GTX Garrett Motion

Paul Blalock Vice President-Investor Relations
Olivier Rabiller President and Chief Executive Officer
Alessandro Gili Senior Vice President and Chief Financial Officer
David Kelley Jefferies
Joseph Spak RBC Capital Markets
Aileen Smith Bank of America Merrill Lynch
Colin Langan UBS
Call transcript

Hello, my name is Nichole and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion's Earnings 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 over the call to Paul Blalock, Vice President of Investor Relations. Please go ahead.

Paul Blalock

Thank you, Nichole. Good day everyone and thanks for listening to Garrett Motion's second quarter 2019 financial results conference call.

Before we begin, I’d like to mention that today's presentation and press release are available on the Garrett Motion website where you'll also find links to our SEC filings along with other important information about Garrett.

Turning to Slide 2, we encourage you to read and understand the risk factors contained in our financial filings, become aware of the risks and uncertainties in this business, and understand that forward-looking statements are only estimates of future performance and should be taken as such. Today's presentation also uses numerous non-GAAP terms to describe the way in which we manage and operate our business. We reconcile each of those terms to the closest GAAP term and you're encouraged to examine those reconciliations which are found in the appendix to this presentation both in the press release and in the slide presentation. Also in today's presentation and comments, we will be referring to light vehicle diesel and light vehicle gasoline products by using the terms diesel and gasoline only. On slide 3 please notice the additional disclaimers related to the basis of our financial presentation. The nature of our historical carve-out financial information and our standalone post-spin financial results reported today. In accordance with the terms of our Indemnification and Reimbursement Agreement with Honeywell, our consolidated and combined balance sheet reflects a liability of $1,188 million in obligations payable to Honeywell as of June 30, 2019 in Indemnification Liability. The amount of the Indemnification Liability is based on information provided to us by Honeywell with respect to Honeywell's assessment of its own asbestos-related liability payments and accounts payable as of such date and is calculated in accordance with the terms of the Indemnification and Reimbursement Agreement. Honeywell estimates its future liability for asbestos-related claims based on a number of factors.

As previously disclosed in our Form 10 and our consolidated and combined financial statements for December 31, 2018, our management has determined that there was a material weakness in our internal control over financial reporting related to the supporting evidence for our liability to Honeywell under the Indemnification and Reimbursement Agreement.

Specifically, we were unable to independently verify the accuracy of certain information Honeywell provided to us that we used to calculate the amount of our Indemnification Liability including information provided in Honeywell's actuary reported and the amounts of settlement values and insurance receivables.

For example, Honeywell did not provide us with sufficient information to make an independent assessment of the probable outcome of the underlying asbestos proceedings and whether certain insurance receivables are recoverable. This material weakness has not yet been remediated. In consultation with our outside advisors, we are working to obtain additional information about the Indemnification Liability through a dialogue and iterative process with Honeywell. That process continues, and we and our advisors remain in communication with Honeywell on these issues.

Following those comments it's now time to turn to the main purpose of today's call. With us today is Olivier Rabiller, our President and CEO; and Alessandro Gili, our Senior Vice President and CFO. I’ll now hand it over to Olivier.

Olivier Rabiller

Thanks, Paul, and welcome everyone to Garrett's second quarter 2019 earnings conference call. Beginning on Slide 4, Garrett's results for the second quarter were overall in-line with our expectations and they reflect our success in maintaining a solid margin profile in a challenging market environment. Net sales of $802 million declined, 9% on reported basis and 4% organically as compared with second quarter of 2018 due to the slow down in the global automotive industry and the continued acceleration of our shift from diesel to gasoline products. This obviously has to be put in perspective of the global auto production decline off about 7% in Q2. Net income was $66 million and earnings per basic and diluted share were $0.88 and $0.86 respectively.

We also saw an acceleration of our portfolio rebalancing as gasoline products reached 31% of net sales, up from 25% in Q2 last year and 29% in Q1. And as anticipated and communicated earlier, we are approaching parity in revenue between gasoline and diesel products, which now stands at 31% versus 35%. I would share more detail about this on the next slide.

