BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

Okay. It looks like the webcast is starting. So once again, I'm Ryan Brinkman, the U.S. automotive equity research analyst at JPMorgan. Very happy to have BorgWarner with us, including their relatively new CFO, Craig Aaron, Executive Vice President and Chief Financial Officer. Of course, not new to BorgWarner and longtime Vice President Investor Relations, Pat Nolan. So Craig and Pat, thanks so much for coming to the conference.

Thank you for having us.

We've been starting all of the supplier discussions with a couple of standard questions. And the first one, it really relates to BorgWarner, and that's what has happened over the past 1.5 years or so in terms of the changing expectations for battery electric vehicles. For a long time, it just seemed like we couldn't keep pace with the forecast. And now we're starting to go in the other direction. Still growth, but not like before. S&P Global Mobility at the start of the year was thinking that global BEV production this year would be up 32%, and now they think only 10%. What in your view accounts for this significant reset of expectations? And has the slower near-term growth cost you to think any differently about the medium or long-term trajectory? And what are the implications do you think for BorgWarner?

Yes. So we're obviously seeing a lot of volatility on the light vehicle side of our eProducts portfolio. And we're seeing the push out of some programs, but also just lower volumes on existing platforms. When I take a big step back, it all comes back to the consumer and what does the consumer want. And I think there's some challenges right now, whether that's range anxiety, infrastructure-related challenges or just the cost of the vehicle. I think, over the long term, those issues get solved. For BorgWarner, there's obviously going to be changing regulations in Europe and in China. And for us, that's going to drive future hybridization and electrification of the vehicle. So I think our long-term thesis of battery electric vehicles and hybridization is going to be a larger portion of the market, I think, holds. I think that makes a lot of sense to us. Over the short term, I fully expect that we're going to see volatility in the market. And so it really comes down to what can BorgWarner control, and what BorgWarner can control is having a technology-focused portfolio that can support our customers around the globe. What we can control is growing above market production and converting that growth into income in the mid-teens. What we can control is converting that income into cash flow and be able to invest that intelligently, whether that's organically or inorganically or providing it to shareholders, which is what we're doing this year. So we're really focused on what we can control.

Second question relates to another big theme in the industry currently, which is the strong rise of domestic Chinese automakers, where I think you have some very good news to report. These automakers were quick to embrace electrification. Their quality and design has improved significantly. They're introducing models twice the rate of global peers, incorporating latest technologies. BYD 5 years ago, it was 13th largest automaker in China. Now they're the biggest. Collectively, the Chinese have gone from 35% of that market to 55%, even more maybe in some recent months. Still small outside of China, but with big ambitions. How do you see this trend evolving inside and outside of China? And many of the companies we cover are underexposed. You're overexposed. Maybe talk about how you got there and what's next with your relationship with Chinese -- domestic Chinese automakers.

Yes, you're right. And we've seen the rise of some China OEMs. BYD is a great example of that. I think for BorgWarner, really, what it comes down to is diversification. We need to be diversified across regions. We need to be diversified through our customer base. We don't want to rise and fall with one region. We don't want to rise and fall with one customer. So when I take a big step back, we just need to support all of our customers around the globe, have a diverse customer base, be diversified by region. I think that's the best way to run the portfolio.

Would it be helpful just to talk about our exposure just in that context?

Yes, please.

So China today, it's about 20% of our revenue, which is obviously significantly higher than it was a few years ago. And within that mix of revenue, about 70% of it is with the local OEMs. It's pretty diverse representation among them. But if you also look at our eProduct side of our business in China, about 90% of that net sales is with the locals as well. So I think it's a really good testament to what we're seeing in terms of the pull of our technologies across the portfolio.

Pat and I were talking on the phone not long ago, and he reminded me that our annual bus tour of Detroit, whas -- how many years ago did you join? What is 6, 7?

Late -- right at the end of 2016.

