Garrett Motion Inc. (GTX) Earnings Call Transcript & Summary

Good morning, everybody. My name is Eric Birge, I'm Head of Investor Relations here at Garrett Motion. I wanted to welcome everybody to our Tech and Investor Day. We're live here in New York today, but this event will be recorded, webcast that will be available for replay on our website afterwards. And after, I just want to mention also that the presentation we'll be using today is already on the website and accessible for you as well. I do want to give one comment, please, no photos while you're in the booths. Feel free to talk to anybody, ask you questions, but we do ask you not to take photographs. Before I begin, I want to mention that today's presentation is on the website. Also there, you will find the SEC filings and other important information about our company. And then, we do note that this presentation contains forward-looking statements within the meanings of the Securities and Exchange Act. We encourage you to read these risk factors that are contained within the filings under the SEC, become aware of these risks and uncertainties in our business and understand that looking -- that forward-looking statements and estimates of future performance and should be taken as such. The forward-looking statements represent management's expectations as of today and the company disclaims any obligation to update them beyond that. We've got a very busy agenda for you today. Obviously, you can see that in the presentation. I'd like to introduce our speakers today: Olivier Rabiller, our President and Chief Financial Officer (sic)[ Chief Executive Officer ]; Sean Deason, our Senior Vice President and Chief Financial Officer; Pierre Barthelet, our Senior Vice President of Strategy and Advanced Technology and Craig Balis, our Senior Vice President and Chief Technological Officer. Let's go ahead and get this started. [Presentation]

