BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

Okay. Great. My name is Mark Delaney, and I cover the U.S. autos and industrial tech sector at Goldman Sachs. We're very pleased to have, for this session, BorgWarner. With us from BorgWarner today, we have Kevin Nowlan, the Chief Financial Officer; and also Pat Nolan, the Vice President of Investor Relations. Thank you both for being with us today.

Yes. Thank you.

There's a lot to get into. I think we're going to start off with some prepared comments and slides that Kevin is going to go over. Then we'll go into Q&A. I'll start out with some questions that I have. We'll be taking questions as well over the webcast. You can use the Submit a Question function that will get e-mailed over to me or you can just e-mail your question to me directly at [email protected]. And with that, let me turn it over to Kevin.

Okay. Thanks, Mark, and thanks, again, for hosting us today. We appreciate you having us here, and we're happy to be here. And so today, I just want to give a little bit of an overview of the company and maybe some of the trends we're seeing in the market, give you a little bit more color there. And hopefully, you can see the slides up on the screen here. So let me start with a quick high-level overview of who BorgWarner is. I'm sure a lot of you already know us and are familiar with this, but probably some of you aren't. So let me give you that summary of the business on Slide 3. And it starts with our vision. You can see on the top right a clean, energy-efficient world. And to that end, we're a technology leader in clean, energy-efficient solutions, whether it's in combustion, hybrid or electric vehicles. So our products are designed and manufactured to help improve vehicle performance, propulsion efficiency, stability, air quality. When you look at BorgWarner, we have a strong mix of customers, supplying virtually every OE around the globe, and we have great geographic diversity as well. Our strategy at BorgWarner has been about a balanced propulsion. You can see it on the top left of the slide, which means what? It means being relatively balanced across combustion, hybrid and electric vehicle architectures. And what that balance allows us to do, it allows us to maintain strong profitability and cash flow while, at the same time, outgrowing the market. And so let me talk about each of those aspects. From a margin perspective, we've delivered strong financial performance over a long period of time. But even if you look at 2020, just look at the results we're delivering, our Q3 operating margin was 12.5%, and we're on track to deliver over $0.5 billion of free cash flow this year, and that's even after $100 million of Delphi-related transaction costs. So that performance, coupled with our strong balance sheet, we view as a competitive advantage of the company, particularly in an environment like this. And then as you shift to outgrowth, we consistently deliver outgrowth at BorgWarner. And what does that mean? It means growth above and beyond market. So when the market grows 2 points, we grow 7 points. We say that's 5 points or 500 basis points of outgrowth. In each of the last 4 years, we've delivered that, including 2020. And so as we look ahead, we expect to continue to deliver that type of strong outgrowth. And so when you take a step back and then just look at BorgWarner beyond the profitability, beyond the outgrowth, our business is obviously in transition right now. We're evolving. There's a more aggressive shift to electrification going on. And we obviously are in the midst of the Delphi Technologies integration. But one thing doesn't change through all this, and it's that bottom bullet point. Product leadership remains the driver of our business. And it's why we continue to invest in the business even in a challenging environment like we've experienced in 2020. So with that, I'm going to go to the next slide and talk a little bit about our addressable content per vehicle opportunity across each of combustion, hybrid and electric technologies. And so the analysis you see on this slide actually now incorporates the impact of Delphi Technologies on our business and our opportunity. And as a reminder, when we talk about addressable opportunity, it represents the potential revenue that exists if we were to hypothetically attain 100% market share on all of the products we offer in each of combustion, hybrid and electric vehicles. And the analysis also incorporates the expected market penetrations for the different vehicle architectures and the different products within our portfolios on those different vehicle types. So let's talk about the data on the slide then. You can see the content opportunity per vehicle in the combustion space is about $940 per vehicle. Hybrid in the middle column, about twice as large, $1,900 per vehicle; and electric, $2,400 per vehicle. So each of these represents a pretty significant vehicle increase compared to our addressable market opportunity prior to Delphi, but that's not really the key message here. The key takeaway is look at how much larger the hybrid and electric opportunities are for BorgWarner. Hybrids are 2x the content opportunity of a combustion vehicle, almost $1,000 more per vehicle. And electric is more than 2.5x as large, almost $1,500 more per vehicle. So the overarching message here is electrification, hybrid and electric, is a significant opportunity. It's an opportunity for BorgWarner. The other thing I'd highlight down at the bottom of the slide, you see this $49 billion total combustion market opportunity in 2025. But when you look at the addressable market opportunity for BorgWarner in hybrids and electric, it's more than 70% higher than combustion by 2025. And so all in, that's why we're so excited as we see the profound shift in the market toward hybrids and electric. It's a great opportunity for us. And it's why we also continue to focus our investment dollars here, both R&D from an organic perspective and inorganic dollars. They're focused on the transition to the electrification space. And so I'm going to go to the next slide, and this is actually new. So Mark, you and the team are a beneficiary of us putting out some new information here today.

