BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today, both here in person and for those of you online. We're excited to share with you the next step in our charging forward journey today. Before we begin, I need to remind you that during today's meeting, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed during today's call. Also from a logistics standpoint, the presentation materials for today's call are Events and Presentation section of our IR website. But now on to today's agenda. First, you can hear from Fred Lissalde, our President and CEO, Fred is going to give an overall update on BorgWarner as well as share some of the details of our Charging Forward 2027 strategy. But then you're going to have the opportunity to hear from each of our business unit presidents as they talk about their respective eProducts. You're going to hear Stefan Demmerle talk about our ePropulsion products. You'll hear Joe Fadool talk about our eThermal portfolio. Volker Weng is going to talk about our battery pack offerings. And finally, you'll hear from Isabelle McKenzie, who's going to discuss our plans in charging. After Isabelle, we're going to take a short break, about 10 minutes, and then we're going to come back with Kevin Nowlan, our CFO. Kevin is going to talk about our financial outlook. And then after Kevin, we're going to bring all the speakers back to the stage for a Q&A session. During that time, we're going to take questions from the audience here in the room. But for those of you listening online, throughout today's meeting, you can e-mail [email protected] with any questions you have. I'll compile a list during the meeting, and I'll pose them to the team during today's Q&A session. So with that, I'm excited to turn the meeting over to Fred after the short intro video. [Presentation]

Very good morning to you all, and thank you for being with us this morning, year-end online. Last time we were together, it was about, a bit more than two years ago in March 2021. And back then, we explained to you how we were going to put electrification in the forefront of our strategies, and we call that charging forward. Since then, we've done just that. We've substantially met or exceeded all the target we set to ourselves back then from an organic growth standpoint from a disciplined M&A standpoint and from a disposition standpoint. Today, we're going to tell you how we're going to accelerate and evolve charging forward, and we will give you some targets that we set to ourselves for 2027. Long story short, we will generate more than $10 billion of eProducts revenue in 2027. $10 billion was the size of the overall company in 2019. This was my first full year as a CEO. And as importantly, we're going to do that profitably. When you take a step back and we look at our vision that has been around for about a decade, a clean, energy-efficient world. This is really a vision that resonates both internally and externally. We're committed to that vision. For those who've known the company for a few years, you may remember that we've changed our mission from a mission that was focused on a balanced combustion, hybrid electric mission to an all-in mission electrification. We deliver innovative and sustainable mobility solutions. This mission really represents what we're doing. At BorgWarner, we're focusing on product efficiencies. We're focusing on solving the challenges of battery electric efficiencies from a propulsion standpoint, and we think that we have doubled down on our vision over the past few years, and we're more committed to this mission that you see on the screen than ever before. BorgWarner today, post PHINIA spin and resulting from the progress that we've made in electrification. We are a more focused company, focused on electrified powertrain. We're very balanced across the three continents, which allows us to scale up fast -- we're still a very decentralized company with a great leadership team. You will hear from some of them today, and great leadership on the ground. And this global balanced decentralized company focusing on product leadership and product efficiency allows us to scale up fast. And that's where we are right now. Over the past 2 years, we brought in more than 1,500 electronicians and software engineers in the company. And that's after the acquisition of Delphi who brought us already, scale, breadth and width of electronics and software knowledge. So today, more than 1/3 of the engineers are electronicians and software engineers. We also training our own engineers from the world of combustion to the world of electrification. And we're helping transition. We call that power to evolve, and we'll talk to you more about that later. So we are more focused on electrification, balanced company decentralized and focusing on efficiency. We announced charging forward in March 2021. That was right after the closing of the Delphi transaction, which closed in November 2020. And we've moved pretty rapidly. We saw the opportunity, the tremendous opportunity that electrified powertrain would get us. And we also saw what we could bring to the party with the focus that we have on efficiency. Since then, we've put in play $2.2 billion of [ER&D] and CapEx investments we've done great progress organically. We've launched great product organically, you hear from some of them later. We closed on five transactions. And you can imagine that we looked at many more, we turned down many more. We've announced 29 new project awards on eProducts since the inception of charging forward. And that's just what we announced and that has resulted to already this year, $2.3 billion to $2.6 billion of eProducts revenue. We're also marching towards the spin of PHINIA. So we think that we've really grasped the speed at which we had to move, the speed at which we wanted to move, in order to participate to the upside of electrified powertrain. When you think about our vision of clean energy efficient world and when you think about how to make that vision a reality. We're thinking about it in three key directions. First, the product we're making; two, how we're making them and what's the supply chain associated to manufacturing those products; and three, how do we transition our workforce. From a product perspective, already last year, 88% of our products were emission-reducing products or totally clean products for ePropulsion. 53% of our R&D last year already, we're fully focused on eProducts. When we think about how we make those products, we're fully committed to carbon neutrality Scope 1 and Scope 2 in all our locations by 2035. And we've made great progress. And we want to do it the right way, bottom-up from the plant standpoint. We're not buying credits. We're focusing on efficiency of our productions or recouping wasted energy and buying clean energy. And we've set a goal of 25% reduction on Scope 3 between 2021 actual and 2031. We're focusing on transitioning our workforce, you will hear that were transitioned quite a bit during our presentation. It is very important to give our workforce a chance to transition from the world of combustion to the world of electrification. So far, we've focused over the past 12 months -- or 14 months on product engineering, and we've graduated 338 engineers, and we've had the placement rate in eProduct lines of 92%, and we're going to accelerate that and scale that, and also open this to other functions in product engineering. Let's go back a little bit to March 2021 and look at how fast that market has moved. The green line is what we announced when we announced challenging forward from a battery electric vehicle production rate in that given year. Back 2-plus years ago, we said 15% of the world production is going to be BEV in 2025 and 30% will be BEV in 2030. And if you remember, we were one of the most bullish back then. That's why we move so fast. We were happy we moved fast, because the view that we have right now is that in 2025, we are at 22% -- the market is at 22%. And in 2027, the market is at 32%. I actually let you to remember those two numbers, 22% in '25 and 32% in '27. We think that half of the market will be battery electric vehicle at the end of the decade. And so we think that we moved at the right place at the right time, not too early, certainly not too late. And when you look at this market and look at the available market that exists for us with the product that we have looks like this. In 2030, $157 billion of true available market, which takes into account two things: one, we've removed what we think is going to be in-sourced by customers, some customers in some regions; and two, it is based upon the product portfolio that we have. If you double-click on the $127 billion of eProducts, you see that we are active and very successful in a market that grows by itself already at a 20% CAGR between now and the end of the decade. And what you also see is that about half of that market is made of power electronics, which is a key element from an efficiency standpoint in a battery electric vehicle. And a key element to solve some of the challenges that our customers and the world has from a battery electric vehicle standpoint. So let's have a quick look at the product portfolio that we've created, through challenging forward that we've announced a couple of years ago. Pretty much we have products wherever the electrons go from Grade 2 wheel that allows us to find the efficiency gains in order to move the vehicles with as little electrons as possible so that we can extend the range for the battery electric vehicle users, reduce the size of the battery and be less dependent to supply chain issues and be more competitive. Our goal is to have both product leadership and scale in all the products that you see on the screen. Before going into a bit more detail about how we're going to evolve and accelerate charging forward, we wanted to take a little bit of time to show you our scorecard. We had three pillars. The first one was grow organically with the products that we had back then and the target was $2.5 billion, and we are today at $3 billion of organic revenue growth in 2025. We also had a target of $2 billion of disciplined M&A, $2 billion of 2025 revenue linked to disciplined M&A, we are at $1.3 billion. So $3 billion plus $1.3 billion is $4.3 billion of pure BEV revenue 18 months from now. On top of that, you can add another $1.3 billion of eProducts that go in hybrids, essentially high-voltage plug-in hybrids. So $3 billion plus $1.3 billion, plus another $1.3 billion on hybrids, $5.6 billion of eProducts 18 months from now, confirmed, booked business for BorgWarner. When we approach the spin-off of PHINIA, we will have completed our third pillar which was between $3 billion and $4 billion of dispositions, combustion assets. And we think that we've met or exceeded the targets that we set to ourselves a bit more than 2 years ago, pretty much 2 years ahead of the plan. So what's next? What's next is challenging forward 2027. We think that what was very powerful when we announced challenging forward was that it was simple. It was very measurable, and I know some of you like build up, very measurable regularly. And we were not thinking 10 years from now or 15 years from now, it was short, it was a short time span of 4 years, '21, '25. Where we're going to replicate that, '23, '27, simple, measurable, 4 years. We like the #3. We keep three pillars. We're changing the content, but we still have three pillars. The first one is eProduct growth. How do we define an eProduct. An eProduct is a product that go into a battery electric vehicle and also a product that goes into a hybrid that could go into a battery electric vehicle. So let me give you an example. An inverter or a motor that goes into a plug-in hybrid could go into a BEV. That's an eProduct. An eTurbo that goes into a hybrid cannot go into a BEV. It's not an eProduct. That's how we define simply eProducts. Second pillar, we're going to focus very, very strongly on this eProduct profitable growth and eProduct profitability. And third pillar with the products that remain with BorgWarner post the PHINIA spin. We will maximize the value generated by those foundational products. Let's go a little bit deeper in each of those three pillars. So pillar one is the eProduct growth. Do you now understand what an eProduct is. And we think that we will generate more than $10 billion of eProduct revenue by 2027. We will do that profitably. We just convert on the additional sales. And we have a plan to get to double digit by the end of the decade with a very clear milestone of 7% adjusted operating margin by 2027. And last but not least, we want to maintain our top quartile double-digit margin for our foundational products. Now I'm going to go a little bit more in detail in those three KPIs, the $10 billion, the 7% and the double-digit margins on the foundational products. So let's go into eProduct growth. I wanted you to remember 22% market of BEV in 2025, we're at 26%. And you remember, our goal was 25%. Pure BEV. Goal isn't met. On top of that, in 2025, if you add the eProducts on top of our BEV revenue, you are -- you have BorgWarner with more than 1/3 of its revenue based on eProducts 18 months from now. And this is linked to the fact that our products are in very high demand because they're solving the efficiency challenges that our customers have. They're also solving competitiveness efficiency because we have scale in three continents, and we are scaling up rapidly. Scaling up to pretty much half of the company's revenue will be eProducts in 2027. I also wanted you to remember the 32% market of BEV in 2027, we are 1,000 basis point overweight in BEV in 2027. On top of that, you had 7% of eProducts into hybrid. And if you take 2027 and you have BorgWarner grow at market, which you saw in a component slide before, 2/3 of our revenue by the end of the decade will be with eProducts. It's very important to also remember that this is our financial profile and the strength of our financial profile that allows us to carry on growing at that speed and launching those products, developing and launching those products in the three continents at the same time. So let's have a look at four of the products that comprise our eProducts. And the business unit President in charge are going to go a little bit more in detail. I just want you to have a look at the numbers at the volumes in 2027 and also the revenues, pretty staggering growth. Everything is booked for 2025. The vast, vast mass majority of the business is booked in 2027. If you do the math, you will have the aggregate revenue of those four products alone equaling $6.6 billion of revenue in 2027. We are booking business and many more than what was -- what we could announce over the past 2 years, we've announced 29 wins. We're very proud about the mix of products, about the breadth of products. Very proud about the regional mix, too. If you take the top 10 vehicle carmakers in the world in 2023. And if you remove the 3 Japanese OEMs, we actively work in a meaningful way with 6 out of the 7 top car manufacturers in the world. If you take the top 3 commercial vehicle makers in the world this year, we're actively working and growing with these top 3. That's how big we are. That's how relevant we are in the marketplace. Let's shift gear to pillar two, which is profitability. As you've heard Kevin and I talked over the past few quarters, we're marching towards breaking even in eProducts by the end of this year or early next year. We have a clear path to double-digit profitability on those products, and we've set a goal of 7% operating margin in 2027 and positive free cash flow. How are we going to do that? We're going to do that simply by applying what we're good at. BorgWarner is very good at focusing on product leadership. What do we call product leadership. We take great technologies, we transform them in products that are differentiated and those differentiations are focused on efficiency that we can commercialize globally and scale. We're really solving the challenges of the new mobility of efficiency of range of size of packs of competitiveness. When we get scale, you've seen some of those numbers, when you get scale, do you thinking differently on how you develop those products, you can think about modular development. You can think about making your own ASICs. You can think about, I think different ways of thinking of product development and Stefan Demmerle is going to talk about that a little bit later. When you have scale, you have different relationship with your supplier partners and you can develop products that are helping you to drive the efficiency that the world is needing. And we're going to leverage the 60 locations around the world that we have. We've done compound for 100-plus years. Why reinvent the wheel? We know how to develop program on -- for car manufacturers. And we know how to launch high-volume programs across three continents and sometimes at the same time, we're just going to leverage the great talent that we have on the ground. Let's shift to pillar three. With the products that remain at BorgWarner post the PHINIA spin, they're pretty much all products that are leading from a market share standpoint. Everything that stays with Borg is pretty much at a market share of being #1 or #2 in the world. And when you put yourself in the shoes of the carmakers do you need 4 turbo suppliers in your panel? Maybe not. Do you need 5 BCT suppliers in your panel? Maybe not. Who are you going to work with? You're going to work with people where you can bridge the relationship. We strongly believe that we can maintain those market shares in those foundational products. We strongly believe that we can maintain the top quartile double-digit margin in those products. And we strongly believe that we can carry on converting margins at a 100% conversion margins to cash flow. But this is not only why those foundational products are foundational. They're foundational because they're supporting our customers to also make those transitions from combustion to hybrid to battery electric vehicle. They're foundational to us because they are key enablers of our product leadership into the eSide. You've got three examples on the right side of this page here. Our scale, engineering knowledge, product knowledge, launch knowledge from a low-voltage perspective from an engine controlling, transmission controlling and other different controllers is a key enabler of our growing fast on power electronics. Our understanding of vehicle dynamic four-wheel drive systems, gear sets, mechanical, rotating electrics and motor control under one roof is a key enabler for our e-propulsion business unit. Our thermal management in the current powertrain area is a key enabler of thermal management in battery electric vehicle back to efficiency. Thermal management, battery electric vehicle being in the battery pack or elsewhere is critically important to drive that percentage of efficiency that the world needs. And Joe Fadool is going to talk about our thermal management later this morning. And last but not least, those products generate the cash that we need to carry on executing charging forward 2027. There is another reason why those products are foundational to us because we're leveraging the footprint. By the end of 2026, we will have leveraged, utilized 25% of our manufacturing footprint, and it's just the beginning. Why would we reinvent the wheel? Nobody at [all] when it comes to Kevin and I with a greenfield project that is in the middle of nowhere where we have no one. We're leveraging our people, we're leveraging the capital. We're transitioning human capital and capital to the new electricized world. Take Seneca, for example, here in this country, where we've decided to put battery packs, Volker Weng is going to talk about that. Do they do battery packs right now? No, they don't. But what are they good at? They're doing forward drive systems. They're good at manufacturing. They're good at launching. They're good at quality. They're good at understanding a complex logistic flow of components. And they have decades of experience, that's why we're putting battery packs in Seneca. And by the way, they went through a tornado, 3 years ago, which talks about the resilience of that team. So we're not reinventing the wheel. We're leveraging and transitioning our capital. So here is what I would like you to remember from my presentation. First, battery electric vehicle are growing very fast. And we have done the right move. We've moved at the right speed, and we are 2 years ahead of completing charging forward that we've announced in 2021. We're extending and accelerating charging forward with a view of 2027, more than $10 billion of new eProduct revenue. profitable with a 7% operating margin in that year. We're transitioning our human capital and capital. We are fully committed to charging forward 2027. We're fully committed to being an enabler of solving the efficiency problem, the efficiency challenges in the world of electrified powertrain. And with that, we think that we will create shareholder value long into the future. Thank you very much. With this, it's my pleasure to introduce some of my team members, and I want to use this opportunity to publicly thank them and you all for the support and the hard work that you've put into getting us where we are. You're going to hear from Stefan Demmerle, who is our Business Unit President, running ePropulsion. You're going to hear from Joe Fadool, who runs our biggest business unit and is making great progress in thermal management. You're going to hear from Volker Weng and Isabelle McKenzie you're going to talk respectively about battery packs and challenging devices. After that, Kevin is going to come on stage and wrap it all up for you, and I'll be with you for Q&A, and we'll have further discussion around lunch time. So with that, Stefan, if you want to join me on stage.

