BorgWarner Inc. ($BWA)

Again, Doug Karson here, and Alex Perry. We're really grateful to have BorgWarner with us. With us from the firm, we have Craig Aaron, Executive Vice President and CFO; and Patrick Nolan, Vice President, Investor Relations. And BorgWarner has been with us through thick and tin and Auto Summit for the last 17 years. They've quoted a lot of time to both the equity and credit investors. I think you'll see they're a leader in clean efficient technology solutions, combustion, hybrid electric vehicles to really do it all. And with that, we're going to kind of just dive into a fireside chat. We try to have it interactive. We'd love some questions from the audience throughout. But maybe I'll just kind of open it up with -- how are you guys seeing the market right now for global production. We had this, obviously, this oil shock, but for many of our panelists before, they said that unless it's going to be a 3-, 4-month prolonged event, we don't really think it will be a major mishappen in the auto industry and affordability has been a concern in people's minds.

Sure. First of all, thanks for having us. Bank of America is an important relationship for us. So we're really happy to be here. As we sit here today, our initial guidance from an industry production perspective was flat to down 3%, and midpoint of that is, of course, down about 1.5%. And I think S&P right now is right around the right around 1%. . So the schedules right now are hanging in there, but we'll see how the year plays out. I think our biggest concern is with higher vehicle prices already in North America, and with this oil shock happening, this consumer demand dry up at some point. Obviously, the longer this goes on, the higher the risk. But as we sit here today, we're or seeing demand hang in there, but what's the out plays now early days.

Perfect. I wanted to get a little bit more into sort of mix, hybrid versus bed versus ICE and how that plays into things. I think the beds are growing at a lower rate than previously expected, hybrids are taking off. Can you just tell us how mix in more hybrids and how you sort of impact your business? What are the positives? What are the negatives as you think about sort of the evolution of the mix?

Yes. So when you think about our business, we're able to provide each of the markets, which we're seeing move differently with our portfolio. Our portfolio is very broad. We can supply and provide solutions for our customers, whether it's foundational products, combustion products, hybrid or electric. How we measure success for those businesses is pretty simple. So for our foundational businesses, which is DMS and TTT we measure their success based on the foundational market plus the hybrid market. And their goal is to outgrow industry production. And for our e-product businesses, it's the hybrid market plus the battery electric vehicle market. And so that's how we measure success for them. And again, their goal is to outgrow those end markets and increment in the mid-teens on an all-in basis. So that's how we measure success. What I'm seeing across all of our businesses that's maybe changed over the last couple of years is really regionalization. So each region is adopting hybrid products and battery electric vehicle products at a different pace. And I think our operating model and our portfolio is playing out really nicely. So in this market, we don't see battery electric vehicles penetrating significantly over the next handful of years. That's okay. We'll sell foundational products, and that provides us a nice cash tailwind because we have capacity in this marketplace, and we're not having to put in new capital. We can utilize what we have. In China, it's probably the opposite, right, battery electric vehicles, hybrid vehicles are a significant portion of that market. And we're having a lot of success with local Chinese OEMs and we're winning in that market. And Europe is probably somewhere in the middle. So I think it's our portfolio diversification, our customer diversification. Our operating model where we're making decisions at the lowest level of the organization, which is at the plant level. That's really playing out well for us. And you can see it in our metrics from a win percentage where we had record wins last year, but also from an operating perspective where we've increased margins 60 basis points. We had record free cash flow last year. We grew EPS 14% year-over-year. That's our operating model in action and being able to adapt to these different dynamics.

Maybe I'll double click on China for a moment. So we were just talking earlier that you're winning in the local Chinese manufacturers. And we've seen over the last day to many panels have kind of shown that the Chinese market is continuing to evolve. Of course, EV has been very strong, but also the domestic manufacturers there are gaining a lot of share relative to the rest. So what's giving you the wins in the Chinese market? What are you doing maybe differently than some competitors?

Yes. So if you look at the breakdown of our China business is about 20% of our overall sales. Of that, about 75% of that sales base is with the local Chinese OEMs. Maybe you double-click whether in that about 3/4 of that is with the top 6 Chinese OEMs by market share. So we tend to do better with the larger Chinese OEMs. And why is that? Well, those Chinese OEMs prioritize speed to market. They prioritize technology leadership, both from a standpoint of their domestic market strategies, i.e., electrification or eventually, I mean, we're now at almost 7 million units exported from China. Those large OEMs are the ones that ultimately have aspirations to go global. When they go global, they want to have that technology leadership, but they also want to get the speed end market very quickly.

