Good morning. My name is Jay and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2021 Third Quarter Results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Jay. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, on our homepage and on our Investor Relations homepage. With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release. Please see the event section of our Investor Relations homepage for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of the core business performance and to provide consistent comparisons to prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items. When you hear us say adjusted, that means excluding noncomparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We will also refer to our growth compared to our market. When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure. Our outgrowth is defined as our organic revenue change versus this market. Please note that we posted an earnings call presentation on the presentation page of our website. We encourage you to follow along to these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Patrick, and good day, everyone. Let's start on Slide 5. We're very pleased to share our results for the third quarter and provide an overall Company update. The third quarter operating environment was very challenged, both from an absolute volume perspective and in light of the production volatility we experienced throughout this quarter. Overall, we're doing a solid job managing the near-term environment, while securing our future growth. With just over $3.4 billion in sales, our third quarter revenue decreased by about 7% organically. Excluding the year-over-year growth in our aftermarket business, our OEM business declined 9% compared to the 22% decline in our market during the quarter as we benefited from new business and favorable mix. Our margin and cash flow performance in the quarter was impacted by the volatile production environment, which put pressure on near-term cost containment and drove excess inventory within our plans. Even with those challenges, we're still on track to deliver a near double-digit operating margin for the full year. And we still expect full-year free cash flow to be among the strongest results in our history. I want to thank all our employees and particularly our plant managers and plant management teams around the world, who are working very hard to manage the short-term and serve our customers. At the same time, we're very focused on ensuring that we secure our future. To that end, this past quarter, we won multiple new product awards for electric vehicles, which I will speak about in a few moments. As a result of these awards, along with wins in prior quarters, we are well on our way to achieving the organic, electric vehicle 2025 revenue target under our Charging Forward plan. In fact, we estimate that more than 90% of that target is already booked. Let's now turn to Slide 6, where you can see our perspective on global industry production for the remainder of 2021. The market environment continues to be extremely volatile, with the risk of future production disruption rising from ongoing supply constraints. With that in mind, on a full-year basis, we now expect our global weighted light vehicle and commercial vehicle markets to be down 2.5% to flat year-over-year. This is down materially from our previous assumption, reflecting both the third quarter decline and our most recent expectations for the fourth quarter. As you can see from the line chart showing the different scenarios, we do expect light vehicle industry production to improve sequentially, Q3 to Q4. Underlying customer demand remains robust; however, just like we saw in the third quarter, industry production levels will be dependent on the varying impact of ongoing supply constraints and on the potential impact on our customer mix. Overall, we expect the challenging environment to continue throughout the remainder of 2021. And at this point, we think it will carry on well into 2022. As we manage this challenging environment, we are also continuing to focus on securing our mid- to long-term opportunities in electric vehicles. And we did just that during this quarter, securing several awards for electric vehicle programs. I'm very proud of the team. Two of those awards are highlighted on Slide 7. First, we secured a major award for a North American inverter with a global OEM expected to launch in 2024. This high-voltage silicon carbide program is our largest inverter win to date. This business award also marks the Company's first major win in the North American market. It will also be used in multiple battery-electric vehicle platforms, including cars and trucks. Our product performance, scalability, cost competitiveness, size optimization, and global manufacturing footprint all contributed to securing this business win. Additionally, we announced a new 800-volt silicon carbide inverter award with a German OEM expected to launch in early 2025. This award expands our existing 400-volt inverter business with the same German customer, by now adding 800-volt products. This new technology offers enhanced power density, proven performance, and long-term reliability. Given these two new and significant inverter awards, I would like to give you an update on our positioning in the inverter market on Slide 8. We've had tremendous success establishing ourselves in this market. When I think about BorgWarner's competitive advantages in power electronics, it's driven by, first, the breadth of our product portfolio; this allows us to be faster and more effective at bringing products to market. Second, our ability to innovate, like with our Viper power module technology. We can continue our innovations in part due to our vertical integration strategy. We have in-house capabilities for power modules, integrated circuit development, and software, which we feel are advantages in the marketplace. And finally, I think the last driver is our ability to leverage the electronic scale that we already have across our Company, and especially within our engine control units. The result is that we have secured significant new business awards. And as you can see by the chart on this slide, we expect the business to grow rapidly from about 500 thousand units in 2021 to 2.5 million units by 2025, representing about 50% CAGR. We expect this volume to drive total inverter sales of $1.7 billion in 2025. And remember, these programs are already booked. We continue to pursue additional inverter opportunities with production volumes in 2025 and beyond, and would expect to secure more awards in the coming quarters. And one more thing, with the business we've already won, we believe that we are positioned to be the number one non-captive inverter producer globally by 2025. With that, I'll turn the call over to Kevin.