Good morning, everyone. My name is Stefan Demmerle, and I'm the Business Unit President for ePropulsion. I've been with BorgWarner more than a decade and more importantly, spearheading our electrification efforts prior to and following the acquisition of Remy in 2015. You may remember, I spoke with you 2 years ago at our Investor Day about some of our eProducts. Since then, as Fred mentioned earlier, we have made significant progress and recently made ePropulsion an externally reported segment because of its importance to the overall BorgWarner business. I'm excited today to speak with you about the progress and the path forward. You will see here that we have four key product categories, beginning with inverters, then moving to eMotors, our combination products, including iDM and other power electronics. We have very strong technology positions in all of them. I'm going to walk you through each of these products and will share how we have already established scale in many of them and have significant runway ahead of us. Importantly, many of these products play off each other. For example, the inverter, together with the eMotor, combined with the gearbox make up an iDM. Given our experience in drive units, we understand how to set up these products for success individually, but also as complete systems. We see significant TAM across our ePropulsion product portfolio. It's almost $100 billion, which is nearly 2/3 of the total EV TAM for BorgWarner by 2030. These are products where we already have good position, and we are still seeing a large opportunity ahead. So we'll now go into some of that detail. Turning to inverters, which is a very positive story for BorgWarner. It's a product where we have product leadership, which gives us a competitive advantage and supports our strong mix and average selling price. Based on our booked business, we believe we can grow to the #1 non-captive inverter supplier for both battery electric vehicles and overall electrified vehicles by the middle of the decade. And we are growing -- as we are growing significantly faster than the market. Our industry continues to evolve towards 800-volt solutions, which are more complicated and harder to manage than the current standards of 400 volts. We are already a leader in 800-volt and silicon carbide which we believe is a competitive advantage and supports our differentiation approach. I want to point out that, that follows the constant innovation cycle that we see on our other automotive products like turbos. These innovation cycles built off each other, which means it requires years of investment time, resources and customer intimacy. It's something companies cannot develop and start selling overnight. And we've been preparing for this ongoing development bring over 40 years of experience in automotive electronics and brought capabilities to our inverter business across the world. So we are leaders in what it's already in the market today, but also in other areas that will continue to trend in the future. And we capitalize on this expertise that we build up globally to drive strong growth, and we expect that our share of TAM to be in the high teens with the largest single TAM in our portfolio. As I mentioned earlier, inverters are not a single entity. They have many components of building blocks, how we call them, that work -- that we work to understand all of them. We started off this business with the Sevcon acquisition, and we quickly learned that the importance of leadership in all of the inverters core areas, including the controls, the capacitor, the power module and so we've done that. Over time, this has become another competitive differentiator for us, having strong in-house capabilities in these areas, is why we believe our products are more efficient. Our team has leveraged significant experience in automotive industry. Having spent decades learning how different electronic control units or interact with each other in a car to develop inverter controls that allow for a highly efficient operation in complex hardware and software architecture of an electrified vehicle. On the competitor, product and system innovation are driving advanced developments for our inverters. And we continue to work on improving our capabilities so we can better tailor its performance and heat resistance to the needs of the market. One of the most critical components is our power module, where we see our value in the versatility and the performance of our product. In particular, our Viper power switch, which is very well known in the industry, has the ability to shift across suppliers and technologies without requiring an overhaul of the complete module. This flexibility is the main building block of our agility in this area, which we believe enables us to get faster to market and better manage ups and downs in supply and cost. Using a silicon carbide power module as an example, I want to share how innovation will continue to drive leadership and efficiency in our inverters. Today, our inverters are already highly efficient, more than any of our competitors, in terms of how many amps we can put through a square millimeter of silicon carbide. And we only expect this efficiency to grow. Silicon carbide is used in -- is a semiconductor used in high-end inverters. And while it converts power efficiently, it's also an expensive material. That's why we are focused on optimizing the use of this material throughout the life cycle of our products. And we have concrete plans to do so. This includes introduction of performance-enhancing technologies on chip and power module level. The usage of 800-volt architectures, double-sided cooling and other thermal management improvements. By investing in our inverter systems as a whole, our usage of silicon carbide, therefore, expense is going to come down without any negative impact on efficiency or power rating of the product. We believe that this will enable us to maintain our industry leadership, which we are already seeing with the current Viper power module. At a comparable power level, our module today is significantly smaller than the competitions, giving us confidence that we will continue to drive our competitive advantage in the market in terms of efficiency, and power density. In effect, with what we believe is the top solution in the industry, BorgWarner can scale our inverters across multiple OEM platforms. And the additional applications for these products allow us for enhanced reuse. So we can win more business and repeat these efficiencies across even larger volumes. Moving to eMotors now, another growing market for us. The story here has changed meaningfully from what you heard 2 years ago, which was centered on the sole pursuit of systems from an e-motor perspective. Our position has significantly changed and improved since then, in large part due to our acquisition of Santroll which brought us an in-house tooling capability and scale. While Santroll was a small company, the expertise in manufacturing technology strengthened our in-house manufacturing, which has another -- has been another competitive advantage for us, driving scale over the last 2 years. As a result, we are much stronger and now believe we are set to be in a leadership position by mid-decade. We also expect a meaningful improvement in market share. When we look at it versus the addressable market, we are expecting low double-digits. We will continue to focus on creating efficiencies, driving reduced [rare] earth content and innovating our technology to keep evolving business like we've seen to date. I've mentioned throughout this presentation that we have been investing in various parts of our portfolio. and they're getting to the point now where we can really begin leveraging that investment. By creating base designs as building blocks for our products, we have developed the ability to drive adaptability across our portfolio. While this has helped us to drive scale, that scale is now meaningful enough to reuse designs across OEM customer programs. As we launch new products, more and more of our engineers are going to go into this reuse phase and the next generation of products will come out using the same platforms. Effectively, the momentum of our eR&D is accelerating. And with this, going forward, our eR&D can be concentrated on customer platforms, improving product costs, and maximizing talent. All of this taken together, we are confident in our ability to reach profitability in ePropulsion. We anticipate breaking even in the fourth quarter of this year and are excited about the opportunity to then turn our focus to growing our margins through increased scale, which we can achieve with our building block designs. Before I wrap up, I want to speak to the security of supply. There are two main things you need to know here. First is that the flexible design of our products helps us to manage the supply chain and the potential disruptions that come with it. And second, our decentralized approach within BorgWarner, Fred mentioned earlier, which helps us to meet our customers' needs that are different by region with speed and agility. We are already growing significantly in EV. And as it accelerates, we are thinking about each layer of our supply chain. So let me share three examples that will show what I mean. First, on our power switch, where we see strong value in our ePropulsion. It's all about semiconductor supply. As I mentioned, the growing use of silicon and silicon carbide is so vast in terms of expectations that the capacity is already constrained and will be for years to come. As a response, we are not only adding strategic partnerships with various members of our supply base, but we are more critically ensuring there is flexibility within our power model that enables the power switch to work across platforms for silicon and silicon carbide. Next, in the middle of the slide, is the control board. In this instance, we have designed inflexibility to use multiple sources of shipsets depending on our customers' requirements. So it works seamlessly with their hardware and software architectures. Lastly, the risk is more heavily weighted by the rare earth materials that are used for eMotors, often from a singular region. With recent geopolitical tensions and the potential to make certain regions inaccessible, we have been working to ensure our supply is secure by developing technical solutions that don't require rare earth-based materials. As you can see, we have made ourselves agile to adapt to changing markets and we'll continue to improve this over time as markets and customer demands shift. Big picture. We see the diversity and flexibility in our product design and a strong regional presence as a means for meeting customer needs at all points of interaction. So I would like to wrap up with the long-term revenue outlook for ePropulsion. As you can see, our eProduct sales are expected to exceed $5 billion by 2027. This would represent more than 50% of BorgWarner's eProducts sales in that year. So clearly, ePropulsion is core to BorgWarner's success in electrification. I've illustrated the positions that we already established in many of our ePropulsion products. We are building on successes we have achieved to date, including delivering on our original charging forward commitments, as Fred mentioned earlier, as well as the various organic and inorganic investments that have positioned our business unit for long-term growth and value creation. Thank you for your time, everyone. I will now turn it over to my dear colleague, Joe Fadool, who is going to talk to you about our exciting eThermal products.