And you guys are able to get them to the market faster than...

That's what we hear. When we hear from our customers, and when Joe, our CEO is meeting with his principles over in China, what he hears is 3 things. They really like our overall technology portfolio. likes the fact that we've been in China for quite a long time. I have those deep ingrained relationships as OEMs but also probably most importantly, we can run shoulders with them. Right. In the Western world, typically, it's 3 years from award to going your production. In China, you're knocking at least a year for that.

Like a 2-year window.

If not less.

We've taken products from PowerPoint to production in 12 to 18 months. I mean that's how fast we can yes.

So I wanted to double-click a little bit on the competitive environment. I think maybe you're alluding to some competitive advantages in China that you have. But just give us an overview of the competitive landscape for both the foundational products in EV products, have you seen any change? Do you expect consolidation in the space and do you see any risk from Chinese suppliers in China locally, and I guess more globally?

On a global basis, there is typically between 5 and 7 true competitors in most of the products that we do. And there's a handful of Chinese competitors and different products that we do compete in. So they have gotten to that point where they do have a good, strong global presence. I think when you look at the 2 different sides of the business from dynamics of where are we stronger. On the foundational side, we're typically a 1 or 2 in terms of market share, in terms of those product categories. We do see some natural consolidation. And the way I mean that is the larger suppliers are generally winning some conquest business. You see it in our awards on a quarterly basis as ultimately, the OEMs want to lean a little bit more on the supply base there as we go forward. On the e-product side, we see a path towards being a top 3 in most of the products that we play in today, and we are starting to see share consolidation there where there was a lot of players in some areas and now you're seeing more of that consolidation play out?

Maybe we'll kind of switch gears a little bit to the regulatory regime. How are some of the regulatory changes, whether DPA, Cafe, CARA, impacted your strategies, your growth initiatives. I've been covering the company for almost close to 30 years. I know that some of the regulatory changes have actually been in favor as things need to get cleaner it impacted your ability to put turbochargers into kind of lower new gasoline content. So can you just give us a little color on how you're looking at the regulatory environment.

That's what I think is beautiful about our portfolio. We can adapt. So in this market, obviously, regulatory changes moved in one direction. And that's fine. We're meeting with our customers to solve their problems, and we're not trying to push one technology or another. In this market, it's probably going to be more foundational products. . And that's okay. We're #1 or #2 in everything we do. And again, it's going to provide a nice cash tailwind for us. In other regions in the world, it's probably going to be a little bit more e-Products. And again, we're meeting with our customers for understanding the issue they're trying to solve. We're providing solutions on both sides of the portfolio that helps them. And if we're doing that, BorgWarner is going to be successful. And that's what I see. And I think the evidence point is the 30-plus awards that we announced last year across the entire portfolio. I think that's a great evidence point. So I see us being able to adapt nicely. Win new business. And ultimately, as we win new business, we'll increment that extra revenue in the mid-teens on an all-in basis and create a lot of value for our shareholders.

Just going as a part of that, let's talk about the battery business a little bit. So I think you called out a lack of North America incentives and softer Europe are driving headwind in the battery business, at least for 2026. Can you detail sort of the policy and the demand drivers there and what actions you sort of take in to minimize the losses in the battery business.

Sure. So when you go back a couple of years ago, we acquired Akasol and we saw a tremendous growth in that business in Europe, and we ended up adding capacity in North America to support that growth. And then the world changed on us a little bit and demand dried up in North America and to a lesser extent in Europe. So it was important that we rightsize that business for the demand dynamics that are -- that have been happening at this time and the team did a fantastic job of rightsizing that business. So we restructured that business and took other actions. And I think the evidence point you can look at is our fourth quarter, revenue is down, in comes up. So we feel really good with the cost structure, and we are confident that as that business grows, we can implement in the mid-teens from this point forward. Overall, we're still pretty bullish on that business. Although revenue is going to be down about a couple of hundred million dollars this year, and that's causing about 150 basis point challenge to our growth this year. From a long-term perspective, we're still bullish. Energy storage is a trend that is going to occur for many years to come, and there's a need for energy storage, whether it's in automotive or outside of automotive. So our product can solve that global challenge. And for us, it's about winning new business, whether it's in auto, outside of automotive. As that business grows, will increment in the mid-teens. So again, we're bullish. We got our cost structure right, and we think we can capitalize on that growth when it materializes.