Good morning, everyone. This is a great pleasure for us, and it's a great day to be able to share with you where we are with the company. The question is always why would we be doing an Investor and a Technology Day? Well, there are 2 reasons for that. The first one is that we have transformed the company a great way for the last 5 years and it's time now to pause and look at the future. When you look at the future and that's the second reason for us being here today with you, it's about sharing what we do, not only with the core turbo business, we'll keep on investing in the turbo business, and we'll share that with you in the coming minutes, but more than that, what's happening on the new technology front. A lot of people may think that our new technology investments are PowerPoint. It's not. And that's the reason for us being today, you will have the pleasure to go visit the booths, see products, see metal, electronics that will power the vehicles of tomorrow. So let's start a little bit with us. Who we are first? We are a technology leader. What ties all these group of people together in the company is technology leadership, bringing differentiated solutions to the marketplace. We are passionate about innovation. The game of the company is not to do what the others are doing, is to bring differentiation that customers need and pay for. So let's step back a little bit, look a little bit at the ID card of the company. Well, you know that card quite well, most of you, but let me insist on a few points. First, transformation. Five years ago, 48% of our revenue was on light vehicle diesel and far more than 50% was European-centric. Today, as you can see, we are 41% in gasoline. This morning, when we announced the result of Q3, we were at 46% in gasoline. So we have been driving that transition moving for a position of 3 on the marketplace to the first position on the gasoline side, pushing for new technology like variable geometry. And at the same time, with our excellence model, maintaining the same level of margins through the transition. The second point is that we are a very different company because today, we are a clean public company, $2 billion kind of market cap, no more obligations, no more complex balance sheet and obligations for us and our shareholders to carry on in the future. We are clean, and we can invest further to support our growth and return to our shareholders. The third point is obviously the point about these machines. This is the electric motor of the future. We have invested. We were alluding to that 5 years ago. Some people were saying, "My God, this is difficult, how these guys can come from turbo business to electrification, what is their right to play, what do they bring that the others are not bringing yet." Well, we decided to invest on 3 differentiated technologies that are fuel cell, electric motors, high-speed, high-power density and E-cooling compressors. This is a fantastic journey, and this company is on the move. Something quite important for us is sustainability. And I wanted to touch on that early on into the presentation. Why? Because 99% of the revenue of the company is to bring solutions that are reducing emissions and addressing the mobility of the future and even beyond mobility, reducing emissions for our customers. For a rather young company, we had very, very early success being gold EcoVadis and CDP B score, which into the automotive industry, when you compare us to our peers, is at the top end. Now these are the products we do. These are the vehicles we support, the engines we support already today. A lot of people know us for the first line on the slide. A lot of people don't know us enough for the bottom part of it. In fact, in excess of 30% of our sales are into commercial vehicle and industrial applications. This is where this company was born. And when I say 30% of our sales, you can imagine that when it comes to profitability, it's even more. There is no way for us to forget where we are coming from. We'll keep on investing there. So let's start with the first leg of the business. The first leg of the business is our core turbo. We are not planning to move away from that. We like that industry, and we have a fantastic leadership position there. The turbo business is having a longer tail than ICE for 2 reasons. The turbo penetration is increasing, as you can see on the slide. When you look at hybrid vehicles, plug-in hybrids, the rate of turbochargers, the penetration of turbochargers is higher than what you have on normal non-hybrid vehicles. The second point, which is addressing the point I was making about commercial vehicle is that the production of turbocharge, commercial vehicle, off-highway equipment, engines is increasing, and that's a very important segment for us. Over the last 5 years, we've been consistently booking 50% of all the businesses that were put on the marketplace, which has enabled us to increase our share of demand. We have the broadest portfolio of the industry. It matters a lot in an industry that is consolidating. Why is it consolidating? In the past, you would have carmakers that to do 1 million vehicle would have like 4 or 5 different engine platforms. Today, they want one. They don't have a 2-liter engine for China, one for Europe, one for the U.S. anymore. They have one. So we are moving from high volume programs that used to be 200,000, 250,000 units a year now to in excess of 1 million a year. When you're awarding a business to a supplier working on a program that's doing 1 million a year, you want to have someone that you know has the portfolio of technology for today and tomorrow, you want to have someone that is financially stable. You want to have someone that will go on with you through the industry transition. Well, we are one of these guys. And that's the reason why this consolidation happening into the industry that we were alluding to 5 years ago, now is reality has been the reality for us and is accelerating. One important point that we've announced today is that we are reinforcing our investment on the big turbos, the industrial and commercial vehicle turbos. This is the baby that we talked about this morning. This is a GT 80. This is the biggest ever turbo that Garrett has done. And you will see versus the size when you visit the booth, the biggest size that we are having before, this is significantly bigger. Here, we are talking about turbos for locomotives, big power gen application, big off-highway vehicle application, marine. It's a new territory for us. It's very relevant because it's not only diesel based. We are talking about natural gas. These machines are getting on to the power gen application for data centers. Facebook and the like want to pay a lot of money to make sure that when there is a power outage, they can spool up their gen sets at the speed of light. They are ready to pay for technology, and this is the technology we bring. So not only are being -- are we playing into an industry that is having a longer tail than ICE, but we have a leadership position that we are reinforcing. And this with the fact that when you built a new program, the first component you choose is usually the turbocharger, gives us a long-term view about the revenue of the company. And that long-term view about the revenue of the company is not enough. Why? Because we are playing into a world that is variable? And how do we address that to have variable cost. We are one of the companies with the highest variable cost, meaning we adapt to the situations we face. And as such, we maintain the top of the range financial performance. As you can see, we delivered on our margin in the good years and in the bad years. We have a resilient operation model. And it's not only about generating margin, but the game at the end of the day is to generate cash. If you do a little bit of a forecast for the next 5 years, and you take conservative hypothesis. Conservative hypothesis means that we are very realistic and even potentially optimistic about the rise of battery electric vehicle. Even with that, we will be generating in the next 5 years, cash that is an equivalent amount to the market cap of today. Okay? That's a lot. This is unknown in our industry. And this, after having invested about $0.5 billion to support our growth in zero electric vehicle technology. So all of that gives us a lot of optionality whether to invest more, do some strategic choices, support some other ideas of growth or return to the shareholders. Now let's talk about the second leg of the company, which is this new leg, which is about exciting zero-emission vehicle technologies. We are not coming to that out of the blue. We've been building up our capabilities in a very thorough way for the past more than 10 years. When I joined that company, we were already working on electric turbochargers. We were already working on high-speed electric motors. And unfortunately, I'm not that young anymore. So turbo machines, that's obviously where we are from. High-speed electric motors, we are not talking about 15,000 RPM kind of electric motor. We are talking about in excess of 200,000 RPM motors. And Craig and Pierre are very excited about that. I'm sure they will excite you even more about it. But when you design the motor, you need power electronics, we have designed our own power electronics because nothing is available in the marketplace. We have to design it. We had to design our own software to drive those power electronics. So when you look at these building blocks, we've -- that's the way we've looked at the opportunities that were offered to us by battery electric vehicles, fuel cell electric vehicles. And these are -- this is the way we define where we wanted to play. First, we started already more than 7 years ago in production with fuel cell compressors, A fuel cell compressor is even more important to a fuel cell system than the turbo for an internal combustion engine. Then we decided to look at the challenge that was offered by electric powertrain, how can we bring something different that's matching the evolving needs of our customers on the electric powertrain side. And last but not least, we already built up on some of these technologies to get into a new challenge that was the cooling challenge for electric vehicles. So at the end of the day, we are moving from a place where we are playing into a $13 billion industry to a place where we keep on playing into that $13 billion industry, and we want to develop that position. But at the same time, we are playing into end markets corresponding to our technology that we estimate to an additional $30 billion. The question you could have in mind is, okay, fine. These guys are coming to electrification. They are coming late to the party. I understand their technology. Is it differentiated? Is it what customer needs? And how easy is it for big guys to replicate that? Well, first, it's answering customer needs, and you will hear that in the rest of the session. But the second point is that it's very difficult to replicate. You're not moving from doing a 15,000 RPM motor to doing a 200,000 RPM motor like that. It's about vibration, it's about controls. It's about cooling. It's about the mechanics of high speed that we have from the beginning, from the turbocharger side, and you need all the building blocks. Let me give you an example. On the fuel cell compressor, you need the compression, high-efficient compression. You need the high-speed electric motor technology. It's in excess of 100,000 RPM. The faster compressing machine is moving, the more efficient it is. So we need 100,000 RPM motors. We need 100,000 RPM power electronics. We need the software and we need the bearings that would work without any lubricant. And we are the only one in the industry to have developed something from taking some technologies from the aerospace, bringing that at scale for the automotive technology. At scale, meaning we are moving from a few hundred a year to 1,000 a year and having experience to the -- in the field that supports that. Okay? You need all the building blocks. Same for the E-Powertrain, Craig and Pierre will come back to that. Same for the oilless compressor. So yes, we are working on things that are difficult to replicate. Now I wanted to step back a little bit because as the leader of the company, I always look at what's available and saying, are we -- is the market seeing the value of what we do. So we decided to compare a little bit ourselves to a few groups of not only peers but other industrials. We are heavier on aftermarket and industrial than our peers into the automotive industry. Usually, people are looking at our adjusted EBITDA to compare us with others. But when you look at adjusted EBITDA, I'm not the CFO, not what we said at the beginning. But into the EBITDA, the bothering piece is that piece because we are light on CapEx. We are a very flexible company, so it's conscious. If you look at the EBIT margin, which reflects better the way we are running the company, we are far ahead of our peers from the auto industry, but we are also far ahead from industrial peers. When you look at adjusted EBITDA minus CapEx of our adjusted EBITDA, which is another way to look at the cash generation of the business, we are far ahead as well. And last but not least, when you look at the cash we generate every year and you compare that to the market cap of the company, my God, we are far ahead too. So there is a lot of value in this company in what we drive today with our core business and what we will bring in the future with our new technologies. So let me wrap up a little bit the introduction before we get into the presentation with the rest of the team. We are the #1 turbo player. We are enjoying a great position in a consolidating industry. And by the way, we want to develop that position. We will keep on investing into areas that are supporting that culture of turbo growth, including developing ourselves into new areas where we are not present so far, hence the investment on the big turbos. We have a resilient model in this company, highly cash generative. We've decided to focus our electrification investment on areas where we see the needs from customers, but also where we know we have differentiation that we want to build up. And then I would say -- that's probably my pride to be leading a team that I estimate to be one of the best of the industry to be able to deliver those fantastic results and those fantastic products. So with that, we'll pass it on to Pierre and Craig that will drive you to the technology piece of the company.