Well, thank you, Stefan. It was certainly exciting. My name is Joe Fadool, and I'm responsible for our emissions Thermal and Turbo System business unit, it's the largest foundational business within the company. Today, I want to bring to life a lot of what Fred and Stefan have been speaking about this morning I'm going to talk to you about some of the exciting eProducts that we've actually developed organically. What I'll share with you is our foundational products and our strong customer relationships have really played a key role in developing and launching some new eProducts. As Fred explained, Leveraging our foundational products will be critical in servicing customer needs in the electrified world. And our eThermal products are a great example of this. So all of the products on this page, in fact, leverage three things: one, existing competencies that we have; the second is great customer relationships, which we've been fortunate to develop over many years; and then three, strong cash flow from our foundational products is helping us fund these new investments. Notably, 3 out of 4 of these products did not even exist before charging forward was announced. And redeploying existing assets and our people is really critical to bring these solutions to market and to move quickly. PE coolers is a great example on the bottom right of moving to market quickly. So thermal management is much more important in an EV world than it is a combustion vehicle. And we see significant upside opportunity for innovation and market leadership in the e-thermal space. As BorgWarner has done in other areas, our approach to winning in this area will focus on product leadership, and we'll use highly engineered products that will deliver the margins that we expect. We believe we have a right to play and win, and we're already delivering on that promise. Now let's jump into each of these four products. Starting with high-voltage heaters, for those of you not so familiar with this product, there's two things that they deliver. One is improved cabin comfort and the other is battery performance. BorgWarner first got into low voltage heaters back in 2008. I'm going to take you back a minute when we purchased a company called BERU. Over time, we pivoted from these low-voltage systems to a high-voltage product using positive temperature coefficient technology or sometimes referred to as PTC. At the same time, we started working on high-voltage cooling heaters because this was very interesting to our EV customers. And as we developed those high-voltage heaters, what became very important is, first, we had this competence in thermal management. And we combine that with our electronics and growing electronics competence from ignition coils and cold start products. Obviously, electronics is very important in the new world. So by offering consistent temperature distribution for these battery packs, BorgWarner's cooling heaters can be used for improving battery performance. In addition, it allows for comfortable cabin temperatures to be generated in a very short period of time. And this brings about a great experience for the passenger and the driver. In some cases, these can also be used and improve safety as they lead the quick defrosting of a windshield during cold temperatures. Key components include stainless steel thick film elements, housed in solid die cast aluminum. Our first award was in 2016, and we've received many awards since. Moreover, we believe there's lots of white space here to grow with an estimated true addressable market of over $4 billion by 2030. Let's take a little bit closer look at our leadership and scale across this product line. Specifically, as we look out to 2027, we expect to gain share and become a market leader similar to the market share that we enjoy on our foundational products. This business that we've been awarded to date gives us great confidence, and I'll give you a great example of this. So in 2022, we announced that we are providing this technology for BMW's IX and I4 electric architecture, and it controls the battery thermal management and cabin heating for their vehicles. In addition, we've announced two awards one for a global OEM and a second for a Chinese automaker to provide high-voltage coolant technology for their EV models. By 2026, in fact, our customer diversity will be second to none, and we will be serving all the major brands in the market. And our value proposition is clear. Customers are choosing our high-voltage systems because they offer a more efficient product in a smaller package. And we're able to get them to market quickly. This I can't emphasize enough, our ability to pivot and get to market sometimes under 2 years on these products is what customers are looking for. We are also one of the only leading global suppliers in this space. And based on the response to date, it's very clear how strongly our customers want us to be successful on these heater systems. Let's turn to a new product, high-voltage eFans for commercial vehicle on-highway applications. So probably you're aware, BorgWarner has been a leader in clutch fans for many years. And in fact, more broadly, about 20% of our business unit sales are in the commercial vehicle on-highway and off-highway markets. So we, back in '21, started to receive some RFQs, I'm going to tell you a short story. And at the time, we weren't working on these products, but we started to take a closer view on could we be successful in this space? We decided to partner with a company called Drivetek, and we've since purchased them in December of 2022, and combined with their power electronics expertise and our thermal management and airflow knowledge, we developed our first system for a European OEM. Since then, we've developed a complete family of high-voltage eFans. And they range from 5 kilowatts all the way up to 60 kilowatts. And just last month, we announced another award for launch in Europe and in North America. So additionally, we continue to entertain multiple requests from customers, which we believe underscores our technology in this space. Customers are attracted to our knowledge in airflow and thermal management. And this comes from our foundational products. They're also relying on our strong customer intimacy. And as Fred mentioned, we know how to develop and launch products with these customers, and they trust us for that. So as a result, we feel we're well positioned to capture the true addressable market opportunity across the geographies that we serve. Now keep in mind, this is still an emerging market, and we expect CV, although a little bit slower in adopting EV will follow a similar path to pass car. This is just a great example of our ability and speed to market. Let's now turn to battery coolers. Similar to battery coolers, we're really excited about this product, and I'm going to tell you a short story again, going back to 2021, we received a customer request for a combustion-based exhaust gas management system and it was to replace one that our competitor had been supplying, but our competitor had a lot of quality issues and warranty issues. So because of our existing customer intimacy, with this particular customer and our technical leadership and ability to move quickly, they chose BorgWarner to develop five brand-new EGR systems for BorgWarner and bring those to market to replace our competitor. And we launched the first one and brought it to market in 12 months from paper to production. So very quick. And building on this success, this particular customer asked us to participate and an RFP for battery cooling, along with 8 other thermal management suppliers. So we ended up winning this business 12 months later. And earlier this year, we announced that we will supply them innovative battery cooling plates destined for their next-generation EVs. This project is expected to launch in 2025, and we'll have an application in Europe as well as North America. Now importantly, we are focused on the premium segment. The segment with intercell coolers that require significant product leadership and know-how versus our large plate -- cooling plates that you often see in the market. So based again on our strong customer relationships to solve major problems that they were having in their foundational business this customer pulled us into this business. And this is a product that we hadn't even been playing in yet. Finally, I want to share with you a little bit about these power electronic coolers that Stefan referenced. These coolers are designed to transfer heat out of the power module inside the inverter. And efficient thermal management can allow the reduction of semiconductor dies needed hence, lowering the overall cost of the inverter. Obviously, the smaller the semiconductor [die], the less expensive and a smaller package you can fit in the vehicle. Now our PE coolers are anywhere from 6 to 12 inches in length and are largely made of copper, but sometimes aluminum. This is a great redeployment of some of our exhaust gas management, people and competence and furnaces and equipment. The development of these PE coolers is also just a natural extension of our thermal management knowledge in general. Our sister business unit, ePropulsion, led by Stefan actually contacted one of our plants. And they suggested that we consider developing this product. Again, we had not thought about participating in the space, but it's just a great extension of what we were doing. So we developed our first application with them. and we won our first business, which we expect to go into production in 2024. We're also developing other products for use with outside customers. So to wrap up, I want to emphasize how these four eThermal products demonstrate great capabilities that we've been able to develop organically and underscore our clear differentiation in the marketplace. So these products also highlight our ability to adapt and evolve in response to our customers' needs. By leveraging our foundational products, our technical capabilities and our deep relationships, we are able to deliver them what they want and get to market more quickly than our peers. We see further opportunities for growth, not only in these eProducts, but further expansion of our portfolio, which we haven't shared with you yet today. Indeed, I'm super excited about where we're headed and the great work that our teams are already doing. And it looks like we're going to be able to capture a significant portion of these markets by 2027. So with that, I'll turn it over to Volker to discuss the opportunities that we're seeing in battery systems. Thank you.