During the second quarter, we also achieved $154 million in adjusted EBITDA and we maintain an attractive margin profile with an adjusted EBITDA margin of 19.2%, up 20 basis points from the 19% margin we achieved in both Q1 2019 and Q2 2018. This point highlights again our ability to weather negative short-term macros and the rebalancing of our portfolio towards more gasoline products by driving high-level of productivity and flexibility both internally and with our suppliers. We discussed in more depth shortly but our total debt remain unchanged from Q1 2019 and we have revised our 2019 outlook to reflect lower light vehicle production in China and more recently in Europe. The slower ramp-up in light vehicle getting launched in China and the impact of foreign exchange on our reported results.

Although, in the second quarter, Garrett maintained a solid margin profile despite more challenging market environments.

Turning to Slide 5, we illustrate the ongoing progress in rebalancing our product portfolio.

On the left hand side of the slide you see that compared with last year, the geographic makeup of our net sales declined two percentage points in Asia due to the slowdown the industry is experiencing in China.

On the product side, as I mentioned a moment ago, we grew our percentage of sales from gasoline products to 31% up six percentage points from the second quarter of 2018 as we continue to accelerate new light vehicle gasoline product launches. Based on our successful progress to-date, we remain on track to our diesel and gasoline revenue to be at parity as a percentage of our revenue by the end of 2019.

We continue to expect strong share of demand gains in light-vehicle gasoline programs going forward and the ongoing launches and ramp-ups are expected to more than compensate for the decline in diesel volume on a full-year basis.

Lastly, the combination of after market and commercial, products accounts for 32% of net sales. These impotent vertical continue to generate positive returns and generally are not correlated with short-term quarter sales.

Turning to Slide 6. Garrett is a leading technology company operating in the automotive industry and our technology led growth strategy depicted here remains a key priority for the long-term success of our company. These discipline multi-stage approach to our technology growth strategy is to pursue only those opportunities where we believe we can offer unique, high-level solutions for our customers and sustain our margin profiles through cutting edge technology and a relentless pursuit of the lowest-cost production and supply chain sourcing. On our core turbo solution business we are driving key air-loop innovations applicable for electrified platforms, which enable the advanced combustion systems the engine makers use to meet increasingly stringent emission standards.

New product launches slated for H2 are largely as plan with a slower ramp-up due to expected production volumes mainly in China. Globally, we see CO2 reduction milestones pushing the OEs to increase the technology content of their engines, whether they are directly being used as part of a pure internal combustion engine platform or the result of electrified/hybrid powertrains. We see also the strengthening of the trend we have shelved already in the past. The increased adoption of variable geometry technology on gasoline engines without our directly the pure internal combustion engine platform again [indiscernible] plug-in hybrids. Indeed the electrified platforms or hybrids are expected to have a significantly higher turbo penetration model-based controls and advanced software, which our solutions provide.

As communicated earlier, we will be launching the first E-Turbo application in 2021, which for us is just around the corner. And we are currently building customer interest and engagement for pushing E-Turbos into larger vehicle platforms.

In addition, we saw strong activity in the second quarter for Fuel Cell applications, particularly in China as commented and increasing from what we commented on Q1.

Lastly, during the quarter we began a new pilot program with a major OEM in China for Integrated Vehicle Health Management application that will help them drastically improve the quality of the diagnosis done in any service when an issue occurs on the vehicle. These add great value for car makers to reduce warranty cost and customers that have to return for service because the diagnosis was not done right in the first place.

As vehicles get more and more complex, this is really perceived as a key point of differentiation for the OEMs. I will now turn the call over to Alessandro to discuss our financial in more detail.

Alessandro Gili

Thank you, Olivier and welcome everyone. I will start my review of the financials on Slide 7.

As Olivier mentioned before, net sales were $802 million in the [second] quarter of 2019 down 9% on a reported basis and 4% organically as compared with the second quarter of 2018, primarily due to the slowdown in global auto production and the accelerated shift from diesel to gasoline products. Net income was $66 million in the quarter and was down from Q2 last year when we had a one-time tax benefit of $55 million, attributable to currency impacts for withholding taxes on undistributed foreign earnings.