Thank you, Olivier, and good morning, everybody. Electrification is coming, that's -- there is no question about it. And this is really transforming the automotive industry. However, when you think about all the variety of applications that transportation has to support that will still need -- there will be still a need for diversity of powertrains. And you can think about it in 2 buckets that you can see here on this chart. First, on the left-hand side, the ICE and hybrid bucket. And then on the right-hand side, the zero-emission vehicle bucket. We are bringing solutions for both sites with our broad portfolio of turbo solution. And then with the 3, zero-emission vehicle, obviously ZEV in the rest of the presentation that Olivier mentioned in the introduction. So now what we'll do with Craig is really try to bring you through the growth framework that we are using to develop this company. But first, let me start with the key underlying assumption when we planned this business. I'm sure everyone in this room has his own view on battery electric vehicle penetration outlook for the future. We are assuming of about 40% of the vehicles being manufactured by 2030 to be battery electric, which means, by the way, that 60% of them will still need some kind of ICE, be it hybrid or not. When you look at the spread of all the forecasts from banks, from consultants, other Tier 1s, that's a pink area that you can see on the chart. We are on the high side, which means that we are planning conservatively for our turbo business, if BEV comes slower, then it will be an upside for our turbo business. Now let's look at the industry in which -- or I should say, at the industries in which we will play in the coming decades. You can really look at it with 3 different industries, each of them having its own dynamics. At the bottom, in yellow, you can see the trajectory, the size of the industry for commercial vehicle and industrial and aftermarket. This is stable, if not slightly growing for the next decade. Then looking at light vehicle turbo industry, in red, it will go through a peak around '25, '26. And then as Olivier mentioned, will go down, but at the same time, be more resilient than the ICE itself, just because of the increased penetration in all ICE and hybrids that needs more turbo. And then in blue, this is the targeted part of the ZEV industry. We are not going after all the ZEV industry. We are going at very specific segments where the differentiated technology that we are bringing will be really valued by our customers. This is growing fast. And that's what we want to harness to drive the growth of this company with a zero-emission vehicle technology that we are developing. So that's probably one of the most important slides that you've seen this morning. We are building our growth strategy on 2 pillars. Pillar #1, we want to be one of the turbo consolidators -- turbo industry consolidators. And we do that by growing the business through very high win rate. If you think about the past few years, we've been consistently hitting more than 50% win rate year after year for all the bids that were offered in the industry. Another, as already mentioned, we are also growing. We want to grow our commercial vehicle industrial business by expanding our portfolio. Then on the ZEV side, we want to bring, and we are bringing differentiated solutions, disrupting solutions that are really fulfilling unmet needs of the industries, leveraging our unique capabilities. As a result, you can see on the right-hand side, our sales outlook for the coming decade. I think that's not often that we share these kind of numbers. But again, looking back at the 3 industries and then the 3 revenue streams that we have in this company. At the bottom, you can see that the -- in yellow, the commercial vehicle and industrial turbo revenues will keep growing at a fairly sustained pace. In the middle, the light vehicle turbo revenues, will go through a peak then go down, but still, look at 2030, revenues for light vehicle turbos through -- because of the growth of share that we have in this industry with a very high win rate, will be bigger than what it was in 2022. And then looking now at the ZEV revenue streams in blue, from '27, we expect fast growth as we launch new applications, new high-volume applications. So now let me deep dive a little bit into this concept of turbo being the turbo -- one of the turbo industry consolidator. There are 2 drivers to explain the turbo industry consolidation. First, OEMs, as Olivier mentioned, are streamlining their engine portfolio. They want to gain scale to get cost reductions. It means that single application yearly volume could reach $1 million, if not more. When a customer awards the business for such kind of high-volume application, they want a stable partner, which can produce at scale. That's the first driver. Second driver are the more and more stringent emission regulations like the proposal from the EPA, so-called EPA Tier 4 proposal. Those emission regulations are driving increased turbo technology content per vehicle. Moving, for instance, from a wastegate turbo to a variable geometry turbo or an electric boosting turbo. Again, our customers need to rely on partner with the right portfolio of technology to support this kind of shift. And then now in this context, when you think about those 2 constraints, having suppliers who have the scales and the stability and have the right technology portfolio. There are not so many suppliers -- turbo suppliers in the industry who are really relevant. And that's what's driving the consolidation of the turbo industry. Now let me come back a little bit on the commercial vehicle and industrial turbo business. We love it. Above 30% of our sales coming from such kind of applications. And what you have to understand is it's a huge breadth of application that we are speaking about. Think about on-highway trucks, buses, couches, agricultural applications, construction, mining, rail, marine and power generation. What you can see at the bottom, in the middle, is a big power generation machine from Caterpillar with 4 large Garrett turbo installed in it. As Olivier mentioned, we are -- we will expand -- we've announced this morning that we are expanding our portfolio with these kind of big machines. This is a 600-pound baby. That will go on such kind of big power gen or marine engine, powered either with diesel or CNG. So that's really -- wrap up the turbo discussion. And now I would like to hand over to Craig, who will explain how we are going to develop our successful zero-emission vehicle offerings.

