Hello. My name is Victor, and I’ll be your operator this morning. I would like to welcome everyone to the Garrett Motion Conference Call. This call is being recorded and a replay will be available later today. After the company’s presentation, there will be a Q&A session. I would now like to hand the call over to Paul Blalock, Garrett’s Vice President, Investor Relations.

Thank you. Good day, everyone, and welcome to the Garrett Motion Second Quarter 2021 Financial Results Conference Call. Before we begin, I’d like to mention that today’s presentation and earnings 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 our company. Turning to Slide 2. We note that this presentation contains forward-looking statements within the meaning of the Securities Exchange Act. We encourage you to read the risk factors contained in our filings with the SEC, become aware of the risks and uncertainties in our 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 includes non-GAAP measures to describe the way in which we manage and operate our business. We reconcile each of these 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 may refer to light vehicle diesel and light vehicle gasoline products by using the terms diesel and gasoline only. With us today is 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 it over to Olivier.

Thanks, Paul and welcome everyone to Garrett’s second quarter 2021 conference call. I will begin my remarks on Slide 3, where we provide our Q2 highlights. During the second quarter, we continue to benefit from the strong demand for Garrett’s differentiated technologies, and also our share of demand gains. As we discussed on our previous call, business activity has rebounded significantly since the mid year of the COVID-19 crisis in the second quarter of last year. Our reported net sales for the quarter total $935 million, a Q2 record. At constant currency our net sales increased by 83% outpacing global auto production by approximately 32 percentage points. Obviously, our year-over-year comparison is [indiscernible] given the unprecedented work stoppage resulting from the COVID-19 as many plants were shut down throughout Europe and North America in Q2 of 2020 due to the pandemic, while China was in the process of reopening. However, if we compare our results to Q2 2019, our reported net sales increased 16.6%. We believe this strong revenue growth demonstrates Garrett’s ongoing ability to develop and deliver the advanced technologies needed by our customers as they continue to focus on reducing CO2 emissions. The 2021 second quarter was not without its onset of challenges as our volumes of 3.4 million units, while up 84% year-over-year were impacted by the well-documented semiconductor shortage and other components supply disruptions, which goes many major OEMs to slow or idol production. The supply-demand imbalance also contributed to rising commodity prices and other costs. Although we believe these global supply chain issue is a temporary nature. The long lead times for components suggests the current constraint would extend throughout the second half of the year, before stabilizing in early 2022. We will discuss our outlook in more detail later on this call. Additionally, the…

Thanks, Olivier and welcome everyone. I will begin my remarks on Slide 5. In the second quarter, Garrett reported net sales growth of 96% on a reported basis and 83% at constant currency. This impressive performance for the quarter reflects higher gasoline and diesel volumes across Europe and North America, but it’s primarily driven by the recovery from the COVID-19 crisis, which peaked in Q2 2020. As Olivier mentioned earlier, global auto production came to a virtual standstill for a significant number of weeks in Q2, 2020 due to COVID-19 with the exception of China, which experienced a similar trend in Q1 2020. On a sequential basis, our reported net sales were down 6.2% due to lower volumes driven by the semiconductor shortage. Adjusted EBITDA for Q2 2021 increased year-over-year by 167% from $63 million to $168 million, which equates to an adjusted EBITDA margin of 18%. In Q1 2021, our adjusted EBITDA and adjusted EBITDA margin was $176 million and 17.7% respectively. Like many in the industry, our performance in the quarter was impacted by lower sequential volumes, inflationary pressures and higher logistical costs associated with the global supply chain disruptions. In response to these issues, we flexed our organizational cost structure and worked closely with our more than 400 suppliers worldwide to help them remain agile as part of our advanced supply base management. In Q2, our adjusted free cash flow was $121 million representing a 134% adjusted free cash flow conversion rate, which we define as adjusted free cash flow over adjusted net income, as we maintain our focus on robust cash conversion. Lastly, we reported adjusted net income, which excludes reorganization items, unhedged debt exposure, restructuring costs and stock-based compensation for the second quarter of 2021 of $90 million. This compares to an adjusted net income…