So thank you, Joe, and hello, everyone. My name is Volker Weng. I'm the President and General Manager of BorgWarner's Drivetrain & Battery Systems business. So I've been with BorgWarner for over 20 years and have been in several roles including President for the transmission business as a President for the Emissions and Thermal business. I've spent some years in China overseeing our [indiscernible] business in Asia as well as in Germany, overseeing our emissions and thermal business in Europe. In addition to my current role, I also oversee our sustainability function as an executive [indiscernible]. So I'm very familiar with our business and history. But today, I want to tell you about our opportunities ahead of us and how we are positioned to grow and win in batteries. So let's get started and talk about the market and the long-term growth prospects. Actually, we expect strong market opportunities ahead of us. Today, we are focused on capturing significant opportunities in Europe and North America, where we see electric bus and truck penetration increasing to over 20% by 2030. In fact, from 2025 to 2030, we expect the market to nearly double in these two regions. In order to gain share and capture future opportunities, we are prioritizing customized solution. We are focused on range, safety and sustainability. This is especially true for commercial vehicles and buses, which require robust safety features. While we are continuing to focus on these fast-growing regions, we also recognize that there are additional opportunities across the world. And in particular, China is, of course, very interesting for us too. So how did we get this business to where we are today. Our success is built on our strong position in commercial e-vehicle. We are pioneering this battery pack technology as a system integrator. We have ultra-high-energy density profile, great modularity and prioritize safety in all our designs. We offer our customers differentiated products that meet customer needs, whether that be performance, scalability or safety. And more and more important for our customers is that we also meet regulatory and circular requirements for their sustainable ecosystem. With this product offering and the favorable industry and regulatory tailwinds, we expect to grow this business to approximately $1 billion revenue by 2025 and approximately $1.3 billion by '27. So while this is what we expect through 2027, the trends we are seeing among our customers and in the industry more broadly are favorable, and we are optimistic that there is potential upside and beyond the expected growth trajectory outlined here. Turning to our manufacturing footprint and our best-in-class capabilities. Today, we have battery systems manufacturing facilities in the U.S. and in Germany and another one being opened in Brazil soon. By having these locations in key geographies, we have been able to ensure that we have a strong manufacturing presence and know-how close to our customers. While we are expanding our footprint in North America and Europe, we expect to have over 6 gigawatt hours of annual production capacity by mid-decade. I want to highlight our Seneca plant Fred already mentioned earlier in South Carolina. Following our BorgWarner beliefs, we take responsibility for our talents and stay committed to our communities. And also we strive to reuse our assets whenever possible. So in line with this, back in April, we have announced the expansion of our Seneca plant through a multimillion dollar investment to produce battery packs. With this investment, we are creating a larger footprint in North America that will produce 3 gigawatt hours of battery module capacity in the U.S. In Seneca, we already have a mature organization made up of world-class talent, the know-how and a proven track record of execution in terms of quality and safety. Our people are skilled at producing complex and heavy products like transfer cases and working with a high level of automation. So we expect these skills to transfer seamlessly to battery pack production. In addition to leveraging our foundational assets and existing workforce, this expansion also expected to create approximately 120 new jobs over the course of 3 years. In addition, we also expect to qualify for the IAA credits. Now I want to discuss how our product portfolio is evolving to support sustainable growth. We actually have three battery product work streams, each positioned to help accelerate a different phase of growth. On the left of this slide is our current generation 3 battery pack. With the 21700 cylinderical cells standard, which currently is a standard in the industry. And this is a product which we have in production, what we grow. We are focused on adding capacity and ensuring efficiency and driving profitability. From there, we turn to the next generation, the 46-millimeter standard cylinderic NMC cell in the middle, which has an even higher energy density, providing more power with less space. So as we transition towards these batteries, we will be able to better meet customer demands for a long battery life with safe, reliable and durable operations. And lastly, on the right side, we are working on battery packs using the LFP cell technology. Today based on lithium and the future may be on sodium. The LFP battery packs will allow us to expand into new markets like China, where these more cost efficient products and cell technologies are used frequently. Let me return to the topic of circularity. Circularity is how we manage the whole life cycle from the initial minerals to the first product use and to the recycling at the end. Government regulations continue to tighten and our customers are expecting from us to provide circular solutions. Batteries are a perfect pilot case for this. For example, a battery may have a first life inside of a truck or eBus. Where it can live for 6 to 7 years. At a certain point, the state of health of these batteries is no longer fit to power the truck or bus. Rather than disposing the battery, we can repurpose it as part of a charging station. We potentially can continue to operate another 10 years. This second life opportunity is a new business opportunity for us. And to capture this full circularity potential, we need to anticipate repair, reuse, recycle from the beginning in our material selection and in our design specification. So I see really a new element of product leadership and a chance to differentiate thinking about circularity from the beginning. And this gives us a real competitive advantage as our customers are really under pressure to deliver on their own supply chain Scope 3 emission targets. So in my presentation, I have shared how customer focus is not just a mindset, but a business imperative ensuring that we have leading products that help customers to reach their business and sustainability goals is what drives business wins. And our success is evidenced by the strong relationships we have with our blue chip customers such as Volvo, Daimler or GILLIG, among others and the numerous awards we have announced since our last Investor Day. So in closing, we believe we are well positioned to capture the opportunities ahead. We have a significant long-term growth prospects. We are poised to benefit from favorable industry and regulatory trends. We possess a distinct competitive advantage through our product leadership and our commitment to circularity is not only advancing our own Scope 3 sustainable strategy, but makes us a top choice for our customers. Thank you very much. And now I'd like to turn it over to Isabelle McKenzie, who will discuss our charging products.

Thank you, Volker. Good morning, everyone. My name is Isabelle McKenzie. I'm the President for the Morse System Business Unit at BorgWarner. I joined BorgWarner 9 years ago, most recently have been the Vice President, General Manager for ePropulsion in the Americas, working closely with Stefan in executing our successful growth into Power Electronics and iDM integrated drive module. Stepping in March as new President of Morse Systems, I have been really impressed with the strength and expertise of my team, and I'm excited to move the Morse System business forward. I would like to start by sharing a story that one of my colleague told me earlier this year, because it resonated with me, it's connected to what I do at work every day. It's about [alternator] electrification. She has 11-year old son, and she has been driving a car, an electric car since 2016. So basically, for the past 7 years, she has been charging her car at home. They were driving on the highway and pass a gas station. Her son asked her, what type of cars go to this station. That question really struck her because she realized her son had no concept of a gas station or car running with traditional gasoline. So this shows how impactful electrification journey is today with our new generation. More than anything for me underscore the importance as a parent and as a business leader at BorgWarner to continue delivering on the BorgWarner vision, which is creating a clean energy-efficient world and also that we are on track with our journey toward electrification. Therefore, today, I'm delighted to share with you the opportunity we see in front of us with charging. At BorgWarner, we are focusing on the DC charging market because we believe this is where the best value can be created and also because we think they are best portioned to enter this space. DC stands for direct current. This is a technology required for rapid charging. We have represented on this slide, the total addressable market with an expectation to reach $17 billion by 2030 with a 20% CAGR, compound average growth rate. The main takeaway of this side is that there is a strong growth across all the markets. But what is really exciting for BorgWarner is that the highest cost is actually with trucks and buses. We are really excited about that because this is where our focus is. If you look at it by region, China is dominating today. But as you know well, North America and Europe are building their infrastructure. So moving forward, you will see a well-balanced demand for charging, which is something that is also exciting for us because at BorgWarner, we have a global footprint, so we can take leverage of that. In summary, the market is evolving quickly, and we recognize the importance to contribute in a positive way in developing the infrastructure for charging because this will enable the true penetration of electrical vehicles in the market. On the next slide, I'm going to explain you on how value can be created in this market. So we did a deeper analysis of the requirement. And the main learning is that we understood the requirement vary by segment. We immediately saw an opportunity there. Let me explain you why. So starting with the light vehicle destination. So these are the charges that you are the most familiar with. This is the charger that you find on your home or add the car dealers at work. That market is quite crowded because the buyer to entry to that segment is not very high. It does require a low-power SC or DC hardware. Also, the customer base is quite fragmented, they've very, very high focus on cost. So for us, at BorgWarner, as we are focusing on product leadership, this is not a segment that we will be focusing on. Moving on now to the light vehicle and route. So these are the chargers that you find, for example, on the highway, the customer base are charging foreign operators, oil and gas utility players. There are similarities between the requirement in that segment and destination, like for example, the consumer-facing software. However, the average time for charging is significantly shorter. That drives the need for higher software and hardware solution. That starts to be exciting because this is an opportunity for creating product leadership. For us, at BorgWarner, our main focus is on commercial vehicle. We have represented here three segments: school bus, transit bus and trucks. The customers here are CD OEMs, also fleet operators. Across these three segments, it requires more complex and innovative solutions. It does require a high-power DC charger. We are not only talking about hardware here. We are also talking about software functionalities, just to name a few of them, charging monitoring and energy management. So this software functionality is allowed a remote access to the charger and you're able to check if the charger is functioning well. Energy Management. This is a functionality for the charger to be able to charge in both direction. So charging the battery inside the car, but also giving electricity back to the grid, and we know how much important this is. These customers in this segment in TV, they are not only looking for a supplier. They are looking for a partner. They are not just focusing on the price of the charger itself. They are looking for the total cost of ownership. They are looking for a supplier that can develop a safe, reliable product for the field. So we use this understanding in the market to build up our go-forward strategy, which I'm going to share now. So again, at BorgWarner, we develop our strategy and segments where we can create value. Our focus will be on commercial vehicle. And then, over time, potentially expand to light vehicle and roots. We see the greatest opportunity with CE because our customers are at the beginning of their channel with electrification. So we want to be right there with them going through that journey. It does require, as I mentioned, a high need for customer intimacy. While us, at BorgWarner, we have well-established relationship with our CV customers. So we will leverage that. As an engineer, I'm always looking for product leadership. As I mentioned, in this segment, it does require innovative solutions, very complex. At BorgWarner, we embrace complexity because we see it as an opportunity to create product leadership. Therefore, the barrier to entry to this segment is higher, which means that this is also well aligned with our BorgWarner margin expectation. So I give you another view of our charging strategy. Now I'm going to put the strategy in action. What BorgWarner does [indiscernible] is to combine core financial capabilities with new technology and here we're charging. So since 2017, we have been building our charging expertise. In 2017, we acquired Sevcon and we had our first stationary charging assets. As you know well, in 2020, we acquired Delphi. And with Delphi, we get significant electronics, scale and capabilities. As I mentioned, the market is evolving in the [fast]. So the past 12 months, we have made two significant acquisitions, Rhombus Energy Solution and SEC. Rhombus gave us a high-power charger up to 120-kilowatt with the V2G functionality. This is the functionality where you can charge the battery in the car and also give electricity back to the grid. With that, also a presence in North America. With the SEC, we broaden our range power. We are also now a Turkey provider and presence in China. So with this acquisition, combined with organic development, we have been able to advance our product portfolio. And today, we are very pleased where we are with our product portfolio because we have been able to meet some key requirements across our targeted segment. But we are not stopping there. We want to continue investing to further advance our product portfolio. With the acquisition, we also have been able to expand our charging footprint globally. So on this slide, you can see that actually, we are now present with development centers and production sites in all three regions. We recognize the opportunity that we can further invest, which we plan to do in Europe, organically and inorganically. And as Fred mentioned earlier, we are going to leverage our BorgWarner footprint in order to further bolster our growth into charging. So this is my last slide. Again, we are very confident that we are very well positioned to enter this space. As we are going to leverage our core capabilities with the charging expertise in order to create product leadership. I would like to refer back to what Stefan mentioned during the ePropusion section. We have demonstrated we are product leadership in power electronics. I'm very passionate about that because we know how to develop systems and software product in a safe and viable way. We know how to put them into production. Well, the charging technology is a natural extension to power electronics. Why? Because 50% of the bill of material of a charger is power electronics. So we have expertise and we have scale. So we are very confident we can be cost competitive in that space. We will also leverage our operational excellence and financial discipline towards charging. With that, we estimate our sales to be above $400 million by '27. We won't stop there. We are going to continue investing to create sales and more capabilities. As I'm wrapping up my presentation about charging, I would like to leave you with the key following messages. We see the opportunity in the market. We have established a strong go-forward strategy. We have made important acquisitions that give us well advanced product portfolio and expand its footprint. So we have run a very confident we can create product leadership in charging and that we can serve our customers into the live vehicle and goods and commercial vehicle segments long in the future. Again, thanks for joining me today. And with that, I will turn it over back to Pat.