I mean do you think that business is going to require more CapEx and R&D? Or do you feel like you've got a good foothold on it right now?

We have a good foothold on it. We have the right level of CapEx in that business. We've restructured appropriately. Now it's about winning new business and incrementing in the mid-teens as it grows.

I guess we'll kind of circle back to the different markets you're in. So maybe you help us a window into you have a pretty good sense as you're talking to when a lot of us are North America focused because it's where we work. But if you look at China, the EV mandate is still super strong there. if you look at like IHS, S&P Global ability, their projections in China, they keep on increasing the penetration rate in the EV. North America has come way down and Europe is kind of somewhere in the middle. So what do you think is driving the EV focus in China and it's still trying to stay alive in Europe and in the U.S. is kind of on pause almost.

Yes. So in China, clearly, the mandates are still there. The electrification is happening in that market. It's continuing to grow in that market at a relatively rapid pace. The one thing I would add, though, is we talked about the Chinese exports. They're going to explore whatever vehicles they think they can sell. And we've actually seen some awards on the foundational side of the business. each high enough for export purposes. So I think, clearly, the opportunity set is going to skew towards electrification in that market, but I think there will be pockets on the foundational side for opportunities for growth. In Europe from what we see, we're still going down the path of electrification. I think the timing may shift a little bit based on some of the changes in regulations, but it's still happening. You're still seeing launches happen. North America, as you said, I think electrification here is delayed for quite some time. It's likely going to be a predominantly foundational business unit, our region, excuse me, with hybrids coming a couple of years from now when I say high is I'm talking more advanced hybrids. I think it's really what this speaks to is that there's 2 benefits that BorgWarner can use to capitalize on this. It's a portfolio that we talked about. We're happy to sell foundational products happy to sell bare products and across hybrids, we're happy to sell both. The other thing that's going to -- we're a very decentralized company. And this is going to be much more of a regional growth business than it has been in the past. And I think that will play to our strength.

I have a capacity utilization question, I'll turn it over to you. One presenter showed us that capacity utilization in China is only 53%, which left us worried that there'll either be some stranded assets in China over time or they'll be hyper focused on utilizing that capacity or there will be some markets that kind of shrink.

I think we have 100 manufacturers in China. I think about it a little bit differently, and it's less of a China question because we're winning in China, and we're seeing them use the equipment that's in place. But one of our focuses last year was okay, we have a lot of capacity that we put in place in the e-product side of our portfolio. We've put that in over the last few years. And some of those programs didn't launch at all or launched a much lower volumes. A big focus of our Power Drive Systems business unit was we need to move that capital from one region to another. So it's not going to be used in North America, move it to Europe or move it to China as an example. And it's one of the reasons that our CapEx last year was only 3% of sales. We're usually in that 4.5% to 5% range. So they did a fantastic job. And it was a part of the reason why our cash flow was $1.2 billion last year. On top of that, we always meet with our customers when we have a program that didn't meet expectations and it's because of a constraint on their end, we're going to go back to them the ask for recovery. And we saw some of that in the fourth quarter of last year. So we're using both of those items to mitigate risk from a capital perspective. So I don't see it as a China issue. I see it more of a North American issue, and it's important that, that plant manager doesn't get the nice new equipment. They get the equipment that's in place and they can modify it and use it. And I think we did a really nice job.

So optimizing CapEx, kind of the global pattern and you were getting some reimbursement when isn't needed.

Exactly.

Let's talk about data centers.

I was waiting for that.

Yes. I think you be able to talk about data centers at the Autocue, but as for the opportunity. So in February, you signed a master supply agreement with Turbocel, focused on data center power solutions, I think targeting $300 million in sales in 2027 well be the first year I guess what's your longer-term vision in the data center end market? How should we think about capacity and sort of the overall mix as power generation continues to grow?