Thank you, Sean. Turning to Slide 11, we are proud to have launch the company’s first ever sustainability report during the second quarter. The report outlines our commitment to robust environmental, social and governance or ESG management and highlights the commission of Garrett, enabling cleaner, safer vehicles. Our advanced global electrification and software solutions are key contributor in empowering automakers to address the industry’s most pressing issues from emission reduction to cybersecurity. We continue to support our global customers with transformative technologies to help them meet increasingly stringent environmental standards and the optimize vehicle health and safety, while enhancing overall vehicle performance. Additionally, the report focuses on the two pillars that support Garrett’s core mission, namely our culture of innovation and our responsible operations. We mentioned on our previous calls, our culture of innovation has enabled Garrett to offer a wide range of cutting edge technologies, all of which had been developed in-house. As we continue to bring differentiated technologies from the lab to the mass markets, our focus remains on drawing upon Garrett’s global talent with an emphasis on diversity and inclusion, as well as promoting a safe and engaging workplace. We also remain dedicated to operating in a responsible manner to ensure the long-term impact of our mission by being best-in-class policies and procedures to manage our environmental footprint and achieve regulatory compliance in the countries where we do business, we will enhance our ability to serve our global automotive customers in the decades ahead and help drive the future of sustainable mobility. And finally, the report provides our first external sustainability targets and the outlines progress we have made since going public in 2018. Our initial sustainability report represents an important milestone. As we share our vision for Garrett’s societal contribution, we really encourage you to learn…

Thank you, Olivier. And Operator, we are now ready to open the call for questions.

[Operator Instructions] Our first question comes from the line of Hamed Khorsand from BWS Financial. You may begin.

Good morning or good afternoon, depending on where you are. But first off, just want to ask you on the VNT for gasoline, what kind of traction are you getting in this environments and what kind of placement are you expecting to occur this year especially in North America?

Well, this environment is not changing the rate outlook we see for valuable geometry for gasoline. We are seeing big traction in Europe, as we said before, we expect if I’m not mistaken by 2023, that more than 60% of the volumes in Europe will be valuable geometry. We have also very good traction in China. We have traction in the U.S., primarily because there are a lot of engines that have been – that are developed outside of the U.S. that are on two platforms into the U.S., but obviously we are expecting that new CO2 regulations that could be a bit more stringent that what we’ve seen in the past, could boost the adoption of a valuable geometry into the U.S. as well. So we are seeing the early signs of that. But so far I would say, U.S. is still not deliverable what we see in the rest of the world. But the current environment doesn’t change anything to that. Car makers need to reduce CO2 emissions and therefore they need to work on the engines.

Okay. And my other question was, what’s the timing of your software business ramping? Why are you thinking that you – in this crowded space as a security, you would be able to capture much of the market share or any market share really?

So two things on that. First, to remind a little bit what we bring on the software, so on the software, we have three offerings. We have an offering around prognostic and diagnosis. We have an offering on model based controls, and we have an offering on cybersecurity. So people are looking at the software business as a big modernized, but it’s not, it’s much more fragmented than that. And let me pick up on a few. So if you look at the way today, cars are completely owned, whether it’s the issue of the engine, the calibrations of the powertrain, a lot of that is done with processes and methodology that have been coming from legacy practices of the automotive industry. We are introducing something that is quite new to the automotive industry, which is called model-based algorithm. You don’t need to calibrate an engine, or you don’t need to calibrate a powertrain for all the kinds of configurations. We do that with model based on physics. And this is a key differentiator. This is coming from outside of the automotive industry. And the rest of that, is the press release we released few months back with Hyundai, about one month and a half ago back, we showed that Hyundai is now adopting our technology on the crowded space of engine controls. So why would they introduce a new supplier like Garrett, if they had already what they need from the current incumbents? And that’s the point. We are going for technology differentiation. We are bringing something new. Same for cybersecurity. Cybersecurity, we came at it with algorithm that we’re competing not coming from incumbent of the industry, some of them were competing with the few startups. And we came with on top of that, the credibility of an…

Great. Thank you.

If I just could add before the next question. What we are developing is extremely bottom for the future of the automotive industry. There are a lot of translational missions going on, a lot of new kinds of powertrain, more complex vehicle architectures that will require that what we are developing right now. Okay. Sorry, let’s get to the next question.

Our next question comes from the line of Chris McIntyre from McIntyre Partnerships. You may begin.

Hey guys. I was wondering if you could talk a little bit maybe about capital return policy. I mean, Honeywell is be able to put it to you probably in like two months. So I understand that sort of like top of the list, but sort of, maybe we could just talk about like what the plan is there. And also as a kind of secondary question, like when should we expect like the restricted has to become unrestricted?

