Garrett Motion Inc (GTX) 2018 Q3 法說會逐字稿

Hello, my name is Andrew, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion third-quarter 2018 financial results conference call. This call is being recorded, and a replay will be available later today. (Operator Instructions).

I would now like to hand over the call to Paul Blalock, Vice President, Investor Relations.

Thank you, Andrew. Good day, everyone, and thanks for tuning into Garrett's first financial results conference call. I'm Paul Blalock, and I'm truly excited to be here at Garrett. Exactly 2 months ago today, we held our first Investor Day in New York City, where we had the pleasure of meeting with many of you. Over the following weeks, we also met with many of you in your offices and in group meetings. And I can honestly say we look forward to continuing to work with you and expanding the dialogue about our technology, growth prospects, and new growth vectors.

Before we begin, I'd like to mention that today's presentation is available on the Garrett Motion website, where you will also find links to our SEC filings as well as our Investor Day presentation and webcast, along with other important information about Garrett.

Turning now to slide 2, we encourage you to read and understand our risk factors contained in our financial filings; become aware of the risks and uncertainties in this business, and to understand that forward-looking statements are only estimates of future performance, and should be taken as such.

We'd also like to mention that today's presentation uses numerous non-GAAP terms to describe the way in which we manage and operate our business. We reconcile these terms to the closest GAAP term, and you are encouraged to examine those reconciliations, which are found in the appendix to this presentation, both in the press release and in the slide presentation.

Turning to slide 3, please refer to additional disclaimers related to the presentation of our financial information and our previously filed Form 8-K on October 22, 2018. On the call today is Olivier Rabiller, our President and CEO; and Alessandro Gili, our CFO.

I'll now hand it over to Olivier.

Thanks, Paul, and welcome, everyone. It is great to welcome you for this first earnings release of Garrett as an independent company. After an intensive quarter that led to the spinoff from Honeywell on October 1, I'm proud to share with you some solid results, very much aligned with the long-term forecast we shared with you during our first investor conference in September. So, let's get started.

Garrett's third quarter, as presented on slide number 4, highlights include strong organic growth, driven by new product launches. Net sales were $784 million, representing growth of $39 million and an increase of 5% on a reported basis and 7% organically. As we discussed in September at our Investor Day, Garrett is now rebalancing its product portfolio as we shift further towards gasoline products.

For the first nine months, gasoline is now 27% of our sales, up 500 basis points from last year. All of this is based on wins we caught over the last three years, and this is pretty well on track with our forecast to have gasoline turbocharging bigger than diesel in our portfolio by the end of 2019.

As Alessandro will share with you later on in this presentation, this rebalancing is not the result of a decrease of our diesel business. In fact, in an industry globally decreasing in the first nine months of 2018 by about 7%, our diesel business grew 3% in the quarter, confirming our position on the right platforms and the affect on our net sales of our very strong win rate.

With that, we continue to maintain industry-leading financial results through robust cost control, achieving $143 million in adjusted EBITDA and 18.2% margin, excluding hedging impacts. And this despite the negative mix effect of gasoline turbo growth that we presented in September, highlighting the strong contribution of our productivity initiatives overall.

To be [comfortable], we also raised $1.6 billion in new debt in September with an average cost of 3.2%, well below our estimated cost of issuance. Once that was completed, Garrett was kicked off as a public company, and listed on the New York Stock Exchange on October 1 under the ticker GTX.

We now see our full-year 2018 outlook as follows: net sales organic growth between 5% and 6%; and adjusted EBITDA, excluding hedging impacts, between $640 million and $655 million.

Turning now to slide 5, you will see our progress in rebalancing our portfolio as we decreased our European exposure by 2% and grew our Asian exposure by the same amount. In our product mix, our weight in diesel is down 3% versus 2017 on a nine-month basis while our weight in gasoline grew by 5% versus 2017. As we said in September, we continue to expect that our net sales from diesel and gasoline will be equivalent by the end of 2019. This portfolio rebalancing, with greater global geographic and product diversity, is in line with our five-year strategy plan.