Yes.

And this relates to component sourcing, and this slide is focused on pure battery electric vehicles. So ignore hybrids for a second. Let's just talk BEVs purely in the year 2025. We know there's been a lot of discussion about OEM in-sourcing plans. We've been hearing it for the last few months. So we wanted to share some data on our perspective, how we see the markets evolving through 2025. Now obviously, EV volumes are going to trend higher after 2025, but we think the overall sourcing trends that you'll see on this slide are indicative of what we expect for the next decade. So when we look at this, we think it's most informative, probably most useful to look at the in-sourcing versus outsourcing discussion at a component level. So independent of the customer's decision to in-source or outsource the full system integration. So for example, when we talk in the bottom left of the slide in just a moment about inverters, we're going to be talking about both inverters for modules that are outsourced and the inverters that are purchased by customers who are doing the final assembly in-house. So let me just take you around the world here on each of the components, and I'll start on the top left with motors. So based on our latest assessment, we expect outsourced motors to represent about just under 60% of industry volume. And so when you think, again, from my prior slide, BEV is representing 11 million units in 2025. We think the outsourced drive motor market is about $3.3 billion in 2025. That's the outsourced market opportunity for a company like BorgWarner to pursue. With gearboxes on the top right, we expect the trend to be skewed more towards in-sourcing because we think the OEs are likely to take advantage of their fixed labor cost structure, labor-intensive area. And so by 2025, we expect probably about 1/3 of gearboxes for BEVs to be outsourced. Still represents a market opportunity for us of about $1.5 billion, although, I would say, with gearboxes, there's probably some continuing opportunity to supply subcomponents there even for those that are in-sourced. And then finally, the bottom half of the slide represents power electronics. We believe power electronics are going to be trending towards substantially more outsourced model than what you see in the top half of the slide. And that's really due to the lower labor content and the scale benefits that the supply base can achieve that maybe individual OEs can't. And so start on the bottom left with inverters. We expect outsourcing to approximate somewhere around 82% as you look out to 2025 across both modules that are outsourced and in-sourced modules where we believe that customers will still buy the inverter. And so that translates to an outsourced market opportunity of $4.4 billion in 2025. And then on the bottom right, let's not lose sight of the other power electronics, which include things like onboard chargers, converters, battery pack controllers. This is additional product capability we acquired with the Delphi Technologies transaction. And on average, we expect outsourcing of these components to be similar, north of 80% outsourcing from an addressable market perspective, which means for these components, that's a $7 billion-plus market opportunity, just the outsourced piece, in 2025. So what does that all mean in totality? When you roll it all up -- Pat, maybe you can go to the next slide. So as you saw a few slides back, our total addressable market opportunity in EVs, just, again, focused on the EV slice, is about $26 billion in 2025, whether it's in-sourced or outsourced. But based on what I just took you through, we estimate that almost $19 billion of that market or 70% of the dollar value is going to be outsourced to the supply base, and that's just in 2025. As the electric vehicle market grows from there, our addressable outsourced market opportunity, obviously, then grows well beyond $19 billion. And more than 60% of that opportunity is within the power electronics space, which you can see on this slide. That's the portfolio we acquired as part of the Delphi Technologies transaction. So again, the bottom line is this. The electrification market represents a significant opportunity for BorgWarner. And we intend to capitalize on this, both through supplying components and modules to the customers as we partner with them in order to support whatever sourcing strategy they want to pursue. So that's the theoretical opportunity that's available for us. But the good news is that in practice, we're actually demonstrating success and capitalizing on these opportunities. And the slide you see Patrick just pulled up highlights the key wins we've announced in 2020 alone. And I'll just take you through this. When we had the P2 clutch module with ChangAn in China. We have 2 eTurbo with major OEs in Europe; a high-voltage coolant heater we announced with another European OE; the IDM on the Ford Mach-E program; 3 EDMs with key Chinese OEs; and a high-voltage inverter with a major European OE that we announced in September. Obviously, we're pleased with the growing number of announcements you can see on this slide, but I think what's also really exciting is the diversity of wins across our product portfolio. Just look at the slide. For us, it really reinforces that notion that we can have success throughout the value chain in electrification with individual component and system solutions. You see them both on this slide. And so that's what we've done in 2020. But obviously, we're not stopping there. We're not declaring victory. We've got a long way to go in this journey toward electrification. And so as we look out over the next couple of years, we expect to drive additional new business wins in electrified propulsion. You can see some of our planned customer engagement on the vehicle electrification alone summarized on this slide that Patrick just pulled up. Since we closed the transaction on October 1 with Delphi, we've already started engaging with our customers about our expanded product offerings. In fact, in the first 4 months following the closing, we're slated to meet with customers representing 70% of global industry volume. And so the tables you see on the right side of this slide really provide a sampling of both the component opportunities and the full system solutions in electrification that we're pursuing with those customers. And when you think about it, the timing of this acquisition was critical because these opportunities, the ones you see us pursuing with high priority on this slide, are the ones we expect to be awarded over the next 1 to 2 years. And because we now own Delphi Technologies, we're much better positioned to capitalize and pursue these opportunities. So I hope that gives you some better perspective on how we're positioned as a company and how we're positioning the company going forward to capitalize on the growing electrification trends in the market. And so with that color in mind, I'll turn it back to you, Mark, for any questions you want to go through.

