Earnings call transcript: Garrett Motion Q2 2025 sees strong turbo sales

Garrett Motion Inc. (GTX) reported its Q2 2025 earnings, showcasing robust performance in gasoline turbocharger sales and notable advancements in electric vehicle technology. Despite a challenging automotive market, the company maintained stable net sales at $913 million and demonstrated strong cash flow generation. Garrett’s stock showed minor fluctuations, closing at $12.49 with a slight premarket dip of 0.16%. According to InvestingPro analysis, GTX appears undervalued, with the stock delivering an impressive 55% return over the past year and maintaining a strong financial health score of 3.02 out of 5.

Key Takeaways

• Gasoline turbo sales increased by 4%, bolstering revenue.
• Garrett secured over $1 billion in light vehicle program extensions.
• The company reduced outstanding shares by 39% since Q1 2023.
• Strong focus on zero-emission technologies and electric boosting.
• Adjusted EBIT margin stood at 13.6%.

Company Performance

Garrett Motion’s Q2 performance remained steady, with net sales flat at constant currency. The company capitalized on its strengths in gasoline turbocharger technology, offsetting weaknesses in diesel and aftermarket segments. Its strategic focus on electric vehicle innovations, particularly in China and Europe, positions it favorably against competitors.

Financial Highlights

• Revenue: $913 million (flat YoY at constant currency)
• Adjusted EBIT: $124 million (13.6% margin)
• Adjusted Free Cash Flow: $121 million
• Cash Flow Conversion (First Half 2025): 62%

Outlook & Guidance

Garrett Motion projects 2025 net sales of $3.5 billion, with a slight decline of 1% in growth at constant currency. The company anticipates a net income of $256 million and an adjusted EBIT of $500 million. It remains committed to returning over 75% of its free cash flow to shareholders, emphasizing its shareholder-friendly approach.

Executive Commentary

CEO Olivier Rabiller highlighted the company’s success in securing over $1 billion in light vehicle program extensions, underscoring Garrett’s competitive edge in turbo technologies. CFO Sean Deason reiterated the commitment to distributing at least 75% of adjusted free cash flow to shareholders, reflecting strong financial discipline. This shareholder-friendly approach is supported by the company’s solid fundamentals, with InvestingPro data showing a healthy 13% free cash flow yield and management’s aggressive share buyback program, which has reduced outstanding shares by 39% since Q1 2023.

Risks and Challenges

• Continued softness in diesel and aftermarket segments could pressure sales.
• Tariff-related margin dilution remains a concern, despite full cost recovery.
• Macroeconomic factors and a soft automotive market may impact future demand.
• Competition in zero-emission technologies is intensifying.
• Supply chain disruptions could affect production and delivery timelines.

Q&A

During the earnings call, analysts inquired about the unfavorable sales mix, driven by gasoline growth and aftermarket softness. The management confirmed full tariff cost recovery and expressed optimism about significant revenue potential in the backup power/genset market, projecting revenues in the hundreds of millions over the next 3-5 years.

Full transcript - Garrett Motion Inc (GTX) Q2 2025:

Megan, Conference Call Operator: Hello, my name is Megan and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion Second Quarter 2025 Financial Results Conference Call. This call is being recorded and a replay will be made available later today. After the Company’s presentation, there will be a Q&A session. I would now like to hand the conference call over to Cyril Grandjean, Garrett’s Vice President, Investor Relations and Treasurer.

Cyril Grandjean, Vice President, Investor Relations and Treasurer, Garrett Motion: Thank you Megan. Good day and welcome everyone. Thank you for attending the Garrett Motion Second Quarter 2025 Financial Results Conference Call. Before we begin, I would like to mention that today’s presentation and earnings press release are available on the IR section of Garrett Motion’s website at Investors. There you will also find links to our SEC filings along with other important information about the company. We note that this presentation contains forward-looking statements within the meaning of the U.S. Federal securities laws. These statements, which can be identified by words such as anticipate, intend, plan, believe, expect, may, should or similar expressions, represent management’s current expectations and are subject to various risks and uncertainties that could cause our actual results to differ materially from such expectations.

