BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

We're very happy to have BorgWarner up next. We view BorgWarner as one of the leading powertrain technology companies on the planet with a great portfolio of ICE technology as well as EV technology, that if I were to set up a powertrain company, I would set it up in a very balanced fashion the way this company has. But the market obviously disagrees us with us for the moment. So we're going to get into some of those disagreements in this session. We're very happy to have Joe Fadool, President and CEO; Craig Aaron, CFO; and Patrick Nolan, VP of IR. And Pat, thank you for all the help. You're always a treasure chest of information for us. So thank you for joining us as well.

Maybe if we could just open it up first, Joe. You've been with BorgWarner since 2010, I believe, so it's been a while. But you just took over as CEO in February. So I was just wondering if you could talk about, just generally, some of the positions that have been taken in the company, how it's been set up, before you took over, and also kind of that in sort of the context of a very uncertain macro environment, suddenly, it's been a little bit uncertain for a while, but suddenly gotten a little bit more uncertain, and what you think the biggest issues and opportunities are from BorgWarner that may be slightly different or maybe the same as what your -- what Fred used to talk about.

Sure. So John, first, thanks for hosting the conference, well-attended conference. From where we're sitting today, the way we view our business is this is the strongest portfolio we've had, and you could argue that BorgWarner may be one of the strongest powertrain players in the market. And the reason we believe that is, first, if you go back, when I started, what I found at BorgWarner is a very strong combustion portfolio. So when you think about turbochargers or exhaust gas management, 4-wheel drive timing systems, where we're #1 or #2 in all of those products, we started from a position of strength. About 10 years ago, we started to make this transition toward electrification. We began with an acquisition of Remy International, which brought us really good motor technology. And over the course of the years, we've been able to outgrow our end-markets with this portfolio. And in the last few years, we accelerated toward electrification with a number of acquisitions that brought us inverters, it brought us more motor technology, onboard charging and a number of other products. So as I look at it today, we're very pleased with the portfolio. It's very strong. From our standpoint, we are leveraging growth across that portfolio independent of where the growth is coming from. So our goal is to outgrow our end-markets. So I think our biggest opportunity is really capitalize on that portfolio now. We worked really hard to build that portfolio, especially with the investments in the last 5 years. We're able to do that because we have very strong customer relationships, our customer diversity is very high. So I see growth opportunities on all sides of the business now. We were focused heavily on the E side under Fred's tenure, because that's where the market was headed quickly, and most people believed that, but now we see the growth across the entire portfolio. So that's our big opportunity. Of course, the challenges are like any other automotive supplier these days. Will there be an impact in volumes this year? Tariffs and uncertainty obviously playing a big role. But my focus is outgrowing our end-markets, leveraging the core competence we have. It's really continue to build on the portfolio. Even though we feel it's very strong, we still want to make organic investments and inorganic investments. And then finally, which is really important, is driving enhanced financial performance. So we want to expand margins and generate a lot of cash.

That's a great start. I want to stick on sort of tariffs and the trade stuff first and then get into the good guys, because there's a lot of good stuff to talk about. Can you talk about sort of your setup for your footprint in North America, U.S., Canada and Mexico? What your exposures are, but why they are, right? Not just -- I mean because there's reasons that you set up your footprint like most companies in the way you have. And what could be the opportunity or the flexibility to reshore to the U.S. from Mexico? I guess, would probably be the bigger potential, or maybe not, right, it might not make sense. So if you could just talk about that, that footprint, why it is and what the potential could be for you.

Yes. So maybe how do we set up our footprint. So generally, we focus on investing in the region where our customers are and where they're going to consume the products, so we don't ship tremendous product from one region to another. The sales in North America are about 30% of our total sales, so it's pretty significant. Now if you think about our footprint in North America, we've got 7 plants in Mexico, and a lot of our products we produce in both the U.S. and Mexico. By the way, we don't have any plants in Canada. For us, what's important is, first, we got to get some clarity on all the tariff noise. Nobody's going to make a long-term move until there's some clarity on what the actual tariffs are going to be. Short term, we'll focus on recovery of those tariffs from our customers. And then mid and long term, we're starting some conversations with customers should there be some product relocations or can we leverage some existing capacity we may have. But we're not going to make those moves for -- until we get better clarity. And it takes time, by the way. We can't do that in a vacuum. We need our customers to support any change we make. And we're in a strong financial position to do that if necessary.

