BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

Craig Aaron, CFO; and Pat Nolan from Investor Relations. Craig, you're just sort of chatting. Right before we started, you're coming up on almost a year of being in your new CFO role. I'm not going to ask you to rate your performance, but I guess just as a company, like how would you sort of view performance over what's really been a quite challenging year in the industry. And what were some things you think BorgWarner has done well and execute against. And what are some areas where there can still be some potential room for improvement.

Yes. First of all, really happy to be in the role. This is -- I'm very passionate about the company. I've been with the company for going on 18 years. So this is really a dream position for me. So I'd start there. As you mentioned, from a top line perspective, it's been a bit of a challenging year when you look at industry production first half, second half, two different stories. First half, kind of flat industry production, second half more down 6% year-over-year. So two different halves. From my perspective, I think the company has done an exceptional job of controlling what we can control. We're really focused in three areas. Let's make sure that we outgrow industry production. So even though the industry might be down 6%, we need to outgrow industry production. And when we look at the full year, we expect outgrowth of 200 to 300 basis points. I think that shows our focus on technology and supporting our customers, having great products for each of the industries that we -- each of the different segments that we serve. And that's about increasing operating income, increasing margin. Well we've done that this year in a pretty big way. If you look at the kind of the midpoint of our guide, we expect to be up about 30 basis points year-over-year. And when you compare that and exclude, although, we're actually up about 60 basis points. So we're focused on controlling our costs, restructuring the business productivity, restructuring savings, et cetera. And then it's about delivering cash and we're expecting about $525 million in free cash flow this year. We indicated earlier in the year that we're going to deploy all of that cash to shareholders, which we've effectively already done. We repurchased about $400 million of our own stock this year, and we'll pay about $100 million in dividends with fourth quarter dividend payment just around the corner here. So from my perspective, I think we've executed extremely well in what has been a pretty difficult market, but overall industry production down about 3% year-over-year.

Yes. I guess that was super helpful. As we sort of think about the guidance that you sort of just laid out here, and we have through [indiscernible] in the year or maybe at least 3 production weeks, maybe even less given some of the shutdowns and we've obviously seen some news. There's been some production announcements sort of here and there as there typically is. Is there anything that sort of has really caught you off guard that relative to sort of how you saw the rest of the year playing out.

Yes. I mean I have to be careful on what I can say about 2024. But as I mentioned, overall, industry production is a bit challenged fourth quarter. And so it really goes back to we have to just focus on what we can control. And our focus is on our cost structure, making sure that we're executing those various savings initiatives so that ultimately, we're really proud of our margin profile. Let's make sure that we can deliver that quarter in, quarter out. That's what we're focused on.

Yes, completely recognizing that you're not going to sort of drop '25 guidance on here, although defensive by all means, but just at a high level, and understanding that BorgWarner's goal is to sort of grow faster than the market. I mean how do you see the market playing out? Because -- and maybe even if you could provide some commentary by region, there's been a lot of -- a lot going on across the 3 major sort of theaters of the world, whether it's stimulus in China, whether it's some challenges in Europe and then obviously, election here in the U.S. And has that sort of changed at all over the past month, like how do you begin to, I guess, set the backdrop or how you want to plan to execute again in '25.

Yes. I mean I think going -- looking at the back half of the year, that's down 6% when you take a look at that and what does that mean for the first half and into 2025, I think we want to be, I would say, cautiously optimistic, but we need to see a change from that Q4, Q3, call it, second half run rate to get to what we would call a reasonable market next year whether that's flat or slightly down. So we're coming off a difficult Q3 and Q4. Let's keep our eye on it. Right now, we're focused on just making sure that we can meet customer demand for the fourth quarter and beyond. But industry production is certainly a challenge in the second half of the year, and we'll take a closer look at that as we get into early 2025 guidance.

As we think about the two sides of the business, right, the foundational, call it, ICE related side and sort of the e-product side. Again, there's a number of things happening as we sort of think about '25 and beyond, starting with higher CO2 regulations in Europe, but also in the U.S. maybe a further sort of push out of the growth. So how are you -- well, I guess, not so much how are you planning for it? What are your conversations with your customers about how they are sort of going about some of these challenges.