Thank you, Fred. And good morning, everyone. Let's turn to Slide 9. As we look at our year-over-year revenue walk for Q3, we begin with pro-forma 2020 revenue of just under $3.6 billion, which includes a little over $1 billion of revenue from Delphi Technologies. Next, you can see those foreign currencies increased revenue by about 2%. Then our organic revenue decline year-over-year was approximately 7% or almost 9% excluding growth in our aftermarket segment. That compares to a 22% decrease in weighted average market production, which suggests that our outgrowth in the quarter was more than 13%. Now with that said, the significant volatility in production schedules and the varying levels of supply disruptions among our customers are continuing to make it difficult to draw conclusions from the quarterly outgrowth figures. Nonetheless, we were pleased that we delivered strong relative revenue performance in all three major markets, despite the overall decline in revenue. Regionally, in Europe, we outperformed, driven by new business in small gasoline turbochargers and fuel injection products. In China, we also outperformed the market driven by the resilience in the former Delphi businesses. And in North America, we outperformed the market primarily due to new business, as well as vehicle and customer mix. The sum of all this was just over $3.4 billion of revenue in Q3. Now let's look at our earnings and cash flow performance on Slide 10. Our third quarter adjusted operating income was $311 million compared to pro forma operating income of $396 million last year. This yielded an adjusted operating margin of 9.1%. On a comparable basis, excluding the impact of foreign exchange and the impact of AKASOL, adjusted operating income decreased $79 million on $261 million of lower sales. That translates to a decremental margin of approximately 30%. This higher-than-typical decremental margin was primarily driven by $24 million of higher commodity costs net of customer recoveries. Excluding these higher commodity costs, our year-over-year decremental margin was approximately 19%, which we view as a sign that we're effectively managing our operating cost performance in spite of the supply-chain disruptions. Moving on to cash flow, we consumed $10 million of free cash flow during the 3rd quarter. This was worse than our expectations going into the quarter due to lower-than-expected operating income, as well as higher-than-planned inventories. Fundamentally, when production declines this rapidly and unexpectedly, it's difficult to get inventory out of the system in the near term. We expect inventory to improve in the coming quarters, once we see less volatility in production orders, which will give us the ability to right-size our supply chain demands accordingly. Now let's talk about our full-year financial outlook on Slide 11. We now expect our end markets to be down 2.5% to flat for the year. Next, we expect to drive market outgrowth for the full year of approximately 1,000 basis points. This contemplates the strong performance to date, with a sequential step-down in the fourth quarter, as we expect to return to more normalized year-over-year outgrowth in Q4. Based on these assumptions, we expect our 2021 organic revenue to increase approximately 8.5% to 11% relative to 2020 pro forma revenue. Then, adding an expected $425 million benefit from stronger foreign currencies and an expected $70 million related to the acquisition of AKASOL, we're projecting total 2021 revenue to be in the range of $14.4 billion to $14.7 billion. This wide revenue guidance range reflects the continued production uncertainty we have in the fourth quarter. From a margin perspective, we expect our full-year adjusted operating margin to be in the range of 9.6% to 10.0% compared to a pro forma 2020 margin of 8.3%. This contemplates the business delivering full-year incremental in the low 20% range before the impact of Delphi-related cost synergies and purchase price accounting. From a cost synergy perspective, our margin guidance continues to include $100 million to $105 million of incremental benefit in 2021, the same as our prior guidance. Based on this revenue and margin outlook, we're now expecting full-year adjusted EPS of $3.65 to $3.95 per diluted share. And finally, we expect that we'll deliver free cash flow in the range of $600 million to $700 million for the full year. The reduction versus our prior guidance is a little larger than our projected decline in operating income as we expect inventory to remain higher than usual through the fourth quarter. Then once we head into 2022, we expect to start to see reductions in inventory toward more normalized levels. That's our 2021 outlook. Let's turn to Slide 12. Given the uncertain outlook for the remainder of 2021, we felt it appropriate to provide you with some of our initial thoughts on some key financial drivers and strategic priorities heading into 2022. Starting with our top-line, as of right now, we do expect supply chain challenges, particularly with respect to semiconductors, to continue well into 2022. Ultimately, where full-year 2022 industry production shakes out will depend on the scope and duration of these challenges. But at this point, we would still expect a modest level of growth in industry production next year. Next, we expect to deliver outgrowth in 2022. However, we're currently assessing the extent to which the much stronger-than-expected outgrowth in 2021 will result in any headwind to our outgrowth next year. From a cost perspective, we expect incremental Delphi-related cost synergies in the $40 million to $45 million range, and we also expect incremental restructuring savings of $40 million to $50 million. These combined savings are expected to largely offset our estimated increase in R&D spending of approximately $100 million. We're planning for the significant increase in R&D spending in order to support the new business wins we've achieved to date, and to pursue additional EV opportunities consistent with our Charging Forward organic growth objectives. And finally, we're building our plans based on the assumption that we'll see sustained levels of commodity inflation continuing into 2022, which means we expect that to create a year-over-year headwind during the first and second quarters. That's the near term. But while we're managing the near-term, we're also focused on securing our long-term future. Consistent with our Charging Forward initiative, we have three key strategic priorities heading into next year. First, we plan to continue to pursue and secure additional electric vehicle awards, for both components and systems. Second, we intend to execute additional M&A to accelerate our positioning in electric vehicles. And finally, we expect to complete the disposition of approximately $1 billion in combustion revenue. Ultimately, it's the pillars of near-term execution, securing future profitable growth, and disciplined inorganic investments that will drive the success of our strategy and thus drive value creation for our shareholders. With that, I'd like to turn the call back over to Fred.

