BorgWarner Aktie

Why don't we kick off the next session with BorgWarner. Today, we have the CEO, Joe Fadool and CFO, Craig Aaron, as well as Pat Nolan, Head of IR.

Most of you probably know, BorgWarner is obviously an auto powertrain leader, both in ICE and EV. And it has been actually our top pick for quite a while now, mostly on my view of them proving out the EV story and e-powertrain story. However, recently, pretty well known now as you've made a pretty smart pivot into data centers, which is, I think, a pretty very compelling diversification opportunity. And I think it has generated quite a bit of excitement, obviously reflected in the stock year-to-date. It will probably be most of the focus of my questions today.

But -- maybe just sort of more maintenancey. Any color on -- I know you guys don't preannounce, but how is the quarter trending? We've seen S&P has cut numbers a bit. Does that sort of present a risk to you guys? Any thoughts there in terms of the quarter and the outlook?

Yes, sure. I can take that one. So when you look at our full year guide from an industry production perspective, we said flat to down 3%. S&P is coming in right around 2%. So we're right in the middle of the guide. We did reconfirm our February guidance in April, sales coming in right around $14.15 billion at the midpoint. When you look at Q1, Q1 came in at $3.53 billion. You sort of annualize that, you get pretty close to the midpoint of our guide. So we feel good about how we executed in Q1. Margins up 50 basis points, revenue, again, coming in at $3.5 billion. We feel like we're right on track to deliver our guide. So we're pretty pleased with the way the year has played out so far.

Okay. So obviously, a lot of excitement on the new products and data centers. You announced a win on the turbine generators on the Q4 call. And last call, you highlighted storage and the microgrid inverters. Can you talk a bit about how long have you been developing this product? It sounds like it's been several years. And how much overlap is there with your current auto tech in these products?

Sure. So thanks for having us, Colin. If we first start with the problem we're trying to solve, it's all around power availability. That's the problem. So these 3 products all addressing that issue. Starting with the power generation or turbine generator, we've been working on this with our partner, Endeavour over 3.5 years. But if you consider all the technologies and size, for decades. When you look at the inside of this, it's turbocharging, it's high-speed rotating machines, power electronics, software and controls. So we bring quite a bit of know-how and IP to the table here. And we're pretty pleased with this partnership we've had with Endeavour.

When you think about the battery storage business, this is a business -- we actually started talking about this topic of nonautomotive for a couple of years now since 2023. But this is the window that we see the opportunity to move into the space more concretely. So we have been working to leverage the open capacity we have. We all know the CV market, which we position this business for has been much softer than we all anticipated. But these systems are designed for very high reliability and tough use cases on a commercial vehicle. So it makes them very suitable for stationary power.

When we look at the microgrid, which is a little bit newer product to market, the basis of that is the convergence of 800 volts in data centers with automotive technology, which already operates at 800 volts. So that's the piece or the window that really gives us a chance to move into this space fairly quick. If you look at why are people moving to 800 volts, it's really driven by the NVIDIA chipsets. On the next generation, which requires the higher power, higher power density. And we're a market leader in inverters and have been shipping 800-volt systems for years. So for us, that gives us a right to win.

When you cut across all 3 of these products, so power generation, storage and conversion, the one big common theme is the automotive scale and competitiveness. When I talk about automotive scale, you're talking about high volume with very high-quality requirements, very competitive space in automotive, and that cuts across all 3 of these, which allows us to sort of accelerate the disruption.

Can you talk about starting with the first, the turbine generator. I mean, what is the Endeavour relationship? What kind of products is that exclusive to? What can you do in that area beyond that partnership?

Yes. So with Endeavour, as I mentioned, we've been working with them for over 3.5 years. And the way you want to think about it is they're the front end of the relationship. So the customer-facing piece, their principals have been in the data center space for 25 years or more. They see the world similar to us, more efficient, lower emissions, so it was very easy to work with them. We're providing the guts of the system. So we're designing and developing more or less the content of the turbine generator, and this is where we're able to leverage all of our internal knowledge.

The combination of the 2 of us makes complete sense. We want to be laser-focused going to market. They provide that customer relationship with many of the customers like the hyperscalers. And you've probably heard us on our calls, we've had visits at our Asheville location from some of the hyperscalers. That never would have happened without Endeavour. They're the ones that have those relationships. So each of us bring pretty strong contributions to the relationship, and we couldn't be more excited about it.

Now with regard to the other 2 products, the battery storage, we can serve Endeavour, but we can serve the rest of the industrial and data center market independently. Same with microgrid inverters. We can sell them to Endeavour for their use case or we can sell to other players. So we're not in an exclusive relationship like we are with the turbine generator just to contrast the 3 product lines.

And with the turbine generator, though, is it a certain size generator and only data centers? Can you do any of that on your own or everything in that space is through the...

Not everything. So what we have an agreement on is what we call a 350-kilowatt system. And that's the one we're going to market first with and quite frankly, has a lot of interest and demand. So that's where we're putting all of our efforts. I mean we've developed smaller systems in the past. We have a 100-kilowatt system that we've worked with a different start-up on for a sort of waste-to-energy conversion. So we've been playing in this space for, I would say, 12 to 15 years in some form or another. But the exclusive relationship is with the 350-kilowatt system.

Okay. And then -- but you have -- you're bringing 2 gigawatts of capacity. So is that just a whole bunch of those systems together, Joe?

Right. So if you want to imagine, and this is in our investor deck, these 350-kilowatt systems, you can also put them in a single enclosure for a 1-megawatt system, okay? That is likely the first application, but may not be the only. And then as you need more capacity, you add more of these generator systems in place.

One of the things we probably don't talk about enough is the flexibility of that. So when a hyperscaler designs and develops an AI farm, let's call it, they don't start with maximum capacity. You even hear today, some are building 2 gigawatt to 5 gigawatt data centers. Well, they don't start there. They start at maybe 0.5 gigawatt. And then over time, they add on, and that makes our system completely flexible for them. So they don't have to build a complete turbine power system that meets the whole needs at once. They can do it incrementally as they bring more capacity out.

Can you maybe talk about the competitive landscape? Who are the main competitors? And in terms of size, cost and efficiency, how does your products compare?

So there's really 2 use cases. One is primary power and the main competitor there are turbine companies. So you think of Siemens, GE Vernova, Mitsubishi. Now the advantages our system has to theirs is going to be lower emissions. It's designed for Tier 4 emission levels, a little bit less noise. I would say the big advantage right now is if you were to order a large turbine right now, you probably won't see it until 2030. Let alone find an EPC that's going to build it for you.

So for us, we're installing that capacity. We know how to scale quickly. And we're going to make a decision later this year, do we add additional capacity given the demand and the backlog. So the other use case is backup generation. Backup generation usually is with diesel gensets, a little bit natural gas. These are guys like Cummins and Caterpillar are well-known players.

Now how do we compare to them? So significantly lower emissions, which is becoming more and more talked about today for our system. The total operating cost, also much lower. Diesel fuel, pretty expensive compared to natural gas. So even -- let's just say this power to compute starts to subside and you don't have such demand, which has really given us the window to play right now. Let's say that gets back to more normal situation. We still have a very competitive product for the reasons I mentioned. So we think this business is very sustainable over time.

And your initial launch in 2027, that's primary? Or is it backup?

We believe it's going to be primary. I'm not sure we announced it yet. But when we started this journey 3.5 years ago, 80% of the applications were going to be backup and 20% primary. But with the acceleration of generative AI and companies like Anthropic and others, we think it's going to be just the opposite, 80% primary. So I think we're in a really strong position.

Those are more lucrative, I believe, right?

I'm sorry.

Primary is usually more lucrative. I think...

Yes, we haven't delineated between the 2 of them. I mean, for us, they're both great business cases. But let's just say if you're solving the primary need, you're in a lot stronger position because the utilities can't get there fast enough. Once you're there, you're building your brand and your knowledge of the site much more than you are as the backup. We're going to learn a lot more in that primary position. So yes, we're happy to serve both markets. But yes, it's more likely the primaries will be larger.

And on -- if we look at the BESS battery storage. Obviously, that was a pretty smart pivot. So any color on where did this tech come from? This was part of AKASOL, I believe, that was already in the capability set? And any color on the capacity that you have to pivot over to storage and the opportunity there?

So yes, we purchased AKASOL 3, 4 years ago, and the primary purpose was to serve this CV space and the e-bus space. And we installed quite a bit of capacity to serve that space. Unfortunately, those trucks and buses are more expensive than their equivalent diesel. So the market hasn't developed like we all expected. Given that, though, the technology is very fitting to these industrial and data center applications. So it's more how do we design the form factor different. We're cell agnostic. So we're not stuck to one cell type or chemistry. And then, of course, we're leveraging the open capacity.

The name of the game right now is if you can provide generators, if you can provide stationary storage, people are moving you way up the list, okay? So they're willing to take more risk on a player like BorgWarner, which is unknown in the industrial space, but we're well known in the auto space. So that existing capacity, we haven't released a number on it, but let's say it's able to serve the next couple of years what we expect the demand to be. And if we see that demand is going to be even higher, we're happy to put more capital in, more investment in. But I would say we're able to leverage that pretty fast and be in production by next year.

Okay. So I thought in the past, you've capacitized to $1 billion and then you closed one of the facilities further.

Yes, we did announce we capacitized 6 gigawatt total storage between the 3 facilities, Darmstadt, Seneca and Hazel Park. We've since closed Hazel Park. So we have -- in total capacity, we have less than 6 now, but we haven't really given those numbers yet.

And when we think about transitioning from the EV to e-bus type packs to storage, they're pretty much the same technology, just one sitting flat and one is up and down.

Yes, I would say it's similar technology. There's not a lot of new invention going on. We're pushing these down the same production line. We're using the same end-of-line testers. We had to make some small investments to adapt to the new form factor and there's some software changes needed for stationary power. But in all essence, they're a very similar product.

And where are you looking to compete? Because I think there's some big players that are doing more grid-type applications. I assume you don't have that kind of capacity or plans. And what gives you sort of an edge in the areas that you're going to compete?

Right. So some of the big announcements from Ford or LG are more in the segment of those very large container storages, which support the grid directly. We're not playing in that space. We're more in the custom tailored solutions for particular use cases. So think about smaller form factors that are designed specifically for an application. And again, speed to market is important here. I think in Ford's announcement, they're not going to start shipping until 2028. So the need is now for some of those customers, we're able to fulfill that.

I mean any sense of how quickly, because you actually already have showed some customers on the storage side?

Yes. So we're actively quoting battery systems. We're doing everything needed to support a 2027 production launch. So not that far away. And I would say it's likely we're going to be successful.

I thought one -- I was talking about last week. The microgrid inverter, can you talk about the competitive landscape there? And any way to frame the sort of revenue opportunity from these systems? I guess it's sort of interesting with the 800-volt shift, the current product set, the current players in that space don't have -- or aren't used, currently supplying. So is that the big window for you to kind of get into that?

That is the window. As a technology company, you're always looking for the right time to jump into a market because there's incumbents that are very strong. We have a lot of respect for the current players. The shift to 800 volts is the moment. Why is that? First of all, these 800-volt systems are not just higher voltage, they're higher power in general. And we've been serving that market in automotive for quite some time. We're a top 3 player in inverters.

So we understand the requirements there. We design and develop and produce our own power modules, which is the guts of the system. We do that in Singapore. So for us, this is the moment to move, and we're getting very good feedback from the 4 customers we have samples with. So I would say we would expect the next step would be to make sure this is UL certified and that we can support production again in 2027. So we feel we got a very good right to win in this space.

And how should we frame the revenue opportunity there? Because I think a car inverters is like $600, $700 per car or something like that.

Yes. Thank God, they're not at that pricing. But -- we haven't quantified. Automotive is a different space. You're talking about 1 or 2 inverters per car, highly competitive, and we're very successful in that space. So we haven't released any numbers for industrial. But if you think about the backdrop of data centers, they're growing in the mid-teens every year for the next 10 to 20 years. I mean, it'd be hard to believe we wouldn't see a significantly different landscape, especially using 800-volt technology and higher in the future. So pretty sizable TAM.

Also outside of data centers, power conversion plays a big role anytime you're trying to adjust power from AC to DC or up and down the voltage level. Like in a data center, you're generating power at, let's say, 480, you need to move it up to 800, maybe even 1,500 DC. And then when you step it into the building, you got to step it down again to serve the individual racks. So there's tons of opportunity for inverters throughout that entire data center. And those -- that inverter technology is applicable to other industrial applications as well. If you think about oil and gas or power security, power gen applications, they all need inverters that operate at this higher voltage.

In terms of sort of sizing, like are you looking for a handful of wins here? Because it sounds like they'd be in the very large in terms of revenue for just one individual win because it's massive data center versus a car.

Yes. I wouldn't put a number on it. I would say we don't enter any market lightly. We want to make sure we have a right to win in the space. So based on our assessment, we continue to invest R&D into this area, and we're prepared to capacitize for that microgrid inverter that we've been talking a little bit about recently. But I think we have walk before we run. We want to make sure we get it right out of the gate. And that's why it's important to have samples with customers. We'll get important feedback from them, then we can fine-tune the application and make sure we go to market with something that's really different and of value to those customers.

And can you talk about the financial profile? I think you've talked about mid-teens type margins or converting at mid-teens businesses not really exist today. So is that a mid-teen EBIT margin overall that we're thinking about?

Yes. When we publicly discussed the power generation opportunity, we've shared $300 million in revenue in 2027, and we would expect that to convert in the mid-teens, consistent with our auto expectations. We're, of course, expecting some inefficiencies in that mid-teens conversion because it's our first year of launch. We're just ramping up. We're not at full capacity. So that's the expectation in the first year. And that's what would mean success for us as we look at power generation.

As we get into battery and power conversion, the same discipline applies in our auto business. So we're looking for 15% ROIC or higher. And I think Joe and I feel pretty bullish that we'll meet or exceed that threshold as we look at those other opportunities.

And what about R&D and CapEx in these areas? Because it seems so far, it's extremely CapEx light, but how are you thinking about those headwinds going forward?

What I think is really impressive about our business, and I'll use power generation as a great example. We've been working on it for 3 years. That's what Joe mentioned. But when you look at TTT that's been doing all of this work, they've exceeded or expanded or at least maintained their margin while still investing in this technology. That's incredible work by that team. And we have the same expectations as we jump into battery and we jump into power conversion. We still think we can meet our mid-teens incremental conversion while still investing in these new technologies. So that's how I think you should think about it from a margin perspective.

As we jump into the capital side, we did a phenomenal job last year really managing capital. We had a lot of eProducts capital in play. We need to make sure that we utilize that capital throughout the world. And that's why CapEx as a percentage of sales is only at 3%. As we step into this year, our guidance assumes about 4.5%, which is more in line with our historical range. And as we move forward, Joe and I think, hey, that 4.5% to 5% of sales range is likely where we're going to stay as we expand into these new opportunities. And we see that as a very achievable level of CapEx as we move forward to support all this growth that we expect to see in the near future.

How much -- if you were to add more capacity, I mean, how should people frame that in terms of the CapEx needed?

Yes. So when we think about power generation and this expansion, we publicly disclosed it cost us about $70-ish million to stand up this greenfield site in North Carolina. So that's probably a good baseline as we move forward. But again, I think as you think about -- as this revenue comes into our P&L and we're going to continue to expand, that 4.5% to 5% of sales range is probably a good modeling assumption as we move forward. That's the best way I think should think about it.

And I think what's important to note, in the automotive space, efficiency of capital is super important, of course. It's no different in this industrial space, but the demand is so high. We'd be happy to invest more capital because ROIC is super attractive. So people shouldn't think about us constrained too much on the capital side. If the demand is there for the products, we're going to invest because it's very attractive for us.

And don't forget, we're generating $1 billion of free cash flow. We have plenty of opportunity to invest if the business case makes sense. So I completely agree with Joe.

Got it. And maybe going back to the core business. You didn't change guidance last quarter. S&P has gotten a little bit worse. Raw mats are a bit worse. I mean, any puts and takes to kind of kept things sort of held in line?

Yes, it is really what I mentioned earlier. S&P has come in about 2% down for the year. It's right within our range, flat to down 3%. So market production is right in our assumptions for the guide. Q1, Q2 seem to be holding up pretty well from a revenue perspective. Really happy with how the team performed in the first quarter, 10.5% margin, up 50 basis points. It's a continuation of the great performance that we've seen over the last couple of years. As Joe and I sit here, I think we feel really good about our guide, and we're just going to continue to focus on Q2 and execute. So we feel good about where we're going for 2026.

Got it. I actually going back a second for the -- when would you decide to put more CapEx in place? Do you need the orders in hand for the turbine generator opportunity? Or would you do it just anticipating those orders? How are you thinking about that?

Yes. What we've said is second part of this year, we'll likely make a decision on whether we put more capacity in. So the criteria we're using for certain demand is part of it, but not only. If you think about bringing a new product to market, we want to make sure the quality is right, the first time through on the manufacturing side, our supplier readiness. So we're evaluating all those things. Hey, we want to come out strong and make sure the BorgWarner brand really shows well in our first big industrial play.

So those are the criteria. Also, we're looking at where would we put that investment. Would we put that in Hendersonville or will we put it in Europe? We see demand on the data center side in Europe or would we put it in Southeast Asia. So that's also part of the decision so that we can balance the capacity and serve the customers in their markets.

Got it. Okay. Switching back -- going back to the core guidance. One question I have gotten hasn't been too much year-to-date, but Q1 organic growth was a bit weak. I mean even if you take out batteries, it was down 3%. How should we -- what sort of drove that sort of weaker growth? And how should we think about it playing through the rest of the year? Because you've historically been very solid grower over market.

Yes. So if you look at Q1 and you remove battery, we're basically right in line with market, which is right in line with our full year guide. So that's one data point. When you break it down by region, North America, we saw some strength. It was really coming from our DMS business from some transfer case growth in that market. On the European side, we did have a thermal program ending. So that was a bit of a headwind for us. And then in China, it was really timing of an eProduct program.

So those were kind of the puts and takes. But I wouldn't over-index on any one quarter. When I take a big step back, $3.53 billion in revenue in the first quarter, you annualize that, we're right around $14.15 billion, which is in the middle of our guide. So it seems like we're right on track. That's, I think, the best way to look at it.

And how should we think about -- you mentioned sort of an organic growth. I think you've highlighted this year was a tougher year going into this year. The '27 still on track to be a strong recovery with some launches coming? Is that the right way to think about it that picks up on the core auto business next year?

Yes. So when you think about where have we been in the last couple of years, it's been -- we've been moving in this flat to 1% growth over market. And it's because we've had this EV overhang for the last several years. Obviously, there were a lot of expectations that EVs were going to grow, and we won our fair share of business, but those programs either didn't launch or they launched at much lower volume. And one of the things that Joe and I were really focused on as we took these roles was we're not happy with the outgrowth profile of our business, and we want to change it.

And Joe set a tone of we want all of our business units to grow, find your growth opportunities. And that's led to a lot of energy in our company being released and 40-plus wins that we've announced over the last 5 quarters. And as we look into '27, '28, '29, we expect to see some of those programs into our P&L. And we see it as a step function. So we should see outgrowth in our auto business in '27, further outgrowth in '28 and further outgrowth in 2029.

And so we're really excited to get to a place where we're seeing outgrowth and increasing revenue in our P&L because it's amazing what our company has done to expand margins and the earnings power of the company despite revenue being relatively flat. I think we're really excited to see what our company can do when we see that top line growing again in '27, '28, '29. It's going to be a really powerful story for us.

Got it. Any questions out there? I got a quick check in there. Raise your hand if you have any. I'll try to get you before we end.

Yes, one question on the backup power when you talk about [indiscernible] so coming up faster [indiscernible]?

So it matters to a certain extent. Our system comes up in about 45 seconds, which is a main requirement. Diesel gensets has come up a little bit faster than that. So we feel that where we're positioned with that 45 seconds is adequate for what the hyperscalers are asking for. Remember, they got -- they often have battery storage on site too. The trio effect here is primary power, backup power and battery storage to help smooth out transients and also interruptions to primary power.

Follow up on the comments made on the auto business returning to growth in '27, '28, '29 [indiscernible]. Just what's driving that [indiscernible] program specific launches or anything else?

Yes. I mean, as we had mentioned on the calls, the change we made to leverage the entire business for growth, not just electrification, resulted in the business units really working on and winning new business. And we've been trying to share many of those awards in the last 18 months. If you look in those awards, some of them are conquest businesses. So this whole idea of the strong get stronger in these -- especially the foundational businesses, we're starting to see it now in the wins. So those wins take 2 to 3 years to bring to production. So this year, we're still living with this EV slowdown in the Western world, but we'll start to see those programs launch next year and then pick up volumes in '28. So that's our thesis there.

Maybe to add just a little bit more. I love the profile. It's across region, it's across customer. It's across technology. When you think about where the world was 2 or 3 years ago, it was really focused on eProducts. Now it's across all different technology, all different customers. That gives us a lot of confidence that we're going to see this growth accelerating in '27, '28 and '29.

Color on maybe China. It seems like you're very strong position globally in your technologies. But what is the competitive landscape in China, particularly on the e-powertrain, where there's just a lot of emerging suppliers, at least in other segments that seem to be taking share. Is that -- are you seeing the emergence of pretty good competition out of the Chinese suppliers at this point?

So there are a few new players in China, but we're competing extremely well. A number of those wins that we've announced over the last 18 months have been in China. So why are we winning there? First, we've been there a long time, over 30 years. We have very close relationships. And especially when we think about the leading 6, they're the ones that are gaining the export market benefits. What do Chinese OEMs want? They want speed and they want competitive technology, and we have both of those.

So we run shoulder to shoulder with them to get products into the market usually in the 12- to 18-month time frame after you kick off a program. So that's half the time of the Western OEM. So speed is super important. So as we see those Chinese OEMs exporting more, over 7 million vehicles last year, this year, it's likely going to be higher. We're on a lot of those product lines and a lot of those vehicles. We even get a little tailwind here and there, like in the 4-wheel drive business. because the take rates are higher in Europe than in China. So we feel real good about our position there.

And the next step is they're going to have to localize, and we're going to be the likely partner of choice if we're supporting them in China. We already have factories, people, knowledge. We understand the local laws. We can move fast because we've already got existing assets and folks that can stand up localization for them in those markets. So that's our game plan for China so far. It's working quite well. And I think being nimble as they adjust is also important.

How about overall eProducts profitability? So you've shown really, really good growth. It seems like the competitive landscape seems like you're emerging as a leader. But when should we think -- what needs to get that to profit levels overall and then sort of in line with the rest of the business?

Yes. So if you go back a couple of years, we were investing heavily in that side of the business, and it made a lot of sense the world was moving to electrification, and we were supporting a lot of programs that we had won. But it was important as time went on that we rightsized that business to the level of revenue that we were seeing. And so we went through a restructuring that started in 2024. And one of the things that Joe and I were really watching last year, besides the growth, and we had phenomenal growth, 31% light vehicle eProduct growth was, are we converting that growth into income at the mid-teens. That's our expectation.

And that would give us confidence that we got that restructuring -- and that's exactly what we saw last year, 31% growth, and we converted in the mid-teens. That's something that we need to continue to watch as we execute this year. We're expecting growth in light vehicle eProducts around 10%. And we've got to make sure that we can continue to convert that growth into income. If we do that, we got our restructuring right. But we also need to look at the regions. The regions are adopting electrification differently. You know that very well. So we need to make sure that we're continuing to adapt our cost structure to what's happening in the various regions, and I see our business units doing that.

Maybe to wrap it up, there's so much focus on data centers. How are you now thinking about M&A, which is a big -- seem to be a big -- historically has been a big focus of the company, doing smart deals. What are you looking at now? Are you looking more outside of auto? Or how should we think about what you're focused on in terms of M&A priorities and types of assets from here?

Yes. First of all, we're really pleased with the portfolio and the move back toward growth and growth above market, and we're getting good traction there. When we think about M&A, we've really raised the hurdles around M&A. We're in a different situation than we were 5 or 6 years ago. So we can be a little more selective. But we've opened the aperture. So we're not just looking at automotive, we're looking at nonautomotive, including industrial and data center spaces. The criteria we use is straightforward. It means to make industrial logic, leverage our core -- the second is near-term accretion is important. And then third, how we value it. We want to pay a fair price.

So we are very active looking at targets. We've passed on a number of deals that didn't meet one or more of those criteria. But I feel Craig and I and the team will be as disciplined around M&A as we're being around the rest of the business, and you can see the benefits of that's yielding. So if we can't action something, we then return much of that cash back to shareholders and buybacks, dividends. In fact, the last 5 quarters, we've returned 70% of it back to shareholders in that form. So we're looking for balance and consistency in the capital allocation side.

Great. I guess we'll wrap it up there. Thank you very much for joining.

All right. Thank you.

Thank you.

Good morning. My name is Michael, and I will be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner 2026 First Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Michael, and good morning, everyone. Thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on our home page and on our Investor Relations home page. With regard to our Investor Relations calendar, we will be attending multiple conferences being now in our next earnings release.

Please see the Events section of our IR page for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods. When you hear us say adjusted, that means excluding noncomparable items.

When you hear us say organic, that means excluding the impact of FX. When you hear us refer to our incremental margin performance, incremental margin is defined as the organic change in our adjusted operating income divided by the organic change in our sales. We will also refer to our growth compared to our market. When you hear us say market, that means the change in light vehicle production weighted for our geographic exposure. Please note that we posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion.

With that, I'm happy to turn the call over to Joe.

Thank you, Pat, and good morning, everyone. I'm pleased to share our results for the first quarter of 2026 and provide an overall company update, starting on Slide 5. We I wish to begin by thanking our employees, our customers and our suppliers for all of their trust, efforts and continued support. In the quarter, we achieved sales of $3.5 billion. Excluding the decline in our Battery Energy Systems segment, our organic net sales were down approximately 3% year-over-year, in line with the decline in the market production.

I am excited to report that our strong award activity has continued into the first quarter. To date, I'll highlight 12 business awards across our foundational products and e-products portfolios. These wins represent only a portion of the awards secured during the quarter. But I believe that they underscore the strength of our portfolio and the global demand for efficient powertrain technology.

Our adjusted operating margin performance was strong in the first quarter, coming in at 10.5%. This strong underlying operational performance was once again driven by our focus on cost controls across our business. And we are taking steps to grow our product capabilities for the data center and other industrial markets. I will share 2 additional products with you in a few slides. At the same time, our turbine generator continued to make progress towards its 2027 launch.

Lastly, we remain disciplined in deploying capital to drive shareholder value during the quarter, returning approximately $185 million to shareholders through share repurchases and our quarterly cash dividend. Looking back on our first quarter performance, I'm extremely proud of our team and our results. Once again, we executed at a very high level which gives us confidence that we are on the right path to achieve our full year guidance while also continuing to win awards across our portfolio to deliver sustained shareholder value throughout long-term profitable growth.

Turning to Slide 6. I'd like to highlight several recent product awards that demonstrate both the competitiveness of our technology and the strength of our execution in key markets. First, BorgWarner has secured 3 electric motor business awards with Asian OEMs in South Korea and China. BorgWarner is broadening its electrification offerings in China by introducing S winding and ultra short hairpin winding technology for hybrid vehicles. In South Korea, BorgWarner secured a new state or assembly business for an electric vehicle program I believe these awards reflect the customers' confidence in BorgWarner's engineering capabilities, localized manufacturing footprint and product quality in Asia.

Second, BorgWarner has secured a 7-year contract extension to supply 8 families of engine, machines, power module and battery management controllers to a leading off-highway manufacturer. The extension builds on decades of partnership with the OEM and spans a broad range of applications from construction vehicles and marine platforms, the stationary power systems. I believe this contract expansion validates our position as a trusted long-term propulsion partner that is agile enough to support them and provide tailored solutions as they expand into new and emerging markets.

Third, BorgWarner has secured 3 turbocharger program extension awards and 1 turbocharger conquest award with a major European OEM. Our turbochargers will be utilized on a range of passenger car and fan applications. The awards include variable turbine geometry, twin-scroll wastegate and regulated 2-stage turbocharging technologies. These technologies are tailored to a range of engine and vehicle requirements, helping the customer meet demanding performance fuel economy and emissions targets across a broad range of applications. I believe these business wins reflect -- BorgWarner's strong turbocharging technology.

Our competitive solutions and the trust we have built with this long-standing customer. Fourth, BorgWarner secured conquest business with a major European commercial vehicle OEM to supply both a variable turbine geometry turbocharger and an exhaust gas recirculation cooler for a Euro VII compliant heavy-duty diesel engine platform. The award expands BorgWarner's product portfolio in the on-highway commercial vehicle sector and further broadens our collaboration with this customer. Production is expected to begin at the end of 2028. And finally, BorgWarner continued to grow its drivetrain and engine timing portfolio in Asia with 2 new program overs.

BorgWarner will supply a next-generation wet dual clutch for a Chinese OEM SUV platform. BorgWarner also secured a conquest win for a Tamtor-actuated VCT system for a Japanese OEM's next-generation hybrid ego. These new awards reflect BorgWarner's continued commitment to advancing efficient and competitive propulsion solutions across both transmission and engine timing technologies. I believe they further demonstrate the resilience and growth potential of our propulsion business in Asia as customers continue to value high-performance, cost-competitive solutions for both combustion and hybrid powertrains.

Next, on Slide 7, I would like to discuss our expanding capabilities for the data center and other industrial markets. Let's start with an update on our turbine generator launch progress. I'm very pleased with the advancements we've made over the past quarter. First, strong customer demand indicators continue with ongoing end customer visits to our facility in Asheville. Next, I'm pleased to report that our first B sample turbine generators are now being delivered to our customer. This is a very important step to allow our customers to move towards field testing our product.

In addition, our teams have continued their testing processes, which are performing as plan. And as part of our production readiness, I'm also pleased to report that our supplier nominations for production are now complete. Our UL compliance process is now well underway. We have completed our internal UL compliance requirement evaluation on our B samples. This is an important milestone toward our final certification which will take place with C samples later this year. In my opinion, these are all positive steps as BorgWarner continues to progress towards industrialization and production, currently expected in 2027.

In the middle and right side of the slide, you'll see that BorgWarner continues to expand its portfolio to serve the data center and other industrial markets. I'm really excited that this portfolio now includes battery energy storage systems and bi-directional microgrid inverters. With this expansion, we have products that serve the market needs across power generation, energy storage and power conversion.

First, I would like to highlight our battery energy storage system offering. You've heard BorgWarner speak about the possible application of our battery technology for various industrial markets, and we are now testing and quoting business for these markets. We believe our battery energy storage system will be well suited for deployment in multiple uses across the data center market, but we also see other commercial and industrial applications.

Importantly, our battery energy storage system designed a cell chemistry, form factor and application independent. I believe this is important. Given the wide range of needs and potential battery cell technologies that could be deployed for these markets. Our product design is modular lean and scalable with redundancy in our design. We believe this design can be deployed for applications, including peak shaving, backup power and more.

We believe our battery energy storage system will be production-ready in 2027 with ongoing customer validation and UL compliance and process. I look forward to providing you with updates as we receive customer feedback. Finally, we are also adding bidirectional microgrid inverter or grid tie inverter to our portfolio for these markets, and we expect this product to be production-ready in 2027. Our grid tie inverter features a power distribution unit, critical for efficient and flexible grid forming across microgrid applications. Our tie inverter is designed to enable the filing, significantly reduced weight and size compared to traditional systems, efficient bi-directional power flow for seamless charge and discharge. Why voltage conversion capability to support diverse energy systems and fast dynamic response for improved micro grid stability and controlling.

Our UL compliance for this new product is already underway as part of our product readiness. We're excited to share that the first grid tie inverter B sample units are being shipped to 4 customers, a major milestone for the program and a testament to the work behind it. To summarize, there are 3 key takeaways from today's call. First, BorgWarner's first quarter results were south. Excluding the decline in our battery and charging sales, our sales performance was in line with industry production and is consistent with our full year outlook.

Our adjusted operating margin expanded 50 basis points and adjusted EPS grew 12% compared to the first quarter of 2025, reflecting our continued focus on cost controls and growing the earnings power of the company. Second, we announced 12 new business awards across our portfolio in the quarter, which we believe further demonstrates our focus on product leadership across the propulsion market for combustion, hybrid and BEV architectures.

