Sean and Nils are here just to introduce them. Sean Deason is the company's Senior Vice President and CFO, and Nils Martens is the Senior Vice President of Strategy, Business Development, and Advanced Technologies. The company has about 192 million shares. Trades around $17, about a $3.3 billion equity cap, there's $1.2 billion of net debt, so about a $4.5 billion total enterprise value. Sean will take us through some slides and we'll get into some Q&A. Thanks.
Thanks, Brian. Okay, not gonna spend too much time, but just for the people that aren't familiar with Garrett. We describe Garrett as a technology company that's participating in part in the automotive space, but more importantly, the transportation space currently. When we say technology company, it's, a lot of people in the auto space say they're a technology company, but we define technology as something that our customers need, want, and will pay for, and thus will produce the margins that we generate. We generate 14%+ adjusted EBIT margins, most recently 18% adjusted EBITDA margins, and generate an enormous amount of free cash flow because we make a product that is derived from aerospace. We'll get into this a little bit later, but effectively our product is something that our customers don't know and master.
Most in the automotive space, in the transportation space, most of the OEMs have done most of the things and then they've outsourced them. They've never outsourced the turbocharger, and that's because it really is derived from aerospace and it's really difficult to make. That's why when you look at the competitive landscape, it's really us and BorgWarner are the two biggest players and the industry itself is consolidating. Our strategy is two legs. We love turbo. We are last man standing on turbo. We will always be there for any customer that wants a turbo. Second, as you can see, our geographic spread in terms of sales is more weighted toward Europe. The main reason for that is Europe has the most stringent emission standards.
As you have stricter standards of emissions across any type of mobility, any type of ICE engine, you need ultimately to start to use a turbo because it gives you more power with less and you pollute less and you get better mileage. That's why turbo penetration in Europe is very, very high. In the U.S., it's closer to 50%. In Europe, it's north of 70%, and all diesel engines, by the way, are turbocharged 100%. You need a turbo just to get the torque necessary to move the vehicle. I probably said that wrong, Nils, but he'll correct me later. That's really, really exciting.
Actually even more exciting is as you move to the bottom of the right-hand side of this slide, we've taken these sort of pillars of intellectual property that we've developed organically derived from aerospace and we've created new zero-emission products, but it's all based on the same fundamentals, which I'll get into in a little bit. If we move to the next slide, one of the things people often ask me is, what don't we understand about Garrett? You know, we have very, very stable earnings through all different types of cycles. One is because of our variable cost structure, but two, it's also because while only 31% of our sales are what we call industrial, which is aftermarket, commercial vehicle, and construction, agriculture, and other big, power generation and marine applications. That is a significantly greater portion of our profit.
What that allows us to do, and it's much more steady, it's not subject to the same cyclicality as passenger vehicle. The reality is we've got a great piece of business that is actually going to be increasing over time. We are not ignorant. We know that there's electrification. We know that electrification first and foremost will probably come to the pass car vehicle, but given where we are, given where we stand today, that is elongated. We're gonna have a much longer tail and a better growth trajectory as the industry consolidates. That CV piece, industrial piece is gonna continue to grow for the foreseeable future. That's great business for us. It's very high margin and most of it comes with an aftermarket stream because think of machines that are in service for 30 or 40 years.
The first turbo we ever made was for a Caterpillar, for a tractor. We actually started off as a commercial vehicle company in terms of providing turbos for them. Okay. On this slide, what you just, you see some of the market dynamics. As I was mentioning, we see increased turbo penetration globally growing through the end of the decade. That's good for us 'cause the more turbos penetrate on ICE engines that are produced, that's more turbos we can sell. Also, the industry is consolidating. We are winning share of demand from other customers. So is BorgWarner, but it's really coming down to the big two. Because we're designed in so early on to the drivetrain, three, four years before, the balance sheet of a company is very, very important for our customers.
When you have these other smaller players, the customer doesn't know, at least the bigger ones, if they're gonna be around in four years. They certainly don't want to be held hostage for price increases if they're starting to have financial issues, w hereas Garrett has a very, very good balance sheet and we're in a great spot. Second, as you see on the bottom of the left-hand side of this slide, commercial vehicle continues to grow, continues to have more and more turbocharged engines. That's a very good thing for us. That's what I was referring to in the earlier slide. We're number one in turbo across all verticals. We plan to stay here and continue to grow. We're winning over 50% of new business awards in any given year, and that's over time. That's why you're constantly seeing us expand our share of demand.
