BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

Thanks everybody for joining us for the next session. Next up, we have BorgWarner, a global leader in powertrain technology that ranges from not just ICE and EVs but also a very strong hybrid portfolio as well. In 2021, the company had a very prescient view of where powertrains are going and started charging forward plan and has made real significant progress on that, which we'll get into in Q&A. The market remains almost permanently skeptical, and we think that should change over time on the stock. Because I think as you guys set up the business in CHARGING FORWARD would succeed in almost any way powertrain tech goes in the coming years. Execution has been wonderful as well. So we think there's a tremendous opportunity here at BorgWarner. Today, we're very happy and honored to have Fred Lissalde, BorgWarner's President and CEO; and Patrick Nolan, who I think you guys all know very well, Vice President, Investor Relations. We really appreciate you guys coming today. There's a lot to talk about. So we're going to try to get through it in the next 38 minutes.

I guess, just the first kind of start sort of big picture. Volumes at the beginning of the year are kind of -- people are a little bit skeptical, we're a little bit optimistic. I'm just curious how you see things shaping up. And very specifically for you, powertrain does matter to some extent. There's been sort of cutting of EV volumes, right, or pullback in EV volumes and launches. And it doesn't seem like there's necessarily the subsequent return or increase in ICE volumes, right? So are you seeing that in forward schedules? And do you think that's potentially an opportunity? So sort of broadly, how are you thinking about volumes? And then how are you thinking about this potential sort of mismatch of what's going on in this pullback in EVs and the potential upside in ICE vehicles?

So we guided '24 with China and North America pretty much flat year-over-year and Europe down a little bit. We're seeing Europe closing some of the backlog gap in Q1, but it's difficult to see how this is going to flow through in the rest of the year. From an EV perspective, and we'll come back to the portfolio because, for us, we've set up a portfolio that is resilient, as you said, no matter what. We started seeing our combustion product going back up last year when EV was slowing down. So I think that was a good proxy if you believe that the market is at 80 million or 90 million cars. If one goes down, the other should compensate, and we started seeing that last year.

I mean, so in the schedules for some of the manufacturers, it doesn't sound like they've quite done that. Are you actually -- you're starting to see that replacement of ICE volume for lower EVs?

Started to see that 2023 numbers. I think as you look to the guide and what's ensued on most of the production forecast this year is that, you're right, that associated offset that if we're going to be at a certain level of volume and does come slower as some are speculative, that associated offset on the combustion side is not predicated on some of those production schedules yet. So I think we're going to have to wait and see how that plays out over the course of the year. Now the good thing is if those combustion volumes are higher, it's going to be on programs that are already in production, right? So that will benefit those that are the strongest share on those products.

Great. And one of the other sort of potential good guys here is as the hybrid volumes sound like they're going to be higher and there's a lot of your customers are leaning into those. What are you seeing on sort of volume forecast there? And what is sort of the net benefit on hybrids to you versus ICE and EVs?

So if you take a step back, 80% of our revenue is on combustion, right? The rest is on EV and hybrids. If you look at the content opportunity per vehicle in combustion, we have about $550 per car. And in hybrid, we would have all the combustion business coming in slightly at lower level, maybe $450 per car. Because you don't need the transient behaviors of combustion powertrains, it's done with hybrid, where you would get another $2,100 per car of eProduct going into hybrid, right? Our eProduct has been built that it is fungible between BEV and hybrids. It's the same motors, it's the same power electronics, inverters, transmission, et cetera, et cetera. This hybrid discussion that as accelerated the past 6 months, I would say, is very North American. Outside of North America, hybrid has always been part of the electrification strategy. In China, 37% of the new energy vehicle that are produced and are produced now are hybrid. And our portfolio, the $1.9 billion of light vehicle 2024 revenue, 40% is hybrid and 60% is BEV. So again, we have built a portfolio that is growing with the electrification of powertrain. And so far, we haven't seen any technological -- any other technological means to decarbonized mobility than electrifying powertrain. I didn't say BEV. I said, electrifying powertrain. And that's what we've created with CHARGING FORWARD.

So I mean that's an interesting statement, electrifying powertrain. Does that mean that fuel cells, which aren't really in the mix in any significant way right now, could be an opportunity for you over time as well?

Fuel cell. We believe that fuel cell may be in long-haul trucks. But if you look at the well-to-wheel efficiency under the premise that you need green electricity as well as green hydrogen to move the cars with low carbon emission, the efficiency between an electrified powertrain and the fuel cell is very, very different.