Turning now to slide 6. Again, I wanted to take the opportunity to come back on a few points about our three-stage technology growth strategy. First, on our core business, most technology is needed by carmakers to improve fuel economy and reduce emissions while preserving drivability. And we are seeing a lot of traction on the [plane] variable geometry turbos to gasoline engines. In fact, while one of the largest European OEMs was pioneered that launched a first high-volume application in 2016, we are seeing more and more carmakers adopting it, whether it is for pure internal combustion engine, powertrain, or for hybrids. And I'm pleased to report that we have just won a large global engine platform from a global OEM that will also be a cornerstone of their hybrid strategy.

It is important to remember that industry projections show that by 2025, hybrids will account for about 30% of car production, and be 5 to 6 times larger than battery electric vehicle production, and there will also be a turbo penetration on these hybrid powertrains.

At the same time, we are making great progress with our electrification strategy, whether it is for E-Turbo, for which we expect to be the first to launch in 2021, or for e-compressors for hybrids or fuel-cell vehicles. We have also secured additional pilot projects with OEMs this quarter for our software and connected vehicle business.

I will now hand it over to Alessandro, who will cover the financials.

Thanks, Olivier, and welcome, everyone. Turning now to slide 7, we are showing our key financial metrics. Our net sales grew 7% organically, both quarter-over-quarter as well as year-over-year. Adjusted EBITDA, excluding the impact of foreign currency hedging, was flat quarter-over-quarter and $143 million, but increased 16% on a 9-months basis in 2018 versus 2017 at $514 million. Adjusted EBIT, at $126 million for the quarter, excluding the impacts of foreign currency hedging, was substantially in line with our prior-year performance; while, for the nine months, grew by 16% at $460 million versus the same period last year.

Our CapEx was $19 million in the third quarter 2018, down from $22 million a year ago. And on a nine-month basis, our CapEx was 2.6% of net sales, in line with our historical performance and our long-term targets. CapEx was mostly related to our growth and productivity initiatives.

Income before taxes was $73 million for the quarter, down 1% versus Q3 2017, and $293 million on a nine-month basis, which is 12% ahead of the same period in 2017. Finally, adjusted EBITDA, minus CapEx, was $118 million in the third quarter, down $1 million from last year; on a nine-month basis, was up 3% to $415 million, representing an 86% conversion rate.

Turning to slide 8, our net sales bridge shows $39 million growth in Q3 net sales from $745 million to $784 million, comprised of: $38 million growth in net sales from gasoline products, or 25% organic growth, in line with our continuous focus on rebalancing gasoline products versus diesel; $5 million growth from diesel products, or 3% organic growth, notwithstanding global industry diesel decline of approximately 11% in the quarter; and $2 million growth in commercial vehicles, slightly lower than prior quarters in 2018, or 3% organic growth; offset by 2% organic decline or $6 million lower in aftermarket and other net sales.

Slide 9 shows the adjusted EBIT walk for the quarter, with and without the impacts of foreign currency hedging. Adjusted EBITDA for the quarter was 18.2% of net sales, excluding the impacts of foreign currency hedging, 100 basis points lower than prior year, mostly driven by the acceleration in net sales from gasoline as previously communicated during the Investor Day. Margins are within the long-term range guidance, and above the industry average. Volume growth in the third quarter was $13 million, mostly driven by gasoline net sales growth.

Price, productivity, and mix in the quarter was negative $14 million, driven by strong growth in gasoline products and lower growth in commercial vehicles and aftermarket and other; with mix partially offset by the net effect of pricing and continued strong manufacturing and materials productivity.

SG&A and R&D for the quarter were in line with the same period in the prior year.

Negative impact of foreign currency for the period of minus $2 million was driven primarily by the euro weakening versus the US dollar compared to the same period last year; and further by the impacts of minus $4 million from the hedging policy in place for the quarter and the nine-month period. In September 2018, previous hedging, defined by Honeywell, was discontinued. And Garrett will set up its own hedging strategy, considering euro FX primary transaction currency.