Thank you, Kevin. I'm now really excited to share an update of our progress towards our Charging Forward targets on Slide 13. As evidenced by our program announcements over the past several quarters, including the two wins that I alluded to earlier, we're making significant progress on the organic growth in electric vehicles underlying our Charging Forward plan. As of this call, we have now booked electric vehicle programs leading to about $2.3 billion of revenue in 2025. Or to put it another way, with this booked business, we're more than 90% of the way towards our $2.5 billion organic revenue target we gave you back in March. The breakdown of this program is highlighted on the chart to the left. We're excited about the mix of both components and system awards and importantly, our booked business is across all major regions with leading OEMs. Plus, we expect to add to this booked business portfolio over the next quarters by securing additional EV awards with 2025 revenues. And then, we will supplement this organically-developed revenue with EV revenues from AKASOL and any future acquisitions. The takeaway from today is this. It's a challenging near-term environment, but, once again, BorgWarner is successfully managing the present and delivering solid financial results. At the same time, we're delivering our future. We're doing this by establishing product leadership and winning new business in the world of electrification. And with these wins, we are successfully executing on our long-term strategy, Charging Forward, which will deliver value to our shareholders long into the future. With that I'd like to turn the call back over to Pat.

Thank you, Fred. Jay, we're ready to open it up for questions.

Thank you. In the interest of time, please limit your questions to one question and one follow-up question. We'll pause for a moment to compile the Q&A roster. Our first question comes from the line of Colin Langan of Wells Fargo. Your line is open.

Great. Thanks for taking my question. Just looking sequentially, the midpoint of guidance would imply sales are down and also margins are down sequentially. Just any color on one — I think you commented that you thought the market was up, so is there a certain product mix that's a headwind as you go into Q4? And why would margin slide sequentially?

Yes. Thanks, Colin. A couple things. Even though production is expected to be sequentially up, our revenue when you look at what's embedded in our guidance is expected to be under a little bit more pressure because we had 13+% outgrowth in Q3, but as you step into Q4, our implicit guidance is somewhere of outgrowth in the range of 7.5% to 8.5%. So sequentially, actually, it's a revenue headwind even though market production is up. So, when you look at our revenue, our revenue actually is under more pressure on a sequential basis. The other thing you have is commodities are still a continuing headwind and that's true on a sequential basis, where it steps up probably in the range of $5 million to $15 million going from Q3 to Q4. So, I'd say those are a couple of the big drivers.

Got it. And just more strategically, pretty impressive with the inverter targets being a leader by 2025. How is that market shaking out? Is that going to be a significant percent of the market by 2025, and are there going to be three or four top players there, or is it still just a very fragmented market? I guess there's some concern that it's still going to be fragmented and competitive as we go out.