Thank you, Pierre. Good morning, everybody. As Pierre said, I'm going to talk to you about technology. So I know many of you are maybe numbers people, you're probably waiting for Sean to come and talk about the numbers. My job is to get you a little bit excited about the technology. I'm excited about the technology. Our people in the room are, and more importantly, our customers are. So I want to show you how and why. Before I start to talk about that technology, let me tell you a little bit about how we do it. As you heard from Pierre and Olivier, where -- our drive is for differentiation on turbochargers and on zero-emission vehicles, doing both. You may think when we do both, that means we have to double our R&D or if we can't double our R&D, maybe we have to cut something, but that's not how we work. As you heard from Olivier, we have a big advantage in the turbocharger industry. It's becoming more efficient. Our customers are having fewer programs with higher volume. That has a direct benefit to us, because our R&D that we have to do for turbocharger is proportional to the number of programs that we have to support. So if our customers are doing fewer programs for higher volume, we can put less R&D because we have fewer programs to support. That's one of the key drivers in our R&D efficiency. But we also push on something that we call cost per launch. So for each one of those programs, every year, we find ways to get more efficient. How can we do a program by spending less R&D for each program. And we do that every year getting better and better. When you put those 2 things together, that means a combination of the number of programs going down and our ability to get more efficient on every program that we're doing. Over the last 5 years, it's improved what we call our R&D efficiency, by 40%. That means the dollar we have to invest in R&D on turbo, for the dollar of revenue that we get back. So we've been able to still keep that technology leadership while we're managing that investment down through that efficiency. In parallel to that, at the same time, we're ramping up our investment on electrification. Electrification is not new to Garrett. You're going to see a lot of products today. And when you see these products you'll realize these didn't just happen overnight. This is something we've been building up for many years as we've been ramping up that investment in electrification. We are now today at more than $100 million of R&D investment in electrification. At the end of last year, we had more than 400 engineers, and we're still growing in electrification. This is what's driving our transformation. And you see it now where more than 50% of our R&D is dedicated to zero-emission technologies. So I've talked to you about the numbers, $100 million of funding. You may be asking, okay, you've got the money, but do you have the know-how, you're a mechanical company, you do turbochargers. How do you know how to do these electric products, right? E-Turbo is a product that's made that bridge for us. So let me tell you a little bit about what's inside an E-Turbo. An E-Turbo has a high-speed electric motor. You heard Olivier talk about it, 200,000 RPM. This is 10x faster than any other electric motor on a vehicle. To drive that motor, you need high-speed power electronics, what we call the inverter. And to drive that inverter, you need the advanced software that controls it. Those are the things that are inside our E-Turbo. And as you'll see in the coming pages, they are the same things that go into our zero-emission vehicle products. Those technologies, and let me just illustrate it a little bit for you. When we spin a motor at 200,000 RPM, we have to sense the position of that motor 10x per revolution. And each time we sense it, we have to adjust the voltage a little bit and the current a little bit to make it as efficient and high performing as we can. So that means a 200,000 RPM motor, we are sensing and controlling and adjusting voltage and temperature, 2 million times per minute. That's a technology that does not exist on the market. And then when you combine it with the environment that we operate, the high speed, the vibration, the very high temperature, the cooling that we have to do in such a compact package, we had to invent all of this. We looked around, we couldn't find it. So we had to invent it. Those are the technology building blocks that came out of our E-Turbo and established the know-how in our company to do the other products I'll talk to you about today. Our E-Turbo, we are the first ones to bring it to market. We're the first ones to invent this technology. It's in high-volume production today. These are the 4 technology building blocks that I mentioned coming from our e-turbo, the high-speed machines, the high-speed electric motors, the high-speed inverter and the advanced control software. These are the building blocks as well for what we use in our zero-emissions vehicle products. So as I mentioned, these are not technologies that are available on the market. 200,000 RPM motors, these don't exist in automotive. The inverter that can drive that, we've looked, we've worked with multiple suppliers to see if we could just buy inverters that would work with our motors. They don't. So we had to invent or own. And then to drive that inverter, we had to write our own software. So those are the know-how, the building blocks that we've been building up over these years as we've been ramping up our zero-emission vehicle investment. When we look at electrification, we are not targeting to play in 100% of the electrification industry. What we do, you heard Olivier say it, we bring differentiated technology to create unique products that solve tough problems for our customers that deliver that value to our customers. When we look through that lens and when we look at the technology capabilities that we have, that's how we arrive at the 3 products that you see on this page, fuel cell compressor, E-Powertrain and E-Cooling. So now let me tell you a little bit more about each one of these. What is a fuel cell? It's actually a pretty simple concept. Fuel cell takes hydrogen, you put it together with air, you make a reaction. And what comes out of that reaction, electricity and water. It's a zero-emission electricity generator. However, for a fuel cell to work well, you have to push a lot of air through it. The more air you can push through it, the more hydrogen, you can put it in. And then you can get more power out of it. So that means the air compressor that's pushing the air through the fuel cell is mission critical to the operation and the efficiency of that fuel cell. And this air compressor, it's not a simple machine. It's not -- when I say air compressor, this is not like a pump you used to pump up the tires on your bike or on your car. This is a high-tech, big air compressor. And you'll see some after the presentation today. So what do I mean? We're talking about a machine that's spinning at more than 100,000 RPM, and to power it, it needs 15 to 30 kilowatts of electric energy. So what does that mean? It's about 3x higher than you would use in your house on a very busy day. So it's a high-power machine, pushing a lot of air. Because it's consuming electricity, it's consuming the electricity that the fuel cell is making, what you would call a parasitic loss. It's very important that it's efficient. And this is one of the areas where Garrett's technology has a differentiation versus our competitors. We're more efficient, so we need less electric energy to drive our air compressor. There's another really important trick in the fuel cell compressor which is, if you allow oil to go into a fuel cell, it poisons it. It kills the catalytic capability inside the machine. So you can't allow any oil in your air compression system, that means we need to run this 100,000 RPM air compressor without any lubrication at all. The way we do that is with air bearings, which are exactly what they sound like. You have this rotor spinning at 100,000 RPM, and it's literally floating on a small cushion of air, not oil, air. That's a technology that we took from aerospace more than 7 years ago. We took it from aerospace. We developed it into automotive and to be able to do it at automotive scale. We're the first ones to do that, and we already have more than 10,000 products with air bearings in the field. So that technology leadership is what's given us a great position in this industry. When you look at where we've come in that 7 years, we are already on our third generation of fuel cell air compressor. We've made massive advances in the efficiency of the machine. We've made massive advances in the cost reduction. We've made massive advances in the durability. We are ahead of the industry, and we are recognized as the technology leaders for this. We've looked at the market. We have the widest global portfolio in the industry, covering from small cars or light commercial vehicles, up to industrial applications. So you can think about power generation centers, fuel cell power generation centers at the other range. So we have this full portfolio. We have the best technology, and this is what's leading us to the business wins that we have. We have already 5 series production programs that we've won. And we are engaged with customers for many, many more. In fact, as you've heard, next year, we will already generate close to $20 million of revenue in fuel cell compressor. It may be easier for you to think about Garrett doing a fuel cell air compressor because it's an electric air compressor. It's kind of close to the E-Turbo or turbochargers that I've talked about. When you look at E-Powertrain, you might think, what is Garrett's right to play in powertrain. There are already many established competitors offering electric drives for traction. So what -- how can Garrett play here? When we look at the E-Powertrain industry -- when we looked