BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

All right. Good morning, everybody, and thank you so much for joining us for this 2022 edition of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner, and I'm the lead U.S. Autos and Auto Technology Analyst at Deutsche Bank. I'm very pleased to be spending the next 2 days with you. We have lined up an exciting roster of 60 participating corporates, doing fireside chats to them tomorrow, in addition to yesterday's virtual sessions. I would like to bring to your attention some of the next 2 days' highlights. We'll have 3 keynote sessions later this morning and at lunch with the CFOs of Ford, Aptiv and General Motors. Tomorrow's keynote session will be the CFO of Stellantis, and the lunch keynote will be the CFO of Rivian. Also, do not miss this afternoon's reception from 3:30 p.m. on the spectacular rooftop terrace of this new Deutsche Bank Center, overlooking Central Park. And finally, we'll also have a whole roster of exciting electric vehicles in the lobby available for test drives, including the not-yet-released Cadillac Lyriq, the Hummer, Rivian, Polestar, Faraday. Let the meeting [indiscernible] if you'd like to add any of these [ rights ] to your schedule. So now with this out of the way, I would like to very warmly welcome our presenters, the BorgWarner team. We have Harry Husted, who is the CTO; and Kevin Nowlan, who is EVP and CFO. Thank you so much for being with us this morning. As you all know, BorgWarner is a leading supplier of engineering system and components in large parts, focused on the powertrain applications. The company's products are manufactured and sold worldwide to OEMs, passenger car, SUVs, light truck and with a growing focus and success in electrification under the CHARGING FORWARD initiative. So the format will be, first, a presentation, an update from BorgWarner on some of these efforts, followed by a fireside chat around some of my prepared questions as well as questions from all of you in the audience. So to get us started, I'll turn it over to you, Harry.

