Good day and welcome to the fourth quarter 2019 Garrett Motion earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Paul Blalock. Please go ahead.

Thank you. Good day everyone and thanks for listening to Garrett Motion’s fourth quarter and full year 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’ll also find links to our SEC filings along with other important information about Garrett. Turning to Slide 1, we note that this presentation contains forward-looking statements regarding our business prospects, goals, strategies, anticipated financial performance, payments to Honeywell, and the anticipated impact of the coronavirus on our business. We encourage you to read the 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 to both the press release and the slide presentation. Also in today’s presentation and comments, we will sometimes refer to light vehicle diesel and light vehicle gasoline products by using the terms diesel and gasoline only. On Slide 2, we provide additional disclaimers related to the basis of our financial presentation, the nature of our historical carve-out financial information, and our standalone post-spin financial results reported today. Please also note on this slide that the material weakness in our internal control over financial reporting related to the lack of information, documentation, and supporting evidence for our liability to Honeywell under the indemnification agreement has been remediated as a result of the remediation activities and controls in place as of December 31, 2019. We do not expect the remediation of our material weakness to impact our ongoing litigation with Honeywell, commenced on December 2, 2019. I’ll now turn to the main purpose of today’s call. With us today is Olivier Rabiller, our President and CEO, and Peter Bracke, our interim CFO. I’ll now hand it over to Olivier.

Thanks Paul, and welcome everyone to Garrett’s fourth quarter and full year 2019 conference call. Beginning on Slide 3, Garrett delivered a strong net sales performance in our first full year as an independent company, totaling $3.25 billion, up slightly at constant currency and outperforming global auto production by approximately 600 basis points. This performance is in line with our most recently stated guidance for the year and higher than our original long-term target. Although the 2019 decline in global auto production was one of the largest disruptions in the auto industry in the last decade, Garrett’s significant outperformance reaffirms the favorable secular drivers in our industry. Notably, our outperformance for the year was achieved while undergoing a transformation in our product portfolio. In 2019, net sales from gasoline products increased 33% at constant currency, driven by new product launches and share of demand gains in gasoline platforms. Based on this considerable growth, 2019 gasoline product sales exceeded those from diesel products, well ahead of our original target and is now our largest product category. As Peter will discuss shortly, our Q4 growth in gasoline sales was even higher at 52% at constant currency. During 2019, we also maintained our strong financial position despite the marked deceleration in both light and commercial vehicle production. In fact, without any growth in auto production or commercial vehicles, Garrett generated $583 million in adjusted EBITDA in 2019, representing a margin of about 18% and $318 million in adjusted free cash flow, resulting in 109% adjusted free cash flow conversion. I am pleased by the results of our global team that delivered this in a challenging macro environment, and I believe our performance underscores Garrett’s flexible and resilient business model. In 2019, we also stayed true to our approach in utilizing our solid cash…

Thanks Olivier, and welcome everyone. I will begin my remarks on Slide 6. In the fourth quarter, Garrett reported strong net sales growth of 3.9% on a reported basis and 6.2% at constant currency. Our performance for the quarter reflects higher gasoline volumes stemming from increased turbocharger penetration in gasoline engines and new product launches, which were partially offset by lower diesel volumes, lower product sales for commercial vehicles, and for aftermarkets. Adjusted EBITDA for the quarter was down 1% to $137 million for a margin of 16.5%. Our adjusted free cash flow, which excludes indemnity-related payments to Honeywell, was $136 million, representing a 219 adjusted free cash flow conversion rate, which we define as adjusted free cash flow over adjusted net income. Our robust cash conversion was positively impacted by strong seasonality in the fourth quarter working capital, similar to what we experienced in Q4 2018. Lastly, our adjusted EPS, which excludes Honeywell indemnity obligation expenses and related litigation fees, as well as special tax matters such as from the Swiss tax reform, was up 17% to $0.82 per share compared to $0.70 in Q4 2018. Overall in 2019, Garrett delivered strong financial results amidst challenging market conditions. Turning to Slide 7, we illustrated our net sales by region and product line. In Q4, we grew our sales in Asia as a percentage of total net sales by seven points over the same period last year, mainly due to our new gasoline product launches, while net sales in Europe and North America declined by four and three percentage points respectively. On the product side, we grew our percentage of net sales from gasoline products to 39% in the fourth quarter, up 12 percentage points from Q4 2018. On a [indiscernible] basis, gasoline product sales exceeded diesel by more than…