at the powertrain industry, we realized there was a very important unmet need for our customers, which is about power density. Power density is about getting more power out of something that's smaller and lighter. When we looked at power density, we realized that by going high speed, we can make a step change in the power density of a traction drive system. Everybody in the industry is looking to make advances in power -- in power density. But the others don't have the capability to do high-speed like we have. When we come to a high-speed traction drive system, we're scaling down from our know-how. We're going from 200,000 RPM down to 35,000 RPM. All the things that I've talked about, the high-speed motors, the high-speed inverters, the advanced control software, dealing with the vibration, dealing with the temperatures, all of that, we've already mastered it. So it's very -- it's easier for us to just apply that now to a high-speed machine at 35,000 RPM. The traditional players are more -- they have a technology base, more around 15,000 RPM. So if they go from 15,000 RPM to 35,000 RPM, they don't have those technology building blocks that we have. You see many of the benefits of the page that power density translates to. I'll show you 2 examples here. In the middle of the page, that big gray box represents a space of one of the next-generation systems that our customers are working on for traction drive. Inside that, you can see the size of our traction drive, high speed, higher power density. We are saving a lot in space. We are saving a lot in size. You have another example on the right side of the page. That upper image -- that image on the upper right, that's, let's say, a leading electric vehicle manufacturer in California. That's one of their more recent traction drive systems that you see. The image below that is the [indiscernible] of our system at equivalent power and output. So we are able to save that size and save that weight, which is the power density that our customers are looking for. On the right here, you can see one of our prototypes. This is what we call a 3-in-1 traction drive system. Why 3-in-1? Because it has 3 main elements to it, it has high-speed motor, it has the inverter that drives it, and it has the gearbox for it, right? This is our 3-in-1 traction drive system. We've already won 2 predevelopment programs with customers. This is really important, because it means, when a customer awards us a predevelopment program, they're spending their time and their money with us to develop our technology for their next-generation vehicle. It's also important because it means they're spending their time and their money with us and not with somebody else, not with the traditional companies that can't do what we're doing. So that means we're already relevant in the E-Powertrain. We've looked carefully at the market. We know that our high-power density solution is not for the entire industry. So we've looked at the segments where it's valued. And from that, we are developing 3 powertrain families that you see here on the page. In those segments, our customers are looking for the next step of capability for their next-generation vehicles. Anywhere where they have constraints on power, constraints on space, constraints on weight, that's where they need our technology, and that's where we're focused on developing. Now I'll talk to you a little bit about E-Cooling compressor. This is the third product in our portfolio, and it's the one that we've most recently started developing. It's something you may not have heard of, but I can tell you it's one of the ones that I'm most excited about in our portfolio. What is E-Cooling? When you think about electric vehicles, you may think about the challenges that everybody knows. You think about electric vehicles, you think about the cost challenge. You think about the driving range challenge or you think about the charging infrastructure challenge, the list goes on. When I talk to my counterparts at the OEMS, in engineering. When they're looking at the technical challenges that they have for electric vehicles, thermal management is one of those key challenges. So what is thermal management? Thermal management is about cooling the battery. It's about cooling the powertrain. It's about cooling the cabin. It's the second highest consumer of electricity on a vehicle after actually driving the vehicle. That's why it's so important. But when you look at a vehicle, an electric vehicle, you don't really sense this because it doesn't have a big grill and a big radiator in the front. So it doesn't feel like it has a cooling or a thermal management challenge. But there are very important challenges inside. When you fast charge an electric vehicle, a battery electric vehicle, the battery is heating up. And if you can't cool the battery, then you have to slow down the charging. So even if you go to a 250-kilowatt charging station and try to fast charge your electric vehicle after a few minutes, you're not getting 250 kilowatts anymore. You have to start slowing it down because the battery is getting too hot. Because it's not -- there's not enough cooling capability on the car to do it. If you take an electric vehicle and you drive it through a heavier usage condition, think of a truck carrying a load and going up a long hill. In that condition, the battery is also heating up. And if you can't cool the battery enough, you have to start cutting the power, you have to derate, that means less power coming out of the battery, less power going to the wheels. Those are real constraints today with electric vehicles, and that's why my counterparts at the OEMs are working hard on thermal management and what they can do in their next-generation vehicles to improve that. When you look at a thermal management system, the heart of the system is the cooling compressor. Today's technology is called a scroll compressor. It's been around for decades, a scroll compressor is the same technology that you have in your refrigerator. It's the same technology that you have in your air conditioning system for your house. And it's the same technology that's been on air conditioners for cars for years. Thermal management systems today are basically just an evolution of the air conditioning system that's been on cars for years. But that scroll compressor has a lot of fundamental limitations. It's an unbalanced machine. So what does that mean? That means when it spins, it makes a lot of noise and it makes a lot of vibration. On an electric vehicle, where you don't have the normal engine noise, it is quiet, that's a problem. The scroll compressor technology doesn't scale very well. If you want more cooling capacity. If I need to double the cooling output of my compressor -- scroll compressor, I have to double the size of my scroll compressor. And then finally, it has a strange characteristic, which is -- when you need it the most, is when it starts to become the least effective. So what do I mean by that? A scroll compressor, when the ambient temperature is getting hotter and hotter. So think of a hot summer day, it's actually losing its ability to cool. The hotter it is, the less effective it is. And the same happens when it's cold outside, when it's working as a heat pump. The colder it is outside, the less effective the scroll compressor is to provide -- to operate as a heat pump. Our approach is fundamentally different. We are bringing our high-speed centrifugal compressor to this problem statement. And it avoids those limitations of the scroll compressor. And the way our system is working, because it's a high-speed centrifugal machine, it's balanced, which means it's low noise and it's low vibration. Because it's a high-speed centrifugal machine, we can get a lot of cooling power out of a small machine. Our machine, for the similar size of a scroll compressor, can offer 2x or more cooling capacity to the vehicle. And because of the nature of the centrifugal machine, it doesn't have this problem of effectiveness when you go to the -- when you go to the more extreme ambient conditions. On very hot days, it's providing the same level of cooling power. On very cold days is providing the same level of heating power. When you put those advantages together, that's why our customers are so excited about what we're doing with our E-Cooling compressor. They are looking at their next-generation thermal management systems, and they are seeing that we are bringing a technology that offers a breakthrough for them on how they can architect those systems. That's why we already -- very quickly have won 3 predevelopment programs with our customers. They see the potential of the technology. And it's further helped by the fact that it's actually a similar technology as we have in our fuel cell compressor. A lot of the underlying high-speed motor, the electronics, the software, even the oilless bearing because this one has a bearing that doesn't run on air, it has a bearing which runs on refrigerant. There's no oil inside. Even that technology is the same. So that's allowed us to have a fast start on the development and the engagement with our customers, but it's also given a lot of credibility in the eyes of our customers that we can bring something fundamentally different, and it will work and it does work. We have -- we're working on a portfolio that's covering from light vehicles, up to, you can think of stationary, industrial battery farms where you need cooling as well. So we have -- we're working on the portfolio to cover all of those applications. And you'll see more. You can see some of that after the show when you get a chance to see some of the hardware. So that's what I would encourage you to do when we finish the presentation today. We've got a lot of booths, with a lot of hardware on display. You'll see some of our team here who will be very happy to share with you the excitement that they have on that technology.