In addition, Q2 of 2018 had no interest expenses on long-term debt due to the different capital structure, whereas Q2 2019 had $18 million interest expenses on long-term debt.

As we mentioned in our Q1 call, our effective tax rate might vary from quarter-to-quarter due to the discrete items and in Q2, it was 24%.

Going forward, we continue to expect potential fluctuations in DTR. Adjusted EBITDA totaled $154 million in the second quarter of 2019 which is a decline of 8% or $13 million versus second quarter last year and a sequential decline of $5 million versus Q1.

As Olivier mentioned, the adjusted EBITDA margin was 19.2% of net sales, up 20 basis points from both Q1 2019 and Q2 2018. Adjusted EBIT in the second quarter of 2019 was $138 million, down 7% from last year and represented 17.2% of net sales. Capital expenditures were $30 million in the quarter, up from last year but still tracking similar to H1 2018 and in line with our full year expectations. Adjusted levered free cash flow was $27 million in the second quarter and was impacted by the timing of tax and interest payments as well as CapEx. Q2 2018 was impacted by transactions with related party and carve-out adjustments and is therefore not comparable. Overall, Garrett had a solid quarter in light of the global auto slowdown with a strong adjusted EBITDA margin consistent with our expectations.

Turning to Slide 8, our net sales bridge is showing a decline of $75 million versus last year or 4% at constant currency. And this is primarily due to lower shipments. In breaking down this performance, gasoline products grew $31 million, representing 21% organic growth.

While diesel products on the other side declined by $84 million, representing a 19% organic decline. This was driven by the overall market decline and the runoff of certain applications. Commercial Vehicles declined by $13 million or 4% and was a result of softer business in Asia and off-highway in North America.

Lastly, the organic decline in aftermarket was driven by Europe and partially offset by North America.

Turning now to Slide 9, you see our adjusted EBIT and our adjusted EBITDA walk for Q2 2019, as compared to Q2 2018.

For the quarter, adjusted EBIT was $138 million, down $11 million from last year. This performance was driven by $50 million from lower volumes, $8 million in price, productivity and mix which was partially offset by $5 million improvement in SG&A, primarily related to lower professional service fees. The R&D favorability of $8 million was driven by higher customer and government funding during the second quarter of 2019.

Lastly, the negative constant currency impact in Q2 2019 was driven by weaker euro dollar exchange rate versus last year and was mostly offset by FX hedging impacts year-over-year. Overall, our highly variable cost structure, coupled with our continuous focus on cost control and ongoing productivity initiatives contributed to our ability to mitigate the impact of lower volumes and maintain an attractive margin profile. On Slide 10, we are providing a more detailed depiction related to our income before taxes.

As you can see, the year-over-year comparison reflects $17 million in interest which are higher due to the different capital structure pre and post-spin compared to last year. It is also important to note that asbestos expenses to Honeywell were $38 million in Q2 2018, prior to the spin, versus the lower indemnification expense of $17 million on a post-spin basis in Q2 2019. On a net basis, income before taxes declined to $87 million in Q2 2019, which is largely due to the higher interest expense.

Turning to Slide 11, we are providing a graphical depiction of our net debt walk since March 31, 2019.

As mentioned earlier by Olivier, gross debt was unchanged for the quarter at $1.598 billion.

However, net debt rose by $24 million due to the various items depicted here and including the non-linear nature of cash tax payments $45 million in Q2 versus $12 million in Q1, as we anticipated on our Q1 conference call. Seasonally higher CapEx in Q2 of $30 million, similar to H1 last year, which was $51 million versus $47 million in H1 2018 and within our full year expectations; Other of $31 million, which includes $5 million from spin-off cost, $12 million from accrued liabilities and the remainder is a combination of other assets and other liabilities variances. Semi-annual cash interest payments on our bonds of $11 million in Q2 and is included in the $20 million of Q2 interest expense. The annual mandatory transition tax payment to Honeywell of $18 million, which we mentioned on our last conference call, was paid in April. And when coupled this with the quarterly indemnity payment obligation to Honeywell of $38 million accounts for a total of $56 million of cash in the second quarter.

Just as a reminder, the MTT is due annually once a year, obviously.