Yes. I mean I think it varies by region, but I think the one that you're probably most of it a lot more headlines on what's going to happen to Europe next year. I mean the conversations with our customers, our customers have products that are ready to go, right? You can look at how many launches or wins have you announced in Europe and there's 5 of them that are launching next year and are across the portfolio in inverters and cooling plates and other products. So there are clearly new products ready to launch in Europe next year. Still TBD, ultimately all the regulation is going to be enforced next year. Is there going to be some easement mostly. The products are there. We -- our preference would be, obviously, we'd like the new products to launch. That always is a good thing for our outgrowth. But that being said, if they don't, it's probably better for our foundational business. So I think I'm going to -- Europe is a good snapshot of that resilience of that, okay, if things don't go faster on the electrification side, but it's going to benefit the foundational side of the business and vice versa.

If they do -- I mean, it seems like they're going to have to sort of at least start to try to sort of comply because it doesn't seem like things are changing in the near term. So if they incrementally push the EV portfolio and at the same time, make fewer ICEs to sort of get that mix in the right spot. Is that still that you think a fairly neutral outcome for BorgWarner given that portfolio resiliency .

I think we'll have to wait and see the details. Obviously, when you think about it in the context of market will be what it's going to be, right? We can't control that part of it. But if there is compliance and those new products are coming, that should be beneficial for the product side of our business.

You had mentioned on the third quarter call that there were a bunch of new product launches in the quarter and more coming in the fourth quarter. Is that the same stuff you were just talking about in terms of sort of the launches for '25? Or is that sort of separate from what's beginning to ramp up here in the back half of the year.

Okay. Do you want to start that?

Yes, maybe I'll start and Pat can add on. So we have a lot of launches, particularly in our PowerDrive Systems business unit. It's occurring in the fourth quarter, but also in Q1, Q2 and into '25. The good news is they're across the globe. So in North America, Europe, Asia, we have a lot of activity in all regions. Ultimately, though, what it will come down to is consumer demand, our customers pull from us. So we're focused on getting ready for those launches. But as we sit here today, all of those programs should be launching in 2025.

Yes, and like you said though, that will come as a result, it starts in Q4. Those volumes obviously have impacts throughout 2025, and there are additional launches in 2025 as well.

I guess if we take a step back and just sort of again, think about -- you sort of talked about out, Craig, in the beginning about outgrowing the market, and you've done that, right? What if we slice it a little bit differently and said, okay, well, here's the ICE or sort of the foundational market? What's the outgrowth there. Here's the electric portfolio, e-products portfolio, here's the growth there. And like backing out the battery business, like how would you sort of -- what kind of range would you sort of put as sort of reasonable targets for each of those businesses.

Yes, I would say we want to see outgrowth on both sides of the business. When we look at our outgrowth this year, we're in the 200 to 300 basis point range. And when I think about the foundational side, where is that outgrowth coming from -- it's in our Drivetrain & Morse System segment. It's coming from strong export sales coming out of China into Southeast Asia. So we're seeing strong pull for that foundational business, again, exporting into Southeast Asia. On the other side of the portfolio, it's really coming from the battery business. This year, we had a couple of challenges in the PowerDrive Systems business. There was a program in North America, program in Europe. I'm sorry, in China that didn't materialize like we had hoped. But we'll lap that in next year, and I think that will provide a benefit as we look into 2025.

So even ex the battery business into '25, there's hope for -- even if it didn't occur this year, there's hope for outgrowth ex-battery business on new products?

Absolutely. I mean when you think about our PowerDrive Systems business unit, that's going to be the future growth of the company. A lot of the launches that we've just talked about are in that segment. So when you think about BorgWarner going forward and the growth aspirations, it's going to be in the east side of our portfolio, and our goal there is to grow above industry production, convert that growth in income in the mid-teens on a hauling basis, grow income, grow margin. That's our focus.

One of the things you've been able to do here, right, is -- and I'm going off memory, so don't -- I'm sure you'll correct me, but I feel like there was one year where you were increasing R&D for e-products about $100 million. And then I think there's another year that was order of magnitude similar, maybe even a little bit higher. Since that's sort of been pulled back, like if we -- like given -- I guess, how would -- what your level of R&D are we sort of back out, given sort of some of the pushouts you've seen right now?