Let me show a few more quotes that we -- that you won't find in this video, missing piece of the puzzle, most advanced in high-speed, game changer that are really strong testimonies of what we bring to them. But say, why do they like our solutions? That's really the critical questions. Great question. And it's all about 2 words, unmet needs. While our customers were launching their first generation of battery electric vehicles, they realized that there were a number of needs that were not properly fulfilled with the existing technologies, which have driven us then to do undesired trade-off. What we bring leveraging our, say, specific capabilities or unique capabilities, we bring solutions that are really answering the unmet needs, then delivering high value to our customers, and high value being measured in terms of increased vehicle range, increased productivity, lower TCO, total cost of ownership, and easier installation, for instance. So now you would probably say, coming back to one point that had to be raised, you would say, okay, I got it. Garrett is bringing new differentiated technology to the ZEV arena. But how long will it take to -- their competitor to catch up? And it's really all about this unique set of capabilities and the way we are able to combine them that makes it very difficult for competitors to catch up. We have invested years of development in those technical capabilities. And now if you think about fuel cell compressors to bring a competitive fuel cell compressor, you need to combine best-in-class aerodynamic bearings, IP motors, obviously, and the electronics and software that goes with it, you also need to have unique manufacturing technologies when it comes to balancing. For instance -- and you need to have a broad portfolio that can answer all the different applications that your customers has. Last but not least, you also need to have some field experience. All that is very difficult to acquire. E-Powertrain is the same game. The current baseline is about 15,000 RPM. We bring something which is 3x higher. It comes with challenges. On the valuation management side, on the cooling side, on the control side, all things that are difficult to acquire and really need several -- many years of investment. Same applies for E-Cooling compressor. So now wrapping up this technology discussion. We say we -- you've heard in the past few months discussing and presenting our target of $1 billion of revenue from ZEV offerings by 2030. I hope that by now, you understand that it's not PowerPoint. It's real stuff, metal stuff that you can see here that you would see in the booths. And really, you have to think about Garrett DNA. Garrett DNA is to bring differentiated solution. And ZEV offering, the ZEV offering that we are bringing to the market are no exception to that. Now I hand over to Sean, who will tell us how we'll keep delivering best-in-class financials while going through this electric transition.