Yes. Thanks, Kevin, and really appreciate all the material, especially some of the incremental work that your team did in putting it all together. You already had a few investors e-mail me about that Slide 5, and since there's some new content, I thought we could start there. And we're looking at -- as analysts and investors, looking at that Slide 5, and it looks like BorgWarner put a lot of work into trying to come up with some of these percentages of what you think will be in-house versus outsourced. And you talked already about some of the rationale, how you're thinking about why you think some of these things may make more sense for -- to be done at a Tier 1 versus at the OEM level. Can you just go another layer into that and talk a little bit more where you have any discussions with your OEM customers? Is this based on your backlog? Any sort of major assumptions you're making as you're coming up with some of these different percentage mixes that you put on Slide 5?

Yes. The analysis we put on Slide 5 is not something that's new at BorgWarner. It's something we've been looking at for a long period of time. And in fact, it informed the acquisition analysis that we did for Delphi Technologies. It wasn't as though we woke up here yesterday and said, hey, wait a second. We've got a significant opportunity in power electronics. We've assessed this trend looking out over the next decade as the market moves more aggressively to electrification. So the analysis we put together is really looking across the geographies, across the OE landscape and what we're expecting based on the dialogue with customers, based on other markets intelligence we have about what customers are likely to in-source versus outsource what components. I'm sure this will evolve over time. But I think materially, it's in line with what we've looked at in the past, and we wouldn't expect it to change materially, but we'll continue to monitor it. Now the good thing about BorgWarner when you look at that Slide 5 is we're positioned in-house with capability across each of these components. Motors, we acquired that capability with the Remy acquisition in 2015. Gearboxes, we've done this for a long period of time on the mechanical side, 100-plus years at BorgWarner. And then the power electronics, we dabbled in it with the Sevcon acquisition in '17 but really went deeper, obviously, with the Delphi Technologies acquisition. I think we've positioned ourselves to be a credible supplier who has capability across each of these components in-house, probably only -- one of the only ones in the world with in-house capability in all of these different components, which means what? It means we can go to our OE customers and talk about system solutions with real credibility and knowledge or talk about component solutions, and we can supply either to our OE customer.

And there's a number of new companies that are trying to enter into the EV market and a lot of start-ups that maybe could really benefit from some of the expertise that a company like BorgWarner could provide by selling a complete powertrain and electronics solution. Do you think your customer mix is going to evolve at all? And do you envision being able to do some of this full range of capability that you now have and so selling to some of these newer types of customers?