Got it. It's like his first day there. We -- he -- it was our tour and he got that question, what's the exposure to foreign -- it was the opposite. It was 70% with the JVs, right? So a big change there. Good call on that one. Next question is about growth over market, right? So you're currently targeting 0.5% to 2.5% organic growth this year in an industry, which weighted for your end markets' forecast, I think, to shrink 2% to 3%. So sort of 400 bps of outperformance at the midpoint, which is really very little change versus the 425 bps that seem to be implied by the 2024 guide when it was first introduced in February. And the context here is what we just talked about, the S&P Global Mobility BEV forecast coming down so much. And a lot of the other suppliers have been complaining about adverse customer mix and maybe you side skirt a little of that in China with your better composition. But still, everybody is hit by Stellantis here and there. And just curious how your growth over market has managed to maybe hold up better than peers this year. And if that tells us anything about how the growth over market might be able to trend going forward as the industry continues to be volatile and change.

Yes. So our growth over market this year that we just updated with our June release was 350 to 450 basis points for the full year. So we're really proud of that. And it really comes back to our technology-focused portfolio and how do we manage that. We manage that on the foundational side of the business, which is our combustion products. The goal of those businesses are to grow over your respective market. The market for them is the combustion, plus the hybrid market. And we have our eProducts business units. They're focused on hybrid and electric vehicles. Those business units, you need to grow over market, which means the hybrid market and the battery electric vehicle market. If both of the sides of our portfolio are growing above market, the total company grows above market, and that's really what we're focused to do -- what we're focused on doing. And that's what's really leading to that 300 to 450 basis points. At the end of the day, if we're leading on both sides of that ledger, then it doesn't really matter what the propulsion mix is in any given year. So that's our focus.

Yes. And let's go back for a moment to what I thought was really one of the key takeaways from the May 2023 Investor Day, which was that scenario analysis that you put out, demonstrating your expectation that BorgWarner could deliver roughly the same amount of EBIT dollars as assumed in your base case scenario of 48% BEV penetration in 2030. Even in the event that BEV penetration were to track a materially lower 40% or higher as 60%, I note that S&P Global Mobility, they currently expect 2030 BEV penetration of 43%. So down from the -- that 47% that they expected when you expected 48%. So trending towards the lower end there. And perhaps, there could be another change in the volatile powertrain expectations. But just wanted to check in with you. Now that it does appear, we think, that the industry is probably trending toward the low end of the BEV penetration scenario, how are you feeling about the company's ability to deliver on that similar profit level that you talked about? And then I'd note, too, that your scenario analysis, I made sure it's says BEV, not EV, right? And so it seems to be specifically about the BEV penetration versus ICE. And it seems like some of the consensus is that, okay, well, if we're going to be lower on BEV, we might be higher on the HEV, which I don't know if that add some nuance. It could be good, make the downside different. What do you think about that scenario analysis now in light of everything that you -- that has transpired since the Investor Day?

Yes, maybe I'll take that one. So Ryan, I agree with a lot of what you said about the volatility in the market. Clearly, that's making it very hard to predict over the near and maybe very near midterm, where, ultimately, the industry is going to be. As Craig talked about, we continue to believe in the long-term trend, I would say, in the NEV market, that hybrid plus BEV market. But I think given the volatility, I think the one thing that's changed a bit, and it's interesting, though, when we put that scenario analysis together, we were getting questions on the other end, what if BEV becomes faster. Now it's the opposite way. What I think the takeaway for us is and how we've changed, how we're managing the operating profile of the business is we want to deliver an incremental margin on an all-in basis as we move forward. So as we drop through the higher revenue, whether or not it comes from combustion, hybrid electric, we want to deliver that same mid-teens conversion. That's a little different than what we said a year ago because a year ago, our message was, well, we are going to deliver a contribution on our growth, but we're going to be continuing to ramp up our spending, i.e., our ER&D that we're not going to quite hit that mid-teens conversion if it comes from BEV purely. Now the message is different. Now we want to deliver that same mid-teens all in because given the lack of visibility that we have near term, because all the volatility you talked about, that's how we think we have -- this is the appropriate way to manage the business and drive the margin profile.