Thanks, Pierre. So one of the first questions I usually get asked, especially since we've converted to a normalized capital structure is, "Sean, what am I missing here?" And my first answer is, you're not missing anything. The balance sheet's clean. But then I've thought about it a bit more. And I actually think -- a lot of people are missing a key point of differentiation about Garrett and our financial performance. If we look at adjusted EBITDA, we're at 16%. That's part of our framework, we're above our peer group in any way, shape or form, take CV, take powertrain, and that's good. But when you move over to the middle of the page and you talk about -- EBIT, I said, adjusted EBITDA, is what I meant to say. When we talk about EBIT, in the center of the page, we're at 14%, 3 points higher than the nearest peer group. Now I come from a commercial vehicle background in my prior life, and that's even better than what we did there. And then when we look at the far right side of the slide, Olivier talked about capital intensity. He talked about cash flow generation. When you look at adjusted EBITDA less CapEx, divided by adjusted EBITDA, 87%. Again, superior to our peers. And there's an approach that we take, a financial framework that we have, that we will adhere to even as we transition into this new product set that Pierre and Craig and Olivier have been talking about. And so I'm going to take you through that. But with these metrics, one would think, why wouldn't Garrett get a better valuation? So then we look at valuation metrics. And again, moving to the middle of the page, from an EBIT standpoint, EV divided by adjusted EBIT, we are far below, far, far below any of our comps. That represents a unique opportunity to enter into Garrett and take advantage of the valuation appreciation that we're so excited about, driven by all the products that we've just discussed, not only the core which we'll talk about, but the new products as well, the optionality on the new products. And by the way, and Olivier hit on it well, when you look at the adjusted free cash flow yield to EV, 20%. So in 5 years, if you do some basic assumptions, we will have generated our market capitalization today. That is unbelievably powerful. And we're in a great position. And that, by the way, after investing $100 million plus in new technologies and still maintaining all the R&D investment on our core business. So now let me walk you through some of the key factors that allow Garrett to drive such great financial performance. So we've mentioned that we have very good visibility looking out for the next 4 to 5 years because of our booked business. So why is that? The reason for that is because our products -- in our core business, turbochargers, have to be selected before the engine is even designed. So we are at the forefront of vehicle powertrain design that comes first and foremost for anything else. And another important point about that is, it's across a diversified customer base, 30%-plus commercial vehicle aftermarket in industrial, a much longer lead time. So even the shortest lifespan products, passenger vehicles, before you even get to aftermarket or 10 years from start to finish, and then aftermarket kicks in, and much, much, much longer for industrial, off-highway commercial vehicle, think of mining trucks, they're in use for 30 to 40 years. We enjoy that business. We enjoy all the aftermarket that comes with that. And on top of that, and another important point that I want to mention on this slide is this visibility does not go away when we talk about some of these new products because they are also, in particular, this one here, the E-Powertrain, the motor has to be selected before you put together the rest of the axle and the powertrain as well. So we don't expect that this visibility of our sales stream is going to be changing at all as we move through this very exciting transition. And on top of it all, all these products are basically single source. Certainly in our core. It's not easy to switch because you are on the powertrain across multiple vehicle platforms. You're homologated in the industry to meet certain emission standards on our core technologies and other standards when it comes to electrification. But that happens upfront. And that is not easy to change. It's too expensive. So we have high, high stickiness. It's not going to go away. So great visibility, high stickiness and that characteristic will continue through the transition to the electrified drivetrain. Now what else does Garrett do that's really, really special. We have a very highly profitable set of products, and we have a variable cost structure. We talk about it a lot, but the proof is in the numbers up on the screen. And we've seen some of the most volatile macroeconomic shocks to the industry in the last 3 years than ever before and compressed. So starting with COVID, then you move to supply chain and chip shortage issues. Now we're doing the global conflict and rampant inflation. Through all of those challenges, including the worst when COVID shut down basically the globe. That year, we still did a [14.5%] adjusted EBITDA margin, and we still generated $128 million of free cash flow. And we've continued to see that performance throughout the different shocks. And when times get good, we enjoy it even more that financial performance. And all this with a capital-light model. So that brings us to this next slide, and this is a very important slide for me personally because this is the framework that I hold our company too. This is what all of these new products, both core and new businesses have to fit into, okay? Starting at the top. We commit, our framework is a 16%-plus adjusted EBITDA margin. We will spend 5% or less of R&D as a percentage of sales. And Craig mentioned how we're going to do that with the intensity, with the efficiency of the R&D spend on the core, getting better, while we're redirecting those funds to new technologies, but we will stay within that range. We will maintain a capital-light model. This is a great new product, but we are going to manage the CapEx around it, just like we do so with our turbo products. We keep in-house, the critical manufacturing technologies, the things that matter, the secret sauce that we have and we devote suppliers to manufacture the rest. That's how we maintain a capital-light model. And on top of that, we have a very unique working capital management of 20x or more. In all of this, [magic] allows us then to deliver is -- what I call a 60% free cash flow conversion. And when I think of free cash flow conversion and how we define it, as I look at -- if I generate $100 of adjusted EBITDA or maybe $100 million, let's say, I will generate $60 million of adjusted free cash flow, and that's after interest, that's after tax, so a really levered free cash flow number. And that is our framework. And we're marching toward a 2x net leverage ratio. We're already at 2.3x. We said we're going to get there at the very latest by the end of 2024. And that framework will hold. And now we move to the right-hand side. And the first point on the right-hand side of the screen is as we look forward with all this stickiness of the business that I just talked about, that gray line in the middle. If you look out to 2030, our core business will be bigger than it is today in 2030, it'll have those characteristics. You go to 2033, it's barely, barely smaller than where it is today, with those characteristics. And on top of that, you also have the new products that are coming in that we just talked about. So we have, for the next decade, a very, very good visibility of where we're going and how we're going to perform financially. Now, people might think about that blue bar in the last slide and say, $1 billion of sales, how are you going to get there? Well, we've already heard that we have fuel cell compressor. It's going to generate just under $20 million of revenue next year, okay? But then we talk about and think about these preproduction contracts we won. And then you look on this slide, and this is also on some of the earlier slides, but if you look at the bottom, look at the ASP multiplier. The products that we're creating are bigger and they're more expensive. The 3-in-1, electronics, motor, high-speed motor, gearbox, 5 to 10x ASP when we compare it to some of our base products. When you start to put that in perspective and then you overlay the addressable industry that Pierre and Olivier talked about, $1 billion seems quite achievable. Now what the mix will be, we will see. But either way, we don't think it is an insurmountable task, and we know actually we will achieve it and hopefully exceed it. So bring that all back to how we look at our liquidity and capital structure. We've just recently been upgraded by S&P. So we're BB credit. We're very, very happy about that. That was primarily due to our deleveraging, at 2.3x now. We have got still strong liquidity, very strong liquidity at $732 million. We continue to generate cash, and we'll continue to generate cash at a 60% conversion ratio. And then we take all that cash, and we are going to still maintain what we've articulated before, our capital allocation approach, which is, first and foremost, continue to invest in the business. But within the framework I just mentioned. So 5% or less on CapEx as a percentage of sales. We're going to continue to delever down to our target of around 2x. We're going to continue to buy back stock. And then we have the optionality to look at potentially inorganic, as it -- if it complements our business with the right -- within our financial framework to enhance it or also potentially dividend in the future. But that's a great optionality that this company has never had. And -- that we do have now. And that's what really excites me. So to bring it all back together, Garrett right now has the financial building blocks for value creation, and it's a great entry point. We've got 16% forecasted EBITDA -- adjusted EBITDA margins this year. We've got a track record of consistently delivering profitability through good times and bad. We have -- we are in the luxury position of generating enough cash flow to both delever and buy back stock, and still invest in all the businesses we need to invest in. And we've got a capital-light model, for the current business and the business as we look at it in the future. We've got 1 class of debt and 1 class of equity now after the conversion. And all the investments and the exciting optionality that's coming our way as the industry transitions to the electric drivetrain. That is the power of Garrett. That's our financial model. That's what we commit to deliver and we will be successful. And with that, I'm going to hand it back to Olivier for his closing comments.