Thanks, Emmanuel. Thank you. Good morning, everyone. So what I'd like to do is go through some slides, give you an update here. So we've got a couple of slides of beginning information. The thing -- place I'd like to start it with is CHARGING FORWARD. We announced this last year at the end of Q1. It's got 3 main pillars, and this is really a progress update, showing you how we're doing against the goals we set for ourselves. So we broke the CHARGING FORWARD into 4 goal areas or 3 goal areas. And you can see, for the first one, EV organic sales, we had an organic goal for ourselves. We set it at $2.5 billion. We're at 2.7 in terms of what we've already booked in 2025 year. So we've checked that box already. We go to the center one, M&A inorganic. And you can see with the AKASOL acquisition, the eMotors part of Santroll, we think we've got $600 million to $700 million of revenue booked in the 2025 timeframe. We got a goal of $2 billion. So there's more to come here. We're going to -- we're planning to do additional M&A. We've got several targets that are active right now, so making progress there. And then dispositions were started and underway. What I want to do now is go look at products that are driving the growth and talk about 3 key product areas. First is electric commercial vehicle battery packs. This is the AKASOL acquisition. If you look to the right, you can see what the revenue profile looks like between now and '25. So really nice growth there compared to where we're starting from a 2021 baseline. So the question is, these battery packs, why is it growing so much? Why are we winning? So there's several reasons. First of all, we're a pioneer in electric CV battery pack. So we were working on this long before. It was a really clear trend where things were going. So what that means is, products are ready and they're mature already. The next thing we're doing is, we're packing a lot of energy into these battery packs. So we put as much as we can, we pack it very high density, which is important. You got packaging on the vehicles, we pack a lot of energy in, and then we've got the ability to integrate. So an electric bus takes typically about 5 of these large battery packs. What we've got, we've got the hardware and software that pull that all together and make it seamless and look like a single big battery pack to the bus, which is very valuable. It makes it easy to apply these. And then lastly, we're CV grade with this product. So we've got the structural ruggedness, the cycle life to survive in a [ eCV ] environment for the duration. But let's go a little bit further into this product. I want to explain it to you a bit more. So a battery pack is more than just a bunch of battery cells, and I say that because in the battery pack business, we think a lot about what's the cell chemistry, what's the cell material supply, things like that, but there's a lot more to it than that. The thing we start with is a rugged structural enclosure, this sealed. This has to have CV grade durability. It has to pass high levels of vibration, shock, go through temperature cycling and keep the cells safe. Then with that, we have to thermally manage the battery cells. So depending on the circumstance, we're heating the cells or we're cooling the cells to keep them in the range that they want to be in. And then, when you look at those expensive battery cells, you have to know how they're doing, how much energy is in there, and that's this combination of electronics and software called BMS, or Battery Management System. They keep very close track of these cells. So you know how much energy is in the pack right now, how are the cells doing. So when we look at this collection, what you can see is, we've got a highly engineered product. It's multidisciplinary. So sounds pretty complicated. How do we make this work for efficiency to actually make these? And the answer is, modularity. So what we're doing, you can see I crunch that down. We break these into modules that are uniform. So that when we build them in our factories, we've got an item that's easier to handle. Battery cells can be heavy. And then we can apply robotics. So our plants have robots, and we use robots to assemble these modules. And then you can see, for example, this is our -- one of our mainstream products, and it's an [ AKM-9 ]. It's got 9 modules in it. And then you can see there's a BMS on every module, that electronics, and then there's a BMS that talks to all of them at the pack level. So we've got a couple of levels of electronics and software to manage this. When we look at a picture of what it actually physically look like, this is the same thing, but a picture of that. So you can see this cluster of round cells up with the type. This has cylindricals in it. Then you can see that module with the corner cutaway. So we've got rows and rows of these cylindrical cells packed in there. And then you can see the pack, we've got 9 of those modules lined up in that pack. And then you got to keep in mind, for an electric bus, for our customers, there's actually going to be 5 of those battery packs in that bus to make the thing have enough energy storage for the unit. And we have what's called a multipack manager collection of hardware and software that makes those 5 battery packs just look like a big battery pack for when we discharge and then when we [ recharge ] it. So that's battery packs. Let's go on to another product now, which is the inverter. And then the inverter, our big story is, we're positioned to be the #1 noncaptive producer by 2025. You can see the growth there on the right side. A strong growth from about 0.5 million units last year to 3 million units of inverter sales in 2025. There's a split there between electric and hybrid, but we've secured quite a bit of business here. In fact, a lot. And I'd like to show you why on this next slide. But first, I want to start in inverters a little bit of sometimes not well-understood product. So I'd like to start for some of you that may not know what an inverter does. Look on the left side, you see the battery pack over there, and then you see the motor on the right. So the inverter sits between the battery pack and the electric motor, and it supplies a smooth variable flow of power from the battery to the motor under the control of that driver's foot pedal. So you see the upper left there, when you're driving the vehicle, you're determining how much power and torque you want, and that's the inverter's job to make that smooth and seamless. So what's in there? There's 3 main parts to an inverter. We've been doing this for a long time. There's the power module