These risks and uncertainties include the factors identified in our annual report on Form 10-K and other filings with the Securities and Exchange Commission and include risks related to the automotive industry, competitive landscape and macroeconomic and geopolitical conditions, among others. Please review the disclaimers on slide 2 of our presentation as the content of our call will be governed by this language. Today’s presentation also includes certain non-GAAP measures which we use to help describe how we manage and operate our business. We reconcile each of these measures to the most directly comparable GAAP measure in the appendix of our presentation and related press release. Finally, 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 are 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 the call over to Olivier.

Olivier Rabiller, President and Chief Executive Officer, Garrett Motion: Thank you, Cyril, and thank you all for joining today’s call. I am pleased to report that Garrett delivered another set of very solid financial results in the second quarter thanks to strong sales performance in a soft environment. Net sales for the first quarter were $913 million, which is flat at constant currency, representing outperformance over the industry in light vehicle turbo sales for both gasoline and diesel applications. In fact, gasoline turbo sales grew by 4% in the quarter, outperforming the industry. Thanks to the team’s effort, we’ve achieved another quarter of solid operating performance. Adjusted EBIT was $124 million and our adjusted EBIT margin was 13.6%, including 30 basis points of margin dilution from tariff. We also delivered strong adjusted free cash flow of $121 million for the quarter, placing our first half 2025 conversion at 62% of adjusted EBIT, above our stated targets.

We are also raising our outlook for 2025 to reflect the Eurodollar exchange rate. We will indeed remain alert and ready to take measures to adapt to slowing demand should it become necessary. In addition, we continue to allocate capital in line with our stated framework and our commitment to delivering value to shareholders. During the second quarter, we repurchased $22 million of common stock and paid a $12 million quarterly dividend. Additionally, our Board of Directors has just declared the third quarter dividend payable on 16 September 2025. Finally, Garrett was included in the Russell 2000 Index in the June index reconstitution, reflecting the positive impact of our capital structure transformation and disciplined approach to capital allocation. Let me now move to Slide 4 to share more about Garrett’s continued success across our differentiated technologies.

I am very happy to share that we were awarded over $1 billion of light vehicle program extensions in Q2, some of which will last until 2034. This achievement increases visibility on future turbo sales and is a testament to the strong demand we continue to see for our differentiated turbo technologies. Moreover, we continue to see growing interest in the development of turbochargers for range-extended electric vehicles. We secured three additional wins to serve this technology in China. This quarter, we were also awarded another major eTurbo program in Europe, which highlights our leadership in electric boosting. In addition, we won five awards for on-highway commercial vehicles and two for off-highway tractors with global OEMs. Lastly, the recent field test of our Garrett MEG Turbo demonstrated superior performance against the existing turbo solutions for gensets.

As a reminder, the MEG Turbo line is the new line of products we launched at the end of 2023 to address the needs of big engines for genset and marine applications. These products represent the largest turbo we have ever engineered at Garrett, and they serve an industry that is seeing significant growth, mostly driven by data centers. Back to power, this quarter we continue to make significant progress across our differentiated zero-emission products, so our high-speed e-powertrain business. We secured an additional proof-of-concept award with a major European passenger vehicle OEM. In addition, we have seen growing interest from commercial vehicle OEMs for our offering since announcing our award with Hyundai Axle earlier this year. On the e-cooling side, we are happy with the traction we get for industrial non-automotive cooling.