Got it. Okay. And once again, I think your volume assumptions might be a little bit on the conservative side. If there were upside and let's say that global volumes were up 2% to 3% as opposed to flat to slightly down, what kind of incremental sort of at a company-wide basis and maybe segment basis, should we be thinking about, if that good guy actually happens?

Yes. So I think this is one change that's different from what we said in the past couple of years, what we've been saying now. We are in conversations about our incremental over the past couple of years, we were saying we're going to increment to mid-teens. But that was before a factor -- that was at -- before factoring in our increase in early R&D. Now our messaging is that -- and how we're running the business is that we want to deliver a mid-teens incremental on an all-in basis. That means even as we're increasing our R&D spending to support our growth on the electrification side, we want to deliver a mid-teens incremental. And in that guide this year, you can see that. We're incrementing at a 15% to 17% incremental on an all-in basis when all of our growth is coming from E, on the foundational side. Now as the -- if you do see production come in higher, you should be able to increment that same kind of mid-teens incremental based on that higher production. But most importantly, as you look forward, whether or not it's '24 or beyond, the idea is if it's higher combustion volumes, you increment to mid-teens. If it's higher hybrid volumes, you increment mid-teens. If it's higher BEV volumes, you increment mid-teens. So the onus on us is to control our cost to what those new volume environments are going to be. We can't give ourselves the pass just on the costs because we have this near-term uncertainty here. We have to manage our costs to deliver that incremental margin.

So what is changing in the cost and the management of the business that's allowing you to kind of ex out that, but we have the R&D investment. I mean, it sounds like the core business is operating is kind of what we're hearing in other parts of the [indiscernible]. The core business is operating and you're executing right now, it's not just new happening, better than people are realizing. What's changed?

Well, the first thing that has changed is that whenever scaling eProducts, we're guiding this year at $2.65 billion at the midpoint of our guide for eProducts, BEV and hybrids, including battery commercial vehicles. So the structure of what we've booked at 15% ROIC is starting incrementing as the volume grows. It's pretty much as simple as this.

The second part is just the bravery to control our costs, right? We need to adjust that spending based on what the new volume environment could be for each of these individual platforms and make sure that we're controlling our R&D spend, controlling other aspects of our cost that goes along with it.

One of the things that's been a positive development, you guys have gone after this, so it does -- once again, these things don't just happen. As commercial recoveries and discussions with automakers have been a little bit more fruitful than they have in the past. Given some volatility in schedules, right? I mean, it's not this -- it should happen. Just curious, as things are kind of normalizing right now, if you call it now normal, things are normalizing a bit If some of those discussions get a little bit tougher and we go back to sort of normal 1% to 3% price downs, but then also sort of in addition to that, if EV volumes are lower than expected and you have programs where volumes are missing by 50% or large swaths is there some kind of a volume guarantee? And could that be sort of a step up in some of the commercial discussions where you could get some recoveries or returns for your investment that you would normally have those kind of gaps in schedules versus planning?

Yes. So we take in a couple of different buckets, right? So on the inflationary side, you're right. We've started to see some pockets, you're starting to see some moderation. In some areas, you're seeing pressure. On a gross basis, we think inflation is more or less a push this year. And we're managing our discussions with our customers to kind of hold to serve in terms of pricing as it relates purely to inflation. On the [ AIF ] side or the annual price downs, what's interesting is even the past couple of years, we were giving our price downs, right? The inflationary discussion was almost a different part of the ledger. So we were giving our typical price downs, which for us, run in that 1% to 1.5% range, and we still think that continues on going forward. And did you want to talk about the...

Yes. From a volume volatility standpoint, the best thing is to install flexible manufacturing, having motors that run on the line that serves 10 customers. That's what we do. But we insist now on having volume-based pricing because it's very difficult to forecast. And so when volume -- when you have a volume shortfall in the year end, let's pick a number, 20%, you renegotiate the pricing for year-end plus 1. When you have a volume shortfall of 90% in year-end, renegotiating a price increase doesn't really get you anything. So we are negotiating a lump sum. But we have volume-based pricing, especially on eProducts because it's very difficult to forecast and even the OEMs have difficulties to forecast. We have some good examples in this country, too.