And third, we plan to take steps to continue growing our capabilities for both our existing markets while also expanding into data center and other industrial markets. We expect this technology expansion will help ensure that our profitable growth continues long into the future. While the current environment remains challenging and uncertain, I'm confident in our team's ability to effectively navigate these conditions, which we clearly demonstrated in the first quarter.

I also continue to firmly believe that we have the right portfolio decentralized operating model and financial strength to deliver our full year 2026 guidance and drive long-term profitable growth.

With that, I will turn the call over to Craig.

Thank you, Joe, and good morning, everyone. Let's jump into our first quarter financials. By turning to Slide 8 for a look at our year-over-year sales. Last year's Q1 sales were just over $3.5 billion. In the first quarter, stronger foreign currencies drove a year-over-year increase in sales of $167 million. Then, you can see the sales headwind from our batteries, which drove a year-over-year decrease in sales of $54 million.

The remaining organic sales decline of $95 million or 2.7% was in line with the reduction in our light vehicle market production for the quarter. This decline was primarily driven by transfer case outgrowth in North America, which was more than offset by foundational product headwinds in Europe and a timing-related e-product sales decline in China. The sum of all this was just over $3.5 billion of sales in the first quarter.

Turning to Slide 9. You can see our earnings and cash flow performance for the quarter. Our first quarter adjusted operating income was $372 million, equating to a strong 10.5% adjusted operating margin. That compares to adjusted operating income of $352 million or a 10.0% adjusted operating margin from a year ago.

The exit of our charging business in 2025 increased operating income by $8 million year-over-year. Excluding this benefit and FX impacts, adjusted operating income decreased $4 million on $149 million of lower sales. This strong year-over-year performance benefited from ongoing cost reduction actions that our teams continue to take across our business. Our adjusted EPS was up $0.13 or 12% compared to a year ago as a result of higher adjusted operating income and the impact of over $650 million in share repurchases over the past 4 quarters. And finally, free cash flow was a generation of $13 million in the first quarter, which was a $48 million improvement from a year ago.

Now let's turn to Slide 10 and take a look at our full year 2026 outlook, which is unchanged compared to our initial guidance provided in February. We continue to project total 2026 sales in the range of $14.0 billion to $14.3 billion. Starting with foreign currencies. Our guidance assumes an expected full year sales benefit of $200 million compared to 2025 due to the strengthening of the euro and the renminbi versus the U.S. dollar.

We continue to expect our weighted end markets to be flat to down 3% for the year. We expect our light vehicle business, which comprises over 80% of our sales performed broadly in line with our weighted by vehicle market. However, we expect a sales decline in our battery business due to the lack of North American incentives and weaker European demand. This decline represents a 150 basis point headwind to our year-over-year sales group.

Based on these assumptions, we expect our 2026 organic sales change to be down 3.5% to down 1.5% year-over-year, which is roughly in line with our market, excluding the decline in battery sales. .

Now let's switch to margin. We continue to expect our full year adjusted operating margin to be in the range of 10.7% to 10.9% compared to our 2025 adjusted operating margin of 10.7%. On a year-over-year basis, we expect the exit of our charging business to drive a 10 basis point improvement in adjusted operating margin. Excluding this benefit, the low end of our margin outlook contemplates the business delivering a full year decremental conversion in the low double digits, while the high end of our outlook assumes we largely offset the impact of the organic sales decline through further cost controls, just like we saw in the first quarter.

We view this as strong underlying performance with our first quarter results, providing a strong start to the year. Based on this sales and margin outlook, we're expecting full year adjusted EPS in the range of $5 to $5.20 per diluted share, which is unchanged compared to our initial guidance. The midpoint of this EPS guidance represents approximately a 4% increase versus our 2025 adjusted EPS and once again demonstrates our focus on consistently driving or expansion despite lower industry production, battery sales declines and potential cost inflation.

And finally, we continue to expect full year free cash flow to be in the range of $900 million to $1.1 billion, building off a strong 2025. With that, that's our 2026 outlook.

Let me summarize my financial remarks. Overall, we were very pleased with our first quarter results. Our sales performance was in line with our full year guidance despite a challenging first quarter production in market. We achieved a 50 basis point adjusted operating margin improvement on relatively flat reported sales. And our free cash flow performance represented a solid start to the year. Our Q1 results once again demonstrates the BorgWarner team's ability to deliver strong financial results and a declining production environment.

As we look ahead to the balance of 2026, we intend to remain focused on expanding the earnings power of the company. At the midpoint of our guidance, we expect another year of adjusted operating margin expansion and adjusted earnings per share growth despite our expectations that market volumes and battery sales are expected to decline in 2026.

Finally, with another year of anticipated strong free cash flow, we expect to have additional opportunities to create value for shareholders as we prudently evaluate inorganic accretive opportunities that grow BorgWarner's earnings power and execute a balanced capital allocation approach that reward shareholders.

With that, I'd like to turn the call back over to Pat.

Thank you, Craig. Michael, we're ready to open it up for questions.

[Operator Instructions] And the first question today comes from James Picariello with BNP Paribas.

Good morning, everybody. So I'd like to hit on the company's non-auto industrial focus to start things off which is clearly gaining momentum in terms of the company's strategy. So for the battery energy storage product launch potential, how translatable is the company's competency regarding commercial truck battery packs to a proper energy storage system. How -- I mean, clearly, you're targeting the potential for production next year. Like is there additional investment that we should anticipate within that Battery Systems segment this year? And how rich is the quoting pipeline. .

Yes. James, so first of all, the battery energy storage business and our products are very portable to these types of stationary applications. If you think about the requirements in commercial vehicles and buses, they're pretty significant in terms of reliability and quality. So -- we are leveraging our existing capacity to pivot further into the data center space and other industrial markets. So from that standpoint, it's a really smart play for our teams and as we mentioned, the battery energy systems are cell chemistry and form factor independent. So we think we're well positioned for various types of applications that are out there. As far as the pipeline, we are actively quoting with a number of customers. So we're really pleased with the pipeline we're seeing.

Got it. And then as a segue, my follow-up, is there a natural synergy for battery energy storage through your turbine generator partner endeavor? And -- as we think about the power generation business for data centers for BorgWarner, I know production starts next year, targeting $300 million plus in sales. It's early days. But -- are there any considerations to potentially expand your turbine generator capacity like beyond the North Carolina plant? I know Endeavor and its subsidiary edged have data centers, active data centers in Europe in addition to the U.S. So I'm just curious how the company might be thinking about that capacity potential international expansion element and then the synergy, the potential synergy on the energy storage piece.

Yes. Sure. So the first question on synergy, there's definite synergy. I mean, if you think about the 3 offerings we show on Page 7, turbine generator, battery energy storage and then power conversion. Those are highly related products in the system, and they're all solving a major issue, which is lack of power. So when it comes specific to Endeavor, definitely, we've got a great partnership with Endeavor.

We see it continuing to grow over time even better news is these energy storage systems and power conversion have lots of opportunities outside of the strong endeavor relationships. So we're optimistic. There's a lot of applications and potential customers out there for both energy storage and power conversion. With respect to your question on the turbine generator, as we mentioned on the call, the progress is quite good, in our view, we're on track for a 2027 launch sometime this year, we will have to make a decision on whether we expand capacity further beyond the 2 gigawatts that we've installed in North Carolina, but we'll take that decision as we get closer to the second half. .

And your next question comes from Emmanuel Rosner with Wolfe Research.

Great. Just 1 follow-up on the power gen side. Obviously, it's still early days and a lot to learn there from customers, et cetera. Are you able to give us some color on how do you think about the value proposition that your solution offers. What unit economics look like? How does that compare with the existing established solution? Just trying to understand how the conversation with potential customers is going.

Sure. So a couple of things we're solving here for. One is time to market the backlog for power generation is pretty significant, sometimes up to 5 and 6 years. So our ability to leverage automotive scale and move quickly into the space is speed that's well needed in this market. That's the first thing.

The second is the emission profile of these turbine generators raises the bar and meets even the car requirements in 2027 and beyond. So from an emission standpoint, very clean power. The third thing is the total cost of ownership is very attractive. So -- we feel really good about the value proposition of this into the space, especially right now.

Understood. And then the -- my second question would be on the capital allocation. So it looks like you have in front of you some opportunities to invest more capital into this industrial solution, you'll make a decision on the capacity for power gen. And then obviously, you're trying to get into energy storage, power conversion. Is there any change at all into how you're thinking about capital allocation, either within CapEx in terms of increasing that or just shifting that towards these solutions and away from autos? And then in terms of M&A versus buybacks, like if you have so many organic opportunities, you still need -- do you still have as much focus on M&A as you did recently?

So let me begin by saying our top priority will always be on driving organic growth, and we're able to show that we're leveraging our entire portfolio especially if you look over the last 18 months of win. So we want to continue with that winning strategy and the first priority then for capital would be to invest for those projects. Nothing has changed from our capital allocation process beyond that. I'll answer the M&A topic, maybe Craig talk more deep about the other way to serve shareholders. On the M&A side, we continue to open up the aperture and have a very disciplined process and flow of targets that we're looking at.

But just to remind you, there's 3 main criteria here. One is really leveraging the core competence we already have. So it has to make some strong industrial logic. The second is we want any acquisition to be accretive. And third, we want to pay a fair price. So we're sticking with that disciplined approach. We continue to have a good flow of targets inside auto and out. And I would just say you can expect from Craig and I to stick to that game plan.

Maybe just to add on to Joe's comments, what is our goal? Our goal is to create value with our cash. And I think we've done that very effectively over the past several quarters. Q1 was another great example of that, $185 million of cash deployed to shareholders between share repurchases and dividends. Over the past 5 quarters, we deployed over $800 million of cash, which represents about 70% of our free cash flow. Joe and I are focused on discipline, consistency and how we're allocating capital across the business, but it's through those levers for investing in the business organically. So we feel really good about the actions we've taken over the last several quarters.

Your next question comes from Joseph Spak with UBS.

Thanks. Good morning, everyone. Back on the best opportunity. I just want to be clear sort of what you're doing here. So you're -- it's similar to what you doing -- or we're doing on commercial trucks, where you're putting the pack together into a system with some software because it does say sort of chemistry and form factor independent, which leads me to believe you're still not doing the calls here. But I guess the reason I ask is I keep going back to this FinDreamsLFP announcement from 2024. And I know that agreement said it was specifically for commercial vehicles, but I'm wondering if there's any leeway in that agreement to be able to leverage that relationship as well.

Yes. Joe. So as you mentioned, we do have a strong partnership with FinDreams and our products are cell chemistry agnostic. So, we're in production today on NMC, but we're also working on future cell chemistries, like LFP, sodium-ion and others. The great part about the pivot here is we're leveraging both our technology that's existing that commercial vehicle and the current CapEx that's invested. So that's 1 of the reasons we can get to market so quickly. So we're moving forward with UL certification and quoting. As far as our content on it, it's very similar to CV or eBUS in terms of procurement of the cells, design of the entire pack, the system, the BMS and the final testing. The main difference is these will be for stationary applications versus mobility.

Okay. That's helpful. And then just to, I guess, follow on to Emmanuel's question on capital. Look, these opportunities are super exciting, are still relatively small, but you can see how they are much, much -- are much more meaningful in the future. So is there any like just a rule of thumb for -- and I know you're using existing capital as you sort of just mentioned, but is there any rule of thumb about how you would advise investors think about incremental investment dollar per every pick your metric of revenue just so we can understand how the return profile looks going forward?

Yes. I think it would be Fair to say that the ROI and capital intensity will be similar to our light vehicle business. So if I look at our turbine generator, which we talked about over the last quarter, although we're putting a greenfield site in for the final assembly and test and Henderson Bill, we're leveraging 4 existing auto plants, broad components and subassemblies. So I think it's a great example of how we're leveraging our CapEx, our capability and our speed, so that we can move quickly into these new markets.

And your next question comes from Colin Langan with Wells Fargo.

Just on the overall guidance to step back. I mean, production has come in a bit worse. Raw materials have gotten better. and the guide is being held. Are there any puts and takes within that we should be thinking about? Is there favorable mix or favorable FX? And any additional cost actions that may be needed to offset some of the inflation we've seen in the market?

Yes. Colin, overall, we think we can manage the inflationary impact at this point. in our mid-teens decremental conversion. So let me start there. But I'll walk you through again the guide from a revenue perspective and a margin perspective at the midpoint. And really, it's unchanged from our view Q1 was a good start to the year. So when we think about sales year-over-year, we ended last year at $14.3 billion. We do see a headwind from industry production right around 1.5%. A decline versus last year. We see the battery business declining, but we see positive FX coming in as well as some modest outgrowth.

And that's what gets us to $14.15 billion, when you think about the margin profile, we're excited that we're expanding margins at the midpoint and the high point of our guide despite some challenges from a market perspective. That's really coming from a couple of areas. First, the exit of our charging business, that's about 10 basis points of enhancement. Additional cost controls, just like you saw in Q1, that's another 10 basis points. And then again, we're holding that decremental conversion in the mid-teens, which includes the inflationary pressures that might, might happen in Q1 and throughout the year. So we're closely monitoring that, but we feel good that we can expand margins and expand EPS this year despite some macro headwinds.

Okay. So there's no incremental -- there's no cost or there's no -- you're going to offset those cost savings actions from a raw material side.

At this point, we feel like we can manage that appropriately.

Okay. And then on the -- just on the data center and storage. I'm just trying to understand all this. One, just from the energy gen side. I mean, just to be clear, this is more -- at this point, you're just capacity constrained that looks like that market is just completely sold out. And then on the storage side, anything -- any way to size that market, is that potentially just as big as the turbine generator opportunity. And then lastly, as we think of these businesses together, does that actually help you market to customers? Because I believe hyperscalers are actually starting to actually have storage requirements as they build out data centers. Does the combo actually, is that a selling package that you could provide both and that created an added opportunity to win business?

Yes. Colin, maybe I'll start with the second question. When you think about, again, Page 7 power gen, storage and power conversion, those are highly related and they're all towards solving this power availability issue. So yes, there's synergy between those 3, and we do find customers that want more of a system solution or at least someone that understands the complete system across these very complex product segments.

With regard to your first question? The ability to bring storage to market fits well within the same data center growth that we see across all 3 platforms. So from our view, we're talking mid-teens CAGR for the next 10 years or more. So the backdrop and the demand very strong for these products, and it's actually increased over the last 12 months as many folks know.

And your next question comes from Chris McNally with Evercore.

Thanks so much, team. And sorry, some of these will be really questions, I get the toner of the call on the industrial extensions. But I wanted to just kind of phrase it differently. I think the way I'm questioning the size of -- let's focus on the power gen opportunity over the next couple of years. Would you characterize it as -- are we -- is there a supply constraint, a capacity constraint or signing up customer by customer?

I mean it's a new business, it's going to be deal by deal. But I would love to know is what is a capacity ramp look like? How does that occur? Is that the type of thing that you'll need multiple years lead time or as the deals come in, as the customer wins come in, capacity will follow. But that supply versus demand, what would be the bottleneck taking a couple of years out would be great for sizing the business.

Sure. Thanks for the question, Chris. So let's say this starts massively with demand. The demand for power gen, especially behind the meter, driven by the fact that many utilities have a 4-, 5-, 6-year lead time to get the power to serve these data centers. And on top of that, the growth of Gen AI specifically, it's creating a massive demand challenge. I would say over the last 12 months, what we've seen is the supply constraints of the existing turbine generators and other behind-the-meter solutions has made the challenge even bigger. So we're fortunate to come in at the time we are with a great product that has a lot of value to the customer.

So I hope that answers that question. With regard to the capacity we have installed and how do we go about selling that. So as a reminder, we've installed at of capacity, the $300 million next year is the initial launch and revenue that we're planning. So it's a subset of this capacity. So we feel really good about the installation of the 2 gig. We wouldn't install that much if we didn't feel that there was going to be a backlog created.

And as we mentioned earlier in the call, we'll likely take a decision whether or not we add additional capacity based on the demand we see in the purchase orders placed. And that capacity could be installed in this market, but we also see demand in Europe and other markets. So we'll also have to decide the location.

And I know we tried to do this last call, and obviously, we're not going to get specific pricing, but just ballpark like 2 gigawatts is multiples of $300 million of revenue. Is that fair to say?

Yes. We haven't provided pricing. So yes, multiples is a fair way to think about it. I think if you look at the pricing that's out there for power gen, especially behind the meter, you get a range that's out there. And it's only increased over time. So that might give you some indication of where we're at.

No, that ended. That was the check on the math. And is the last follow-up. I think someone asked right before -- it seems like with the behind the meter and the battery stores that also you could have great lead-in from some of the auto customers, right, on the battery restorage side, a lot of excess capacity we know in batteries. Is that helping on a cross-sell specifically on those 2 businesses?

Yes. I would say it's adding significantly to our play. Our play is more about serving these industrial markets directly, not with our automotive customers. Clearly, we have relationships with those customers and where we can work together, we will. But these plays are more about our relationships with the industrial customers.

And your next question comes from Dan Levy with Barclays.

Thanks for taking the questions. I'll continue. The line of questions on the data center side. And more so just a supply chain question. I know you've talked about 2/3 on the turbine generator 2/3 of the content is coming from you and then you're heavily leveraging the automotive supply chain. But I think we've heard within the power gen side that 1 of the key sort of supply constraints out there is areas around [ blade, veins ] and very large lead times. So we know that generally, it takes maybe only 1 or 2 components to have a bottleneck.

So maybe you could just walk us through your confidence that when you look across the supply chain, there won't be any issues getting what you need for the turbine generator system and that if you're going to expand capacity that the supply chain can keep up with you, even on the most supply limited component.

Yes. No, thanks, Dan. So a couple of things that I think may help address your question. So first of all, our turbine generator system, it does leverage not only our supply base, but our technology. So our turbo products are radial turbos many of the large turbines are more flow-through or axial turbos. So it's different technology, different levels of material selection for these are more consistent with what you see in commercial vehicle applications and sometimes pass car. So the requirements are different for what we're buying.

Second point, -- it is true 80% of the supply base for the turbine generator is already in a BorgWarner is already a BorgWarner supplier. So they know how to work with us from developing those components to launching and producing those components. So we feel that's a big risk reduction, getting this product to market. I think the third important thing here is 1 of the things that we are experts on is global supply chain. I mean we have teams of people around the globe that manage suppliers in many, many commodities.

So this is our wheelhouse. It's a core competence of the company and we're going to bring all that confidence to launch these products. So from time to time, you do see a constraint or you see an issue with the supplier. But as a global company, we get boots on the ground to address those constraints and make sure it doesn't impact the products to our customers. .

Great. As a follow-up, I'll give you a question on the core business today. I mean our reaffirming the guidance for the growth of the market to be flat this year, but you've given a sort of another slide of all these component wins. You've talked about really being this reacceleration of growth. Maybe you could just give us an update on where we are on line of sight to the rest of the portfolio seeing a reacceleration. Is it just content gains, new new program launches? What's going on that's driving that uptick in growth from the core portfolio in '27.

Yes. I think it's fair to say, in 2016, we're still living with the overhang from some of those programs on the EV side from a couple of years ago. but we're working through that. In '27, what we like to point to are the product wins across the entire portfolio. So if you just go back last 18 months I mean over 30 awards we've announced publicly. And it's not just 1 part of the world. It's not just a couple of product lines. The other thing to point to is if you just look at this quarter, we announced 12 wins, 3 of them were conquest wins.

So what we've been sharing over the last 12 months that the strong will not only survive, they're going to thrive in this type of market, we're starting to see that in the program wins. And of course, as those launch we'll start to see the revenue beginning in 2027.

And our next question comes from Luke Junk with Baird.

Maybe you could just put a finer point on how you're thinking about capital allocation is a way to maybe potentially accelerate the data center and industrial story in an inorganic sense. Is that something that you're looking at intentionally in terms of building the acquisition funnel and thinking sort of holistically and deploying capital towards these efforts?

Yes, Luke. So the capital allocation story hasn't changed. I would say, over the last 12 months, we've continued to open up the aperture of what we're looking at. So not only automotive and CV space, but also this new data center space, but I just want to bring us back to the 3 criteria. The first 1 is, it needs to make a lot of sense and leverage our competence. We wanted to be accretive, and we want to pay a freight price. We want to pay a fair price.

So we want to stick to that discipline, and you can kind of Craig and I to do that. But we do feel more and more confident that our products and technology played really well into this data center space. So as you can see, we're leaning further into it with the R&D investment. And so I can expect we're going to look at some things that might help accelerate that journey. But you can count on us being disciplined about it.

Stay tuned there. And then second, maybe this is an unfair question, Craig, but I'll ask it. Just you mentioned that you're confident in the right path to achieve full year guidance, why not raise the display margins, especially, -- is it just too early in the year? Or is there something that we should be thinking about in terms of investments tied back to these incremental products that you're showing us this morning.

Yes. I think we had a really good Q1. There's still a lot of uncertainty in the overall environment, but when you look at our performance, that's implied in the guide, and I'll walk through what we saw Q2 through Q4 last year versus this year. Q2 through Q4, sales were about $3.6 billion a quarter. Margin was about 11.0%. And -- what's implied in our guide is revenue is coming in a little bit lower, $3.54 billion per quarter, about $60 million loss per quarter, and that's really the contraction in our battery business.

But our margin profile is staying right about 10.9%. So basically on top of the 11.0% and it's managing that decremental conversion right around the mid-teens, which is what we've communicated consistently. So from my perspective, I think, hey, solid Q1, a lot of uncertainty with higher energy prices around the globe, through Q4 looks pretty consistent year-over-year. We feel like we're on the right path to create value by executing our guide. So that's where we sit today, look.

And your next question today comes from Andrew Percoco with Morgan Stanley.

I do just want to come back to the power gen side 1 more time. I know you're in an exclusivity with Endeavor for this turbo cell product. But as you mentioned, it's such a capacity-constrained market and you obviously have a decent amount of content and in-house capability there. I'm curious like whether or not you've evaluated if there is an opportunity to develop a product on either on a stand-alone basis or work through Endeavor to look outside of their captive universe of customers to deploy this product.

Sure. So Andrew, a couple of things. It is true. We're an exclusive relationship with Endeavor to bring that turbine generator to market. What we're hyper focused on is a successful launch next year in 2027. One of the things that's important to know, so Endeavor and the entity we're working through Turbocell, they sell internally for their own data center use, but they also are able to sell to other customers and users.

So you need to keep that in mind. They understand the market. They've been in this market for a long time, the principals have -- and of course, they want to leverage those relationships and know-how. And we're more of the design and manufacturing house to help them deliver.

So Hopefully, that brings some clarity. As far as the other 2 products, battery, we're actively quoting and I would say, with an outside of Endeavor inverters, the same. The exciting part about the inverters is the 4 customers we're shipping product to for their testing. So I feel real good about the overall momentum of these 3 product segments.

Okay. So that makes sense. So essentially, Endeavor could sell that turbo cell product outside of their own data center applications, if there was demand for it. So that's a helpful clarification. And maybe to follow up, on the battery storage for a second here. I think it was asked earlier about the content. Can we just double click on that. If you think about the current environment, I think battery storage on average, it's $225 to $250 per kilowatt hour. Is there a way to bracket what your content is as a percentage of that potential ASP?

And as a follow-on to that, I think it makes sense that you guys are getting into this market, you have core competencies there. I think 1 thing that we've seen across this landscape is the service angle and the service requirements from some of these customers can be a lot different than maybe what you see in auto. So I'm just curious in terms of the investment needs maybe on the service side of the organization to make sure you're providing the level of uptime needed for some of these customers?

Sure. So the content of the battery energy stores, we want to think about it, it's very similar or maybe a little bit incremental to what we serve on the CV side. So we're buying cells. We're designing complete packs. We're assembling those complete packs. There's other value-add like battery management systems and control systems, software development, and then we test and ship those packs.

Now the main difference is these are in stationary applications as opposed to mobility. So you would see a little bit different structure there. But in essence, it's a very similar type of product that we serve the CV market with.

We have time for 1 final question, and that question comes from Mark Delaney with Goldman Sachs.

One on the power gen business as well for me. Joe, you mentioned BorgWarner may need to expand capacity there, and you're going to have to make that decision soon. We've also seen several hyperscale guides now during earnings season, they've been pretty robust. So given that backdrop and based on your customer engagements and discussions with Endeavor, should investors think about BorgWarner shipping the full 2 gigawatts in 2028.

Yes. We haven't shared that level of detail. I would say as we get into early 2027, we'll start to provide more color on the sales and a longer-term view on the business. It is true. We've seen recent announcements with hyperscalers really growing their capital investments, which I think holds well for this entire data center space.

So -- but we'll provide more details as we get into late '26 or early '27.

Okay. My other question was specifically on the auto business and China, the company spoke about a little bit of growth in our market in China in the first quarter based on some program timing. Maybe talk a bit more on how you see the China market developing from here and your ability to get back to growth over market in part given some of the past wins you've discussed?

Sure, Mark. So first, it's important to note, generally speaking, we are really strong in the China market. We continue to win business there. It's a very important market for us. I think what you've seen in this last quarter, if you start with the market itself, the domestic market was down -- but overall, it was buoyed by a lot of export sales. And much of that export sales has put into content on it. So we continue to feel optimistic about that market. It's hard to read too much into 1 corner like we have in the first quarter. But generally speaking, the Chinese OEMs continue to grow their share globally and a lot of it has to do with the export markets, which we're very well positioned in as they eventually localize in those markets.

Thank you all for your great questions today. If you have any follow-ups, feel free to reach out to me or my team. With that, Michael, you can conclude today's call.

This concludes the BorgWarner 2026 First Quarter Results Conference Call. You may now disconnect.

Again, Doug Karson here, and Alex Perry. We're really grateful to have BorgWarner with us. With us from the firm, we have Craig Aaron, Executive Vice President and CFO; and Patrick Nolan, Vice President, Investor Relations. And BorgWarner has been with us through thick and tin and Auto Summit for the last 17 years. They've quoted a lot of time to both the equity and credit investors. I think you'll see they're a leader in clean efficient technology solutions, combustion, hybrid electric vehicles to really do it all.

And with that, we're going to kind of just dive into a fireside chat. We try to have it interactive. We'd love some questions from the audience throughout. But maybe I'll just kind of open it up with -- how are you guys seeing the market right now for global production.

We had this, obviously, this oil shock, but for many of our panelists before, they said that unless it's going to be a 3-, 4-month prolonged event, we don't really think it will be a major mishappen in the auto industry and affordability has been a concern in people's minds.

Sure. First of all, thanks for having us. Bank of America is an important relationship for us. So we're really happy to be here. As we sit here today, our initial guidance from an industry production perspective was flat to down 3%, and midpoint of that is, of course, down about 1.5%. And I think S&P right now is right around the right around 1%. .

So the schedules right now are hanging in there, but we'll see how the year plays out. I think our biggest concern is with higher vehicle prices already in North America, and with this oil shock happening, this consumer demand dry up at some point. Obviously, the longer this goes on, the higher the risk.

But as we sit here today, we're or seeing demand hang in there, but what's the out plays now early days.

Perfect. I wanted to get a little bit more into sort of mix, hybrid versus bed versus ICE and how that plays into things. I think the beds are growing at a lower rate than previously expected, hybrids are taking off. Can you just tell us how mix in more hybrids and how you sort of impact your business? What are the positives? What are the negatives as you think about sort of the evolution of the mix?

Yes. So when you think about our business, we're able to provide each of the markets, which we're seeing move differently with our portfolio. Our portfolio is very broad. We can supply and provide solutions for our customers, whether it's foundational products, combustion products, hybrid or electric. How we measure success for those businesses is pretty simple.

So for our foundational businesses, which is DMS and TTT we measure their success based on the foundational market plus the hybrid market. And their goal is to outgrow industry production. And for our e-product businesses, it's the hybrid market plus the battery electric vehicle market. And so that's how we measure success for them.

And again, their goal is to outgrow those end markets and increment in the mid-teens on an all-in basis. So that's how we measure success. What I'm seeing across all of our businesses that's maybe changed over the last couple of years is really regionalization. So each region is adopting hybrid products and battery electric vehicle products at a different pace.

And I think our operating model and our portfolio is playing out really nicely. So in this market, we don't see battery electric vehicles penetrating significantly over the next handful of years. That's okay. We'll sell foundational products, and that provides us a nice cash tailwind because we have capacity in this marketplace, and we're not having to put in new capital.

We can utilize what we have. In China, it's probably the opposite, right, battery electric vehicles, hybrid vehicles are a significant portion of that market. And we're having a lot of success with local Chinese OEMs and we're winning in that market.

And Europe is probably somewhere in the middle. So I think it's our portfolio diversification, our customer diversification. Our operating model where we're making decisions at the lowest level of the organization, which is at the plant level. That's really playing out well for us.

And you can see it in our metrics from a win percentage where we had record wins last year, but also from an operating perspective where we've increased margins 60 basis points. We had record free cash flow last year. We grew EPS 14% year-over-year. That's our operating model in action and being able to adapt to these different dynamics.

Maybe I'll double click on China for a moment. So we were just talking earlier that you're winning in the local Chinese manufacturers. And we've seen over the last day to many panels have kind of shown that the Chinese market is continuing to evolve. Of course, EV has been very strong, but also the domestic manufacturers there are gaining a lot of share relative to the rest. So what's giving you the wins in the Chinese market? What are you doing maybe differently than some competitors?

Yes. So if you look at the breakdown of our China business is about 20% of our overall sales. Of that, about 75% of that sales base is with the local Chinese OEMs. Maybe you double-click whether in that about 3/4 of that is with the top 6 Chinese OEMs by market share.

So we tend to do better with the larger Chinese OEMs. And why is that? Well, those Chinese OEMs prioritize speed to market. They prioritize technology leadership, both from a standpoint of their domestic market strategies, i.e., electrification or eventually, I mean, we're now at almost 7 million units exported from China. Those large OEMs are the ones that ultimately have aspirations to go global.

When they go global, they want to have that technology leadership, but they also want to get the speed end market very quickly.

And you guys are able to get them to the market faster than...

That's what we hear. When we hear from our customers, and when Joe, our CEO is meeting with his principles over in China, what he hears is 3 things. They really like our overall technology portfolio. likes the fact that we've been in China for quite a long time. I have those deep ingrained relationships as OEMs but also probably most importantly, we can run shoulders with them.

Right. In the Western world, typically, it's 3 years from award to going your production. In China, you're knocking at least a year for that.

Like a 2-year window.

If not less.

We've taken products from PowerPoint to production in 12 to 18 months. I mean that's how fast we can yes.

So I wanted to double-click a little bit on the competitive environment. I think maybe you're alluding to some competitive advantages in China that you have. But just give us an overview of the competitive landscape for both the foundational products in EV products, have you seen any change?

Do you expect consolidation in the space and do you see any risk from Chinese suppliers in China locally, and I guess more globally?

On a global basis, there is typically between 5 and 7 true competitors in most of the products that we do. And there's a handful of Chinese competitors and different products that we do compete in. So they have gotten to that point where they do have a good, strong global presence.

I think when you look at the 2 different sides of the business from dynamics of where are we stronger. On the foundational side, we're typically a 1 or 2 in terms of market share, in terms of those product categories. We do see some natural consolidation.

And the way I mean that is the larger suppliers are generally winning some conquest business. You see it in our awards on a quarterly basis as ultimately, the OEMs want to lean a little bit more on the supply base there as we go forward.

On the e-product side, we see a path towards being a top 3 in most of the products that we play in today, and we are starting to see share consolidation there where there was a lot of players in some areas and now you're seeing more of that consolidation play out?

Maybe we'll kind of switch gears a little bit to the regulatory regime. How are some of the regulatory changes, whether DPA, Cafe, CARA, impacted your strategies, your growth initiatives. I've been covering the company for almost close to 30 years. I know that some of the regulatory changes have actually been in favor as things need to get cleaner it impacted your ability to put turbochargers into kind of lower new gasoline content. So can you just give us a little color on how you're looking at the regulatory environment.

That's what I think is beautiful about our portfolio. We can adapt. So in this market, obviously, regulatory changes moved in one direction. And that's fine. We're meeting with our customers to solve their problems, and we're not trying to push one technology or another. In this market, it's probably going to be more foundational products. .

