Garrett Motion Inc. (GTX, Financial), a leading automotive technology company, is experiencing growing demand for its differentiated electric technology. This technology may help companies like Ford (F, Financial), General Motors (GM, Financial) and Honda (HMC, Financial) close the drivetrain technology gap with Tesla (TSLA, Financial).
The company's president and CEO, Olivier Rabiller, highlighted this during the second-quarter earnings conference call.
E-Powertrain and E-Cooling contracts
Rabiller mentioned that Garrett has secured its second pre-development contract for its high-speed, high-power density E-Powertrain, which demonstrates the increasing interest from customers in the electric technology solutions. This success in the electric vehicle market is a result of Garrett's expertise in air compression and high-speed electric motors.
In addition to the E-Powertrain, Garrett has also won a pre-development contract for its high-performance E-Cooling compressor. This innovative product leverages its industry-leading air compression capabilities and high-speed electric motors to deliver a smaller, lighter and more powerful cooling solution for electric vehicles. This technology is crucial for fast-charging and high continuous power use in EVs.
These pre-development wins are proof that Garrett's EV technologies are differentiated and in demand from its customers. The company remains committed to its target of achieving $1 billion in annual sales of zero-emission vehicle products by 2030, with a margin profile equal to or better than its existing business.
Financial performance
Garrett's success in the EV market is reflected in its strong financial performance. In the second quarter, the company delivered net sales of over $1 billion, representing an 18% increase on a reported basis and a 19% increase on a constant currency basis compared to the same period last year. This revenue growth was driven by the ramp-up of new products and restocking by original equipment manufacturers in Europe and North America, as well as the easing of Covid restrictions in China.
The company's adjusted Ebitda for the quarter was $170 million, up from $138 million in the same period last year. This increase in earnings was attributed to higher volumes and continued operational performance. Garrett's strong financial performance also enabled it to finish the quarter with an adjusted free cash flow of $140 million, a significant improvement from $23 million in the same quarter of the previous year.
Capital structure transformation
Garrett has recently undergone a significant capital structure transformation, as discussed in the earnings call. Chief Financial Officer Sean Deason provided insights into the changes and their impact on the company's financial outlook.
During the call, Deason highlighted the conversion of Series A shares into common shares, which led to a substantial increase in Garrett's market capitalization. The company's market capitalization grew from almost $500 million in the first quarter to $2 billion at the end of the second quarter. Additionally, Garrett repurchased $570 million worth of Series A shares and increased its share repurchase program.
The capital structure transformation resulted in Garrett ending the quarter with only one class of equity outstanding, totaling $264 million in common shares. This consolidation of equity is expected to streamline the company's financial operations and improve its overall financial position.
Furthermore, Garrett's liquidity position strengthened significantly, with over $1 billion in liquidity at the end of the quarter. This includes $570 million of undrawn revolving credit facility capacity and $478 million of unrestricted cash. The increase in liquidity was driven by strong cash flow generation and net inflows from the Term Loan B after the conversion of Series A shares.
The improved liquidity and capital structure transformation have allowed Garrett to enhance its financial flexibility and pursue its strategic objectives. The company plans to pay down $200 million of outstanding debt, taking a step toward achieving its target net leverage ratio of 2 times by the end of 2024.
Future outlook
Garrett Motion recently announced it raised its outlook for full-year 2023. The company reported strong financial results for the second quarter, with the highest quarterly revenue in the past two years. This positive performance has led to an increase in its projected net sales, adjusted Ebitda and adjusted free cash flow for the full year.
According to Rabiller, the company has delivered on all key financial metrics and achieved strong earnings and cash performance. As a result, it has completed the transformation of its capital structure, increasing the market capitalization to approximately $2 billion and improving the liquidity by 5 times.
Garrett Motion also announced significant wins in three areas of differentiated technology, positioning it to achieve its target of $1 billion in revenue from zero-emission vehicle technology by 2030. These wins are expected to contribute to higher average selling prices and the same or better margins compared to the current business.
The company's success in the first half of the year has prompted it to raise its outlook for full-year 2023. The updated midpoints of its projections include net sales of $3.93 billion, adjusted Ebitda of $645 million and adjusted free cash flow of $390 million.
Garrett Motion's positive outlook for the rest of 2023 is based on its strong operational execution, growth from share of demand gains and the conversion of revenue into earnings and cash flow. The company remains vigilant in monitoring the global situation and potential challenges that may arise in the second half of the year.
Conclusion
Overall, Garrett Motion's raised outlook for full-year 2023 reflects its confidence in its business performance and its ability to capitalize on the growing demand for ZEV technology. With strong financial results and strategic wins, the company is well-positioned for continued success in the automotive industry.
The capital structure transformation undertaken by Garrett has positioned it for future growth and financial stability. The consolidation of equity, increased liquidity and debt reduction efforts demonstrate its commitment to optimizing its financial structure and creating long-term value for its shareholders.