Got it. So it sounds like it's normalizing a bit, but there's still a sensitivity from your customers to where things are major shortfalls to work with you because that's of their purview of their products. So it hasn't -- they haven't ripped that away. That's still in force in a big way. On eProducts, right, I think you guys are looking in 2025 of having about $4.5 billion in revenue, which is a big step up over time, over the next 2 years. What gets us there? How much risk is there? And/or how much opportunity if all of a sudden, hybrids take off in North America more than people are expecting?

So as you alluded to a new product question, it's very difficult to forecast. So we're not going to forecast. We're focusing on '24 and focusing on what we can control, incremental on the additional sales and launching our product the right way. We're launching about 60% of the products that we've announced to you guys, I think we've announced 39 wins on eProducts. We're launching 60% as we speak. So the timeliness of the launch and also the take rate of the cars themselves are going to be critical to the 2025 revenue. There is one bucket of our eProducts that accounts for about $750 million, which is the commercial vehicle battery packs. And here, the dynamic is different. Because could we make more, we would sell more. And we're putting capacity in place right now. We are going to add 3x more capacity at the end of this year that we had at the end of last year. And that has a different dynamic where it's more predictable and we could sell way more if we could make way more, and we're going to make way more soon.

So as we get to, let's say, I think you guys have talked about this for 2025 getting close to $4.5 billion in profitability of eProducts eventually, is there the potential for it to be similar to corporate averages or potentially maybe even higher in some ways, where you can argue just given the nature of the product, it could tend to be higher, particularly because you're getting that more direct crossover to commercial vehicle business than you might on the ICE side. You might correct me if I'm wrong on that.

Just a couple of things. So as it relates to the $4.5 billion to $5 billion, we can't control what the customers' volumes are going to be. We've done our part, right? We booked the programs and we'll ultimately see what the volume turns out today. But I think what's more important than even absolute margin level for E., now we're pricing the business on the same return on capital. And if the capital intensity is similar, which it is, steady-state margins will be similar. But I think more important than the absolute margin where we are today is as we move forward, as incremental margin comes to the company, delivering that mid-teens incremental regardless of where that revenue growth comes from, whether or not it's BEV, whether or not it's combustion, whether or not it's hybrid, hitting that conversion irregardless of the source of that revenue growth is key to getting the ongoing margin improvement for the company.

Okay. One of the other big things that's going on in the market lately is China is on fire from a production standpoint and some of that is being exported. So I'm just curious if you could talk about your current position domestically in China and with the Chinese partners, that they may be exporting and using you sort of as a sort of [indiscernible] supplier as they go overseas. Or if there's risk that you might see some homegrown suppliers supplying to you or become more competitors from China over time, which North Americans have gone global with their supply base, Japanese have, Europeans have. I mean, how do you kind of fit in, in sort of their view of a domestic supplier, potentially an international supplier?

So [ Fubon ] want our all-in. Our business in China has made 70% with the Chinese carmakers. For eProducts, actually pretty much half of our eProducts is made with the Chinese in China and 95% of that is made with the Chinese carmakers, the BYDs, the Li Autos, the ChangAn, the Cherys, the Great Wall, you name it. So we've been present in China for a long, long time and being one of the first ones supporting the Chinese carmakers getting off the ground with EVs and hybrids, actually. Again, in China, 40% of the NEV vehicle are hybrids and 60% BEV. When Chinese carmakers start thinking about exporting, they're laser focused about making sure that they're compliant from an IP perspective. And the tendencies that, especially on powertrain, they tend to work with Western suppliers when it comes to exporting cars. When it comes to potential localizing of production, I think it's early to say. But being there, a key powertrain supplier in China, puts us in the position to also support their localization plan in the Western world. Actually, if you look at the alliance that we signed with BYD on the FinDreams battery packs for commercial vehicle, where we are going to be their manufacturing arm outside of China, it is at a very small scale of a niche commercial vehicle battery pack, not a bad proxy, not a bad example.

So the early times that you're flying under an international flag as opposed to a U.S. flag for those companies, right? I mean, there's not a move -- I mean they're happy to go global with you is what you're saying from an early read so far.

I don't see the color of the flags so far.

There you go. That's helpful. There's a lot of consternation about potential in-sourcing as we electrify and the potential for more vertical integration. That's sort of been a bear argument against your stock and your story for a long time. But it seems like that's not really playing out, if at all. Do you see the sort of the incumbent and then the incoming EV manufacturers as potential competitors in a way that other parts of the car might not?