So to be clear, most of the products that you're producing in Mexico are going into vehicles that are produced in Mexico, or are there any parts that you're producing that are crossing the border on their own? And if they're crossing the border, usually the import of record, I think, is the automaker itself. So it's almost like it's going into a vehicle, I think, from your perspective. Maybe I'm getting that wrong. But is that about right?

Yes. Well, first, we do serve the local Mexico market where there's production, and we bring parts across. I don't know if you want to comment on roughly what we import.

Yes. So when we look at last year, is a good reference point, about $875 million is the amount that we imported into the U.S. When you break it down by region, about 55% of it was from Mexico, 10% of it was from Canada and 5% from China. So just some good statistics that the group can use here to kind of model what they see fit. But that's a good way to look at the imported value from last year and what that may mean into 2025 and beyond.

And just on the import, and I'm not sure this is even clarified yet, but I think most of the way it's set up is the import is actually -- the import of record is actually the automaker, is that correct, into the U.S.?

I think that comes down to the terms of your agreement. Sometimes it's us, sometimes it's the automaker.

Got it. Okay. And then, we don't think it's going to happen necessarily, but I mean there's kind of a draconian situation where, if tariffs really stick, which sounds like they might not as of last night or yesterday with the potential relief on parts, if there's this potential 2 million to 3 million unit decline in industry volume, how are you guys set up to handle that, which would be sort of a normal -- not normal, but like a pretty tough downturn in the industry here in the U.S.?

Yes. So clearly, 2 million to 3 million, a fairly big number from where we're at today. For us, again, 30% of our sales are in this region. If we see a lower production environment, short term, we're going to slow down discretionary spending and focus really on managing any kind of decremental that might exist. If we think those changes are going to be longer term in nature, meaning the tariffs are pretty sizable and they're going to have some kind of impact for a longer period of time, that's one thing we feel we're quite good at, is adjusting our structure to what we think is going to be more a midterm or long-term change in the market.

Okay. I mean from your customer base, I mean, you're probably hearing a varied set of responses at this point, right, from not importing to taking that production. I mean, is that -- I mean, are there any kind of streams that you could talk about positively or negatively? Or what are you hearing generally, without getting into too short-term stuff, from the automakers?

I think it's early days. I think they're all waiting. We're all in the same bucket. We're all kind of waiting. Where is this thing going to land? I think you've seen like we have Ford and Stellantis offering pretty attractive pricing to stem -- or to motivate folks to buy more vehicles. Where the tariffs land is a big question-mark for all of us and what the impact it has. I think we're just going to have to wait and see.

There's one other layer below this from a macro sort of regulatory standpoint, is EVs versus ICE. And there's some changes that might be coming with the CARB ACC II mandate, EPA and its fuel economy and emissions regulations. If those get watered down or CARB gets eliminated, you kind of alluded to, I mean, you've got a great ICE portfolio, if programs get extended or we shift back in the direction of ICE, how do you think that will impact the business?

Yes. So our products are driven primarily by 2 things, as you know: regulation and the need for customers to just have more efficient vehicles, right?

Well, we like to drive fast too, right? You can do some pretty good...

Drive customer demand. But the main drivers are regulation or striving for better efficiency. As you said, we've got a very resilient portfolio. So in this particular market, our great combustion products, which we're #1 or #2 in, can go into ICE vehicles, they can go into hybrids. So for us, it's exactly what we built this portfolio for, is this level of uncertainty. If the market, like in the U.S. is driving for more combustion than hybrids, we've got a great portfolio to serve them. If the markets want more hybrids and more EVs over time, we're in a great position for that. So we think we're in a great position to support the market regardless of where it goes.

Can I ask a question on Europe for a sec? We're U.S. domiciled, so we kind of look more at the U.S., but Europe is a big part of your platform, and the tariffs in Europe could be quite extreme whoever is going to be importing here and there may be less relief in European tariffs. How are you thinking about your European platform, especially those -- your vehicles are going to be imported into the U.S.?