I would look at it in a couple of ways. First, where are we -- where have we been historically from an R&D perspective. And we've been at more elevated levels like you just talked about for a couple of years, right, I'd say that mid-5%, 5.5% of sales. We're navigating more towards, call that 5.2, 5.3 range. And I would expect us to get down to more of our norm, which is 5% as we kind of move forward. But when we think about all of that, how are we managing the business, it all comes down to, we're going to outgrow industry production. We got to take that outgrowth and convert it into income in the mid-teens, inclusive of R&D and generate cash . And that's really where we're focused across the portfolio. .

Was that -- when you were increasing R&D, was that really driven by your customers? And -- or was that an internal effort to sort of try to develop product for your customers? Like how much was true, I guess, R&D versus sort of engineering for awards won?

We don't have a lot of people just sitting around thinking about the XYZ. What we do is -- the R&D is basically application and engineering. It's supporting launches that we have around the globe. We announced a number of programs, and we were supporting those programs with a lot of engineering investment, and then obviously, things changed on us. And so that's what caused us to do the PowerDrive system restructuring. Really ensure that we couldn't wait for that revenue to come. We had to get our cost structure right, and that's why we announced the PDS restructuring in the summer time right around July.

I'm assuming there's been conversations with those customers about failed volume commitments -- and I think even maybe you've alluded to some sort of recoveries for that? Or is do those conversations persist? And are they ongoing? And what's really -- what shape does that take, because clearly, they didn't deliver on some promises, but they also sort of have the offer of new potential business. So how does that sort of manifest into sort of the BorgWarner financials.

Yes, it's a dynamic conversation, obviously. We did announce in the third quarter that we had some pretty sizable recoveries in the PowerGraph Systems segment and it related to what you just talked about. So we're going to continue to have those conversations annually as we get into 2025 and volumes to materialize like we expected for '24 we're going to meet with our customers, have those discussions. They can come in various forms. They could come from a lump sum reimbursement, which we've seen. It can come from a piece price increase as we move forward. And so we just navigate those with our customers. But I would say we've been very successful at getting cost recovery actions when they're appropriate.

Yes. So we touched a little bit on some of the changing landscape and while I sort of want to focus on two topics that have really come up in North America and the U.S., I guess, sort of post the election. One is sort of like just the EV outlook here for the U.S.? And if you're able to sort of provide any -- or are you able to provide any sort of like high level views of how you see either what your own or BorgWarner are used over that progressing are or even more valuable, I guess, would be the types of conversations that you've been having with customers in the wake of slower uptake for [indiscernible].

Yes. Maybe I'll start, and you can add on. Look, it's very early. It's very early days. When you think about any of our markets, North America, Europe, China, it takes time for these things to take hold. What I think -- why I think BorgWarner is really uniquely positioned is because we have two great portfolios. We have the foundational portfolio that's going to support highly efficient combustion engines that go into a hybrid vehicle that go into a combustion vehicle. And then we have the product portfolio. It's going to go into hybrid vehicles, it's going to go into battery electric vehicles. So if it's a little bit slower in the U.S., that's okay. We'll just provide foundational products. These are mature products, we're #1 or #2 in the markets that we serve. So we'll be highly successful that way. If he moves a little bit faster than maybe than what we expect as we sit here today knowing a new administration is coming in, we will provide e-products and we'll ensure that we convert that growth in income in the mid-teens. So that's what I say. I think no matter how it plays out BorgWarner will be successful.

The only thing I'd add is if there's a silver lining to the election from that regulatory standpoint, it's maybe it brings some clarity because the EV slowdown in North America didn't just happen a couple of weeks ago with election. It's probably a better part of a year ago. and our customers have been struggling about what their new mix is ultimately going to be. Now hopefully, we'll get some regulatory certainty they can just decide what that portfolio is going to look like going forward. And then we're happy to help them whichever direction they want to go. If they want to go down the foundational path improvement, great. They want to do it advanced hybrids, awesome. If they want to do a full [indiscernible] they can do that too. So I think that's the way we would think about it. I don't think anything has necessarily changed in North America from that standpoint because it's already been weaker based on consumer demand. Hopefully, we now have certainty what the portfolios look like going forward.

Are they more customer conversations on advanced hybrids, plug-in hybrids, range extended type vehicles? And maybe just for the benefit of the audience, can remind everyone sort of what parts of the BorgWarner portfolio from each side of the business sort of really gets on that type of vehicle? .

Yes. So we should think about it in terms of that part of the portfolio, all of our foundational products apply to hybrid. Turbochargers, timing system. All those products will still be on it. .