there on the right. That's the heart of the inverter. That's got power electronics in it. It's actually just 6 large switching transistors is what's in that, but they're very big. And what we've done is, we focused on that because that has been a big cost driver to take the cost down and get very efficient with that power module. The computer is also in there. It's an embedded controller. And what it does is, it looks at what you're commanding with your foot pedal and then it controls those power transistors to do that for the motor. You see the motor's got 3 arrows to it. An electric motor's a 3-phase machine, has 3 big wires coming out of it. We put 2 transistors on each wire to control it. That makes 6. So that's where we get the 6 from. And then the last thing that's very important to inverter is this capacitor. It doesn't sound exciting, but in some of our inverters, this thing is the size of a small laptop. So it's just big and bulky. And so we've looked at that and said, if we're going to shrink the inverter, take material out, this needs to get better. And we've been working with a company, a start-up called PolyCharge, where -- cuts the size of that capacitor in half and makes it more temperature capable. So these are some really key vertical integration leadership factors to help explain why we're winning in the inverter business. I want to show you a couple of pictures here. The left-hand side, if you look at that American penny there, above that, it's a Viper power switch. You can see how small it is and yet it supplies -- it can control 500 amps of current, which is enough to do your house and your neighbors houses, right? So very powerful. That's got a transistor or it's got silicon carbide transistors in it, depending on what the OEM chooses. And then it's very small with cooling on both sides. So if you look to the right of that, you see that silver-looking thing, that's our power module. And there are 6 of those transistors laid out across there, you can see the tab sticking out, there's a quarter on top. That is very compact, very small, very high power, and that's what our customers really like. They like the compactness. And because we double-side cool the transistors, we can push them all the way to their electrical limits. If you don't cool the transistors well enough, what you end up doing is, you add up -- adding area. You add size to that to be able to cool them better, and it costs you a lot of money. So by doing it this way, we're reducing the cost of this power module. The other thing on the right side is custom integrated circuits. We've got one of the most experienced and talented IC automotive design teams in the industry. And what they do is, they take sections of the circuit board, that green board, and they compress that down onto a very small silicon die. What that does is, it makes our product smaller, it makes them cheaper, and then we get some differentiated functionality we can design in, and we also get copy protection. So you can't go out and buy that IC because it's our IC. Third product I want to talk about is electric motors, okay? Electric motors, once again, really nice growth story here. You can see there on the right-hand side, going from about up 700,000 this year to roughly 2 million units out in 2025. With the addition of the Santroll eMotor business, we've added strength in the China market, which is really nice. Why are we winning in electric motors? Well, the key thing is this technology around rectangular-shaped wire. What that allows us to do is the slots in the state that we push those into, those have this kind of rectangular shape. So when you use rectangular shape, what the industry calls hairpins, you can get more copper in the slot. And what that does is, it makes more magnetic flux and it makes this thing more power dense. So we can shrink it, make it more efficient. That's a key differentiator. We've been doing that for years. And what I'd like to do now is show you, in the context of our integrated drive module, a little bit more about that. I will also say that these bookings here, very nice. It's across the 400V systems. It's 800V. We've got passenger car. We've got commercial vehicle bookings. So a nice breadth of portfolio in terms of bookings here. So this is my last product slide. This is an integrated drive module. And so if you look at this unit, you see these arrows coming out. Those arrows go out to the tires, to the wheels, okay? So that's where this is placed in the vehicle, between the tires. The big story here for us is, what we're saying, all under one roof, which means we now internally make all the key components. I'm going to show you what those are. The first one is what we just talked about, a class-leading inverter. If you look at that, you'll see these orange cables that come from the battery, but what you don't see is 3 orange cables going to the motor. Those are a direct busbar internal connection, which means we get rid of that size and mass and the cost of those orange cables. So that's a really nice integration. Here's our electric motor. It's in the middle. It's got that circular shape to it, got the hairpin rectangular wire. We also oil-cool the end turns. That gives us higher continuous power. So when you pull away and you kind of hit the throttle, you get some seconds of peak power, and what this allows us to do is more sustain continuous power with that oil-cooled end turns. And the last thing is, with our Santroll acquisition, we've got the ability now some up integration of the process design, the equipment design. So what we're shifting to is co-designing the product, and the equipment is going to make it. And you can imagine, that makes us [ able ] to be more efficient in that build and synergistically lower cost structure for it. And the last piece, the other key pieces is gear reduction. The motor is spinning fast, the tires don't spin as fast. We do that. We know how to do those quietly and efficiently, based on our legacy as a drivetrain company, and we also make a lot of transfer cases. So we do a lot of this already. So this is very natural for us. Then we integrate a couple of key functions there. So when you step back and you look at the portfolio for us, we've got a nice portfolio now. We're really going from energy from the grid on one side all the way to the tires on the other side. So here are those parts: DC fast charger battery pack. The next 3 turn into that integrated drive module, all the way to the wheels. So I want to give you that overview, help you understand products and where the growth is coming from. So with that, Emmanuel, back to you.

