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. After today's presentation, there will be an opportunity to ask questions. 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 homepage and our Investor Relations homepage. With regard to our upcoming investor calendar, we will be attending multiple investor conferences seen 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 as detailed in our 10-Ks. 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 non-comparable items. When you hear us say adjusted, that means excluding non-comparable 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 large 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've posted today's earnings call presentation to the IR page of our website. I 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 five. 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 e-product sales, which demonstrated the strong demand for our hybrid and BEV products. Despite challenges in our battery business, we delivered modest organic growth. Excluding the decline in our battery and charging system segment, our organic sales were up approximately 1.6% year over year, led by outgrowth across both our foundational and light vehicle e-product portfolios. Despite modest sales growth, we significantly improved our overall financial profile by increasing the earnings power of BorgWarner. We expanded our adjusted operating margin by 60 basis points despite a 20 basis point net tariff headwind. We achieved 14% EPS growth year over year and generated more than $1.2 billion 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 e-product portfolios. All of our business units contributed to our record wins, and I expect a robust pipeline of further opportunities in 2026 and beyond. Additionally, I am truly excited to share with you a new product that will serve as a power generation solution…

Thank you, Joe, and good morning, everyone. Let's jump into our fourth-quarter financials by turning to Slide nine 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% 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 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 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 to $14.3 billion compared to $14.3 billion…

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

If you would like to ask a question, at this time, we'll pause momentarily to assemble our Q&A roster. And your first question comes from Colin Langan with Wells Fargo. Please go ahead.

Great. Thanks for taking my questions and congrats on a good quarter. Can we dig in a little bit more into 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 an upside if you book 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 the data center win of $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 an 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 could see our CapEx guide is four and a half percent of sales, which is up from 2025. And that's because we're investing in the 30 plus wins we've announced publicly last year as well as the turbine generator system that Joe spoke about in his script.

Got it. That makes sense. 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 EBIT rose about 70 on sales up 40. Any way to frame the size of the recovery? Is that repeat into next year? Wouldn't that be a headwind if you had a one-off recovery this year? 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 power drive systems, I would encourage you to look at the full year. Joe and I were really watching power drive systems this year not just from a growth perspective where we saw substantial product growth, 23% product growth on the light vehicle side, a lot of that in PDS. But also ensuring that we incremented on that 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 e-products growth in that low double digits, and we expect power drive systems to convert in the mid-teens off of that 2025. That's how you should think about that business as we move into 2026.

That's very helpful. Thanks for taking my question.

Thank you, Colin. Your next question comes from Chris McNally with Evercore ISI. Please go ahead.

Thank you so much, team. 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 revenue? Don't need a hard number, but like a couple of years past '27, just the opportunity because it's, you know, whether this is a, you know, a triple or a home run. But it seems like there's a lot of runway here.

Good morning. I think the way to think about that business, we announced today $300 million in the start of production year. So, you know, this program, like many others, has a ramp-up phase to it. When we look more broadly at this market, you know, the data center market is growing in the mid-teens per year for the ten years is what most people believe. We think it's applicable to over 90% of the data center markets globally. And it's a product that is really differentiating us versus some of our competitors, you know, 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 eight, highlights really all the BorgWarner content that's helping us bring this to market. So, you know, 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.

Okay. That's great detail. I'll definitely follow-up offline. And then just the second one, going back to the auto side, so growth over market minus one, 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, where there's basically good secular tailwinds 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? Thanks so much.

Sure. As I look back first at the last couple of years, 2024, 2025, 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's gonna 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 outgrowth we've been seeing. So what I am pleased about, however, is all the booking strength in both the foundational and e-product side we've announced over the last eighteen months or so. So I expect these bookings to support our midterm objective. For our foundational e-product businesses to outgrow their respective markets, and we'll start seeing that top-line benefit in 2027 and further in 2028 and beyond.

Okay. Excellent. Thank you.

And your next question comes from Joseph Spak with UBS. Please go ahead.

Thanks. Good morning. It's helpful your slide that sort of shows the content you're getting on the power gen opportunity. And I know you have this comment 65% of the content controlled by BorgWarner. I guess I just wanna understand that a little bit more. And please correct me where I'm wrong because, you know, again, I'm sort of still getting familiar with the side of the business. But $300 million two gigawatts, that's like a $150 a kilowatt. I thought the rule of thumb on industrial scale powered, you know, gen was something like $900 per kilowatt. So that's, like, 15% of the value. So where am I off there and or what am I missing for your content opportunity within this power gen opportunity?

Yeah. Good morning, Joe. So first of all, the $300 million does not relate directly to the two 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 year. We have kicked off and we'll install the two gigawatts of capacity. In addition to that, there's 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 more 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 to follow-up there. Like, what does it correlate to? Or put another way, like, at capacity, how do you sort of size the revenue opportunity?

Yeah. We'll size it 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, you know, 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 microgrids 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 gonna capture our share of that.

Okay. Maybe just, on the core business. You know, if we're how just broadly, I guess, how are you sort of thinking about the Turbo's outlook over the coming years and the competitive dynamics, I guess, within that market. And, you know, I guess one of the reasons I ask and it's a 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, it was quite high. And obviously, that was sort of replaced by, you know, a 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 over extrapolate, but if 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, you know, 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 a 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. We're prepared to make that investment. So globally, we feel we're in a really great place with that business.