Thank you. I hope you've all enjoyed our speeches so far by each of our presidents and Fred, we're going to take about a 10-minute break now. So we're going to come back at a roughly 20 of the hour. I'm going to start with Kevin, and then go right into the Q&A. See you in a few minutes. [Break]

Okay, everyone. We're going to get started here in a minute. All right. We're going to kick it off again. So I'm excited now to welcome the stage, our CFO, Kevin Nowlan. Kevin?

All right. Well, thanks, Pat, and thanks to all our great presenters so far. I think they were very interesting presentations today. You heard Fred talk about the evolution of charging forward and what it means for our company over the next few years. And you heard each of those business unit presidents talk about the products that are underlying that evolution. Now I'm going to talk about how it all comes together in the form of financial strategy. As Fred explained, we're in scaling mode right now, which means what? It means we're focused on growing our existing eProduct portfolio and establishing market leadership across these existing eProducts. Think about it as harvesting the crops we've already planted as opposed to planting new crops and brand new fields. And so by scaling our business and leveraging our fixed cost, we believe we're going to drive long-term profitability both in our eProduct portfolio and for the company in totality. But talking about eProducts more specifically, I'm going to take you through this in a moment, we expect to achieve breakeven in that portfolio by the end of this fiscal year on the path to strong levels of profitability in 2027 and beyond. And at the same time, we plan to continue to maximize the value of our foundational businesses by working to maintain strong margins across that entire portfolio. And as we do that, we'll work to convert that strong margin, that strong operating income into strong free cash flow. And as a result, that's going to deliver strong free cash flow for all of BorgWarner, which we'll continue to do -- to deploy in a disciplined, balanced way from a capital allocation perspective. So importantly, while we're evolving our charging forward strategy, we expect that the financial profile of this company that is the underpinning of our investment thesis is going to remain robust. High single-digit organic sales growth, single digit, high single digit, top quartile margins, strong free cash flow generation. So to better understand where we're heading, we thought we'd better first give you some context of where we're starting from, pro forma for the spin-off of PHINIA. On a pro forma basis, we expect revenue in 2023 to be between $14.0 billion and $14.6 billion. And within that, we expect e-product sales to be $2.3 billion to $2.6 billion. So that outlook contemplates year-over-year organic growth of 10% to 15%. We also anticipate adjusted operating margin 9.2% to 9.6% on a pro forma basis, $400 million to $5 million of free cash flow. Now that's excluding the onetime costs associated with the PHINIA spin-off. And then we expect by the end of the year, net debt to adjusted EBITDA net leverage of 1.3x. Simply put, we believe we're well positioned financially to advance our electrification strategy. Let's now dive into how we think accelerating our eProduct strategy is going to drive growth as part of charging forward 2027. Just as I said, on a pro forma basis this year from a revenue perspective the midpoint of our guide that $14.0 billion to $14.6 billion, the midpoint is $14.3 billion of revenue. Over the next 4 years, we expect to drive organic growth of approximately $5 billion over that time frame. We also anticipate executing additional M&A of about $1.7 billion, and that's really composed of two things. There's $700 million left in our initial charging forward plan to complete that aspect of charging for $2 billion of M&A. And then beyond that, we anticipate additional M&A of about $1 billion looking past 2025. We intend to be thoughtful and disciplined in our approach to M&A, just as we have been in the last number of years as we look to continue to augment our electrification capabilities. So as a result of these drivers, we expect to be at about $21 billion of revenue in 2027, a sizable increase from where we are today. And while we do expect there's some level of industry production growth that's supporting the overall ramp here in our outlook, we believe the bulk of the growth is really being achieved by our capitalizing on our eProduct growth opportunities, which is helping to increase our overall content per vehicle. So let's focus on eProduct revenue, more specifically within that walk and let me put into context the $10 billion plus of eProduct revenue in 2027 that Fred talked about. As I showed you in our 2023 guide, the midpoint of that guide for eProduct revenue 2023 is just under $2.5 billion, call it, $2.45 billion. When you roll that figure ahead to 2025, just counting booked revenue and already executed acquisitions, just counting those two things, that $2.5 billion increases to $5.6 billion. From there, we expect to add another $3 billion of organic eProduct growth through 2027 as demand for electrified vehicles continues to grow pretty rapidly. And then you can see the two components of inorganic growth, The $700 million to complete the initial phase of charging forward and another $1 billion beyond that with the potential to do more if we see attractive opportunities that we think makes sense for the business. As you'll see when I go through the capital allocation plan a little bit later on, we're building in flexibility to take advantage of opportunities that we see as they arise. We feel like we've been successful with the disciplined approach we've been executing on over the last few years and plan to do that and continue that going forward. So taken together when you aggregate all of this, this is the path to how -- why we anticipate being able to generate $10 billion plus in eProduct revenue in 2027. And to be clear, that's our expectation, but it's not necessarily a ceiling either. So we touched on total revenue through 2027. We touched on eProduct revenue. Now I want to shift gears and talk a little bit about profitability, specifically the path to achieving 7% operating margin in 2027. So how do we plan to get there? Well, it starts with what our expectations are here in 2023. By the fourth quarter of this year, we expect that eProduct portfolio in totality to be approaching breakeven. And that's a really important milestone for us. But it's just a first step in the journey toward our long-term profitability objectives. Because we're still in the process of scaling that business and investing to support future growth, look at our R&D in the year in 2023. ER&D relative to eProduct sales, it's 19%. So as we plan to grow eProduct revenue rapidly from '23 to '27, we think the pace of that revenue growth is going to outpace the pace of eProduct R&D growth. ER&D dollars are still going to grow, but because the revenue growth is growing more rapidly and the gross margin is growing rapidly, we're starting to leverage the scale benefits of this business. And that's why when we get out to 2027, we expect to be at approximately 7% margin. Where is that coming from? It's because the eR&D starts to decline pretty significantly as a percent of sales. We're leveraging that. It's 7% of the eProduct revenue. And so we're pretty pleased with that outlook in 2027, especially when you compare that to where a lot of the suppliers today in totality across their existing portfolios deliver margins today. But just as breakeven at the end of 2023 is a milestone, and it's not an end game, 7% is not the end game for us either. We expect to be driving towards double-digit margins in this business by the end of the decade. And for perspective, when you look between 2027 and 2030, we believe that the number of EVs being produced is going to continue to increase. And if we just keep pace with the growth in the market, obviously, BorgWarner's track record, its history is we outgrow the market consistently every year. But if we simply keep pace with the growth in the market in e-products, we would expect between '27 and 2030 to have another $5 billion to $6 billion of eProduct revenue. And if conservatively, we only deliver about 15% incremental conversion on that revenue, we hit 10%. That's our expectation for this business as we look out to the end of this decade. So bottom line, we feel really good about the profitability trajectory of this eProduct portfolio, both that initial milestone of hitting breakeven by the end of this year, but more importantly, what it looks like over the medium term and the long term. So while we're focused on scaling our e-product portfolio, we don't lose sight of the fact that we see substantial value in the foundational businesses that we have and what they do for BorgWarner in totality. And you can see it outlined on this slide, leading margin profiles, strong free cash flow generation, converting that margin into actual free cash flow relatively stable revenue profile over the medium term. We believe that financial profile is going to continue to support the investments we're making in electrification. Additionally, should eProduct growth happen to slow because the market slowed down relative to what's underlying our baseline plans, we believe these foundational businesses could drive even higher margins and even higher cash flows than what we currently expect. Over the longer term, though, we do recognize that the foundational businesses will eventually start to experience a decline, as the market shifts away from combustion and hybrid vehicles more rapidly toward battery electric vehicles. And so as Fred mentioned, over the next few years, we're implementing several initiatives to support that transition from our -- in our foundational businesses towards electrification. As Fred showed, we're repurposing a number of our facilities, almost 1/4 of our manufacturing facilities to be able to support eProducts within their four walls. We're also retraining workforce to be able to support the -- to move forward on the journey toward electrification as well. But with that said, we recognize some of our plants are going to continue to be foundational plants. So in addition to the initiatives that Fred talked about earlier, to redeploy people to redeploy fixed assets, we're taking proactive restructuring actions now much like we did back in 2020. And just like we did 3 years ago, we're doing this from a position of strength. So overall, as we look at the restructuring plan we're talking about here today in this business, it's about $130 million to $150 million of cash costs over the next 4 years or so and generates about $80 million to $90 million of annual cost savings by 2027. And we expect that this level of savings, these restructuring actions are going to contribute to our ability to sustain that strong margin profile in our foundational business and overall long-term competitiveness. So the message here is this. While we're working to profitably grow our eProduct, we're not losing focus on our foundational products. And when we obviously have some challenges to come as we look out over the balance of the decade, we're working to get ahead of those now. So if I were to summarize my comments so far, it's that we believe the charging for a 2027 strategy is both supported by and driving a strong financial profile for the company. As you can see on this slide, when you look at that anticipated revenue growth I outlined earlier and combined it with the margin profile for the total company that we see out through 2027, you can see that we expect a CAGR of about 11% to 12% in adjusted operating income from '23 to '27. In income, 11% to 12% CAGR, think about that. That's a $750 million increase in our adjusted operating income 4 years from now, 55%. This is significant because it shows we're continuing to deliver returns commensurate with the historical performance of this company, even while we're driving investments in growth in electrification. It demonstrates the financial strength of the company, not just what we've done in the past, not just what we're doing today, but long into the future. So we've talked extensively about our expectations for 2027 and the confidence we have as we move forward, including that double-digit CAGR in earnings on the prior slide. We've also referenced the e-growth opportunity, including what it could look like out through 2030. But we recognize when you look out that far, sometimes things don't always play out with a baseline plan. And that's why we do scenario planning at BorgWarner. So let me spend a minute talking about this, what could happen under various market scenarios. First is our base case, which is in the middle of this slide. It assumes almost half of the global light vehicle production will be battery electric vehicles by 2030. Under that scenario, we expect total revenue of about $25 billion, adjusted operating margin of somewhere around 10%, plus or minus, and what that translates to from an adjusted operating income perspective, somewhere in the range of $2.4 billion to $2.6 billion of operating income in the year 2030. But what happens if EVs don't accelerate at the anticipated pace underlying our baseline plan. That's the scenario on the left. We looked at a scenario that said, what if global penetration is only 40% EV in 2030 instead of 48%. Well, we believe it probably means our revenue is going to be about $1 billion less because the fastest-growing portion of the market, which is also the fastest-growing portion of our portfolio isn't growing as quickly as under the baseline plan. But due to the higher percentage of foundational revenue that would be in our portfolio at that point which we would believe would still have modestly stronger levels of profitability at that point. The adjusted operating margin for the business is probably in the low 10s. So rough math, we think under that scenario, adjusted operating income somewhere in that $2.3 billion to $2.6 billion range. Finally, let's look at the other scenario. What happens if global EV penetration exceeds our baseline planning by 2030. That's what we've modeled on the right side, 60% EV penetration in the year 2030. At that level, we actually think revenue is a bit higher because, again, the fastest-growing portion of our portfolio is growing faster than we expected, probably $26 billion of revenue in totality. Now we're probably making some additional investments in R&D. It probably means our foundational business is under a bit more pressure from a profitability perspective. And so we would expect our margin profile at that point to probably be in the mid-9s. When you do the math on that, maybe it's a little bit wider range because of some of that volatility there, it suggests that our operating income is probably somewhere in that $2.3 billion to $2.7 billion range. Here's the takeaway, the way we're constructing this portfolio, we expect that it will be able to deliver stable, strong levels of earnings. It's resilient under any of these different EV scenarios. So that gives you a sense as to how we think about revenue, how we think about margin. How does that translate to cash flow? Well, we believe cash flow, strong cash generation is going to remain core to the story as we move forward. Specifically, if we look on a pro forma basis, excluding PHINIA, 2023 through 2027, we expect to generate about $3.5 billion of revenue -- or I'm sorry, of free cash flow. Even since we began our pivot to electrification, we've taken a balanced approach to capital allocation. If you look at the operating cash flow we've generated, we've deployed about half of it toward reinvesting in capital expenditure in the business, about 1/4 of it towards acquisitions, and the balance toward returning value directly to our shareholders in the form of our dividends and our share repurchases. As we look ahead to the business post spin-off of PHINIA, we intend to maintain that disciplined balanced capital allocation strategy, which we believe starts with that strong commitment to returning value directly to our shareholders. Pro forma after the spin, we anticipate implementing a dividend of around $100 million annually. And we would expect to continue to be opportunistic in executing on the remaining authorization under our buyback program, about $0.5 billion. Now we do expect to be less reliant on M&A in the next phase of charging forward, as you've seen. However, we do intend to be opportunistic going forward in pursuing potential acquisitions that we think could bolster our overall leadership in the world of electrification. So with that in mind, we expect to utilize the balance of the cash we expect to generate over this time period, about $2.5 billion to support organic investments, acquisitions and/or potential additional returns of value to shareholders. As the market is evolving, we believe it's valuable. It's really important to maintain a level of flexibility in our capital allocation strategy in order to ensure we can respond quickly to emerging trends or opportunities that might surface in the market over the coming years. Now in terms of deploying capital to support M&A, we feel like we've built a really strong track record over the last number of years. Since 2015, we've completed approximately $6 billion of enterprise value acquisitions that have really enhanced our electrification capabilities. And we believe we've been really thoughtful in that process. If you look at our track record of acquisitions across power electronics, battery packs and modules, eMotors and DC fast charging, we first generally started by acquiring some level of capabilities in the space before investing more aggressively to expand those capabilities. We believe that's been a prudent approach to assessing how you expand into a new product category. And let me give you an example. Let's talk about DC fast charging. Our initial foray into DC fast charging started with the Sevcon acquisition back in 2017. Not only were they doing power electronics, they were doing some fast charging. In fact, they have fast chargers out in the market now today. We enhanced that capability with the Delphi Technologies acquisition in power electronics. And then from there, we expanded more aggressively with the acquisitions of Rhombus and SSE. That playbook has been pretty similar when you look across these different product categories where we've been driving acquisitions. And so as a result of this disciplined approach that we've been taking the portfolio management, we believe we've developed a cohesive set of eProducts that are now really positioned to scale profitably and capture significant market share through product leadership. Now as we've invested in these emerging technologies, both organically and inorganically, we've done it in a way that continues to maintain BorgWarner's hallmark of financial discipline. This has ensured that our investments are yielding returns above our cost of capital. Even with the significant amount of R&D, CapEx and M&A that we've been investing in over the last several years, we've still delivered in year -- in year double-digit after-tax returns on invested capital, and we expect to continue to do that pro forma post the PHINIA spin-off, as you can see in 2023. Importantly, this theme of financial discipline is core to who we are and how we operate at BorgWarner, and we don't intend to change that discipline going forward. So let me wrap up. Over the past 2 years, we've accomplished so much. We're well on track to deliver our original charging forward objectives, only 2 years into the plan. And we have a clear path forward in this exciting growing world of electrification. Looking ahead, we're well positioned with the systems, the processes and the technologies that will allow us to drive shareholder value and deliver on these 2027 targets, including $10 billion of eProduct revenue from strategic growth actions, delivering 7% adjusted operating margin on that $10 billion of eProduct revenue and at the same time, sustaining the strong margin profile that's underlying our foundational businesses. Importantly, as we achieve these targets, we expect to maintain our track record of consistently outgrowing the market, while also maintaining our position as a top quartile margin performer in the automotive supplier space. And while we deliver these strong margins, we also expect to deliver strong free cash flow through 2027 and beyond. And as always, we'll be thoughtful and disciplined in how we approach capital deployment, building on the track record of success we've had over the last number of years. Needless to say, the future is bright. BorgWarner is well positioned to capitalize on this e-product opportunity as we look ahead and deliver strong value for our shareholders. I look forward to giving you progress reports along the way as we progress towards 2027. And with that, I thank you for your attention and participating here with us today. So with that, I think I'm going to invite the other presenters back up to the stage, and we're going to open it up for some Q&A.