On the plug in as well. .

Yes. Maybe slightly different specs, but still you would have that -- and then our e-products also go on those hybrid vehicles. When you think about our business today on the e-product side. If you ex out the battery business, about 40% of our e-products business today is for advanced hybrids. Well, why is that? Well, if you look at the NEV market in China, it's in that same ZIP code in terms of that split. So these advanced hybrids have been out there in the market. It's been mostly in China then coming in Europe. And now if they come to North America, that will be good. There are conversations with customers and their specific programs, They haven't gone to the RFQ phase yet.

Is the -- I mean, I guess, like you said, it's still sort of early, but -- so is the pace of inquiries increasing? Like what type of urgency is there, I guess, from your customer and have you -- has that actually steadily increased throughout the year irrespective of the election?

I would say we still have increased throughout the year. Hopefully, election will drive some of those programs that are -- this kind of RFQ, but they haven't been awarded yet to anyone, but hopefully, that will push this over the fence line.

Do you think there's -- historically, some of the customers, especially in North America, take some time from RFQ to sort of actually getting the product and SOP. Do you see any -- given that the sort of it's seemingly leverages existing power plants, et cetera, right, like you could take maybe an existing engine and sort of add it to some sort of hybrid. Is there the potential for those programs to move faster? Or you think it's status quo?

Still going to -- even if it moves faster, it's still going to be 3-plus years before the vehicles are in the market.

The other thing on coming out of the election on investors' minds, obviously, is trade and tariffs. And I know you've got a footprint in the U.S. and sort of Mexico. I don't want to say this is a BorgWarner issue. I think it's sort of an industry issue, especially when you look at sort of where final assembly capacity is looking and really even beyond you, a lot of other sort of supply content come from us. But just remind us of sort of your footprint and what could potentially happen if it was a place and if you're even able to offer a view or do you think anything will happen there? .

Yes. Important to just remember, from a regional basis, typically, we produce in the region where our customers produce. There can be tight across country borders, but generally, from a regional basis, we're producing within the region. If you were to think about our specific exposure, I'm assuming you're asking related to Mexico. Our revenue in Mexico last year was $1.76 billion. So it's not immaterial, but it's not the biggest number. In general, most of our sales in Mexico are two plants in Mexico, there is some that goes north over the border. There are some products that come south over the border. But in general, it's exposed to our customers in that region. All of our -- largely all of our products are produced on both sides of the border. So there's flexibility there. But I think we'll ultimately have to see what our customers decide, because we're ultimately serving those plants. And if those plants need to move, if they decide to move them, we'll adjust accordingly. There's cost and time that comes with that, though.

Of course, just I mean, understanding that, but like -- and understand this ultimately end up into sort of one larger negotiation with your customers. But just if for argument's sake, the tariff was put in tomorrow, right, and the product was shipped across the border, who is actually bearing the cost of that right now? Is that clear? Or is it not clear?

It depends on who the importer of record is -- and that can be -- it can vary by contract. It can vary by customer -- it's not a [indiscernible].

It depends how the contract is written. Makes possession one.

Okay. And it's written. And there's contracts that go both ways, does that sound...

Correct.

Okay. And what -- is there any components from any European facilities that end up in vehicles made in the U.S.?

I'm sure there's some, but I don't think that's a material number.

Okay. Okay. Let's sort of turn our attention to China a little bit. You talked about 90% of your e-products revenues with domestic players. So obviously, some good traction there, especially when we've seen how some of the foreign players have fared there. What's -- like can you just sort of go over the competitive dynamics and why does someone choose a BorgWarner versus a domestic supplier, especially since it does seem like there's -- not -- it's not sort of necessarily forceful, but doesn't seem like there's a push from -- within China to sort of use more of a domestic supply chain.

Yes. So I think you need to start with. We've been in China for a very long time. We have deep customer relationships that go back decades and decades. So we have a lot of credibility with our customers. I think winning in that China market, which we've done really successfully comes down to speed. Speed is very much appreciated and leading with technology. And we have a very strong China team that lives with those beliefs, leads with speed and technology. And I think that's what's resulted in us being very successful in China on both sides of the portfolio, the foundational portfolio or the e-product side of the portfolio. So I think that's been our secret thoughts, and we'll continue to execute in that way.

Is there one -- on the e-product side, is there one product, whether it's inverters or somebody else that has sort of resonated better with the domestics? Or?