Wanted to ask. I saw in June that you announced a change in your segment reporting, probably no different go-to-market, but who reports to who within the organization. And there was one change in the name of a division. ePropulsion now is going to be called PowerDrive. So not a lot of change to that unit, but just curious if you're trying to signal anything with the name change. And then the more substantive change appears to be -- to have been grouping the Morse engine timing systems together with drivetrain and then grouping battery with charging. It appears very logical, but maybe just talk about what the motivation might have been there. One focus on growth, one focus on costs. Anything going to change differently within the organization as a result of this?

Yes. I think the key word that comes to mind is focus. It's really all about focus. When you think about this resegmentation, we're going to have 2 very focused foundational business units. It's going to be called Turbo & Thermal Technologies will be one of those business units. And the other one is Drivetrain & Morse systems. And their goals on that side of the business is outgrow their individual markets, again, the combustion market and the hybrid market, convert that growth into income and deliver cash for the company. Those are their objectives on that and those -- for those foundational business units. On the other side, we're going to have very focused eProducts business units. It's PowerDrive Systems, formerly ePropulsion. We're simply just changing the name, which is an internal name. So we're using the same internal name and external name. But then we also are breaking out our Battery & Charging business, which is at scale. And so the focus of those ePropulsion business units are grow over market and deliver incremental conversion on an all-in basis. So it's really for us all about focus. And then the other thought here is providing additional clarity to our investors. We get a lot of questions, obviously, about the eProduct side of our portfolio. By breaking out battery and charging, they're going to be able to see another business unit from us, not just PowerDrive Systems, but now Battery & Charging and the success that we're having with that business.

Next, I thought to ask around the restructuring programs that you're currently engaged in. Firstly, you have this ongoing restructuring that was announced last year, impacting your foundational businesses. Maybe just give us an update on where you stand with regard to the planned $130 million to $150 million of spending, with regard to the $80 million, $90 million of savings. But secondly, you've got this new restructuring program that was just announced and -- which already began delivery in savings in June, helping margin during the quarter aimed at this time at ePropulsion. In fact, I heard you talk on the call about how all -- look, there were some onetime items that kind of helped us. And one of which, the surrendering of some, I don't know, Kevin's comp package as he left. But another one was just restructuring program that you guys didn't know about that contributed in the quarter. It's arguably -- yes, we -- it wasn't in consensus, but that's real. That's not a onetime item, right? So it's already helping. What can you tell us about the second new restructuring program as well and what it implies for your ability to deliver profitable growth and targeted incrementals, regardless of the source of that growth? I remember those teams just kept expanding, expanding for so long and maybe they weren't expecting to have restructuring. But what does it say about the discipline that you have?

Yes. So we have 2 restructuring programs like you mentioned. In 2023, we announced a foundational restructuring. And so some of the statistics that you mentioned are very true, $130 million to $150 million of restructuring costs. We see $80 million to $90 million of savings in 2027. And what was the purpose of that restructuring? Well, we expect that foundational revenue to decline over time. And so we need to take cost actions to make sure that when we lose that revenue, we're decrementing in the mid-teens. That's the goal of that restructuring. And we're seeing the benefits of that restructuring through our P&L today. When you look at our second quarter results, also our first quarter results, part of the reason they were so strong is because you're seeing the benefits of those restructuring actions around the globe. Then in June, we announced restructuring related to our PowerDrive Systems, formerly ePropulsion segment. That's a $75 million restructuring costs, and we expect $100 million in savings by 2026 with $20 million to $30 million this year. And the focus there is we couldn't wait for the revenue any longer. We're seeing the delays in revenue. Like we've been talking about earlier, we needed to get that cost structure aligned with the current level of revenue. That's going to be the future growth engine of the company, get the cost structure right, so that when that business grows, which it will, we're going to drive incremental margins in the mid-teens on an all-in basis. So it's really about aligning the current level of sales with the appropriate cost structure.