We're going to have some mics running here in just a second. Just a reminder, as we're gathering here on stage. For those of you who are listening online, feel free to e-mail me at [email protected]. We start up here on the front.

Colin Langan, Wells Fargo. Can you talk about the overall margins? Because if I look at the conversion on sales, it's only like 12% for the total comp. So what is kind of keeping the conversion below the historic norm as we go from 2027? So usually, I think you're thinking almost get to 20% at some point. Is it just all eR&D or are there other factors that we should be thinking about on that low...

Yes. I mean as we look out through 2027 and then even beyond 2027 and our 2030 scenarios, I mean, first, it's that we're converting in that high teens like we traditionally do, but we're still looking at eR&D as a headwind through 2027 against that -- that conversion on the eProduct revenue. And then what we also do is we look at the portfolio product by product, and we assume that, hey, if any of the products start to decline that they decline with a higher decremental margin, that high teens conversion we see on incrementals. So all of that is the math that's underlying what drives us to effectively that 10% margin profile in 2027.

Got it. And can you maybe talk a little bit about inverters. Some of the automakers are talking about in-sourcing some of that. And I know up until now, it's been one of the more heavily outsourced components. Are you seeing that trends sort of accelerate that automakers thinking about bringing that product in-house? And do you still think you'll be sort of the #1 player by 2025 in inverters?

We don't see any acceleration of in-sourcing of inverters. You've seen those volumes. We're going to get to a scale where it honestly doesn't really matter to us. And we're going to get to a scale where we think we can bring better product leadership and better competitiveness to the world than potential outsourcing. We don't see any acceleration along those lines globally -- talking globally.

All right. We go to John here.

John Murphy from Bank of America. Kevin and maybe even in the rest of the team, as we look from '27 to 2030, you're looking at more sort of more normal incrementals when things get a little bit more normal, and that seems like R&D is normalizing at that point. What is your confidence or expectation for that normalization in R&D relative to sales? Is it literally just the scale ramping up? Or is there something going on with the technology at that point that you think is maturing and you're not going to need to continue to accelerate this R&D because I think we're at the early stages of everything that's going on with the EV technology, there might be a case that like there's still a continued acceleration and change in the technology that might require a higher R&D burden. So I'm just how you're thinking about that then? Is it really just scale is driving that and you're still accelerating R&D? I mean what's sort of the puts and takes there?

Yes. Maybe I'll start and I'll ask Stefan to comment because I think he addressed that in his slides as well. But yes, I mean, a huge part of this is really the scaling up of the revenue and growing the revenue and the corresponding contribution margin at a faster pace than the growth of R&D. And you saw it in my slide, right, 2023, eR&D as a percent of eProduct revenues 19% just the scaling effect through 2027, we think drives eR&D down to 7%. And that gets to, I'll say, a more normalized level, which is why even in our scenario planning, when you look beyond 2027, we're then assuming more normalized incrementals because we think we're kind of getting to the point where that R&D is at a relative level of scale. But maybe you want to talk a little bit, Stefan, about the scaling effect, which you were talking about with modularity and the head count and your capacity to support additional growth with the existing headcount?

Yes. So you mentioned, are we going to slowdown in eR&D. We cannot slow down on the innovation because we need to drive the innovation because it continues. You saw the reduction in silicon carbide there's work behind in order to get there in our R&D but also at our supplier partners. And -- but the overall usage, we are driving the scale and nobody else also coming to the in-sourcing earlier. Not a lot of companies have the scale we have and the scale is important when you talk about purchasing chips. So it's the scale that drives a better efficiency of our R&D, but on the advanced development on the technology, we continue to focus on...

And maybe, John, I'll just add, on the math of it, too, just think about the math that's underlying that, again, we're driving scale relative to sales, right? But as you think about 2023, we're still on track to invest $480 million to $490 million in eProduct-related R&D. That's the decline to 7% doesn't mean we're cutting R&D. That math is $700 million of R&D. That's another $200-plus million from where we are today. It's just the revenue effect, the revenue and the gross margin is growing a lot more quickly then that growth of $200 million in R&D in the next 4 years.

That's helpful. And maybe, Joe, and Volker, I don't know if one or both of you can answer this question. If you think about sort of the -- you each have one foot in the foundational side and one foot in sort of the charging forward side of the business, when you go to companies and you're bidding, you're telling a story of EGR transitioning and torque transfer transitioning to the new products. Are you dealing with the same folks? How do those discussions go specifically? And really, is it the same folks that would -- would do an EGR that might do an inverter, right, or the folks that you're talking to as you're bidding on that new program. It's like, hey, listen, I know you guys, you got to renew good product. Just going to transition to you, no sweat. I mean, obviously, there's a lot of sweat in the competition in the bidding process, but are they the same folks and you could just transition with that new product? I mean how do those discussions very specifically go?