Slide 10 shows the net sales bridge for the nine months of 2018 versus the same period last year. Net sales grew by $284 million on a nine-month basis to $2.576 billion. Growth in net sales was comprised of $162 million from light vehicle gasoline products, or 27% organically, in-line with our continuous focus in rebalancing gasoline product versus diesel; $63 million growth in light vehicle diesel products, or flat organic growth, notwithstanding global industry negative performance of approximately 7% in the same period; and $60 million of net sales growth from commercial vehicles, or 10% on an organic growth.

On slide 11 we show the nine-month 2018 versus 2017 adjusted EBIT and adjusted EBITDA bridge, with and without the impacts of foreign currency hedging. Adjusted EBITDA of $514 million for the nine months in 2018, excluding foreign currency hedging, was $71 million higher than same period last year, or 70 basis points; with margins reaching 20%, one of the highest in the industry for this type of business.

Volume impact of $68 million was mostly related to net sales growth, driven by strong focus on rebalancing gasoline products versus diesel. Negative mix was driven mostly by strong gasoline products, partially offset by productivity improvements, for a combined total effect of minus $30 million in the 9 months.

Positive foreign currency impact of $39 million for the period was primarily driven by the euro strengthening versus the US dollar during the nine months versus the same period last year. In addition to that, foreign currency hedging impacts as a result of the hedging policy in place partially reduced the positive performance of the euro during the nine-month period.

On slide 12 we show our profit before tax walks for the quarter and for the nine-month period. In the third quarter 2018, pre-tax profit was $73 million or $1 million lower than last year's third quarter. For the nine months in 2018, pre-tax profit was $293 million and grew $31 million versus the same period of 2017, or 12%, and was largely driven by the growth in adjusted EBIT.

Profit before tax includes the impacts of asbestos and environmental related charges of $51 million in Q3 2018 versus $43 million in Q3 2017, and $132 million for the nine months 2018 versus $129 million in the same period last year; as well as other charges related to nonoperating expenses, repositioning charges, stock compensation expenses, and FX gains and losses on our financial debt.

On a net income basis, both the quarter and the nine months ended September 2018 are still reflecting the impacts of the restructuring of Garrett's business in advance of the spinoff; and, therefore, are not indicative of Garrett's future performance on a standalone basis. For the same reason, we are not providing, at this stage, an EPS metric.

Net income, as presented on slide 19 in the appendix, was $929 million for the third-quarter 2018, an increase of $872 million from the $57 million of net income in the third-quarter 2017, and includes an $856 million tax benefit. The third-quarter 2018 tax benefit was primarily from an internal restructuring of Garrett's business in advance of the spinoff attributable to currency impacts for withholding taxes on undistributed foreign earnings, partially offset by adjustments to the provisional tax amounts related to the US tax reform.

For the first nine months of 2018, net income was $1.137 billion, an increase from $237 million in the nine months in 2017, and was driven by the one-time tax benefit attributable to undistributed foreign subsidiaries' earnings.

Turning to slide 13, we show our debt and liquidity position and its maturity profile. On September 27, 2018, we entered into a credit agreement for senior secured financing of approximately the euro equivalent of $1.254 million (sic - see press release, "$1,254 million"), consisting of a seven-year senior secured first lien term loan B facility, which consists of a tranche denominated in euro of EUR375 million, and a tranche denominated in US dollars of $425 million; a five-year senior secured first lien term loan A in aggregate principal amount of EUR330 million; and a five-year senior secured first lien revolving credit facility in an aggregate principal amount of EUR430 million.

On September 27, 2018, we also completed the offering of EUR350 million -- approximately $400 million -- in aggregate principal amount of 5.125% senior notes due 2026.

The amounts outstanding on September 30, 2018, were $382 million for the term loan A, $859 million in the term loan B, and $406 million in senior notes, for a total of $1.647 million (sic - see slide 13, "$1,647 million").