Sure. Well, I’ll start with the easier question, which is the unrestricted cash. We expect the unrestricted cash to be fully released by the end of the third quarter or very beginning of the fourth quarter, so at end of September, very beginning of October. And we have had a plan in place. That’s been a focus of us – the whole team since we emerged that is a bit of a carryover hangover from the Chapter 11 process we went through. But we expect it will be released in fourth quarter, early fourth quarter. Regarding capital return, you may have seen, we filed an 8-K we did amend our Series A certificated designation to allow for pro-rata common dividends or a share buyback. We did that and just have more flexibility. It doesn’t mean we’re going to actually start to do that, but we are – we would like to eventually get to a normalized capital structure and then have a conversation in discussion and guidance about how we would return capital, but in the short term, if the Honeywell put option does go live. We will – are in conversations with Honeywell, we’ll determine what works best for Garrett. But again, we have ample liquidity, should they choose to put the entire thing to us? And obviously, we can also call it at any time having just emerged a few months ago, we are still digesting the new capital structure and working with our new board by capital return policy is on our mind. And obviously, if we don’t have another use for the cash, delevering strategy at least in the short term, may be something we would consider. But I think I’ll be in a position to give you a much better guidance on that on our third quarter call, because then we will know better how the industry has performed and whether or not that put option is going to go live.

Okay. Great. And then could you talk about the seasonality this year? It’s a bit of a weird. Normally, you’re stronger in the first half compared to back. But with the semi issues and frankly, all of the COVID wonkiness, let’s say of all the markets, I’m just kind of curious how we should be thinking about that.

I think you said it in your question, we were sitting and seeing it, that it was – it’s very not common, not only starting this year, but starting the back end of last year. You may remember that we had well biggest quarter ever in Q4 last year with a lot of that driven by China. And then, we had Europe ramping up very strongly in Q1. Then we have the semi con that does impacted us in Q2, like the rest of the industry. And now I seeing the question mark, and it’s pretty much what you see in all the latest release from everyone. The question mark is what position in Q3 and Q4, and that’s why we are staying quite cautious at this point to understand the different scenarios that could unfold in the rest of the year. We have contradictory information from the marketplace. Some people are viewing that suddenly the situation is getting better. Some people say that the situation would get better only in 2022 and it could even get stay quite low in Q3. We are probably on the side of people that are a little bit cautious before we see anything coming up for us. We are not having huge expectations for the backend of the year and that’s what’s reflected today in our guidance. But it’s – we are little bit switching to adopt like a lot of the companies trying to be as smart as we can on that. The strong points for all the companies will be to understand the way September is unfolding. July and August are usually not really good to paint the story about the backend of the year. September will be the time at which we’ll be able to say, okay, now we understand exactly where the end of the year is going.

Okay. Great. I think just one final question. When we think about working capital and you used to run a negative working capital model with sort of like, there’s a lot of moving parts I got in the last 12 months to 18 months, let’s say, but sort of, when should we think about, like, maybe we’ll get back to that kind of a negative $200 million working capital.

Yes. Well, I think in the second quarter, because of the volume slowdown, you actually saw the negative effect, typically on the way up, we’ll throw off cash. And as our revenues are up slightly and our volumes were down, you saw the opposite. And on top of that our inventory did also build up a bit more in that – in both of those effects are driven by this semicon shortage. The semicon shortage has really thrown our scheduling and planning into a bit of chaos just because the OEs are changing weekly and things they ordered, then they don’t pick up. And so it’s created a lot of challenges to manage our inventory. And then on top of that, with the slowdown, what you’re seeing is we’re paying out, right, our AP terms are much longer than our AR terms. So we’re collecting on the lower sales volumes, but we’re still paying for the much higher sales volumes, five to six months ago from the supplier side. But I think, I think you’re seeing inventory issue aside, and I think that negative working capital position is – we are in sort of a normalized trend, but we’re slowing down. So you’re seeing it unwind.

Probably something to add though, because it’s a question we had in the past, and it’s probably good to restate that point. We don’t have any negative effect on our working capital coming from the Chapter 11. So in the sense that we did not get to a position where we had to reduce terms with our suppliers and things like that, and that’s an important one to keep in mind. I mean, the fundamentals are working capital, are working the same now as it were working before.

All right. Great. Thanks, guys.

Our next question comes from the line of Rajeev Gupta from Goldman Sachs. You may begin.