We have the broadest portfolio for turbo. We have just introduced about a year and a half ago the MEG, which is our biggest turbo yet, mainly targeted at marine applications. Again, really trying to focus our turbo technologies on more industrial and larger transportation applications and stationary power generation to really expand our market, to expand our opportunities with our core turbo business. I mentioned earlier we have great visibility into what we are going to produce because we are designed in four years before. If I look out through 2028, as you can see on the right-hand side, I am 70% sure of what I am going to be producing. I just do not know how many because that is the cyclicality of the industry we are dealing with.
As long as I can flex my variable cost structure, I can easily adapt to that, but I have very good visibility as to what I will be producing. Talked about the four pillars real quickly, and this is where Nils will be able to really answer your questions if you have them. We are really good at high-speed rotating machines and air and gas compression. When I say high-speed, over 200,000+ RPMs and at very, very high temperatures. You see on the slide, 1,050 degrees centigrade. Really, really highly engineered, very unique products that again, our customers do not master. This is really directly from aerospace. Second, we do high-speed motors and people do not realize they think of Garrett, they think ICE engines.
That is not true at all. We have been making the fuel cell compressor in production that has a high-speed motor that turns at over 150,000 RPMs. We do all the power electronics and the control software for it. We have been doing that since 2016. If you think about a fuel cell compressor, that also bridges its way into, it is effectively the closest product we have to our e-cooling compressor that we are really excited about as well. The power electronics, as you can see on the slide, and this control software, all of that is organically developed in-house IP. Then we just talk about the products a bit. I mentioned fuel cell compressor. We have got the widest range of it, a widest range of product offerings, and they are off-the-shelf offerings now. If someone comes to us, we can give them a product.
It does not cost us much to produce or engineer. If they want to customize it, then they have to pay for it. Now, fuel cell, unfortunately, as an industry is pushed out more, we still think there is a future and we have a great product set, but it is on the shelf and really ready to go for when the customers have a need for it. Second, the e-cooling compressor, as I mentioned, the closest thing to fuel cell. But what makes that so special is that fuel cell we've been producing, we're producing it today. We've got thousands of units on the road in different places, in different markets, and we're constantly getting more and more data. We know how to do it. We know how to do it at scale, and we know how to do it in a cost-effective manner.
And it uses certain technology that we have in-house, such as the airfoil bearing. That's where the actual turbine is rotating on a cushion of air. That's something other people can do, but they can't do it at scale like we can. Then we have the e-powertrain, probably the furthest removed. And again, just using our high-speed technology to really make a much smaller, like 40% smaller motor that will drive the axle of the vehicle. The higher your power density needs, the more applicable this particular product is. With that, I think that should give you a nice overview of our product set and really how we view Garrett and where we're going, and we'll go to Q and A.
Sean, that was terrific. Obviously a lot going on here as it relates to growth opportunities and what may not have been thought of as a growth industry to start. I think a couple of items have been in your favor, namely EVs maybe slowing their growth curve, if it's even a growth curve now. But maybe talk about your own competitive position, not only as it relates to turbos, but advanced technologies as you look forward, whether it's e-boosting or thermal management with other suppliers.
Okay. Nils, do you wanna take that?
Sure. No, I am more than happy to. As you mentioned, it's exciting times for us because we see a lot of growth platforms that are really catering a lot to the technology and the IP that we have in-house. If you look at e-boosting, it's a great technology. It's essentially putting an electric motor totally to the turbocharger. It's a great technology for applications where you want to drive down the emissions further. What we are more and more seeing is interest also for plug-in hybrids or so-called REV vehicles, which are range-extended vehicles, which essentially are born as a battery electric vehicle, and then you're adding an ICE engine to add range.
That's something where you'll find, especially in China, there's more and more a race towards getting more range in these vehicles, which they don't necessarily do by increasing the battery, but they do this by increasing the efficiency, the thermal efficiency of the ICE engine, which is interesting, right? We always thought about China as being the leader in battery technology. Nowadays, if you're going into some of the detail, they're starting to become the leaders in some ways of the ICE engine too in that respect, and we're seeing a great fit there and a high demand for our products because they really help them to push the boundaries. If you move beyond the e-turbo space, what we're clearly seeing, some of these new technologies are something that is very unique and clearly catering to a specific unmet need of our customers.