And that's okay. We're #1 or #2 in everything we do. And again, it's going to provide a nice cash tailwind for us. In other regions in the world, it's probably going to be a little bit more e-Products. And again, we're meeting with our customers for understanding the issue they're trying to solve. We're providing solutions on both sides of the portfolio that helps them. And if we're doing that, BorgWarner is going to be successful. And that's what I see.

And I think the evidence point is the 30-plus awards that we announced last year across the entire portfolio. I think that's a great evidence point. So I see us being able to adapt nicely. Win new business. And ultimately, as we win new business, we'll increment that extra revenue in the mid-teens on an all-in basis and create a lot of value for our shareholders.

Just going as a part of that, let's talk about the battery business a little bit. So I think you called out a lack of North America incentives and softer Europe are driving headwind in the battery business, at least for 2026. Can you detail sort of the policy and the demand drivers there and what actions you sort of take in to minimize the losses in the battery business.

Sure. So when you go back a couple of years ago, we acquired Akasol and we saw a tremendous growth in that business in Europe, and we ended up adding capacity in North America to support that growth. And then the world changed on us a little bit and demand dried up in North America and to a lesser extent in Europe.

So it was important that we rightsize that business for the demand dynamics that are -- that have been happening at this time and the team did a fantastic job of rightsizing that business.

So we restructured that business and took other actions. And I think the evidence point you can look at is our fourth quarter, revenue is down, in comes up. So we feel really good with the cost structure, and we are confident that as that business grows, we can implement in the mid-teens from this point forward.

Overall, we're still pretty bullish on that business. Although revenue is going to be down about a couple of hundred million dollars this year, and that's causing about 150 basis point challenge to our growth this year. From a long-term perspective, we're still bullish.

Energy storage is a trend that is going to occur for many years to come, and there's a need for energy storage, whether it's in automotive or outside of automotive. So our product can solve that global challenge.

And for us, it's about winning new business, whether it's in auto, outside of automotive. As that business grows, will increment in the mid-teens. So again, we're bullish. We got our cost structure right, and we think we can capitalize on that growth when it materializes.

I mean do you think that business is going to require more CapEx and R&D? Or do you feel like you've got a good foothold on it right now?

We have a good foothold on it. We have the right level of CapEx in that business. We've restructured appropriately. Now it's about winning new business and incrementing in the mid-teens as it grows.

I guess we'll kind of circle back to the different markets you're in. So maybe you help us a window into you have a pretty good sense as you're talking to when a lot of us are North America focused because it's where we work. But if you look at China, the EV mandate is still super strong there. if you look at like IHS, S&P Global ability, their projections in China, they keep on increasing the penetration rate in the EV.

North America has come way down and Europe is kind of somewhere in the middle. So what do you think is driving the EV focus in China and it's still trying to stay alive in Europe and in the U.S. is kind of on pause almost.

Yes. So in China, clearly, the mandates are still there. The electrification is happening in that market. It's continuing to grow in that market at a relatively rapid pace. The one thing I would add, though, is we talked about the Chinese exports.

They're going to explore whatever vehicles they think they can sell. And we've actually seen some awards on the foundational side of the business. each high enough for export purposes. So I think, clearly, the opportunity set is going to skew towards electrification in that market, but I think there will be pockets on the foundational side for opportunities for growth.

In Europe from what we see, we're still going down the path of electrification. I think the timing may shift a little bit based on some of the changes in regulations, but it's still happening. You're still seeing launches happen. North America, as you said, I think electrification here is delayed for quite some time. It's likely going to be a predominantly foundational business unit, our region, excuse me, with hybrids coming a couple of years from now when I say high is I'm talking more advanced hybrids.

I think it's really what this speaks to is that there's 2 benefits that BorgWarner can use to capitalize on this. It's a portfolio that we talked about. We're happy to sell foundational products happy to sell bare products and across hybrids, we're happy to sell both.

The other thing that's going to -- we're a very decentralized company. And this is going to be much more of a regional growth business than it has been in the past. And I think that will play to our strength.

I have a capacity utilization question, I'll turn it over to you. One presenter showed us that capacity utilization in China is only 53%, which left us worried that there'll either be some stranded assets in China over time or they'll be hyper focused on utilizing that capacity or there will be some markets that kind of shrink.

I think we have 100 manufacturers in China. I think about it a little bit differently, and it's less of a China question because we're winning in China, and we're seeing them use the equipment that's in place. But one of our focuses last year was okay, we have a lot of capacity that we put in place in the e-product side of our portfolio. We've put that in over the last few years. And some of those programs didn't launch at all or launched a much lower volumes.

A big focus of our Power Drive Systems business unit was we need to move that capital from one region to another. So it's not going to be used in North America, move it to Europe or move it to China as an example. And it's one of the reasons that our CapEx last year was only 3% of sales. We're usually in that 4.5% to 5% range. So they did a fantastic job.

And it was a part of the reason why our cash flow was $1.2 billion last year. On top of that, we always meet with our customers when we have a program that didn't meet expectations and it's because of a constraint on their end, we're going to go back to them the ask for recovery. And we saw some of that in the fourth quarter of last year.

So we're using both of those items to mitigate risk from a capital perspective. So I don't see it as a China issue. I see it more of a North American issue, and it's important that, that plant manager doesn't get the nice new equipment. They get the equipment that's in place and they can modify it and use it. And I think we did a really nice job.

So optimizing CapEx, kind of the global pattern and you were getting some reimbursement when isn't needed.

Exactly.

Let's talk about data centers.

I was waiting for that.

Yes. I think you be able to talk about data centers at the Autocue, but as for the opportunity. So in February, you signed a master supply agreement with Turbocel, focused on data center power solutions, I think targeting $300 million in sales in 2027 well be the first year I guess what's your longer-term vision in the data center end market? How should we think about capacity and sort of the overall mix as power generation continues to grow?

So if you look at the market for power generation, it's supposed to grow mid-teens for the next 10 years. So obviously, the market itself is very appealing. When you think about hyperscalers and others, what are they trying to solve for right now. It's really 2 issues. It's water in its power.

And we're coming up with a solution that solves the power equation clearly. From our perspective, what we've shared is we feel like we have a great product that answers those needs and has BorgWarner all over. It has our thermal competency, our power electronics competencies, our turbocharger technology in it.

So we're utilizing the core competencies of BorgWarner to come up with a unique turbine generator that meets that end-user demand, which is really exciting for us. What we announced publicly is $300 million of revenue in the first year of production. And we expect that to be immediately EPS accretive. We expect to convert in the mid-teens, and we really like the return on invested capital profile.

We're in the launch phase here. So we're quickly doing B samples and C samples and really focused on launch at this point. But the team is really energized. We were just down there a couple of weeks ago.

Excited to see the product maturing and excited to see it in our P&L in 2027.

Can you just talk a little bit about sort of the installed capacity for the data center solution and how you sort of plan on scaling that?

Yes. So we communicated we're putting in 2 gigawatts of capacity in North Carolina. That will be installed at the end of the year. The $300 million in revenue is not correlated to the 2 gigawatt hours. It's our first year of production. We haven't provided that math yet, but we will give more insight as we get closer to launch.

Frankly, our decision at some point this year is do we expand capacity, so that decision will be made call it, second half of the year? And where do we put in capacity? Is it in North America? Is it in Europe? Is it in Asia? Those that the type of decisions that we're focused on making over the next 6 months.

Sorry, I think you may have given this, but how should we just think about margins in that business? And over time, how should they evolve?

So all we've shared to this point is you should expect next year mid-teens incremental conversion on that $300 million in revenue. You should expect EPS accretion immediately and you should expect from an ROIC perspective, we like it, which means it's at least meeting our 15% ROIC threshold.

Maybe I'll ask a question on e products. So I think about 5 years ago, you presented the Charging Forward initiative. I think a lot of investors know your business. If you could maybe just give a little bit of color on how the product differentiates itself from more traditional ICE business?

And what are some of the key wins that you've had to have such amazing growth in that segment?

So when you think about our 2 different businesses, I would think about you have our 3 business PMS business. Those are our foundational businesses. And then we have PDS and our battery business. So PDS has had a lot of success. You talked about the bookings and the progress that they have there. Those products include everything from your inverters, your motors, your combination products.

And they've been really successful particularly in China, but also in Europe and less in North America. What's really interesting beyond just the product itself, you're starting to get to the point where you actually start to see the award activity in China is driving wins in the Western world.

We've heard a multiple of our wins that we achieved this year. Our Western customers saying to us, well, you're winning in China, we're trying to correct that, not in terms of affordability clearly, there's something there, so let's go down this road. So I think that is actually start into the business because it goes back to what we talked about earlier, right, is that technology, that customer intimacy, that speed to market.

And I think PDS really leverages all 3 of those. It's really interesting.

Yes. I guess just switching to foundational. I think it foundational is expected to be a little softer in 2026 with more programs starting in 2027. Can you just maybe walk us through the award pipeline and incremental margins of these programs?

Just keep in mind on the foundational business, well, we do expect the sales to be down this year. That's mainly a function of their market. So the overall market, we're expecting to be down fit to down 3%. I mean the foundational market is going to be down a bit more than that. We expect our foundational sales to be down this year but it's going to outperform that market.

As you look out to '27 and 2028, and I think it applies both of the foundational businesses and the products businesses. The award activity acceleration that you started to see in '24 and further acceleration on 2025 a 3-year lead time, that means you start to see that flowing through in '27 and '28. So I think it's a function of 2 things. I think from an external environment, there was a kind of an unlock, particularly in North America in terms of OEMs awarding business, but also as our current CEO, then COO in 2024 really changed the way we think about growth.

In '22, '23, the world was going to electrification at a rapid pace. That's really what we were focused on in terms of award activities. Joe came in and said, well, our e-cars business have gotten to the point where now they're the size of a small automotive supplier, they can stand on their own.

I want all our business users to go find their areas of growth. foundational business units book foundational awards, maybe Conquest business, maybe develop a new product like turbine generator and e-products go capitalize on that secular growth opportunity.

Really independently allowing these businesses to kind of operate.

Their objectives are the same now versus 3 years ago it was, well, you as a foundational business unit, your job is margin, cash help support your brother that's growing into the products business. The e-products business has matured to the point where now our objectives are the same across the business units to outgrow your markets increment in the mid-teens.

We want to engage the full business to grow not just a portion of the business. And people want to work for businesses that have aspirations to grow. It's not as fun just to generate cash and give it to your brother or sister. And so we're seeing that change in thought process the change in maybe motivation has really unlocked the whole company, and that's why we saw 30-plus awards that we announced publicly, and there were obviously more record new business wins.

Moving into a new data center space with a new product, all of that doesn't happen without that change in tone. And so we're really happy with the progress that we've had to date.

I guess on that, so you announced data centers as sort of a foray outside of the traditional automotive value chain. Where else could we see BorgWarner go into? I mean what other sort of end markets applications as you think more broadly and longer term, do you think your current you could position?

Maybe I'll start, and Pat can certainly add on here. Obviously, power generation is the one that we spoke about, and we see $300 million of revenue next year. But we also have a lot of core competencies that we think can play outside of auto. Inverters is a good example of that, power conversion. That's an area of focus for us.

And then we spoke about the battery business and having power stored power is important too. So we think those are the areas that we can play, power generation, power conversion, power storage are all areas that we can leverage our core competencies outside of auto. And again, it goes back to finer growth opportunities, whether that's inside or outside, our goal is to grow our top line, convert to the mid-teens.

And at the end of the day, how I measure success as the CFO is we're growing the earnings power of BorgWarner. That's our job day in and day out. That's what I wake up and think about, and we have multiple avenues to do that, whether it's top line growth, whether it's cost controls, whether it's having a smart capital allocation approach that rewards shareholders through share repurchases.

We need to use every lever at our disposal to grow the earnings profile of the company, that's going to be good for our employees, and it's going to be good for our shareholders. So that's how we think about it.

Nothing else to add.

Maybe we'll just double click on the turbocharger business. leaders in that forever. We just kind of curious on the hybrid powertrains. You've had some big wins in that. And as you think about oil at $100, I'm sure it's not going to stay there, but let's say if it does for a longer period of time.

Does that influence the turbocharger business at all in a positive way perhaps?

Yes. I think there's a couple of growth opportunities for the T3 business unit. Obviously, they're developing new products like turbine generator. But I think the turbo business themselves I think we have opportunities for penetration still in North America. North America were in the 50s in terms of turbocharger penetration, much below Europe, so now much below China.

So I think there's a penetration opportunity there. In vision, you brought up hybrids, hybrids, you're going to see penetration of turbos on to hybrids as well. And then you also have potentially more efficient turbos coming more variable geometry turbocharging. I think that's coming as well.

But the last thing as I kind of talked about earlier, I think this idea that the larger players have more conquest opportunities going forward. The guy starts to play out, too. And I think that's also, Joe, again, challenging the organization of the -- I think there was a mindset of we're already #1 or #2, can we really go out and gain share.

I think you ask yourself the question, why couldn't you gain share? Why couldn't you conquest business? I got an opportunity.

And we saw those wins last year. Profitable right.

Absolutely.

What -- I mean, I guess as you look at maybe a more mature business like your turbocharger business, and you speak about large conquest wins, what's driving that? Is it better technology? Is it better pricing? Like can you just walk us through how you're sort of driving that growth in a more mature business?

I can start maybe -- all of the above I would say. Have those smaller suppliers struggle. You still have to invest in the technology. The market is still looking for advanced turbos. And we have scale that others don't have, the market should consolidate. And we're using that to our advantage. And that's exactly why we saw some of those conquest wins. So I think it's all of the above. It's pricing, it's customer relationships, it's technology.

You have to bring all of that to the table to win these awards. And I think our turbo business and our TTV business is really good in all of those regards. So I think that's what's leading to the wins.

Perfect. So I want to take a moment in the audience if we have anything out there for the BorgWarner team question in the back.

The opportunity in the turbines business is very interesting. Can you talk about how you compete against the likes of GEV CAD. Is that your true competitor? Or are you complementing their existing products? And maybe just a little bit about the auction process and how you win awards versus those [ brands? ]

Sure. So just to make sure that everybody understands the business model as it's currently set up, so we started a joint development agreement with a company called Endeavor about 3.5 years ago. And the purpose of that joint development agreement was make sure that we were able to bring a product to market that met certain specs that we agreed to with Endeavor.

And over the last 3 years, we've developed that product and it's running, and we've tested it. So we feel really good about the product. When you compare that against other competitors. We don't see a clear competitor. But when you look at items like efficiency or total cost of ownership, we're really competitive with those alternatives.

What we like better about our product is its flexibility. So as an example, some of the competitors that you talked about can provide power can provide primary power or backup power, ours can provide both. It's flexible.

We have modular flexibility, meaning we can provide one megawatt or we can provide a whole data farm. Some of those alternatives are huge turbines ours can be put on a truck and move from one data center to another data center or those larger turbines.

Once they're in place, they're in place. And ours provides fuel flexibility. So we think as we get out the curve, those things are going to be really important. As we look at the next handful of years, there's just such a need for power generation. I don't know that those discussions really are really important right now, right now is we need to get to market as quickly as possible make sure that we launch appropriately.

We have a great product that works in the field. And if we do that, then I think it's going to be our ability to supply not the demand in the short term.

The one thing I'd add is that I think the one benefit that we're really excited about bringing to this market is bringing the automotive scale, automotive technology and automotive cost base to this market. We think that's going to be a real competitive advantage for us.

When you look at the supply base for that product, 80% of the suppliers for the turbine generator from the automotive space. So think about what that means in terms of scale, pricing, continuous technology innovation. We think all the attributes that Craig talked about, the product is out for 100% right.

But I think from a competitive dynamic, bringing that automotive competitiveness is going to be a real strong differentiator to your point.

Perfect. Margins a little bit.

Yes. So we've got inflation in certain areas in the world with oil up. Just if you can talk a little bit about supply chain and the issues that you want to double-click on or raw material impact and margins have been very strong historically, if you could just fold that into the margin book.

So this is just the latest conversation. But if you look across the last 3 or 4 years, it's always something in automotive. It's a supplier a semiconductor shortage. It's inflation. It goes on and on and on. And so our teams are really agile. I think from a sales function perspective, I think we have a world-class sales function.

We know how to navigate these discussions with our customer and if we see excessive inflation. Obviously, we're going to push on our supply base and do the best we can manage it but we also have to have those discussions with our customers because the pricing power is going to probably go to the end consumer.

And we become -- we're very good at those discussions. So that's how I see it playing out. But again, it's just -- every year, it seems to be something that we have to navigate and we're really good at navigating those types of issues.

So I don't see it as a major concern at this point. And it's a complex industry. That makes it fun.

Just aftermarket, can you just sort of remind us your exposure to the aftermarket business? And how large and profitable that business is?

It's about 3% of revenue today. It's mostly on our foundational sides of our business. Margins are similar to our OEM business.

Perfect. We'll do one more skin out there before we get in rebar loss. I'm just going to circle back to endeavor in this JV. I could not find much information on endeavor. I was shocked about how little there is on the founder and the whole side of it. So what did you guys see in them 3 years ago to partner with them.

What are they bringing to the table? I'm sorry if some of this is a bit repetitive. I know you did talk on this when you announced it, but obviously, the opportunity is really big, but endeavors, I don't know, like I'm trying to understand how they're going to help get you to market quicker and all that. Maybe you can just touch on that quickly.

Patrick?

Yes. So just to give you a bit of history of Endeavor approached us about 3 years ago with this idea of bringing this product to market. And we've gone to this development stage. And now we've reached the phase of -- we have a manufacturing supply agreement with the company, which we're really excited about.

What we think endeavor brings to us is I think we're bringing a lot of the manufacturing know-how that I just talked about in the last question, but they bring that level of customer intimacy that we need to enter this new market. One great example that I find side is we've had multiple hyperscalers come through our R&D facility to see the product running. If we didn't have a customer that was already a known entity in that market.

I know they are private companies, you're not going to see as much data on their website like you would like a public company like us, but they are well known within that space. And we wouldn't have had those hyperscalers coming through our facility to see it. If we were an automotive company that just announced that this year, well, maybe they would come through maybe they wouldn't.

We've learned that in some of the other markets we've tried to enter that just because you have the best nausea, doesn't necessarily mean you're going to be successful. You need that customer and see, you need someone that can speak the language of their customers, and that's what Endeavor brings. So we think they're a really exciting customer for us, and we're really happy about it.

And just to clarify one point, it's not a joint venture. It's a supply agreement, just to make sure that's clear.

Just to be clear, on your competitors, who are you bumping up against -- is it cat? I'm just trying to understand -- I know this was asked before, but what particular competition because there's a lot of different things you got aircraft maintenance companies now taking engines right and turning them into supply -- power supply -- just trying to understand who specifically, are you kind of bumping up against when you do have an RFP?

So I want to talk about competitors' names. We all talk about products, and you can kind of figure out who their competitors. So there's 2 different sides of what this product will be aimed for. The primary power side, which you're competing against when the grid finally catches it up. But today, you're competing with as large industrial turbines are the primary source of for primary power for these sites.

And then on backup generation, there are typically diesel gen sets. So this product can compete on both sides of that market. I think you had asked us the question 3 years ago, we would have said the business is going to skew more towards back up. Today, we actually see more of a pull on the primary power side.

Perfect. Any others think we have one here.

I asked about hybrids. In the past 2 years, we've seen range extended hybrids coming into vogue, the key -- those vehicles only drive the wheels through the battery. Those vehicles also may or may not have turbocharging technology.

Can you talk a little bit about the difference in content per vehicle on those particular kind of hybrids, what the margin is on those products and how you see that market taking shape over the next couple of years?

Yes. I'd say, first of all, we love hybrids. It pulls from both sides of our portfolio, our foundational portfolio plus our e-product portfolio. When you look at content per vehicle, hybrids have the biggest opportunity for us.

$300 per vial versus $570 million in the foundational stack $2,300?

So it's a big opportunity for us. hybridization, obviously, is taking shape in across the globe, but we're seeing it obviously in a big way in China and Europe as well as starting to form in this market. And we've announced a lot of hybrid wins last year.

So from a margin perspective, same margin outlook, increment in the mid-teens on that actual growth, ROIC from a business case needs to be 15% or higher, and that's how we measure success, whether it's a foundational product, a new product hybrid application, battery electric vehicle application or a combustion application. Everything.

Regardless of the type of hybrids.

We don't really do low-end hybrids, it's advanced hybrids that you see our technology on.

Just the one thing I'd use [indiscernible] I would just point out the fact that if you look at our e-products business today on the light vehicle side in China, 45% of it is on advanced hybrids. So I know it's become the thing that comes up a lot in North America, but efficient hybrids, plug-ins, REVs have been a portion of the Chinese NAV growth for quite some time.

Perfect. I could sneak one in. Yes. Could we sneak one for allocation question and I know we're out of time. But you stepped up share repurchase over the past 2 years, how are you thinking about sort of future M&A? How do these take priority over dividend growth, share buybacks what areas would you prefer to acquire a company rather than sort of grow organically.

Can you just talk to us a little bit about capital allocation and you've got a great balance sheet and a very good rating, and we've got a lot of credit investors here who want to [indiscernible]

Okay.So maybe I'll touch on the balance sheet. -- what's my first priority in and this goes into my capital allocation philosophy. First priority, healthy balance sheet. We love our investment-grade rating. We think it's a competitive advantage. In fact, we know it's a competitive advantage for the company. .

And when I look at liquidity, my goal is 20% of sales or higher, meaning our revolver, which is $2 billion plus cash on hand. And from a leverage perspective, on a gross basis, my target is 2 times. When I look at the balance sheet at the end of this year, 12/31/25, I'd put a checkmark next to each of those. And then our focus as a company is let's create value with our cash. That's really important.

And we can do that in multiple ways. We can increase our dividend, which our Board agreed to do in July of last year. we can repurchase shares, and we can acquire great companies that increase the earnings power of BorgWarner. And we're going to use all of those avenues to do that over an extended period of time, over, call it, a 5-year horizon.

We want to have balance across each of those areas as we worked our way through last year, we have a very healthy M&A pipeline, and we're talking to a number of potential targets, but you need a buyer and a seller to agree and in the short term, if we don't see a transaction occurring, we're going to return that cash to shareholders. And that's exactly what you saw last year.

We returned $630 million of cash to shareholders. through share repurchases and dividends. And as we work our way through this year, we'll follow a similar methodology. We already announced $100 million share repurchase in Q1 of this year, and we'll continue to do that assessment quarter-by-quarter.

Looking at transactions that may occur. And if that doesn't happen, then you should expect us to return that cash.

So I want to thank Craig and Eddie for a great conversation and we really appreciate it. So thank you, guys, again.

Thank you.

Thank you, everyone, for joining, as we continue day 3 of the Barclays Industrial Select Conference. I'm Dan Levy. I lead U.S. autos and mobility coverage at Barclays and very pleased to have with us BorgWarner, leader in powertrain technologies and expanding to different markets as we're going to discuss.

Very pleased to have with us Joe Fadool, company's President and CEO; Craig Aaron, the company's CFO; and then Pat Nolan, who leads IR.

So before we start, we're going to kick off with a couple of audience response questions. So everyone -- BorgWarner used to be from Chicago at some point. So vote early, vote often. Did you used to be from Chicago?

A long time ago. We moved our headquarters to Detroit in 2004.

Okay. It's probably vote early, vote often there as well. All right. So if we could just pull up question number one. Do you own the stock? I hope all of you guys are overweight. You own very much so. Can we start the timer, please?

Okay. All right. So mark the weight some opportunity here. We could start then question #2, general bias toward the stock. Okay. I assume your bias is positive.

I think so. I think we're bullish.

Okay. Okay. All right. So it's an interesting split. All right. So before we go, Joe, I think you had some opening remarks you wanted to make.

Yes. Thanks, Dan, for having us here. So first, I thought it'd be important to recap our 2025 results and then set the stage for our priorities this year. So 2025 was a terrific year for BorgWarner.

We expanded our adjusted operating margin 60 basis points. We increased our EPS 14%. And finally, we generated free cash flow of $1.2 billion, a record year for us. In addition to this, we shared with the Street 30 wins across our entire portfolio. So both our Foundational business and our eProducts.

And in total, really a record level of new business. And the cherry on top, of course, is the turbine generator. We announced we have a supply agreement to bring that to market next year with an initial revenue of $300 million.

So really proud of our team and what we achieved last year. When I think about our priorities this year, again, first priority is driving financial performance and discipline throughout the organization. So that means doing what we need to, to secure profitable launches with the backlog; second, adjusting our cost structure as needed and then driving performance and productivity and supply chain.

That will allow us to expand margins again in 2026. Second priority is continue to win new business. We saw a lot of RFQ flow last year, and that momentum is continuing into 2026. So we want to continue to win across the entire portfolio. And this will drive future growth.

It will enhance shareholder value of the company. And then third, we remain focused on delivering shareholder value through a number of mechanisms. So last year, we provided back to shareholders more than 50% of our free cash flow and dividend and share buyback, and we'll continue to do that and look for inorganic opportunities along the way that really leverage our core competence and can expand the earnings. So for us, we feel like we're in a really strong position right now in this market, and we're starting to see growth opportunities outside of light vehicle.

Okay. Great. Okay. That's a helpful introduction. I want to just broadly get a sense because -- and I think we've had this in some of the conversations since earnings. I think we know the last couple of years, the organic growth has been muted. It's going to be muted again in 2026, but I think you're providing some guidepost signposts that it's going to get better.

Is it fair to say that starting in 2027, your core business alongside this power gen opportunity should provide you with an improved growth profile. Meaning are we sort of -- is there a light at the end of the growth tunnel, so to speak?

So it is true. We are still living with this, we call it the EV overhang, right? We won a lot of business a couple of years ago. All that business really didn't come to fruition outside of China. So we've seen much slower growth on the E side.

And 2026 is a continuation of that. But what I am satisfied with are these new business wins. If we look back the last 12 months, even the last 18 months, we've secured a record amount of new business. And not just on the eProducts side, it's across our Foundational products, which we have a lot of confidence in.

Think about those products, we're #1 or #2 in nearly every one of them. So I'm pleased with the backlog we're building. And yes, in 2027, in addition to the turbine generator revenue, we expect to see our core business grow again.

Okay. Great. Can we also put this in context with maybe some of, I'll call it, an organizational shift that I think we've seen play out, in which it seems like you shifted your allocation of resources relatively away from being solely on eProducts and more toward the broader business. I think the words you used on the call were unleashing the growth across the segments. Can you maybe just help us understand and appreciate the organizational shift that's at play? And what's different in the past year versus the past prior years?

Sure. So what we've really done is adjusted our focus of the organization. So I'll first take us back to 2020. The whole world thought the light vehicle market was going to go to EV fairly quickly.

So we made a lot of capital decisions. We bought a few companies. We won a lot of new business, preparing for the growth that was coming. So it's fair to say we were hyper-focused on the eProduct side because that's where we thought the new world would be 10 years from now.

We all know that's not the case. It's playing out regionally different depending on where you sit. So what was important for us was to adjust the strategy and adjust the focus of the company, and that's what we did 18 months ago. Instead of just primarily focusing on eProduct growth, we're unlocking the growth potential across all the businesses.

So all 4 of our segments were asking them, go find your top line growth, go find those opportunities that you think are going to support profitable growth in the future. That's the big change that came. And what you see as proof points is we're winning business across the company.

So I'm really proud of what our teams are achieving there. And some of them are also with new products on the Foundational side, so our drivetrain Morris team, we announced last quarter a win for eXD solution, it's torque management solution. It can be used in hybrids.

That's a great example. Turbine generator, of course, getting a lot of attention. That's a great example of leveraging the competence of the company inside TTT. So I'm really pleased with how the organization has adjusted quickly to really unlock this new growth and think how powerful that is unleashing all of BorgWarner to go find growth rather than a subset of it. So really happy with how the teams are doing there.

And when we look at specifically on the Foundational wins, is that just -- these are share gains? These are CPV gains? This is -- help us contextualize what specifically is happening on the Foundational side. Were you maybe sort of not punching at your full weight previously and now there's more share opportunity to be had?

Yes. I think in the market, we also see a change, right? The rebirth, we'll call it, of the Foundational business and the extension of the combustion engine is clearly here. I mean it's going to have a much longer life than everybody thought.

So what we see is OEMs are adjusting their cycle plans to incorporate more combustion engines, a few of them even bringing new engines to market, which -- whoever thought that would happen a couple of years ago.

So our wins cut across a number of types. One is new business, which is very competitive to win it. You need the right technology and the right pricing. Some of it is conquest business. This is something we've been talking about, Dan, being #1 or #2 in nearly all of our Foundational business, we expect over time, we're going to conquest more and more business.

The reason for that is the smaller players are not going to be able to stay competitive and keep up with the demands of innovation. If you think about turbochargers, there's still another couple of generations so that you can be a great supplier in that space. So also uplifts are part of those wins, extensions, volume increases.

So all of the above, and we're participating in all of those types of wins. So we're really pleased with how the Foundational business has started to evolve with all that backlog.

Okay. So I think then my next question is to then transition to the power gen side. I think there is a view on the part of some that what you're doing in power generation might be a way to offset maybe declines in the core LVP market. It sounds like you're saying that's not the case. There's still growth in the core market. You're just getting it in different ways. And then the power gen is additive. Is that right?

That's correct. So think about our core markets, which are very important to us. We strongly believe in the future of electrification, okay? Electrification is coming. You see it playing out in China under the right environment. It's growing in Europe. It's growing in other markets.

It's just not growing here at the moment for a number of reasons, which maybe we'll talk about later. But electrification brings more content opportunities for BorgWarner. So think about our business. We're going to remain strong on the Foundational side, and we've got a growing eProduct side. Last year, we did $2.6 billion in eProducts. So we can complain about the lack of growth, but we've been growing year-over-year for 5 years. And now we've got a reasonable size supplier just in our eProducts.

So I'm really pleased with that. So that's our primary growth engine that we've been working on. In addition, now we're going to mark with this turbine generator. So for me, it's a great example of unleashing the power of BorgWarner to enter new market spaces. So it's more cherry on top than it is to replace what we think is our core market.

Okay. So let's talk about that. Can you maybe give us a sense how long this was in the works, the turbine generator, the path to success, the challenges you're going to have. I mean, we'll unpack these, but give us an overall flavor of this opportunity.

So we've been working with our partner, Endeavour and their subsidiary, TurboCell for over 3 years. First, I'll just start with Endeavour. They're a very innovative data center supplier. They've been in the business for over 25 years.

So they've got a lot of experience building out data centers, operating data centers. We share the vision of a cleaner, energy-efficient world, which is really cool. They are coming at it from a data center space. We're coming at it from a mobility space.

They're a very innovative partner. As we know now, time to power is a crucial part of data center success. It's water and it's power, and we're able to solve one of those 2 problems, at least to a smaller degree.

So think about the development cycle of a typical automotive platform, it's 2 to 3 years. In this case, we're already 3 years into this development. By the time we launch, it will be 4, 4.5 years. So a little bit longer cycle than typical, but I'm excited because we're leveraging all the core competence of the company to bring this to market.

So think about the content of a turbine generator. You got a multilevel turbocharger system in there, high-speed rotating electrics, an inverter, advanced software controls. I mean, these are things BorgWarner has been known for, for 20, 30, 40 years.

So we're leveraging all of that even though we're only working with Endeavour on this solution for 3-plus years. The other thing I'm really excited about, which we can't emphasize enough, think about bringing automotive scale and competitiveness to the power market, okay?

There's a lot of great power companies out there. But none of them are bringing the automotive scale, the automotive quality, the discipline, the ability successfully like BorgWarner is. And that's the piece we're really excited about. We haven't talked about as much in the past, but we think that's a game changer.

Okay. So as it relates to the specific offering, and you just touched on it, help us understand, I think the number you gave on your earnings was a 65% of the content is going to be BorgWarner. So help us understand what you're responsible for, what Endeavour is responsible for? And then within that 65%, how much of that is technology that's already in-house that was used for auto and is just being applied differently versus technology you have to go out and acquire or a different supply chain you have to access. Help us understand on that.