We achieved our funded targets at an average cost of 3.2%. And total interest is now estimated to be around $52 million per year, down $12 million or 19% lower from the Form 10 previously this estimated interest of $64 million annually. The senior notes were placed at par, and we accommodated stronger European demand at lower cost.

Total cash at the end of the period was $197 million or $99 million, net of $98 million related party note in place with Honeywell, which was fully repaid during the month of October. As a reminder, targeted cash after the spin will remain at $90 million as a result of $9 million cash distribution post-spin to Honeywell, as presented in our pro forma financial information in the following page.

On slide 14, we show certain elements of our pro forma balance sheet, with specific focus on our targeted cash, post-spin, as well as the obligations to Honeywell, post-spinoff. The asbestos-related reimbursement obligation is $1.353 million (sic - see slide 14, "$1,353 million") and substantially virtually unchanged from the Form 10.

The MTT tax obligation was reduced to -- from $350 million, shown in the pro forma balance sheet in our Form 10 filed with the SEC in September, to $240 million as a result of the revised allocation provided by Honeywell following the filing of its 2017 tax return. As a result, the revised cash payments to Honeywell for the MTT tax related obligation will be $8 million annually lower for the first five years, and $110 million lower in total for -- over the eight-year period. The contingent tax liabilities have been slightly updated to $71 million based on uncertain additional tax costs of $4 million paid by Honeywell in anticipation of the spin.

Turning to slide 15, we are providing a summary of Garrett's Q3 and first nine-month performance. These results confirm the fundamentals of our business model. We provided strong net sales growth driven by new product launches, and focused on gasoline rebalancing versus diesel products. Our strong margin profile continues to be driven by our strong technological position and our focus on productivity and flexibility of our cost structure. Our product portfolio rebalancing is accelerating.

Our cash flow from operations, which is including $130 million of asbestos and environmental-related payments, minus capital expenditures, was $174 million for the first nine months of 2018.

And based on this, we are providing for the first time our full-year 2018 outlook as follows: net sales organic growth between 5% and 6%; and adjusted EBITDA, excluding hedging impacts, between $640 million and $655 million for the year.

With that, I will hand over to Olivier for his final strategic remarks, as presented on slide 16.

Thank you, Alessandro. So, all in all, a pretty good quarter with significant organic growth, driven primarily by gasoline launches and the rebalancing of our sales, as expected; but not at the expense of a decrease of our diesel business, that kept growing in a very much -- of a declining industry. All this concerns our strong win rate and positioning on the right powertrain platforms. I am also very encouraged by the continued progress we make in both electrification and connected vehicles as we move toward securing more pilots and preparing for mass production launches.

And that concludes our formal remarks today, and I will hand it back to Paul.

Thanks, Olivier. Before we began the Q&A session, I'd like to remind everyone that Garrett filed an 8-K regarding Honeywell's disclosure of their own SEC enforcement action. Garrett was unaware of that action prior to Honeywell's disclosure in its 10-Q. The Company's indemnification and reimbursement agreement with Honeywell, filed with the SEC on September 14, 2018, has not been amended, and otherwise remains unchanged.

As such, we would ask you to refrain from asking questions regarding these issues or regarding the Company's restated carve-out financials in the Form 10, which already contemplated those revisions and are consistent with Honeywell's previous disclosure in its Form 8-K filed with the SEC on August 23, 2018.

Operator, we're now ready for questions.

(Operator Instructions). Aileen Smith, Bank of America.

If I look at your regional mix, and specifically exposure to Europe and Asia, and broader production trends in the quarter, I get to industry volume growth weighted by your market mix of down roughly 3% to 4%. And, yet, you were able to drive organic revenue growth of 7%, which was impressive, and implies potentially double-digit growth above market.

Is this above-market growth something that we should expect to persist going forward? Or where there particular product launches and other factors in the third quarter that would equate to outsized growth that you would expect would moderate over the next few years to get to your 4% to 6% revenue CAGR?