Think about the e-cooling compressors that we have. They are probably bringing double the cooling performance of more conventional technology in half the space for thinking about automotive applications, where if you think about commercial vehicles, it's a great technology. It really helps to cool a battery. If you think about a bus, the cabin. From what we are seeing more and more, this is a technology which initially we had conceived for the mobility space, but it's a technology that has much broader applicability, right? You can use the very same technology also in HVAC systems for buildings, for example, rooftop units, unitary units. There are other spaces that you're aware of where cooling is very much mainstream. We are now starting to venture out, but the more we talk there to our customers, the more excited we are actually getting about this technology.
As Sean said, the one advantage we bring, we know this technology inside out from our fuel cell experience. We are ready pretty much to produce. We know how to solve some of the issues that competitors in that space cannot solve based on the technology platforms that we have. There is a lot to win. Maybe just as a last item, also talking about the e-powertrain, what people do not necessarily always understand at the surface, but think about it that way. Power equals torque times speed. It is a very basic equation. What we are able to do, because we can spin so much faster and we have this unique capability as a company coming from the turbo space to control these high speeds, we spin the e-motor faster, which means we can lower the torque of the e-powertrain compared to what mainstream competitors would do. Reducing torque, to make it simple, means you need less materials and you need less copper, you need less aluminum, but also extremely important nowadays, you need less magnets and less rare earths while still providing a very attractive machine in terms of the power density. These are some of the things that we can do, which we really believe bring great value to our customers and are extremely exciting for us in terms of growth.
Sean is the person most responsible for the purse strings and what you're investing in. How does that, how do you balance the core portfolio, which is really driving the profitability and development there versus maybe some of these other technologies? Obviously, you have room in the margin and your free cash to do so, but maybe talk about that.
Sure. We do have a financial framework, and part of that framework is we, you know, we don't wanna spend more than 5% in any given year on R&D. Now we're running in the low fours right now. It's a balanced approach. At the same time, we are very lucky because unlike others in our space, we haven't had to say, well, we're investing in this. Now for electrification, we have to invest on top of that because in the turbo world, we're seeing, and we continue to see, and we have seen a consolidation of engine platforms. Put simply, a million units used to be five programs, meaning a million turbos a year. Now it's one. That means one engineering spend versus five. That's actually driven by our customers because they need to consolidate to reduce their engineering spend. All we've done is keeping that same framework, but we've redirected that excess cash to new technologies like this. We do have our limit of 5%, which we haven't exceeded. I will never say we won't because if, you know, if I can book millions and, you know, hundreds of millions of sales on something next year, if I invest more, of course the business case makes sense. Generally speaking, that's how I look at it from a financial discipline standpoint.
I mean, I would imagine part of this is on just common engine architecture for global, global OEMs. Apart from maybe the R&D benefit you get there, how much of a scale benefit is that for you to just be able to have your one turbo now on one platform for a global OEM as opposed to five different ones?
No, for sure.
How margin accretive is that for you?
We haven't given numbers on the exact margin accretion, but certainly having one program produced in one or two plants, depending upon how global it is, and it does vary by customer, but there absolutely is an efficiency gain there, a scale game.
Let's talk about some of your end markets. I encourage audience participation where you want. Light vehicle market maybe a little bit better than you would've expected in North America this year, maybe a little bit softer elsewhere. A part of your core profitability is still on the commercial vehicle side as well, which is very down. Maybe talk about that market for a couple minutes and how you're adjusting within that space.
Sure. I, like I said, we are a roughly, we have a very highly variable cost structure. We are roughly 80% variable cost. We are very good at flexing up and down. It is true, unfortunately, commercial vehicle has been in a bit of a rut. We do see a few green shoots, in particular on backup power generation for data centers. I mean, we, you know, our customers cannot make enough of these big diesel backup power generators, but also I think they are a bit of a bottleneck. They are trying to expand capacity as quickly as possible. Think Caterpillar in China, think Weichai. Those are customers of ours. That is the one green shoot I would say we see. We are hopeful that we will start to see a recovery in mining and agriculture, in particular in the United States. Later on, Class 8, as a company, generally speaking, we are more off-highway in North America. Caterpillar, John Deere, et cetera. We are more on-highway in Europe, and we are a nice mix in China.