Great. And maybe can we check in regarding your thoughts on valuation, given -- I feel like we've talked about some pretty good news so far. And your growth over market, almost unchanged for the year when other peers have seen significant degradation with you actually taking up your margin, despite lower sales, only 1 of 3 suppliers that we covered that -- out of 11 that has managed to do that this year. And that's despite the headwind from industry sales. So -- but I think the knock on Borg historically has been that you couldn't sustain the performance you have now because of the upcoming changes in the powertrain mix. I feel like this year, you're showing that you can do that. But despite this, using the midpoint of the new EPS guide, which is supercharged by your buybacks at $4.05, up from $3.83 at the start of the year, given where your shares are now, it's just about 8.2x EPS, right, 8.2x PE versus 12.1x for the average supplier we cover and 5.3x EBITDA versus the sector average of 6.3. So where do you think the biggest opportunity or opportunities may lie in terms of helping to close this valuation gap to trade even at parity with the other suppliers, let alone to return to the type of premium multiple that you'd historically commanded?

Yes. I'll start by saying I'm really proud of the year that we're having so far. We had a really strong first 6 months of the year, growth over market, really strong margin profile, and we delivered $297 million of free cash flow in the second quarter. It was a great quarter for us. When we updated our outlook, even with revenue coming down primarily from production, we're expanding margins. And we're delivering over $500 million of free cash flow in the year. I'm really proud of where we're at as a company. I think our focus from a valuation perspective is let's focus on what BorgWarner can control. And what can BorgWarner -- what can we control. We can control having a great portfolio that can support our customers around the globe, whether that's for foundational products or eProducts or hybrid applications. We can focus on that growth, converting it to income on an all-in basis in the mid-teens, which isn't something we were talking about previously, focus on growing operating income on an absolute basis year-over-year, focus on delivering free cash flow, and that will allow us to invest organically, inorganically, but also return cash to shareholders. And we announced we're providing all the cash flow this year to our shareholders. So I think we need to focus on what BorgWarner can control, growth over market, conversion, cash flow. I think that's what we should focus on.

Yes. Let's talk about that buyback then, right, $300 million. You did $100 million already in the first quarter. You pay about $100 million in dividends, right? So that is the $500 million of the $525 million of FCF that you guide to. How indicative of -how indicative is this year's allocation to what we might expect going forward? Because in the past, the repurchase needed to compete with M&A to prepare the company for the EV transition. Feel like that's pretty much done, would you say? I don't know. Is -- so is there much more room now to return capital? And then maybe on a related note. I'm curious if you would ever potentially consider levering to repurchase shares, while maintaining your investment grade rating similar to what Aptiv announced last week. You're probably expecting that question after what they did. And can you remind us of your targeted leverage range, why you feel that's the appropriate amount to run with?

Sure. Yes. So I'll actually start with liquidity and leverage. And when I look at our balance sheet at the end of the second quarter, I put a checkmark next to both of those. We target liquidity, including our $2 billion revolver at about 20% of sales, and we're achieving that mark in the second quarter. When I think about leverage on a gross basis for the company, we're looking for leverage right around 2x. Again, when I look at our balance sheet at the end of the second quarter, I feel good about liquidity, I feel good about leverage. Fred shared on the call that we don't see any M&A closing or being announced in the next few quarters. And so the right approach from us, just a very balanced capital allocation approaches. If we feel really good about our balance sheet, we should take this extra cash and return it to shareholders. And it's exactly what you just said, $40 million in buybacks and $100 million in a consistent quarterly dividend that we're not going to turn on and turn off. It's going to be paid through the cycle. As far as your comment about Aptiv, that's not our focus right now. Our focus right now is let's execute that $300 million buyback. And so that's what we're going to do in the -- through the course of the next 6 months. And I think an interesting point is when you take a step back and look at our repurchases going back to Q4 of last year, once we execute this $300 million, we'll have repurchased 7% of the company's shares post the PHINIA spin-off. So I think that's a pretty healthy share buyback program, and we're excited to execute it.