We have demonstrated our ability to outperform existing compressor technology and exceed targets shared by existing players in that field. This is very promising for this venture outside of the automotive space. Additionally, we secured one of our largest awards to date for our fuel cell compressor from a leading Asian OEM, which again demonstrates the significant value of our product and our industry-leading portfolio in this area. Given the momentum we are seeing across our zero-emission technologies, we have also integrated a new state-of-the-art R&D center in Wuhan, China, reinforcing our presence in this fast-moving region. I will now hand it over to Sean to provide more details on our financial results and outlook.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: Thanks Olivier and good morning everyone. I will begin my remarks on slide 5. As Olivier highlighted, we delivered solid second quarter financial performance. Our net sales were $913 million, driven by favorable foreign currency impacts, tariff recoveries, and new gasoline launches and ramp ups in Europe and North America, partially offset by continued weakness in diesel and aftermarket. We delivered $124 million of adjusted EBIT in the quarter, which equates to a 13.6% margin, a sequential decline resulting from continued unfavorable sales mix, tariff dilution, which was partially offset by favorable foreign currency impacts. Finally, adjusted free cash flow was $121 million, representing a marked increase over the prior quarter as we converted earnings into cash and released working capital, resulting in a free cash flow conversion of 98% for the quarter and 62% for the first half.

Moving now to slide 6, we show our Q2 net sales bridge by product category as compared with the same period last year. In the quarter, net sales increased by $23 million versus the prior year, or 3% on a reported basis and flat on a constant currency basis, reflecting favorable foreign currency impacts. We continue to experience strong gasoline growth, outperformed the industry, and is driven by continued share of demand gains and new launches. This is partially offset by diesel softness resulting from lower industry production in Europe as well as lower demand for aftermarket applications primarily in North America. Additionally, we recovered $14 million of tariffs within the quarter. Turning to slide 7, we show our Q2 adjusted EBIT bridge as compared with the same period last year.

Within the quarter, we delivered $124 million of adjusted EBIT, representing a $1 million increase over the same period last year and a margin rate of 13.6%, a 20 basis point decline. Though softness in demand for aftermarket and diesel applications drive unfavorable product mix, we continue to benefit from the impact of sustained fixed cost action and variable cost productivity in the quarter. The impact of newly implemented tariffs drove 30 basis points of margin rate dilution. Additionally, we benefited from $11 million or 80 basis points of contribution from favorable foreign exchange impacts year over year. Turning now to slide 8, I’ll walk you through the adjusted EBIT to adjusted free cash flow bridge. For the quarter, we delivered strong adjusted free cash flow of $121 million.

This performance was due to higher sequential sales and the conversion of earnings into cash, complemented by the release of working capital. Cash taxes, capital expenditures, depreciation, and cash interest were all in line with our expectations, and this strong Q2 result equates to a free cash flow conversion of 62% for the first half of 2025. Moving now to Slide 9, we ended the quarter with a liquidity position of $862 million, comprised of $630 million of undrawn revolving credit facility capacity and $232 million of unrestricted cash. In the second quarter, our strong cash generation enabled us to pay our second $12 million quarterly dividend and repurchase $22 million of common stock in Q2 for a total of $52 million in the first half under our $250 million share repurchase program.

It’s important to note that since Q1 of 2023, we have reduced total outstanding shares by 39% through our share repurchase programs, demonstrating our commitment to return capital to shareholders in line with our capital allocation policy. We continue to target a distribution of at least 75% of our adjusted free cash flow to shareholders over time through dividends and share repurchases. As Olivier mentioned earlier today, our Board of Directors has also declared a third quarter cash dividend payable in September 2025. I will now transition to Slide 10 to discuss our 2025 outlook. We are raising our 2025 outlook to reflect the impact of a stronger euro U.S. dollar exchange rate, reaffirming our commitment to deliver operating performance consistent with our prior outlook. This outlook maintains our prior industry view and reflects the impact of newly implemented tariffs on sales and adjusted EBIT margin net of recovery.