As an analyst slash investor in the space, I encourage you to say data center in your quarterly conference calls as much as possible. It seems that seems to do the trick.
It is a very interesting space that's growing and changing. I think another application that we see where there's a possibility, and Nils mentioned, is that e-cooling compressor. I mean, it's really, really fascinating to see an area that we really hadn't, I mean, we thought about it, but we didn't expect that our technology is going to be that disruptive. When you go to a machine that Nils described for e-cooling, it saves electricity. If you think of a data center that needs cooling, 50% of the electricity for that data center is spent on cooling, electricity for cooling. If you can introduce a technology that can save some of that bill, it has tremendous value. That's another area. Nils, I don't know if you wanna.
No, I absolutely. I mean, that's one of the areas we are exploring right now. We definitely do believe there is applicability of that technology. We're discussing with several customers in that space. It's true. I mean, if you can save some of the energy bill, it's got a huge impact. Think about some of the studies Bloomberg pulled out where they said around data centers, you had an increase of the energy costs within five years north of 260%, right? If you can save a few percentage points, given the sheer size of these installations, you have an. How valuable such a technology could be there, right?
Let's talk in your light vehicle market about what you're seeing out of Europe and, in particular, what you're seeing out of China. I think China in particular has become even more opaque in some ways, from an investor understanding perspective. Maybe some color there, it would be really helpful.
It is the most competitive market. I mean, it seems like every day there's another customer in a price war demanding more price cuts. We are very competitive in China. We continue to win business there with locals and with the internationals. I think if we take that and go global, what do we see for next year? Right now, and you see a lot of the same data we do in S and P, it's flattish, which is unfortunate. At some point though, we believe we're going to have to start, we will start to see growth in PV again, just because the vehicle park continues to age and age. There is going to have to be replacement. It looks like 2026 right now, as we look at S& P globally, is looking to be another flattish year. We are ready to go with our variable cost structure to adjust to that and maintain our margins, profitability, and cash flow.
How do you end up balancing in China, the global OEMs versus the locals?
You wanna answer?
Sure. We do see that the global OEMs continue to lose share. You have a lot of these more private newcoming companies with very innovative vehicle concepts that are taking a lot of the shares. Coming back to REVs, companies like Ceres are extremely successful in that space. We believe we are well positioned with many of these newer companies as well, which maybe adds also to the other aspect on China, which I think we are very closely monitoring, is who will be the future export champions out of China, right? If you look at the Chinese LV industry, you will find that the total output is starting to plateau a bit more. There is some growth, but it is limited. The real growth for Chinese OEMs will come from export. We are taking a very active view in terms of who are the future winners in the export from what we are seeing and how do we position ourselves as a company well with them. I think it is fair to say that we see ourselves well on the way on that.
Moving on to Europe, clearly a regulatory driven environment in many respects. You, at least from the outsider, are on the wrong side from a nice perspective relative to where the EU wants the vehicle population to go. You know, talk about what you are seeing there and what you are hearing from your customers and maybe from regulators in the space.
Honestly, I think it's still a very open debate. No matter whom you talk to in Europe, they will have a different opinion right now, whether 2035 will happen and how 2035 will be changed. Also, if you're in some of the industry associations, what we see is that the OEMs are starting to adjust their portfolio because they are realistic that they will not reach anywhere close to 100% BAF in 2035. What we are starting to see from my perspective is much more push back to go to hybridization, to PHEVs, maybe even REVs in Europe, which is great news for Garrett because most of these vehicles are turbocharged, right? You have a much higher turbo penetration on PHEVs and REVs than you have on classical ICE engines. Where we see this going is really there will be an extension of 2035 most likely, and you will see more and more tilting towards PHEVs and REVs.
All positive for you. Let's shift to profitability. Clearly, you are top of industry as it relates to both your gross and your EBITDA margins. You've done an excellent job mitigating tariff impacts with a global footprint. Maybe talk about your exposure and what you're seeing from your customers regarding mitigation.