I think it's -- all of our products have done reasonably well. We've announced inverter wins. We've announced IDM wins. Anything else you would add?

No, the only thing I'd add is they certainly source individual components, but there's probably more of a propensity to source full system solutions in China than there are in other parts of the world. And maybe that stems from their preference for speed. The phrase off the shelf is not the right description, but they're using known technologies that they can make small adjustments to allow them to get to market faster. So they like some more of those system solutions because it ultimately increases that speed to market.

And on the foundational side within China, if you run sort of the numbers like a little bit more weighted towards still, I think, more sort of domestic than formed, but a little bit more foreign exposure there as well, how do you're sort of managing your footprint there as maybe some of those customers might be in structural decline? And then on the domestic side, maybe this is difficult for you to exactly know. But it does seem, which you alluded to earlier that, that's at least been buoyed by some of the export device vehicles from China to, whether it's other parts of Southeast Asia or South America. So is that a trend you expect to continue? And if they -- if they were customers begin to localize, is that something you would you look to follow them into it?

Yes. I mean we're going to continue to look for growth opportunities. And if they localize in different regions, we're there to support them. We have a global footprint already established in most major regions of the world. So I think we have the ability to support them right away. From an export business perspective, it's really encouraging that we've seen that the last couple of years. As I sit here today, I don't see any material change. But ultimately, it's going to come down to what our customers pull in various regions. So I think we have great technology across our portfolio, and it's obviously not only supporting the China market, but it's also supporting their plans as they move outside of China and export to other regions of the world.

Maybe just one other thing that's sort of been on investors' minds in terms of when we sort of look at when the phone rings or when you look at the in-boxes, it seems to be there's greater concern now about some of the Chinese suppliers moving into Europe or maybe moving into North America, which I don't think we've seen a ton in North America, but correct me if I'm wrong. Europe, maybe we've seen a little bit. But that's a sort of very broad service supplier statement. What have you seen from a BorgWarner competitive perspective? And do you see that all as a sort of a credible threat for the Chinese to become larger players on a global scale?

Well, I think if you look at our business in China, I mean, you referenced the e-product mix, but even our overall mix in China, we look 70% with the local OEMs is our business there. So we're more or less in line with them, maybe slightly overweight how the market shifted the past year. And I think that really speaks to our competitive invest in that market. So you're right that there are Chinese suppliers that have increased their capabilities over the past several years. But I think if you look at our performance in that market, we've shown our ability to be able to compete with that. When and if they expand in other parts of the world, I think our competitive position would be as strong or stronger than it is in China.

Have you seen any of that yet in Europe or North America? .

No. I don't think I've seen that. Not yet. But -- in China, for sure, but not outside of China. . Yes. And I think it's very logical. If we're winning in China, which we've demonstrated, we have, we already have the capability in place in other regions of the world. It seems very logical that we're -- would be a great partner for them -- but let's see how that materializes as we move forward.

Can we just -- like can we -- I know you've done some restructuring, you sort of mentioned that, but how would you sort of assess your overall footprint? And I guess I'm specifically focused on Europe and China. Because in Europe, right, you could see sort of production is still 20% below prior peak, things have structurally changed and that as we moved from a net export market to an import market. You might have additional challenges on some of the European vehicles into the U.S. or other markets if tariffs come into play. And a lot of those customers are struggling. So one, is there -- do you think there needs to be further work done with your footprint to stay ahead of what of challenges we see in Europe. And then in China, I guess I'm just curious, as you've sort of seen the shift between domestic and foreign, are you just sort of shifting the allocation within your facilities? Or is there an opportunity or maybe for some consolidation or other work to be done? -- on the footprint side.

So on -- if I just come back to me if I missed it. I'm just trying to remember it. So in Europe, you're right, Europe was part of our cost reduction efforts over the past several years. I think when you think about our footprint in Europe, you should not think about a BorgWarner plant dedicated to one OEM, if one OEM loses or gain share that's going to materially. Most of our plants are serving multiple customers. And I expect -- if you see some of those newer customers moving to Europe, they'll supply those customers as well. There's also inherent flexibility between our foundational and the e-products business, 7 of our plants in Europe today can produce either foundational e-products. So I think you have flexibility from a customer standpoint, you have flexibility from an end product standpoint. And I think that's hopefully how we're going to manage it. I don't think I'd said described BorgWarner's footprint in Europe as when you talk about below peak that we're sitting on 20% excess capacity, we're going to -- you see us typically adjust our costs.