This implies the following: net sales of $3.5 billion, net sales growth at constant currency of -1%, net income of $256 million, adjusted EBIT of $500 million, net cash provided by operating activities of $410 million, and finally, adjusted free cash flow of $370 million. Turning now to Slide 11. This bridge illustrates our updated midpoint outlook of adjusted EBIT compared to the prior outlook. We anticipate continued gasoline strength and incremental operating performance will offset unfavorable product mix, slightly improving our margin rate before foreign exchange and tariffs. Foreign exchange is expected to drive 70 basis points of rate improvement, and the impact of full tariff recovery is expected to drive 20 basis points of margin dilution for the year. I will now turn the call back to Olivier for his closing remarks.

Olivier Rabiller, President and Chief Executive Officer, Garrett Motion: Thanks, Sean. Turning now to Slide 12, our strategic priorities remain clear and consistent. We aim to identify and deliver on customer needs by leveraging our capabilities to develop differentiated, high speed and highly efficient technologies. In doing so, we generate robust returns for our shareholders. Let me wrap this up on our final slide, which is next slide. First, we deliver very solid results with an adjusted EBIT of $124 million and adjusted free cash flow of $121 million, with gasoline sales outperforming the industry due to shell demand gains and new product launches. Second, we continue to return capital to our shareholders. This quarter we paid our second quarterly dividend and completed $52 million in share repurchases in the first half. Overall, we have reduced our share count by 39% in Q1 2023.

Through our repurchase programs this quarter, we also secured significant business wins including awards for over $1 billion in light vehicle turbo program extensions. These wins reinforce our position and provide strong revenue visibility moving forward. In terms of innovation, we are making steady progress on zero-emission technologies. This includes a new proof-of-concept partnership on an e-powertrain, strong test results for our oil-free cooling solutions and a significant fuel cell program award. Finally, we increased our 2025 outlook to reflect a stronger Eurodollar exchange rate. I am proud to highlight these achievements and the promising start we’ve had this year with these strong first half results. It’s positioning us very well for the rest of 2025 and beyond. Thank you for your time and operator. We are now ready for Q&A.

Megan, Conference Call Operator: We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Hamed Khorsand with BWS Financial, please go ahead.

Olivier Rabiller, President and Chief Executive Officer, Garrett Motion: Hi. My first question was, could you.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: Just talk a little bit about this unfavorable sales mix and how you’re adjusting the business for such an environment?

Olivier Rabiller, President and Chief Executive Officer, Garrett Motion: That’s a very good question. What we call unfavorable sales mix is basically driven by two things. On the one hand, there is a very positive thing that’s happening to us, which is we are growing very fast.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: On the gasoline side, we are.

Olivier Rabiller, President and Chief Executive Officer, Garrett Motion: Going very fast on the gasoline side all over the world, whether it’s in Asia, Europe, and to a certain extent in North America. We are very pleased with that. As you know, the margin rate on gasoline turbochargers is a bit lower than what we have on the rest of the business. This unfavorable mix is a good thing to us, where we are seeing on the other end a little bit of softness that is impacting us. The second aspect of that mix is more on aftermarket, off-highway, and that’s basically more in North America, where we have not seen the traction yet on the aftermarket. That would reflect demand recovering, because usually the demand is recovering first on aftermarket before it gets into OEM.

I think our customers are probably still suffering from the fact that their sales channels have been having a lot of inventory or built up a lot of inventory for the past few years. These are the things adjusting the business for us. Do we adjust the business with the same recipe as we usually have? We have a high variable cost structure, and therefore for us, it’s working on the fixed cost like we do every year. More than that, it’s adjusting on the variable cost side. This is something we know how to do very well in the company.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: Okay. My other question was, you ended the quarter with significantly more cash. Any reason why you didn’t buy back more stock? Hi, Hamed, this is Sean. Our buyback is not linear, but as I mentioned in my prepared remarks, we’re committed to returning 75% or more of cash over time to shareholders. We believe the buyback is a very important tool to return value to our shareholder base, and we’ll continue to do so, but it’s not linear. Okay, thank you.