Hi. Thanks for taking my question. So I really had one around the capital structured, really just given the various moving parts here. So how do you think about the leverage going forward with the CDSB coming up and then also kind of the ongoing payment of the CDSK? So, I mean, like if I’m looking at leverage, in your presentation, you have defined it at both the term loan, as well as including the CDSB, but how should we think about it going forward from a target perspective on a medium to long-term basis?

In terms of ultimately what our target liquidity would like to be – we would like our target leverage to be on a longer-term basis.

Yes. And also kind of from a capital structure perspective, like do you want to secure and secured tranches going forward, if it’s secured only in terms of that as well?

As you stated, we have a rather complex capital structure. Now with the performance that the business is delivering and just put option and it could materialize if we hit the midpoint of our guidance, for example, the put option will go live in the fourth quarter. We need to assess whether or not there’s an interest on Honeywell side to put it. They have a short window to decide, and then we wait until the next reporting period. But clearly that’s something we’re looking at now. It’s something we can refinance. We have enough liquidity to deal with it on hand, and then we would probably worthy to put it to us. We would refinance it and go to the market, use some cash on hand, because as I stated earlier, we would release about $200 million by the fourth. And then probably refinance in the market, depending upon what instrument would depend on how the market is at the time. And going forward, we do aside from any other opportunities that may present them themselves, in terms of organic or an inorganic investment, we would like to focus on the deleveraging the exact target of that. Again, this remains to be articulated. We just came out a few months ago, so we are still digesting that full capital structure. But definitely what we would like to do over the next two to three years, four years is get to a normalized capital structure with effectively common in debt.

Understood. Okay. Thank you. That’s it for me.

And the next question comes from the line of Brian Sponheimer from GAMCO Funds. You may begin.

Hi. Good morning, everyone and welcome back. Just a question, your restructuring was more or less a financial one, it took place within the throws of a pandemic. I’m just curious from an operational perspective, if you’re thinking about your own cost structure, and I don’t want to take your breakeven point. But call it a breakeven point, let’s say from a fixed cost perspective, are you able to quantify cost outs that maybe make you a functionally more profitable company now than when you entered and understanding the borrowers was already very high?

I would start to answer the question. I’m sure Sean will add some more colors to that. But in term of principle, I’m not sure the triggering event to improve our infrastructure was the fighting, the triggering event was the COVID-19. And we’ve been using – because we are doing in this business, we are doing some level of restructuring every year. I mean, it’s like doing since I’ve commented on that all year. It’s like doing the gym. You need to do the gym on a regular basis to stay in good health, otherwise then the surgery is always more painful. So we are doing that on the business. And we were having already some plans that we had started to address the impact to the mix, to address the impact of an industry that before even the COVID-19 was slowing down and to address as well some of the points we see in the rebalancing of our resources to go after our new technology. So what we did basically is to take benefit of the COVID-19 crisis to accelerate these plans to make sure that we would get the benefit of them by the time the crisis would be over. And this is what we did. We did some significant restructuring in the course of 2020 or the beginning of 2021 that probably be on the high end of what we would have done at 10 years of point. And you can see that our cost, because if you compare to Q2 last year, and Q2 last year like many other companies, we are having a lot of benefits from one-off cost mitigation actions incentives given by governments to offset some of our fixed costs. And if you look at where we are today, we’ve been able to offset a lot of this positive impact of last year that would have come up as a negative this year. And that’s I think a key testimony to what we did in term of cost structure. But Sean can give you more details.

Yes, that is true. However, in the second half as you look at our midpoint guidance there are some costs that will be coming back. We have planned to, for example, start to travel again. And those are costs that we initially had expected to have incurred in the first half, but under – but the COVID crisis have pushed out, now rain should be seen if that is potential upside again in the second half. But as Olivier said, we’re continuously looking at ways to streamline our cost structure. The crisis helped some, but really we took full advantage of the state funded aid. But going forward we are going to try to continue. We will continue to restructure where we see opportunity, but I would say our cost structure also is already in what we call high growth regions, quite a bit of it. And there are some opportunities to potentially look to taking further advantage of that on the supply side, as well as new production in other locations. But again, no concrete plans, we’re ready to disclose at the standpoint.

Okay. Thank you. And just one clarification on Honeywell put option that would be for the entire face value of what’s remaining under the Series B? Or would this be for that present value number on your balance sheet?

It’d be for the present value, it’d be discounted to 7.25%.

All right. Thank you very much. And best of luck for the remainder of the year.

Thank you.

Thank you. And this will conclude our Q&A.

Okay.

And this will conclude the conference call for today.

Thank you very much.

You may all disconnect.