And they were talking yesterday, they're buying back their shares as well, yes. And I wanted to check in on where we are at the latest with the automaker in-source, outsource decisions. Because I think it's been clear for some time to the investors that the content per vehicle opportunity is much greater on battery electric vehicles for you than on internal combustion. But there's always been that separate question of what will your share of the battery electric opportunity be, including because of how much will the automakers maybe opt to do in-house versus -- in-house for EVs versus what they had done after the ICE components, which ICE, maybe they're more willing to outsource. GM, especially, seems with the Ultium drive, Ford with some of their statements seem to be desiring to do more in-house when it came to EV propulsion and even EV driveline. However, it seems like these strategies were articulated when there was a lot more concern about continuity of supply than there is now because there was thought to be not enough lithium to go around. I don't know if motors or inverters, there was this gold rush to EVs. Now that the growth in EVs is expected to be more moderate with the increased focus on profitability that the automakers have versus growth previously in EVs at any cost, I'm curious how you're thinking now about the -- how much of the addressable market might end up going to suppliers like BorgWarner. How are you thinking about this? And how are the customers -- are you having any different tone or conversations with them?

Yes. So I think you're right that the volatility that we've seen, the change in some of the volume expectation of the programs, the rationale that it's going to at least bring to light or the thought process of, do I reconsider what I thought was going to be in-house versus outsourced, I think that's a very reasonable thing to think that those decisions that seem so finite 12, 24 months ago probably could see some potential to change. I'd say the reality is we haven't seen it yet, right? I think we're -- I think many of our customers are trying to figure out how their portfolios are going to pivot and really -- in reaction to this volatility. There are some programs coming now. And then that's what's different from maybe 3, 6 months ago is those programs are getting starting to get closer. They're starting to become real programs. They haven't come up for a quote yet, but they're starting to make programs in the pipeline. As we stand here today, I think our view of what the outsourced market in terms of percentage of BEV is roughly unchanged from a component level. We still see about 80% of inverters outsourced. That's just not where the OEMs live, right, in that electronics space. Motors, we still see 50% to 60% of that outsourced. Maybe that could go higher, we'll see. And IDMs is about 1/3 of the market today. So those numbers have been fairly consistent over the past over years, but I think we're going to have to wait and see, do this change in this market dynamic change the outsourcing systems by customers. I think it's the right question. We haven't seen it change yet.

I think it was 2 of our Detroit trips ago, December of '22, I guess, when we're leaving the BorgWarner campus to go to Ford and we'd mention to Fred about what Ford has been saying about in-sourcing even inverter production. And he said, "When you get -- when you ask Jim say -- what do you mean when you say you will in-source it? What do you mean exactly? Are you going to be doing everything? Are there still going to be a component opportunity?" So maybe just frame that a little bit to the downside. Even when the automakers are doing it themselves, is there still a role for BorgWarner to play there, an opportunity for you?

I think the opportunity is still significant. If we're supplying -- we're happy to supply an inverter. An inverter can be $400 to $800 of content. That's more than we have on combustion vehicles in terms of our average addressable content. Motors, we're happy to supply a full motor. You need a supplier for rotor and stator and do the final assembly of the motor, we're happy to do that, too. I think when you take a step back, I think the strength that we have is that we can go both paths. IDMs are not the biggest eProduct in Borg's portfolio. About 5 of the eProduct wins that we've announced to date, which is now close to 50, have been IDMs, but that's a nice business for us. But also having the capability to have that system level discussion helps you as you're pursuing those individual products. So we're happy to do either. We apply the same internal capital hurdles, whether that's a system or it's a component or individual component. So we're happy to do either.

And relative to those IDMs are 3-in-1 systems or 4-in-1 systems, electronic driving, it's e-machines, whatever, people are calling them. When you combine the electric motor, the inverter, the gearbox, we make an EV go. And we cover a number of suppliers competing in this space. We've got American Axle, which partners with Inovance. We've got Magna, which partners with LG Electronics on the power electronics side. We've got Dana that partners with TM4 up in Canada. And then you've got BorgWarner, which is different. It's entirely vertically integrated, entirely in-house when it comes to these capabilities. On the one hand, sort of 3 against 1. When I go to these other companies, because I know BorgWarner says, "Hey, we can move faster, we can do it better," and they say, "Oh, we can do just as well partnering. We don't have to make the inverter ourselves." But then you look at the share and the awards, and I feel like you guys seem to have by far the most. Just curious, what do you think that your awards or your anticipated share or your conversations with the customers might imply about the merits of your differentiated vertically integrated approach?