So if you look at the market for power generation, it's supposed to grow mid-teens for the next 10 years. So obviously, the market itself is very appealing. When you think about hyperscalers and others, what are they trying to solve for right now. It's really 2 issues. It's water in its power. And we're coming up with a solution that solves the power equation clearly. From our perspective, what we've shared is we feel like we have a great product that answers those needs and has BorgWarner all over. It has our thermal competency, our power electronics competencies, our turbocharger technology in it. So we're utilizing the core competencies of BorgWarner to come up with a unique turbine generator that meets that end-user demand, which is really exciting for us. What we announced publicly is $300 million of revenue in the first year of production. And we expect that to be immediately EPS accretive. We expect to convert in the mid-teens, and we really like the return on invested capital profile. We're in the launch phase here. So we're quickly doing B samples and C samples and really focused on launch at this point. But the team is really energized. We were just down there a couple of weeks ago. Excited to see the product maturing and excited to see it in our P&L in 2027.

Can you just talk a little bit about sort of the installed capacity for the data center solution and how you sort of plan on scaling that?

Yes. So we communicated we're putting in 2 gigawatts of capacity in North Carolina. That will be installed at the end of the year. The $300 million in revenue is not correlated to the 2 gigawatt hours. It's our first year of production. We haven't provided that math yet, but we will give more insight as we get closer to launch. Frankly, our decision at some point this year is do we expand capacity, so that decision will be made call it, second half of the year? And where do we put in capacity? Is it in North America? Is it in Europe? Is it in Asia? Those that the type of decisions that we're focused on making over the next 6 months.

Sorry, I think you may have given this, but how should we just think about margins in that business? And over time, how should they evolve?

So all we've shared to this point is you should expect next year mid-teens incremental conversion on that $300 million in revenue. You should expect EPS accretion immediately and you should expect from an ROIC perspective, we like it, which means it's at least meeting our 15% ROIC threshold.

Maybe I'll ask a question on e products. So I think about 5 years ago, you presented the Charging Forward initiative. I think a lot of investors know your business. If you could maybe just give a little bit of color on how the product differentiates itself from more traditional ICE business? And what are some of the key wins that you've had to have such amazing growth in that segment?

So when you think about our 2 different businesses, I would think about you have our 3 business PMS business. Those are our foundational businesses. And then we have PDS and our battery business. So PDS has had a lot of success. You talked about the bookings and the progress that they have there. Those products include everything from your inverters, your motors, your combination products. And they've been really successful particularly in China, but also in Europe and less in North America. What's really interesting beyond just the product itself, you're starting to get to the point where you actually start to see the award activity in China is driving wins in the Western world. We've heard a multiple of our wins that we achieved this year. Our Western customers saying to us, well, you're winning in China, we're trying to correct that, not in terms of affordability clearly, there's something there, so let's go down this road. So I think that is actually start into the business because it goes back to what we talked about earlier, right, is that technology, that customer intimacy, that speed to market. And I think PDS really leverages all 3 of those. It's really interesting.

Yes. I guess just switching to foundational. I think it foundational is expected to be a little softer in 2026 with more programs starting in 2027. Can you just maybe walk us through the award pipeline and incremental margins of these programs?

Just keep in mind on the foundational business, well, we do expect the sales to be down this year. That's mainly a function of their market. So the overall market, we're expecting to be down fit to down 3%. I mean the foundational market is going to be down a bit more than that. We expect our foundational sales to be down this year but it's going to outperform that market. As you look out to '27 and 2028, and I think it applies both of the foundational businesses and the products businesses. The award activity acceleration that you started to see in '24 and further acceleration on 2025 a 3-year lead time, that means you start to see that flowing through in '27 and '28. So I think it's a function of 2 things. I think from an external environment, there was a kind of an unlock, particularly in North America in terms of OEMs awarding business, but also as our current CEO, then COO in 2024 really changed the way we think about growth. In '22, '23, the world was going to electrification at a rapid pace. That's really what we were focused on in terms of award activities. Joe came in and said, well, our e-cars business have gotten to the point where now they're the size of a small automotive supplier, they can stand on their own. I want all our business users to go find their areas of growth. foundational business units book foundational awards, maybe Conquest business, maybe develop a new product like turbine generator and e-products go capitalize on that secular growth opportunity.

Really independently allowing these businesses to kind of operate.

