by the commercial vehicle company. I mean not a lot of people were expecting that in September. And second, the increased volume that we are seeing in China, slightly above what we are expecting in July.

Okay thanks for that. And then one more, if possible, so one of your peers recently sold its asbestos liability. And if you can give any color on this, what are some reasons as to why you would not be able to maybe do something similar to that?

Very simple answer, we don't have asbestos liability. We have an indemnity obligation towards Honeywell that is having an asbestos liability, which is a little bit of a different animal, but maybe Peter wants to build up on that?

No. That's exactly right. So definitely, it would be something we could – we would consider, but we don't own the asbestos liability. It's just an obligation to Honeywell.

Fair enough. Thanks very much.

Our next question will come from Aileen Smith of Bank of America Merrill Lynch. Please go ahead.

Good morning everyone. Thanks for the questions. Following up on Slide 6 and David's question earlier asked if gas versus diesel, can you remind us of the content per vehicle between a gas VNT turbo versus a diesel VNT turbo? I appreciate the increase in CPV from gas wastes to VNT. But if we had to think about where the growth in gas VNT is going to come from over the next few years, could it be more at the expense of diesel VNT than necessarily gas wastegate or is it more just net new penetration?

Thanks, Aileen. That's an interesting question. But I would say I would probably answer your question in two steps. The first point of your question is what is the content? So what we said in the past, and we are still sticking to that, obviously, is that when you look at the content per vehicle, diesel variable geometry is equivalent more or less to a gasoline wastegate. Why? Because on the one hand, in diesel, you're having a lower exos gas temperature but you're adding the technology of the VNT. And on the gasoline, you don't have the technology of the VNT. But since you have higher exos gas temperature, we have more exotic materials into the turbo. And then what we are saying is that VNT is coming on top of that for gasoline with an additional content of 30% to 40% versus the wastegate gasoline. The point that you are seeing right now is, obviously, it's a little bit more exacerbated because our sales growth on gasoline in the quarter and to go on in Q4 is a lot driven by the launches in China, which we know are happening on smaller vehicles, smaller engines, and therefore, at lower average selling price compared to [indiscernible] application. Now that's the answer to the first part of your question. The second part of your question is to say, do we have a shift from VNT diesel to VNT gasoline as you have a shift between diesel to gasoline, is happening in Europe. We know that diesel engines are still having a significant advantage in terms of CO2 emissions versus gasoline ones, and therefore, car makers have the pressure to mitigate the impact on CO2 emission that's linked to the shift from diesel to gasoline by putting more technology on the gasoline engines in order to reduce CO2 emission further. Hence the movement from wastegate to variable geometry and then to some other technologies, like Electric Boosting. So in the grand scheme of things, the overall shift of the market that we are seeing between diesel to gasoline is favoring the variable geometry penetration on gasoline platform when it comes to reaching the emission targets of the European and Chinese carmakers mostly at this stage. So this is where we see the shift. It's not exactly directly shift from diesel VNT to gasoline in VNT, but it's a shift from diesel to gas and then pushing carmakers to put more technology on gas in order to mitigate the impact of the shift under CO2 emissions. Overall, that's a very good news for us.

Okay, that’s very helpful color. And to follow-up on that in terms of the commentary around Europe and sort of discussions with your customers heading into next year with the higher compliance costs and emissions targets, has the interest and engagement around traditional combustion powertrain solutions like turbochargers changed in any ways as OEMs are aggressively pushing to hit the 95-gram target next year. And within Europe, specifically, has the shift from – and I think you answered this, from diesel chargers been met with a one-for-one replacement on gasoline or are customers pursuing a broad range of different solutions?

In fact, it's – there is an increasing interest, but it's not too recent. We've seen that for the last two, three years. That's not only linked to what's happening next year because pretty much with what's happening next year, everything is casted already. Carmakers, we cannot launch 50% new vehicles in the next year. Pretty much, a lot of the vehicles that will be available for sale next year are already into the market. So it's not so much the reaching the target of next year that's driving the discussions, but then, the trend that the car makers are anticipating for 2025 and beyond that. As you know, this industry – this automotive industry is having a cycle time. Sometimes when we want to push for innovation, that cycle time we feel it, too slow. And – but at the same time, it provides long-term view for where the technology is going. And people need to work in advance of those milestones to convert their engines. So I would say when you look at it, your point is absolutely right. There are increased interest, whether it's for hybrids or pure internal combustion engine, but I would say hybrid, the interest is driving a lot more technology on the turbocharger side pretty much driven by post-2021 moves whether in Europe and China.