Megan, Conference Call Operator: Our next question comes from Jake Scholl with BNP Paribas. Please go ahead.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: Hey, guys. Congrats on a great quarter. I just want to ask if you could help us understand some of the drivers of your stronger operating performance in the second half, especially with volume assumptions roughly unchanged. Sure. We will continue to benefit from cost control. I would say the other point I wanted to make is that right now we’ve maintained our view, our prior view. I think the latest S&P estimate might be showing a bit more favorability. Depending upon how the second half works out, more importantly, that could give us an opportunity to trend toward the upper end of our range if we start to see volume stabilize. At the moment, we felt it prudent to be a bit more conservative in our guide from a volume and revenue standpoint, as the impact of tariffs starts to work its way through the system. Got it.

Cyril Grandjean, Vice President, Investor Relations and Treasurer, Garrett Motion: Thank you.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: Could you provide an update on the tariff recovery situation? Do you guys still expect to be able to fully recover your tariff costs this year?

Olivier Rabiller, President and Chief Executive Officer, Garrett Motion: Absolutely. Absolutely, we expect that. Not only do we expect this is what we’ve achieved, and obviously, if the situation is changing, we’ll adapt to the changing tariff. We have the tools in place, and since we’ve been recovering everything since the beginning, there should not be a change moving forward.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: Thanks, Gezo.

Megan, Conference Call Operator: Our last question comes from Eric Gregg with Four Tree Island Advisory. Please go ahead.

Cyril Grandjean, Vice President, Investor Relations and Treasurer, Garrett Motion: Thank you.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: To the Garrett team, just excellent results. Great to see all this communication on multiple levels. Two questions in terms of these large turbos for backup, data center, AI and whatnot. Can you give us a sense of when you think that business or if you think that business will ever get to as much as 10% of revenues, or I don’t want to, you know, limit you there, but how big do you think that business can grow and how substantial do you think it can be for Garrett?

Olivier Rabiller, President and Chief Executive Officer, Garrett Motion: A very substantial business. It’s a big business for us because it’s coming when you get into very large turbo. I’m not talking only about the genset one, but more widely, all the applications. There are a lot of genset, and there are some marine. A significant part of the revenue, once you establish your position, is coming from aftermarket. We love that. We love aftermarket. We have a really strong brand in aftermarket. We have a very strong network of distributors on aftermarket. That’s an additional activity that we would develop with them. Before we get there, obviously, we need to establish our install base. I’m not saying that it should reach 10% of the activity just on the genset backup power, because today that would be a big number. We would talk about $400 million a year.

I’m not sure that there is any player out there that’s doing $400 million a year on the turbo business. I don’t even think that the industry is that big to allow that, but it will be in the hundreds of millions of dollars anyway, and that should come within the next three to five years.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: Great. The second question is really digging a little bit further on the linearity comments on stock repurchase. You know, you probably did almost twice as much free cash flow this quarter. You had some of your sponsors who were more active on the sales front. Your valuation is incredibly low. Just, you know, and you did almost 30% less stock repurchase this quarter. Can you give us a better kind of just sense of how, you know, it’s nonlinear, but you know, why you didn’t, why you didn’t dig in further this quarter? Do you think you’ll be more aggressive throughout the rest of the year? Like I said, it’s not linear. We had a very busy quarter. What I would say is we also recognize that we have some dry powder for block trades as well if they happen to come up.

I would just reiterate the company’s commitment and the board’s commitment to deliver to our capital allocation framework, which is 75% or more of free cash flow to our shareholder base. Great quarter.

Olivier Rabiller, President and Chief Executive Officer, Garrett Motion: Thanks, everyone. Thank you.

Sean Deason, Senior Vice President and Chief Financial Officer, Garrett Motion: You.

Megan, Conference Call Operator: This concludes our question and answer session.

Cyril Grandjean, Vice President, Investor Relations and Treasurer, Garrett Motion: This concludes our call.

Megan, Conference Call Operator: Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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