Yes. So maybe starting with the regulation in Europe through that strategic dialogue that was happening in the first quarter. The conclusion of that was not necessarily relief on the regulatory environment. It was more they're going to take a 3-year average and allow the OEMs to meet the requirements over a 3-year average. But what they don't meet this year, they got to catch up a little bit in year 2 and year 3. So from our view, there's not a big change in what the demand is looking like. We still see strong RFQs across the entire portfolio, especially when you think about hybrid and EVs. So we're in a great position to support that. In terms of -- I think your last question was around exporting, we're a powertrain company, and those powertrains can go in a variety of vehicles. We're focused on making sure our customers have good technology for whatever they're trying to achieve. We don't really track what vehicles they go into to the nth detail, nor whether how many of those get exported or not. So we just don't have that kind of transparency.

And if we think about the other regions that I just kind of got into, I mean, Europe will have a higher EV penetration in the U.S. over time, how much we'll see. China will be much higher. You serve all the -- you serve the globe, you serve Europe, as Doug just mentioned, and then China as well. As you think about sort of the investment burden that's spread from that fragmentation of powertrains, right? I mean 2 years ago, we're all talking about ICE globally and it was kind of a little bit easier and a little bit more consistent. How do you think about serving sort of those different constituencies now with sort of this fragmentation of powertrain? Does that mean the investment burden is higher, returns and margins are ultimately lower? Or how do you think you can manage through that currently and then over the long term? And is there enough scale to serve all markets without having any incremental burdens?

Yes. The way we kind of run the business is, if you look at the last 5 years, the heavy lift was the portfolio. So we had to do a number of acquisitions. And of course, we invested heavily when we were winning a lot of new business on the E side. That was the massive lift we had to do. From here forward, since we feel really good about the portfolio, it's more around winning new programs that come through an RFQ process. Of course, we will discount those volumes depending on the experience we've had with the OEM. But our customer diversity plays a very important role here. It gives us a view into all the powertrain cycle plans, and we can aggregate that information to help us make better investment decisions. But in general, we chase RFQs, we win new business. We have an ROIC of 15% that every new program has to achieve if we make an investment. So for us, it's a little bit more business-as-usual versus the last 5 years where we had to do a lot of heavy lifting to get the portfolio in place.

So now we're at a point with whichever direction the market goes in, you believe you're very well positioned. Can you remind us of -- are we sort of at a point where, no matter which way it goes where we have the same incremental margins and the margin potential and what those incrementals could be on the upside? And then unfortunately, based on some of the stress we're going to see right now potentially on the downside?

Yes. I mean, we manage the business at a mid-teens incremental conversion. I think 2024 was a great example of BorgWarner in action. What did we do on relatively flat sales? We expanded margins 50 basis points. How did we do that? Really focusing on cost controls. So we focused on restructuring savings and productivity and supply chain savings. If we get into a scenario this year where industry production is a headwind, we're going to follow the same playbook, really focus on cost controls across the business and those 3 levers. So I think 2024 is a great example of what BorgWarner can do on relatively flat volumes. And I've complete confidence in the business units, that they can execute in the same manner as we go into 2025.

And then if we think about another issue and opportunity is inflation, right? I mean it seems like pre-tariffs, that it would have been normalized and not a big -- not necessarily a big issue. But now with tariffs, it can become a large issue for some of your -- some of your Tier 2 and 3 suppliers, right, that you guys are dealing with? I mean if you think below you, what kind of issues you're hearing from this inflation that may be tariff-induced or may be just natural inflation from other macro factors? Is that something that you guys have started game-planning and understanding how you're going to either absorb it, push back on the Tier 2s or potentially to pass it through to the automakers? And maybe, I mean, using experience over the last couple of years with your customers as kind of a guide in answering.

Yes. What did we learn from inflationary time? I think a couple of things. One, we really focused on our cost across the business, like I mentioned earlier, but also worked with our customers. We have deep customer relationships. Obviously, that's what Joe mentioned earlier. And we need to utilize those relationships to manage through these difficult times. I think we did a fantastic job during the inflationary period. It really -- we found a solution to not have a material impact on BorgWarner's margin. As we go into a tariff, we're going to dust off the same playbook and execute it, while I have no doubt that we'll be able to navigate the situation just like we did the inflationary period.

