Garrett Motion Inc. (GTX) Earnings

Management highlights

Overall Financial Performance - Delivered a strong second quarter with growth across all verticals, year-over-year margin expansion, and record adjusted EBIT - Generated $122 million in adjusted free cash flow, representing an 80% conversion rate from adjusted EBIT, in line with expectations - Ended the quarter with $788 million in total liquidity, completed a voluntary early $50 million term loan repayment, and reduced net leverage to 1.8x - Returned $43 million of capital to shareholders in Q2: $28 million in common stock repurchases and $15 million in dividend payments; year-to-date repurchases reached $115 million under the existing $250 million authorization, targeting ~75% of adjusted free cash flow returned to shareholders over time New Business Awards & Technology Progress - Secured multiple new gasoline turbo awards in the quarter, including a large program in North America - Won several new power generation turbo awards, including the first production award for the Garrett Meg 200 Turbo (one of the company's largest ever turbos) for data center power generation - Advanced zero-emission technology development: kicked off pre-development for a commercial vehicle electric powertrain solution with a Japanese truck manufacturer, and received positive test results and OEM feedback for passenger vehicle high-speed e-powertrain - Growing customer interest in e-cooling and e-compressor technology across multiple HVAC OEMs, with the first centrifugal air compressor production award secured and active development for new applications including data center cooling Long-term Strategy - Reaffirmed the long-term strategy laid out at the May 2026 Technology and Investor Day, focused on leveraging differentiated turbo and zero-emission technologies and the company's proven execution model to drive shareholder value

Guidance

Management raised the full-year 2026 outlook across all key financial metrics, reflecting stronger-than-expected first half performance, continued share gains, and favorable product mix trends that are expected to continue through the second half: - Net sales: Updated midpoint of $3.8 billion, representing 4% constant currency growth for the full year, despite a downward revision to the overall industry light vehicle production outlook - Adjusted EBIT: Updated midpoint of $580 million, representing a 15.3% full-year adjusted EBIT margin. This is a $20 billion increase from the prior midpoint guidance, driven by stronger product mix and better operating performance, partially offset by unfavorable foreign currency impacts from a stronger US dollar relative to the Euro - Adjusted free cash flow: Updated guidance midpoint of $430 million for the full year

Segment performance

Garrett Motion reported total Q2 2026 net sales of $976 million, a 7% increase year-over-year (5% at constant currency), with growth across all product verticals. Light vehicle: Revenue grew on a year-over-year basis, driven by continued share of demand gains for gasoline turbo applications, offsetting overall lower industry light vehicle production in the quarter. Commercial vehicle and industrial: Combined revenue increased 10% year-over-year, with growth driven by on-highway demand in China and rising demand for industrial turbo applications (primarily in power generation). Aftermarket: Revenue saw a recovery and contributed to overall net sales growth alongside diesel and light commercial vehicle diesel applications. For the full year 2026, industrial segment sales are now expected to reach ~$200 million, up from prior lower guidance, with year-to-date sales through Q2 already exceeding $80 million. Adjusted EBIT for the total company was $152 million (15.6% margin), up $28 million year-over-year, with the 200 basis point margin improvement driven by higher volumes across all segments, favorable product mix, and ongoing productivity gains.

Risks & headwinds

• Uncertain macroeconomic and geopolitical conditions have created an unclear demand outlook for the end of 2026, leading management to maintain caution around underlying market fundamentals despite the upward guidance revision • Overall industry light vehicle demand is softer than previously expected, which creates a headwind to overall volume growth, partially offset by Garrett's market share gains • Foreign currency exchange rate volatility (specifically a stronger US dollar relative to the Euro) created an 80 basis point unfavorable year-over-year impact on Q2 adjusted EBIT margin and will continue to pressure full year results relative to prior expectations

Analyst Q&A

• Q: The analyst asked if share gains in light vehicle, which drove overall sales growth despite a weaker industry outlook, are a temporary near-term dynamic or a lasting trend, and how management sees share gains progressing in the second half. /

  A: Management noted that strong first half share gain performance is not expected to reverse in the second half, and the visibility from H1 performance supported the upward full year guidance. Management remains prudent about uncertain macroeconomic and geopolitical conditions, but is confident that demonstrated H1 share gains will carry over to H2 results. This aligns with the historical target of 0.5% to 1% annual share gain, with current performance tracking above that baseline in the near term.

• Q: The analyst asked for clarity on the timeline and progress for HVAC/e-compressor production for data centers, which was originally discussed at Investor Day. /

  A: Management confirmed that the development timeline remains on track from what was shared at Investor Day, with active customer engagement across a broader set of customers and applications than originally announced. First product shipments are expected to start in 2027, with production for data center applications ramping between late 2027 and early 2028. Management noted it will accelerate timelines wherever possible but has not deviated from the original planned schedule.

• Q: The analyst asked about potential downward price pressure on light vehicle turbos amid weak industry demand, and how Garrett competes to maintain volume. /

  A: Management explained that pricing for turbos is tied directly to OEM vehicle production plans: each vehicle built requires one turbo, so discounting to drive extra volume is not standard industry practice. Volume is entirely dependent on OEMs' ability to sell their vehicles, so Garrett does not typically cut prices to gain additional short-term volume.

• Q: The analyst asked what conditions would enable further margin improvement beyond current guidance. /

  A: Management highlighted that the company maintains a relentless focus on cost improvements across internal costs, fixed costs, and material costs, which will continue to drive expansion over time. Garrett's variable cost structure means that higher-than-expected volume growth would flow through quickly to additional margin gains. A stable long-term macroeconomic demand environment, which management noted is currently an uncertain dream for the automotive industry, would allow for faster margin expansion, but the company is already delivering strong performance under current uncertain conditions.