Their objectives are the same now versus 3 years ago it was, well, you as a foundational business unit, your job is margin, cash help support your brother that's growing into the products business. The e-products business has matured to the point where now our objectives are the same across the business units to outgrow your markets increment in the mid-teens. We want to engage the full business to grow not just a portion of the business. And people want to work for businesses that have aspirations to grow. It's not as fun just to generate cash and give it to your brother or sister. And so we're seeing that change in thought process the change in maybe motivation has really unlocked the whole company, and that's why we saw 30-plus awards that we announced publicly, and there were obviously more record new business wins. Moving into a new data center space with a new product, all of that doesn't happen without that change in tone. And so we're really happy with the progress that we've had to date.

I guess on that, so you announced data centers as sort of a foray outside of the traditional automotive value chain. Where else could we see BorgWarner go into? I mean what other sort of end markets applications as you think more broadly and longer term, do you think your current you could position?

Maybe I'll start, and Pat can certainly add on here. Obviously, power generation is the one that we spoke about, and we see $300 million of revenue next year. But we also have a lot of core competencies that we think can play outside of auto. Inverters is a good example of that, power conversion. That's an area of focus for us. And then we spoke about the battery business and having power stored power is important too. So we think those are the areas that we can play, power generation, power conversion, power storage are all areas that we can leverage our core competencies outside of auto. And again, it goes back to finer growth opportunities, whether that's inside or outside, our goal is to grow our top line, convert to the mid-teens. And at the end of the day, how I measure success as the CFO is we're growing the earnings power of BorgWarner. That's our job day in and day out. That's what I wake up and think about, and we have multiple avenues to do that, whether it's top line growth, whether it's cost controls, whether it's having a smart capital allocation approach that rewards shareholders through share repurchases. We need to use every lever at our disposal to grow the earnings profile of the company, that's going to be good for our employees, and it's going to be good for our shareholders. So that's how we think about it.

Nothing else to add.

Maybe we'll just double click on the turbocharger business. leaders in that forever. We just kind of curious on the hybrid powertrains. You've had some big wins in that. And as you think about oil at $100, I'm sure it's not going to stay there, but let's say if it does for a longer period of time. Does that influence the turbocharger business at all in a positive way perhaps?

Yes. I think there's a couple of growth opportunities for the T3 business unit. Obviously, they're developing new products like turbine generator. But I think the turbo business themselves I think we have opportunities for penetration still in North America. North America were in the 50s in terms of turbocharger penetration, much below Europe, so now much below China. So I think there's a penetration opportunity there. In vision, you brought up hybrids, hybrids, you're going to see penetration of turbos on to hybrids as well. And then you also have potentially more efficient turbos coming more variable geometry turbocharging. I think that's coming as well. But the last thing as I kind of talked about earlier, I think this idea that the larger players have more conquest opportunities going forward. The guy starts to play out, too. And I think that's also, Joe, again, challenging the organization of the -- I think there was a mindset of we're already #1 or #2, can we really go out and gain share. I think you ask yourself the question, why couldn't you gain share? Why couldn't you conquest business? I got an opportunity.

And we saw those wins last year. Profitable right.

Absolutely.

What -- I mean, I guess as you look at maybe a more mature business like your turbocharger business, and you speak about large conquest wins, what's driving that? Is it better technology? Is it better pricing? Like can you just walk us through how you're sort of driving that growth in a more mature business?

I can start maybe -- all of the above I would say. Have those smaller suppliers struggle. You still have to invest in the technology. The market is still looking for advanced turbos. And we have scale that others don't have, the market should consolidate. And we're using that to our advantage. And that's exactly why we saw some of those conquest wins. So I think it's all of the above. It's pricing, it's customer relationships, it's technology. You have to bring all of that to the table to win these awards. And I think our turbo business and our TTV business is really good in all of those regards. So I think that's what's leading to the wins.

Perfect. So I want to take a moment in the audience if we have anything out there for the BorgWarner team question in the back.

