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Garrett Motion Inc. (NYSE:GTX)
Q2 2019 Earnings Call
Jul 30, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, my name is Nicole, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion earnings 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, VP of investor relations.

Please go ahead.

Paul Blalock -- Vice President of Investor Relations

Thank you, Nicole. 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 will 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 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. 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 note the additional disclaimers related to the basis of financial presentation, the nature of our historical carve out financial information and our stand-alone, 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, the 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 of our financial reporting related to the supporting evidence of 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 report 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 such 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. The 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 -- President and Chief Executive Officer

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 a reported basis and 4% organically as compared with second quarter of 2018 due to the slowdown 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 of 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 toward more gasoline products by driving high level of productivity and flexibility, both internally and with our suppliers. Alessandro will discuss in more depth shortly, but our total debt remained unchanged from Q1 2019, and we have revised our 2019 outlook to reflect lower light-vehicle production in China and more recently in Europe, a slower ramp-up in light-vehicle gasoline launches in China and the impact of foreign exchange on our reported results. Overall, in the second quarter, Garrett maintained a solid margin profile despite more challenging market environment.

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 2 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 6 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 demand gains in light-vehicle gathering 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 our aftermarket and commercial vehicle products accounts for 32% of net sales.

This important verticals continue to generate positive returns, and generally, are not correlated with short-term auto 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. This disciplined, multistage approach to our technology growth strategy is to pursue only those opportunities where we believe we can offer a unique, high-value solutions for customers and sustain our margin profile for cutting-edge technology and a relentless pursuit of the low-cost production and supply chain sourcing.

 On our core turbo business, we are driving key air-loop innovations applicable for electrified platforms, which enable the advanced combustion systems the engine makers is used to meet increasingly stringent emission standards. New product launches slated for H2 are largely as planned, with a slower ramp-up due to expected production volumes, mainly in China. Globally, we see CO2 reduction milestone 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 a trend we have shared already in the past, the increased adoption of variable geometry technology on gasoline engines, whether they are directly that pure internal combustion engine platform again or mild hybrid or plug-in hybrid.

Indeed, the electrified platforms of 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-turbo 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.

This has great value for carmakers 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 -- Senior Vice President and Chief Financial Officer

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 first 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 onetime tax benefit of $55 million, attributable to currency impacts from withholding taxes on undistributed foreign earnings.

 In addition, Q2 of 2018 had no non-interest expenses on long-term debt due to the different capital structure, whereas 2Q 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 DTA. 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, both from 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 late 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 of 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 services. 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 a 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 a $17 million in interest, which are higher due to the different capital structure pre and post being 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 $70 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 nonlinear 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 this 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 entity 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 a mandatory payment of 6 million and an anticipatory repayment of $9 million. For the quarter, we generated positive adjusted lever of free cash flow of $27 million and adjusted un-levered 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 recouponing of our cross-currency debt swap, offset by $15 million in debt revaluation due to a euro weakening versus the U.S. dollar.  And just to close the loop on our gross debt, the gross debt remained unchanged as of June 30 compared to March, as a combination of mandatory repayments of debt for $15 million, which includes the prepaid component, 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 ATR 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 that our 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 to 620 million as a result of the following key assumptions: Key assumption on the -- 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 gathering launches. And some regulatory-driven demand adjustments for light commercial vehicles products, 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 being 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 -- President and Chief Executive Officer

Thanks, Alessandro. In summary, on Slide 15, our key takeaway for the quarter is that we had a 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 toward 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 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 excluding the indemnity and tax payment to Honeywell.  I am encouraged by our strong ongoing win rates in our core turbocharger business, and we -- 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 -- Vice President of Investor Relations

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 are now ready for questions.

Questions & Answers:


Operator

[Operator instructions]. Our first question comes from David Kelley of Jefferies. Please go ahead.

David Kelley -- Jefferies -- Analyst

Good morning guys. Thanks for taking my questions. I thought the margin held up pretty well in a tough macro. Can you just talk about, a, the cost levers you were able to pull in the quarter? 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's some inventory work down period at your customer level on the horizon here?

Olivier Rabiller -- President and Chief Executive Officer

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 far before they get into production. And as those multiyear contracts with the suppliers that are providing certainty into achieving the cost targets.  So I would say, within the quarter, when you look at all the variable piece of what we have, there is obviously a lot that we are programming a long before and executing long before the quarter actually starts. That's the point about sustaining those margins.

I mean we work on these programs 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 earning higher variable cost, it's obviously easier, although we see the negative effect of it. But it's obviously easier to adjust to the short-term volume variation.

I think some of our peers have reported that the valuation, the 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 -- Jefferies -- Analyst

OK, great.  

Alessandro Gili -- Senior Vice President and Chief Financial Officer

And maybe --

David Kelley -- Jefferies -- Analyst

Go ahead.

Alessandro Gili -- Senior Vice President and Chief Financial Officer

No, it's OK, David. Go ahead.

David Kelley -- Jefferies -- Analyst

I was just going to ask kind of 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, any change in your ability to pass on incremental cost to your suppliers at the Tier 2, Tier 3 level?

Olivier Rabiller -- President and Chief Executive Officer

No, we don't see any significant change in that respect. I mean once again, those are -- the pricing you are for the contracts you have ongoing with our 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 development you do in order to keep a 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, there is a -- that we're paid 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 -- Jefferies -- Analyst

OK great. Thank you. I'll pass it along.