I think 2025, as far as we see it, is going to be the inflection point. The volumes in 2025, with production starting in 2023, 2024, 2025, are only going to go up from there. This is a product where you need a lot of product leadership. You need skill in electronics. You need a certain level of vertical integration to innovate freely. And I think we have all that: we have a global manufacturing footprint and we're very, very pleased with the product leadership. I'm hearing a lot of good feedback from customers, so very pleased with the momentum we have in power electronics at this point in time.

Okay, all right, thanks for taking my question.

Thank you. Next question comes from the line of John Murphy of Bank of America. Your line is open.

Good morning, guys. Fred, just on Slide 13, it's pretty impressive that you are this far along in your goal. I'm just curious — typically around powertrain we'd think about a solid four- or five-year lead time for bookings if not more. I'm just curious as we're going through this transition and even maybe EVs more generally, is the time frame compressed in which you can win business, meaning instead of four to five plus years, are we now looking at like two to three plus years? I'm just trying to understand how the timeline has changed here.

Yes. John, I think a good proxy is around three years. It's pretty much what we have in electronics between award and start of production. In some cases, since we have a breadth of product and very modular design, in some cases we can be faster than that. But I think three years from booking to SOP is a good proxy.

So, it'd be fair to say that you have a solid year left to build on what you might be able to win for 2025. Is that a fair statement you think, Fred, at least?

I think it's fair.

Okay. Second question on capital: you've got roughly $1.5 billion in cash on the balance sheet, you generated $670 million this year, assume next year is no worse but maybe better. We're looking at north of $2 billion of cash plus if you're able to sell about a billion dollars of ICE business. It seems like that's a lot of dry powder. How do you think about allocating that capital to the organic business, acquisitions or directly back to shareholders? It seems like that gives you a lot of potential to make intriguing acquisitions.

Yeah, that's right, and it's consistent with what we laid out in our Charging Forward Investor Day presentation back in March. We expected — just like the math you've gone through — we expect to be able to generate a lot of capital over the planning horizon here. And we believe that capital is available to support our dividend policy, as well as the buyback program that we have outstanding. But right now, the priority for us is to preserve that dry powder for M&A priorities over the near-term and medium-term to accelerate the path toward winning in electrification for this Company, consistent with our Charging Forward initiative. So that's where the priority and the focus is right now. And so, to the extent that we have pipelines of opportunities built up that we think will potentially utilize that capital, we're going to maintain that capital to be ready to support those types of M&A initiatives.

Kevin, just — I'm sorry. That billion dollars you're talking about selling by 2022, I mean, that's a pretty direct statement. Is this stuff in process, is it just a matter of timing that you're almost locked into that point at this stage?

I mean, there's a couple of dispositions that I'd say we are actively in progress. In fact, when you look at the 10-Q that's going to get filed later today, you're going to see some assets and liabilities on one of those transactions. Actually, we've moved some into held-for-sale accounting, so you can see we're making some progress there, although we don't have anything specific to announce today. But those couple of transactions that are in progress are really the start point. We have a couple of others that I would say are in the planning phases that we think when you combine those things that we look at the 2022 timeframe, we think we're on the path to disposing of a billion dollars of combustion revenue consistent with what we laid out back in March.

Great. Thank you very much.

Thank you. Next question comes from the line of Brian Johnson of Barclays. Your line is open.

Thank you. Yeah, I want to follow up on Collins's question around power electronics and the competitive environment. You have a comment in there that you're talking about custom silicon, proprietary integrated circuit development. Is that custom silicon and do you have a fab to do that? And that gets to the bigger question, which is how do you quantify the value add against the margins in power electronics when a cynic might say OEM goes to a SiC supplier, and they're really just looking for a Tier-1 that packages and ships it, which is more of a build-to-print function.

Yes. Brian, we are not making silicon or silicon carbide. We have very, very strong relationships with our supply base. We're developing products together. And those are very important elements when you think about the fact that those elements are embedded into our power modules. And for inverters, those are really critical elements.

I think on the margin, even looking at the two programs that Fred presented today, we look at those types of programs the same way we look at all of our other programs. We focus on the ROIC of those programs, and given the capital intensity of those types of programs being substantially similar to what we see in the bulk of our business, it means that the margin profile of those businesses ends up looking substantially similar to the types of programs we've booked historically at this Company. Those programs, in particular, as well as any others actually come up through Fred and me. We look at those, we look at the ROIC and the margin that comes out of that and we're pleased with what we see.

The financial discipline of this Company has not changed. In the world of electric vehicles, we have the same discipline — absolutely the same discipline.