To answer that question, I will get back to what we've disclosed so far. And I think we laid it out quite well in our Investor Day back in September, highlighting that our win rates and the launches that are coming up are driving most of the revenue growth that we see. We have never said that we are immune to the macroeconomics. But as you can see, those launches are enabling us to -- as you've highlighted yourself -- quite outperform the macros.

Okay, that's helpful. And a housekeeping item: the 17.5% adjusted EBITDA margin that you reported in the quarter, should we think about that as relative to the 18% to 20% adjusted EBIT margin target you outlined in your financial goals through 2022? Or is the 18.2% adjusted EBITDA, excluding hedging losses, the better mechanism?

You should consider the adjusted number with hedging. That is consistent with the way we presented, during the Investor Day, our consolidated EBITDA metric. We are now using adjusted EBITDA just to be consistent with the way we provided information since the beginning in the Form 10 in our selected financial information. Adjusted EBITDA and adjusted EBIT will be the key metrics going forward to be reported. But we are keep on providing the adjusted elements of FX hedging just to clean, to a certain extent, the previous hedging policy that was something that was in place until the end of September. We are detaching from that policy, going forward, and we will have our own policy in place for hedging starting from the beginning of next year.

Okay, great. And last question on the forward outlook. Can you give us any additional color on some of the puts and takes behind your longer-term revenue CAGR of 4% to 6%? What are the underlying volume assumptions we should be thinking about in that outlook? Are they similar to IHS projections? And if it all possible, can you break out your assumptions for growth above market during that time frame?

When you look at what we provided (inaudible) for the year, we obviously very much aligned with what we've disclosed as the long-term targets. When we project our sales out -- and this is back to what we said, again, in our investor deck in September -- we are obviously looking at the industry macros that are provided by companies like IHS, but we tend to base our plan on something that is usually more conservative.

Great. That's very helpful. Thanks (multiple speakers)

Sorry; it is, by the way, for the car production or for the turbo penetration or for the diesel penetration.

So your turbo -- your penetration estimates are also coming from IHS to an extent, with some level of conservatism, and also your own underlying assumptions based on what you're hearing from your customers?

(multiple speakers) Where we go with our forecast. We are big enough in this industry to have a view on pretty much all the engine programs that are done around the world. We have a very comprehensive database with each of the programs, each of the volumes, that we track and maintain -- update key along the year. And then we adjust with the macro, so that gets us a view of the industry that is quite accurate in the long run.

Okay, great. Thanks for questions.

Brian Johnson, Barclays.

This is Steven Hempel on for Brian Johnson. Just wanted to drill down on the implied outlook for 4Q organic growth, the 5% to 6% for full-year 2018 here versus the 7% you've been running 3Q year-to-date. Just wondering what the drivers of that step-down for organic growth in 4Q.

That change that you see in Q4 is primarily driven by a slowdown that we started to notice in China. That's really the primary driver, both on the OEMs side and also including in our commercial vehicle market.

Okay. Do you have a rough estimate of how much exposure you have to China?

I think our exposure to China is visible in the deck. You see the slide that is providing the split on a regional basis for Asia, as well as for the other regions. On the nine-month period, if you go back to the slide, slide 5, there is a 28% in total for Asia. A large part of that is driven by China.

Okay. And then just quick housekeeping on that one, then. I think IHS has China volumes down, like low single digits. Is that what you guys are assuming for 4Q? Or are you guys haircutting that a bit, based on what you're seeing from a production schedule standpoint?

I think we are substantially in-line with the industry [reporting].

Okay. And then looks like you guys did a good job on R&D cost control in the quarter. R&D was actually down year-over-year; ditto for CapEx and SG&A. Just wondering what the driver of that kind of -- R&D expense basically being held flat year-over-year is. Because normally we'd see R&D going up.

Just wondering if there was higher reimbursements in the quarter from engineering recovery standpoint, or if it's just kind of -- especially considering there's generally higher launch activity in 3Q and 4Q. Just wondering how you guys were able to hold in R&D and SG&A in the quarter.