Sure. So the 65% when we talk about that, just to frame it properly, 65% of that content, we are developing and producing internally. So in addition to the new site we're investing in, in North Carolina, we have 4 other locations around the globe, where we're leveraging their competence, their footprint, their know-how.

So it's things like turbochargers, motors, inverters, advanced controls and thermal management. Those are the things that we're leveraging our auto core to bring into this product. So the confidence is there. The application is different. So there is some invention along the way, and we've got a lot of IP in this new product, which helps create some moat to it.

When you think about the other 35%, we're still the design source, but we're asking our supply base to supply the parts. So we're 100% in control of what we call the turbine generator. Then we ship that to Endeavour. They finish the packaging with one of their other partners. They add some more material to it, and then it's a complete unit.

And we're talking about how large is the application, at 2-megawatt plus applications, like what is the typical product look like or unit that you would sell?

Right. So they're packing and shipping in as small as a 1-megawatt system. So if you only need 1 megawatt, they'll be able to serve that piece of the market, but you can scale these up. So that's another beautiful part of this is they can serve an entire data center farm if you need them to.

That flexibility also extends to -- we can serve as backup power, we can serve as primary power. So we've got the flexibility between those 2. And then these things can be lifted from one site to another if you want -- let's say, we're used as bridge power, meaning the utility is not ready to serve that market yet.

We can be there for a period of time and then airlifted somewhere else to another data center to serve that data center. So a lot of flexibility built in. And when we talk to some of Endeavour's customers, they're sharing with us, hey, we really value some of the things you guys are doing.

Okay. And then as far as Endeavour, you said you've been working with them now for a few years already, and you gave some sense within the product itself, who's doing what. Who's handling the go-to-market? How broad is their potential customer set? Maybe just give people a better sense of Endeavour and where they sit in this situation, their relationship with hyperscalers, et cetera?

So Endeavour is the face to the customer, okay? They're the ones with the 25 years of experience building data centers. We are providing -- and that includes the service and the install. We're providing really what I call the content, right?

We're providing the complete turbine generator system. We are technical support. We're going to provide all the service parts as needed over the lifetime of these things. So think about it, all the hardware, we're the majority of the supplier there.

But they're interfacing with the hyperscalers and the edge customers as they normally would as a data center designer and provider. So that's the split of the business. Again, it's a great partnership because we need them for the entry into the channel, but we're providing a lot of the technology and product into the final assembly.

And your sense of how this product will compare to maybe some of the other power gen players being the larger players like a CAT or Cummins or even maybe guys that are newer guys or like Generac or how does it compare versus others? What's your sense?

So one reason we feel very good is we don't see a direct competitor for what we're doing. Those names you mentioned, all valuable companies. We supply some of them turbochargers today. But you think about their backup power. They don't serve the primary power.

And it's very expensive backup power. They only run on diesel for the most part. There's a few natural gas entrants now, but it's very expensive uptime for that. The larger turbine players, the time to power is much longer. They don't have the resiliency we have.

In data centers, you have loads coming in, loads getting dumped on a regular basis. And our system is able to handle that beautifully. The time to power is much shorter. So 45 seconds to start up a turbine generator, BorgWarner turbine generator. We can serve a variety of fuels. So natural gas, diesel in the future, hydrogen. Many of the players don't have that variability.

And then finally, it's the scalability of this thing. Like I mentioned, you can serve a 1-megawatt system and even outside of data centers. These can be used for backup power for hospitals or for hotels or island nations. Oil and gas is another great potential application here.

So we just think the flexibility, the total cost of ownership is very attractive, and that's what the hyperscalers are also feeding back to us.

And maybe one last one on this. So $300 million next year, you said 2 gigawatts of capacity. Maybe what subset of the 2 gigawatts of capacity does next year's revenue represent? And what's the line of sight for there being demand to the capacity that you have?

Yes. So the capacity -- sure. The capacity doesn't really align to the $300 million. Think about the $300 million, that's our initial SOP and ramp-up year, okay? But we wouldn't install 2 gigawatts if we weren't pretty confident that we can fill that.

So I can't answer your question directly. But beyond the 2 gigawatt, we see enough demand and backlog that we're considering decisions in the near future, do we expand beyond that?

And not just in this market. We're seeing demand in Europe. We're seeing demand in other countries like India. This is a solution that works globally. So for us, we're super excited, but we're hyper-focused on the initial launch.

I think Craig and I, we were just in North Carolina yesterday to spend time with the team, see the new site, see the testing and the progress we're making and the progress is tremendous. So I'm feeling really good about our ability to launch and secure that $300 million, and that's what we're super focused on right now.

Great. Let's pivot maybe to the margin dynamics because I think the margins last year, this year are a very interesting part of the story here that even with a tougher growth environment, not only have we seen margins hold in, but actually expand.

And now the outlook this year, this is with incremental R&D and spend. So maybe just give us a sense of the levers that you've already pulled and how much more runway there is on margins in spite of what's been a tougher growth environment the last couple of years?

Yes. Joe and I are really focused on growing the earnings power of BorgWarner. That's our ultimate goal. That's really what we've been doing in the last few years. And margin has been a big story as part of that.

So when you think about our margin progression over the last 2 years, up 110 basis points over a 2-year period, 60 basis points last year, 50 basis points the year before. The main drivers is cost controls. So focused on restructuring, productivity, supply chain savings is a big part of it.

Lower cost of poor quality has also been a big part of it. So really proud of the progression. As we move to 2026, we see another 10 to 20 basis points of margin expansion focused on cost controls again, while we also invest in the future with the turbine generator that Joe just mentioned, plus the 30-plus awards that we've announced publicly, we're supporting those launches as well.

And that's what great companies do. They support the growth objectives as we move to '27 and forward. At the same time, we're able to expand margins. That's what we're focused on doing.

Your R&D profile this year versus past years, is it elevated?

No, it's similar. It's at a similar level.

Okay. So it's spend in some areas offset by maybe saves in other areas. That's how it nets out.

Exactly.

Okay. Commercial recoveries, maybe give us a flavor for how significant it was in '25 and what's in '26?

Sure. So we mentioned in our fourth quarter call that we had a sizable recovery that went through our PDS segment. It had about 100 basis points of impact on our margin profile in the fourth quarter. But as you think about our jump-off point, our jump-off point from '25 to '26 is 10.7%.

That's inclusive of that recovery. And what we're guiding to is 10.8% at the midpoint, 10.9% at the high point. So it's important that we jump off the inclusion of that. So we need to continue to overcome that. And our goal, again, and the earnings profile of the company, that means margin expansion, that means EPS expansion, and it means including that recovery that we saw in 2025.

Great. And then maybe last question before we go back to some of the other ARS questions. The path to getting to breakeven in battery and PowerDrive. Is it purely volume at this point? Or are there other levers on restructuring beyond what you've already done?

Sure. So when you think about the battery business, Joe mentioned it earlier, but visibility from a sales perspective is a little bit challenging right now, but we're happy with the cost structure actions that we've taken over the last year.

So restructuring, we restructured that business. We've moved our breakeven point to much lower. And we do see growth opportunities down the road. Energy is a big driver going forward, and we see applications for that business outside of automotive.

And so the team is really looking at those opportunities. And as those growth opportunities come into our P&L, we have high confidence that we can capitalize on that growth. For PowerDrive Systems, we announced a restructuring 18 months ago.

And one of the items that Joe and I were really looking at as it relates to that business last year is we need to grow, but also we need to convert in the mid-teens. And when you look at that business, they grew 31% year-over-year on the light vehicle E side of their portfolio.

And if you look at the results, they converted in the mid-teens. That was an important data point for us. As we look at 2026, we expect that light vehicle eProducts portfolio to grow in the low double digits, and we fully expect them to convert on that growth in the mid-teens. So we feel good about that business. But we're also always looking at the cost structure to make sure we're as competitive as we can be as we move forward.

Great. Why don't we get to ARS question #3. We'll get through the rest of these and then a couple of wrap-up questions. #3, okay? Through cycle EPS growth for BorgWarner, and this is relative. You start the clock, please. Relative to peers, so other autos.

You're painting a good growth picture, so I can only extrapolate that it will be a better EPS growth with share buybacks and whatnot. Okay. So above in line, split. Okay. Next, question #4. You can start the clock. Maybe while that's going on, a word on sort of the capital allocation story where you sit today?

Sure. So really pleased with our actions from 2025, just to recap some of what Joe said earlier. $1.2 billion in free cash flow, record free cash flow year for the company, up 66% year-over-year, and we deployed $630 million of that free cash flow to shareholders through dividends and buyback.

We increased our dividend 55%. We got great support from our Board, and we repurchased $0.5 billion in shares last year. As we go into this year, we expect $1 billion of cash -- free cash flow at the midpoint of our guide.

And we've already indicated that we'll buy back $100 million in the first quarter. What Joe and I are always balancing and it's a constant conversation is we need to create value with our cash, and we're going to do that in multiple ways.

We're going to continue to buy back shares, but we also have to look at the inorganic opportunities that are in front of us that drive EPS accretion. And so that's a constant conversation that we're balancing, but pleased with our actions in 2025, and we're going to follow the same playbook as we move into 2026.

It's a balance. Okay. Good. Question #5. All right. Multiple. I'll point out here, the market is like 20x. So I think you're low double digits right now.

I like # 5. 5 and 6.

5 and 6. I will point out to the folks that say that your stock is expensive that -- you're still trading at a depressed multiple versus the market, okay? And then #6, most significant share price headwind for BorgWarner. And I think the message here is it's -- I mean, it's all of these points, but you're focused on the growth and the margins combined, really.

Yes.

Okay. So growth. Folks, any questions? Okay. Maybe just -- I'll wrap with a couple here. Maybe you could just talk about where the bidding is for PowerDrive, what the program -- what the pipeline looks like after this reset that we've seen. So you guided to, I think it was low double-digit growth in PowerDrive this year. What that pipeline looks like?

Yes. I think it's first important to kind of go back a few years and look how far that team has come. In 2021, that was a $700 million-ish business. It's grown 20% a year and is now a $2.6 billion business.

So we're making great progress in that business. Many of the awards we won last year were also on the eProduct side. And we've learned a lot. I think that's really important for folks to know.

We've learned a lot about what this market is going to look like, who the winners and losers are likely going to be. So our teams have done a great job to reposition some of our quoting. We've also redeployed a lot of the existing capital structure.

As Craig mentioned last year, that's one of the reasons our CapEx was down. We were moving around existing investment to serve some of that future growth. So we feel good about the backlog. Of course, there's always risk in your backlog, right?

Every OEM feels they're going to win more market share. But we've also gotten smarter about how we discount volumes, discount certain OEMs. So from our view, we're in a really good spot because the Foundational business has never been stronger.

Just as a reminder, we're #1 or #2 in every one of those products. We won a lot of new business there. The eProduct side is scaling very nicely. We plan to be a market leader in all of those products. So from our point of view, we're in a much better balanced situation and environment than we were 4 or 5 years ago.

And maybe final, just on the M&A bolt-on side. Is there any capability that you need to acquire to properly meet the power gen opportunity?

So the short answer is no. We are looking at M&A through the lens of 3 strict criteria. One is we want to leverage the core competence of the company. That's very important. So industrial logic needs to make a lot of sense.

The second is near-term accretion. So we love our portfolio. We're in a much better position than we were 5 years ago. Can we enhance it? Can we build on it? Can we add to it? Absolutely. But we want it to be near-term accretive.

And then finally, we don't want to overpay for anything. So it needs to be properly valued. We've passed on a number of deals that didn't meet those 3 criteria. So we still remain active in M&A. But I would say we've raised the bar in terms of our decision-making. And if we don't do something on the M&A space, as Craig mentioned, we're going to return shareholder value in other ways like buybacks.

Yes. Great [ call there ]. Joe, Craig, Pat, thank you.

All right. Thank you.

Good morning. My name is Michael, and I will be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner 2025 Fourth Quarter and Full Year Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Michael. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on our home page and our Investor Relations home page. With regard to our upcoming Investor Relations calendar, we will be attending multiple investor conferences now in our next earnings release. Please see the Events section of our IR page for a full list.

Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods.

When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items. When you hear us say adjusted, that means excluding noncomparable items. When you hear us say organic, that means excluding the impact of FX and any net M&A. We will also refer to our incremental margin performance. Our incremental margin is defined as the organic change in our adjusted operating income divided by the organic change in our sales.

We will also refer to our growth versus our market. When you hear us say market, that means the change in light vehicle production weighted for our geographic exposure. Please note that we have posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion.

With that, I'm happy to turn the call over to Joe.

Thank you, Pat, and good morning, everyone. We are pleased to share our results for 2025 and provide a company update, starting on Slide 5. I wish to begin by thanking our employees, our customers and our suppliers for all of their trust and efforts during the past year and for their continued support. In 2025, we delivered approximately $14.3 billion in net sales, which was up approximately $200 million year-over-year.

This increase was supported by a 23% increase in our light vehicle eProduct sales, which demonstrated the strong demand for our hybrid and bed products. Despite challenges in our battery business, we delivered modest organic growth. Excluding the decline in our Battery and Charging Systems segment, our organic sales were up approximately 1.6% year-over-year, led by outgrowth across both our foundational and light vehicle key product portfolios. Despite modest sales growth, we significantly improved our overall financial profile by increasing the earnings power in free cash flow.

Additionally, we returned over 50% of our free cash flow to shareholders through a balanced capital allocation approach. In my view, our 2025 financial performance was outstanding and positions us for continued momentum into 2026. Looking to the drivers of our future performance, we finished the year by securing our record number of new product awards across our foundational and eProduct portfolios. All of our business units contributed to our record wins, and I expect a robust pipeline of further opportunity that 2026 and beyond.

Additionally, I am truly excited to share with you a new product that will serve as a power generation solution for the data center market and other microgrid applications. As many of you know, the demand for on-site power generation is growing significantly. We believe this product could open up an additional avenue of significant profitable growth outside of our core automotive markets. I will provide more detail on this exciting news in a few minutes.

Looking back on our 2025 performance, I'm very proud of our team and our results. As Craig will detail, we believe we remain well positioned to continue to expand margins, grow adjusted EPS and generate strong free cash flow in 2026. We expect to do this while also investing in our business to support our focus on long-term profitable growth.

Now let's look at some new light vehicle product awards on Slide 6. First, BorgWarner has secured a conquest award with a major European OEM and to supply of variable turbine geometry turbocharger for one of their hybrid electric vehicle platforms. This business win positions BorgWarner as part of the supply base that will power this OEM's first hybrid electric offering in North America. We are proud to extend our long-lasting relationship with this OEM.

Next, BorgWarner has secured a contract with a major North American OEM to provide an 800-volt secondary IBM and a generator module incorporating a dual inverter. These products will be integrated into a series of the automakers range-extended electric vehicle trucks and large frame SUV models. I believe this award showcases our product breadth in the electrified propulsion space.

Next, BorgWarner has secured an award with a premium European OEM. The supply in iDM supporting a hybrid range-extended powertrain architecture. The iDM features BorgWarner's innovative single motor and integrated drive module by enabling a single electric motor to perform both power generation and driving functions within a very compact package, the solution provides greater flexibility in vehicle platform design, system integration and performance optimization.

Next, BorgWarner's battery management system has been selected for an expanded program with a global OEM. The system will support additional B-segment and C-segment passenger cars, as well as light commercial vehicles for battery electric and plug-in hybrid electric vehicle applications.

Finally, BorgWarner has secured a new electric cross differential program with a leading Chinese OEM. This eXD solution is designed for a 48-volt system and is integrated with the customer's electrical and electronic architecture. This program represents BorgWarner's first 48-volt eXD application and expands the company's torque management capabilities for electrified vehicles.

Next, on Slide 7. I'm extremely excited to share the details of a new product for the data center market and other microgrid applications. BorgWarner has signed a master supply agreement with TurboCell, which is a subsidiary of Data Center Infrastructure developer, Endeavour. Under this agreement, BorgWarner will supply a highly modular turbine generator system. This exciting new technology leverages many of BorgWarner's core competencies including our world-class turbocharging, thermal management, power electronics, advanced software controls and high-speed rotating electric capabilities. It also leverages our deep manufacturing footprint.

As many of you know, the power generation market is expected to grow significantly over the next decade. We expect roughly a mid-teens annual growth in demand for on-site power generation through 2035. This is where we expect our turbine generator system to be a transformative solution for the data center market as we believe our product addresses the growing demand for alternatives to traditional on-site power generation.

Within the U.S., we expect our turbine generator system to help support the acceleration of the power and energy solutions needed to strengthen our grid. For those of you unfamiliar with Endeavour, let me provide some background. Endeavour provides turnkey facility solutions to data center and microgrid customers. The company has 25 years of experience in the data center market and operates multiple facilities, both in the United States and Europe. BorgWarner has worked with Endeavour and their TurboCell subsidiary for more than 3 years to bring this turbine generator system to market. Throughout this time, we found them to be a thoughtful partner that supports our vision of a clean, energy-efficient world. I look forward to all we can accomplish together as we bring an innovative, lower emissions power generation platform to the data center market. From a financial perspective, we expect production of the turbine generator system to begin to ramp up in 2027 and with sales expected to be more than $300 million during the first year of production.

Now let's turn to Slide 8 and discuss some of the advantages of the turbine generator system compared to existing power generation solutions. As you can see by the image on the left side of the slide, the turbine generator system leverages many of our foundational and eProduct capabilities. And we believe the breadth of our capabilities is the competitive advantage that will be difficult to replicate. We believe the turbine generator system offers unmatched adaptability for diverse applications, including backup and primary power, advanced controls and quick transient response to manage power and grid peaks. Based on our analysis, we also believe the turbine generator system provides a lower emission solution relative to other options.

Importantly, it also allows for flexible fuel types, including natural gas, propane, diesel and hydrogen, giving additional options to the end user. BorgWarner expects to leverage our robust automotive supply base and world-class manufacturing capabilities to maximize vertical integration allowing us to control approximately 65% of the contact. I am excited to update you throughout the year as we move closer to the start of production in 2027. Opportunities for other industrial applications for BorgWarner products over time. Congratulations to our entire BorgWarner team.

To summarize, the takeaways from today are the following: BorgWarner ended 2025 with strong results. We delivered $14.3 billion in net sales, a 10.7% adjusted operating margin, which was up 60 basis points compared to 2024. We also grew our full year free cash flow to $1.2 billion, an increase of approximately 66% compared to last year. We secured a record level of new business by leveraging growth across our foundational and eProduct offerings, which we believe demonstrate our focus on product leadership.

And we announced the signing of a master supply agreement with TurboCell for our turbine generator system, which expands our product reach into new and growing data center and other micro triad markets. We expect this transformational and innovative system will further support our focus on long-term profitable growth by addressing the growing need for a superior power generation solution.

As I reflect on my first 12 months as CEO, I'm so proud of our continued progress on three key factors, I believe, will drive long-term shareholder value. Second, we secured record new business wins across our foundational and eProduct portfolios, which we expect will support our ability to deliver long-term profitable growth. The 30 awards that we have announced over the past 4 quarters give me great confidence in our strategy. Our business units are embracing the challenge to find additional growth opportunities through new product developments like our turbine generator system and our EXT solution. And in 2026, we expect to launch new products like our innovative battery cooling plates.

And third, we remain focused on delivering incremental shareholder value through our free cash flow generation. As Craig will highlight, we returned over 50% of our free cash flow to shareholders over the course of 2025 and we continue to prudently explore accretive inorganic opportunities to grow our capabilities. By continuing to focus on these priorities in 2026 and beyond, I believe we are well positioned to continue growing the earnings power of BorgWarner, which we believe will drive long-term value for our shareholders for years to come.

With that, I will turn the call over to Craig.

Thank you, Joe, and good morning, everyone. Let's jump into our fourth quarter financials by turning to Slide 9 for a look at our year-over-year sales.

Last year's Q4 sales were just over $3.4 billion. You can see that stronger foreign currencies drove a year-over-year increase in sales of $104 million. Then you can see a modest increase in our organic sales, which was primarily driven by turbocharger outgrowth and customer recoveries in North America, partially offset by foundational production headwinds in Europe and China. The sum of all this was just under $3.6 billion of sales in Q4.

Turning to Slide 10. You can see our earnings and cash flow performance for the quarter. Our fourth quarter adjusted operating income was $427 million, equating to a strong 12.0% adjusted operating margin. That compares to adjusted operating income from continuing operations of $352 million or a 10.2% adjusted operating margin from a year ago.

On a comparable basis, adjusted operating income increased $67 million on $29 million of higher sales. This performance benefited from more than 100 basis points in customer recoveries, primarily for a North American new product program that has seen significant volume shortfalls, as well as $11 million of positive net tariff recoveries. Our adjusted EPS from continuing operations was up $0.34 compared to a year ago as a result of higher adjusted operating income and the impact of over $500 million in share repurchases during 2025.

And finally, free cash flow from continuing operations was a generation of $470 million, which drove our full year 2025 free cash flow to over $1.2 billion or a 66% increase from 2024.

Now let's take a look at our 2026 full year outlook. On Slide 11, we are projecting total 2026 sales in the range of $14.0 billion to $14.3 billion compared to $14.3 billion in 2025. Starting with foreign currencies. Our guidance assumes an expected full year sales benefit of $200 million compared to 2025 due to the strengthening of the euro and the renminbi versus the U.S. dollar.

We expect our weighteld end markets to be flat to down 3% for the year. We expect our light vehicle business, which comprises over 80% of our sales to perform broadly in line with our weighted light vehicle market. However, we expect a sales decline in our battery business due to the lack of North American incentives and weaker European demand. This decline represents a 150 basis point headwind to our year-over-year sales growth. Based on these assumptions, we expect our 2026 organic sales change to be down 3.5% to down 1.5% year-over-year, which is roughly in line with our market, excluding the decline in battery sales.

Now let's switch to March. We expect our full year adjusted operating margin to be in the range of 10.7% to 10.9% compared to our 2025 adjusted operating margin of 10.7%. On a year-over-year basis, we expect the exit of our charging business to drive a 10 basis point improvement in adjusted operating margin. Excluding this benefit, the low end of our margin outlook contemplates the business delivering a full year decremental conversion in the low double digits.

On the high end of our outlook assumes we largely offset the impact of the organic sales decline through further cost controls. We view this as strong underlying performance building off of 2025 that well exceeded expectations. Based on this sales and margin outlook, we're expecting full year adjusted EPS in the range of $5 to $5.20 per diluted share or approximately a 4% increase versus 2025 at the midpoint of our reach.

This once again demonstrates our focus on consistently driving earnings expansion despite lower industry production and battery sale declines. We expect full year free cash flow to be in the range of $900 million to $1.1 billion with the 2026 midpoint being a decline versus 2025 strong results, mainly due to an expected increase in capital spending as we support our upcoming turbine generator system launch and other light vehicle launches around the globe. We expect these investments to accelerate our top line growth in 2027 and beyond. With that, that's our 2026 outlook.

Now let's turn to Slide 12 and review our share repurchase progress. First, we successfully repurchased $400 million of BorgWarner stock during the second half of 2025. This was ahead of our October guidance, supported by our stronger-than-expected free cash flow during the fourth quarter. Combined with our second quarter repurchases and common stock dividends, we returned approximately $630 million to shareholders in 2025, which was approximately 52% of our free cash flow during the year. This demonstrates our focus on a balanced, disciplined and consistent return of cash to our shareholders, which we expect to continue in 2026 and beyond.

I would also highlight that we have repurchased over 31 million BorgWarner shares since 2021 or a 13% reduction in our outstanding shares over that period. This represents a $1.3 billion return of cash to our shareholders over the past 4 years and shows our confidence in the strong and sustainable cash flow that we believe we'll generate for years to come.

As we look forward, we are pleased that we have $600 million of remaining availability under our current share repurchase authorization to support additional shareholder value creation. We continue to see a consistent and disciplined cash return to shareholders as an important component of our balanced capital allocation approach.

So let me summarize my financial remarks. Overall, we delivered strong 2025 results. Sales were up modestly supported by a 23% growth in our light vehicle eProduct sales. We delivered a very strong 10.7% adjusted operating margin, which was 60 basis points higher than 2024. And importantly, we saw operating margin expansion across all business units and appropriately reduced corporate overhead. 2025 adjusted earnings per diluted share increased 14% year-over-year, supported by our focus on margin expansion and returning cash to shareholders through share repurchases.

And finally, we generated over $1.2 billion in free cash flow or a 66% increase year-over-year and approximately $630 million of this cash was returned to shareholders through share repurchases and dividends.

Now as we look ahead to 2026, our outlook aligns with our focus on expanding the earnings power of the company. At the midpoint of our guidance, we expect another year of adjusted operating margin expansion and adjusted earnings per share growth despite our expectations that market volumes and battery sales will decline in 2026.

Second, we continue to make important product investments that leverage the many mechanical and power electronics or competencies that BorgWarner has developed over decades of product leadership. These core competencies will help us continue to secure new business awards throughout 2026 and beyond. Today's turbine generator system announcement is a great example of finding new avenues of sales growth that provide a strong return on invested capital.

And finally, with another year of anticipated strong free cash flow of $1 billion at the midpoint of our guidance, we expect to have additional opportunities to create value for shareholders as we prudently evaluate inorganic accretive opportunities that grow BorgWarner's earning power and execute a balanced capital allocation approach that reward shareholders.

As I look back on our 2025 results and our 2026 outlook, I'm extremely proud of the BorgWarner team around the globe and their ability to deliver strong financial results in an uncertain light vehicle production environment. We believe we have a red technology-focused portfolio, financial discipline and global team to continue to drive the long-term earnings power of the company. We're excited about 2026, and we look forward to executing another strong year.

With that, I'd like to turn the call back over to Pat.

Thank you, Craig. Michael, I'll open it up for questions.

[Operator Instructions] And your first question comes from Colin Langan with Wells Fargo.

Congrats on a good quarter. Can we dig in a little bit more to the data center opportunity? Obviously, you gave a lot of color, but how should we think about the margins of that business as it launches? Is the $300 million a target? Or is that already booked with upside if you could put more business? And is there any CapEx that we should be worried about as you need to invest to develop this business?

Sure, Colin. Thanks for the question. So we announced obviously the data center wins, $300 million in revenue as we look out to 2027. As you think about the margin profile, what you should assume is a mid-teens incremental conversion on that extra $300 million of sales, which is consistent with our automotive business. What you should think about from an EPS perspective, we believe it will be EPS accretive immediately, and we see a strong return on invested capital for that program. From a CapEx perspective, you can see our CapEx guide is 4.5% of sales, which is up from 2025. And that's because we're investing in the 30-plus wins that we've announced publicly last year, as well as the turbine generator system that Joe spoke on in his script.

Got it. That makes sense. And then if we could just dig into the PowerDrive. You kind of commented in your commentary, you mentioned something about a recovery. I mean, I guess that would explain why sales -- the EBIT rose about 70 million on sales up 40%. Any way to frame the size of the recovery? Does that repeat into next year? Wouldn't that be a headwind if you had a one-off recovery this year? And how should we think about the sustainability of growth in the segment given the slowdown of EV?

Sure. So in the quarter, we had about 100 basis points of benefit in the fourth quarter. But as you look at PowerDrive Systems, I would encourage you to look at the full year. Joe and I were really watching PowerDrive Systems this year. Not just from a growth perspective, where we saw substantial eProduct growth, 23%. eProduct growth in the light vehicle side, a lot of that in PDS. But also ensuring that we incremented that net growth in the mid-teens. And if you look at PDS results for the full year, that's exactly what you see.

So we feel really good about the progression of that business throughout 2025. As we look at 2026, we continue to expect light vehicle eProducts growth in that low double digits, and we expect PowerDrive Systems to convert in the mid-teens off of that 2025 basis. That's how you should think about that business as we move into 2026.

Your next question comes from Chris McNally with Evercore ISI.

Just a quick follow-up to Colin. So I mean, launching the turbine business out of 3T at auto-like margins, given the shared technology, I mean, it's obviously just fantastic. Can you give us a sense for that $300 million rev, I don't need a hard number, but like a couple of years past '27 is the opportunity because it's -- whether this is a triple or a home run, but it seems like there's a lot of runway here.

I think the way to think about that business, we announced today $300 million in the start of production year. So this program, like many others, has a ramp-up phase to it. When we look more broadly at this market, the data center market is growing in the mid-teens per year for the next 10 years is what most people believe.

We think it's applicable to over 90% of the data center market globally. And it's a product that is really differentiating us versus some of our competitors. To give you some color on the technology, it incorporates a very fast transient response to support the load imbalances that happen quickly in data centers. We have a very integrated approach to the system, one of the slides in the deck, Page 8 highlights really all the BorgWarner content that's helping us bring this to market. So from my perspective, this is exactly what we asked our business units to do, and that is drive top line growth, increment in the mid-teens, and we feel very optimistic about this new entry into the industrial market.

That's great detail. I'll definitely follow up off-line. And then just the second one, going back to the auto side. So growth over market, minus 1. You talked about the battery drag, right, which is a multiyear -- unclear when we hit sort of bottom there. But I think you said that's 150 basis points if you ex that out, you're still only really growing 50 basis points on the other three divisions, whether it's basically good secular tailwind in both ICE and hybrid.

So can you just an order of magnitude when we may see those get back to that sort of low single digit that we were doing sort of consistently. And what would get us back to that level? What is the market driver?

Sure. As I look back first at the last couple of years, '24, '25, it's clear to me that our outgrowth was impacted by EV programs that we booked several years ago. And as we know, the volume of many of these programs, at least in the Western world has been lower than we expected. So what I can see now is that dynamic is going to continue into '26 and that's what we're living with at this point.

And I can also say I'm not satisfied with the outflows we've been seeing. So what I am pleased about, however, is all the booking strength in both the foundational and eProduct side, we've announced over the last 18 months or so. So I expect these bookings to support our midterm objective for our foundational eProduct businesses to outgrow their respective markets, and we'll start seeing that top line benefit in 2027 and further in 2028 and beyond.

And your next question comes from Joseph Spak with UBS.

Thanks. It's helpful your slide that sort of shows the content you're getting on the PowerGen opportunity. And I know you have this comment, 65% of the content controlled by BorgWarner. I guess I just want to understand that a little bit more. And please correct me where I'm wrong because again, I'm sort of still getting familiar with the side of the business, but $300 million, 2 gigawatts, that's like $150 a kilowatt.

I thought the rule of thumb on industrial scale PowerGen was something like $900 per call. So that's like 15% of the value. So where am I off there? Or what am I what am I missing for your content opportunity within this PowerGen opportunity?

Joe. So first of all, the $300 million does not relate directly to the 2 gigawatts. So $300 million, the way to think about it, that's our initial year of production. So we're not going to have a full year. It's going to be our ramp-up here. We have kicked off and will install the 2 gigawatts of capacity.

In addition to that, there is a backlog there that we expect to make some future decisions about additional investments. So our focus right now, though, is on the launch and making sure it's flawless, and we deliver that $300 million board during that initial year. But I wouldn't directly correlate those two figures. One is a capacity figure, which we're installing the other is the initial revenue from the start of production year.

Okay. Well, then maybe just a follow-up there, like what does it correlate to? Or put another way, like at capacity, what -- how do you sort of size the revenue opportunity?

Yes. We'll size that as we get closer to 2027, what we're announcing today is what we see as the initial revenue during the launch phase and our teams are super focused on making sure that launch goes well. But we're really optimistic about this product and this market.

As we all know, the power generation market needs more innovative and alternative solutions. And we believe at the end of the day, this is just a better mousetrap than many of those that are out there. It has fuel flexibility, fast transient response. It's very flexible and modular. It can support the small micro grids, all the way up to serving multiple generative AI farms. So from our view, we think we have a lot of room and runway in the market, and we expect we're going to capture our share of that.

Okay. Maybe just on the core business, if we're -- how -- just broadly, I guess, how are you sort of thinking about Turbo's outlook over the coming years and the competitive dynamics, I guess, within that market.

And I guess one of the reasons I ask and this question we get a lot from investors is you have companies like Stellantis in the U.S. sort of coming back with the V8 and that sort of looks -- if you look what the V8 share of those -- on some of those vehicles used to be was quite high, and obviously, that was sort of replaced by V6 turbo. So it seems like there's some replacement going on. I know that's just one example, I don't mean to sort of overextrapolate, but I just -- at a high level, if you could sort of talk about what customers are doing on the turbo side.