Yes. I mean the good news is today, as we look at the global OE landscape, we supply virtually every OE today across the globe. And that's whether you talk about the large European OEs, premium OEs or you get into some of the smaller players you might have in China. I mean we have a great geographic and customer diversity. As you talk about some of the EV start-ups that we have, we do work with those customers in different ways as well. I mean you might remember, at the beginning of 2019, we acquired a couple of companies that we combined together in what we call our Cascadia Motion business, which is really positioned to support companies that are in the true start-up phase with little or no production volumes today. And so Cascadia has full EV system capability and can provide those customers with a wide variety of support functions. And as those customers mature and they start to get into real production and start to get to some level of scale, they can become customers of the larger BorgWarner enterprise. So we'll work with them at the infancy through our Cascadia Motion capability and then mature with them as they start to grow and develop real scale.

Maybe we go to Slide 4. You talked about the different content opportunities at these different types of powertrains and hybrid roughly 2x, or BEV about 2.6x more content. To the extent BorgWarner sells everything it's capable of selling, of course, then it comes down to what your win rate and participation in. And could you speak a little bit to how you imagine really being able to expand your win rate and participation on some of these new powertrains and some of the steps that the company is taking to achieve that?

Again, I think it starts with our ability to understand the system across the propulsion space from grid to wheel. And again, even as you look at the IDM type of components, I think our understanding of the full system gives us an advantage because it allows us to engage in the dialogue with the customers during their design phases. They're trying to figure out what type of propulsion system that they want to pursue. And so that gives us a real opportunity from a system perspective or an individual component perspective. But obviously, the market is still relatively immature and evolving over the next decade in terms of who the winners and losers are going to be. I think when we look at our technology capability, when we look at the scale that we have and the customer intimacy and relationships we have, we think that positions us to be able to capitalize on having the types of win rates we would ordinarily expect at BorgWarner to continue to maintain product leadership. And that's what we mean by product leadership. It's not just having the technology. It's taking the technology, working with your customers, commercializing it to have a profitable business and one of the leaders in the marketplace, and we think we're positioned to do that.

That's helpful. Historically, BorgWarner talked about out being agnostic about powertrains, and that outgrowth the company has achieved over so many years compared to auto production has been enabled by your ability to benefit from higher content, irregardless of whether or not there's a little bit more BEV, a little bit more hybrid, a little bit more internal combustion engine. We're starting to see, I think, as an industry, an acceleration towards BEV powertrains, and the company has talked about how post the Delphi acquisition, that you're now a little bit overweight to the BEVs as you think about your sales by 2023. As you're thinking about allocating getting your capital as the CFO, is that more of a deliberate decision you're now saying of, you know what, we've had a little bit more of a balanced approach. As I perceive it as an analyst, and we're not going to really put our dollars more into BEV and accelerate that part of our portfolio. Or do you imagine really just being a bit more broadly exposed still and just wanting to be able to benefit no matter which the powertrain is a little bit larger at the time?

Yes. I mean I think we're definitely -- I mean taking a step back, we think the shift to electrification over the next decade is going to be profound. And so we want to make sure we're capitalizing on that. But we think the relatively balanced approach to the propulsion market is a benefit to us. It's a strategy that we're definitely pursuing to be relatively balanced, and we expect to capitalize on that as the market shifts to electrification. So obviously, you see how we've been repositioning the company to capitalize on that going back to the Remy deal in 2015, Sevcon in '17. We've even got the Romeo Power investments in 2019 and now the Delphi deal. So it's been both organic investments as well as some of these inorganic investments that have positioned us to be overweight. But while we're doing that, we're also continuing to maintain a focus on the combustion market. We continue to outgrow the combustion market. We have products that are still in growth mode, whether it's turbos or VCT or now we have GDI with the Delphi Technologies acquisition. And so we're taking advantage of those, both in the combustion space as well as, as we go to hybrids, which are going to continue to require those types of products. And so our backlog across the company reflects that. So yes, becoming probably more overweight towards electrification as the move there is more dramatic, and our content opportunity is higher there, but that balanced approach allows us to continue to generate strong profitability and cash flow and manage toward that while investing in these new business opportunities. And we think that's the strength of BorgWarner, top-quartile margin profile, outgrowing the market in a significant way, generating cash flow to redeploy in the business or return to shareholders. And so then as you talked about, well, where are your investment dollars going, yes, they're more biased, absolutely, from an organic and inorganic perspective on things that better improve our position in the electrification space. And so our R&D dollars are disproportionately there right now. And if you look at the M&A activities that we're pursuing and that we'll continue to pursue going forward, they're going to have a bias and a slant toward things, technologies that improve our positioning in the electrification market as the market moves there more aggressively.