So this payment was the one that was required for 2019. Total debt repayment of $15 million in the second quarter, includes the mandatory payment of $6 million and an anticipatory repayment of $9 million.

For the quarter, we generated positive adjusted levered free cash flow of $27 million and adjusted unlevered free cash flow of $47 million. The fully levered free cash flow as a result was $29 million negative after the payments to Honeywell.

Lastly, foreign exchange was positive by $4 million in the quarter, as a result of $19 million positive impact from the re-couponing of our cross currency debt swap, offset by $15 million in debt revaluation due to euro weakening versus the U.S. dollar. And just to close the loop on our gross debt, the gross debt remain unchanged as of June 30, compared to March, as a combination of mandatory repayments of debt for $15 million, which includes the prepaid components which were offset by FX translation of $15 million due to the euro weakening versus the U.S. dollar. And just as a reminder, our gross debt is primarily euro denominated.

Moving to the next slide. On Slide 12, we are showing available liquidity of $669 million which is including $182 million in cash and cash equivalents and the $15 million debt repayment in the quarter just discussed. Overall, cash decreased by $25 million and net debt increased by $24 million.

Our net debt-to-consolidated EBITDA ratio was 3.2 times as of June 30. And we continue to have no near-term debt maturities. We remain focused on utilizing our cash generation to deleverage our balance sheet. On Slide 13, we note that the June 30, 2019 balance sheet items that are related to Honeywell.

Our liabilities were reduced by $94 million in H1 2019 to $1.453 billion, as a result of our indemnity obligation payments in Q1 and Q2 2019, as well as the impact of FX being the indemnity obligation euro denominated.

As a reminder, the indemnification obligation, which now stands at $1.19 billion and is capped at $175 million cash payment with respect to any given year.

As we mentioned earlier, there was no mandatory transition tax payment in Q1 but however, we did make the annual payment in April to Honeywell and our eight-year mandatory transition tax payment schedule remains unchanged. It is 8% of the total in each of the first five years and then it's 15%, 20% and 25% respectively in the last three years. Overall, the mandatory transition tax balance now stands at $196 million.

Turning to Slide 14, we are providing color to our revised outlook for 2019, where you can see the organic growth in net sales moved from positive 2% to 4%, which was initial guidance down to minus 1% to positive 1%. And we have lowered at the same time, our original target of adjusted EBITDA from $630 million to $650 million, down now to $600 million to $620 million.

As a result of the following key assumptions, key assumption for global automotive production which we have now lowered from the initial 2% to a range of minus 3% to minus 5%; a persistent softer level of macros in China; a slower ramp-up in H2 China light vehicle gasoline launches and some regulatory driven demand adjustments for light commercial vehicles product primarily in China. Adjusted levered free cash flow conversion has been as well revised with a new range of 50% to 55% due to lower sales in H1 impacting collections in H2, primarily in China. And slightly higher inventory levels given the higher demand volatility impacting our supply chain.

Our original outlook was also based upon a euro dollar assumption of 1.15, in line with the performance at that time when we released guidance February, 2019 this year, which is now been lowered as a result of the most recent performance at 1.12. And with that, I will hand back the call to Olivier for final comments.

Olivier Rabiller

Thanks Alessandro. In summary, on Slide 15, our key takeaway for the quarter is that we had successful financial results in a challenging market environment.

While volumes were lower due to short-term macro conditions we maintain and slightly increase our margin profile even as we accelerated the shift towards gasoline products. The positive long-term fundamentals of our business remain intact. And as Alessandro just discussed, our outlook for 2019 has been adjusted as we now anticipate full year growth in organic sales of minus 1% to plus 1% and from $600 million to $620 million in adjusted EBITDA.

We continue to target significant free cash flow generation with an adjusted conversion rate between 50% and 55% for 2019, which includes interest but exclude the indemnity and tax payment to Honeywell. I am encouraged by our strong ongoing win rates in our core turbo charger business and the continued acceleration in our electrification and connected vehicle growth vectors we discussed earlier. And we remain excited by our future prospects. This concludes our formal remarks today, I will now hand it over back to Paul.

Paul Blalock

Thanks Olivier.