Got it. And China. China is a shifting market or changing market very quickly and it's going to continue to change. The domestics are gaining massive market share, not just in market, but rest of the world outside of the U.S., at least at the moment. Maybe you can remind us what your position is in that market with domestics versus internationals and what you think the opportunity is both in China then going international. Because I think there's a fear over time that a Chinese supply base rises up that is maybe more domestic, that it could be a challenge. That might not be the case. I'm just curious from your standpoint on that as well.

Yes. So we have a really strong China business. It's about 20% of our sales last year. When you look at the breakout, that 20%, about 75% of that 20% was with local OEMs. And when you look at the e-product side of our business, we're overweight about 90% supports local OEMs. So again, we have a really strong business. We get a lot of questions about how are we able to have so much success in China. And it really comes down to deep customer relationships. China OEMs move at a much different pace than western OEMs. A program gets developed about half the time as the western world. And our China team knows how to run with them. We run shoulder to shoulder. And that's why we've had a lot of success beyond providing great technology at a competitive price. So I think it's a factor of all of those things. When you look at we have 30 e-product launches going on across the business this year and about half of them are in China, I have complete confidence in our China business, not only for this year, but for many years to come. We have a great team and they know how to execute in that market.

I think it was just about 23 years ago, I was the Chengdu auto show doing a conference there, and I was in a sea of people in sort of the drinks afterwards. And I saw Tim Manganello's face across the crowd. And I think we're the only 2 Westerners there at the time. So I can attest to you guys, [ hawking ] and working very hard in China for decades. It was an interesting moment. And Tim knew how to sell and drive the product, so you have a good foundation. I remember that very vividly. But as far as the speed, right, I think the -- one of the tricks or advantage the Chinese have right now is that they move fast. The regulatory environment and the customer base is much more accepting of less than perfect. It's got to be pretty good, right? It can't be totally a mess. But that seems to be kind of okay when you get into sort of HMI stuff and even machine interface stuff. But on the powertrain, it's not, right? Because if a powertrain is not working, you can be kind of forgiving or not forgiving. So can you just talk about how they are able to move that quickly, particularly on powertrain in 2 to 3-year cycles when we're looking at 7 to 15-year cycles in developed markets? I mean, how do they do -- I mean, obviously, you're helping them. But how are they able to do that on the powertrain without running into real major issues?

Yes, maybe to emphasize a few things Craig mentioned. First of all, we've been in China for a long time, over 30 years. And I'll be at the Shanghai Auto Show, and I hope not to see Tim's face next week. He's probably on a beach...

You never know. He might be there.

He could be, but he's probably on a beach somewhere. I think going back to the speed topic, that is a huge advantage for them. So if you think about the Chinese, they get 2 products into the market in the same timeframe that a western OEM gets 1 product. So what does that mean? Not only are they quicker to market, they're able to learn more quickly because they're putting 2 products in in the same time frame as another OEM is maybe getting 1 in. The other thing is they're much more willing to take products off the shelf and tweak them rather than all new. So if you looked at some of the western OEMs, their traditional powertrain development, they're building much more from ground-up requirements. We find the Chinese automakers, due to speed, are willing to take something, adjust it to their requirements. And I don't want to use the word it doesn't have to be exact, but they will make some compromises where it's not functional or it's not safety related in order to get that product in the market more quickly. So what customers tell me all the time in China, they love how fast BorgWarner is willing to work. Our operating model, which is very decentralized, gives a lot of autonomy to our teams in China. And they're not spending their time calling Germany or our headquarters, "Hey, can I do this? Can I do that?" They're very savvy, very technical and they're able to support those customers at the same speed.

So you're working with everybody on the planet in powertrain. A lot of the Chinese have learned from your help, to some degree and from some of their JVs with the western OEMs. Do you think we'll get to a point where you can help your western partners or customers and they can learn to move as fast? I mean, are you seeing any of that? Or are we sort of in an environment where things are so entrenched and processes are so entrenched that they're never going to be able to move as fast as that, with you, right, with your help in your specific area?