That's very helpful. You mentioned the Romeo battery pack joint venture and an investor just e-mailed me a question about that. So maybe I can go to that. And the question was, can you talk about what BorgWarner is doing with Romeo and what the financial implications are for BorgWarner?

Sure. We entered into the Romeo relationship about 1.5 years ago and there's 2 elements to that relationship. First, there is the investment we made in Romeo Power, the parent, which is -- which was a $50 million investment to give us a 20% stake in the company. But then more important to us was then the joint venture that we set up with Romeo Power underneath that investment where we own 60%, and Romeo Power owns 40%. And the purpose of that joint venture was to bring our customer relationships and our ability to manufacture to automotive quality with Romeo's capability in battery modules, battery pack technology. And so the scope of that JV, that 60-40 JV, is on battery businesses for light vehicle markets globally and for commercial vehicle opportunities outside of North America. That's the scope of the 60-40 JV. Now as we look at that business, our real plan is that we're going to pursue smaller-volume opportunities initially, more niche opportunities. To date, we haven't announced any awards for that business, but when we do, they'll be consolidated as support of the BorgWarner enterprise because we own 60% of that business. So we like the prospects of that business. We think it's an interesting market and one we could see us growing significantly and over time.

I want to talk a little bit about the return on invested capital focus that BorgWarner has had. And you have that 15% goal, and of course, there's a lot that goes into it, right? It's a number we see, but there's a lot of things you have to do. And especially now that you have Delphi as part of the combined company, can you just talk about some of the steps you're taking as a company as you put that ROIC lens and what you have to do to get there?

Yes. I mean -- and I think you said 15%, right? I thought I heard 50%, and I thought, wow, that's ambitious. I mean that's a discipline that we've maintained at BorgWarner. I think it's been an important ingredient to the success of this company in terms of generating positive returns, both from a margin perspective and, ultimately, even a growth perspective. But if you look at how we think about that and how we drive long-term profitability of this business, I think there's really 3 components. One is we continue to invest to drive outgrowth because I think as you drive the revenue growth opportunities, it's definitely easier to deliver profitability in a growing environment than a shrinking environment. I think it's important for us as we deliver returns for our shareholders that we continue to not just rely on the revenue but we also be proactive from a cost perspective. And that's why we were proactive in announcing our cost restructuring plans earlier this year, proactively before COVID-related shutdowns. But then that's kind of how we manage the business day in and day out in the nearer term and drive growth. But as you mentioned, we focus on this ROIC and approving new programs because if you don't maintain that discipline of driving toward return metrics on new business wins, you're going to wake up in 5 years with a portfolio that doesn't support a level of profitability and returns that you would expect. So we maintain that discipline, whether it's a legacy BorgWarner business or a newly acquired Delphi Technologies business. We have already rolled that discipline into what we acquired, that we expect new business programs as they come up to earn that 15% ROIC over the life of the program. And so that discipline is already instilled in the Delphi businesses that we acquired there. In that way, when we wake up in 5 years, we know that the portfolio of business we have is right to be profitable and deliver the types of returns we would expect. And so what that means, though, from a profitability perspective is businesses or portions of the business that are still in growth mode are getting a lot of investment dollars today with returns that come out the curve. And so over the life of those programs, we expect to earn that return on invested capital target. But in the infancy, you might not see that manifesting itself in the margin profile until you get to a steady state. And so that's the reason also we manage to a balanced portfolio. We have certain businesses that are more stable and mature, that are earning kind of the type of steady-state margin profile we'd expect, certain businesses that are in growth mode, earning 15% ROIC over the life but still in ramp-up. So the margin in the near term is depressed relative to the steady-state margin.

Yes. And maybe I'll just take that one step further. I mean is that the way to think about some of these newer products that are going into EVs? And these are maybe newer types of products that still have more investment, and they meet that return on invested capital target the company has over time. But maybe some of these BEV products potentially start out at lower margins. Or is that not the right way to be thinking about it?