Thanks Peter. On Slide 15, we summarize our priorities for 2020. We remain well positioned to once again outperform global auto production given our schedule of new product launches. Our outgrowth is expected to continue even though our shift from diesel to gasoline will persist in 2020, albeit at a slower pace. Next, we have a big year in front of us to leverage our technology developments in electrification and software. We intend to finalize the industrialization of our E-Turbo for an initial mass market launch next year. For fuel cells, we have a clear plan to start deliveries to Chinese customers in 2020 and to develop our gen-2 technology for sample qualification and high volume bids, although we [indiscernible] cyber security award to be ready to start production in 2021. We also will take full advantage of our flexible and resilient business model. In addition to our low capex requirements, about 80% of our cost structure is variable. This provides us with significant flexibility to help mitigate the impact from any short-term fluctuations in the underlying macro environment, and we will continue to manage our extensive and reactive supply base to ensure our production levels are in line with customer demand. We are taking active steps to maximize our free cash flow. This includes conducting a thorough review of our capex and working capital targets for the year while preserving the integrity of our business over both the short term and the long term, and as discussed earlier, we will benefit this year from lower than expected indemnity obligation payments to Honeywell which are estimated to be approximately $67 million below the $175 million cap. As Peter mentioned earlier on the call, we plan to continue to utilize our strong cash generation to reduce our debt. For 2020, we intend to lower our total debt by at least as much as we did in 2019. Finally, I want to add that we remain committed to achieving an adjusted EBITDA margin in excess of 18% over the long run. We believe this target is achievable and will be achieved readily as some signposts come back, the first one being the macro environment that will improve and get more normalized in terms of production growth rates, the impact of the mix shift from diesel to gas will become smaller and smaller, the commercial vehicle industry which is more cyclical in nature will rebound, and as we previously stated and shared with you, the higher sales of our valuable [indiscernible] gasoline products through mass scale launches combined with our E-boosting solution will drive greater technology content and will be accretive to our margin profile. This concludes our formal remarks today, and I will now hand it back to Paul.

Thank you Olivier, and we are now ready for questions. Operator, you may open the line.

[Operator instructions] The first question today comes from Eileen Smith of Bank of America Merrill Lynch. Please go ahead.

Good morning everyone. First question, adjusting for the $80 million to $100 million hit from coronavirus to EBITDA and applying that pro forma number to an implied revenue level based on your organic sales growth outlook, you could get to a range of 17% to 19% on EBITDA margin. How does that stack up versus the 16.5% EBITDA margin you posted in the fourth quarter, meaning excluding the impact from coronavirus, is 16.5% a good starting point to think about for EBITDA margins with more of your product mix attributable to gasoline versus diesel?

Yes, it’s Peter here. We did the same math. I’m not completely with you on the 17% to 19% excluding the impact from the coronavirus. If you do the math based upon our guidance number, you will calculate that we currently estimate approximately $200 million to $240 million of revenue impact. If we estimate between $80 million and $100 million, take the midpoint of $90 million from the coronavirus, I think if you calculate everything backwards you would probably be in a range between 16% and 17%, which would be in line with our exit point for the fourth quarter of 2019. But maybe we can take it offline if you want, if you really want to cross the dots and to make sure that we are fully aligned on this reconciliation.

Eileen, just let me add one point, because obviously it leads to a follow-up question later on, which is are you seeing any difference from what we said in Q3. In Q3, we said that we would see the impact of the gasoline mix increasing in Q4, which is what you have seen and what you are noting in our results, fully in line with what we said in Q3, and we also said at that time that this will continue in 2020. As you see, the numbers that Peter are giving right now are just confirming that.

Absolutely, that’s helpful. Then following up on some of the commentary on Slide 13, is the $10 million estimated H2 recovery in adjusted EBITDA, is that a first versus second half bridge or should we see a second half inflection that’s much greater than that as you have recovery, in addition to just the non-repeat of coronavirus production disruption?

It’s not really second half versus first half. It’s basically recovery versus pre-coronavirus production estimates.

Okay. Last question, your outlook for global light vehicle production to decline 5% to 7% in 2020 is obviously well below current IHS production projections and even below other companies that were looking for down 2% to 4% earlier in this quarter. Within the 5% to 7% decline, can you outline what your expectations are by region, specifically China versus Europe versus North America?