Yes, I wouldn't want to speak to any particular customer, but trust me, they are all recognizing how fast China is moving and the China OEMs. They've learned so much in the last 30 years. And you're right, they're able to now take all those learnings and be leaders in many parts of BEV. So yes, they're taking note. Everybody wants to make sure they can compete. We see some OEMs adjusting their product development times. I think what makes BorgWarner such a value to our customers, since we're working with all these OEMs, we're able to take what we know and share with them, hey, this could be an opportunity for you. Maybe here's our portfolio of products. Instead of doing that bottoms up, let's grab one of these and tweak it and run. So I think you are going to start to see a little bit more convergence on timing. But each customer is approaching it a little bit different way.

But we are literally just on the leading edge of the curve of any kind of change happening with most of the incumbents on that speed of powertrain development. Is that...

Yes, I would say it's early days. And for us, a lot of people talk about the Chinese OEMs as a threat. For us, we see it as an opportunity. And our strategy is to win in China with the domestics, which we have been doing. We're slightly overweight with the domestics. And as they grow outside of China, we're going to be in a great position to be a partner of choice. We've got factories and suppliers and people all over the world with an excellent footprint even on as they export vehicles. China exported almost 6 million vehicles last year, we even picked up a little tailwind on our drivetrain product due to that. So we think we'll be in a good position. We want to keep winning in China so we can support them outside.

And even older CEO than Tim Manganello, Fiedler, I remember we were talking about the Japanese and how well you guys did with the Japanese in the somewhat early days there. So I'd imagine it's -- you guys have this constant ability to win with new "upstart," but not upstart anymore, manufacturers over time. So I mean it's happened in the past and you've done very well. Maybe we could just touch back on the competition. When you're going in for a bidding process, even RFI situations, are you seeing any new competition? Or is it the regular standard players that you see? Meaning, are there any Chinese companies that are coming into the mix or any other new players, maybe even from Korea, that are coming into the mix?

Yes. So our business has always been very competitive. I mean there's always pressure on cost and price, and we don't see any big change there. Yes, there are a few more competitors coming from some of these younger markets. But materially speaking, it doesn't change the dynamics of the industry and how we're operating. The thing to remember about powertrain, it is a business of precision. There's requirements to meet, emission regulations to meet. That's not changing. And the quality requirements are immense. You need to have a system that has high reliability and people can afford, but is always there and has some failsafe to it if there is a component failure. So for us, remaining competitive into the future is the primary focus, and we plan to do that.

I want to ask, you guys are in the leading edge of the EV shifts. There's been a lot of talk about slowdown in the U.S. and a little slowdown more in Europe, and China seems to be doing really well with EVs. How would you just kind of characterize what temperature we are kind of globally on the EV migration? It's a broad question, but.

I mean if you look first globally, we're still bullish on electrification. Why is that? Electrification is the really only affordable way to decarbonize mobility. And despite some of the politics going on in this country, long term, electrification is going to grow. So we're bullish on it even though the growth is slower than we expected. So for us, what's important is the regions are probably going to play out at different speeds. And we have the portfolio to support our teams on the ground. If there's more hybrid and electric vehicles, we've got great products from both sides of the portfolio. And especially on hybrids, what a great vehicle that is, to allow consumers to get more used to plugging in a vehicle and managing some of the intricacies of a hybrid. For us, the content potential per vehicle is a homerun. It's the same as it is on a BEV. So we still, long term, believe in the electrification plan. And I think most people, if you see, they're moving in that direction. So it just may be a little bit slower growth. And we don't control the growth. What we control is, hey, making sure we're winning business, controlling our costs, installing the capacity and delivering on a 15% ROIC.

Perfect. Thank you.

I've got one more and then we'll open up for questions in the audience, then I've got much more. But if we think about sort of the growth initiatives on the EV and the ICE side, it seems like those are kind of, maybe even now more than maybe we thought, we're now at a point where incrementals are mid-teens. How do you think about sort of the mid to long-term margin potential of the aggregate portfolio? Is it getting -- could we ever get close to sort of low to mid-teens ongoing operating margins with those incrementals and the business grows over time? I mean, how are you thinking about the opportunity to drive margin midterm, long term, and where does it settle?