Well, they do because we're not pricing the programs to be money losers. They do because it takes you a while to get the scale on each individual program before they start generating the return that you would expect. But then when you look at a portfolio of those, if I have 2 programs that are launching today and there's -- or that they are in production today, but I've got 5 more that I'm competing on and are launching in 3 years, the ones that are launching in the future and the investment going along with that is outweighing the margins of those that are more achieving their run rate. So as long as you're continuing to be in a ramp-up mode, it takes you a longer time to hit that steady-state margin profile, but that's okay. But that's not because we're buying business, it's because the margin profile is weaker at the infancy of a program than it is later in the life of the program. And as you're in growth mode across that portfolio of products, then the margin in the shorter term tends to be more depressed. But we manage the margin across the company in totality, recognizing some are more in growth mode, some are in more mature space, maybe still growing but the margin profile of that combined portfolio is top quartile in the industry.

That makes a lot of sense. As part of that, you already mentioned managing your cost structure. And there are some specific targets the company has spoken about relative to Delphi, $175 million of synergies. Maybe you can just talk about how confident you are in meeting that $175 million number now that you have the asset as part of the combined company.

Yes, we're very confident. I mean we didn't wake up and figure out what those synergies should be on October 1 when we closed the deal. After we signed the deal in late January and announced our expectation based on initial diligence of $125 million, then we spent the next 8 months building out the detailed integration plans, including the detailed actions of what we think our cost synergies are. So this isn't a number sitting in a spreadsheet that's comprised of 1 cell. This is hundreds of initiatives across 14 different work streams driving costs out of the system, whether it's SG&A-related costs associated with things like eliminating duplicative third-party costs, that could be insurance or we don't need 2 sets of auditors or 2 boards of directors, things like that as well as a meaningful reduction in headcount. Again, you don't need -- I'll speak of finance. You don't need 2 controllers orgs. You don't need 2 CFOs. You don't need 2 treasury groups, things like that. There's a lot to be able to take out very quickly from an SG&A perspective. And then about 1/3 of the synergies are purchasing opportunities, particularly in the indirect purchasing space. We're bringing the 2 companies together, drives a lot of opportunity. So again, we've built up a pipeline of initiatives that, on a risk-adjusted basis, rolls up to that $175 million, and we feel very confident about delivering. And our cadence kind of bears that out. As we look to 2021, we just closed this deal, obviously, 2 months ago. And as we look to 2021, we expect half of that to be in the P&L already next year and 90% in 2022. And that speaks to, one, the level of confidence we have; but two, the fact that the bulk of these synergies are really those low-hanging fruit costs that you can take out very quickly.

That makes a lot of sense. I had a question come in, and it's pretty related to one that I have on my list, and it's about the current industry environment. And auto demand, it's been very nice to see has been recovering pretty well and the U.S. SAAR on average in recent months has been high $15 million, low $16 million range. However, unfortunately, we've been seeing COVID cases start to rise again, both in the United States and globally. Can you talk about what BorgWarner has seen in the industry environment and maybe talk about it both in terms of what you would be working on with your customers but then also from your own manufacturing perspective and any implications or things we should be thinking about with COVID cases, unfortunately, back up again?

Yes. I mean as we gave guidance on our Q3 earnings call, we thought, hey, production year-over-year is going to be down in that 2% to 4% range. You're probably going to have some pluses and minuses in different regions as you look at that. And while I can't update or affirm kind of that guidance outlook, I can't tell you directionally -- Q4 is kind of shaping up directionally the way we expected. We are definitely seeing the impact of COVID-19. We're seeing some week-to-week volatility. There's definitely impacts on manufacturing efficiency. There's impacts on the supply chain. We haven't been disrupting our customers to this point, but there is definitely inefficiency in the system. But when we gave our guidance, we tried to contemplate what we knew were some of the short-term inefficiencies we would see, and we did our best to incorporate that in the guidance and I think, directionally the guidance really incorporates kind of what we're seeing. But I think as we look ahead, at least through the balance of this year and maybe into the beginning of Q1, I think the risk of disruptions is likely going to continue until COVID settles down. And so -- but I think overall, as you just take a step back, I think with the talk of vaccines and what this might look like, I think there's -- people are starting to feel a little bit more comfortable looking out a little bit longer in terms of the predictability of the markets, recognizing that in the shorter term, we're still going to have some week-to-week and month-to-month volatility.