So I think one thing that's changed over the past few months and there are a lot of things that hasn't changed. But one thing that's changed is volatility is bringing doubts in the head of car manufacturers to do everything in-house, right? And working with suppliers like BorgWarner, where we make millions of inverters, millions of high-voltage coolant heaters and millions of motors is kind of a safe bet, right? And there are things that hasn't changed. First, invertors which is the motor controller in a hybrid or a BEV is still outsourced at about 80%. Motors are outsourced pretty much at 40%. But when people say, we are in-sourcing motors, you need to ask the same question, what are you in-sourcing? Because if we sell the stator and rotor of the motor and the carmakers just put ones inside the other, we're very happy with that, right? Because we get a lot of the value of the electric motor. Auxiliary power electronics, DC/DC converters, onboard chargers, pretty much nothing is insourced. So that view hasn't changed over the past 3, 4 years, but the volatility of the marketplace in electrified powertrain as well as the cost of capital is, we think, tending -- as well as the size of the scale that we have in the eProducts is standing towards more outsourcing than insourcing.

Got it. Another key component of the charging forward plan or one of the key components was M&A and acquisitions on the eProducts side. Some of that's happened, but we haven't seen maybe quite the pace that would get you to that, the 2027 targets. Is there anything on the horizon here? Or could we see something that's big and chunky? Or is it sort of a layering of technologies that you commercialize sort of from a more traditional BorgWarner fashion? How do you view that acquisition target that growth in eProducts?

I think if you take a step back, what Borg is doing well is to take great technologies that enable powertrain efficiency and put it under the BorgWarner roof, which is financial strength and discipline, geographic diversity and customer intimacy and unlock value that way. We've shown it with Delphi. We've shown it with AKASOL, where our production plan is higher than the one we underwrote back when we closed the acquisition. And hopefully, it's going to be the same thing with Eldor. Because nowadays the volumes of those products are such that OEMs can outsource companies that have very solid rains and very solid financial strength. Now the dynamic has changed. M&A is still part of what we are looking at from a technology perspective. But we're going to take into account also in the discount cash flow when we look at those targets the short- to midterm volatility. And that's going to have an impact on how much we want to pay for, the target. And so in those times of high volatility, the conversions in pricing might become a little bit of a hurdle. On the other hand, I think a lot of companies are going to become under huge financial pressure, which might open opportunities. Long story short, we're going to be even more disciplined than in the past and looking at it in a -- with lenses of very different volume scenarios. Do you want to add anything?

No...

I mean -- but in the acquisition, so it would probably be more focused on tech than necessarily scale. Is that a fair statement?

It's a fair statement, tech and bolt-on products.

Got it. As opposed to just a straight scale.

Correct.

Balance sheet is in great shape. We have bond investors here in the audience. In the context of your capital allocation and potential acquisitions, how important is it to maintain a high-quality rating and conservative leverage?

So I'll take that. So I think when we think about our capital allocation, I think it starts with 2 things first. And that is from a balance sheet perspective, we want to be on a gross leverage standpoint right around 2x. And I'd say, as I look at the balance sheet today, I'll call it a solid check. Second, from a capital allocation standpoint is liquidity. We want to make sure we have roughly 20% of revenue to manage through cycles. Because we don't want to be cutting back CapEx, reducing R&D spending or frankly, cutting our dividend as we go through a cycle. So we model out a kind of great recession type of downturn for multiple years and make sure that we have ample liquidity for that. And when I think about liquidity, it's cash on the balance sheet plus our revolver capacity. So as I look at that 20% liquidity standpoint, so I'd call that a check. So when you think about capital allocation beyond that, it is a question of our free cash flow generation, which for us is in excess of $0.5 billion a year. What are we going to deploy that capital towards? Well, the dividend, we view as a kind of fixed commitment. It's something that we don't want to have to move up and down with cycles. To the extent that, that changes, it needs to be something that can be sustained. Then as John asked us about is inorganic investments, which we're going to look at and be pretty discerning on what we're looking at. And then in the absence of near-term M&A, we'll obviously -- we're not looking to build excess cash on our balance sheet, we'll look to deploy capital to shareholders. And we've done that over the past several years. You saw us buy back $177 million of stock or roughly 2% of the stock in Q4. And since we completed Delphi, we've done $633 million of buybacks. That's on top of almost $600 million of dividends since 2020 and PHINIA spin proceeds to our shareholders. So we like to take a balanced approach, but I think first and foremost, it starts with making sure I'm taking the leverage and checking on the liquidity side on the balance sheet.