Let me clarify something. This is not us managing our R&D down to make the quarter, so that we are very clear. That would not be something very smart to do. So, we are obviously investing in our RD&E all year long, according to the targets we have for the full year. That can vary a bit, one quarter to the other. And quite frankly, when we look at the RD&E spend, the comparison to the previous year quarter-over-quarter is not exactly the way we look at it.

But think about it as being pretty well on track with what we said we would spend for the year, and the guidance we did give in terms of percentage of RD&E spend for the next five years. RD&E is an extremely important part of our strategy. We are a technology company. We are invested in differentiated technology. We have a number of launches. But more than launches, we are funding very well our growth vectors that will drive the Company, not only for the next five years, but the next 10 to 15 years.

Okay. And then just lastly on -- as you think about the 50% new order intake rate you guys have been able to achieve since 2015, which is obviously pretty strong overall, just wondering just in terms kind of the implied above-market growth here moving forward. Do you guys have a sense of what Garrett's current market share is overall? Just trying to get a sense of how much that 50% new order intake rate would imply for above-market growth here moving forward.

We have a good market share, and growing. You can see, in our numbers that we published today, we are growing faster than the industry. So we can assume that our [shop] demand is growing.

Was there a follow-up, Mr. Johnson?

No, that's it. Thanks.

Colin Langan, UBS.

Just more of a maintenance question. How should we think about adjusting for tax in the quarter? And will you be giving adjusted EPS in the future? Just trying to -- so we could model these things out.

No; I think we said that we are not providing EPS at this stage, for two main reasons. The first one is Q3 in particular is still part of the -- a quarter that was under carve-out financial statement structure. So all the metrics that you see there are coming from our preparation under the structure -- what is required under SEC's US GAAP [for carveout financial statements]. And we say that it's not indicative of our future performance; on the upper part of the income statement obviously there are no relevant changes.

But as we are progressing in our -- in becoming a stand-alone public company, those numbers might slightly change as a result of the overall structure. So, that's the reason why we are filing a pro forma today, just to provide also some visibility of what is changing.

The main changes are going to be driven by the debt that is coming into our books at the end of September, which will provide a different profile from an interest standpoint. So interest expenses, as we said, are going to be better than what we estimated in our Form 10, but are not yet visible in the quarterly information.

Tax is another one key element that is going to be changing substantially going forward. That's the reason why we are not providing EPS at this stage. We will provide EPS the future.

One other element, which is actually the second one, is driven by the debt structure. We've been describing during our Investor Day that we have a target to delever the Company. So until we get to a normalized capital structure that we believe is the optimal one, our EPS might not still be significant and indicative of our ongoing stand-alone pro formas. So that is the primary reason why we're not providing it at this stage.

Okay. I think in your Investor Day you said a 27% tax rate going forward. Is that still the right rate? I know there was some changes in the (multiple speakers)

No; the implied tax rate -- if you were to back out of the elements coming from the tax reform from the restructuring as a result of the spin -- for the quarter itself would be close to 24%, as well as for the full year; 24% to 25%. Clearly, again, we are not providing that element on an adjusted basis because the basis itself is prepared under a different structure for covered financial statements.

But you can consider a [transpoint] a tax rate -- an implied tax rate, including the fact that the indemnity obligation, once that will be on our books as a result of the spin, will be nondeductible for taxes. The implied tax rate will be at around 25% to 26%.

So it's a little bit better than what you said at the Investor Day, at 27%?

It is. Likely better mostly because of the interest itself and the deductibility of the interest expense on our P&L.

And then the margins were down, I think, on adjusted EBIT, 150 basis points. How should we think of the puts and takes in that? Is there -- is that all just the shift from diesel to gas? Are there other issues in there? And is there, in particular, any issues from China tariffs? Is that impacting you at all?