I think important knowledge, we've been doing this for quite some time, right? IDMs, individual products, we've started down this journey about 10 years ago. And what we've learned is the pillars of what made our foundational business successful, i.e., leading with the product leadership in the individual components, is still very much the path. So we think that helps you not only with the component sales, but I think it's hard to get that same level of leadership if you don't have that capabilities or anyone else. I don't know if there's anything else you would add.

No, I think that's exactly right.

Maybe can we check in on the battery pack business? So wasn't coming down with some of the other eProduct sales and the outlook. Talk about the assets that you purchased with AKASOL, but also the expansion over into Seneca, right? And how has that process been going, the ramp at Seneca? I know the battery business that you do, it's not levered to light vehicles, right? It's more like the commercial vehicles like the buses, for example. Have we seen the same type of expectation reset in ELCVs as we have in ELVs? And also, I think that business had been capacity constrained previously, which might have prevented you from being able to exploit some of the adjacencies, like with stationary power, industrial. Where are you on the -- in terms of the process of solving the capacity constraint? And when can you turn to these other end markets? And what could the ultimate potential there be, do you think?

Yes. The teams in Seneca and [indiscernible] have done a really great job with capacity expansions. So I think we'd classify today is we don't see ourselves constrained by our capacity. We still see growth in that business as we move forward based on demand with our customers. So -- but we're really happy with the expansions that we've been able to execute there. Keep in mind, this is a relatively small part of the ECV overall market, right? This is where we see an opportunity to do battery packs for first buses is where we see the biggest growth. And we don't need a lot of volume for this to be a significant sales business for us. These systems on these buses range anywhere from $75,000 to $100,000 per vehicle. So you can kind of run the math for a nice $700 million to $750 million business this year. You don't need a lot of volume by customers. So we still see really strong demand there. Has not had the same volatility that we've seen on the light vehicle part of our business, but we're really happy with what we see, both from the demand and again, on that capacity expansion side. The teams did a really great job.

When I first heard about the AKASOL acquisition, I thought, wow, that's -- these guys are going to take on LG CAM, NSK and Honda. How can they possibly compete? It was this mile-long factory in South Korea. But I think it's different. You said the content is so big and the size of it. Is that business always going to be like a batch-type assembly and you will be able to effectively compete against these really big companies?

I think we're going to -- where we're going to focus is still going to be on that ECV side of the business, right? We see buses is a growing area and opportunity for us. We think there could be other opportunities in other commercial vehicle markets, maybe off-highway long term. Light vehicle, that's not a business that we foresee pursuing for battery packs because those battery packs are going to be integrated into the structure of the vehicle. Tough to really penetrate that market. But we see a significant opportunity on the commercial vehicle side.

Okay. And I've got a number of more questions, but let's check to see if there might be any in the audience. It looks like Jim, over here up in the front middle, the hand raised.

Just a follow-up on one of Ryan's earlier questions. The OEMs in-sourcing, you've already addressed that. But there's a narrative from -- whether it's Jim Farley and the Skunk Works and this dramatic low-cost EV coming out of California or Stellantis talking about a Chinese cost structure that's much, much lower than what you're getting today from existing Tier 1 suppliers. Could you kind of provide, and you already have provided a little bit of it, where you're already competing against those players? You already know what that cost structure is, and that's not really new news to you. But I just want to kind of give your ability to kind of push back on that narrative. Because it's being applied to all suppliers in terms of the developed markets. So a little elaboration on what you already touched on with Ryan.

Yes. I think it comes back to the different dynamic in the Chinese market and how you work with those customers. Particularly, your questions seem to be centered on the BEVS on the eProduct side. Those customers are very focused on speed to market. And as they do that, they're more willing to use, I hate to use the phrase off the shelf, but existing technologies to really leverage -- get those vehicles to market faster. They also have the propensity to source some more systems than components, which also helps that speed to market. It's that speed to market and the lack of needing to customize components, which helps their cost base. So it's not just a pure cost to cost. It's how -- it's the process is different, too.