Sure. So we still see growth in the turbo business line. So just as a reminder, we're in the top two market leader in that product space. We love turbochargers we see penetration continues to increase. We also see the adoption of more complex, highly efficient turbines like the one that we announced today, the variable turbine turbocharger, which improves performance at the low end.

And on top of that, being one of the market leaders, we expect to conquest business often from some of the weaker players. And we think that trend will continue, and that was one of our announcements today with the European OEM. So from our position, we're really leading from a position of strength in turbochargers. We see that there's going to be a few more generations of technology, and we're prepared to make that investment. So globally, we feel we're in a really great place with that business.

And your next question comes from James Picariello with BNP Paribas.

Hi, everybody. I want to double click on the business -- the battery systems business. So you have revenue down 35% to 40% year-over-year. Just -- what's next for this business? I assume there's an additional restructuring effort in place or underway to address the declines and -- yes. yes, curious how you're thinking about the loss rate relative to what we saw in 2025 with the business down as much as it is.

So we continue to see sales headwind in this business as we've talked about today. It's mainly due to the challenges in North America, but to a lesser degree, demand in Europe is also down. So we expect the decline in this business to be about 150 basis point headwind in our '26 growth. And in the near term, sales trends are a little bit difficult to predict.

But what I'm very pleased at are the tough decisions and the actions that our team has taken to really minimize the losses and adjust the cost structure in this business. What that does for us is it also poises us well for future growth. So near-term sales trends are difficult to predict. However, pleased with the actions we're taking, and I do feel still optimistic about this business. I believe we've got opportunities not only to continue as one of the market leaders in CV battery packs but also look outside of the commercial vehicle space for other opportunities for battery storage.

Okay. Understood. And just -- I mean, I know you guys don't guide foundational growth versus product. But maybe could you just provide some thoughts on what's embedded in the 2026 outlook with respect to the e-Propulsion sales, that revenue stream? Yes, yes, that would be helpful.

So when you look at the light vehicle to keep out from '25 to '26, we're expecting low double digits. That's the way to think about it. Obviously, we gave you the details on the battery business. So we see another year of growth primarily in Europe and China, and we expect to convert that growth on the light vehicle side in the mid-teens, that's what's implied in the guidance.

And your next question comes from Dan Levy with Barclays.

I want to go back to a question that's been asked on past calls about your M&A strategy. And obviously, we see the stock today, and what's doing to your multiple. And I see some of the multiples of other companies that are levered to data centers.

And the question really is, if we are seeing an increase in your multiple, how does this potentially change your M&A playbook that all of a sudden, there's a wider set of targets that would allow for accretive deals as opposed to when your multiple was more compressed. And you have limited upside on how much you can do deal. So how does the opportunity set on M&A change here? And let's start there, yes.

Dan. So as we've stated in the past, we still remain active but are very disciplined in our M&A approach. So we believe there's great compelling opportunities out there for a company like BorgWarner, financial strength and operational strength. So I just want to remind us the priorities that Craig and I have said, are first, any acquisition needs to really leverage our core competence and have to make industrial logic at the end of the day.

The second is we're looking for near-term accretion. So we're really pleased with our portfolio. We did a lot of heavy lifting in the last 5 years. And as I sit here today, we want to make sure any acquisition not only strengthens the portfolio, but we see near-term accretion and expand the earnings power of the company.

And then finally, we want to pay a fair price at the end of the day. We don't want to overpay for anything. So we're going to continue to keep those criteria in front of us. As we've mentioned in the past, we've passed on some deals that didn't beat one or more of those criteria. And lastly, I'll just say we've really opened up the aperture when we talk about leveraging the core competence of the company, but we've significantly raised the hurdle using those street criteria to make sure we're adding to shareholder value and expanding the earnings power.

Okay. Great. The second piece is, I think just touching on some of the prior questions. The core business alongside this PowerGen opportunity. Obviously, there's a growth slowdown this year, and that's why the core business is flat. It sounds like you're talking to some opportunity for incremental launches beyond this year and you have the opportunity from PowerGen, what is the right way we should be looking at the growth over market beyond this year, which has been compressed, but -- it sounds like you're talking about some tailwinds beyond this year that could get you back to maybe that 3 to 4 points of outgrowth that you had done previously.

So as we mentioned in the remarks, Craig and I are not satisfied with our growth or outgrowth, and we're still living with a little bit of this overhang from the EV business outside of China and that will continue in to '26. But if you look back in the last 12 to 18 months, especially the last 4 quarters and the 30 wins that we've shared, we are very optimistic about the future launches of those programs.

I think it really speaks to the portfolio strength and the flexibility that independent if a region is looking for combustion products, or EV products or hybrids, which pulls from both sides, we are very well positioned to capture that growth. So of course, it takes time for these new product wins to get to the launch phase and ramp up. And that's why we said we expect to start to see some of that growth to '27 and even more in '27 and beyond.

And your next question comes from Luke Junk with Baird.

Maybe if we could start, just hoping to unpack some of the margin dynamics around this modular turbine effort, Craig, you mentioned that you'd characterize as a mid-teens incremental margin, I just want to think through maybe some of the elements in terms of leveraging your existing production for, let's say, some of the thermal products and the model itself. It sounds like this is sort of an assembly model ultimately. And if we think about that mid-teens, is it safe to say this is piece of business you would expect to be above the corporate margin at maturity as well or even earlier stage.

Luke. So let me start first with -- this is a great example of not just leveraging our portfolio, but leveraging our manufacturing footprint and supply chain and automotive. So the way to think about it is you may have noticed in the fourth quarter, there was an announcement put out about a new plant in Hendersonville, North Carolina, which is just about 20 minutes from one of our larger turbocharger plants. That's where we're going to do the final assembly, the test and pack out of the complete system.

Now leading into that factory we've got four other factories around the globe that we're leveraging. These are existing automotive factories where we've got lots of manufacturing competence and depth, and they're producing some of the ones that will then go into this final assembly in North Carolina. So that's how we're really leveraging the strength of BorgWarner.

We are making a new investment in this factory in Hendersonville, it's a brand new greenfield site. Team is making great progress on it. But I'm really proud of the fact we're able to leverage some of our automotive footprint and supply chain, by the way, so that we can get off to the right start and profitably grow this business.

I'll let Craig comment on the incremental.

Yes. And as Joe mentioned, this year, 2026, we're focused on successfully launching that product. And as we get into market, in 2027, and you see that $300 million of sales growth, again, Luke, you should expect '18 incremental conversion. You should expect immediate EPS accretion and you should expect a strong return on invested capital. So we feel really good about the financial profile of that business and we're excited to launch in 2027.

That's all very helpful. And then I want to switch gears, Craig, you mentioned that within the margin range this year, I guess, when I just pick out two things.

One, that the path to the high end of the range is fully offsetting the organic decline. And I'm just wondering if there's anything you call out there. I know the company has some early-stage efforts around AI, in particular, that are interesting, both on the manufacturing floor and within R&D?

And then just to clarify, the mid-teens expectations for PDS specifically, is that including getting up and over the customer recovery that you had this quarter?

Sure. So I'll start, and maybe Joe can provide highlights from an AI perspective. But when you look at our margin expansion, and first, I want to highlight our margin expansion in 2025, up 60 basis points year-over-year. Fantastic job as a team and we saw margin expansion across every business unit, as well as managing corporate overhead appropriately. So a great job in 2025.

As we move into 2026, we see another 10 basis points of expansion at the midpoint and I'll kind of walk you through that, Luke. First, the charging asset that's 10 basis points of margin expansion. Additional cost controls across our entire business. That's another 10 basis points of margin enhancement. And then obviously, we have the lower sales and teams are doing a nice job of decrementing in the mid-teens on both the decline in the battery business, but also industry production. So you go through the math, that takes you to 10.8%.

To get to 10.9%, it means we're going to take additional cost measures, and I see the team is really rallying around that. With that, I'll turn it over to Joe to maybe talk about our AI efforts and what we're doing as a company.

So we are using machine learning and generative AI. We started about 2 years ago on some of the new generational AI technologies, and we serve with some pilots. We had pilots in our plants. We had pilots in our back office and also some in R&D. And out of those pilots, let me estimate about 30% of them look really positive. So that's where we're continuing to invest and scale those pilots so we can see more comprehensive improvement.

Now some of the improvements are in quality, like if you think about visual inspection. We also have areas where we're able to reduce cost, labor costs or scrap costs. We're finding opportunities on the R&D side. So if you think about when we win a new program, we're producing highly engineered products. So the stack of requirements from a customer is pretty high and engineers have to go through those requirements and turn them into specifications.

We have found a great application of using Gen AI to really simplify that process which frees up our engineers to work on higher level things like innovation and bringing the product to launch. So as we think about generative AI, it will continue to help us not only improve our quality, but our cost structure. And some of that fall to the bottom line, some of it we're using to fund some of these future projects to drive long-term growth. So we're excited about what we're doing with generative AI, and we think it could be a major lever for the company.

Just on the -- just lastly, the -- yes, the PDS margin expectation, specifically that mid-teens is all in, including the recovery, just to clarify.

It is. It is. So when you think about that jump-off point for BorgWarner, we're jumping off that 10.7% margin that we ended 2025 with. And so that obviously is inclusive of that recovery, and we expect to increment above that level as we move forward, including PDS.

And your next question comes from Mark Delaney with Goldman Sachs.

I was hoping to start first with your outlook for your business with the China domestic auto OEMs. We've seen vehicle sales in China soften in recent months and decline year-on-year, but the Chinese auto OEMs are increasingly expanding their export business and growing internationally. And just given how important of a customer set that is for BorgWarner and your strong presence with a number of those China domestic OEMs. Can you help us net out what that might mean for your business with that to the customers this year?

Sure. So the way to think about our China business, just as a reminder, it's roughly about 20% of our overall business. So it's a very important market for us. And about 70% of that China business is with the domestic. So as we know, the domestics are just about at that 70% of the total market.

One of the things you noted is, although the local market there has slowed down, the exports have hit another high last year, over 7 million exports from China. So we're pretty excited about the work our team is doing in China. Most of our business is with the leading seven Chinese OEMs there. I would say over half of our electrification business is in China, and that's where the music is playing very loudly. So for us, having them grow outside of China is a great strength for us. We're even in discussions with the Chinese OEMs about localization outside of China given our strong global footprint and technology.

That's helpful context. My other question was a follow-up on some of the prior commentary and questions around the M&A opportunity and I understand the high-level criteria that BorgWarner has previously articulated. But as you think about expanding into the data center market and with the new offering today and turbine generator systems you mentioned not having all of the content. Is that maybe an area where you can augment or are there adjacent areas within that broader data center space that you may look to do M&A?

Yes. First, I just want to double down on how proud I am of our team and how they are just leveraging so much of our portfolio. I mean, if you think about 65% of the content we're controlling, that's tremendous. So I'm really excited about what we are doing with this turbine generator.

I'll just bring us back to the criteria we're using for M&A. We want to stay very disciplined and really, the first is leveraging our core competence. We want this -- anything we look at to really make industrial logic for anyone that looks at it we want it to be near-term accretive and we want to pay a fair price. So we haven't limited ourselves to automotive, but I would say the TG is a great example of what we can do organically and many of our business units continue to look for growth opportunities. And this is just a great example of what we can do with the current portfolio that we have.

We have time for one final question. And that question comes from Alex Potter with Piper Sandler.

One question, additional question here on the turbine generator. I know permitting and the timing of, I guess, data center rollout as a result of permitting constraints has historically been sort of a headache for this industry. How does your product address that? Or is it potentially exposed to some of those same headwinds?

So we're working, first of all, with our partner, Endeavour who really has a lot of experience in the data center market over 25 years. They bring tremendous customer intimacy knowledge about the real estate market and what it requires to install a complete data center. Now specifically for our product, we're going to ensure it's UL certified, and it meets any of the requirements in any country that we plan to deploy them. We don't see that as a real constraint for us.

Again, it's together with Endeavour, who's bringing the customer side, also their innovation approach to the markets very similar to us. We have a similar vision and path to go to market with them. And of course, BorgWarner brings not only great technology, but our automotive scale manufacturing footprint. So it's really together, we think we're able to capture this unique part of the business.

Okay. Very good. And then maybe one last question here, topical issue lately. I noticed that the word DRAM never came up in your prepared remarks or anywhere else. Just interested if you could quantify or maybe ring-fence your exposure to that shortage, which has been making a lot of headlines recently. Presumably, it's not a huge deal for you, but just wanted you to maybe put a finer point on that.

Sure. We don't use DRAM in our products, but of course, we're monitoring the overall market for any impact the OEMs may incur in production.

Okay. So as of now, there's no impact to your production time lines or you're not hearing anybody flag this as a potential risk to the business in any way?

No, not from our view.

With that, I'd like to thank everyone for their great questions today. If you have any follow-ups, feel free to reach out to me or my team. With that, Michael, you can go ahead and conclude today's call.

This concludes the BorgWarner 2025 Fourth Quarter and Full Year Results Conference Call. You may now disconnect.

Very glad to have all of you here as we continue day 1 of the Barclays the -- 16th Annual Barclays Global Autos and Mobility Conference. Very pleased to have with us here BorgWarner, a leading supplier in powertrain.

We have with us Craig Aaron, CFO; and Pat Nolan, who leads the IR efforts. So we're going to go through a list of fireside chat questions. And then anyone who wants to ask questions, please do, and you can e-mail my colleague, J.R. Young, [email protected], if you want to ask a question anonymously. So with that, Craig, Pat, thank you.

Why don't we just start very near term? Because I think a lot of people on the near-term basis have been just following what's been going on with some of the supply disruptions in terms of the Ford Novelis issue in terms of Nexperia. It seems like we dodged a bullet there. Maybe you could just give us an early look at how fourth quarter has played out vis-a-vis these supply disruptions? Anything outside the realm of what you've expected?

Sure. First, thanks for having us, Dan. It's our pleasure to be here. .

You mentioned a couple unusual activities happening in the third quarter and the fourth quarter. We mentioned it on our earnings call in the third quarter that JLR was impacted by a cyber attack, and that had about a $35 million impact on our sales in the third quarter. We're watching that in the fourth quarter. It seems like it's stabilized for us.

You mentioned the Ford aluminum supplier issue. We did mention that was going to have a $50 million to $100 million impact for us in the fourth quarter. We're obviously watching that and then the semiconductor challenges with Nexperia. It seems like it's improved over the last few weeks, but it's certainly something that we need to continue to watch and navigate.

So those are the areas that we're watching in the fourth quarter and would likely impact us in Q4. And we'll give you more guidance as we look into 2026.

Okay. Great. Okay. I want to go to the topic of growth because I think this has been an area where there is maybe some different dynamics between your foundational and eProducts businesses. So maybe let's just start as we look into next year on backlog, how much is the backlog shifting? Because I think a lot of people have been asked questions. We've seen some changes on EV.

We've seen some changes on tariffs and reshoring and whatnot. How has this changed the launch cadence? And how does this impact the launch of your backlog?

Sure. So if we go back 3, 4 years ago, we did -- we won a lot of key product programs and was coming off the Delphi acquisition. And as you know, at that time, the whole world was going towards hybridization and electrification, and we had done our part, we had won of those programs. look at our outgrowth '24, '25, we've been in this 1% outgrowth range. And a lot of that reason is because these programs that we won the volumes haven't materialized for various reasons, but primarily consumer demand.

We believe there's going to be an overhang, so a similar level of outgrowth as we go into 2026. What we're excited about is that we've won -- we've announced 17 programs across our entire portfolio over the last 6 months. I've been with the company almost 20 years. I've never seen that level of activity. So we're excited about that and what that means for our outgrowth as we move into '27 and '28. But as we look into '26, we probably still have this overhang. I would say the other really important change that was made under Joe's leadership, Joe, taking over the CEO role and, call it, March, is he's encouraging all of the business units to find their pockets of growth.

Before we were really focused on, hey, let's take the foundational businesses, the combustion businesses, your job is generate cash provided to the eProducts businesses where -- and that's where it's going to be our growth engine. Joe is encouraging all of those business units to grow. And if that culture shift which I think is really resulting in that 17 wins that I mentioned earlier.

Okay. So let's maybe unpack the foundational versus eProducts side?

Sure.

Foundation is on track for some organic growth decline this year. But I think you've talked about you are still seeing some growth over market. So what is the opportunity to unlock growth -- positive organic growth in foundational if the core market is continuing to decline. Can you have enough an elevated sort of outgrowth to help? Is it hybrids?

Yes. I would say a couple of things. First, what's the goal of our foundational business units? It's outgrow your industry, your industry defined as the combustion market plus the hybrid market. So that's the goal.

What we're excited about is in the second quarter, we announced a couple of key wins. So when we talked about unlocking Joe, unlocking those business units to grow, well, we announced 2 Conquest awards. 1 in North America and 1 in Europe related to turbochargers. That means, hopefully, we're going to have more market share from a turbocharger perspective. That's really positive for those businesses.

The other thing is all-wheel drive, where we're really strong, #1 in the market. we're seeing a nice tailwind, as an example of our China business. China is exporting vehicles in the Southeast Asia, and we're seeing a nice tailwind there. On top of that, in this market, it seems like combustion is going to be here for longer. So between combustion and hybrid vehicles in this market, those are pockets of growth for our foundational business, and we expect to capitalize on those.

Would you say that there is a lot more runway on uptake of some of these advanced size technologies, turbos, dual clutch transmission. And your share, have you been picking up share? Maybe you can just talk about the positioning?

Yes. I mean obviously, I think there is still penetration opportunities. I mean Turbo is a great example. It's in the 90s in Europe, you're about 70% in China. Here, we're still in the 50s. And we're seeing there's still going to be a need for more fuel-efficient vehicles in North America. We may not switch as fast to BEV. But we'll be an efficiency push, and we see that in the bookings. So we're very happy about that.

And I think Joe is also emphasizing as we are generally a 1, 2, or worst case, 3 player in many of our foundational products, there's no reason that the stronger players shouldn't be able to gain share, particularly the OEMs have to turn back on the foundational growth engine. You need to leverage a little bit more of the larger suppliers in those areas.

What's the hybrid opportunity right now? Are you seeing that in the backlog? And what's the timing?

Yes. The hybrid opportunity, the way to think about it is, if you're talking about advanced hybrid, one that you would actually plug in, the content opportunity on that is 4 to 5x what a pure combustion engine is. So it's significant. But what's nice about it from the portfolio perspective is it's going to be both sides of the business.

We expect hybrids to have all of the efficient foundational technologies that we have, turbocharging, advanced timing, advanced transmission systems. All of those can be applied to those hybrid vehicles, and then we're going to see the benefit on our eProducts business, things like our motor business, dual inverter awards that we've announced several in China this year. So we think hybrids are a nice opportunity for us. I think that goes back to what Joe is emphasizing. Grow on the BEV side, grow on the combustion side, find the average to growth on the hybrid side.

Okay. Maybe we can talk about eProducts and let's just start with PowerDrive, which has actually had pretty good growth this year sort of after some program roll-offs last year. I think you're tracking mid- to high teens. What -- can you sustain this growth in '26?

And maybe you could just talk about -- we know that there is an air pocket that is hitting in North America, but that is a smaller piece of that business. So what is the opportunity to grow even if North America EV is obviously down?

I think it's fair to say they've had -- like you said, they've had a really strong year in terms of outgrowth of the market and growth overall.

So we haven't given guidance for 2026 yet. I don't know we'll go deep enough to give guidance by segment. But I think they probably have a little bit harder comp. We'll see how that plays out for them. But we see the growth continuing to come to that business, particularly as you look out in '27, '28. But again, really nice growth. They delivered this year, which is really driven by a lot of those programs outside of North America.

We're seeing growth in Europe, growth in Asia. And I think that's what will continue to be the drivers of that business, they'll probably grow more outside of North America versus some of our other business...

And the competitive dynamics for those businesses, I assume the vertical integration risk that had been discussed that that's probably dissipated more so?

Yes. That's a very Western world type of question because when we speak to our Chinese customers, there, what are they focused on? They're focused on technology and they're focused on speed to market. So they'll be much more pragmatic about there may be a platform where they're outsourcing a full IDM, which is the motor, the inverter, the torque splitting device.

There may be a platform that they produce that module in-house that they got to buy the motors and inverters. So we think there's opportunities on both sides of the business there.

Okay. And then maybe just one more on PowerDrive. And I think this is helpful. I think people don't realize that PowerDrive is not all eProducts, I think it's roughly like 1/3 foundational. So that growth that we've seen this year, presumably that is mostly eProducts, like what is -- maybe you could give some ideas of what exactly has driven that growth? Because I think it's mostly Europe and China, but anything to unpack that growth in PowerDrive this year?

Yes. Maybe I'll start and Pat can add on to it. Definitely on the e-product side of the portfolio. They do have about, call it, 1/3 of the revenue that's primarily ECU driven that's foundational. So that's kind of stabilized, I would say.

But really, the growth engine has been on the eProducts side. Not so much in this market, it's been in China and Europe. And importantly, for me, Joe and Pat's how are we converting on that growth? And we're on track to convert in the mid-teens.

If you go back, we had restructured that business back in 2024. And what's important for us is grow that business through the first 9 months, we're about 27% growth, and we're on track to convert in the mid-teens, and we're seeing that growth in China and Europe, which is great to see.

It's not one product here. They're seeing growth. They're seeing new program launches on the motor side. Inverter side, we then either be inverters for full BEVs or a product that we've talked about multiple times is our dual inverter in China that's seeing nice growth, and we're seeing full systems growth there, too. So kind of growth across the portfolio. We think there quickly getting to a nice share position both on the inverter side and the motor side.

That's helpful because I think in the past, we had this idea that it was really your signature eProducts with inverters, but it sounds like you're getting a wide set of uptake across the...

Yes, we are.

Maybe you could just talk about the dynamics in battery because I think we've obviously seen reset. You've exited charging, the commercial EV market has come down. So what is the right -- we've been run rating at roughly $130 million to $150 million of revenue per quarter this year. What's the right run rate going forward?

Yes. We've seen some challenges in that business, in particular, in North America, this market but also to a certain extent in Europe. We have -- it's difficult to tell what's the short-term outlook for that business. We believe in the long-term outlook.

Energy storage is an important trend, and our battery business can support that trend. So we feel good about our long-term aspirations. In the short term, it might be a bit of a challenge still. What's important about that business, which is different from charging is we're EBITDA positive and free cash flow positive. We believe that business is going to grow.

And so we feel like we're operating from a position of strength. When that business grows, we'll be able to capitalize on it. Unlike charging where we didn't have necessarily the best technology in the market. We have really good technology. On top of that, we have a great cost structure that we can leverage as we move forward.

Okay. Let's pivot to margins. And I know you talked about it. And I think this is maybe the piece that has really struck people is just the margin resiliency, especially in your foundational businesses that even in the face of organic growth declines you've still been putting up phenomenal margins in both your Turbo segment and your Drivetrain in BMS, right? I mean, some of the best results you've ever put up.

So can you just help us unpack what is going on in here? How have you maintained your margins even in the face of this negative growth where you're probably decrementing on some of those declines, you're clearly offsetting with something?

Yes. First, really happy with those businesses, as you have mentioned. And what's our goal our goal is still operate in the mid-teens, convert in the mid-teens, and we've done much better than that, as you mentioned.

And when I think about what's those drivers, it's really been a strong focus on cost controls across the business. I mentioned earlier, hey, we had restructured some of those businesses in 2023. We are operating from a position of strength, let's make sure we continue to focus on cost controls in those businesses. We're seeing that restructuring savings go through the P&L. On top of that, supply chain savings, we're seeing a nice uptick in that area. Lower cost of poor quality, things like warranty and scrap much lower.

Productivity. So it hasn't been 1 or 2 things. I would say it's been 3, 4 or 5 things that those businesses are focused on. And it's really allowing us to either maintain or expand margins despite, call it, flattish sales. And that's been really great to see. And I think we'll continue to focus on those aspects as we move into 2026.

I mean, so when we're thinking about -- and I don't want to pin you down on '26, but like when we're thinking about what the right base of margins is to look for the future, it sounds like there's nothing abnormal here. There's no one-timers, right? Is there a path that if organic growth continues to decline because of the market that there is still more in your pocket that you can dig into on the cost side or conversion or scrap? How much more runway is there on some of these initiatives?

Yes. I think I'd like to think about wherever we land in 2025, our guide is 10.3% to 10.5%. Let's just say we lane at the midpoint, 10.4%. That's our jump-off point. We're not calling anything out -- our goal as a management team is continued to grow earnings per share period. That's our focus.

And we're going to continue doing that. We did that in '25. We're going to continue to do that in 2026 and use all of those levers that we spoke about to drive earnings per share growth. That's our goal.

Can you talk about automation. What is the role of automation -- how much -- because I think this is coming up a lot more amongst some of your supplier peers. What is the level of automation that you're using in your manufacturing? What's the runway?

Yes. I mean I think you automation more from an AI perspective, we launched -- I would say, about 18 months ago, we launched a lot of programs throughout the business units and even in corporate.

I'd say there's 2 main areas that I'd focus on from the manufacturing floor standpoint, we see some cost benefits from that. One of the big things we do in a lot of our products is a lot of visual inspection, towards the end of the production line. And that's a great application for a lot of AI projects.

So we see some cost benefits there. But in other things, like R&D is another great example one of the first things you do when you're submitting a program, you have a stack of requirement and the engineer needs to work through all those requirements. Working with an AI partner, they can quickly roll through a lot of that, find a lot of the requirements they need and a lot of them focus on more of the actual engineering. So there's a cost benefit there.

So I'd say from an AI automation perspective, it's most mainly a cost play for us, but I think there's applications not only on the manufacturing floor, I think there's back office R&D opportunities, too, for cost.

Is this near term? Or is this more of a mid- to long-term type opportunity in the cost of extracting these benefits?

I think you're seeing it within the productivity that you're seeing in the business are starting to see benefits already.

Let's talk about the margins on the eProducts side. PowerDrive has seen some improvement. You're still tracking at negative margins. Just broadly, what is the path to breakeven? Is this just purely a volume play that you're going to increment at your mid- to high teens on the volume. And so you need the volume to get to breakeven? Or is there anything else you can do on the restructuring cost takeout side?

Volume is clearly going to be important. No question about it. And I think this year is a good example. Revenue up at least through 9 months around that 20-ish percent, and we're converting -- we're on a path to convert in the mid-teens.

If you go back to 2024, again, we restructured that business. And what Joe and I are watching is, do we restructure at the right level and to determine that did we convert in the mid-teens in 2025. And so that's an item that we want to finish the year and make sure we're meeting that objective. If we don't get to that objective, then we need to take additional cost actions, and we're not afraid to do that.

We showed you that in '24. And if we have to do that again, we certainly will. But our focus right now is grow that business, convert in the mid-teens on an all-in basis. That's what we're focused on doing.

Have you -- when we factor in all of the restructuring, so on a clean and volume basis, have you been converting in the mid-teens? Is that the way that the numbers have played out this year?

In Q1 and Q2, we certainly did. In Q3, there was a bit of a timing item with recovery that we got from a customer in Q3 of last year that didn't repeat in Q3 of this year, but we're still on track for the full year to convert to the mid-teens, and that's how you should look at that business.

Okay. Same question on battery. You're now running at sort of negative 5%. That's after the benefited charging exit and you've done some footprint rationalization on the battery side. Path to breakeven? Is it same -- it's a volume play or more on the cost side you can do?

Definitely volume play from here. The team has done a really great job. We exited charging, which helped that segment at the same time. They've done a lot of restructuring in that business already. When you look at Q3 is a great example of that. Revenue was down called $60-ish million, and we held operating income flat.

How did we do that through cost controls, whether it's restructuring or other cost actions within that business. What I mentioned earlier is really important. That business is in a far different spot than our charging business. We're EBITDA positive, we're free cash flow positive. I believe in the long-term aspirations of that business, we're in a position to grow profitably as we move forward, but volume is certainly going to be an important component.

Okay. From an EV standpoint, you've talked in the past, and I don't think you discussed it much this year, but this idea of R&D, there's ER&D versus, I guess, what foundational R&D would be the alternative.

So with the reduced EV environment, at least in North America, how are you thinking about the R&D approach? You've been tracking in the low 5%. How does this differ between foundational versus the what's the right R&D profile going forward?

So we've changed the way we look at R&D broadly over the past 2 years. We used to communicate mid-teens incrementals, but we're going to have to spend x amount for R&D, so you have to back that off when you think about our incremental return process.

Now we want to deliver a mid-teens incremental inclusive of that spending for R&D. And there's 2 ways to think about that. It means if you're a growing eProducts business, you need to manage the growth in your R&D spend within that mid-teens incremental. So PDS still needs to hit mid-teens, even though they're spending R&D for their future growth.

But the other side of that is our foundational businesses, which previously were funding a lot of that higher R&D spend now as long as they're hitting their mid-teens incremental, if there's R&D dollars to spend to drive your future outgrowth, so be it.

So I guess now we don't think about it, it needs to be a certain percentage outside of that incremental margin, it's one of the levers that you have on the upside and the downside to manage that incremental margin within each business unit. So we don't view it separately. It's a cost lever within the businesses now.

Okay. How about from the perspective. You referenced a moment ago in PowerDrive customer recoveries. Obviously, on the EV side, there's been a lot of programs that the volumes haven't come in as planned or have been canceled. There's some other dynamics on the commercial side in terms of tariffs. So how are we thinking about the commercial side, how much opportunity there is to maybe recover some costs that have been incurred for volumes that haven't played out as expected?

Yes. So we have volume clauses in our contracts and basically it says, hey, if volumes don't materialize to what the OE communicated, we have a right to sit at a table like this and have a discussion. And we obviously do that. I mentioned Q3 last year where we were successful in getting some recovery.

Obviously, to hit the mid-teens incremental conversion year-over-year, it means we have to replicate that this year. So it's a constant conversation as those volumes haven't materialized. We're at the table with our customer, and it's going to be a significant component of making sure that we recover that capital because those volumes do materialize.

Okay. Let's pivot maybe to the regional side of things. China, obviously, there's a lot of questions for across the supply base on China exposure.

You've given some disclosure in the past, domestic OEMs are roughly 75% of your China revenue and your China revenue as a whole on the foundational side seems like that's gone well. So maybe you can just give us a sense the domestic OEM split within China, how that is faring? And maybe you could just talk about the competitive landscape, not only against Chinese suppliers, but also from a vertical integration standpoint?

Sure. So you mentioned it about 20% of our revenue is with China -- within the Chinese market. When you think about that, about 75% of that 20% is with local OEMs. So we're overweight locals. And we tend to work with the top 8 to 10 in that market. When you think about the financial aspects of that market. It's very challenging, but we still hold our discipline of, hey, we're going to focus on 15% ROIC or higher. We're meeting that objective in China.

And for us, the dynamics in the Chinese market are very different in the Western world. Example is R&D. When we get a program in China versus a Western OEM, Joe likes to share the statistic, we have to test against customer specifications. For an IDM in Europe, there might be 20,000 different specs that we have to test against.

So think about all of those R&D dollars going to test those specs for that same IDM in China, there might be 600. So that plays into the equation significantly. But for us, it's all about 15% ROIC. 15% ROIC, that helps us to maintain our ROIC discipline and our margin discipline across different regions of the world.

So that's saying the trade-off is maybe a lower R&D footprint, but the pricing maybe is a little tighter because of the...

Absolutely.

Just R&D. I'd say the cost across the board, whether or not your supplier costs, your manufacturing cost, manufacturing flexibility. I think there's a lot of cost levers that you have. So I don't think you can look at just the price point of the product in the region, dictating what the overall margin profile is.

And I think you've answered the question, but I know there's been some question amongst other suppliers that all of this rise of domestic Chinese business could be heavily margin dilutive. But it sounds like if you're maintaining your ROIC threshold throughout regions, that's not the case for you. Is that a fair assessment?

It's a fair assessment. And the best data point I have is look at PowerDrive Systems. If we're converting in the mid-teens and the growth is primarily in China and Europe, well, we're doing our job.

Okay. And then one more on the China side. And really, it's sort of the entry of China into Europe. That there's been some concern, you've obviously seen Chinese share in Europe rising a lot of exports and talk about localizing.