Yes. Joe and I are focused on incrementing in the mid-teens on an all-in basis. That's a different approach than a few years ago. We saw a substantial increase in e-revenue coming from an industry perspective and we needed to support it. So we were incrementing in the mid-teens, excluding the investment in e-R&D. That's not our focus anymore. Our focus is incrementing in the mid-teens on an all-in basis. I don't think Joe and I view it as a cap. We're going to continue to focus on incrementing in the mid-teens as we move forward. Our goal as a company is really quite simple: Outgrow industry production, turn that growth into income, grow income dollars, grow EPS over time. We think that's the secret to creating a lot of shareholder value as we move forward. That's our focus.

But if you were to think about operating margins sort of in total, I mean, where do you think the level could be over time?

Our focus is incremental in the mid-teens. In the mid-teens.

So you can get there, okay. Do we have any questions in the audience? If you want to fire away? Yes, it's coming to you right now. Sorry.

Thanks for the discussion. Just want to follow up on John's question about China. When we think about your customer diversity and your position today, how are you thinking about winners and losers within China? I mean there's a few players like BYD that are very rapid growth, more vertically integrated, but moving international. So I just want to make sure I understand that opportunity set for you, gaining share within the China players in China versus think more about the opportunity as BYD moves externally. And then to the extent somebody that you have a big program with is a loser, but you've got another guy that's a winner, are you basically leveraging the same manufacturing footprint so that, to some extent, you're a little bit indifferent given that diversity? Just want to make sure I understand that dynamic on your cost structure.

Sure. So it's a great question. I mean there's 100 OEMs in China, who do you focus on? First of all, since we've been there for a very, very long time, we've built businesses over time with all the names you know: BYD, Changan, Cherry, Great Wall, Geely. And those are the players that are winning inside that market. Now someone who's #1 this year might be #3 next year. We don't really pay attention nor care. It's more or less, are we winning with the winners? We've also got to focus on some of the startups. There's a lot of startups in China, have been in the last 5 years. So Xiaopeng, Xiaomi, just to name a few, also are part of our base. And there, we look at, okay, what is their plan to get to market? Are they focused on software-defined vehicles? Are they focused on something that can go more global versus a niche in the China market? So our teams on the ground constantly are evaluating that. We feel really good about our business. Not only are we slightly overweight with the domestics, but over 90% of our business are with the top 6 customers. And for the most part, those are the customers that are able to export. The small players, they're not going to have the funding or the wherewithal to maybe support those other markets, and especially when you talk about localizing. It's the players like Cherry, Geely, BYD. They're the ones you're starting to see the expansion, and they're in our customer portfolio.

The only thing I'd add is that we're really focused on having flexible equipment. So it's impossible to pick always a winner and a loser. But hey, if a program doesn't work out, are we able to redeploy that equipment to another program? That's always a question we're looking at. And if that's not possible, we need to work with our customers if volumes don't materialize and get recovery. So that's how we manage the risk.

So the equipment is flexible?

Yes.

And it plays back into this idea of Chinese OEMs are more apt to grab something that's off-the-shelf and modify it, which again fits better to manufacturing concept. So all of that kind of goes together. You can't have flexible equipment if you don't have some modularity to some of your products. So we feel we're in a good position to manage in that downside risk.

Okay. Two more I want to sneak in. Any questions out there?

I got one balance sheet question when you're done with your questions.

So yes, that's the last one. So when we look at some of what's happening with programs right now, there's program extensions that are ongoing. My view has been, and I think this might be wrong, my view has been that that's actually good because then you get to run a program for a year, maybe 2, maybe in some cases 3. We'll see how much longer things are extended right now on the ICE side. But we've heard that that actually has become somewhat challenging because the way the lines have been set, the tooling has been set up, it's set for the 5, 6 or 7 years of the original program. And then if you're extending it a year or 2, that actually can create some challenges of refurbishing or replacement of tooling. I'm just wondering if you guys can talk about that, because I'm sure -- I mean you're running into that like everybody else is. Is that actually challenging or is that actually sort of net beneficial on margins and returns? And I'm not -- I mean, not with a short-run answer, but like just how does that actually work? Because it sounds like a big opportunity, but then we're also hearing it might be a little bit problematic.