Operator

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

Joseph Spak -- RBC Capital Markets -- Analyst

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 sort of 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're seeing on that front because you've clearly touted the variable nature of your cost structure, right? I think like 80% of your cost 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 -- President and Chief Executive Officer

Jeff, this is Olivier, I will start the answer and maybe Alessandro will complete that. But two things to keep in my view that, 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 relevant in that respect. The second point is that we've been doing, for years, a big push to source our product from what we were calling, internally so far, high-growth regions.

So think about China, think 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 therefore, as a 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 -- RBC Capital Markets -- Analyst

OK. Thank you.

Alessandro Gili -- Senior Vice President and Chief Financial Officer

And maybe just to add the comment, the comment on volatility was focusing on the cash generation. And the reason why we've 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 they could be, so that it is translating some higher inventory level to which then translate into potentially lower cash flow.

Olivier Rabiller -- President and Chief Executive Officer

And just to add on that, it's true that when you operate at such a high level as where we are operating in terms of rotation of the working capital, in any small value, soon obviously, is very low.

Joseph Spak -- RBC Capital Markets -- Analyst

Second question I have is really was sort of just more on the regulatory front as we come up here with RD&E 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 OEs. So just broadly, how do you think about potentially supporting your customers to make sure they can navigate through the transition?

Olivier Rabiller -- President and Chief Executive Officer

So to your first point about RD, 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 have learned their lessons from the difficult situation of last year, and we know that the ones that are in the most complex portfolio of engine vehicles platform, obviously, the ones that are susceptible to potentially face issues.  But at the end of the day, quite frankly, we don't have any news on that front so far. So we -- I think the industry is really quite good to adapt to this challenging conditions, so we'll see how far it has been adapted to the reality of this year. So that's the first point.

For the CO2, the CO2 points you have. There is just so much you can do within the time frame of a year. So let's step back a bit. I mean when we bring new technology to the marketplace, you are usually working two years in predevelopment 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 -- RBC Capital Markets -- Analyst

I'll pass it on, thank you.

Operator

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

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

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 six emission standards? I would have thought that China six 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 -- President and Chief Executive Officer

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 carmakers are in the inventory, and how much more cautious they are planning their ramp-up. And the China six, quite frankly, doesn't change that much to that into the way they are forecasting the second half versus the first half.

 So they are forecasting the second half that is lower. This is right in the middle of the ramp-up and therefore, the ramp-up is the consequence of that lower as well.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

OK. And as a follow-up to the question, and apologies if I missed this in your prepared remarks, does the 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 -- Senior Vice President and Chief Financial Officer

Not really, because when you look at it, we had -- when you look at the geographic exposure that we had, 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. That's why it's for what it is in North America.  So in all things being equal, all 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 side. So that doesn't change the point of parity that we're expecting by the end of the year.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

OK, great. And then last question is a follow-up to Joe's line 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're 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 a substantial more opportunity for you to shift around suppliers that you see right now is maybe not being fit for --

Olivier Rabiller -- President and Chief Executive Officer

Now we need to be a little bit more technical into purchasing them and supply base management. Supply base 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 will always keep some level of margin for themselves, and they will give the best performance to someone that sticks with them.  So our sourcing strategy is obviously more complex than 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, obviously. But it's more than that. It's getting into understanding their cost, optimizing their cost, optimizing the 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, who would run off ammunition very quick.

But on the other hand, there are still a number of suppliers that are interested with -- to do investment into an industry that's presenting extremely favorable macros compared to the rest of the auto industry.

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

Great. Appreciate the detail.

Operator

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

Colin Langan -- UBS -- Analyst

Great. Thanks for taking my question. Just kind of follow-up on the competitor comments. So competitors have been talking about on new business, that there's a very challenging pricing environment at turbos.

I mean are you seeing that? Should we expect margins on new business to come down, such as the dynamic of the products being more established that there's lower R&D involved? So how should we think about that?

Olivier Rabiller -- President and Chief Executive Officer

Well, quite frankly, the job has always been -- it's 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 doesn't change.

They have had many levers in the past, pushing some new competitors and they are seeing that they've been using. So quite frankly, I don't see that environment changing that much. And by the way, we just -- we just completed our, as you know, we are reviewing every year, program by program, our outlook, not obviously, not on a one-year horizon basis, but to what's important for us, a five-year horizon basis. And today, we are pretty much aligned with the view we had at the same time last year, both -- really in term of share demands.

So that means that the competitive pressure into 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 variable geometry gasoline two-stage in diesel, there is only a very small number of suppliers that can deliver that, not even talking about electrification and e-boosting and everything else. So to your question, I'm not sure I would see a significant change.

Colin Langan -- UBS -- Analyst

OK. 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 the amount much worse than that, or?

Olivier Rabiller -- President and Chief Executive Officer

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

Colin Langan -- UBS -- Analyst

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

Olivier Rabiller -- President and Chief Executive Officer

It's mostly launches, as we said before, mostly launches of new products. So those launches are coming lower as we are expecting, and that's one of the reason of the guidance as being reviewed into an overall macro environment that is lower. But it's primarily launches that are running that.  And we are launching when we are in July, we start to have a good idea of the fact that they are opening on time.

The only uncertainty that we're having so far with the magnitude of consumption.

Colin Langan -- UBS -- Analyst

Got it. Thanks for the question.

Operator

[Operator signoff]

Duration: 46 minutes

Call participants:

Paul Blalock -- Vice President of Investor Relations

Olivier Rabiller -- President and Chief Executive Officer

Alessandro Gili -- Senior Vice President and Chief Financial Officer

David Kelley -- Jefferies -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Aileen Smith -- Bank of America Merrill Lynch -- Analyst

Colin Langan -- UBS -- Analyst

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