Just maybe on that, I want to get back to R&D in a second. But on Wolfspeed, you guys sold down some of the stake there. Was that -- I mean, what -- because it seemed like when you first bought in, that it was kind of a maybe strategic and pulled closer, but you've sold that. Is that -- was that -- what was the rationale for in and out there?

The rationale was to secure silicon carbide capacity corridor and helping them with their convertible note, but the strategy was never to be a long-term investor in any other strategy company. We are -- and we've sold those notes.

That's in Q4.

Okay. So that was never going to be a long-term investment. That's really just given help them ramped up seed capital. Okay. Back to R&D. Pat, you made that interesting comment about removing the but on the incrementals. As you think about R&D spend, are you achieving that by pulling back dramatically on ICE spending? Or is that just a rationalization across the board? And then maybe just also on the ICE side, the opportunity seems like, relative to where we sat 6 or 12 months ago, far greater or positive than we would have thought. Could there be a scenario where you lean into R&D and you're bringing more technology that the automakers themselves just can't afford -- their hair's on fire trying to allocate capital and invest from an operational standpoint efficiently, forget about even the capital itself, where it might make sense to lean into the R&D on the ICE business and drive a real solution for them as ICE, it is maybe a little more prevalent than people have been expecting.

So I'm going to start with -- we don't see a lot of new ICE engines being developed around the globe. And so our focus is to always find that additional 1% or 2% efficiency at our level that would bring ICE efficiency for combustion powertrain, or hybrid powertrains for that matter, for our customers. And yes, over time, our R&D as a percentage of ICE sale has come down. Do you want to take the overall R&D question?

I think overall, R&D, I think it's -- one thing to note before I get to the different parts of it is our R&D is largely application engineering. BorgWarner, our R&D is not a -- so it's much more development for products that are either in launch or you're actively pursuing. There's not a lot of advanced kind of skunkworks R&D at BorgWarner. Now taking a step back and looking at the various products, the eR&D that we spend on that. So within our guide this year, our original guide and incorporated roughly $40 million of additional eR&D spending this year on a year-over-year basis. Now if it continues on as we expect this year, we'll spend that. In an environment where those volumes start coming in lighter or there's less programs to pursue, obviously, we back off that. We view it as a lever to manage those costs. On the combustion side, as Fred said, there's not a lot of new programs to pursue. And -- but if we see some pull on the combustion side, could we spend a little bit more on the margins for efficiency? Sure. But we view these -- I guess, we're viewing all the cost as kind of levers that we can do to manage this incremental margin performance that we're targeting for the company going forward.

Got it. And then also on that front, I mean, IRA -- I mean, there's concerns about the consumer incentives, but maybe not necessarily sort of tax credits and indirect incentives. So I'm just curious, as you think about sort of the battery and module production, what kind of opportunity is there for you on the IRA to benefit? And do you see any risk if the IRA changes? Or is that more just the consumer level, which is where I would kind of think it would be? But what's your perspective on that?

So the provision we're taking advantage of is the 45X provision, which has to do with production of battery packs, and we get a $10 per kilowatt hour of production, not of capacity, of actual complex production -- TBD, ultimately, what happens with that, I'm not going to speculate on the political side of it. But I can tell you, our customers today are very intimately aware of that incentive. So I wouldn't view that as an incentive that certainly that is something all accruing to BorgWarner. It's part of that total cost of goods sold of making the pack. And if it goes away, that factors into those discussions with the customers, too. Just as right now, they're very aware of it, too.

But I mean, as far as the magnitude and the benefit this year, have you guys quantified what that is on a volume based particularly on AKASOL side?

We haven't quantified it specifically, but you can look at our disclosure in terms of what we have in terms of capacity last year, where we have globally 2.2-gigawatt hours of production going up to 6.0 gigawatt hours by 2025. And we've given a breakdown between North America and Europe this year, which will be roughly 55% North America and 45% Europe. So you can kind of run the math that way.

Pretty good answer. We've got 7 minutes here. Is there any questions in the audience?

I wanted to ask on the content per vehicle, if you look at EV versus ICE versus hybrid. You talked about hybrids, it seems like there's moving parts. Your ICE component of that, I think, is lower, but then you've got, it sounds like, significantly more on EV for a hybrid. So is there a way to just like take your median vehicle or overall exposure?