I mean we love extensions. If you think about it, there's no new R&D for an extension, right? We're a heavy R&D type of product, highly engineered product. If you look at some of our wins, over the last 3 to 6 months, we've had extension, we've had some uplift, volume uplifts, especially in this part of the world, in addition to new programs. So I think we're starting to see a few new programs around the combustion side. But I wouldn't say there's any big retooling needed. Of course, you always have to refurbish your tools, make sure you got investment that has good uptime and good quality. But no, we love extensions. We love uplifts. More product with the same R&D is always a good thing.

Okay. And then just -- and I'll let -- we'll probably ask this question together. If you could just talk about sort of M&A and what you're looking at, particularly on the acquisition side, on mergers, but the acquisition side, of technology, and maybe how you balance that with Doug's question? Maybe you want to kick in?

I mean you've always had a very strong balance sheet. If you look at kind of a myriad of a lot of suppliers, you've been in the higher echelon of the quality, never really flirting with sub-investment-grade ratings. As we head into this downturn, like how much focus do you have on a high-quality balance sheet?

Maybe you could start with the balance sheet.

Sure. Yes. So we have a couple of targets from a balance sheet perspective. First is liquidity. Our target is 20% of sales. That includes our revolver. We have a $2 billion untapped revolver. As I look at our balance sheet at the end of last year, we're actually above that threshold. So we're operating from a position of strength. And from a leverage perspective, we target gross leverage at 2x, again, when I look at the balance sheet at the end of last year, I put a checkmark next to that. I think it's more important to have a strong balance sheet more than ever. It's during these turbulent times that having an investment-grade balance sheet is really important. And I think it provides us a lot of flexibility to take advantage of inorganic opportunities that Joe can kind of talk about, but also looking into how we can return cash to shareholders if that's the right thing to do.

Yes. And specifically about potential acquisitions, acquisitions have always been a part of our strategy. I would say we did a lot of heavy lifting again in the last 5 years. So how we're approaching acquisitions on a go-forward basis, I would say we're opening up our aperture a bit to take a look at, hey, what's out there, especially in the time of so much turmoil right now. As Craig said, we're in a position of strength. So we'd be remiss if we didn't take a look at what could be a potential acquisition. Now with that said, there's 3 criteria that we're focused on. One is it needs to leverage the core competence we have today. So we want to continue to build a strong portfolio. You're not going to see us do something far out in left field acquisition-wise. We have good industrial logic. The second is we want to see near-term accretion, so something that can contribute very quickly to BorgWarner. And third is valuation, okay, especially in this type of time. We don't want to overpay. You have to run lots of scenarios to anticipate what the market could look like. And for us, it's important that we value an asset properly and stick to our numbers. So that's how we're approaching.

Good framework.

Just maybe to follow up on that before we finish here is, historically, acquisitions in the supplier space have been regional, customer and then tech, right, is kind of the way that it's been looked at, sort of regional diversity, customer diversity and the technology. I think for you guys, really, it's more of the technology side that kind of leads the first 2. I just want to make sure we have that straight. When you're kind of evaluating what you're going after, what is like the target sort of more strategically?

Yes. I would say, regionally, we're pretty balanced, yes. So I think that's probably not the highest priority at the moment. If you think about our strategy, we're #1 or #2 on the foundational side. We're still building scale on the E side. So yes, when it comes to more customer diversity on the E side or when it comes to good technology, we're in the early days of electrification. We feel really good where we're at right now, but we think there's going to be some opportunities out there. And again, I don't want to comment further than that, but...

But tech and customer diversity in that tech, right?

Yes. I would say building scale overall. We want to get to be a top player in electrified products just like we are on combustion side. We know when we do that, we can not only invest well into the future, but provide top-quartile margins like our investors expect.

Great. Well, Joe, Craig and Pat, thank you very much for the time. Appreciate it.

Thank you. Yes.