Great. That's very helpful. And last question. We've heard anecdotally from some Tier 1 suppliers instances of distress in the Tier 2 supply base that have made it harder to push price or cost from the OEMs down through their supply chains. Obviously, you've got a much more integrated supply chain than some other suppliers. Is there anything you're seeing among your supply base lately that corroborates and some of the things that we're hearing from others? Or asked another way, are you getting the same level of productivity gains and efficiencies with your supply chain that you would be expecting?

I think, I got a similar question last quarter. And I think, I will give a similar answer. We are not seeing any change so far on that. If anything, the volume increase that we are seeing is driving a lot more business for our suppliers. And therefore, it's favoring scale opportunities with them. The way we manage our supply base is a long-term one. We negotiate with them the contracts in a long term way. We developed our suppliers. And we are maintaining as much as we can the right, I would call it, liquidity within our supply base. And that's why we are investing so much on supplier development. And probably a point to keep in mind, we've been exiting a lot of the legacy western suppliers already a long time ago.

Great.

If I may add, the key to driving productivity with suppliers is winning new business so that you can offer future growth to them and bring that into negotiation to generate productivity with your supply base. And I think on that front, we are doing well this year.

Great, that’s the questions I had, thanks.

And our next question will come from Steven Hempel of Barclays. Please go ahead.

I just want to take a look at the diesel light vehicle, diesel, in particular, in isolation here as we think about the margin trajectory, obviously, that's a little bit higher structurally right now relative to gasoline. But as we think about that business over time, call it over the next three to five years as that business potentially stabilizes in the 20% range, would you expect that business to kind of remain neutral-ish in terms of the margins or potentially go down as R&D is reallocated outside of the business, potentially goes down long term. We see some other suppliers that generally reallocate R&D out of certain businesses and actually get margin boost from that. So just wondering what your take is on the diesel business margin profile. Can you treasury up now over the coming years?

So there are a few questions that are – few points that are interesting into your question, maybe I'll answer them one by one. The first one is the trajectory of the diesel business worldwide. First, when you look at the relative growth of the regions in terms of business and when you look at the same time at – although it's going at a slower pace but a decrease of diesel in Europe. We have a forecast that positions that will probably drop another 6.6% diesel penetration worldwide between now and 2025. This is what we anticipate. Okay? So volume is still going down in diesel worldwide as a percentage because most of the growth will be driven by gasoline vehicles or gasoline hybrid vehicles. On that front, it means that, I mean, first, diesel is not dead. I think there is the end of another much bigger Tier 1 than us that have said that diesel have sold the emission challenge for 2025. But we all know that diesel will remain strong, where the sweet spot is, which is on heavier vehicle, which drives me to the second point of your question. What is happening on margin for diesel moving forward? Since a lot of the applications that are disappearing from the marketplace are the one with small displacement engines, and therefore, lower content. The content in diesel as a result of that, is increasing. And therefore, we expect the margin to stay quite stable in diesel.

Okay that’s helpful. And I guess, just specifically if you think about the North American diesel base…

Maybe, also – I think your benefit of your question, Steven, to add one more point. When I read very often that carmakers are allocating out R&D to specific technologies, and they do not bet on the rest. That would mean that allocating money to one technology specifically would be enough to help them reach their emission targets with a perfect compromise in terms of technology and cost. That's not what we see today. For carmakers to reach their 2025 CO2 targets, they need to work on everything at the same time. So they need to work on the electrification. And they need to work on improving the efficiency of the combustion engines that are on those hybrid platforms. And then they need to work on optimizing the energy of this overall powertrain architecture. And then, to have architectures that from a cost standpoint are optimized versus the segments in which they are working. I’ll just give you additional color on that because if it was as easy as I can reach the 2025 targets by putting all the engine with just an add-on on electric, believe me carmakers will not work on internal combustion engines anymore, and this is not what we see.

Okay. So I mean, net-net, kind of over the mid to long term, do you still expect the diesel margins to remain relatively stable?

Yes, we are expecting our sales, as we said, to remain slightly down over the next five years but not at the pace we've seen for the last few years.

Okay. And then maybe just on China in terms of the regulatory change over there. In terms of your specific customer mix, where do you see kind of inventory levels standing right now and then the benefit potential from new China 6 production ramp up?

Well, we are seeing a lot of the launches that we are seeing of China 6. So we are pretty happy with that. As I mentioned for – in a few conferences we did in September, we were expanding the move to China 6 to be a little bit more disruptive than what it has been. And I think the carmakers in China have done quite a good job at managing their inventory level on China 5 and then pushing the shift to China 6. Quite frankly, the China market is volatile. We all know that. So I think the range of outcome for next year is wide still.

Okay, great. Thanks for taking the questions.

[Operator Instructions] The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.