The opportunity in the turbines business is very interesting. Can you talk about how you compete against the likes of GEV CAD. Is that your true competitor? Or are you complementing their existing products? And maybe just a little bit about the auction process and how you win awards versus those [ brands? ]

Sure. So just to make sure that everybody understands the business model as it's currently set up, so we started a joint development agreement with a company called Endeavor about 3.5 years ago. And the purpose of that joint development agreement was make sure that we were able to bring a product to market that met certain specs that we agreed to with Endeavor. And over the last 3 years, we've developed that product and it's running, and we've tested it. So we feel really good about the product. When you compare that against other competitors. We don't see a clear competitor. But when you look at items like efficiency or total cost of ownership, we're really competitive with those alternatives. What we like better about our product is its flexibility. So as an example, some of the competitors that you talked about can provide power can provide primary power or backup power, ours can provide both. It's flexible. We have modular flexibility, meaning we can provide one megawatt or we can provide a whole data farm. Some of those alternatives are huge turbines ours can be put on a truck and move from one data center to another data center or those larger turbines. Once they're in place, they're in place. And ours provides fuel flexibility. So we think as we get out the curve, those things are going to be really important. As we look at the next handful of years, there's just such a need for power generation. I don't know that those discussions really are really important right now, right now is we need to get to market as quickly as possible make sure that we launch appropriately. We have a great product that works in the field. And if we do that, then I think it's going to be our ability to supply not the demand in the short term.

The one thing I'd add is that I think the one benefit that we're really excited about bringing to this market is bringing the automotive scale, automotive technology and automotive cost base to this market. We think that's going to be a real competitive advantage for us. When you look at the supply base for that product, 80% of the suppliers for the turbine generator from the automotive space. So think about what that means in terms of scale, pricing, continuous technology innovation. We think all the attributes that Craig talked about, the product is out for 100% right. But I think from a competitive dynamic, bringing that automotive competitiveness is going to be a real strong differentiator to your point.

Perfect. Margins a little bit.

Yes. So we've got inflation in certain areas in the world with oil up. Just if you can talk a little bit about supply chain and the issues that you want to double-click on or raw material impact and margins have been very strong historically, if you could just fold that into the margin book.

So this is just the latest conversation. But if you look across the last 3 or 4 years, it's always something in automotive. It's a supplier a semiconductor shortage. It's inflation. It goes on and on and on. And so our teams are really agile. I think from a sales function perspective, I think we have a world-class sales function. We know how to navigate these discussions with our customer and if we see excessive inflation. Obviously, we're going to push on our supply base and do the best we can manage it but we also have to have those discussions with our customers because the pricing power is going to probably go to the end consumer. And we become -- we're very good at those discussions. So that's how I see it playing out. But again, it's just -- every year, it seems to be something that we have to navigate and we're really good at navigating those types of issues. So I don't see it as a major concern at this point. And it's a complex industry. That makes it fun.

Just aftermarket, can you just sort of remind us your exposure to the aftermarket business? And how large and profitable that business is?

It's about 3% of revenue today. It's mostly on our foundational sides of our business. Margins are similar to our OEM business.

Perfect. We'll do one more skin out there before we get in rebar loss. I'm just going to circle back to endeavor in this JV. I could not find much information on endeavor. I was shocked about how little there is on the founder and the whole side of it. So what did you guys see in them 3 years ago to partner with them. What are they bringing to the table? I'm sorry if some of this is a bit repetitive. I know you did talk on this when you announced it, but obviously, the opportunity is really big, but endeavors, I don't know, like I'm trying to understand how they're going to help get you to market quicker and all that. Maybe you can just touch on that quickly.

Patrick?

Yes. So just to give you a bit of history of Endeavor approached us about 3 years ago with this idea of bringing this product to market. And we've gone to this development stage. And now we've reached the phase of -- we have a manufacturing supply agreement with the company, which we're really excited about. What we think endeavor brings to us is I think we're bringing a lot of the manufacturing know-how that I just talked about in the last question, but they bring that level of customer intimacy that we need to enter this new market. One great example that I find side is we've had multiple hyperscalers come through our R&D facility to see the product running. If we didn't have a customer that was already a known entity in that market. I know they are private companies, you're not going to see as much data on their website like you would like a public company like us, but they are well known within that space. And we wouldn't have had those hyperscalers coming through our facility to see it. If we were an automotive company that just announced that this year, well, maybe they would come through maybe they wouldn't. We've learned that in some of the other markets we've tried to enter that just because you have the best nausea, doesn't necessarily mean you're going to be successful. You need that customer and see, you need someone that can speak the language of their customers, and that's what Endeavor brings. So we think they're a really exciting customer for us, and we're really happy about it.

And just to clarify one point, it's not a joint venture. It's a supply agreement, just to make sure that's clear.