Okay. Thank you.

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

Hi, everybody. I want to double click on the business, the battery systems business. So yes, 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, curious how you're thinking about the loss rate relative to what we saw in 2025. You know, 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, 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 a 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, I'm 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 can you just provide some thoughts on what's embedded in the 2026 outlook? Respect to the e-Propulsion sales that revenue stream.

Sure. So when you look at the light vehicle e-product relative to 25% to 26% versus 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 guide.

Great.

And your next question comes from Dan Levy with Barclays. Please go ahead.

Thanks for taking the questions. 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. It's, you know, and what's doing to your multiple. And I see, you know, some of the multiples of other companies that are levered to data centers and, you know, 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 was more compressed. And you have limited upside on how much you could do deal. So how does the opportunity set on M&A change here? And we'll start there.

Hi. Good morning, Dan. So, you know, 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, you know, great compelling opportunities out there for a company like BorgWarner with financial strength and operational strength. So just want to remind us the three priorities that Craig and I have set are first any acquisition needs to really leverage our core competence. It has 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 five years. As I sit here today, we want to make sure any acquisition not only strengthens the portfolio, 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 meet one or more of those criteria. And lastly, I'll just say, you know, 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 three criteria to make sure we're adding to shareholder value and expanding the earnings power.

Okay, great. Thank you. The second piece is, I think just touching on some of the prior questions, the core business alongside this power gen opportunity, obviously, you know, there's a growth slowdown this year, and that's why the core business is flat. Sounds like you're talking to some opportunity for incremental launches beyond this year, and you have the opportunity from power gen. What is the right way we should be looking at the growth over market beyond this year, which has been compressed but sounds like you're talking about some tailwinds beyond this year that could get you back to maybe that three to four points of outgrowth that you had done previously?

So as we mentioned in the remarks, you know, 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'll continue into '26. But if you look back in the last twelve to eighteen months, especially the last four 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 in '27 and even more in '28 and beyond.

Great. Thank you.

And your next question comes from Luke Junk with Baird. Please go ahead.

Good morning. Thanks for taking the questions. 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 it 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 a piece of business you would expect to be above the corporate margin at maturity as well or even earlier stage? Thank you.

Yeah. Good morning, Luke. So let me start first with this is a great example of not just leveraging our but leveraging our manufacturing footprint and supply chain and automotive. 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 twenty minutes from one of our larger turbocharger plants. That's where we're gonna 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 subcomponents 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. The 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 mid-teens incremental conversion. You should expect immediate EPS accretion. And you should expect a strong return on invested capital. We feel really good about the financial profile of that business. And we're excited to launch it in 2027.

That's all very helpful. Thank you. 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, you know, 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? Thank you.

Sure. So I'll start and maybe Joe can provide some highlights from an AI perspective. When you look at our margin expansion, and first, I want to highlight margin expansion in 2025. Up 60 basis points year over year. Fantastic job by the team, and we saw margin expansion across every business unit as well as managing corporate overhead and program. So 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, charging access, 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, but the teams are doing a nice job of decrementing in the mid-teens on both the decline in the battery business and industry production. You go through the math that takes you to 10.8%, get to ten nine, it means we're gonna 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 two years ago on some of the new generational AI technologies. And we started with some pilots. You know, 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 looked 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, and more 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 GenAI 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'll continue to help us not only improve our quality but our cost structure. And some of that falls 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.

Yeah. Just on the just lastly, the, yeah, the PDS margin expectations, 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.

Understood. Thank you.

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

Yes, good morning. Thank you very much for taking the questions. 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 sort of customers this year?

Sure. So good morning. So the way to think about our China business and 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, you know, 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, you know, 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. Thank you. Other question was a follow-up on some of the prior commentary and questions around the M&A opportunity and understand the high-level criteria that BorgWarner's 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 in 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? Thanks.

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, you think about 65% of the content we're controlling, that's tremendous. So I'm really excited about what we are doing with the turbine generator. You know, I'll just bring us back to the criteria we're using for M&A. We want to stay very disciplined and, you know, really, the first is leveraging our core competence. We want this anything we'd look at to really make industrial logic for anyone that looks at it. We want it to be near-term accretive, and, you know, we want to pay a fair price. So we haven't limited ourselves to automotive, but I would say, you know, the TG is a great example of what we can do organically. And many of our business units continue to look for growth opportunities. This is just a great example of what we can do with the current portfolio that we have.

Thank you.

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

Awesome. Thanks very much. So 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 Endeavor, who really has a lot of experience in the data center market. Over twenty-five 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 gonna ensure it's UL certified. And it meets any of the requirements in any country that we plan to deploy it in. We don't see that as a real constraint for us. Again, you know, it's together with Endeavor who's bringing the customer side also, their innovation approach to the market is very similar to us. We have a similar vision and path to go to market with them. Of course, BorgWarner brings not only great technology but our automotive scale and 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. Thanks.

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

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

No. Not from our view.

Okay. Very good. Thanks, everyone.

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.