So, what is the key value add that drives your win rate and also creates the margins that you like?

I think we just simply have better products. Better products that package better, that are lighter, that are more competitive than competition. And this is linked to better product leadership and better innovation. Also, the ability to innovate in our verticals, which are power modules, software, ASIC and design. There is no magic there. You need to be better in all those elements and the proof is in the pudding; we are.

Great. Okay, thanks. And look forward to chatting with you in a few weeks.

Likewise.

Thank you. Next question comes from the line of Noah Kaye of Oppenheimer. Your line is open.

Good morning and thanks for taking the question. So, the CEO of a leading premium European OEM was talking this morning in public commentary about the lack of charging infrastructure in Europe, just not keeping pace with the growth and demand, and the availability of new models. As you think about growth verticals and opportunities for the Company, how do you look at the EV charging opportunity? Are you doing any work there as an area of potential growth for you? Can you comment on that?

We have a small operations and business today producing charging stations. We also think that the future is fast charging and that battery packs are central to that. We're looking at where we can add value to the market; this is something we're evaluating right now.

And then as it relates to the step-up of $100 million in R&D that you're expecting for next year, understanding it sounds like a significant portion of that is just to support new EV programs and development, should we start to see operating leverage from an R&D perspective on EV sales growth? Is R&D within EV as a percentage of sales going to stay the same or decline next year? It's helpful to understand the trajectory because by 2025, presumably your R&D intensity will have significantly declined to achieve those target margins.

Absolutely. I would refer you to the slide we provided at our Investor Day because that's a good way to think about it, which showed how the R&D right now is heavy particularly relative to the revenue that we have when we're running $300 million or $400 million of EV revenue. We're investing — of that $725 million of R&D this year, around a third of that is being focused on the e-product portfolio. Obviously, that math doesn't work from a near-term profitability perspective. As we go out over time, we start to launch some of these programs from an EV perspective. The EV businesses start to get some real gross margin and contribution margin that starts to help to fund some of those R&D investments. So, R&D is continuing to ramp over the next few years, but ultimately, that contribution margin is coming on more quickly and you start to get the leverage that you alluded to. You can see as we laid out in the Investor Day that by the 2024-ish timeframe is when we start to cross and you start to see profitability on a standalone basis as the contribution margin on incremental sales starts to overtake the R&D investments that we're making. And as you think about that for the long term, as we think about the steady-state for that business, the margin profile of that business we think is a good margin business. It's just that we're in growth mode for a long period of time. Until growth slows, you never fully offset R&D from a normal operating margin perspective. We're always continuing to invest, as long as we're growing. But we start to get the real leverage in the coming years here.

Great, thanks very much.

Thank you. Next question comes from the line of Dan Levy of Credit Suisse. Your line is open.

Hi. Good morning, everyone. Thank you. First on 2022, I know on Slide 12 you give us some parameters, but I just want to aggregate this: what type of incremental margins might we be able to expect on any volume recovery? I realize it's early here, but what type of incremental margins might we be able to expect? When I add up the items listed here, it seems incremental should be a little lower than usual, but just want to see if there's an aggregate view on all that.

I mean, the good news is as we're looking at the decremental we experienced in Q3, and even what's implicit in our Q4 guide, we're suggesting there's a 30% decremental, but about 10 points of that is being driven by the commodity cost headwinds. So, underlying the performance outside of commodity costs, we're managing right around that 20% mark on a year-over-year basis. Which is good considering how much revenue has come out on a year-over-year basis. When volumes come out relatively quickly like that, and then they recover, we would expect generally to increment directionally at the rate at which we decremented when you have a drop down and then a snap back. And then as you look longer term, we continue to expect, once you get into a more normalized operating environment, incrementals go back to a more normalized rate in the high teens tends to be where we operate from a pure incremental perspective.

All-in that could lead to incrementals next year potentially in the 20% range?

On recovery of volume from the low levels that we're operating at now, absolutely. And then as you get into a more normalized outgrowth relative to normalized market expectations then you would expect to return to more normalized incremental margins. But when we get a snap back from production drops like we would anticipate at some point here, we would expect to be able to increment at the rate at which we decremented. No different than what we saw coming out of COVID. When COVID started to — when we started the snap back at the end of last year, we had obviously decremented at a pretty healthy rate earlier in the year and it came back very quickly and we incremented at the rates in which we decremented. I think that's the right way to think about us as we come out of hopefully the production challenges that we're seeing in the market today sometime during '22.