Before we open the line, I need to mention that we will not be taking questions today on our future course of actions related to the material weakness in our financial reporting under our Indemnification Obligation Agreement. Operator, we're now ready for questions.


Thank you.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from David Kelley of Jefferies. Please go ahead.

David Kelley

Good morning guys. Thanks for taking my questions. I thought the margin held up pretty well on the tough macro. Can you just talk about A, the cost levers you were able to pull in the quarter? I'd love some more details there. And then also how we think about the go-forward cost opportunities, if we continue to see some lower industry volumes and if there are some inventory work down period at your customer level on the horizon here?

Olivier Rabiller

Well, I'll start – David, I’ll start answering the question. I'm sure Alessandro will provide a little bit more granularity.

We are in an industry where you cannot invent the cost reduction on the go – into the quarter.

So you need to plan for them long in advance.

You need to work with your supply base.

You need to work the margin of your product before they get into production. And as those multiyear contracts with the supplier that provided certainty into achieving the cost targets.

So I would say within the quarter, when you look at all the valuable piece of what we are, there is obviously a lot that we are programming long before and executing long before the quarter actually starts. That's the point about sustaining those margins. I mean, we work on this program for a very, very long time. And then obviously, within the quarter, there is all the discipline you have at managing your cost. And I would say when you're managing a company that is having higher valuable costs, it's obviously easier.

Although, we see the negative effect of it, but its obviously easier to adjust to the shutdown volume variation.

I think some of our peers are reported that the valuations of volumes were quite important, during the quarter a lot of volatility.

If you have a supply chain that is very reactive, you can adjust better. We know that we had a little bit of an impact on inventory, but overall we did quite a good job to adjust to that both from a working capital and from a cost standpoint.

David Kelley

Okay. Great – go ahead.

Alessandro Gili

It’s okay. David, go ahead.

David Kelley

I was just going to ask, can I – as a quick follow-up, you mentioned the supply chain. I guess, are you seeing any change in the pricing environment either more aggressive price downs from your customers and also at any change in your ability to pass on incremental cost to your suppliers at the Tier 2, Tier 3 level?

Alessandro Gili

No, we don't see – we don't see any significant change in that respect. I mean, once again those are the pricing you have for the contracts you have ongoing with your customers or even with your suppliers is the result of multiyear negotiations.

So and then on the supplier side is the result of all the supplier developments you do in order to keep supply base that is into the lowest cost country and lowest cost environment possible, the lowest cost processes.

As we mentioned before, we have about 70 people that are just working on developing suppliers and therefore, the result of that work pays off at some point. But I would say on the customer side, we are seeing the same trend as what we've seen for years.

David Kelley

Okay, great. Thank you. I'll pass it along.


Our next question comes from Joseph Spak of RBC Capital Markets. Please go ahead.

Joseph Spak

Thanks. Good morning or good afternoon there. I guess, I wanted to maybe follow-up on the previous line of questioning. Alessandro, I think you mentioned some higher volatility impacting the supply chain. I'm not sure if you're talking to upstream or downstream there, but one of your major competitors has talked about increased supplier bankruptcies in Europe and that's weighed on cost reduction efforts. And I was wondering what you are seeing on that front because you've clearly touted the variable nature of your cost structure, right.

I think like 80% of your costs are from external suppliers. And you've been able to get great productivity from them. But if the volume stays low, if diesel sort of continues to come down, is that going to be incrementally harder like, do you see risk there that you need to maybe take your foot off the gas a little bit to make sure that your supplier stay healthy?

Olivier Rabiller

Joseph, this is Olivier. I will start the answer and maybe Alessandro will complete that. There are two things to keep in mind, in my view at first, the supply base that we are using for gasoline versus diesel is not that much different at the end of the day.

So the shift is not that relevance in that respect.

The second point is that we've been doing for years a big push to source our products from what we are recording internally so far high growth regions so thinking about China, thinking about India, Eastern Europe. It is true that if we had stayed in being significantly exposed to Western Europe supplier, we would suffer much more. But the point is that we've been moving away already for a long time and the farther result of that, we don't see any significant impact from those bankruptcies. And we are obviously monitoring very, very closely the financial health of our supplier base.