So as I had mentioned in my presentation, some of those products, our customers actually pulled us in. So oftentimes, it's the same folks, but not always. The OEMs are also hiring new talents to cover their new competence. But it's not unusual that we would see folks that were in the turbo side or EGR have now transitioned to some of these new products and they know us and they trust us. So the conversations, either we're approaching them based on some success we've had and we're trying to sell them a new product or in two of the cases I mentioned, they pulled us directly in. They were seeking whether we want to participate in that market. So it goes both ways.

And the competition is the same cast and crew that you're bidding against right now? Or is it actually shrinking or growing the competitive set?

If you take us there, [indiscernible] a big OEM. And if you have a supplier like BorgWarner that can help them do the transition and has a great product portfolio in, it would be very costly to cut that relationship. Very costly to stop that relationship and build a new relationship with someone that you may or may not know. So as long as we have that product portfolio and we are partners because we're not in the business of making deals here, right? We were in business of decade long relationship, and so we think that we currently in a position where we actually build win-win relationships and win-win strategic partnerships.

I go to Emmanuel here in now.

Emmanuel Rosner from Deutsche Bank. First, I was hoping if you can maybe help us with the organic growth piece of your walk to revenue to 2027, $5 billion of organic growth. What is contemplated within this in terms of automotive production growth of the market, which I think has been sort of like one way you've looked at it historically. And then importantly, eProduct versus ICE in terms of any decline on the ICE side and how much growth really on -- how much organic growth above market on the eProduct side?

The detailed product the market assumptions for you, but it's definitely growing from where it is today, more toward that $90-ish million plus market as opposed to the $83 million or so we're operating in today. But I think Pat and Eddie can give you that detail. But the bulk of that growth is really coming in the product the overall organic growth that we're driving. But you could see some of the math of it underlying our numbers. So our expectation is that e-product revenue growth in there is somewhere approaching that $6 billion level of that $5 billion. The foundational business as you saw in my one slide, the midpoint of that guide was saying it's coming down about $750 million over that same time frame from the $11.5 billion to $12 billion range down to about $11 billion. So that's what's comprising that $5 billion.

How do you think -- I guess just to put a finer point, I understand I don't have another question, but how do you think of the new -- the profile of the new BorgWarner in terms of growth of the market when you put it altogether? And I'm talking about the organic piece of it. I know the combined BorgWarner historically was probably in the, I don't know, 4 to 5 points is probably what you would have describe what does this look like now with this EV.

We've definitely been much more focused as we've been thinking about the BorgWarner pro forma for the PHINIA spin-off, just what we're driving from an overall organic growth perspective. So the 10% to 15% in 2025 and the high single digits called in that 8% to 9% range through 2027, which is what's underlying our guide. It's undoubtedly stronger outgrowth than what you've seen in the past because our expectation is the remaining business is growing faster than the business that we were spinning off. So we're not really focused as much on the outgrowth so much as that high single-digit organic growth rate that we see going forward.

And then on the topic of the margin, just making sure I understand well, so by 2027, you believe you can get to around 10% operating margin. And then you have a scenario analysis for 2030, which under some fairly extreme scenarios, you can still get to around 10%, but also in the base case. I guess is that -- since your R&D normalizes around 2027 should there be some upside potential to being able to expand margins over time? Or I guess what would be the offsetting driver?

Yes. I mean, from an eProduct sector, the answer is absolutely, yes. That's why we think going from 7% in 2027 and just growing with the market which is another $5 billion to $6 billion of eProduct revenue. If we just deliver 15% conversion on that, that takes us to 10% on the eProduct portfolio. We also saw in that main [indiscernible] that baseline scenario that we're 10% for the total company. Well, what's happening? Well, you have some headwinds coming from the foundational products where we're assuming there's a heavier decremental on the downside than there is 15% on the upside for the eProducts. So the net of all of that still gets you back to about a 10% in that base case scenario, but it's 10% on $25 billion as opposed to 10% on $21 billion in 2027.

I guess, is there conservatism baked in to these incrementals that are only in the mid-teens and decrementals that are much higher? Or is there any structural reasons why eProduct would have lower incrementals?

As we've talked about in the past, we expect that the contribution margin on the eProduct portfolio should be relatively healthy because it's been priced to be able to offset that initial ER&D upfront. And I would just tell you as a general rule, we want to make sure that the expectations we put out there, just like charging forward, we're going to deliver on them.

Why don't we go to Rod there?

Rod Lache from Wolfe Research. I was hoping you can just talk a little bit about the big picture that we're hearing from your customers, many of whom are facing some challenges in terms of EV profitability. I'm curious about how you think that plays into your business, both from a BEV content perspective over the next few years? Are you assuming that as you go on, your next-generation products have lower content or price per unit for the same type of product. Is that kind of factored into your growth expectations how do those customer challenges play into pricing and your margin expectations, both on the EV and the ICE business for that matter as you look out later in the decade.

I'm going to start and you can chime in. Rod, I would say it's not unusual that OEMs and Tier 1 suppliers margin defer one way or another, right? As far as we are concerned, the business that we call are contracted at a certain price level for a certain volume band. So the fact that they're making more or less money doesn't really matter to us. Now 5, 6 years from now, competitiveness is going to matter, right? And that's why one of the key strategies that we have implemented is gain scale rapidly in all the products. Because scale will drive competitiveness, scale will drive better supplier relationships. And we're pretty convinced that with the product leadership that we've created a scaled that we've created, we're going to be competitive going forward. That's what I would say.

And effectively underlying the outlooks that we have, and we do this on a product-by-product basis. The assumption is, generally speaking, a like-for-like product is going to see price pressure over time. The offset though in a lot of cases, depending on what products we're talking about, is the technology innovation that might be underlying that product going from a 400-volt inverter, which might over time start to see degradation in price, but it moves up to an 800-volt silicon carbide inverter, which is a different price point. That mix of portfolio with the technology evolution over time offset by the like-for-like pricing declines. You have to factor that all in when you're thinking about your pricing dynamics looking out into the future, and that's what we do. Just like I think we've talked about in the past, the Turbo, Turbo of 20 years ago is very different than the turbo sitting here today. The overall average price of a turbo hasn't really changed much like-for-like they have, but the overall average per Turbo that we produce today is roughly comparable from a price perspective as to what it was 20 years ago.

And I was hoping just secondly, you can talk a little bit about your business in China. You've done very well actually with some of the Chinese OEMs, and I presume that that's helping your growth today because they're some of the largest -- fastest-growing companies in the world today. Can you just give us a sense of for that battery electric vehicle business, what percentage of that is kind of associated with these rapidly growing Chinese customers that you penetrated early on? And how -- to what extent is that helping your growth?

The profile of our business has changed pretty dramatically over the past few years. Right now, 70% of our revenue in China are made with Chinese carmakers and the vast majority of that 70% are made with the top 4 or top 5, and we very -- it was very purposeful that we did that. And also our business in China is made of both systems, food systems and components. So very happy with the customer profile that we have in China and the product profiles.

Do you have any estimate of what your BEV mix is? What is the exposure today for China and rest of world?

I don't think we've disclosed that, but I think you can get a sense from the slide where we showed the 29 product awards that we've announced and 12 of those coming in Asia, both of those being in China that China is an important part of the growth, but we are pretty diverse across the globe in terms of where we're playing from an eProduct perspective. We're not dependent on any one geography, not dependent on any one customer or product, pretty diverse.

We're going to go to Dan next. But first, I'm going to ask one of the questions from the IRM box. We're getting a question on M&A. In what areas would we look to add to the portfolio there? It seems like it's part of the plan not only through 2025, but even beyond that, where would we look to supplement from a portfolio standpoint?

I think the strategy on M&A. First of all, we're going to widen our wings with the products that we have right now and scale it up. On M&A, we're always looking at the M&A from a product leadership standpoint. So we look at the path to better product leadership, The path to better efficiencies. Can we do that organically? Do we have other players inorganically and look at those people that we could talk to? If you look at the slides that shows the different products into battery electric vehicle, there are some products where we would be happy to have a little bit more scale and thus quickly, and we're going to look at that, too. So we look at it from a product leadership efficiency standpoint and also gaining scale. That's how I would look at M&A going forward.

Why don't we go to Dan there?

Dan Levy, Barclays. I wanted to start with a question on the foundational business. So you've laid out, you have some modest decline in ICE revenue between now to 2027, roughly $1 billion. But I think the implied math is actually that the margin actually increases that time. So maybe you could just explain the dynamics in ICE. Is that just cutting away some of the spend and resources. And then maybe you could just contextualize. Obviously, you're making a big divestiture today with PHINIA going its own way, but you still have a lot of ICE revenue. How do you looked at that remaining foundational business in the context of clearly trying to position BorgWarner as a leader in EV going forward because it is still a lot of ICE business?

Yes. If I could just comment on one element underlying the question. The margin isn't expected to increase or even decrease. It's relatively flat as you look from 2023 to 2027 underlying what's in the math there. So we showed that 13% net of the corporate cost in 2023 where we're operating today, we're expecting to continue around that level in 2027 as well. And then I think you saw some of the things we talked about in terms of redeploying people, redeploying some of our fixed assets, some of the proactive restructuring actions that we'll take. And all of these business leaders are constantly looking at way to manage the margin profile, looking at all elements of the P&L and seeing where there's opportunities, which might be different by product, by geography, by opportunity.

And with ICE within the portfolio, is that -- how are you -- are you just going to continually just review it?

Yes. We're constantly reviewing proactively what we do with our product portfolio. But you haven't seen in charging forward 2027, a fourth pillar called [divestitures]. So it's right now not something that we look at, but I'm not saying that we won't look at it in the future.

Great. And the second question is on the in-sourcing question. And I know earlier, you said inverters, you're not seeing any change there that's still being heavily outsourced. But I think at the Investor Day 2 years ago, you said this in-sourcing question is not uniform. It depends on the product. It depends on the region, it depends on the customer. So maybe you can provide a little more voice over on how the in-sourcing question has evolved over the last couple of years by product. Are there areas where you're seeing still -- is it still much more heavily skewed to outsourcing in inverters, eMotors, it's bit more so outsourcing, drive units more insuring -- just a little more voice over on how this in-sourcing debate has evolved, especially as you're now getting into second and third-generation EVs and platforms?

Yes. I think that question becomes a little -- we get that question less and less because when you look at our true available market, and when you look at the different customers taking different strategies, sometimes for different platforms or different regions, it's not really a really relevant question for us when you get the size and the scale that we're having. Overall, power electronics is what is outsourced the least if there is in-sourced the least, right? Motors are in-sourced a little bit more than power electronics. But if an OEM tells you we're in-sourcing motors, you should ask them, what do you in-source because most of the time, Stefan is selling them the state on the rotor. So if in-sourcing a motor means putting a rotors we're perfectly happy with it. right? So this question is becoming very -- I think it's a little academic. When you look at the market growth and the scale that we're gaining.

Why don't we go to James here on the front on the right, while we're moving the mic over there, maybe I have another one from the inbox. Any update on spin timing?