Great. Thank you. And then my follow-up is, I know there's been a number of questions on inverters here, but I'll ask another one. I think it's pretty clear inverters are effectively becoming your signature product, similar to how turbos are a signature product historically. If we're making the inverter versus turbo comparison, maybe you can just give us a sense where turbos are clearly a very concentrated position for you; what type of competitive environment you anticipate for inverters? And how would that compare to motors and drive units? And then maybe also how you plan to allocate resources to inverters internally versus other products. Is this going to get disproportionate attention given it will be a signature product in the future?

A lot of questions in your question. So first, very happy with the inverter positioning. As I alluded to in my prepared remarks, we think we're going to be the number one non-captive inverter producer by 2025 — 2.5 million inverters in 2025 and absolutely growing from there. More to be booked; already 90% booked, and that ramps up R&D to support that booking rate and also the high level of pursuits that we do. So, I am very happy with that. I would not call that the finished product. When you look at Slide 13, you add other products in the mix. It's true that this product has a high content per vehicle, but we're very successful with systems and iDMs. We've announced quite a few wins and more to come, very successful with the surrounding of the batteries. Needless to say, that Slide 13 does not include AKASOL because we don't totally own it yet. We are in the squeeze-out period. It is not one product — there are a lot of products in the world of electric vehicles that we are excelling at. Now inverters, as I mentioned in prior calls, are products that are outsourced by our customers by the vast majority because they're complex to do. It requires scale in electronics and a lot of vertical integration. And so we're very successful with that. On motors, we are embedding our own motors in our iDMs, and we're also selling standalone motors. I would say that the market in motors is still more fragmented than the competitors in inverters, which is becoming more and more concentrated. That's what I would tell you.

Thank you, I know there's a lot there. I appreciate it. It's very helpful.

Thank you. Next question comes from the line of Emmanuel Rosner of Deutsche Bank. Your line is open.

Thank you very much. My first question is around some of the elements of outlook that you provided for 2022, which are really helpful. Maybe focusing on the top-line and the growth first, I think you mentioned expecting additional modest LVP growth and then still assessing the outgrowth outlook. Could you provide a little more color around your early thinking? I would think modest LVP growth is probably quite a bit more conservative than some industry forecasts or what we've heard from some automakers. To what extent is some of the growth you saw this year a pull-forward that would impact next year's growth?

A couple of things on the outlook for next year: still early days and we're still operating in a very volatile environment, as evidenced by the fact that we still have a $300 million revenue range on our Q4 revenue outlook. As we look out into 2022, from where we sit today, we don't see a rapid solution to the semiconductor challenges and a sudden snap back in market volumes. So our expectation is that there's going to be continuing impact of supply chain disruptions well into 2022. That's why we're suggesting, given where we sit today, we expect that probably translates to modest growth year-over-year in production. But I'd say you're sitting here in early November trying to project what next year looks like when we're still struggling with Q4 production — it's pretty challenging to project right now. In terms of the outgrowth, it starts with what was your outgrowth in 2021 and how much of that might have been a pull-forward or a benefit you would've otherwise expected over the couple of years. The fact that we outgrew the market based on our guidance or expect to outgrow the market by ten percentage points in 2021 is obviously not a normal outgrowth for this Company. We're happy with it, but it suggests to us that knowing we normally grow in the mid-single-digit range, some of that may have been a pull-forward of things we would've otherwise expected in 2022. We're in the middle of that assessment right now. We're in the middle of our long-range planning process and really understanding in this volatile environment how much of that is a headwind in next year's year-over-year outgrowth versus whether we expect this as the new base from which we grow. So still in the middle of the assessment, but it wouldn't be a bad thing; it would just mean some things accelerated into this year, and you can really see that in our full-year guide where our backlog in our full-year guide is a billion and a half in 2021. It tells you the strength of what we've been able to accomplish this year. It's just a question of how much of that might have been a pull-forward from next year.

Understood. And then second question, around your strategic priority to dispose some ICE revenue by the end of next year, can you provide a framework for how to think about potential implication on margin? Is it typically business that would be at average margins or below average? More broadly, as combustion engine revenues may decline over time while EV side initially doesn't have scale, how do you plan on managing the impact on profitability from a declining but historically profitable business, either organically or through disposal?