And the only thing I would add is we take a proactive approach. I don't know what you indicated in your commentary to restructuring our business, we announced actions in '23, we announced actions in '24. So we're always looking ahead. It's an important lever that we need to continue to drive efficiency in our business to deliver that incremental team's conversion.

Yes. I guess the question was, is it -- were some of these actions taken sort of more in response to some of the challenges or looking ahead to sort of so you don't get burned by some of the challenges?

It's always proactive, meaning we know we need to continue to focus and getting cost out of our business to stay competitive to win business and then to deliver that incremental income.

As it relates to the Chinese capacity, though, right? keep in mind that as the business that's been growing. I don't think it's a situation where we were doing with one customer switching to the other customers. Our mix has shifted over time. So back in 2016, our mix foreign versus domestic was closer to 40% domestic, now it's 70% domestic versus the global. So I think I guess there's flexibility in the plants, but you have to keep in mind that it's been a net growth business, so you've actually been adding capacity in the market.

And presumably, the comment you made in Europe is similar for China that it's not plants dedicated to customers. So even if there's shifts within the customers, you can sort of reallocate capacity then. Why don't we just pause to see if there's anything in the audience. Is that a question -- all right. The battery business, I think you're targeting about $700 million in sales this year. It sounds like the capacity build-out that you've done is sort of mostly complete. So are -- do you sort of hit full sort of run rate ramp in -- at some point in the fourth quarter? And is that sort of a good jumping off point to think about '25 for that business? .

So you're right, the business is tracking, we said, around $700 million. That's at the low end of our forecast that we had going into the year, where we're seeing a little bit of weakness in North America versus those original expectations. As far as the capacity expansion, you're pretty much done now as we move through the fourth quarter. That capacity don't think about it as that's 2025 capacity. Now the capacity we are putting in place is to support the original aspirations for that business through 2027. But how I described the business today, where if you would ask us 1.5 years ago, we would have said we are capacity constrained. Today, I think we have sufficient capacity to meet our customer needs. And ultimately, those customer volumes and that customer pull is going to drive the trajectory of that business over the next couple of years rather than returning on a line, and that's how it's going to drive the revenue higher.

Right. And so I know that sort of that business provides a mix of trucks and buses. Is there any -- like presumably, it's the Europe plant is for Europe than North America plant is for Europe. Is it more buses versus trucks in North America and a different sort of mix in Europe? Or is it pretty similar across both [ sides ].

Heavily weighted towards bus in both regions, yes.

And from a competitive standpoint in that business, how do we sort of see the landscape for commercial vehicle battery packs.

So our business is mainly North America and Europe, are totally North America and Europe today. We're the last independent battery supplier left in the Western world, so that part of that market. So we're effectively solving a solution for our customers. A portion of the market is going to be in-house. We think it's going to be about 50-50 in-house versus outsourced. And for us, it's comes down to the same thing as the [ nonlife ] basis? Are we delivering that value to our customers.

And can you just remind us on the FinDreams sort of portion kicks in?

Yes. So today, our battery packs are all NMC-based. We're now going to the phase of -- we have a partnership or agreement with FinDreams. And that business can supply battery packs outside of China to the commercial vehicle market with LFP. We're in the process of getting those packs ready now that they can be -- meet all the Western standards. And we have to now approach our customers with that. We haven't got an award yet, when you get an award, it's probably a couple of years out when the revenue comes. But we're getting to the pace of that we can start talking to our customers about the product.

And how are the lines in the facility set up flexible enough to sort of accommodate either -- or would there be a need to be a specific portion of the plant set up to accommodate the LFP cells?

It would be a different line. We had a different -- slightly less capital-intensive product than the NMC programs. So -- but obviously, we have a footprint. Just like we did with the NMC products, we'd find somewhere in the BorgWarner network to do it. Seneca is a great example. Today, they do transfer cases, and that's where we added our North American capacity. The capacity expansion was all NMC. It was LFP.

But is there room left in those plans to accommodate LFP or not?

We have space if we were -- if we need to do.