We work very closely with our customers and we have obviously two different sets. We have commercial vehicle aftermarket and we have passenger cars. Two very different sets of customers which require different solutions. In the end, from the very get-go, even before tariffs were implemented, we anticipated it. We started conversations with our customers and contractually we're passing all tariff impact through. Now we're just under 20% sales to North America, so we're a little bit more limited because of our exposure in North America. Again, because the lowest there, they have some of the lower emission standards. You know, I think we called it out as about $12 million in Q3. If you analyze that, our exposure is about $40 million-$50 million. Again, we're passing through. We're also working with our customers to try to figure out, all right, how can we change? It might be a little bit more expensive, but how do we become USMCA compliant? Is it possible? We're flexible. I'd say that's an ongoing dialogue, but something we started talking with them about long before tariffs were implemented.
Yeah. Just a couple of nuts and bolts questions. First on the R&D, how much is U.S.? What percentage of your R&D is U.S. spent so that you can get right off 100%?
Our spend is global. Okay. We have an R& D center in Torrance, in Los Angeles. We have close to customers.
Just a number.
We don't break down our R&D spend.
Why not?
We do it.
Why not?
We don't.
What impact will it have on your third quarter 10Q with regards to the tax rate? We get that part. Asbestos liabilities, where are we on that? If I had your.
There are none.
They're all gone. Okay. The third part is you have a lot of shareholders that constantly wanna sell stock, the PE firms that need to mark it up. What's the number that they still own between the three, a third of the company, a little more?
No. So the stat I can give you, and we're waiting for the 13 Fs to be published on November 15th, and then we're gonna have a much better view. We have our own estimates, but what I can tell you is we believe that we're the top three, Oaktree, Centerbridge, and Cyrus used to be greater than 50%. Now it's the top 10. And that's, you can derive from publicly.
We had a fairly large order in the buy when they pulled the order back when it was 10, 11, or 12. Delighted they're selling it.
That was the follow-on offering.
I know. Thank you very much for those bits.
Along those lines, Sean, you have been fairly aggressive this year buying your own stock. Maybe talk about your own valuation metrics for what you see the company being worth and how you go about that, or that buyback.
I would say when we looked at the stock, and it's very different 'cause it has changed quite a bit, we finally, in my mind, are getting the recognition for all the good things that this company does, the balance sheet that it has, and just the stability and growth potential of the business. That's why our stock has had a nice growth. What do we think about when it comes to valuation? We think about cash flow yield as a percentage of the stock price, we look at EBIT margins. That's why we changed this year from EBITDA to EBIT, because we also don't believe that people appreciate our capital-light model. We're less than 3% of sales spend, again, part of our financial framework on CapEx. When you look at 14.7% EBIT margin in Q3, show me another competitor in the automotive space that does that.
There are none that I know of, maybe one or two, but not doing what we're doing globally. That to me is what we think about. When we look at that and we compare across and we see also where we're going in terms of the potential opportunity to expand into new industries, industrial type of applications, we think there's a really good shot at even re-rating the company at some point in the future. Again, that's where we're going. It's all about, in the end, offering a technology that's differentiated that customers are gonna pay for 'cause it solves a problem they have.
Just remind me, free cash flow this year is?
$385 million at the midpoint per latest guidance.
Okay. And that on a $3.3 billion equity cap company, you're still over a 10% free cash flow.
Yes.
Andrew, you have the microphone.
Just to build on what you were talking about, the new electric products, you had a $1 billion target in 2030. And even though you guys often move at China speed, it takes time to ramp these. Do you, are you starting to think that that $1 billion target could be on the low side?
Right now, we have not walked back the billion dollar target. We are, this year, as you know, things have changed a lot. Interestingly enough, just because BEV is later does not necessarily affect us because our strategy always was to really target certain sections of the mobility space that is electrifying where, again, we are solving a problem. We are coming with a product that is much more efficient, that uses electricity in a more efficient manner. You can either put more weight, it weighs less, so you can put more weight in the car via battery or cargo. Again, we have not walked back that number. We are looking at what is happening as things are changing, but we also have some of these new opportunities that a year or two ago we did not even think, you know, about two years ago, that was not on our radar. Now they are. A lot of interesting things are happening. I would say we are looking at doing an investor day at some point in 2026, and then we are going to do a refresh and an update.
It's been a great story. You guys have done a terrific job and look forward to seeing what's next. Thank you very much for being here.
Thanks, Brian.
Sean, Nils, thank you very much.
Thank you for having us.