We got a question come in from the audience, and it was on that Slide 5 of the in-sourcing/outsourcing mix again, and it was, can you help me talk about where the industry stands today on some of these metrics? So you laid out 2025 numbers, but are you able to speak about where some of these products are today on that?

Yes. I mean it's hard to talk about today only because if you think globally, this is a battery electric vehicle slide. BEVs represent 2% of the global market today. So I mean it's tiny from a volume perspective. You obviously have a Tesla who's much more vertically inclined than what we might see with other OEs. So I think it's hard to really measure that today in terms of what these percentages are. I think once you get to some level of scale, like in 2025 where we're talking about 11 million units, I think you'd start to see what this really transitions to. But I also think taking a step back, we see it based on -- this analysis is based on our interactions with our customers, our assessment of the market intelligence and what customers are saying and what we're actually seeing in the backlog and the opportunities and the real wins that are out there. And I think, directionally, it's in line with what you see on this slide. But again, to translate that to the 2% of global volume today, it's kind of hard to do outside of knowing, hey, Tesla is a big player in that and Tesla is largely vertical today.

Yes. And then there was another question that also came in. It was -- it kind of related to what you just spoke about, and it's, is BorgWarner making any OEM market share assumptions around somebody like Tesla who does a lot of things in-house versus some other companies who are more balanced in using the Tier 1 suppliers? And how are you thinking about that as you make those 2025 projections?

Yes. I mean, definitely, we're looking at how the world is evolving into electrification beyond just a Tesla and knowing what programs are in launch mode and in -- on the docket for the different OEs around the globe that we're interacting with because, again, we have relationships with all the OEs around the globe. So we know what their program pursuits are and what's in the mix for production. So based on the expectations that we have in some of the market and intelligence we have and expectations around their likely success in the market, it's really based on that. So there are assessments about where we see the market and individuals, customers growing around the globe. But definitely knowing that all the OEs are really investing in advanced hybrid and electric vehicle technologies over the next 5 to 10 years and what we see in the pipeline, that's what's reflected here.

That's very helpful. You talked about continuing to make an investment as a company. And of course, you did just do the Delphi acquisition, but the company saw a very good balance sheet. And so can you talk about other types of investments you think the company may need to make, either in terms of R&D investments or other technologies that may look interesting to BorgWarner from an M&A perspective?

Yes. I mean I think the good news is the company -- when we start thinking about capital allocation, we start saying, well, are we comfortable from a liquidity and a balance sheet perspective? Or do we need to set aside more cash to support those things? And the good news is, from a liquidity perspective, when we closed on the Delphi deal, our revolver automatically upsized to $2 billion. And then Delphi closed their third quarter with $0.5 billion of cash on the balance sheet, much higher than we anticipated when we renegotiated the deal back in early May. So when you add that to our cash balances and our revolver, we feel great about our liquidity. We don't think we need to take additional cash generation and set it on the balance sheet. From a leverage perspective, we feel really good about that as well. If you look at a debt to, say, an EBITDA, trailing 12-month EBITDA leverage, it's going to look elevated right now. And it's going to look elevated for everybody because of what happened in Q2. The impact of COVID-19, hey, even a BorgWarner, highly profitable company, we take pride in that, we had negative operating margin in Q2. So if you're looking at a trailing 12-month earnings and the denominator of a leverage profile, your leverage profile is going to look elevated. Excluding that Q2 impact and looking beyond that, we feel great about our leverage profile. We'll be operating below 2x on our gross debt-to-EBITDA basis and expect to be investment grade. And so why do I give you that color? It's because the incremental dollars that we generate in cash flow are available to deploy to invest in the business organically or to pursue M&A opportunities or to return value to shareholders. And you should expect us to be doing all of those things. From an M&A perspective, our dollars are focused on things that are really technology opportunities to improve our positioning as the market moves toward electrification. So what things should we continue to be investing in that improve our positioning there, particularly in electrified propulsion? I know people ask us, well, are you going to look at consolidating the industry from a combustion perspective? That's not our focus. That's not to say we won't look at opportunistically things that might pop up. But our focus with our M&A dollars is on things that are improving our technology position as the market moves more aggressively to electrification. I don't think you should expect us to execute transactions in the next couple of years that would disrupt our ability to successfully integrate Delphi. But at the same time, I think there are some real opportunities out there that you should expect us to be pursuing in the next year, in the next 2 years, that we don't think would disrupt that but would really continue to propel us on the journey toward electrification.