Yes. Thank you so much, Harry, for this overview of [ the electric ] opportunity. Definitely coming back to it as part of the question -- and I promise, but before that, I absolutely need to set the stage in terms of what you're facing in industry and current environment for investors. So let's maybe start with those and then come back to the CHARGING FORWARD. Kevin, can you maybe provide an update on the impact from the China COVID shutdown, the indirect impact from Ukraine war in Europe on industry production as you see it in the second quarter? And then, any sign of sequential improvement of green shoots over the rest of the year?

Sure. Thanks, Emmanuel. Yes, as we had talked about on our earnings call a little over a month ago, our expectation was, we were going to see significant pressure really in the second quarter, stemming from those couple of things. I mean the COVID shutdowns in China, we've definitely seen that impact. I think at some point during the second quarter, we saw upwards of half of our plants shut down at some point. Our expectation and our guidance was that as we came into the beginning of June, we were going to start to see the situation abate. And I think we have actually, but last week of May, we started to see the plants really start to open up again. All of our plants are operational at this point, but not operating necessarily at 100% in all locations either. We might have some that are 15%, 20% and ramping up right now. I think you should have an expectation that we're going to see a lot of pressure in the second quarter, from a production standpoint, linked to the China COVID shutdowns. How that plays out in the back half of the year? We're hopeful that we're going to continue to see the ramp-up and back to normalized levels of production and maybe even recoup some of the lost production in Q2. But that's an assumption -- a planning assumption at this point. We'll see how that plays out. I mean China tends to be pretty resilient in recovering from these types of things, but we'll see. In terms of Ukraine, I think we expect a little bit of choppiness through the second quarter. Some of the supply chain issues that we expected would have an impact on the industry, were really going to manifest in the second quarter. And I think we saw a little bit of that. So a little bit of choppiness there, but things that are really temporary in nature, I think. So when you take a step back from a full-year perspective, Q2 is going to be the most challenged quarter of the year, barring something else unforeseen in the back half of the year.

Okay. That's great to hear. And then focusing on the supply side, also of the equation, and any -- how has the semiconductor shortage progressed since the start of the year as far as impact on industry production and your revenue? Are you seeing things improving sequentially there?

May be modestly improving. But I would say, what we see right now is that it's a continued overhang on the industry. I know there are some OEs that are communicating some level of bullishness here in the back half of the year. I'd say, it's going to be a continuing overhang through the balance of this year. And we'll see how it plays out next year when we're in calls on a weekly basis, I'll call it, tri-party calls with the OE, with us and with the semiconductor suppliers, trying to figure out how we make sure there's capacity available for the OEs on a go-forward basis. So I don't think we're out of the woods by any means at this point, and I think it's going to continue to challenge production for the balance of the year at least.

Okay. Great. So I guess then coming back to CHARGING FORWARD, and then we'll -- then I have some more questions on the margin side.

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All right. So you're looking to expand sales mix from 3% from electrification to more than 25% by 2025. What are the key product drivers to get there?

So it's a great question. And we -- you think about that last slide, the nice part of this is, it's very broad-based. We've got strong growth across a number of those areas. So it's inverters, it's motors, we're getting good traction with those integrated drive units. There's the battery pack business, and we're seeing nice growth in things like high-voltage coolant here. So it's got a nice diversity in terms of the growth profile.

Can you maybe parse out the content per vehicle opportunity for electric vehicle? I think in the light vehicle side, you've spoken about $2,600 so. What are sort of like key components that would essentially get you there in terms of the opportunity?

So I'll take that one. Yes. So our number we've put out there is [ $2,640 ] in the way. I'll take you through that, is a little bit of a history lesson along the way. So fun fact, we did the gear reduction set for the original Tesla Roadster, all right? So that we've got in there, based on averages now at about $400. Then with our Remy acquisition, very recent Santroll eMotor acquisition. We've got motors in there. That's at a bit north of $500. Then with the Delphi and also Sevcon, we brought in power electronics. Power electronics are in there at about, I think, 1,600 amp. And then we've organically grown this nice business. EVs need a lot of thermal management. We just talked about the battery pack and the thermal management. People need thermal management, too. And so we've grown this nice high-voltage coolant heater business. That's in there at about $120. So that's how the CPV breaks down. In power electronics, when I say that, power electronics is not one thing. Power electronics is a number of different products. Power electronics on the vehicle are important. Power electronics and inverters, [ number ] of chargers, DC/DC converters.