Why don't I take that one? If you haven't seen already, you'll see because it will be public. We filed our third draft of the Form 10 late last night. And so that's an important step forward towards being able to be in a position to execute the spin. We continue to believe we're going to execute in the third quarter, and it's going to be really dependent on the SEC time frame, which is something that's not entirely in our control. But the fact that we're filing our third Form 10, the fact that we're sitting here today having an Investor Day, both for us and for PHINIA at 1:00 today, suggest that we're probably seeing a path toward being earlier in the quarter as opposed to later in the quarter.

James?

James Picariello, BNP Paribas. So as we think about the eProducts revenue in 2027, the $10 billion sales to 7% EBITDA margin, just to ask another question that was asked another way maybe -- what are you assuming for the margin profile of the inorganic portion of that $1.7 billion in acquired sales? What would that margin profile look like within that 7%?

Directionally, we look at it as being similar to the overall margin profile of the product organic business at that point. We've looked at it different ways. We sensitize it different ways, but we think that's the best way to look at it.

Okay. And then regarding the implied free cash flow conversion rate for the total company as it relates to that $3.5 billion, what does that conversion rate look like? And then the total company EBIT margin of 10% in 2027, you got your 2023 guidance of 9.4%. Should we assume the implied 2025 is just the midpoint of that difference? Or is there a bias one way or the other because of R&D spend or known launches in the pipeline?

Yes. On the margin profile, I'm not sure if it's exactly a straight line, but I mean you should assume because we're building scale over that time and we step up each period leading to 2027 that you're probably going to see a trajectory that grows and it's not just a hockey stick in the last year of that plan. On the cash flow, your question was around.

The implied free cash flow conversion rate on adjusted net income.

Yes, it's -- I mean, I don't know if I've got that explicitly to give here today, but it's probably in that all-in basis, somewhere in that 70% to 80% ZIP code, but that's 100% conversion on the foundational side and of course, continuing to invest, including CapEx and some other things as it relates to the rest of the business. Working capital because working capital, we continue to ramp up as we grow revenue, we're investing at, call it, 12.5% working capital, which is always a headwind in the growth environment.

Great. Noah Kaye from Oppenheimer. I want to ask the M&A question maybe a little bit of a different way. How do we think about your preference at this point for scale or depth in your existing businesses within EV versus new adjacencies? And then just given the expectations you've laid out, talk to us a little bit about the current pipeline, the strength of that pipeline, the diversity of that pipeline and maybe any color on valuation expectations for targets.

Pipeline of M&A? So as I mentioned before, I think we're more focused in scaling what we have than looking at adjacencies. Pipeline of M&A is, I would say, solid, but we're very selective and very disciplined.

Okay. Maybe a question -- you might say this is academic, but I think it actually goes to an earlier question about product and supply chain. The world is shifting towards electrification, but it's also shifting towards regionalization of supply chains and the strategic development of critical materials and components. And obviously, all your customers are dealing with that right now. So how do you navigate that as a global company in terms of your product design, your manufacturing footprint, your supply chain, thinking about rare-earth materials and batteries and battery materials, metals, components. Talk to us about how BorgWarner is approaching that question.

We are generally producing where our customers use our products. And if you remember during the trade war -- how was that called? Yes, trade war, we were one of the least impacted supplier because we usually buy, manufacture where our customers use. We actually -- and maybe Stefan can talk about that. We're actually regionalizing the manufacturing of our module for that particular reason. So we're very conscious that now we need to take in account other risks than just the total landed costs. And we're doing that -- we're starting from a position of strength because we're not moving parts from one continent to -- we're not moving a tremendous amount of volume from one continent to another.

So maybe to give a little bit more color on the supply chain for the electronics. We are working with our supplier partners on the semiconductor side that we have, first of all, redundancy for front end and back end that is requested by us and by our customers. And this redundancy is also agnostic to the regions. So you heard a lot of recent announcement of semiconductor suppliers building plants in Germany, two of them in Germany, and then in the U.S. And even on the back-end side, that is today very focused on Asia or Southeast Asia, there are plants in Morocco, in other areas of the world. So very clearly, it is our goal to make sure we have this redundancy in the supply chain and this is independent from geopolitical threats. And that is for the supply chain in semiconductors but also on the rare-earth magnets.

You can do that -- excuse me, you can do that when you have scale. You can't do that when you don't have scale. I'll tell you a story. We were discussing, Stefan and I, with a customer that gave us the first tranche of business for an inverter. They wanted to source another Tier 1 for the same inverter, just dual source. But we now know that dual sourcing at the Tier 1 level does not prevent the Tier 4 or 5. It's the same and then you're stuck in a supply chain issue. So we went to the customer and say, "Save your engineering money. We're going to do the second tranche for you, same product. And we're going to guarantee full resilience of 2 independent supply chain from us down to as low as you can," and who was actually successful because having a resilient supply chain now is, we think, part of product leadership. It's part of being able to supply. And -- but to do that, you need scale. And that's one of the reasons why we went after scale pretty rapidly.

Mark Delaney from Goldman Sachs. One for me. You guys laid out the scenario analysis with different degrees of BEV adoption between 40% and 60%, I think. You can sustain an EBIT margin in the high single to low double digits. Could you double-click on what you have to do operationally in order to achieve that and some of the flexibility you're building into your plant so they can respond to some of these differing levels and still get that kind of an operating margin?

So I would say that manufacturing flexibility, talent flexibility, being able to reutilize capital and talent capital is what we've done in the past and always what we will do. Our ability to leverage existing plants, leverage campuses. We have a lot of campuses around the world where we put new products. And we use the backbone of the other reporting units within the campus is something that we've done for a long, long time. So I think this is part of the plan.

And I think there's 2 basic moving pieces to this, right? The pace at which our product revenue is growing and the pace at which the foundational revenue is seeing more pressure, more or less, depending on the scenario. And so the products, the key is to make sure that we've quoted this business, right, and make sure we bring home the contribution margin that's underlying our quotes. On the foundational side, to the extent that we see more pressure on the downside from a revenue perspective, it means there's more levers that the business leaders here need to be looking at from a P&L perspective to manage all aspects of the P&L. To the extent there's less revenue, it probably means less fixed cost overhead that we need to be investing in, whether that's remaining R&D, whether that's [ FAO ], maybe there's pricing opportunities across certain of those products. There's a lot of P&L to look at as the business starts -- if it were to start to deteriorate more quickly than what's underlying a baseline plan.

Joe Spak from UBS. Just following up on a couple of points. On the foundational product side, Kevin, you sort of touched around it, with the lower volume, there's some proactive restructuring and cost out. Is part of that maintaining the margins also lower R&D as a percent of sales on that foundational business? And then as it relates to the 100% free cash conversion on that portion of the business, how much of the CapEx over -- from '23 to '27 goes towards foundational versus eProducts?

Yes. So the -- do you want to start? I thought you were going to comment.

I will. I will comment. So on the foundational products, the way we think about it, we obviously are reducing the R&D spend over time and shifting some of that spend and more into the eProducts. So you'll see that as part of our free cash flow conversion. Same with capital. We're trying to leverage the existing infrastructure, facilities, CapEx that already exists. Even if we have a few years of growth ahead of us in some of the foundational business, we simply don't need to invest for high growth and long-term growth. So both of those contribute -- along with OpEx and better use of working capital and getting more efficient in the factories are all contributing to that 100% cash conversion.

And then as you think about CapEx -- or let me say, the cash conversion generation over time, there's 2 inherent tailwinds you have in the foundational business as you look ahead. One is the fact that, because we're investing less today in CapEx than maybe we have been historically, we actually run with higher depreciation than we do CapEx in the business. That's just the reality of the situation. So there's an inherent tailwind that we convert more of that operating income to free cash flow because of that delta. The second thing is as revenue starts to plateau and eventually starts to come down a little bit on the foundational business, you start to get the benefit of working capital to mitigate some of those other headwinds that you might experience because you unwind. It's the opposite effect of what we have in the eProducts scenario where we're building up working capital, receivables and inventories. You have the opposite effect there. So those are 2 potential opportunities as we look out the curve to making sure we can drive that 100% conversion.

And then on the eProducts side, I fully appreciate that if you go -- when you go from the [ 2.5 to the 10 ], the dollars -- the ER&D dollars go up, but there's a margin benefit. But if I look at that chart, which showed you going from 0% margin to 7% margin, I look at the volume bar. And I just take that over the total sales growth. That's like -- I think, like a 12% or 13% conversion. And I would -- it doesn't sound like your inorganic assumptions are really weighing on that. So is that because the eProducts is still not at scale because you mentioned from '27 to '30 you think you could do [ 15 ] and you thought that could be conservative. So what's the disconnect?

Yes. I mean, keep in mind, when you're jumping off that 0, that 0 is a Q4 number. It's not a full 2023 number. So you're not really jumping off 0 to 7%, you're jumping off a negative to 7%. So you got to keep that in mind.

Itay Michaeli from Citi. Just 2 questions on the foundational business, Kevin. First, the $11 billion of revenue in 2027, can you talk about what the underlying assumptions are and the degree of visibility you have kind of how you arrived at that number and the relative stability? And second, on the restructuring on the foundational that you talked about, how much of that restructuring has already been identified as opposed to just kind of assumptions around what the journey could look like?

Maybe I'll ask Stefan or Joe to speak about the 2027 revenue, the visibility to that because it's really a bottoms-up build that we do every single year, both the eProducts side and the foundational side of our long-range planning. So every year, it's kicking off right about now, and we build it up product by product, program by program at the business units within these teams. So maybe you want to talk about it -- as one of the bigger foundational businesses.

Yes. And you can imagine on those foundational products, we've got great clarity with our customers and their cycle plans. So there's a fair amount of certainty in what that looks like. Now what the market is actually going to take or not take a couple of years out, I think that's the variability. But we feel very good about the bottom-up planning portion of that. I think compared to the market change of how fast is e going to come or not, there's probably more uncertainty there. But as far as the foundational products, we get great clarity.

And Itay, what was the second part of your question again?

Just what portion of the restructuring is identified?

You want to talk about that? Well, I could talk about it. I'll start. It's identified. I mean not all of it has been communicated. Some of the locations, I think you have already had some -- there have been discussions with the leadership teams, but it's all identified as opposed to just a number in a spreadsheet.

It looks like we've completed the questions in the room as well as online. Fred, do you have any concluding -- a couple of logistics things to address? Did you want to make any...

No. It was a pleasure to host you. Thanks for the great question. It was actually a pleasure for us to tell the story because we're pretty proud about where we are and very excited about charging for 2027. Simple, measurable. You can count on us to give you quarter-over-quarter where we are, like we did in the past 2.5 years, and thank you again for joining us this morning.

So just from a logistics standpoint, we're going to take about an hour break, and the PHINIA team is going to start at 1 p.m. For those of you listening online, you'll find the link to the PHINIA Investor Day right below ours in the Events and Presentations section. Thanks, everyone, for coming. Appreciate it.