I think by now, you understand our model, you understand where we are. You understand probably better where we go, although I'm really encouraging you to get on the booths and hear the message from people that are passionate, developing the technology every day and interacting with our customers. One more time. One leg that is driving the consolidation of the industry, a resilient business, more resilient than ICE, a highly cash-generative company, that's giving a lot of options for capital allocation, focused bets on RD&E where we think we can differentiate. Not what is electric, everything that is electric today out there is differentiated. Electric motors have been existing for years. And obviously, as you get through the booths, I'm pretty sure you will understand that we have passionate people, probably the best of the industry that are driving those very unique technologies. So with that, I think, Pierre, you want to organize the Q&A?

So we'll do -- we'll start a brief Q&A here in the room before we get into the booths. I think we have some microphones around the room here. I do -- yes, we've got some microphones. Does anybody got some specific questions they want to ask? Anybody first.

It's Hamed Khorsand. I just want to ask you, you were very quick in the presentation, you were talking about the GT 80 for the hyperscale and data center. Where are you in that area of sales process? And how are you going to go about it as far as the marketing of this product to them?

So that's a very good question, and Pierre and Craig, will obviously, jump in. Where we are is that, this is the result of discussions we had with some of our customers already for a long time. That are looking for something different. This is also the result of deep analysis we did of the marketplace and the growth. We are already engaged with a number of customers to develop that. And the time of development of those things, I mean, it's not exactly moving at the same speed as you would think are for light vehicles, but you should expect some revenue starting 2026, 2027. And think about it as well as an industry, where what matters is not only what you sell as OE equipment, but there is a long life. There is a lot of aftermarket when you get into those industrial turbos. This is not a plastic prototype, okay? We had a bit of a struggle to bring it there due to the weight.

Brian Sponheimer from Gabelli. I'm curious, Sean, when you look at the peer group and you compare your balance sheet, which has obviously gone -- undergone a major transformation in the last couple of years, and you compare your leverage to maybe some of the peer groups in the industrial side and in the commercial vehicle side. What do you see? Are you more levered? Do you feel the need to get to 1x to really get that -- your multiple to be respected by the marketplace?

Well, I think we are at a similar level of leverage at the moment when you look across all those groups. But our goal is around 2. That's where our customers are comfortable. They're comfortable if we go higher than that too as long as we have a path back. And I think a good example is what we've done this year already, we levered up to convert the capital structure. And now we're on an aggressive path to delever back to that range.

I think I would add to what Sean's saying, that looking at leverage not considering the cash generation of the company is a little bit only looking at one side of the equation, okay? And obviously, we have a very significantly bigger cash generation capability into this company. And that gives us flexibility and options. So you should always, in my view, although I'm not an analyst, look at the 2 sides at the same time, how much debt, how much cash am I generating.

[Alex Janelle] from [indiscernible] Company. I saw the valuation slides and they were great. But why do you think there's that gap, in the sense -- you bought back 8% plus of their stock, I think around 10% of the debt at Investor's Day showing that your growth are not a declining company. So why do you think we still have that gap? Do you think after today, I guess the gap is a little bigger. You think you will close? What else do we need? Like, it seems to me, execution is there. So it seems to me everything is there. So what am I missing? If I'm missing anything.

Maybe we're asking ourselves a little bit the same question. No. Jokes apart, I think it takes time for people to realize, first the transformation that we have been through. the first time we are coming with a very comprehensive story around the transformation we have been through. If I recall it -- back to when we spun off. The biggest deal was to say, "Oh, you guys are so much on the diesel side at that time. You will crash with the transition to gasoline. Your margin will get down the drain, you are #3, you will not get the revenue and everything else." We've proven that it works. I hope people understand that when we commit to something in this company, we deliver. Obviously, our goals are big. But -- and our story is really not the one that you can find in the rest of the industry. I mean, our cash generation, our margin, the flexibility and the ability to deliver when times are good and when times are bad, are things that are difficult for people covering the automotive industry to understand. So I think it will take time. It will take on us to repeat, repeat and repeat again the story so that it gets there, keep on delivering. And after some time, keeping on delivering, I'm convinced it will come.

Andrew Coye with ICD. To follow on the same points on the delevering and on the buyback. Very good in the third quarter. Given that we're kind of all waiting and asking that question, why is the valuation gap? Are -- can you be potentially less conservative and lean into it, that with a 20% free cash flow yield and maybe less than 10% on the debt to take $400 million of cash over this year and next year. Is there the ability to dial up the buyback and take advantage ourselves of what the market is giving you?

We have obviously a lot of opportunities and a lot of flexibility and with our Board, with which we are managing capital allocation, we are really screening all the opportunities we have to take advantage of the position we have. So all the options are on the table.

And I would just add, look, we're trying to generate shareholder value. That's the focus. We have the cash. And again, as I mentioned in my presentation, we're in the luxurious spot to be able to both delever and buy back stock. Now, what ratio that will be? We're looking at what we can do to maximize shareholder value.

Dan Lewis with Gem Partners. Thanks for the presentation. You guys talked about a very large market opportunity in ZEV products, $35 billion, I think. Your market share in turbo is around 50% or 50% plus for new programs. The implication of your long-term revenue expectations and hopes for ZEV is something like 4.5% of the 35%. So help us understand the degree to which you're pursuing products, which are niche, mainstream within the ZEV category and help us understand why the aspiration of 4.5% seems so modest.