Understood. Where would you envision your EV portfolio becoming margin accretive?

Well, let me take a step back on that because there's a lot to answer that question. I mean, I think it starts by thinking about how we price our product, and I'll get to your answer, trust me. The -- when we price our product, whether it's an EV product or a combustion-based product, we approach it the same way from an ROIC perspective. We look for a 15% ROIC on any new bookings that we have, and given that the capital intensity of our e-portfolio is similar to the combustion portfolio. It means the margin profile of those businesses tend to be substantially similar. And I give you that color because when you look at the margin profile of our business today, underlying that portfolio is a profitable business over the life of any particular piece of business. We're not booking loss [ levers ], we're booking profitable business. But what makes the EV portfolio different is, it's a lot more R&D intensive. So when you look at the life of a program, you've got a lot more R&D cost upfront to support stronger contribution margin on the back end. And to give you some perspective, we had an inverter program we won last year that will have 300 people years of engineering development, one program. 300 people years of engineering development. That's all before start-up production. But I say that because when you look at our P&L right now, if you said freeze it, where are you from an EV perspective, we lose money. But we don't lose money because these are bad programs, we lose money because we're at the early stages of growth. We're having all that R&D hit us today, about $375 million, give or take, of e-products R&D, even though our revenue on EV is only $800 million. So that math just doesn't make sense. But it's because over time, as revenue grows, it kind of catches up than we grow into the P&L and grow into that R&D. So I give you that background because then when does it become accretive? Well, every dollar of revenue we book in EV that we actually book, is accretive because the cost is already in the P&L. We've already got the R&D there. So as we book incremental revenue into the P&L. It's accretive at our contribution margin. If you roll the EV portfolio forward and say, well, when do you hit breakeven then? When does the revenue and contribution margins start to overcome the cost? Probably, back end of '23, beginning of '24 is when we start to hit that breakeven point in the snapshot of a given calendar year. But we have a tough time getting to run rate at the steady state because we're constantly chasing this growth, right? As long as EV is growing at a rapid rate, which we would expect, the R&D intensity, relative to the revenue in that current year, is going to be overweight. I don't know if that answered your question.

Yes. Yes. Absolutely. But just to be clear, total company R&D as a percentage of sales, you don't have any ambitions to grow that from current levels?

We think it will be in that 5% to 5.5% range on a go-forward basis, which is where we're operating this year.

Okay. So the additional investment comes out of combustion engine, basically to fund the...

That as well as revenue growth as well. I mean, effectively, if you just look at the R&D relative to your total revenue as long as revenue is continuing to grow, that's funding the incremental R&D dollars of 5% to 5.5%. But you're right, there is some potential opportunity as we look forward that we manage the P&L differently on any portions of the combustion portfolio that are leveling off or not seeing new programs, in which case we can manage the R&D there more tightly. We saw that in Q1 when R&D was down on combustion.

Let me ask you the in-sourcing question to you both. I guess investors tend to worry that there's maybe a trend from deeper in-sourcing by automakers of electric powertrains than what was historically the case in combustion engines. Do you see it happening? And do you view that as a threat?

I think we see this topic come and go in the industry and with different OEMs. Right now, I think there's concern about supply. There's people looking at that. But when we look at it, there's two things I think about. One is competitiveness. So when you -- when an OEM says, they want to bring something in-house like an inverter, very difficult complex product, the question is why, right? In 2025, why do you want to do that? Is it because you think you can have technology leadership? Is it because you have more scale in electronics than 3 million inverters? What advantage? So when we look at it, I say, what advantage is an OEM really going to get by bringing that in-house and having their focused design team. By working with a Tier 1 like BorgWarner, what they get is a company with a lot of scale. We saw the technology leadership, the product leadership. So that's one way I look at it. The other one is just a degree of difficulty. You look at these products and you say, I'd like to do that product. I'd like to do it in-house. But then when you get into it, what you find out is, it's a very difficult product to do. You need that multi-disciplined engineering team, hardware, software across a bunch of skill sets, and then you have to design products that validate and actually meet the tough automotive standards. It's a high bar, right? Not everyone can do that. People may want to do it. But we think that in these products, we work very closely with our customers to be good partners to them and give them what they need. And we think that's going to continue, and we're seeing that in our bookings, going forward, too. Kevin, I don't know if you have anything to add on that.