Joseph Spak

Okay. Thank you.

Alessandro Gili

And maybe just to add the comment, the comment on volatility was focusing on that cash generation. And the reason why we revised guidance by 5% compared to the previous one.

So certainly short-term demand volatility is creating some additional tension in the supply chain and our ability to manage inventory level at the best it could be.

So that is translating some higher inventory levels, which then translates into potentially lower cash flow.

Olivier Rabiller

And just to add on that, it's true that when you operate at such a high level as where we are operating in term of rotation of the working capital and it's more biased and obviously its visible.

Joseph Spak

Thank you for that.

The second question I have is really sort of just more on the regulatory front as we come up here with RDE in the back half, if you have any sort of color about how your customers are thinking about it. And then I guess more importantly, as we think about CO2 compliance in Europe next year, how you see that playing across your portfolio. And again, I think there's a thought out there that this could be pretty disastrous from a cost perspective for the OE.

So just broadly, how do you think about potentially supporting your customers to make sure they can navigate through the transition?

Olivier Rabiller

So to your first point about RDE, I know we had the same discussion in Q1, quite frankly, I'd like to be much more smart in Q2 about it. But unfortunately, the element of answers are the same, we did not get any negative feedback so far from the customers.

We are all expecting that, they've learned their lessons from the difficult situation of last year. And we know that the ones that are having the most complex portfolio of in/vehicle platform, obviously the ones that are susceptible to potentially safety issues, but at the end of the day, quite frankly, we don't have any news on that front so far.

So I think the industry is usually quite good to adapt to these challenging conditions.

So we’ll see how far it has been adapted to the rate each this year.

So that’s the first point.

So for the CO2 points you have, there is just so much you can do within the timeframe of a year or so.

Let's step back a bit. I mean, when we bring new technology to the marketplace, you are usually working two years in pre-development and then you're developing the engine platform for three years before it reaches production.

So, about one year before the start of anything there is just not that much you can do by providing a new technology to the customers. The only thing you can do is make sure that you're flexible enough with your cost and your supply chain, so that you can adapt to some product portfolio movements that they would have as a consequence of the market movements. And this has always been our focus.

Joseph Spak

I'll pass on. Thank you.


Our next question comes from Aileen Smith of Bank of America Merrill Lynch. Please go ahead.

Aileen Smith

Good morning everyone.

First question, can you provide a little bit of color around the slower ramp-up of light vehicle gas launches in China? Was this a function of the pull forward of China 6 emissions standards? I would've thought that China 6 might have driven more OEM customers to use some fuel efficient products like Turbos and therefore maybe drive a faster ramp-up of launches.

So are you seeing customers opt for different technologies or is this just more a function of the macro-environment deteriorating in the quarter?

Olivier Rabiller

No. It's obviously creating a little bit of air into the forecast to use some of your words.

So, true, when you look at H2 the question is more how much the car makers have in inventory and how much more cautious, they are planning their ramp-up. And the China 6, quite frankly, doesn't change that much with that, into the way they are forecasting the second half to the first half.

So they're forecasting a second half that is lower. This is right in the middle of the ramp-ups and therefore the ramp ups is a consequence of that (0:35:15) as well.

Aileen Smith

Okay. And as a fob to the question, and apologies if I missed this in your prepared remarks, does this slower ramp-up of gas launches in China change in any way, your outlook to reach revenue parity between diesel and gas by year-end? Or is it more of a 2020 story at this point?

Alessandro Gili

Not really because when you look at it, we are the, when you at the geographic exposure we had in fact a decrease in Asia by 2%, compared to the previous point of comparison. And obviously we know that the gasoline penetration is higher in China.

For example what it is in North America.

So, in all things being equal, you would have expected that the slowdown in China would have impacted, the speed at which we are ramping-up on the gasoline. But as we said before, we are in fact accelerating faster on the gasoline inside.

So, that doesn't change the point of parity that we're expecting by the end of the year.