And I would look at in our investor presentation, we've announced about roughly 50 awards that Pat mentioned earlier, and over 20 of them are in China. It's across systems, it's across components. It gives me a lot of confidence that if we're winning in China, we're going to continue to win in North America, we're going to continue to win in Europe. So I think it's a big success for the company.

Staying on this track. So 20% of the revenues from China, how much of that is eProducts. The 20%, how much is with local OEMs outside of the top 5? And why are you not concerned about local OEMs that aren't high ranking in terms of volume, not being marginalized as it's just such a competitive market?

So I can give you the pieces and you can kind of get to that. So it's 20% of our overall revenue. If you look at our eProducts revenue, about $2.5 billion is our forecast for this year. That was the loss of the recent guide. If you take off about $700 million from battery packs, your light vehicle business, it is about $1.8 billion, of which 45% of that is in China. So you can run the math in terms of breaking down that percentage. As it relates to the tops -- I can tell you the top 6 within that 70% is about 2/3 of that revenue.

Maybe we'll think of the next question. I want to ask on commercial settlements. Obviously, your margin is doing well this year. It's gone up despite the softer sales. It seems like that's kind of coming from more like execution and restructuring. And just want to check in on commercial settlements. We've been hearing from some suppliers, they're harder to come by, they're not just handing them out anymore. But first of all, is there any ability, you think, to still recoup some of these out-of-period premium expenses? And then moreover, is there still -- even if the automakers don't open up the contracts and help you out, in addition to what they're contractually obligated to do with aluminum and stuff and nickel, what about just the natural roll-off of these contracts, like things that were signed in 2019 will last through the end of '24, get renegotiated in '25 in an environment that reflects the higher costs? Is there still a little bit of uplift to your margin from correcting those earlier problematic margin programs after inflation changed, whether it's commercial settlements or just new contracts?

Yes. When you go back the last couple of years, obviously, inflation was a major obstacle for all companies, and we were really successful working with our customers to navigate that and get significant recoveries that impact our margin overall. So really, great operational performance by our teams. When I think about our margin performance this year, it doesn't really have anything to do with those commercial settlements. It's going back to the BorgWarner basics, what BorgWarner is really good at. We're good at productivity, generating productivity savings, restructuring savings, supplier savings. We're really focused on cost controls, and that's really been our focus this year. And you can see the expansion of our margins because of that focus. So we need to continue down that path.

And then maybe just last question on some of the internal combustion stuff that you capped apart from turbochargers. I was relieved to see that Morse TEC didn't go with PHINIA. That was such an interesting business. I visited there. It was a long time ago, but I was in [indiscernible] and I think at that point, you guys were talking about 50% of the global market is chains and 50% is belts. And we might have 50% of the chain, and we're only 25% of the vehicles that -- I don't remember exactly what the numbers were, but it is a very high share and a very sort of proprietary technology differentiated, maybe underappreciated. Maybe just talk a little bit about the Morse TEC business, what attracts you to it. And obviously, it's not a separate reporting segment, but what would the investors think about its operating performance if there was that transparency?

I can start. I was the VP of Finance for that business unit. So it really goes back to product leadership. They've been making chain for -- I think, it's close to 100 years. So there's a lot of in-house technology. It's a great culture. And I think it's the combination of technology and culture that drives the business, and Morse is a great example of that. I won't comment on their margin profile, but it's very strong. And we're really happy with that business. When you take a big step back and you mentioned PHINIA, where are we at today versus where we were when we acquired PHINIA, really, the same foundational products that we had pre-PHINIA is what we have today. So the foundational components of that spin-off are really just what we acquired with Delphi.

And having peeled off that silicon carbide inverter.

Of course, of course. It is important technology for us to acquire.

Absolutely. All right. Well, it looks like we are out of time. So please join me in thanking Craig and Patrick for all the great color and insight they shared.

Thank you, Ryan.