So what is your exposure maybe on export business or potential localized China business in Europe. Is that -- does that change the profit picture for you at all?

Yes. I mean I think what's really interesting is I think it's clear that our Chinese customers ultimately do have aspirations to produce in other regions. And Joe gives a great example. He was at the IAA conference, the Frankfurt Auto Conference that occurs every other year, and he's been going now for decades.

What's interesting that changed this year, about 20% of his meetings that we had there were with the Chinese OEMs, talking about how do we enter this market what -- how can you help us from a supply standpoint? How can you help us understand some of the regulatory requirements. I think clearly, their ambitions are to grow in that market. That could be an opportunity for us. I think the key for us, we often get the question, is that a bad thing or a good thing.

We're so diverse from a customer end market perspective. It comes down to that same win business find outgrowth opportunities rather than customer mix dictating our success...

Okay. Why don't we talk about free cash and capital allocation. I just want to start on free cash because you've got -- the earnings profile has been steady, but really what's more interesting is the free cash is like one of your best free cash flows ever. Really good operating cash flow, very low CapEx.

So maybe you could just talk about on the free cash flow. I think we have a good grasp of the earnings side. But what else is going on in free cash flow? And maybe you could talk about the CapEx that's tracking at 4% of revenue historically 5% to 6%. What is the right profile?

Sure. Yes, really happy with the free cash flow generation that we expect for the year. The midpoint of our guide is $900 million. if you go year-over-year, that would be over a 20% increase. I think the teams have done a really great job in all aspects of free cash flow.

First, working capital. They've done a really nice job managing inventory levels, net AR/AP, but you mentioned CapEx being really low. And it comes back to your earlier questioning, hey, you have a lot of eProducts investment. Are you going back to the customer for recovery.

While we're also doing our part of -- if there's an eProducts program, and we can send that capital from one region to another to take advantage of that, do it. And that's what PowerDrive Systems is really doing very successfully. So we're able to leverage that cost, that capital that we already put in place to where it's needed and really make sure that we're managing our CapEx and our cash flow, and we're seeing a really low CapEx environment and a great impact on free cash flow.

Is that 4% sustainable?

I think it's a little bit low. I don't think it's sustainable. When you go back historically, we've been in this, call it, 4.5% to 5% range. And as we go into '26, '27, I think that's probably the right data point.

Okay. M&A, and I think you've changed the way you've defined it. You're looking not about foundationally product. You just -- you're looking for a target that is immediately accretive. So is it fair to say that, that precludes something in eProducts? And maybe you could just talk about what white spaces on the customer or technology side still exist in the portfolio?

Yes. So when we think about inorganic investments, we've laid out 3 criteria. First, it's got a link to the core competency of what BorgWarner does. We have a lot of core competencies. You mentioned the second one. It's got to be accretive. We're focused on growing the earnings power of BorgWarner, whether that's organically or inorganically.

And third is we have to pay a fair price. The way to think about our strategy is we've opened the aperture but we've raised the bar. And why have we done that? Because we have a great portfolio. We feel like we're in a strong spot on the foundational portfolio on the eProducts side of the portfolio.

Let's build on that strength. And so let's raise the bar. I'd say we're really active and we're operating from a position of strength from a free cash flow perspective and a balance sheet perspective, we're ready to execute on a transaction when it meets all those criteria. That's what we're focused on doing.

How does the experience of recent years in which I think we've all been thrown off by a very different uptake curve on EV. How does that shape the way that you look at some of these? Or is it that, okay, as long as it's immediately accretive, I'm not as concerned about how things may play out in 10 to 15 years.

Our overall objective for any of our businesses is mid-teens conversion, mid-teens conversion. So if there's an inorganic opportunity, whether it's on the foundational side or the eProducts side that meets that objective. Let's go take a look at it.

So again, we're opening the aperture, anything is possible. It's got a link to our core competencies. It can't be way off in my field, but it's got to meet those financial hurdles, and we just have to hold to that discipline. That's what we're focused on doing.

Okay. And then maybe just last one. On the -- before I open it up to folks on the balance of share buyback to return to shareholders versus M&A what should that split look like? And in the absence of M&A -- maybe you could just give us a sense of what the pipeline looks like. But in the absence of M&A, is it fair to assume the majority of that free cash flow should be deployed towards share buybacks. So just give us a sense of that trade-off.

Yes. I think that trade-off is we can do it all. I think that's kind of our focus is, hey, we have a great balance sheet. We're generating $900 million of free cash flow at the midpoint of our guide.

We have a strong inorganic pipeline, but we source our own deals so it's difficult sometimes to get a buyer and a seller to agree and get that timing completely right. So in the absence of having a near-term accretive deal, we're going to deploy cash to shareholders because we want to reward our shareholders, and that's what you saw this year. If what we've shared publicly is we're going to return roughly $420 million plus of cash to shareholders this year.

At the same time, we have a great balance sheet to capitalize on an inorganic opportunity. I think we're finding that right balance. And as we go into next year, we're going to look at it quarter after quarter.

And if there is an inorganic opportunity that's there in front of us, that's accretive, we're going to return cash to shareholders.

So when you look at our history, though, our history of M&A and capital, it's pretty bad -- it may not be 50-50 to the percent, but it's been pretty balanced between those 2 things, particularly when you look on a multiyear horizon.

Any questions, folks?

On the 3-year view, cash restructuring, inevitably, one of your customers, even if not huge, is going to do a lot better or a lot worse. But your manufacturing footprint, if I understand it correctly, it's pretty flexible. And so accordingly, do you really anticipate having to do much restructuring over the next 3 years? And if so, what kind of dollar amount should we be thinking about?

Yes. I mean, historically, we've always continued to restructure our business because we're operating from a position of strength and let's stay ahead of any one trend. I would say I like what we did in '23, I like what we did in '24, let's see how the business operates as we end 2025. And if we have to take other cost actions, we certainly will.

But where would that be? Because it seems like from a customer standpoint, that's not going to be the issue. It's going to be if there's some really big shift again that we don't anticipate in the end markets, eProducts or foundational, right?

Yes, any major restructuring actions that we have to take today, but we need to watch those markets. Those markets are moving so dramatically between regions. It's important that we stay ahead of that trend. And if we have to take actions to make sure we're hitting that mid-teens conversion.

Yes, just really add on to Dan's question about cash.

Maybe one final one. There's been some headlines lately. I know this has been sort of a volatility from a supply chain standpoint and rare earth in China. So we've seen some -- some headlines of some OEMs trying to ask suppliers to sort of clear China materials out of their supply chain.

Maybe you could just talk about to what extent the China supply chain for you with an issue in the West or does not really affect you, how easily you can sort of support that goal?

Yes. I mean our goal is to support our customers with what they need. And so if they're looking for supply that's not in China, we're going to try to support that need.

With that said, I would say the underlying goal for most OEs right now is cost competitiveness and China obviously provides a cost competitive supply chain. So I think we have to navigate it customer by customer. But as I sit here today, I would say cost competitiveness is probably the #1 priority for OEMs.

Right. We'll leave it there. Great. Craig, Pat, thank you so much.

Thank you, appreciate it.

Okay. Let's go ahead and kick it off here. Good morning. Thanks for joining us. My name is Luke Junk. I cover vehicle tech and mobility for Baird. And my pleasure to introduce you today to BorgWarner, who, as you probably know, is the global -- a global leader in both legacy combustion technologies, like turbochargers and leader in eProducts as well.

Really happy this morning to have with us Joe Fadool, CEO seated to my right, Craig Aaron, CFO of the company; and Pat Nolan from IR. All of them will be in the discussion today. Before that, let's just jump into Q&A. If you've got questions, you can send those to, I think this is session 3@ rwbaird.com. Joe, you stepped into the CEO chair, earlier this year, you've outlined some key priorities. Why don't we just walk through those to kind of set the table for the conversation this morning.

Sure. Great to be here. Our first priority, we kicked off this year is really driving financial performance of the company. We spent the last 5 years building a really strong portfolio. So we want to make sure that a lot of the business that we won, we're launching it well around globe doesn't matter if it's combustion or some of the new EV products.

The second priority is really take advantage of the environment right now, which is to win a lot of the RFQs that are out there. So if we compare today versus a year ago, the amount of RFQ flow is significantly higher. We're winning our fair share of those new businesses and it's across the entire portfolio.

So whether it's our strong turbocharger or EGR business, but also inverters, motors, complete drive systems, and then finally, it's -- as that growth comes, which we expect out in the '27, '28 time frame, converting on that growth and expanding the earnings power of the company.

We want to do that as we bring in that new business, but also having a very balanced capital allocation approach. So returning shareholder value in the short term with a balanced buyback approach, but also it's a great opportunity for us to look at some inorganic investments, we're in a very unique position to do that.

Okay. Cool. Well, why don't we start the macro and I want to touch on what you just mentioned the workflow that you're seeing out there and capturing those awards. Can we maybe just double-click on what you're seeing sort of in the foundational side of the house versus e-products, advanced hybrids, especially and then maybe geographically, what you're seeing, the lift certainly seems like it's a after shock in a good way of kind of the confusion that had existed in the West that maybe is now freeing up incrementally.

Yes. So when you think about eProducts, the market where eProducts are playing out most strongly is China. We continue to grow and win there. We're very pleased with how our teams are performing. China also has quite a few combustion programs. So it's not all e. And our portfolio serves that market well. When you move west toward Europe, it's a balance of EVs, advanced hybrids, also some combustion extensions.

So I would say, a little bit less EV focused in the short term, but we still see good growth there with our eProducts. When you move more toward this market, as we all know, EVs have more or less flattened out. So it's a great combustion business for us. So that's evidenced by some of our awards when we look at extension of turbocharger businesses or conquest wins, also on the EGR forward drive side. So if you just take all of that in total, we've announced in the last 6 months about 17 wins, which is just a sample of the wins across the globe, and it's across the entire portfolio.

So we're excited. This move, which was unexpected, where the regions are moving at different speeds toward electrification actually, it plays well both into our portfolio, but also in our operating model. Our teams in China are able to run fast, chase that e-growth and similarly in Europe and here, we're able to serve the customers with what they're expecting.

Yes. Like you said, you've shown a lot of awards in your earnings reports so far this year, that's just a subset of the total awards. I mean, any way to think about the dollar impact, it's a question that we get. I mean it seems pretty material, but I don't know, just any context or guardrails you can put around that?

Yes. We don't really declare any particular award or the dollar impact. And in February, we'll give a more concrete guide for next year. If I step back for a minute, a lot of the wins on the EV side the last couple of years haven't come to fruition like we expected here in Europe.

So we've seen a little bit lower outgrowth in '24 and this year, especially, that overhang is going to continue as we get into '26. But what I am excited about is a lot of the new business that I just referenced that we're winning will start to show up in '27 and beyond. So we expect that overhang to be with us a little bit longer before some of those new launches.

Maybe nearer term, certainly, supply chain as we came out of 3Q earnings, some just things bubbling up in terms of aluminum supply and chips, just real time, what are you seeing in the production backdrop.

Yes. So as we mentioned in our full year guide update, the North American truck maker in this market had a supply issue due to a fire. They're working through that. And we've included about $50 million to $100 million of impact into our updated guide. So they continue to work through that topic, and we're hopeful that they're able to recover a lot of those units next year.

When you look at Nexperia, that was, I would say, an issue more concerning about 4 weeks ago. But as we're reading in the headlines, it's becoming really less material. We did include what we expected to be the impact in our guide, but a couple of points I think are important. Although it's disrupted us slightly here and there on some production, we have not shut down any customers, and we're working closely with them to ensure this becomes very little in terms of material.

If we look just at the production backdrop, it large, I would say, certainly, the theme of 2025 has been less bad just at a high level, how do you think about the production environment as we head into '26. Are you planning for growth? Or do you just have to control what you can control from an execution standpoint?

Yes. It's a little bit early to talk about '26, we'll do that in February. As I mentioned, we've got this overhang. We're working through on some of the e-announcements from a couple of years ago. With that said, we are focused on the things we can control. And I think that's playing out very well in 2025. Our teams are executing well. We're launching well. We've been able to upgrade the guide, we're expanding margins. We're increasing cash flow. So we're really pleased with the performance. You can expect more of the same in '26 .

Certainly, governmental policies have been impactful this year, I mean tariffs. Of course, top of mind that we've got the one big beautiful Bill. You've got maybe USMCA renegotiation in '26, interest rates like what's on your horizon, what maybe could be most important and maybe even some good news potentially on policy next year.

Well, we always hope for good news and policy, difficult to plan for. If we take us back to earlier in the year, tariffs became a big topic. As we've worked through that with our customers and our supply chain we found it to be a very manageable topic for us. So we expect that we'll put a lot of that behind us moving into next year. .

I would say some of the other regulations like around emissions or fuel economy, especially in this market, it doesn't really play heavily one way or another in our portfolio. We've got a very resilient portfolio. If it does turn out, we're going to have more combustion vehicles due to the recent clarity on the road in the next 3, 4, 5 years, that's good for us. I mean we're #1 or 2 in each of those markets. So this doesn't really play a lot into our thinking. I would say we have to be ready for any change on the governmental side.

Craig, you also stepped into your role in the last 18 months or so. Similar to Joe's comments, maybe just any high-level priorities or sort of incremental priorities in your role as CFO.

Sure. Joe mentioned it, we're focused. I'm focused, but also the leadership team is. We're going to grow the earnings power of the company. And actually, that's what you've seen this year, really growing EPS from '25 -- from '24 to '25. And we're going to continue to do that as we move into 2026.

How are we going to do that? Well, first starts with growth, what Joe mentioned, we're going to continue to outgrow our markets. We're going to turn that growth into income on an all-in basis, inclusive of R&D. We're going to drive strong free cash flow, and we're going to find a balanced capital allocation approach that allows us to invest organically, inorganically, but at the same time, reward shareholders, return cash to shareholders through dividends and buybacks. And I think we're doing all of those things really well this year, and we're going to continue to do that into '26 and '27.

Yes, Craig or Joe feel free to jump in here. Just 2025 in review, curious what has surprised you both good and bad. And if I look at it through just the lens of guidance and some of those priorities that that you just spoke to, Craig, midpoint operating margins have moved up in the guidance, about 30 bps year-to-date. That's despite tariffs, of course. Can you impact maybe some of the major drivers or areas of execution that have been most helpful this year.

Yes. I think every business unit and corporate is contributing to our overall goal, which is growing EPS. So when you look at our different businesses, our Turbo and Thermal Technologies business. They're expanding margins on relatively flat sales. They're focused on cost controls, same with drivetrain and Morris systems.

So we're using levers like supply chain savings, productivity, restructuring savings, lower cost support quality, all to drive margin expansion with revenues being relatively flat. In our e-segments, Power Drive Systems, we're seeing really strong growth year-over-year, and we're planning on converting that growth in the mid-teens, and we're on track to do that this year, which is an important threshold for us, because we had to take important restructuring actions last year and how were we measuring success this year, convert in the mid-teens on an all-in basis, and we're on track to do that.

And for our battery business that's having some headwinds from the top line, they're controlling what they can control, controlling costs, holding income relatively flat in the third quarter despite revenue being much lower through cost actions including restructuring. So I think the teams around the globe are doing the right things, and it's leading to a great result for BorgWarner. Like you said, revenue is relatively flat. We're expanding margins, 30 basis points. We're growing EPS. We're delivering $900 million in free cash flow, and we're returning that back to shareholders, and we're in a great position to execute an inorganic opportunity when it presents itself. So I feel really, really great about what we've done in this year.

What about just managing through tariffs in the nearer term and tariffs from just a timing standpoint have been a headwind. The last couple of quarters. I think you're expecting those to reverse into the fourth quarter. Can you just help us understand the mechanics driving them. .

Sure. So maybe just for the group, the key statistics as it relates to tariffs. So 1% of sales is our exposure. Right now, as we sit here today, we have agreements in place with our customers to cover about 80% of that exposure. The remaining 20% we're working on. As you think about the cadence of recovery, it's been a headwind for us Q1 through Q3. There's accounting rules in place. We have to go through an audit process. So we provide the input to our customers the exposure, they have to audit it. Once we get that positive audit outcome, we can recognize it in our P&L, and we expect that tariff recovery to flip positive in the fourth quarter. .

AI. It's obviously all the buzz in the markets these days, but I think there are some real opportunities to actually use AI tools. Are you -- I know it's probably not material at this point, but are you looking at those sorts of things for Borg?

We are using machine learning, GenAI. We started maybe about 18 months ago with some pilots across the operations and also some in R&D to see where the value is. And we've since autopilot is about 30% of them, maybe a little bit better, look really positive. They're mostly focused on quality improvement, cost reduction, if you think about a plant, we do a lot of visual inspection.

We found great application to use it there and train the model quickly, reduce some of our labor costs. We're also finding on some of our back-office processes or in R&D. If you think about the very first step whenever you get a new program, you have to go through a big stack of requirements from the customer. So processing through that with GenAI techniques and an agent by your side you can really reduce the time and the amount of engineering workloads, so you can free those people up to work on some of the more value-added areas. So it's mainly been used in quality and cost reduction at this point.

Let's shift to China. Just be curious to get your thoughts to kick this off, just around moving at China speed. Certainly, the company has a strong position with local OEMs in China and just areas you can lean into incrementally either that you have this year or maybe areas of opportunity into next year on that front?

Sure. So for context for the group, about 20% of our sales are in China, and about 75% of that revenue is with the domestic OEMs. So a little bit overweight to the domestics, but we think that's a great position to be. We've been operating in China for over 30 years. So we have great customer intimacy there. We have business with all the leading Chinese OEMs. Why do they pick BorgWarner? Well, besides the customer intimacy, it's -- we're able to bring competitive technology to the market, which is really important.

The second, which is almost as important as the speed. So when you hear China speed, think about they get to market about half the time that it takes a western OEM to get to market. And they want to pick partners that can run fast with them. So that's been a game changer, and that's due to our decentralized operating model. We spent the last 30 years building up very strong and competent teams in China. Now we're seeing some of the fruition of that as they move faster to get products into the market, so it's been a positive process for us.

We look at just your eProducts growth overall, is there a way to contextualize sort of how much of that is expected to come into China over the next few years versus just everything else globally?

Yes. Maybe a few data points to how. About 50% of our light vehicle e-product sales is in China. So that's where the music plays that sort of makes sense. If you think about the growth we saw from last year to this year, our light vehicle eProducts is up about 27%. So we're really pleased with that. So you can imagine where a lot of that growth is coming from. And if you look since 2021, we've been growing that business steadily year-over-year. I think a nice change. You've started to see is how we're incrementing on that business more toward a breakeven position. So China plays a big role in that.

Is working with local OEMs outside of China, something that's becoming more real. I mean certainly, we've seen some movement in Europe. If you look in South Asia, I think that's already something that that's happening, just what works perspective on that opportunity?

Yes, we're starting to work with them how to localize. If you look over the last couple of years, the Chinese OEMs have been really successful, not only in their market, but in export -- so last year, over 5 million vehicles exported. A lot of it with BorgWarner content. So we're really pleased with that. This year probably be a little bit higher than that. Now they're moving to the next step, okay, how can they localize and import less into the markets they're playing in.

I found it interesting, I was in Munich 2 months ago for the IAA Conference and probably 15% or 20% of my meetings were with Chinese OEMs who are looking for help to localize. So we start to see them taking the steps. They want to be successful in the markets that they are gaining revenue. So that's a very positive sign in my view.

Maybe if we could just some out to eProducts. Overall, I think your current business mix is around 60% BEV and 40% advanced hybrid, correct me if that's wrong. Can you maybe just speak about the backlog? I think there's maybe a perception, especially if you live in the west of EV moderation, but especially that hybrid story seems to be one of the best stories in automotive. Can you talk about your leverage to hybrids, advanced hybrids, especially.

We don't really provide a backlog breakout like you're referring to. But I'll talk about how do we measure success for each of our businesses. And when you think about our foundational business, we measure success or outgrowth by outgrow your end markets and your end markets are the combustion for us, hybrid end market.

That's the fine success for you. When you look at our e-product business units, it's the hybrid plus BEV markets, outgrow that end market. And so that's the goal for each of those different segments of our business. Joe spoke about the 17 awards that -- we spoke about externally over the last couple of quarters. And it's those awards that are happening on both sides of our portfolio, that's going to help us outgrow those end markets as we go into 2027 and beyond.

Is there -- would you see an advantage to owning both combustion and eProduct assets when you're going after those hybrid awards? .

I mean, certainly, there is -- if you think about the 3 major types of vehicles, you've got combustion, you've got advanced hybrids and you've got EVs. As we mentioned in the last 5 years, we've spent a lot of effort and resources to build the portfolio we have. So as the regions now play out a little bit differently in that mix of powertrains we're in a great position to serve the customers what they want. So in China, some of the RFQ flow has been more weighted toward NAV.

So advanced hybrids, EVs. So that's why you see more wins in China, representing the NAV market. In Europe, it's a pretty good balance between advanced hybrids and E. And then in this market, it's likely, as we talked about, probably the next 3, 4, 5 years, EVs aren't going to really grow materially. So taking advantage of our strong position on the combustion side. So we think it's a great strength to have a portfolio we do. We can serve our customers from that portfolio regardless of the mix that they're looking for.

Craig, like you mentioned you've been incrementing at the mid-teens incremental in the business overall or higher. And in PDS specifically this year, I know you've got some tools in the toolkit in terms of Zebra plants and some flexibility that you're building in. Can we think of ways that can get to breakeven faster in PDS and maybe is looking at China may be part of the conversation, given that, that's half the company may be a little more mature business that maybe some clues to the future of PDS overall?

Sure. Yes. I mean for PDS, the clear avenue to breakeven and beyond is scale. And when you look at this year, we're having nice growth through the first 9 months over 20-plus percent growth. So it's really nice to see that. With that said, if you go back a year or so ago, we had announced a restructuring for PDS. We had won a lot of awards following the Delphi transaction, but the market didn't cooperate, and we had to rightsize that cost structure.

So what Joe and I have been focused on this year is, hey, let's continue to grow in PDS, which is what we're seeing. But more importantly, we're going to increment in the mid-teens on an all-in basis and PDS is on track to do that. And that's how we're going to measure success. If we see that continue to convert on an all-in basis in the mid-teens, it means we have that cost structure right. If that's not happening, then we're going to have to revisit that cost structure.

And so that's what we're watching this year, but we feel really good about the execution in that business through the first 9 months, and we expect to continue that in the fourth quarter. .

And China, I mean, the level of profitability better in China and not just curious if there's anything to read into getting that scale on what China tells us about it.

Yes. I mean our China business is pretty successful. We don't talk about profitability for any one region. But certainly, if you're going to increment in the mid-teens and China is the growth engine, you can kind of conclude that we're doing pretty well in China.

I want to talk about the foundational business. Maybe I don't know if I'd say this is more of a cultural question. Joe, you mentioned, obviously, over the past 5 years, the focus the company has been building the portfolio, now you're moving into leveraging the portfolio, just be curious from a foundational point of view, maybe to compare and contrast the overall mindset in the company now versus 2 to 3 years ago and recognizing that you actually, of course, spend a lot of time in the company's combustion businesses before becoming CEO.

Sure. No, we have a great combustion business. I mean, we're #1 or 2, if you think about turbochargers and exhaust gas management, forward drive. Our timing systems business. And if I take us back to 5 or 6 years ago, we were facing an existential threat to that business, which is why we made a lot of investments on the east side.

Well, if you step back now, the world's changed. The growth opportunities aren't only in E. We see now great growth opportunities across the whole portfolio. So that was the change Craig and I made a little over a year ago to the strategy. We didn't want the foundational businesses to primarily be funding in E only. So leveraging growth across now all the BUs, I mean, it's been well received inside the company, as you can imagine. And you see us winning the programs, that's the exciting part. The amount of wins in the last 6 months, we've just shared 17 of them. That's what I'm really excited about.

What about just the -- Craig, you've talked to some of the successes in terms of margins this year and certainly the foundational businesses have played a really key role in that story. Just how do you think about opportunities for margin resilience and expansion from here be it, I don't know if restructuring is necessarily part of the conversation, operations and growth. And is there maybe opportunity to kind of stitch these 2 businesses together in terms of the Zebra plant concept or being similar to that.

Yes. I mean, first of all, really happy with the execution in those businesses. They've done extremely well, expanding margins or holding margins relatively flat, despite limited growth in those portfolios. But with that said, those businesses are using all types of levers, restructuring, productivity, supply chain savings, lower cost support quality, all of those things have been really important to expand margins in the foundational business -- and I don't see that stopping. We're going to continue to use those levers to continue to expand margins with the goal.

Hey, we're growing EPS for BorgWarner and part of that equation is continuing to elevate our game on the foundational side of the business.

On the time we got left, I want to talk about M&A. So I think there was a single takeaway from Borg. It's that you want to grow the earnings of the company and the M&A is one of the levers that you're looking to use -- can we just talk at a high level about industrial logic and sort of maybe a hypothetical business that you could buy, given that we haven't seen an acquisition yet or maybe more importantly, I think people are just -- there's -- if you're the unknown, maybe what -- something that wouldn't be interesting to you or even that you've already passed on?

Yes. So we wouldn't comment on any particular target, but to give you maybe more depth on our industrial logic. How do we think about it? So it's about leveraging the core confidence the company has. So when you think about BorgWarner we've got extensive competence in rotating mechanics, high-speed rotating electrics, software, electronics, hardware, system engineering, tribology.

So how do we leverage that to make an inorganic investment where 1 plus 1 can equal more than 2. So that's what we mean by industrial logic. For us, what's important is we're not trying to fill a gap. We're really pleased with the portfolio we have now, because of all the work we did the last 5 years. But we want to continue to strengthen the portfolio and expand the earnings, as you mentioned. So -- we've been very disciplined in the process.

We're pretty strict to adhere to the criteria. But we have opened up the aperture. What is possible given the extensive confidence we have. So I'm really pleased with the discipline we're following, and it's true. We've passed up a couple of deals that didn't fit those criteria, but I'm really happy with the process.

Craig, how do you think about M&A just from a balance sheet standpoint, I'm thinking more valuation, returns? Like what are some of the key commitments that investors should think about from that point of view? .

Yes. I mean the first key commitment, which we've emphasized a couple of times is we're looking for inorganic investments to drive the earnings growth of the company. So we're going to make sure we're focused on that. When it comes to valuation, we have a very disciplined process. We're going to run a discounted cash flow model.

We're going to look at a lot of different scenarios, as Joe mentioned. The regions are adopting electrification differently. We have to put that -- we have to put that intelligence into our DCF model, make sure we run a lot of different scenarios to make -- to ultimately make sure that we feel comfortable with the valuation and can articulate that value externally. So -- we're going to focus on that discipline. And when we have an organic investment, we're going to make sure it's very clear why we think we paid the right value for that asset.

Just in terms of scale, I guess another question that we've gotten is -- are these the sorts of acquisitions that you would press release? Or are these more likely to be tuck-in type things that are more [ gating ] in nature would you say?

I mean I would say we haven't taken anything off the table. So when you think about inorganic opportunities, there's larger ones where you create more synergy and value and expand the earnings power which we're heavily focused on. But of course, we're a technology company. So we're going to find some smaller players that are sort of tuck in, like you mentioned, that help us accelerate a gap that maybe we're looking to close organically, we can do it faster with a small technology acquisition. So we're opening up our aperture, but we want to have a strict, I would say, set of criteria for any decision if we go forward with an inorganic investment. .

Yes, Craig, you mentioned, obviously, the company is generating cash. Just how do you think about returning cash to shareholders if nothing comes to fruition on the M&A front? Or do you want to have a little dry powder for M&A?

Yes. I mean, first, we're operating from a position of strength. So we have a lot of liquidity on our balance sheet. Our leverage is very moderate. So we feel really good about the strength. When you think about opportunities that are in front of us, we're going to continue to focus on those accretive deals. And when you think about returning cash to shareholders, what everybody should understand is we're focused on discipline and consistency.

And that's what you've seen in the last actually 2 years from us. Last year, we returned $0.5 billion of cash to shareholders. We're on track for $420 million plus this year of cash returned to shareholders.

And BorgWarner can do it all. We don't have to focus on one or the other. We can return cash to shareholders through repurchases and dividends. And we're in a great position to execute inorganic investment when the right opportunity presents itself. So again, we're operating from a position of strength and we can do it all.

Okay. Well, we'll leave it there. Management will be available for a breakout in Salon A here in [ 12th ]. Thank you for the presentation.

Thank you.

Good morning. My name is Ashia, and I'll be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner 2025 Third Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Ashia. Good morning, everyone. Thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on our home page and on our Investor Relations home page. With regard to our Investor Relations calendar, we will be attending multiple investor conferences between now and our next earnings release. Please see the Events section of our IR page for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K.

Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture about the core business performed and for comparison purposes with prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items. When you hear us say adjusted, that means excluding noncomparable items. When you hear us say organic, that means excluding the impact of FX and any net M&A. We will also refer to our incremental margin performance.

Our incremental margin is defined as the organic change in our adjusted operating income divided by the organic change in our sales. We'll also refer to our growth compared to our market. When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure. Please note that we have posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Joe.

Thank you, Pat, and good morning, everyone. I'm very pleased to share our results for the third quarter of 2025 and provide an overall company update, starting on Slide 5. I wish to begin by thanking our employees, customers and suppliers for all of their trust and efforts during the quarter and for their continued support. In the quarter, we achieved organic sales growth of just over 2% despite headwinds for downtime at one of our European customers due to a cyber-related shutdown. Excluding the decline in our CV battery and Charging Systems segment, our organic sales were up approximately 4% year-over-year. I'm excited to report that the strong award activity we saw in the first half continued into the third quarter. Today, I will share 8 new business awards across both foundational products and e products, which are just a sampling of the awards that we secured during the quarter. .

We believe these awards illustrate the strength of our portfolio and the demand for efficient powertrain technology around the globe. Our adjusted operating margin performance was strong in the third quarter, coming in at 10.7%, which increased 60 basis points year-over-year despite a 60 basis point net tariff headwind. This strong underlying operational performance was driven by capitalizing on higher sales, continuing to focus on cost controls across our business. and turning earnings into strong free cash flow. Lastly, we remain focused on the efficient deployment of our capital to drive shareholder value. In the quarter, we returned approximately $136 million or over 50% of our third quarter free cash flow to shareholders to share repurchases and payment of our quarterly cash dividend.

Looking back on our year-to-date performance, I'm very proud of our team and our results. As Craig will detail, our year-to-date performance remains strong and has enabled us to once again increase our adjusted margin, adjusted EPS and free cash flow guidance for the full year. Now let's look at some of the new foundational product awards on Slide 6. First, BorgWarner has been awarded several 4-wheel drive contracts with Chery to supply its on-demand transfer case with mechanical locking for their pickup truck vehicles and its all-wheel drive coupling for Chery's SUV models. We believe the new programs further strengthen the long-term partnership between the 2 companies and advanced drivetrain systems with mass production scheduled to begin in 2027. .

We are honored to extend our collaboration with Chery and the drivetrain technology field. As a global leader in this sector, BorgWarner brings a broad product portfolio, deep technical expertise and sharp insights into international markets. Next, BorgWarner has solidified an agreement with Stellantis to supply our 50-millimeter variable turbine geometry or VTG turbocharger for the OEMs GME T4 EVO 4-cylinder gasoline engine. This turbocharger will be featured on the automakers 2026 Jeep Grand Cherokee. Additionally, BorgWarner will supply its electric variable cam timing or eVCT technology on the OEM's Jeep Cherokee engine. We are pleased to partner with Stellantis on these exciting project launches. Our long-standing relationship includes supplying Stellantis with a number of turbos for previous vehicle models, and this specific project marks our shift into the next generation of turbocharging.

The integration of BorgWarner's eVCT into the Jeep Cherokee engine marks the first use of an eVCT on a Stellantis engine. I'm excited to see continued demand for our market-leading foundational products across our portfolio. Now let's look at some new e-product awards on Slide 7. First, BorgWarner has secured a contract to supply a 7in-1 integrated drive module, or IDM, to a leading Chinese OEM with mass production expected to start in 2026. Exclusively designed for the customer's hybrid SUV, BorgWarner's IDM integrate multiple functions within a single compact unit to boost overall system performance and efficiency.