We had another question come in from the audience on Slide 5. Can you please ask Kevin about what they're expecting beyond 2025 on those ratios? And I think you might have mentioned it's tough to understand at this point, and that is pretty far out. But the question was, do you think those ratios may change materially as OEMs move on to their second or third-generation EV platforms?

We don't. And so when we've done this analysis, we've taken it out beyond 2025. But obviously, there becomes a little bit more guesswork as you go beyond there because this is much more informed by, hey, what we're seeing in terms of the feedback from our OEs, what's in their backlog, what's in their pipeline. So beyond 2025, a little bit more of a guess. But based on our intelligence and our assessment of the market, we don't expect this to move materially as you go out the curve. I think from the ratio perspective, with the mix of in-sourced versus outsourced, okay, one OE might move from here to there. Another might move from there to here or you might see some shift geographically. I think directionally, it's going to be in line with this. Probably motor is a little bit more heavily outsourced. Gearboxes, TBD, depending on how OEs rationalize their labor footprint at some point between now and the next 10 years. And I think the power electronics side, I'm not sure why I would see it come down from these types of levels from an outsourced perspective. So I think it stays this way from a mix perspective for a long time. And the great news for BorgWarner is the market opportunity that it measured in dollars is only going to grow from here. In this analysis, it's on Slide 5, it's only 11 million units, call it, 11%, 12% of the market. And as that grows over time, that $19 billion addressable outsourced market opportunity is only going to get that much bigger.

Another question that came in from the audience was, BorgWarner has excellent manufacturing capabilities. Do you think it makes sense for BorgWarner to do more manufacturing in the future on behalf of some of your customers?

If that means like contract manufacturing type of opportunities, I guess TBD. I think, again, our focus when we think of M&A, if that would involve acquiring a footprint, that doesn't sound overly exciting. I think we pride ourselves on technology and product leadership, first and foremost. So if we're going to look at something like that, I guess we'd have to see why does that fit with our DNA about what we do well. I do think we have strong manufacturing capability. And so we'd have to assess that. But again, as we look at M&A opportunities or how we're looking to grow, it's really things that improve our positioning from a technology perspective, capitalizing on the move to electrification. So I'd say never say never on those types of things but not a priority for us as we look at it, but TBD.

Okay. That's helpful. And then lastly, we talk a lot about automotive, but the company has the commercial vehicle and aftermarket businesses. Maybe you can talk about some of the key focuses for BorgWarner on those areas.

Yes. I mean as it relates to aftermarket, I mean as you think of markets, first and foremost, we'll see how the markets recover over the next year because, obviously, they've been -- even the aftermarket has been hit with vehicle miles travel being down. So we'll see how that plays out over the next year or 2 and kind of recovery we will see as the global markets recover. In terms of our focus on that business, I mean you can see some of the performance of that business based on that being called out as a separate segment in Delphi's financials. I think from our perspective, that business from a profitability perspective is not where we expect it to be. So we would expect to drive profitability improvement. As you can imagine, in the preintegration phase here leading up to the closing on October 1, it's been a focus of some of our efforts in terms of our thinking about how we make sure that business is positioned to improve from a profitability perspective. I think from a commercial vehicle perspective, that's becoming a much bigger piece of the equation. It was 13%, 14% of our business before. Now it's going to be, call it, around 17%. And it's good profit business. I think when we look at what we acquired with Delphi Technologies, particularly on the commercial vehicle diesel side, they have really good technology and a business that we expect to be stable for a long period of time. And so that is becoming more of a focus. And I think we'll watch there as those markets move toward electrification over time how we want to play in those spaces. Those programs tend to be smaller than what we see on the light vehicle space, but we do see a move toward electrification there in certain of those niche markets. And we'll look at how we look to capitalize on those opportunities. So definitely a more important piece of the business and probably get a little bit more attention, although light vehicle is still obviously the biggest piece of what we do today.

We are unfortunately out of time. Kevin, Pat, really appreciate you both joining us today and sharing all the insights that you did. Looking forward to learning more as we go forward. And operator, I think that concludes our session for today.

Thanks, Mark.

Thank you, Mark.