No, I don't.

Great. And then maybe just one final one on the electrification side. Can you provide any color on the size of the battery management system contract that you recently received? Tell us what kind of opportunity the technology presents to you. I personally didn't even know that you were in the BMS quoting stage.

Yes. No, BMS is a really nice product area for us. So that big win that we had, just in general, say, it's a large global OEM, [ an old ] name we'd all recognize. It really is across their B-segment vehicles, their C-segment vehicles, some light commercial. It can handle 400 volts and 800 volts. So it's a very large booking. And when we look at that product, it's a very nice fit for us. It capitalizes on our strength in electronic controller design. So it essentially isn't that type of product. It's a circuit board assembly in an enclosure similar to what we've been doing in engine controllers for a long time, and then it leverages that strength. We talked about that IC design on the one side. Some of those same ICs that we designed for engine controller use to make the things smaller and cost effective, now we're right into those battery management products, believe it or not. So that helps give us the strength to go win against the competition. So we like the space. We're going to seek to continue to grow organically. We're going to look around inorganic -- inorganically as well. So...

And that BMS capability, at least for that particular work, came from Delphi. That was part of the Delphi acquisition. We do have some BMS capability on the CV side that came with the battery pack business from AKASOL as well.

Understood. Great. Now let me go back to some of the near-term consideration. The cost pressure that the industry is seeing, some of your margin drivers. You have called in your existing guidance for net commodities headwind of [ $130 million, $140 million ] this year, up $60 million from the previous outlook. What is the model for recovery here? Like is it contractual? Do you have negotiation? Is it mostly a recovery of cost? Or are you able to increase the price of the piece? And how have these negotiations been progressing towards the recovery?

So we have contractual recovery mechanisms that cover about 50% of the underlying raw exposure that we have, but what we're talking about with the $130 million to $140 million and what's implied about pricing recoveries, goes well beyond that. And so we've been engaged with our OE customers for the last couple of quarters and discussions about how do we address the inflationary environment. And it goes beyond commodities just because it's also got energy costs, labor costs, freight and logistics. I mean lots of different things that are coming into the P&L, coming from the Tier 2 and Tier 3 suppliers. So we've been actively engaged with our customers. I would expect us to see substantial progress between now and the end -- and our earnings call, beginning of August, towards resolution of those issues. Our approach is to really focus on making sure that the nature of the costs that we're seeing coming through the P&L, whether that's one-time in nature or if it's piece price in nature, that we try to match that on the customer pricing side and our discussions with customers, so that we have a P&L that looks more like a BorgWarner P&L on a go-forward basis, not just solving a one-quarter problem, solving a go-forward problem. I'd say, the OEs are actively engaged in those conversations. They're constructive discussions, but never easy, right? I mean when you're dealing with customer discussions around pricing, that's always a tough discussion, but we expect to make substantial progress over the next 45 days.

Great. And one more margin question. I think the first -- your first quarter margin was 10%, which was already in line with your full-year target. So how should we think about the trajectory over the balance of the year? When I charted the 4 quarter margins of every [ supply ] I cover, most of them look like a hockey stick. You're essentially talking about Q1, 10%, full year, 10%. What are the puts and takes there?

And we obviously don't give quarterly guidance, but directionally, I mean, you should expect Q2 to be the most challenged quarter. And it's most challenged because that's when a lot of the supply chain costs are coming through without necessarily having the benefit of recoveries completed during the quarter. And second, you have some of the volume pressures. The China COVID lockdowns are going to be an important impact in the quarter and some of the disruption maybe in Europe that we've seen associated with the Ukraine crisis. So I think you should expect to see a step down in Q2, directionally, which means for us to have that margin in line with where we were in Q1, it means the back half must be stronger. And that's because we expect to see some of those customer mechanisms kicking in, the negotiations complete, as well as recovery from China, in particular.