BorgWarner's 7-in-1 IDM combines 2 electric motors, featuring the company's patented high-voltage hairpin winding technology. a dual inverter integrated with an onboard charger, DC to DC converter and voltage boost function as well as an easier transmission. With deep expertise in electrified propulsion and full stack in-house capabilities covering e-motors, power electronics and gear boxes, BorgWarner is able to provide a flexible and highly integrated solution tailored to the customers' needs. Next, BorgWarner is strengthening its electrified propulsion collaboration with Great Wall Motor. Building on 2 previously announced dual inverter programs, BorgWarner has secured 2 additional projects with this OEM with mass production scheduled by the end of 2025.

We believe the extension of this partnership not only reflects recognition of our products and technologies, but also underscores our strong commitment to supporting our customers with new energy strategies. We remain dedicated to accelerating their electrified vehicle portfolio. Lastly, BorgWarner has secured a contract to supply its battery system to the all-new HOLON Urban, a 15-person, Level 4 autonomous fully electric shuttle. The system utilizes to kilowatt-hour battery packs and incorporates a modular design with cylindrical NMC cells, which offer the latest generation cell chemistry and benchmark setting energy density. Additionally, BorgWarner's NMC battery system includes a robust stainless steel battery case and uses a compact active liquid cooling system.

To summarize, the takeaways from today are the following: First, BorgWarner's third quarter results were strong. Second, we secured multiple new business awards across our entire portfolio. And third, we continued returning capital to shareholders. As we focus on a successful finish to 2025 and look towards early 2026, I expect BorgWarner to remain focused on 3 factors to drive value for our shareholders. First, we must continue to focus on driving strong financial performance. To me, this means successfully launching profitable business around the globe that supports our customers' needs for leading-edge powertrain technology for combustion, hybrid and electric vehicles, as well as continuously taking the steps to manage our overall cost structure. I expect this to support expanded earnings and cash flow.

Second, we must continue to capitalize on the strong quoting environment that we've been seeing over the last several quarters. BorgWarner intends to remain focused on securing new business across our portfolio which I expect to contribute to our long-term top line and bottom line growth. And last, we need to stay focused on creating additional shareholder value with our strong free cash flow. I expect this to be achieved through a balanced capital allocation approach that rewards shareholders, while also making inorganic investments that will grow the earnings power of BorgWarner and improve our long-term positioning.

I continue to firmly believe in the strength of BorgWarner. The 17 awards we've announced over the last 6 months provides me even more confidence that our product strategy is built to drive long-term profitable growth across our entire portfolio. In combination with our deep and long-standing global customer relationships and our disciplined financial approach, our talented team will continue to drive BorgWarner to the next level of success. With that, I will turn the call over to Craig.

Thank you, Joe, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our third quarter results. First, we reported just under $3.6 billion in sales, which was up 2% year-over-year, excluding foreign exchange. This performance was modestly weaker than our market production in the quarter due to downtime at one 1 of our European customers and a decline in our battery and charging sales. Second, we had strong adjusted operating margin performance in the quarter at 10.7%. This performance represents a 60 basis point improvement year-over-year despite a $17 million net tariff headwind in the quarter. .

This also represents the sixth quarter in a row with an adjusted operating margin at or above 10%, which we believe demonstrates the consistency of our operating performance. Third, we had strong free cash flow in the quarter of $266 million, which was a 32% increase from a year ago. Now let's turn to Slide 8 for a look at our year-over-year sales walk for the third quarter. Last year's Q3 sales were just over $3.4 billion. You can see that stronger foreign currencies drove a year-over-year increase in sales of $69 million. Then you can see an increase in organic sales, which was primarily driven by a 6% increase in light vehicle e-product sales and a 4% increase in foundational sales, partially offset by lower battery and charging sales.

Some of all this was just over $3.6 billion of sales in Q3. Turning to Slide 9. You can see our earnings and cash flow performance for the quarter. Our third quarter adjusted operating income was $385 million, equating to a strong 10.7% adjusted operating margin. This performance includes a 60 basis point headwind from net tariff costs. That compares to adjusted operating income from continuing operations of $350 million or a 10.1% adjusted operating margin from a year ago. On a comparable basis, adjusted operating income increased $46 million on $73 million of higher sales. We believe this is great performance and reflects our ability to capitalize on higher sales as well as a continued focus on cost controls across our business. Our adjusted EPS from continuing operations was up $0.15 compared to a year ago as a result of higher adjusted operating income and the impact of our share repurchases during 2024 and 2025.

And finally, free cash flow from continuing operations was a generation of $266 million, which was up $65 million from a year ago as a result of higher net earnings and lower capital expenditures. Now let's take a look at our full year outlook, on Slide 10. We are now projecting total 2025 sales in the range of $14.1 million to $14.3 billion which has been narrowed from our prior guidance of $14.0 billion to $14.4 billion. This adjusted range incorporates a higher market production outlook, offset by the expected impact of a cyber-related shutdown at a European customer, the impact of supply constrained production for key North American platform and global semiconductor supply concerns. On a combined basis, these customer and supplier related factors are expected to be a 60 basis point headwind to our year-over-year sales growth.

Now let's review our year-over-year sales walk. Starting with foreign currencies. Our guidance now assumes an expected full year sales benefit of $170 million compared to 2024 due to the strengthening of the euro versus the U.S. dollar. Within our 2025 guidance, our full year end market assumption has improved to flat to down 1% year-over-year versus down 0.5% to down 2.5% previously. This improvement is driven by stronger industry production that we saw during the third quarter and an improved production outlook in the fourth quarter compared to our prior outlook. Within this guidance, we continue to expect a tailwind from tariff-related recoveries of up to 1% of sales as this is a pass-through recovery of our costs to our customers.

Additionally, we expect the company's full year sales outgrowth to be roughly flat, which reflects a 100 basis point headwind from our battery business and a 60 basis point headwind from the customer and supplier impacts I just referenced. Based on these assumptions, we expect our 2025 organic sales change to be down 1% to flat year-over-year. Now let's switch to margin. We are increasing our full year adjusted operating margin to be in the range of 10.3% to 10.5% compared to our previous guidance range of 10.1% to 10.3%. We view this as strong underlying performance supported by our solid year-to-date operational results, which we fully expect to continue for the remainder of 2025.

Based on this sales and margin outlook. We're expecting full year adjusted EPS in the range of $4.60 to $4.75 per diluted share, which is a 3% increase versus our prior guidance or an 8% increase versus 2024 at the midpoint of our range. Additionally, we are increasing our full year free cash flow guidance to a range of $850 million to $950 million, which is $150 million increase from our prior guidance. With that, that's our 2025 outlook. Let me summarize my financial remarks. Overall, we were very pleased with our third quarter results. Our adjusted margin, adjusted EPS and free cash flow performance were strong despite net tariff cost headwinds in the quarter. Our third quarter performance allowed us to increase our margin, EPS and free cash flow guidance. And on top of that, we returned $136 million of cash to shareholders or over 50% of our free cash flow in the quarter through our share repurchases and dividend.

As I look towards the end of the year, we're focused on delivering the improved financial performance outlined in our guidance. We now expect our adjusted operating margin to be up 20 to 40 basis points year-over-year despite tariff headwinds and second half volume challenges. The midpoint of our revised adjusted EPS guidance represents more than an 8% increase year-over-year, which demonstrates our focus on consistently growing earnings. And finally, we expect to have another year of strong free cash flow of $900 million at the midpoint of our guidance, which is more than a 23% increase versus 2024.

By continuing to focus on near-term execution, growing the long-term earnings power of the company through organic and inorganic investments and following a balanced deployment of our capital, we believe BorgWarner will create significant shareholder value for years to come. With that, I'd like to turn the call back over to Pat.

Thank you, Craig. Ashia we're ready to open it up for questions.

The first question comes from Chris McNally with Evercore.

Chris, can you hear us?

Sorry, was on mute. There we go. Joe, Craig, impressive results, particularly, we know that the Q4 Oswego impact is obviously material to board given the high content on the F-Series -- in the prepared remarks, I just want to make sure you talked about 60 basis points. Could you just dive in a little bit to the visibility you have on Q4 specifically for that single large kind of impact because whether it's 60 basis points, $80 million to $100 million rev impact, that's like $0.07 to $0.08 for the full year. So that's my first question.

Thanks, Chris. Appreciate the comments about the quarter. In our guide, what we've included for that North American program, it's $50 million to $100 million impact in the fourth .

Okay. Perfect. And then the second question, it's really around -- your divisional margins were also very impressive. The only question area I saw was around Power Drive or PDS. Obviously, we're going to see a pickup in the European NAV volumes in the second half, and that should start to flow nicely to margins. I know the year-over-year compare in that 1 division. It's not easy to get a $20 million onetime recovery last year. So the incrementals look more like high-single digits. Can you talk about how you walk us, Craig, from sort of a minus 6% margin year to something better as we exit the year and think about getting incrementals start to get back to that sort of mid- to high teens next year, which will close the gap to ultimately getting close to breakeven.

Yes, so when you look at Power Drive Systems sales for the quarter coming in a little over $580 million, it's about 12% growth, excluding foreign exchange year-over-year, led by growth in China. So that was really nice to see. As you mentioned, the conversion was a little bit upside down. You did reference a customer-related recovery last year that we talked about, it was about a $24 million recovery. Pricing was definitely an impact in the quarter year-over-year. As we look into the fourth quarter and for the full year, our expectations remain intact, which is on that extra growth in PDS, we expect to convert in the mid-teens. That's success for us, and we're focused on executing that for the full year. Q3 was really just a timing impact related to customer pricing between Q3 and Q4.

Next question comes from Colin Langan with Wells Fargo.

Great. Just is there anything unusual in Q3's margin? It's obviously very strong. If I look at it year-over-year, it's above that sort of mid-teen conversion. And even sequentially, sales are down, and it's up any onetime items that we should be thinking about as maybe not reoccurring?

Actually, no, no onetime items. When you look at our performance, it was fantastic pretty much across the board. Adjusted operating income increasing $29 million on a little over $70 million of sales. That's a 40% incremental conversion. The company was really able to capitalize on the higher sales environment in the quarter. On top of that, Colin, we've been focused on cost controls. For the last several quarters, items like supply chain savings, productivity, lower cost of poor quality, all really, really important items to deliver, in my opinion, a fantastic result. We're really pleased with the performance. .

Got it. And as we look into '26, I mean is this quarter rate the right sort of jump off point into next year? Or is that just too optimistic?

We're going to continue to focus in 2026 just how we executed in 2025. So we're going to focus on capitalizing on of that extra sales growth. We're going to plan to convert in the mid-teens like we've talked about many times and we're going to use all the levers within our control to do that, meaning a focus on cost controls, again, supply chain savings, restructuring, productivity, lower cost of poor quality. We're going to use all of those levers to continue to expand margins as we move forward.

The next question comes from Joseph Spak with UBS.

Wanted to focus on battery and charging a little bit. I wanted to get a sense from you if you thought this low $100 million a quarter level of sales is a good run rate going forward? And then despite those lower sales, clearly good work on the cost side because the loss went down. So I mean, do you think you're -- with the actions you've taken today properly rightsized that now? Or is there more opportunity to take costs out and rightsize that business?

Yes. So we do continue to see sales headwind in the battery business, mainly due to the adoption challenges in this market, but to a lesser degree, in Europe. So we expect the decline in the battery and charging sales to be that 100 basis point headwind in the overall outgrowth of 2025. In the near term, these trends are difficult to predict. However, I'm pleased with the cost actions, as we've referenced, that the team has taken in the business. So I think an important note is that in 2025, the business is expected to be slightly EBITDA and free cash flow positive Therefore, we're positioning the business for profitable growth in the future. While we navigate these uncertain times on the sales in the short term, we do still strongly believe in the long-term outlook for this business.

Second question, I just wanted to focus on the TTT segment for a second here. If you look in the market, there's obviously been a lot of demand for stationary generators given some of the data center build-out, those are diesel engines typically have a turbo. And I just wanted to sort of get a sense from you guys whether you've been participating in that opportunity, how much it's maybe helped growth this year and what you see as an outlook for that business going forward? Like you obviously had some excess diesel turbo capacity from engines coming down. So have you just been able to repurpose that? Or has that been changed over to gas?

So yes, we do supply turbos for the stationary power stations in support of the industrial and specifically the data center market, although we haven't disclosed specific sales. I mean, just to provide broader context here, about 17% of BorgWarner sales is commercial vehicle and off-highway, which includes stationary power. So we're excited about the potential there. .

Our next question comes from James Picariello with BNP Paribas.

I just want to return to PDS to Power Drive. And curious what the backlog and the sales trajectory by region looks like, how would you assess the growth for this year thus far? And then just high level, how you foresee the regional trajectories, North America, Europe, Asia playing out into next year?

Yes. Thanks for the question. So specifically in the third quarter, the light vehicle product growth year-over-year is about 7%. More broadly, on the full year, that business is up year-to-date 27% versus last year. So we're really excited to see those sales start to pull through. And as Craig referenced on the incrementals we expect for the full year to achieve our goals of mid- to high-teen incrementals on that business. We do see in this particular market, EV sales were strong through the third quarter. in the fourth quarter and beyond, we expect those market sales to subside. But remember, we're not participating in a lot of those sales where customers are in-sourcing the product. where we do see excellent growth is in China. That's where a lot of the music is playing on new energy vehicles. Our teams are performing well there, and that's where you see the pull-through of much of our backlog. To a lesser degree, there is growth in Europe, and we expect that to continue into 2026.

Got it. That's really helpful. And then apologies if I missed this, but for tariffs, regarding the $38 million net headwind the company has incurred year-to-date. What's embedded for the fourth quarter recovery of that within the guide? And then any color or thoughts on the M&A pipeline and how you're balancing that view against buybacks?

Sure. So I'll handle the tariff question. Through the first 3 quarters, tariffs have been a negative recovery for us, back up recovery. As we move into the fourth quarter, we expect that to flip. We expect it to be a benefit for us in that $25 million range.

Regarding M&A, we still remain active and we're very disciplined in our approach. We continue to believe there's some compelling opportunities for companies with BorgWarner's financial and operational strength. As we've mentioned in the past, we're really focused on 3 priorities when we consider potential acquisitions. The first one is inorganic investments must have strong industrial logic. We want to leverage the many core competencies that BorgWarner has. The second is really around near-term accretiveness. We want to see near-term profitability. Why is that? Because we want to grow the earnings power of the company.

We're in a much better position now than if you look 5 or 6 years ago. We like our portfolio. But this is a question about strengthening the portfolio and expanding our earnings power. And then finally, we need to ensure we pay a fair price for any asset. So I continue to see inorganic investment as an opportunity to grow BorgWarner's earning power and improve our long-term positioning.

The next question comes from Luke Junk with Baird.

Craig, maybe to start with the operating margin range relative to implied 4Q even as you're tightening the revenue range, keeping a couple of 100 bps of room there. That's not dissimilar from prior years, but I guess I'm just thinking with additional variables in the macro, the tariff recovery that you mentioned, customer production impacts, this exterior chip situation. Just any way to scale those factors that you haven't spoken to and you think kind of within the range, maybe some of the sensitivity.

Sure. Thanks, Luke. So I'll talk about the fourth quarter guide in the context of our year-to-date average. So when you think about our year-to-date average from a sales perspective, sales coming in right around $3.6 billion per quarter. And our operating margin right around 10.3% for the year. As you go to the high end of the fourth quarter, we would expect revenue to come in pretty similar to our year-to-date average. And if that's the case, we expect our margin to come in right around 10.8%. What you're seeing is that tariff benefit really coming through the P&L, that $25-ish million I spoke about earlier. At the low end of the range, we would have revenue coming in quite a bit lower, around $3.35 billion. And we would decrement on that but also have that tariff benefit, which would hold us at that 10.3% that year-to-date average.

Got it. And then for my follow-up, Joe, just relative to flattish outgrowth this year just at a high level, what are some of the major moving pieces you're thinking about going into next year? Obviously, you're going to be lapping the charging exit in North America post tax credit, I think the reversion to combustion helps to some extent and then the awards that you walked us through this morning, the China awards especially some quick turns and the word even with some 26 launches that you're announcing today. Just how do you think about those elements and maybe anything key that I've missed?

Sure. So in 2025, we are seeing some downtime at a European customer due to a cyber attack on their operations, which I referenced in my remarks, And then as we've spoken about the North American customer that had a fire issue, which is affecting their operations. So those 2 things pulled down our outgrowth in addition to the battery business. With that said, I'm really pleased with the improved year-over-year performance that we expect to deliver in '25. At the midpoint of our guidance, we expect a 30 basis point improvement in margins, 8% growth in EPS and more than 20% increase in free cash flow. So Craig and I are focused really on growing the earnings power of the company, and 2025 is a great example of despite the flattish sales and outgrowth, our ability to deliver on that objective. .

The next question comes from Dan Levy with Barclays.

Wanted to start first with a question on your exposure to the North America EV market. And I know that North America is a smaller piece of Power Drive. But with all the headlines here now of maybe some impairments that some of the OEMs are taking or program cancellations. Maybe you could just remind us, we see the current revenue, but were there other further maybe bookings that now have to be reconsidered that may dampen the pace of growth within Power Drive or some of the margin considerations there as well? And what recovery you may need from automakers?

Yes. So good question. First, as I look back on 2024 and 2025, it's clear that our outgrowth was impacted by EV programs that we booked several years ago. So as you mentioned, the volume of many of these programs, at least in the Western world and specifically this market, has been lower than expected. So I would expect this dynamic will continue into 2026. I can tell you though, we're not satisfied with that outgrowth that we're seeing in 2025. So what I am pleased with is our booking strength. We referenced 17 bookings that we've shared with you. It's just a representative of the strong booking year we're having, and I expect these bookings to support our midterm goals for our foundational and e-product businesses to outgrow their respective markets. And this we'll start to see the benefit of that in the top line in 2027 and beyond. .

Okay. Great. As a follow-up, I wanted to ask on the capital allocation. And I know you talked about the M&A framework for, but how are you in the interim thinking about it? I know you've done some share buybacks. Is there opportunity, especially with the strength in your free cash flow to accelerate the share buybacks? Or are you just sort of opportunistically waiting for M&A? And if not, then you'll pursue share buybacks.

Yes. Thanks for the question, Dan. So first, I wanted to just to reemphasize Q3. Really happy about the strength of our balance sheet currently. Really pleased with the $136 million that was returned to shareholders in the quarter, $100 million in share repurchases, $36 million in dividends. As we look into the fourth quarter, we're expecting a similar level to be returned to shareholders right around that $135 million mark. Taking a big step backward, we're going to return $420 million to shareholders this year. And I think we're finding the right balance. Our plan to return $135 million in the quarter -- in the fourth quarter, but also just returning $420 million allows us to not only take advantage of share repurchases and dividends, but also have the firepower that we need when inorganic investment presents itself. .

Our next question comes from Emmanuel Rosner with Wolfe.

Great. A question on the free cash flow. So good to see a large improvement in guidance. seems like about maybe half of it comes from lower CapEx. And apologies if I missed it, but what are the drivers of the lower spending this year than previously expected?

Yes. So first, I want to congratulate our team. We've delivered over $700 million of free cash flow through the first 9 months. That's great to see. You did reference it, 3% of sales is our current CapEx number for the first 9 months. That's lower than we've traditionally seen. And I think our teams are doing a great job of effectively managing our capital where we have underutilized equipment, we're using it. And that's a great trend that we're seeing. When we look at the full year, CapEx should come in right around 4% of sales. That's lower than we've been historically. We're usually in that 4.5% to 5% range, that's what we should expect as we move into 2026 and beyond.

And then just wanted to follow up on the earlier question around the outgrowth on a go-forward basis? It sounded like some of your comments, a lot of the recent wins will support a return to more outgrowth in 2027 and beyond. I think in 2026, you have some of the more recent trends continue. Can you maybe speak a little bit about sort of like the puts and takes? I understand for '26 some of these old EV programs and some of these volumes coming down into insulation. Are there any positive offsets, I guess, on the eye side, either programs that are continuing for longer or where the volume can not be higher than previously anticipated?

Yes. So as you mentioned, we do expect a little bit of overhang into '26, but with all the new bookings that we've been announcing across the entire portfolio, we do expect that to contribute to our top line in 2027 and beyond. So what can we expect in 2026, I want to reference back to some of the awards we had earlier in the year, which included some extension of programs, it included some uplift in addition to new programs, including conquest. So there's still a very strong demand for our combustion products in the market and especially in North America. So we feel we're in a great position.

The next question comes from Mark Delaney with Goldman Sachs.

Congratulations on the good 3Q results. I was hoping, first, you could double-click a bit more on what you're seeing with respect to the Nexperia chip situation. And if you could speak a bit more on any direct exposure BorgWarner has with its own sourcing to that chip company. But then also, I think you said you assumed some degree of negative impact to industry volumes in the fourth quarter. if I understood that correctly, could you be potentially a bit more specific around how much incremental conservatism you've included from market factors from Nexperia.

Yes. So I'll take the Nexperia topic. So as you know, Nexperia had some incidents in Europe and in China. And although we haven't shut any customers down, we do expect there to be some shutdowns based on that especially in Europe and China. So we're managing that well like we have in the past crisis for semiconductor topics and we've reflected what we know in our full year guide. So we'll continue to manage it as we learn more and find ways to mitigate it.

Does BorgWarner have its own direct exposure? Or is this more about just broader market effects?

It's both. We have exposure to it directly where our teams are working to secure product on the open market through spot buys, but also find other mitigating ways to make sure it doesn't impact our customers. And then there is a broader market exposure, as you mentioned, both in Europe and China.

Okay. My other question is just on the nonautomotive business which you spoke about being 17% of revenue, you spoke on some of the opportunities, such as in industrial and data center. But I was hoping you could maybe speak on the trucking business and on-highway. There's been some pretty weak numbers for the industry, especially with Class 8 in North America. Maybe speak a bit more on what you're seeing in the Class A trucking markets and anything to assume from that in your outlook for the fourth quarter and thoughts on the go-forward potential.

Yes. As you mentioned, that market has been soft, especially in this country. If I step back and look globally, those CV and off-highway markets, they're roughly flat. You do have some choppiness depending on which market you're playing in, all that knowledge is fully into our full year guide. So we don't expect a lot of noise by year-end in those markets.

Next question comes from Alex Potter with Piper Sandler.

Great job on the quarter. I guess I have a couple of higher-level questions. you talk about stranded capital with EV programs going away and this -- obviously, you guys have been able to manage this really, really well. That's not apparently the case for everyone, potentially smaller suppliers upstream of you. To what extent does that impact you? Could it impact you from a supply chain sort of reliability standpoint of some of your upstream suppliers, Tier 2, Tier 3 type players experienced financial difficulty and stream or is that something you're not thinking about? .

Yes. So as you mentioned, our teams have been really good about redeploying some of the stranded capital we had, and that's resulting in our lower capital expenditures this year. There're always disruptions in the supply base is due to capitalization of the Tier 2s and Tier 3s, and we have dedicated teams that manage that on an ongoing basis. So we don't see anything out of the ordinary that would take us off our plan. But it's something we have to continuously monitor, obviously, with volume strong still in most of the markets. We don't anticipate any new or major issues here. But as they pop up, that's our job to manage those.

Okay. Perfect. And then I guess 1 final question on China. Good to see this continuing alignment with Chinese domestic players, presumably some of that business is in support of those companies, I guess, objectives to go global with their own brands. I'm curious to hear what you think in terms of sort of the net impact to a company like BorgWarner. It obviously, it's exciting to talk about new wins and bookings with companies like that. But presumably, if they're going to Europe, they're going to South America, they're going elsewhere and winning share that could potentially be winning share from your existing European or North American or Japanese OEMs. So is it -- does it end up being a wash for you? Is it a net positive, a headwind? How do you think about basically Chinese customers going global?

Yes. So maybe it's important to mention 20% of our sales are in China. And out of those sales, 75% are with the Chinese domestics. So we're a little bit overweight with the domestics, which puts us into a really strong position with them as they go global. What we're seeing is some of the products that we've mentioned, like the 7-in-1 that we're launching with a leading Chinese OEM. This is not only going to make a difference in China, but we expect these types of technologies will enable us to support them as they go to Europe, South America, Brazil. So we think we're in a great position with the locals. For us, we don't tend to think too much about customer mix. It's actually 1 of our strengths. So there will be winners and losers. But as I mentioned, we're in a great position with the leading Chinese OEMs, and these are the ones that are looking to do more export and more localization as they grow in those markets.

The last question comes from Edison Yu with Deutsche Bank.

Just 1 topic I want to ask about. You did announce this hole on urban vehicle wind. And I'm wondering if you can provide a little bit more context around that, either the lifetime volume, the kind of content level, this kind of award would be worth per vehicle? Any context would be great.

Yes. No, thanks for the question. I mean we're really excited that our battery technology is finding its way into some of these new use cases, especially around autonomous driving. Long term, we feel autonomous driving. We'll continue to grow in the market, especially in this type of use case, that whole on is using it for. So we're not ready to share yet the sales volumes or revenues associated with that, but we do see it's going to go into production not too far in the future. So we're excited about that.

Any sense on the content per vehicle, I know you're not sharing the volume revenue, but how much more content this would be compared to normal?

I mean you could probably do some backward math. We announced that it's over 100-kilowatt hours of content per vehicle using the NMC cell technology. So that might be something we can share with you off-line. Off the top of my head, I don't have that number.

With that, I'd like to thank you all for your great questions today. If you have any follow-ups, feel free to reach out to me or my team. With that, you can go ahead and conclude today's call. .

This concludes the BorgWarner 2025 Third Quarter Results Conference Call. You may now disconnect.

Okay. Thanks for joining us for our next session. Very excited to get going with BorgWarner, including we have President and Chief Executive Officer, Joe Fadool, to my -- seated to the right of me the way you're looking. And then Craig Aaron, Executive Vice President and Chief Financial Officer; and at the end, Pat Nolan, Vice President of Investor Relations. I think we're going to launch right into Q&A. Is that the plan?

Great.

Okay. Great. My first question is on the impact of tariffs for the industry overall and for your company in particular. How have you managed the direct impact so far? And how are you thinking about the direct impact going forward, the indirect impact in terms of like the potential for demand destruction as automakers presumably eventually raise prices? Have you changed your estimate of normalized U.S. light vehicle sales or normalized North America production as a result of tariffs?

Yes, I'll grab that one. So when you think about tariffs, our exposure has come down throughout the year. So when we did our April call, we communicated 1.6% of sales. We've seen that come down to 1% of sales. A couple of reasons why. First, regulations have moved in our favor. The second is our teams have done a fantastic job to really find creative solutions to mitigate tariffs altogether. So my hats off to them. Our guidance implies 100% recovery from our customers. As we sit here today, we have agreements in place that cover about 70% of our overall exposure. We're working on the remaining 30%, and we expect to have that in short order. When you think about tariffs overall from our seat, for us, we think it's a very manageable issue. What we're more cautiously optimistic about is volumes in North America in the back half of the year. Right now, those production schedules seem to be normal, but we need to watch and really watch that as we get to the back half of the year.

Good to hear. My second question is to ask what your very latest outlook is for vehicle electrification, including in light of some of the recent changes in the regulatory backdrop, such as the elimination of the $7,500 U.S. federal consumer tax credit and the relaxed enforcement of greenhouse gas and corporate average fuel economy standards. Has your outlook evolved recently? And in what ways might you be running the business or allocating capital any differently as a result?

Yes. So good morning, everyone. I think when it comes specifically to the changes in this market, it's fair to say that electrification is not playing loudest here. If we look across the globe, we start to see the regions are pursuing different paths. China continues to be the market where electrification is strongest, and we're winning and doing quite well there, followed by Europe, where we do see some increases year-over-year in the electrified side, especially in BEVs. In this particular market, what we're seeing is, first of all, the OEMs have much more clarity in their own cycle plans than they did a year ago. So that's resulted in higher RFQ flow. And some of those programs are extensions of current business, which were some of the awards that we mentioned. Some are new applications like in the hybrid space or advanced hybrid space, which we also won some business. So we see in this market for the near to midterm, it's going to be mainly a combustion and hybrid with some opportunities in BEV, but BEV won't be the primary growth driver in the midterm.

Great. And despite that, I wanted to ask on the drivers of your strongly higher eProduct revenue. There's been a lot of talk of the EV slowdown in the industry, rightfully so. Not that we've gone backward, but we're decelerating. We're not going forward as quickly as we'd imagined. According to S&P Global Mobility in 1Q this year, global hybrid electric vehicle, plug-in hybrid electric vehicle and battery electric vehicle production grew 25% year-over-year, while your eProduct revenue to support those vehicles rose 47% year-over-year, some 22 points faster. And in 2Q, with HEV, PHEV and BEV production up 17%, your eProduct sales rose 31%, 14 points faster. So could you speak to the drivers of eProduct growth as well as outgrowth?

So first of all, we're really pleased with our performance in the first half of the year, especially when you look at the growing eProduct segment. In the second quarter alone, as you mentioned, we were up 31%, which was nearly double what those end markets were doing. So great results by our team. For us, what we need to keep in mind is between last year and by the end of this year, we'll have over 30 eProduct launches, which are really the basis of that growth. Why are they choosing BorgWarner? There's a couple of things. One, having very competitive technology in this space. If you think about inverters and motors, high-voltage cooling heaters, these are areas we've been working on and growing and scale.

Second is our deep customer intimacy. We're fortunate over many years, we built a very diverse customer portfolio. And through that, we continue to have really good customer intimacy. So serving those customers, whether it's on the foundation side or the eProduct side, they know and trust BorgWarner to launch those products successfully and help them be successful. There are some nuances in certain markets like in China, where speed to market is very important. And I think through our decentralized operating model, our teams are able to run very fast in China and keep pace with those OEMs, which also leads to some of the success we see.

The outgrowth seems to imply that you're gaining market share. Do you have a sense as to who you might be gaining that share from? Is it from other suppliers or an automakers in-house supplier?

Yes. The growing of market share on one hand, is important for us because we want to build scale across all of our products. If you step back, one of the changes we made 12 months ago in our strategy was to outgrow our end markets across the entire portfolio. So not just focused on the eProducts. So when you think about foundational business where we're #1 or #2 in the space, we do see opportunities to outgrow our end markets, partly due to penetration increases. But also we see some of the smaller players are going to struggle to keep up. They won't have the same scale that's needed. They won't be able to reinvest in those businesses like many of our customers expect. So growing market share and enhancing our market position is going to be a likely outcome due to our strategy.

Great. I wanted to dig in on the margin strength in 2Q. You also announced a number of awards and increasing the dividend and share repurchase authorization. But from my conversations with investors, it seems like the margin strength was probably the biggest contributor to the share price outperformance.

So maybe just unpack those drivers a little bit of the stronger underlying margin. EBIT margin of 10.3%, it was 60 basis points higher than the Street was looking for. It was down 10 bps year-over-year, but 40 bps was from the tariffs, right, which you expect to recoup in the back half. So it's kind of 30 bps higher on an underlying basis on flat organic sales. So help us understand like what were the drivers of that stronger underlying improvement. You did discuss on the call productivity, restructuring savings and supply chain savings as well as higher quality, which led to lower warranty expense. But are you able to maybe dimension some of these drivers for us and give us a sense of the relative sustainability of the different drivers?

Yes. So we were really happy, obviously, with our Q2 performance. And just to unpack some of the numbers, we were down about $30 million year-over-year in sales. We were down $8 million in income. But as you mentioned, Ryan, that included $15 million in tariffs. So operationally, we performed extremely well. And we really capitalized on all the opportunities in front of us. Joe mentioned 31% increase in light vehicle eProduct growth, and we converted in the mid-teens on that extra revenue. That was a great job by our PowerDrive Systems team to really capitalize on that growth.

On top of that, our other businesses continue to focus on cost controls, things like supply chain savings, productivity, restructuring savings. In addition to that, we've seen a reduction of 20% in cost of poor quality, things like expedited freight, scrap, et cetera. So it's a combination of all of those things that led to a great Q2 result. We're really pleased. On top of that, what you're really seeing from us is a sustained margin profile of 10% or higher on a BorgWarner Inc. level. And we've seen that over the last 5 quarters. That's something Joe and I are really proud of. We want to make sure that we maintain that level of excellence going forward.