The margin profile of the businesses and products that we would consider for disposition depends. Some probably have below-average Company margins, some might not. They might have at or even above Company average margins. Remember, when we're looking at the framework for what we don't think is a business or product that fits with BorgWarner longer term, if a business or product doesn't tick one or more of three boxes, we look and say: do we have product leadership in the space? Do we have medium- to long-term growth prospects? Do we have a strong margin profile? So you can have businesses that might have a solid margin profile but actually just don't have the growth prospects that we would expect or product leadership — that would be a candidate for disposition. At the same time, we have products that are undoubtedly below the average margin profile that are candidates for disposition. When we at Investor Day talked about our longer-term margin guide, we contemplated the types of businesses that we thought would be included in our disposition strategy and still thought that over the longer term we would be in the double-digit margin range on a go-forward basis — that contemplates dispositions. It also contemplates the impact of growing the EV portfolio. The one thing to keep in mind is the impact on our P&L is already in our results today because we're investing over $200 million in R&D right now in our P&L in 2021 and we only have $300 million to $400 million of EV-related revenue in our P&L. So that's only a tailwind as we continue to grow that business going forward because we start to get contribution margin that's more than offsetting the incremental R&D as we look out over the coming years. You can't look at that business and say it's a negative margin business and we're growing a negative margin business. We're growing from where we are today and starting to generate the contribution margin on the incremental revenue that comes into the P&L. And the margin profiles of those businesses, we feel very good about.

Okay, that's very helpful. Thank you.

Thank you. Next question comes from the line of Luke Junk of Robert W. Baird. Your line is open.

Good morning. Thanks for taking questions. First question I had is, if there's any additional color you can provide on the North America inverter award specifically: it was described as a high-voltage program. Just wondering if that includes both 400-volt and 800-volt business, and whether that'd be all EV or if there's a hybrid element here, just trying to understand the breadth of this award.

I'd love to give you more detail but I can't. The only thing I'd tell you is that it is all EV.

All EV. Okay. Great, I'll take that. Follow-up question, Fred: to what extent is there potential for award activity to not only sustain in EVs, but to pick up from here? Obviously you've got good momentum going to the 2025 EV targets already, but it's only been about a year since you closed the deal. Any high-level thoughts there would be great as well. Thanks.

From an organic standpoint, we are at 90% and our target was $2.5 billion — we are at $2.3 billion, very happy about that. From an inorganic standpoint, AKASOL, as we mentioned in the past, represents about one quarter of the inorganic sales underlying Charging Forward, and we have a few years to go. Very happy with the pipeline that we have. Good, healthy pipeline. We are engaged with some targets. And of course, right now we're focused on preparing the AKASOL integration, which is not totally ours until the squeeze-out process is complete. We are on track for dispositions overall. We are on track versus what we presented back in March, and very happy to see that momentum both organically and inorganically.

Thank you. Next question comes from the line Joseph Spak of RBC. Your line is open.

Thank you. Good morning. Kevin, I want to go back to some comments made on growth over market. You keep saying pull-forward, but how much — it would seem part of the better growth over market this year is mix-related, right? You're comparing a dollar value to a unit number, and the units that were made this year probably had higher dollar content. Do you have an estimate of how much of that was mix-related? Moving to 2022, does that mean back to your mid-single-digit target or potentially below it because the path for margins next year seems really dependent on the conversion on volume versus some of the headwinds you've laid out here.

So the first question on growth over market: it's a combination of those things. It's absolutely fair that some of this is potentially mix — mix of product, mix of customer — and that's something we're assessing right now. I think that undoubtedly had some impact on Q3 where we delivered over 13% growth in the quarter in isolation. We're in the process of assessing what we think 2022 looks like versus that outgrowth. Are we back to the average or is it slightly below the average? I don't think where we sit today we're expecting to be delivering 10% growth above market again. So it's a matter of whether we're back to normal growth rates we've delivered over the last few years, or if there is any headwind relative to that based on the really strong outgrowth and backlog we delivered this year. We're in the middle of that assessment.

And then Fred, maybe a bigger-picture question: it's great to see traction toward the $2.5 billion number in '25. Does this change the mix of BEV relative to ICE that you have laid out for '25? I think originally you expected a certain BEV penetration — is the mix of ICE decelerating faster as BEV penetration accelerates?

