Good morning. My name is Ashiya, 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, Ashiya. 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 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…

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…

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

[Operator Instructions] 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 questionable area I saw was around Power Drive or PDS. Obviously, we're going to see a pickup in the European NEV volumes in the second half, and that should start to flow nicely to margins. I know the year-over-year compare in that one 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. Thanks, Chris. 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.

I 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 had 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 e-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 Nexperia 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, those China awards especially some quick turns and the awards 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. It 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 and cancellation. Are there any positive offsets, I guess, on the ICE side, either programs that are continuing for longer or where the volume can now 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 A in North America. Maybe speak a bit more on what you're seeing in the Class 8 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 always are 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 one 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? Is it 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 one 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 one topic I want to ask about. You did announce this HOLON Urban vehicle win. 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 will continue to grow in the market, especially in this type of use case, that HOLON 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.