Yes, the ranges are pretty significant, I think. By region, I think nobody really expressed an opinion yet on what the impact is going to be for Europe and for North America, but let me talk to China first. I think China, we had an estimate of approximately another decline, not as much as in 2019, but a decline between 5% and 7% before the impact of the coronavirus. Currently we believe the impact is going to be significant and could be between minus-16% and minus-23% for China. Obviously the bets are all over the place, but I think we are just trying to do something with trying to estimate as much as possible what that could do the industry. For North America and for Europe, as I said, estimates are really, really difficult at this point because nothing really comes out. For Europe, we were working under an assumption that there would be a 2% decline in 2020, and that that would drop to a 4% decline. For North America, we were also working with a 2% decline before the impact of the coronavirus. We have currently modeled that we would lose one to two percentage points in North America, so that’s roughly how we talk about it. Most of the impact that has been modeled so far is for China specifically. There are a lot of estimates out there about will there be a rebound and a strong recovery in the second half of the year. We are not necessarily optimistic that that would come true, and that’s why we expect a significant reduction overall in China. For the other regions, difficult to say, but overall probably a two percentage point reduction versus initial estimates is what we are currently modeling.

Great, that’s very helpful. Thanks for taking my questions.

The next question today comes from David Kelley of Jefferies. Please go ahead.

Hey, good morning. Thanks for taking my questions. Starting with the mix shift in the quarter, and you referenced gasoline sales exceeded diesel by, I believe, 25%, I know you were previously targeting 15% on a dollar basis. Could you walk us through the drivers of that upside? Was there any pull-forward in launches or is this just an acceleration in mix shift relative to your expectations?

Yes, I think it’s really driven by the success of the launches, because if you look at the overall strength of gasoline coming through, it’s basically coming from China, from Europe, and from North America, but very, very strong contribution from China. We talked about that before, that we expected a significant uplift in organic revenue growth in the second half of the year specifically going into Q4 from these gasoline launches in China, and it all depends on the success of the OEMs of selling their vehicles with the turbochargers, and that has been higher, we believe, than what we projected earlier in the year. The same applies, really, to Europe and to North America. So it hasn’t necessarily to do with a change in, let’s say, turbo penetration rates for gasoline products. It really has to do with the success of the vehicles and the sell-through of the vehicles that the turbochargers for the new launches are on.

Just to add to that, which is what translates into the outgrowth performance versus the auto industry, and basically at the end [indiscernible].

Okay, great. Thank you. Maybe just to follow up on that discussion, gas is now 39% of sales. How high do we think that could go in 2020, and again recognizing it’s a very choppy macro and lots of fluidity in how we’re thinking about production, but just some sort of comparable basis, do you have some guesstimation of how you perceive gas sales mix by the end of this year?

Yes, we obviously have an AOP and we have included it there. We believe gasoline sales for the total year, I’m not going to talk Q4 now, but for the total year gasoline sales were 34% in 2019. We believe it would go up in a range of between 40% to 42% for 2020. Diesel sales were 33% for the full year of 2019. We believe the 33% will drop between 28%, 29% for 2020. Is that helpful?

That’s perfect, thank you. I appreciate you taking my questions.

Again if you have a question, please press star then one. The next question today comes from Joseph Spak of RBC Capital Markets. Please go ahead.

Thanks everyone. First, can I just get clarification on the Honeywell overpayment and what’s in guidance, because I think you said you expect to pay $108 million with the, I guess, refund, and then it looks like another $18 million in the MTT, so that’s $126 million; but if I look at your free cash flow and adjusted free cash flow guidance, it’s like $140 million, so is there something else in there or is the repayment not included in guidance?

I think what else is included in the guidance are the litigation related expenses for the indemnity payments, and then another couple of million basically for environmental payments, $2 million or $3 million per year.

Okay, so the refund on the overpayment is in the free cash flow guidance?

Yes, yes it is.

Okay. Second question, just going back to this margin ex-virus, I got also that 16% to 17% level you were talking about, but you’re also guiding to a bigger commercial vehicle decline in 2020 than what you experienced in the fourth quarter. It would suggest that maybe there’s some narrowing on gas versus diesel on the margin, unless there’s something else in the fourth quarter margin that we really just can’t extrapolate.

No, I don’t think there is something in the margin in the fourth quarter that you can extrapolate. We definitely expect commercial vehicles to be worse, as you have seen from our guidance assumption, including the impact from the coronavirus. We expect it currently to be between minus-7% and minus-10% versus minus-4% in Q4. There is clearly a trend there, but I think the overall differential between diesel and gasoline that we have referred to before is not going to change dramatically in 2020. It’s consistent with what we said before - we really believe that the ramp-up of the VNT technology in gasoline is going to be a factor that is going to reduce that gap, but significant contributions from that are only going to come in 2022, or mostly 2023 and beyond. I think that the overall difference as a driver of mix is not expected to be really different next year--or this year, I should say.