Joe, I think in 2025 we still think our assumptions are accurate. If you remember back in March at Investor Day, we talked about 30% BEV market in light vehicles in 2030; I think we might have been conservative and the market might be higher than 30% by 2030. Our target in 2030 was 45% BEV. But I don't think 2025 is going to move meaningfully. 2030 might be north of 30% and might be north of what we thought back in March. You are right: the pace of BEV volume is accelerating and the pace of requests for sourcing is accelerating too. The volumes we are booking are in the several hundreds of thousands — we're not talking about low volume here — so it's significant. The acceleration is here and I'm very happy to be a big part of it.

Thank you for that.

Thank you. Next question comes from the line of Adam Uhlman of Cleveland Research. Your line is open.

Hey, guys, good morning. I want to go back to the margin commentary for next year and I'm wondering if you could share with us: if commodities stay where they're at today, how much of an additional headwind might you expect to see in 2022? And combined with that, outside of commodities you've incurred a bunch of other non-material costs — can you frame the potential commercial recoveries that you might expect and if that could be a meaningful offset to commodity headwinds?

In terms of the commodity headwind, remember this year we've embedded in our guidance a net commodity headwind of about $80 million to $90 million for the full year. In Q4 we're expecting that to step up by $30 million to $40 million. The bulk of the commodity headwind we've experienced has been in the back half of the year. In Q3 it was $24 million, in Q4 we expect $30 million to $40 million. You can do the math based on that and assume that if commodities remained at those types of levels, it's a year-over-year headwind as you look at Q1 and Q2 next year. Those are the planning assumptions we're using but it remains to be seen where we actually end up. In terms of other costs and recoveries, they're embedded in the P&L today in terms of our guide. I think the biggest impact at the moment is really the commodity headwind when we look at the impact on our financials this year.

Got it. Thanks. And then lastly, a near-term question: I'm wondering what you're seeing so far here in the fourth quarter in terms of customer call-offs, and perhaps any color on geographies given the wide range of the fourth quarter revenue guidance. Did it start off a little rockier than previously expected or anything you can share there?

It's a tough one — that's why our guidance is so wide for the remainder of the year. Volatility happens in all regions and can change from one day to another. Staying close to customers is the key, but surprises do happen where our schedules are in place, ready to ship, and the customer is stuck with no path. It is a very volatile environment and I don't think it would be wise for me to answer that question regionally in detail. It's still a pretty wide world right now.

Thank you. We have time for one final question and that question comes from David Kelley of Jefferies. Your line is open.

Hey, good morning team. Thanks for squeezing me in. Maybe Kevin, to follow up on that last commodity headwind question: could you remind us of the pass-through timing and opportunity as we start thinking about first half 2022? I believe you have about 50% typical pass-through on purchases for commodities, but any color would be helpful.

Our typical pass-through, when you look at the blend of all the contractual pass-through mechanisms we have for steel, aluminum, nickel, copper — the things we're most exposed to — the contractual pass-throughs are about 50% on a fully blended basis. A couple things to note: when we talk about the net commodity headwind we've disclosed of $80 million to $90 million, that is on a net basis and so we've been executing at or around that 50% level thus far in our guidance this year, which means the gross impact of those commodity headwinds is roughly double what we talked about. The $80 million to $90 million already contemplates recoveries in it. So if you think about how that translates into next year, maybe you get a little benefit from some of the lag that's in there but we're already pretty close to 50% today. The second thing is when you get into more sustained inflationary environments of such a high degree like we're seeing, it's not uncommon to see suppliers having conversations across the industry with customers about what to do beyond the contractual pass-through mechanism. So the 50% is the contractual piece and we'll see how long the inflationary environment lasts and at what level and whether that warrants additional conversations that we or others have with the customer base heading into next year.

Okay, got it. Thank you. And then maybe one last one, commercial vehicle traction: could you talk about your outgrowth in the quarter and any color on how you're thinking about the fourth-quarter contribution from your commercial vehicle exposure?

Our commercial vehicle exposure is still running in that low-teens range, around 13% of our total portfolio. So not a material change as you look out to the balance of this year or next year. The things that would move the needle would be any acquisitions. AKASOL is really focused on the commercial vehicle and industrial space. As they ramp up over the coming years we'll get a tailwind from that in terms of mix percentage. But we're continuing to operate in that low-teens range in terms of mix.

Great. Thank you.

So, with that, I'd like to thank you all for your great questions today. If you have any follow-ups, feel free to reach out to me and the rest of the team. With that, Jay, you can go ahead and close the call.

Thank you. And that does conclude the BorgWarner 2021 Third Quarter Results Conference Call. You may now disconnect.