No, nothing on China. For the quarter itself, there is a combination of three elements that we are calling out. One is certainly the acceleration into gasoline. That will be an effect that you will see also going forward. We've been already providing that as a reference element as we progress into our acceleration on a gasoline basis, and rebalancing gasoline versus diesel. So there is a per-unit lower impact amount from a gasoline margin standpoint. So that is included in the quarter.

It was already visible in Q2. And it's going to be visible also going forward, until we are rebalancing completely the portfolio. And then, as the technology will evolve also from the gasoline perspective, then we'll be out of the door in terms of comparative information from a margin standpoint.

The other two effects that are specific for the quarter are driven by commercial vehicle. On one side, there is slightly lower in terms of overall impact compared to how it was in the first six months of the year. So if you look back at the first half, commercial vehicles has been growing at 10% on an organic basis, while they are at 2% in the quarter. So there is slightly slowdown on that side, which means that there is an impact also on the mix perspective.

And then aftermarket in the quarter again is slightly lower compared to the prior periods of the same year. This is a temporary situation. It will be recovered going forward. So nothing -- no particular issue -- I think that is everything we've been already communicating during our Investor Day.

I'm not sure if I got my math right. But it seems like Q4 margins, will those also be down sequentially? Or is that wrong?

No, they should be substantially in line with the low end of the range that we provided.

Okay. All right. Well, thank you for taking my questions.

Joseph Spak, RBC Capital Markets.

I guess the first question will just be on the gross margin, some of the commentary you provided. They were down 110 basis points year-over-year. In the commentary, you said mix was minus 270. And then you had productivity of 250, and then volume of 50. So what are the other factors to help bridge that gap to bring the gross margins back down on a year-over-year basis?

There are no other particular elements. The overall margin is described on a nine-month basis. Volume is driven by -- as I said before, is mostly driven by the acceleration on our top line (technical difficulty). Mix is negative for the nine months for $30 million, and that is driven by a combination of the acceleration in gasoline, as well as additional elements that I just covered for the quarter.

And then the change in SG&A and R&D is visible again on a comparative basis. And there is a particular affect on FX. If you look at the metric on an adjusted basis to consider -- to be considered because of the euro-dollar strengthening in the period.

Okay. And then maybe just in the quarter specifically, I think you said productivity was plus 250 basis points. Can you just give us a little bit of detail about what drove that? How much of that is really sustainable? Whether there's anything unusual, either in this quarter or the comp quarter that drove that (inaudible) productivity? Or is that roughly what we should think about in terms of what you can do, going forward?

The way we look at productivity is that we have a plan obviously for the year. It's quite linear in the way we deploy our productivity efforts; because think about what we've said already, we have a significant portion of our cost of that is coming from the suppliers. So this is the result of the continuous negotiations we do with the suppliers that happened during the year and pretty well on track with the target we have.

And same is to our factories. There is not a big one-off that drove that productivity. It's quite continuous. It's the deployment of formerly what was called a manual braking system; and now [our old system] moving forward.

Yes, and just to clarify, we didn't call out productivity separately. So the comment was on the combined effect of price, productivity, and mix to be negative in the quarter for $14 million. So mix was offset by productivity, partially.

Okay. Maybe just a couple other ones. I know you -- within China, I know you said a good portion of your Asia is China. Can you give us any sort of color as to your mix within China? How much is global OEs versus domestic OEs? And within domestics, maybe how much is with the top 10? Any sort of texture there I think would be helpful.

We are very strong with most of the (inaudible) in China. We are proud, by the way, to be strong with the locals, which is not the case of all the international companies. This is a different set of customers that you need to sell differently. We've been deploying that effort for four to five years in what we are calling [e-forest]. And this is the reason why we are quite strong with locals. Not only in the passenger vehicle side, by the way, but also in the commercial vehicle side. And you probably know that on the commercial vehicle side, the locals represent a very significant share of the market there.