Just to be clear, on your competitors, who are you bumping up against -- is it cat? I'm just trying to understand -- I know this was asked before, but what particular competition because there's a lot of different things you got aircraft maintenance companies now taking engines right and turning them into supply -- power supply -- just trying to understand who specifically, are you kind of bumping up against when you do have an RFP?

So I want to talk about competitors' names. We all talk about products, and you can kind of figure out who their competitors. So there's 2 different sides of what this product will be aimed for. The primary power side, which you're competing against when the grid finally catches it up. But today, you're competing with as large industrial turbines are the primary source of for primary power for these sites. And then on backup generation, there are typically diesel gen sets. So this product can compete on both sides of that market. I think you had asked us the question 3 years ago, we would have said the business is going to skew more towards back up. Today, we actually see more of a pull on the primary power side.

Perfect. Any others think we have one here.

I asked about hybrids. In the past 2 years, we've seen range extended hybrids coming into vogue, the key -- those vehicles only drive the wheels through the battery. Those vehicles also may or may not have turbocharging technology. Can you talk a little bit about the difference in content per vehicle on those particular kind of hybrids, what the margin is on those products and how you see that market taking shape over the next couple of years?

Yes. I'd say, first of all, we love hybrids. It pulls from both sides of our portfolio, our foundational portfolio plus our e-product portfolio. When you look at content per vehicle, hybrids have the biggest opportunity for us.

$300 per vial versus $570 million in the foundational stack $2,300?

So it's a big opportunity for us. hybridization, obviously, is taking shape in across the globe, but we're seeing it obviously in a big way in China and Europe as well as starting to form in this market. And we've announced a lot of hybrid wins last year. So from a margin perspective, same margin outlook, increment in the mid-teens on that actual growth, ROIC from a business case needs to be 15% or higher, and that's how we measure success, whether it's a foundational product, a new product hybrid application, battery electric vehicle application or a combustion application. Everything.

Regardless of the type of hybrids.

We don't really do low-end hybrids, it's advanced hybrids that you see our technology on.

Just the one thing I'd use [indiscernible] I would just point out the fact that if you look at our e-products business today on the light vehicle side in China, 45% of it is on advanced hybrids. So I know it's become the thing that comes up a lot in North America, but efficient hybrids, plug-ins, REVs have been a portion of the Chinese NAV growth for quite some time.

Perfect. I could sneak one in. Yes. Could we sneak one for allocation question and I know we're out of time. But you stepped up share repurchase over the past 2 years, how are you thinking about sort of future M&A? How do these take priority over dividend growth, share buybacks what areas would you prefer to acquire a company rather than sort of grow organically. Can you just talk to us a little bit about capital allocation and you've got a great balance sheet and a very good rating, and we've got a lot of credit investors here who want to [indiscernible]

Okay.So maybe I'll touch on the balance sheet. -- what's my first priority in and this goes into my capital allocation philosophy. First priority, healthy balance sheet. We love our investment-grade rating. We think it's a competitive advantage. In fact, we know it's a competitive advantage for the company. . And when I look at liquidity, my goal is 20% of sales or higher, meaning our revolver, which is $2 billion plus cash on hand. And from a leverage perspective, on a gross basis, my target is 2 times. When I look at the balance sheet at the end of this year, 12/31/25, I'd put a checkmark next to each of those. And then our focus as a company is let's create value with our cash. That's really important. And we can do that in multiple ways. We can increase our dividend, which our Board agreed to do in July of last year. we can repurchase shares, and we can acquire great companies that increase the earnings power of BorgWarner. And we're going to use all of those avenues to do that over an extended period of time, over, call it, a 5-year horizon. We want to have balance across each of those areas as we worked our way through last year, we have a very healthy M&A pipeline, and we're talking to a number of potential targets, but you need a buyer and a seller to agree and in the short term, if we don't see a transaction occurring, we're going to return that cash to shareholders. And that's exactly what you saw last year. We returned $630 million of cash to shareholders. through share repurchases and dividends. And as we work our way through this year, we'll follow a similar methodology. We already announced $100 million share repurchase in Q1 of this year, and we'll continue to do that assessment quarter-by-quarter. Looking at transactions that may occur. And if that doesn't happen, then you should expect us to return that cash.

So I want to thank Craig and Eddie for a great conversation and we really appreciate it. So thank you, guys, again.

Thank you.