Aileen Smith

Okay. Great. And then last question as a follow-up to Joe's line of questioning earlier, I think it's pretty well understood that you have a sophisticated management of your supply base and you've already worked pretty diligently to make sure you are partnered with the right suppliers to mitigate some of the industry pressure. But as we think about the global macro environment remaining tough in the future, is there substantial more opportunity for you to shift around suppliers that you see right now is maybe not being fit for the future? And kind of asked another way, how sticky is your supply base and how quickly can you shift suppliers in the event that things change?

Olivier Rabiller

Well, it's, now I will need to be a little bit more technical into dovetailing them and supply based management. Supply based management is just to shift from one supplier to another supplier at some point. It's not the most efficient way to get to the lowest cost with your vendors because if you've seen as a partner that is shifting all the time, then, they will never give you the best because they would always keep some level of margin for themselves and they will give the best performance to someone that sticks with them.

So our sourcing strategies are obviously more complex and just shifting from one supplier to another there is an element of preserving some level of what we call healthiness meaning competitiveness into the commodities, so that we have enough suppliers, into a, given commodity because there is an element of competition, but it's more than that. It is getting into understanding their cost, optimizing their cost, optimizing their supply chain, optimizing the design to cost and giving them some visibility on the forecast.

So that then they can engage in some productivity actions, that are medium-to-long term ones.

So, I would say to a certain extent, we are not just betting on shifting from supplier A to supplier B, because it's true that if we are only doing that, we would run off ammunition very quick. But on the other end, there are still a number of suppliers that are interested with – to do investment into an industry that's presenting extremely survivable macros compared to the rest of your industry.

Aileen Smith

Great. I appreciate the detail. Thanks for the questions.


[Operator Instructions] Our next question comes from Colin Langan of UBS. Please go ahead.

Colin Langan

Oh, great. Thanks for taking my question.

Just kind of follow-up on the competitor comments. Competitors have been talking about on new business, that there is a very challenging pricing environment, Turbos. I mean, are you saying that, should we expect margins on new business to come down or is that the dynamic of the product being more established and there's low R&D involved, how should we think about that?

Olivier Rabiller

Well, quite frankly, the Turbo has always been, if not the most expensive, one of the top two most expensive function that you have on an engine.

So, it has always attracted a lot of attention from the customers in order to make sure that the level of price would be optimized so that that doesn't change. They have many that have risen in the past pushing some new competitors on everything that they've been using.

So, quite frankly, I don't see that, environment, changing that much. And by the way, we just, completed our, we are reviewing every year program by program.

Our recruit not obviously not on a one-year horizon basis, but what's important for us is a five horizon basis and today, we’re pretty much in-line with the view we had at the same time last year, both, really in term of [indiscernible].

And so that we had the competitive pressure on to the industry in that respect is about stable. And by the way, when you look into new technologies and that's something we've shared with you in the past, you’ve probably seen that for some of the technologies, you have less suppliers today than you were having three to five years ago. I mean you came to valuable geometry gasoline, two stage in diesel, there is only a very small number of suppliers that can deliver that. I’m not even talking about electrification and electric boosting and everything else. And to your question, I'm not sure I would see a significant change.

Colin Langan

Okay. What is your current full-year outlook for China? I thought your prior guidance already reflected sort of low-double digit decline in the region. Is it now much worse than that or?

Olivier Rabiller

Well, probably our forecast was around minus 8% for the full-year and our new forecast is around minus 10%. But we have adjusted our forecast down and with minus 10%, I think we are little bit more pessimistic than, the consensus of the industry. But we are just reflecting on Q2 that was mature. And here we see sustainable change into the demand coming from the customers.

I think the minus 10% is a cautious one.

Colin Langan

And when I look at the full-year sales guidance, is at the midpoint is about flat, you're down organically around 4% year-to-date or 3.5%. I mean, what is driving the improved, growth in the second half organically.

Olivier Rabiller

It's mostly launches, as we said before, mostly launches of new products.

So those launches are coming lower, as we were expecting, and that's one of the reason of the guidance as being reviewed into an all macro environment that is lower. But it's primarily launches, that are running that. And these launches when we are in July, we start to have a good idea of the fact that they are happening on time. The only uncertainty that we're having so far with the mainly [indiscernible].

Colin Langan

Got it. All right. Thanks for taking the question.


This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation.

You may now disconnect.