I guess, maybe to sort of close here, you've resegmented the business into four segments. We've got two which sort of lean more are foundational to which lean more products now. I guess it's not too different from sort of how you sort of thought about the business before, maybe just a little bit more neatly aligned. But given that this is sort of still relatively new for investors, maybe just at a -- at a high level, we could sort of take a quick tour through those segments and sort of what are the growth and/or profit drivers for each of those segments, not in the very specific. I'm not talking about '25 just over sort of the midterm here.

Yes, yes. So when you think about our business, this is the first time since I've been with BorgWarner, where our internal segments and our external segments are completely aligned. So that's really positive from my perspective. We have two primarily focused, I would say, two focused foundational business units. It's Turbo and Thermal Technologies and Drivetrain & Morse Systems, two different segments. Those are foundationally focused business units. The products that are incorporated into those business units are #1 or #2 in the markets that they serve. These are very mature businesses highly profitable businesses. They delivered a lot of profit and a lot of cash. It's about 80% of our revenue today between those two segments. The other 20% of our revenue is our PowerDrive Systems business unit and our battery and charging systems business units. Those are e-product business units. Those will be the future growth engine of the company. We fully expect that those business units will continue to grow. We fully expect that as they grow, they will convert in the mid-teens on an all-in basis. So that's how you should think about our business as we move forward. We feel like we've given now investors really strong transparency to both sides of our portfolio in a more meaningful way. And that's why we did the resegmentation.

Maybe just to close here, Aaron, you alluded to earlier the strong free cash generation and sort of the returning of all the cash. It doesn't seem to me like you need based on our conversation today, sort of a ton new incremental capital expenditure sort of -- or an increase, I guess, in sort of what you spend annually. And then the market is going to do what the market is going to do, but you seem very focused on sort of converting in there. So to the extent you sort of are still able to sort of generate strong cash flow, like how do you sort of view the priorities for that cash going forward?

Yes. So I view priorities first is making sure that BorgWarner has a really strong balance sheet. We're an investment-grade credit company. I think that's a competitive advantage for us. And I think it's important to maintain that strength. And so when you think about liquidity, the first priorities are liquidity and leverage for liquidity, we target about 20% of sales. From a leverage perspective, we target 2x on a gross basis. When I look at our balance sheet at the end of the third quarter, I put a checkmark next to both of those items. We indicated coming out of the July call, Fred said, "Hey, I don't see any M&A materializing in the near term", meaning the rest of 2024. And so that's why it was important to take that free cash flow call it, that $525 million and return it to shareholders. So our priorities after the strong balance sheet is M&A with no M&A insight, we bought back $400 million of stock and paid $100 million in dividends. that's effectively all of our free cash flow this year. We're going to continue to follow that same disciplined approach as we go into 2025.

Maybe just on sort of the M&A and sort of the pipeline, I understand that there's nothing sort of immediate. But is it possible that either on the -- a, would you, at this point, consider foundational tuck-in M&A? Or would it sort of more be on the e-product side or you would consider.

I think we're more leaning -- I mean we would move more on the east side of the business. That's what you've seen us do over the last several transactions. M&A is still an important aspect of our businesses. It's still an important priority for us. But I would say our priorities and our thresholds have changed maybe a little bit than they have in the last several years. We're really focused on maybe three things. It does that asset bring product leadership to BorgWarner? Does it help improve our portfolio. What's the margin profile of that business? Is it going to dilute our margin profile? It's something that we're really sensitive to because we're really proud of our margin profile. And then we're going to have to run a lot of different scenarios from a discount of cash flow perspective to make sure we're paying a fair value for that asset. There's a lot of volatility. On the e-side of the business, we need to make sure that we're paying a fair price for what we see. So I would say that's the metrics, that the items that we look at to make sure we're transacting.

And I know we're coming up on time, but just to close that for sort of [ aldo ]. I guess what I'm wondering is if -- maybe it's too early to see this, but do you think there might be somewhat of a loosening or sort of maybe even sort of changing valuations on that product side in light of sort of potential push out or long needed EV adoption.

I think it's always an individual conversation. The businesses that we tend to acquire usually aren't public. They can be private. And so do you see [indiscernible] with that owner of that business. Some still have valuations that are here, and we think the value is here. You got to have a perfect marriage where the value that we see and the value that they're willing to sell for makes sense.

For the benefit of those online, his hand was lower for where you thought the value are still higher. But with that, Craig, Pat, thanks so much for joining us. I really, really appreciate it.

Thank you.