Got it. Let me just switch gears to M&A quickly. We have about $5.5 billion available for M&A through 2025. How are you thinking about inorganic investment to increase your capabilities? What do you focus on? But also, if you could give a shorter-term update around current conditions for that? Is this -- is now a good time for it? Is it something that you're saying, well, right now, we don't really know we could -- the timing may be sort of like further out? How are you thinking about -- what we're looking at and what's the right timing for it?

We're still actively pursuing M&A right now. I mean that up to $5.5 billion that we said is available to deploy for acquisitions, we deployed about $1.1 billion, $1.2 billion or thereabouts for that $600 million to $700 million of EV revenue that you saw. So kind of about 1/3 of the way toward what our objectives or targets were from an M&A perspective, from a revenue side. In terms of the market environment, I'd say, there's two types of companies out there, very simplistically. There's companies that have a more mature P&L, and there's companies that are in the earlier stages of growth. The ones that have a more mature P&L are a little bit tougher to transact on because they're more exposed to the current inflationary environment, and there's a little bit of lack of clarity on how some of those inflationary discussions play out in their customer recovery mechanisms. So hard to execute those types of transactions for a more mature P&L company prior to resolution of those. In fact, we had a particular transaction we walked away from a few months ago because we couldn't bridge that gap, and we're not going to do dumb deals like that where we're relying on something that is out of our control. The companies that are at the earlier stages of growth aren't impacted as much by the inflationary environment. They're more impacted on, are they really able to book the trajectory of growth that they're laying out for us? And so those transactions tend to be much more active right now, and we see opportunities there. So we're involved in a number of processes and would expect to execute on some over the next year. In terms of where we're looking, if you look at the picture downstream the battery, we have a lot of strength already when you think of inverters, #1 noncaptive. When you look at our motor portfolio, we just executed Santroll. We've also got the battery pack, our business from AKASOL, which gives us a strong leadership position. But there are other places when you look at going from grid to wheel, where we don't have maybe as much scale or a technology advantage, and those are probably some of the places you should think we're looking at.

Right. And then maybe just to conclude, the other side of it, which is the potential divestitures, $3 billion to $4 billion by 2025 on the combustion engine side, maybe $1 billion by the end of this year. Is there any likelihood this gets pushed out, given the current market conditions? And what would you anticipate the overall margin impact from this divestiture should be?

Yes, I think you should expect it's highly likely that the longer the current market environment plays out with inflationary pressures and lots of unknowns around how that gets resolved, but it -- just as it impacted us, looking at a deal a few months ago, it's undoubtedly going to impact buyers looking at some of these deals. So I think it's likely that you're going to see some push in that timing in terms of the near-term execution, but it doesn't change the trajectory we're on. And by the way, we don't have a desperation to sell. I mean we think it's the right thing to do from the long-term positioning of our portfolio, but these are cash flow-generating businesses that we're fully content with keeping unless we have the right valuation. So we're going to continue to execute on that, but in due course, we'll be prudent in executing.

Great. And then potential risk on margin, would those -- can those business be particularly profitable, but still not fit within the portfolio? Or is there a profitability hurdle in there?

We look at three major attributes when we're assessing what products or businesses to dispose of. We look at, do we have product leadership? Do we have a trajectory of medium-term growth or longer? And do we have a strong margin profile or the potential for a strong margin profile? If we don't tick all 3 of those boxes as a candidate for disposition, which means you could have a business that has a strong margin and is simply seeing a declining P&L or you could have a business that's growing rapidly but has a weaker P&L. I think within BorgWarner, we tend not to have a lot of weak businesses. So these are all going to have some levels of strength. And most of them, I would say, are probably strong cash flow generators and generate probably pretty good margins.

Great. I think we're just about over time here. So Harry and Kevin, thank you so much for being with us. Please join me in thanking the BorgWarner team for the deeper dive. Thank you.

Thank you.