Yes. You can find that on the IR page of BorgWarner.com, but simply said on combustion -- pure combustion engine content opportunity for vehicle is $550. For hybrids, it's $2,100 of eProducts and $450 of combustion, a little lower. For example, on a hybrid, we would need a VTG turbochargers that optimizes the transient behavior because the transient behavior is most likely done by the motor. And on BEV, the content per vehicle is...

[ 25-59. ]

[ 25-50. ] So pretty much the same, BEV versus hybrid for us.

It's a pretty good setup. Maybe just on the hybrid side and then I got one last question. If you think about hybrids, I mean, most of the people think about Toyota and Prius. But if you look at sort of your hybrid customers, you've got companies like GM, I'm not saying they're your customers yet, I would love to hear what you say. But GM saying it's going to be coming back into the U.S. market with hybrids. What are you seeing -- who are your biggest customers on the hybrid side? And what is the opportunity? Because my understanding is that it's not so much Toyota. It's the folks that would actually be potentially flexing up dramatically.

I don't think we've disclosed the key customers on hybrids, but if you take the Japanese carriers out, we said on BEV, we work on with the 7 biggest BEV makers out of 10 in the world. And on hybrid, I guess, it's pretty much the same number. We have to run the math. But would you want to add something?

The only thing I would add to, I would look at our geographic split, too, John. If you look at our light vehicle eProducts business today, it's about 45% is in China. We have 15% in North America and then the balance in Europe. So if Europe and China are the biggest portions of our light vehicle E-business, and that business is 40% hybrid. It means our biggest hybrid customers today are in China and in Europe.

So now since the best word is going to be hybrid, hybrid, hybrid, be careful about what hybrid means. Because I have people saying, a start-stop is a hybrid. In our definition, no, it is not a hybrid. You've got hybrid powertrains that would propel cars in an electric mode for about 100 yards and hybrid cars that propel cars with an electrified mode for 150 miles, okay? Those are not the same animals and they are not enabling the same regulatory pressure convergence, right? We are heavier on the high-voltage plug-in, full hybrid or range-extended EVs that will propel the cars for more than 50 miles. So back to your question, the $2,100 e-portion of the hybrid would be more into the advanced hybrid, which I would call real hybrids.

Not the mild start stop.

Not the mild start-stop. You need to move up the voltage in order to really make a difference from an efficiency of hybridation standpoint.

So in the last few minutes, if we think about this on your stock, for a while, there was hey, these guys, you guys are moving fast enough on EVs. And then you had CHARGING FORWARD coming in and clearly, you're moving very, very quickly. Now we're kind of hearing, okay, well, that's great. Now they're moving fast on EVs, but EVs are flagging and not going to be as strong as people were expecting. That's not good. So I mean, it kind of almost feels like you guys are positioned to succeed whichever way the powertrain ultimately goes. And if it goes from ICE to hybrid or ICE to EVs, it's a relatively similar benefit, right, as far as content. It must frustrate you, but I mean, as you think about this and the stock, what do you think people are really missing in the stock? Because clearly, there's tremendous skepticism out there. And I think as we listen to the story, maybe there shouldn't be. But what is your take on the bull/bear on this? And what would you tell investors?

I would say two things, and you would chime in. First, the product portfolio is made so that it is resilient to whatever powertrain architecture grows and is resilient across the 3 regions. And shorter term, we want to convert mid- to high teens on wherever the additional revenue comes from. Those are the two things that, I think, we want you to remember which we think is going to create value.

And I think investors want to see us actually execute towards that. I mean, we can tell you we're going to execute mid- to high teens regardless where that growth comes from. But I think this year is a very important proof point for us. As all of our revenue growth was coming from eProducts this year, at least in the original guide, can we actually deliver that incremental margin on an all-in basis that we're guiding to? Because I don't think it's a given until we actually see that, that we're going to get credit for it. So I think we -- as we execute towards that, I think that helps a lot in terms of our valuation. And proofpoint, just like we needed to proofpoint on the eProducts side. We were booking a lot of business, but we didn't really get credit for it until you start to see it in the P&L. I think it's going to be the same thing from the conversion side.

100% agree. Pat and Fred, thank you so much for the time. Really appreciate you guys making the time to join us today. Thank you.

Thank you.

Thank you.