Okay. Maybe to follow up on -- I think it was Colin's question before -- I just want to get -- make sure I have the numbers straight. So the $640 million to $655 million EBITDA you're guiding to, it looks like the year-to-date number you are sort of comparing that to is, I think, the $515 million. So, it does look like there is at least a sequential step down in margins if you look at implied EBITDA. Is that just seasonality and some lower sequential volume, or is there something else?

I don't think it is a sequential slowdown in margins. It's just the acceleration of our gasoline mix that is driving the quarter as well as the full year to the lower part of the range in terms of the margin guidance. As we said, this is temporary, because it's not going to be there forever. It's just the transition to get into a rebalanced structure of the portfolio between where we are today and where we will be at the end of 2019.

And then as we've been mentioning during the Investor Day, also the gasoline technology is, to a certain extent, one step behind the diesel one, which means that we will clearly be providing some better margins and improved margins going forward, just as a result of the evolution of that technology itself.

And just building up on what Alessandro is saying about the next generation of technology: you may have seen in our comments today that we are sharing with our variable geometry at a second major OE, which is a one-off time the [semo] that what we said a few weeks back is really translating into reality for our future.

Okay. One just quick one, on the cash. So the MTT I think previously you were saying was about $35 million payment a year. So you're effectively saying now that's about $27 million. Is that right?

No, actually the MTT has a specific schedule that is in eight years. And it's 8% in the first five years, and then it's 15%, 20%, and 25% in the last three years, under the eight-year schedule. So what changes is that we have $350 million in total before, and now it's $240 million. So over the eight-year period, it's $110 million less. For the first five years, it's just the adjusting element of 8% calculated on $350 million, versus 8% calculated on $240 million.

So it's 8% or $8 million? I thought that (multiple speakers)

$8 million lower, yes, for the first five years.

So that should be about (multiple speakers) high 20s a year?

8% of $350 million versus 8% of $240 million, in the first five years.

Okay, thank you.

(Operator Instructions). Richard Smith, Muzinich.

Just a quick one on cash flow. And I don't know if I'm looking at this the right way, given that we've -- some of the historic data is kind of pro forma. But if I back out the first-half 2018 free cash flow from the nine months year to date, I have you absorbing out reasonable amount of working capital in Q3 (multiple speakers).

Sorry to -- you shouldn't really do that. That's the reason why we didn't provide the quarter number. The first six months of -- that are provided in the Form 10 are actually including a certain number of other transactions coming from the structure that we had in place with the -- within the Honeywell carveout financial structure, including marketable securities as well as cash pooling mechanism, and other elements that are unrelated to the business itself.

So what we have provided is the nine-month cash flow metric, which is a proxy to the free cash flow. As soon as we will get to a steady-state structure, we will be able to provide a free cash flow metric, which means 2019. Free cash flow metric for the quarter for the -- any period in 2019 compared to the starting point of our net debt structure.

Sorry for that; but there was no other way to do it. There is not a mechanism to be able to do a pro forma cash flow structure which is compliant with the SEC requirements. So we ended up with providing what we could provide. at this stage.

Okay, understood. Just a quick follow-up, then. In terms of what you would expect to see for working capital, either absorption or release into Q4, is it likely to be a net contributor to operating cash flow, or (multiple speakers)?

It's normally a positive contribution because we get -- we operate normally with negative working capital, and that is structural for the type of business we are in.

Okay (multiple speakers).

And also [parts].

Prateek Gupta, Goldman Sachs.

Just had one clarification around your adjusted EBITDA guidance. So I'm looking at slide 22, where you provide a detailed bridge around adjusted EBITDA. So, if I'm looking at the LTM 2018 number, that's mentioned as $614 million. And am I right to assume that the full-year guidance you have provided is comparable to this line item? Is that correct?

Not precisely. That guidance is excluding the impact of the hedging, so you should go a few lines below. Back that out, which will drive you to something close to $650 million on an LTM basis.

Okay. Understood. Thank you. That's all I had.

This concludes the question-and-answer session and the Garrett Motion third-quarter 2018 financial results conference call. Thank you for attending today's presentation. You may now disconnect.