Great. And I wanted to ask about capital allocation. Obviously, you had some big announcements on the recent earnings call that we just discussed, the dividend raise, capital, the repurchase authorization increase sends a strong signal about your intention to return capital to shareholders. Just given the acquisitions that you've made, which has really rounded out the portfolio on the eProduct side and allowing you to post organic growth that we talked about and to win the awards that you've been winning. And also maybe considering the EV slowdown, it's not growing as quickly as before. How does that position BorgWarner for the allocation of free cash flow going forward relative to pursuing inorganic growth opportunities versus return of capital?

So maybe I'll address the M&A topic and Craig can answer the return of cash to shareholders. So we are active in the M&A space for a company like BorgWarner that's very strong financially and also operationally. Especially now, we see some opportunities that could be very interesting. With that said, we have 3 criteria that we are looking at acquisitions through. The first is any acquisition must have really strong industrial logic. So linking and leveraging our core competence as a company, we want to make sure it's a good fit. The second is we want to see near-term accretion. So different from 5 or 6 years ago where we really had to reposition the portfolio and we had to do some heavy lifting to get there, we're in a lot better space.

So having near-term accretion is really important. I mean if you think about it at the end of the day, we want to enhance and grow the earnings power of the company. The third thing is valuation. We want to be thoughtful, have a valuation that makes sense, pay a fair price for something, not overpay, which requires to run quite a few scenarios given the volatility in the market space. So quite frankly, we've passed on a number of targets that didn't meet one or more of these criteria. And I think that's the discipline you can expect from Craig and I on a go-forward basis.

Yes. And just to dig a little bit deeper on capital allocation. Joe and I were very explicit in our Q2 earnings call, you should expect consistency and discipline from us from a capital allocation perspective. And as I look at Q2, that's what I see. I see that we returned $130 million of cash to investors through our share repurchases and dividend. On top of that, we're really excited about the decisions of our Board of Directors to increase our dividend 55%, increase our authorization $641 million to $1 billion.

It gives us a lot of flexibility as we move forward. So we're going to continue to focus on that consistency and discipline as we move forward. We're operating from a position of strength. We have really strong liquidity. We're going to generate about $750 million in free cash flow at the midpoint of our guidance. It gives us a lot of opportunity to do it all. We can buy great accretive assets. We can return cash to shareholders through our dividend and repurchases. We can do it all. And it's something that I think is really unique about our company and something we're really proud of.

I wanted to ask too about maybe the less need for transformative or non-near-term accretive acquisitions on the eProduct side, if that might open up 2 avenues for investing more in organic growth, maybe on the foundational side of the business, perhaps especially in light of the relaxation of the enforcement of the greenhouse gas and corporate average fuel economy standards with automakers announcing not only are ICE products likely to be around for longer, but that they may now receive new investments. GM, for example, recently announced investing in a 6th generation of V8 engines in Tonawanda. How might BorgWarner be positioned to compete for this business, not necessarily that program. But with some of your competitors, I think you've said in the past, maybe have pulled back on ICE investments. What do you think the potential could be for rekindling the organic growth machine on the foundational side?

So if we go back 12 months ago, this was one of the main changes we made in our strategy, and that is to leverage growth across the entire portfolio. So we ask our turbocharger business and our thermal management business and our four-wheel drive business to outgrow their specific end markets. So you can't do that unless you're investing in winning new business. Fortunately, we've seen a significantly higher flow of RFQ activity, especially in this market and in Europe versus a year ago. OEMs are getting clarity on their cycle plans. Some of the announcements we've made in the second quarter, I think, highlight what those customers are looking for.

So some of them were turbocharger extensions and four-wheel drive extensions for North America. We announced some turbo businesses, both extensions and some conquest business, which we're really pleased about. One of those conquest businesses was here. One was in Europe. We're also seeing an increase in advanced hybrid activity in this market. So in the second quarter, a few of our announcements were around some products serving advanced hybrids. So for us, we feel we're in a great position to really outgrow our end markets across our entire portfolio. We do see the regions continuing to separate a little bit in what types of products they want. But I think that's the beauty of both our portfolio and our operating model. We give our teams room to run and chase the RFQs and invest and win the business needed to keep them healthy and sustainable. The only target we ask them to meet is an ROIC of 15%. So we continue to see success there.

Maybe moving to China, where your mix of revenue coming from the domestic Chinese automakers is amongst the highest of the U.S.-based suppliers at roughly 75%, right, actually above the 60% to 65% that I think that the C OEMs currently command and far above the sort of 40% that the average U.S.-based supplier is levered to those companies. So a couple of questions around that. Maybe just starting with how have you managed to align yourself so strongly with those faster-growing domestic Chinese automakers? And what might that imply for your growth in China going forward?

Yes. So we have a really strong China business. We've been there for over 30 years. And just to ground everybody in some numbers, about 20% of BorgWarner sales are within China. And when you think about that 20%, 75% is with local OEMs. So we have a strong presence locally. It's really about a couple of things that Joe mentioned earlier. Why are we successful in China? We provide great technology to that region of the world. And also, we are able to run with speed. They launch programs in half the time of the Western world. So it's really important that we run shoulder to shoulder with them, and that's the feedback that we hear from our customers in China. So it's very natural for them to move -- for us to move with them. We were a strong customer on the foundational business. So as their cycle plans changed and their portfolios changed to eProduct, it was very natural for us to work with them.

And then maybe as a follow-up, we've heard from some other suppliers at the conference and elsewhere that the fastest-growing automakers in China, including Xiaomi and BYD, for example, they know that all the suppliers want to be aligned with them that they have the growth, right? So they're able to command very strong price concessions and strong -- very favorable payment terms. There's been some concern about the low margins and long payment cycles and some of the fastest growth parts of the China market. I read an article recently about how the government planners had summoned the automakers in and asked them to please start paying your suppliers on a more standard basis, a little bit more regularly. How do you -- what's your sense of that dynamic? And how do you go about generally sort of balancing the fantastic growth opportunities in China and other parts of the market, too, but with as well the need to maintain the commercial and financial discipline that you're known for?

Yes. I mean it's a competitive market. There's no doubt about it. Cost controls are important in that market to make sure that we can hit our 15% ROIC hurdle. With that said, the R&D intensity in China is different. They value getting to market quicker, and that means less R&D activity. When you think about a Western World award, we're going to have 3 years of R&D intensity. In China, you might only have a year or 9 months. So there's less R&D intensity. They're willing to take a ready-made product, tweak it a little bit and get to market. And so that's the dynamics in that market, and we've been really successful winning business and still achieving profitability hurdles, 15% ROIC or higher in that dynamic market. So we're pretty proud of that.

Great. And I wanted to check in on the nonautomotive battery pack opportunity. Most of your business in this area today is with electric buses, right, come out of AKASOL. You've talked various times before about the opportunity in different industrial end markets, probably not light vehicle, but interested to hear your thoughts. Maybe you didn't pursue these opportunities as aggressively before because of capacity constraints. Just with the expansion of battery pack assembly to Seneca, maybe give us an update on that. And maybe with a bit of a slowdown, too, in the commercial vehicle market. I'm not sure if that applies to buses, let us know, certainly commercial trucks. Where do you stand with regard to the opportunity to supply into some of these more diverse industrial and/or other end markets?

So it's a little bit early to talk about some of the other applications and end markets. You're right. What we've been focused on is the CV truck business, both in Europe and here, also the bus business. So we have seen some slowdown in the demand, which we reflected in our call. And what I'm really proud about is how quickly the teams are reacting to the near-term volatility in those markets. So if I just look at second quarter as an example, we were slightly EBITDA positive in that business, cash flow neutral. So from Craig and my seat, teams are doing what they need to, to adjust to the new market realities, at least in the short and midterm.

And since we touched on commercial trucks, maybe just give us a bit of an update what's going on there. Remind us of your overall exposure to commercial trucks and obviously, a bit of a slowdown in North America. On the other hand, we're hearing South America is kind of holding up better. Europe even a bit better than North America, too. Maybe take us a little bit around the world. I don't think you're huge in China, but North America, Europe?

Yes. So commercial vehicle makes up roughly 16% of our overall business. That includes off-highway business globally. So that's a market that has been down for some time globally. We see some opportunities, especially with pre-buys on the technology side, likely going to be in this market and in Europe. But for us, we stay focused on what we control. We expect that, that market is going to continue to be stable and also adopt more and more of the technology in our portfolio.

And there was a time where there's a lot of excitement around electrification in commercial trucks, too. You have companies like Hyliion and whatnot coming out of nowhere. Just curious if you've seen the same sort of EV slowdown on the commercial vehicle side as you have on the light vehicle side and if there's a difference in terms of geographical outcomes like on the light vehicle side?

So we definitely see some slowdown. I mean that's reflected in our commercial vehicle battery business. It's been more in this market than I would say in Europe, although Europe is down slightly. There's really 2 pieces of that market that we're serving. One is commercial vehicle, the other is bus. The bus market actually has held up quite well. These buses are typically purchased by more local municipalities that may have incentives to get to a cleaner bus architecture. So that particular piece of the market is doing okay in our view, especially in Europe, where you think about the regulations by 2030, where over 90% of the buses need to be electrified, we feel pretty optimistic there. It's more of this commercial vehicle side, especially in this market with the incentives lacking. And quite frankly, at the end of the day, all the requirements were on the commercial vehicle makers, not on the end user. So it was left up to the end user whether they want to invest in these electrified buses. And hence, short term, we're seeing a slowdown.

Great. And going back maybe to the decision to exit the charging business. It's part of the underlying margin improvement. Are there other areas in the business where you may look to strategically exit? Or what would you say that the charging business exit says about how you will manage business lines that you do keep in terms of how you balance the long-term potential on the one hand versus near-term margin return expectations, et cetera?

Yes. Maybe just to recap the charging business decision. First, it was a very difficult decision for us to take. If you look at that market, it continues to be very disaggregated, a lot of competitors. And frankly, the growth in the segments we were serving wasn't what we expected when we did the initial acquisition. So we didn't see really a path in the near or midterm to reach our ROIC targets. So we took the difficult decision to exit that business, sell pieces of it, close other pieces of it. I think that's the type of discipline you can expect from Craig and I on a go-forward basis. So we're constantly reviewing the portfolio for opportunities to strengthen it or to maybe exit areas that we don't believe we can be a market leader and achieve our 15% ROIC.

Helpful. And with the expected volumes for EVs now being less and maybe also given that the price premiums that EVs command over ICE vehicles has come down, it seems that automakers that had previously desired to manufacture EV components in-house, they might be more open to lower cost, less vertically integrated solutions. Are you seeing any confirmation of that? And does this increase the opportunity for BorgWarner going forward?

Yes. Frankly, that's not a question we get as we did a couple of years ago. We think the in-sourcing versus outsourcing is somewhat stabilized. You have some OEMs who announced they wanted to be fully in-sourced on the drive module. And they -- from what we see, they're issuing RFQs for certain applications for either components or systems. So we think it's going to move around a little bit over time, but it's really not a material change in how we're serving those markets. We're a firm believer that you're going to continue to need scale, great technology and move fast to get cost out of these EVs and really to serve the end customers. So it's very difficult for us to see too many OEMs that are going to be able to build the scale needed like BorgWarner can.

You mentioned that we've got more clarity now with regard to the regulatory environment when it comes to emissions, and we're getting more clarity on tariffs. And curious if -- because we had such less bidding activity in the last 1.5 years or so if -- and maybe you've seen some improvement already, but if there could be almost like a flurry of activity in the back half of the year here and if that's confirmed by your conversations in what way are you positioned to maybe capitalize upon an increase in bidding activity?

Yes. So it is true. I mean there was, I'll call it, a quiet period while people were trying to figure out what to do since BEVs were not taking off, especially in this market and to a lesser degree in Europe. But as we mentioned, the OEs seem to have great clarity now. The RFQ flow is significantly higher. So we've prepared ourselves to serve those RFQs. I think second quarter is a great example of the number of wins and the breadth of our wins across the globe and in this market across combustion, especially advanced hybrid applications. So we think we're in a great position to continue to win. And that's really what we're focused on is winning new business across the entire portfolio. As we mentioned, that's a change we made about 12 months ago to not just focus on the e-growth but to leverage outgrowth across all of the businesses.

As I think about how the tariff story has unfolded this year, the headwind has maybe not been quite as great as was imagined. And then relative to the burden sharing by suppliers and the cooperation with the automakers, I think that's worked out more positively than many had feared as well. Just curious what you're thinking as you look ahead to July 2026 with the USMCA renegotiation. And of course, we don't have a lot of visibility, but do you feel like -- well, first of all, you can hazard a guess what may happen. But secondly, does the manner in which the industry has responded to the tariffs that we have had in place, even though there's been a lot of USMCA exemption, does that form a bit of a pattern for how we might expect automakers and suppliers to cooperate post July 2026?

So wow, 2026 seems so far away, given how fast the business moves. It is true. I think most suppliers have found a way to work with the OEMs to either mitigate the impact of tariffs or to gain recovery. Obviously, the OEMs so far seem to have decided not to pass all that through to end customers, maintain pricing, which I think has helped the industry to maintain volume. That's one of the reasons we improved our outlook for this market, and we continue to see strength in the third quarter releases. Longer term, we'll just have to see how it plays out, how the OEMs change their view, what they're going to pass through or not to the end customer. Of course, our teams are working hard on finding solutions to the tariff impacts, right, how to mitigate it, resource activities, if we need to maybe change where we're building a product. So that's what we're focused on the mid- to long term to find ways to mitigate some of the tariff impact.

Great. I've got some more questions. Are there any in the audience? One upfront, please. We can hear you, but the webcast folks need the mic.

Just a follow-up on Ryan's earlier question. With the RFQs picking back up and the highlights that you mentioned in 2Q, can you give us kind of an update on the growth over market? You mentioned growth above your end segments. What are we thinking about right now in terms of foundational versus your eProducts? It sounds pretty positive. And so just on those 2 segments, what's the growth over market that you're kind of thinking about over the next 2 years? And then more importantly, given the fast paced of China sourcing, could your third year out actually be getting to a higher level of growth over market? Any clarity on that?

Yes. So we have seen over the last few years, our outgrowth has been in that 1% to 2% range. This year, you can expect something similar, a little bit closer to 1%, 1.5%. Our target is higher than that. Our internal goals that we've set for our businesses and frankly, they've set for themselves is to have stronger outgrowth. So we haven't announced externally what that number is. But we see great opportunities on both sides. I'll give you a couple of examples. If you look at the penetration of turbochargers in this market, it's north of 50%. In Europe, it's north of 90%. In China, it's 75%.

So we still see opportunities for penetration increases as an example. In China, I would use four-wheel drive as an example. So it's in the single digit compared to here, it's 45% roughly. So as those OEMs, especially want to export more and serve some of the various markets, especially in Asia, South America, Europe, we think the penetration opportunity for four-wheel drive, there's still a lot of room for growth there. So the foundational business, we've asked them to outgrow their end markets. We think there's good opportunities. I should also mention growing market share, obviously, is one lever.

And just one quick follow-up on China with the -- undoubtedly, one of your Chinese customers is going to do much better than you think and one is going to do a lot worse. It's just the nature of those customers. It sounds like from a cost structure standpoint, you're kind of selling the same product. I'm simplifying. But relative to the market share volatility, that's not going to have that big an impact on your China margins. Is that an overstatement? Or is that kind of how you're running that business?

Yes. Obviously, we're working with the top 6 China local OEMs in that region of the world. Some are going to probably do better than others. I think our focus is to support those customers to try to be successful. And as you see that volatility, it's all about making sure we have flexible equipment so that we can quickly pivot if we need more capacity for one customer or the other.

Any more questions in the audience? We do have one toward the back. Webcast folks need the microphone.

Curious on the 10% margin target that you guys have spoken to or 10% kind of as a floor coming out of the second quarter for 5 quarters in a row here. Is that a level that you think could be a quarterly floor from here? Or is it more of an annual floor to aim for?

Our focus is convert in the mid-teens, convert in the mid-teens. Joe and I are really trying to drive consistency, consistency in our P&L, consistency with how we allocate capital. So that's our goal going forward. I'm really happy with our performance over the last 5 quarters, and I don't see a reason why that shouldn't continue as we move forward.

Maybe in a couple of minutes here remains. I'll ask some questions around relative strength within the very strong eProduct portfolio. Is there one product or a couple of products that are growing substantially faster? I mean I feel like the 800-volt silicon carbide inverter just seems to have stronger traction. You let me know maybe it's electric motors. And then also, are there areas where you maybe have a higher relative exposure compared to the industry, for example, on -- is your share the same when it comes to integrated drive modules and components and systems that support that versus e-beam axle, et cetera. Where are you seeing this growth relative to the industry?

So if you think about our eProducts, starting on the traction side, inverters, motors and then complete drive units, we continue to grow the business and grow share. So we're in a very good position in our view. Some of the other products that we serve the e-market with like high-voltage cooling heaters, we're #1 in that market today. So over 7 years, we went from 0 revenue, no products to being a market leader today, which we're really proud about. So we continue to leverage our core competence, work on new products, whether it's cooling technology or it's propelling the vehicle forward. As you know, we don't break out market share by product line, but it's safe to say we focus on being a top 3 player in anything we do. Why is that? Well, when you're in the top 2 or top 3, you have scale, you can reinvest in the business, you can maintain a margin profile that's acceptable to BorgWarner. So that's what we're focused on, on all these new products. We want to scale them and grow them so that we can be one of the top 3 players.

I thought one of the things that Fred used to say that resonated with me, he said that BorgWarner aims to be a trusted powertrain adviser. By being strong on the EV side and on the ICE side, you just want what's in the best interest of the customer. We're not here to sell you a turbocharger, all we do to sell turbochargers, right? But also, if you're strong in IDMs and you're strong in e-beam axles, we're not an e-beam axle company here to sell e-beam axles. We'll work with you to find the best solution. Do you feel that, that strength all around in the portfolio actually helps all the different parts.

We absolutely think that's true. So what Fred is getting at there is we're not just a one-trick pony trying to sell one product line. We see, as we move toward electrification, we're actually taking on more subsystems and more systems -- so we understand the trade-offs that the OEs are making to meet the performance of their customers. And I do think that builds trust. I think they view us as a partner that not only understands how they work and how they operate, but we can trade off the engine architectures to make sure we serve them with the right technology.

Okay. And so with that, we are a little bit over time. So please, everyone, join me in thanking Joe and Craig and Pat for the great color and insight.

Thank you.

Good morning, my name is Rocco, and I will be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner 2025 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you Rocco. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on our home page and our Investor Relations home page. With regard to our Investor Relations calendar, we will be attending investor conferences between now and our next earnings release. Please see the Events section of our Investor Relations homepage for a full list.

Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods.

When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items. When you hear us say adjusted, that means excluding noncomparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We will also refer to our incremental margin performance. Our incremental margin is defined as the change in our adjusted operating income divided by the change in organic sales. We will also refer to our growth compared to our market. When you hear us say market, that means the change in light in commercial vehicle production weighted for our geographic exposure.

Finally, please note that we have posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion today.

With that, I'm excited to turn the call over to Joe.

Thank you, Pat, and good morning, everyone. I'm very pleased to share our results for the second quarter of 2025 and provide an overall company update, starting on Slide 5. I wish to begin by thanking our employees, our customers and suppliers for all of their trust, efforts during this quarter and for their continued support.

Our sales performance was supported by a 31% increase in light vehicle e-product sales. This growth was well ahead of the high teens increase in global hybrid and BEV production in the quarter. Our organic sales were relatively flat year-over-year, which was in line with our market. However, excluding the decline in our CV Battery & Charging Systems segment, our organic sales were up modestly year-over-year. I'm excited to report that the strong award activity we saw in the first quarter continued into the second quarter. Today, I will share 9 new business awards across both foundational and eProducts, which are a sampling of the awards that we secured during the quarter. We believe these awards will illustrate the strength of our portfolio and the demand for efficient powertrain technology around the globe. Our adjusted operating margin performance was strong in the second quarter, coming in at 10.3%, which includes a 40 basis point tariff headwind. This strong underlying operational performance was once again driven by our focus on cost controls across our business and turning those earnings into free cash flow.

Lastly, we remain focused on the efficient deployment of our capital to drive shareholder value. In the quarter, we returned over $130 million to shareholders through share repurchases and payment of our cash dividend. Additionally, our Board of Directors approved both a 55% increase in our quarterly cash dividend per share and an increase in our current share repurchase authorization to $1 billion. These actions demonstrate our confidence in the long-term cash-generating ability of our business, and our focus on driving shareholder value through a balanced capital allocation approach.

As I look back on the first half of 2025, I'm very proud of our team and our results. As Craig will detail, our first half financial performance was strong and enabled us to increase our sales margin, EPS and free cash flow guidance for the year. I'm equally pleased with the strong award activity we secured in the first half of 2025. We which we believe supports our focus on long-term profitable growth.

Now let's look at some of the new foundational product awards on Slide 6. First, BorgWarner has secured 2 significant turbocharger complex business wins for a major global OEMs next-generation vehicles in Europe and North America. The company will supply its proven waste gate gasoline turbocharger for use in next-generation compact and light commercial vehicles in Europe. Production is scheduled to begin in August 2027.

In addition, BorgWarner has also been awarded a high-performance turbocharger program for our North American engine platform with production planned to start in September of 2028. These awards underscore our ability to win in highly contested markets by offering reliable, cost-effective solutions and long-term supply commitments. Second, BorgWarner has secured a business win with a major East Asian OEM to supply turbochargers for their 1.6-liter engine supporting primarily hybrid electric vehicle, SUV applications. This win builds on BorgWarner's strong 18-year partnership, supplying turbochargers to this customer and underscores our commitment to delivering high-performance efficient turbocharging solutions that support the customers' HEV growth strategy. Production is scheduled to begin in 2027. And third, BorgWarner has secured a turbocharger award with a major global OEM for use in a hybrid option for a sports car platform. Production is expected to begin in 2028. I'm excited to see demand for our foundational products, particularly turbochargers, remaining strong around the globe. These awards reflect our strategic focus on supporting global OEMs and with combustion engine technologies while others exit the space. I also believe the conquest and hybrid awards speak to our technology leadership and turbochargers.

Now let's look at some of the new product awards on Slide 7. First, BorgWarner has secured an award to supply its dual inverter with a major Chinese OEM to support its hybrid vehicle lineup. The project is scheduled to begin mass production by the end of this year. In China's rapidly evolving NEV market, BorgWarner remains committed to supporting our customers with innovative and high-quality electrification solutions. This award is a great example. Second, BorgWarner has secured an electric motor business with a major Chinese OEM. The award features a platform-based design enabling compatibility across a full range of NEV applications, including battery electric and hybrid models with a production expected to begin in 2026. We are pleased to see continued progress in our electric motor business in China.

Next, BorgWarner has secured contracts with 2 major global OEMs to supply high-voltage coolant heater technology for plug-in hybrid electric vehicle platforms. The first win expands our technology into several of our customers' light vehicle PHEV platforms including a pickup truck. The second win is with an existing key heater customer, which will now be expanded into several PHEV platforms. Both programs are expected to begin production in 2028. Securing these contracts further validates our technology leadership and expertise in battery and cabin heating. Lastly, BorgWarner has secured a new program for our electric cross differential technology for a leading Chinese OEM electric vehicles in China. By dynamically controlling power distribution between the wheels, EXT technology improves handling and traction capabilities.

Now let's turn to Slide 8 and touch on our balanced capital allocation approach. Over the last 2 quarters, I've been asked about our capital allocation discipline. My view is we need to follow a capital allocation strategy that is focused on delivering sustained shareholder value. As we look back over the last 5 years, we have followed a balanced approach with just under 50% of our capital being deployed to shareholders through share repurchases and dividends and just over 50% supporting technology-focused acquisitions. As I think about the next several years, I expect to see our balanced approach continue. We plan to focus on accretive inorganic investments and a consistent return of cash to shareholders.

Since 2020, we have returned more than $3.5 billion of capital to our shareholders. I believe that today's announcement to increase our quarterly dividend and buyback authorization show our commitment to returning cash to shareholders in a disciplined and consistent manner. As we move forward, we expect to continue to invest organically and inorganically to support our growth. So you should expect us to continue to be active as it relates to accretive M&A while still returning capital to our shareholders.

Next, let's turn to Slide 9 and discuss how we plan to continue to assess our M&A opportunities. When we think about M&A, there are 3 criteria we're using to evaluate inorganic opportunities. First, an inorganic investment must have strong industrial logic. It must link to the many core competencies BorgWarner has developed throughout decades of innovation and product leadership. The second criteria is that we want to see near-term earnings accretion. And -- we believe our product portfolio is strong and well positioned for outgrowth. And as a result, potential M&A should not be driven purely by strategic rationale. Rather, we expect our future M&A to increase BorgWarner's long-term earnings power. Finally, we need to ensure we pay a fair price for the asset. It's critical that we run multiple DCF scenarios given the complex regional markets and customers we serve. Over the past few quarters, Craig and I have assessed a number of opportunities and have, frankly, passed because they didn't meet the hurdles I just spoke about. I'm really pleased with the discipline we followed to date, and I'm confident in our screening process going forward.

To summarize, the takeaways from today are the following. First, BorgWarner's second quarter results were strong. we saw a 31% increase in our light vehicle e-products business and delivered strong margin, free cash flow and EPS performance. This was despite net tariff cost headwinds, reflecting our continued focus on cost controls. Second, we secured multiple new business awards in the quarter across our entire portfolio, which we believe demonstrates the continued need for efficient powertrain technology across combustion, hybrid and electric architectures. And finally, we took meaningful steps to return capital to shareholders during the quarter, with over $130 million returned through our cash dividend and share repurchases.

Additionally, increases to our cash dividend rate and share repurchase authorization demonstrates our commitment to following a disciplined approach of consistently returning cash to shareholders. Overall, I believe our year-to-date results illustrate the strength of our team, our product portfolio and the long-term earnings power of our business. I'm excited to continue our positive momentum into the second half of 2025.

With that, I'll turn the call over to Craig.

Thank you, Joe, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our second quarter results. First, we reported just over $3.6 billion in sales which was relatively flat year-over-year, excluding foreign exchange. This performance was in line with our market production in the quarter. Importantly, our light vehicle e-product sales increased 31% year-over-year, driven by strong growth in Europe and in Asia. Second, we had strong adjusted operating margin performance in the quarter at 10.3%. This performance was achieved despite $15 million or a 40 basis point net tariff headwind in the quarter, which we expect to recover from our customers during the second half of the year. This also represents the fifth quarter in a row with a margin at or above 10%, which demonstrates the consistency of our operating performance. Third, we had strong free cash flow in the quarter of $507 million, which was a 71% increase from a year ago.

Now let's turn to Slide 10, for a look at our year-over-year sales walk for the second quarter. Last year's Q2 sales were just over $3.6 billion. You can see that the weakening U.S. dollar drove a year-over-year increase in sales of $66 million. Then you can see a slight decrease in organic sales which was primarily impacted by a decline in foundational industry production and lower battery and charging sales. This was partially offset by a 31% increase in our light vehicle heat product sales. The sum of all this was just over $3.6 billion of sales in Q2.

Turning to Slide 11. You can see our earnings and cash flow performance for the quarter. Our second quarter adjusted operating income was $373 million, equating to a strong 10.3% adjusted operating margin. This performance includes a 40 basis point headwind from tariff costs. That compares to adjusted operating income from continuing operations of $376 million or a 10.4% adjusted operating margin from a year ago.

On a comparable basis, adjusted operating income decreased $8 million on $31 million of lower sales. We believe this is great performance. when considering our results include $15 million of net tariff costs in the quarter, which we expect to recover from our customers in the second half of the year. Our adjusted EPS from continuing operations was up $0.02 compared to a year ago as a result of the impact of our share repurchases during 2024 and the second quarter of 2025. And finally, free cash flow from continuing operations was a generation of $507 million, which was up $210 million from a year ago as a result of strong working capital and capital expenditure performance.

Now let's take a look at our full year outlook on Slide 12. We are now projecting total 2025 sales in the range of $14.0 billion to $14.4 billion, which is an increase from our prior guidance of $13.6 billion to $14.2 billion. This increase is due to stronger foreign currencies and a higher market production outlook, partially offset by expected lower tariff cost recoveries as gross tariff costs are tracking below our prior estimate.

Now let's review our year-over-year sales walk. Starting with foreign currencies. Our guidance now assumes an expected full year sales benefit of $140 million compared to 2024. However, this is a sales tailwind of $300 million versus our prior guidance, primarily due to the strengthening of the euro and Korean won versus the U.S. dollar. Within our 2025 guidance, our full year end market assumption has been increased to down 0.5% to 2.5% versus down 2% to 4% previously. This improvement is driven by stronger industry production that we saw during the second quarter and a modestly improved production outlook in the second half of 2025 compared to our prior outlook. Within this guidance, we expect a tailwind from tariff-related recoveries of up to 1% of sales as this is a pass-through recovery of our costs from our customers. This is a decrease from our prior estimate of recoveries of up to 1.6% of sales as our gross tariff costs are tracking below our prior estimate. Additionally, we expect the company's full year sales outgrowth to be approximately 100 to 150 basis points. Based on these assumptions, we expect our 2025 organic sales change to be down 1.5% to up 1% year-over-year.

Now let's switch to margin. We are increasing our full year adjusted operating margin to be in the range of 10.1% to 10.3% compared to our previous guidance range of 9.6% to 10.2%. This revised guidance now assumes 10 basis points of dilution from tariffs. We view this as strong underlying performance supported by our solid first half operational execution, which we fully expect to continue for the remainder of 2025. Based on this sales and margin outlook, we're expecting full year adjusted EPS in the range of $4.45 to $4.65 per diluted share, which is an 8% increase versus our prior guidance. And we're increasing our full year free cash flow guidance to a range of $700 million to $800 million, which is a $50 million increase from our prior guidance. With that, that's our 2025 outlook.

Now let's turn to Slide 13 and discuss our recently increased dividend and share repurchase authorization. Starting with our dividend. Our Board of Directors has declared a 55% increase in BorgWarner's quarterly cash dividend per share. Based on the company's current share count, this quarterly dividend represents an annualized distribution to BorgWarner stockholders of approximately $145 million.

Turning to our share repurchases, as Joe highlighted in his opening remarks, we repurchased approximately $108 million in BorgWarner's stock during the second quarter, which brings our share repurchases since 2020 to more than $1.1 billion. Our Board of Directors approved an increase in our share repurchase authorization of up to $641 million over the next 3 years. When combined with the $359 million remaining under our prior authorization, management has the ability to repurchase up to $1 billion of the company's outstanding shares or a 30% increase from our prior authorization. I believe both of these actions demonstrates the confidence we have in the long-term strength of our business and our focus on driving shareholder value through a balanced capital allocation approach.

So let me summarize my financial remarks. Overall, we were very pleased with our second quarter results. Our margin and free cash flow performance were solid despite the net headwinds from tariff costs in the quarter. Our strong second quarter performance, lower projected tariff headwinds and improving second half outlook allowed us to increase our sales, our margin, EPS and free cash flow guidance. And we returned over $130 million of cash to shareholders in the quarter through our share repurchases and dividends. On top of that, our Board of Directors increased our quarterly cash dividend by 55% and increased our share repurchase authorization to $1 billion, which we believe demonstrates our confidence in the long-term cash generating ability of our business. As I look to the balance of the year, we're focused on first, continuing to outperform market production by 100 to 150 basis points. Second, we now expect margins to be flat to up 20 basis points year-over-year despite tariff headwinds and an expected decline in market production volumes. And finally, we expect to have another year of strong free cash flow of $750 million at the midpoint of our guidance. Our team's strong execution and effective management of tariff headwinds has allowed the company to continue focusing on improving our long-term positioning and creating value for our shareholders. We continue to embrace the importance of a balanced capital allocation approach, the increase in our share repurchase authorization and cash dividend are simply additional examples of our commitment to that approach. By continuing to focus on near-term execution, growing the long-term earnings power of the company through organic and inorganic investments and following a balanced deployment of our capital, we believe BorgWarner will create significant shareholder value for years to come.

With that, I'd like to turn the call back over to Pat.

Thank you, Craig. Rocco, I'll open it up for questions.