Joseph, except obviously because there is what we do control, which is the way we work on the margin of the gasoline and the diesel, and you can expect a company like us that’s very strong on cost and productivity is pushing very hard on gasoline, obviously, to reduce the gap. At the same time, you would expect that in a company that would be growing, and we would be outgrowing an industry that would not be tanking, we would get help from overall revenue moving up and absorption of the fixed costs, even if we have a lot of variable costs. So there are a little bit of [indiscernible] that are playing against us right now, not all of them are in our hands, and obviously the ones that are not in our hands at some point will get much more favorable with all the macro, with all the mix of commercial vehicles and the cyclicality, and obviously the marginal impact of the additional mix shift that’s [indiscernible].

Yes Olivier, thanks for that. That actually plays into my final question, which is effectively you’re guiding light vehicle production, it seems somewhere in the mid-80 million unit, which some may interpret as a more normalized level. I think on a global basis we were there as recently as 2013 or so, so putting aside how we get there and what sort of region drives it, I am curious to know what you think your correct margin level is in that environment, because unfortunately we don’t really have history that far back. It seems like you’re guiding margins for this year at 15%, but that doesn’t seem like the right level either because of some of the things you mentioned, like premium freight, but it also, because of the volume factor, doesn’t seem like it would be 18% to 20%. Can you just help us a little bit with some of that scenario planning?

Obviously all these scenarios are very fluid, as you are saying, but the way we look at it is that if we had been into a growth environment, if we had the strong commercial vehicles, obviously we would be in that corridor of 18% to 20%. The point that drives us off that is the accelerating mix shift, which comes also at the time when the rest is decreasing. It’s difficult to predict exactly where it’s going, but let me repeat what Peter has said - we said in Q3 that our margin that we were showing for Q3, Q4 would be the one that we would still face in 2020, and this is exactly the point why Peter restated to Eileen earlier that when you look at our guidance and you compute the numbers, that puts you between 16% and 17%, which is obviously higher than the 15% that we mentioned. Why? Because when you’re into a crisis, there are obviously things that you cannot reduce in terms of cost. You mentioned yourself the premium cost, but at the same time, you know that in China when we close the factory, there is not such a thing as furlough, and therefore you need to keep on paying your employees, so the decremental margin into the current crisis is obviously much higher than what it should be for a company like us. So a long ellipsistic discussion to get back to the 16% to 17% guidance that we gave, and obviously still hitting the long term 18% to 20%.

Okay, thank you very much.

The last question today comes from James Maxwell of Janus Henderson. Please go ahead.

Hi, good afternoon. Just a quick one, really, on the impact of coronavirus and what you’re guiding to. You mentioned it implies $200 million to $240 million of lost revenue and EBITDA impact of $80 million to $100 million. Could you frame that as to what’s driving that, because you talked earlier about your highly variable cost structure at 80%, so walking that through that level of revenue decline shouldn’t lead to that impact on EBITDA. I appreciate there’s other costs in terms of freight and what have you, but perhaps you could give some more context around that in light of your view that you’ve got a highly variable cost structure.

Sure. I think when you do the math, you come to approximately 43% decremental margins on the revenue loss from the coronavirus, which is obviously higher than expected. I think the answer is you said it, we will incur significant premium costs, and we range them between $10 million and $20 million, so if you take a midpoint of $15 million of premium freight costs and you exclude that to the overall midpoint of the estimated impact, then you are down to negative conversion rate just above 30%, which is probably slightly below the overall variable margin of our business. That’s the way to think about it.

And this is not taking into account the fact that specifically to China, as I’ve said before, you need to keep on paying the employees even if you’re not producing anything.

Yes, I get that, but then to claim that there’s a highly variable cost structure is not entirely true, yes?

Well, if you want us to get to that point, in a normal environment, which is not the coronavirus crisis, we would not face the point that Peter is saying, which is about premium freight that we anticipate in our forecast, point number one, because you are adjusting on it into a crisis. The current crisis, by the way, we have to deal with some specific events that are country-related and where we had absolutely no [indiscernible] and very sudden, so if we were into a crisis that was not getting a country into quarantine and factories shut down and everything else, obviously we would leverage our highly variable costs in a different way, so that’s entirely true what we said about the 80% variable cost.

Okay, understood. Thank you.

This concludes the question and answer session today. The conference has now also concluded. Thank you for attending today’s presentation. You may now disconnect.