Thank you, everyone, for joining as we continue day three of the Barclays Industrial Select Conference. I'm Dan Levy. I lead U.S. Autos and Mobility coverage at Barclays. And very pleased to have with us BorgWarner, leader in powertrain technologies and expanding to different markets, as we're going to discuss. Very pleased to have with us Joe Fadul, company's president and CEO, Craig Aaron, the company's CFO, and then Pat Nolan, who leads our. All right, so before we start, we're going to kick off with a couple of audience response questions. So everyone, BorgWarner used to be from Chicago at some point, so vote early, vote often. Did you used to be from Chicago?

A long time ago. We moved our headquarters to Detroit in 2004.

Okay, there's probably vote early, vote often there as well. All right, so if we could just pull up question number one, do you own the stock? I hope all of you guys are overweight. You own very much so. Can we start the timer, please?

Okay, all right. So Mark, we'll wait some opportunity here. If we could start then question number two, general bias toward the stock. I assume your bias is positive. I think so. I think we're bullish.

Okay. So it's an interesting split. So before we go, Joe, I think you had some opening remarks you wanted to make.

Thanks, Dan, for having us here. So first I thought it would be important to recap our 2025 results and then set the stage for our priorities this year. So 2025 was a terrific year for BoardWarner. We expanded our adjusted operating margins, 60 basis points. We increased our EPS 14%. And finally, we generated free cash flow of $1.2 billion, a record year for us. In addition to this, we shared with the street 30 wins across our entire portfolio. So both our foundational business and our e-products. and in total, really a record level of new business. And the cherry on top, of course, is the turbine generator. We announced we have a supply agreement to bring that to market next year with an initial revenue of $300 million. So really proud of our team and what we achieved last year. When I think about our priorities this year, again, first priority is driving financial performance and discipline throughout the organization. So that means doing what we need to to secure profitable launches with the backlog. Second, adjusting our cost structure as needed, and then driving performance and productivity and supply chain. That will allow us to expand margins again in 2026. Second priority is continue to win new business. We saw a lot of RFQ flow last year, and that momentum is continuing into 2026. So we want to continue to win across the entire portfolio, and this will drive future growth. It will enhance shareholder value of the company. And then third, we remain focused on delivering shareholder value through a number of mechanisms. So last year, we provided back to shareholders more than 50% of our free cash flow and dividend and share buyback, and we'll continue to do that and look for inorganic opportunities along the way that really leverage our core competence and can expand the earnings. So for us, we feel like we're in a really strong position right now in this market and we're starting to see growth opportunities outside of light vehicle.

Great. Okay, so thank you. That's a helpful introduction. I want to just broadly get a sense, because then I think we've had this in some of the conversations since earnings. I think we know the last couple of years, the organic growth has been muted. It's going to be muted again in 2026, but I think you're providing some guideposts, signposts that it's going to get better. Is it fair to say that starting in 2027, your core business alongside this PowerGen opportunity should provide you with an improved growth profile? Meaning are we sort of, Is there a light at the end of the growth tunnel, so to speak?

So it is true. We are still living with this. We call it the EV overhang, right? We won a lot of business a couple of years ago. All that business really didn't come to fruition outside of China. So we've seen much slower growth on the east side. And 2026 is a continuation of that. But what I am satisfied with are these new business wins. If we look back the last 12 months, even the last 18 months, We've secured a record amount of new business, and not just on the e-products side. It's across our foundational products, which we have a lot of confidence in. Think about those products were number one or number two in nearly every one of them. So I'm pleased with the backlog we're building, and yes, in 2027, in addition to the turbine generator revenue, we expect to see our core business grow again. Okay, great.

Right. Can we also put this in context with maybe some of, I'll call it an organizational shift that I think we've seen play out in which it seems like you've shifted your allocation of resources relatively away from being solely on e-product and more toward the broader business. I think, you know, the words you used on the call were unleashing the growth across the segments. Can you maybe just help us understand and appreciate the organizational shift that's at play and what's different in the past year versus the past prior year?

So, you know, what we've really done is adjusted our focus of the organization. So I'll first take us back to 2020. You know, the whole world thought the light vehicle market was going to go to EV fairly quickly. So we made a lot of capital decisions. We bought a few companies. We won a lot of new business preparing for the growth that was coming. So it's fair to say we were hyper-focused on the e-product side because that's where we thought the new world would be 10 years from now. We all know that's not the case. It's playing out regionally different depending on where you sit. So what was important for us was to adjust the strategy and adjust the focus of the company, and that's what we did 18 months ago. Instead of just primarily focusing on e-product growth, we're unlocking the growth potential across all the businesses. So all four of our segments, we're asking them, go find your top-line growth. Go find those opportunities that you think are going to support profitable growth in the future. That's the big change that came. And what you see as proof points is we're winning business across the company. So I'm really proud of what our teams are achieving there. And some of them are also with new products on the foundational side. So our drivetrain Morse team, you know, we announced last quarter a win for an EXD solution. It's a torque management solution. It can be used in hybrids. That's a great example. Turbine generator, of course, getting a lot of attention. That's a great example of leveraging the competence of the company inside TTT. So I'm really pleased with how the organization has adjusted quickly to really unlock this new growth. And think how powerful that is, unleashing all of BorgWarner to go find growth rather than a subset of it. So really happy with how the teams are doing there.

And when we look at specifically on the foundational wins, is that just these are share gains? These are CPV gains? This is, help us contextualize what specifically is happening on the foundational side, where you may be sort of not punching at your full weight previously, and now, you know, there's more share opportunity to be had.

Yeah, I think in the market, we also see a change, right? The rebirth, we'll call it, of the foundational business and the extension of the combustion engine, you know, is clearly here. I mean, it's going to have a much longer life than everybody thought. So what we see is OEMs are adjusting their cycle plans to incorporate more combustion engines, a few of them even bringing new engines to market, which whoever thought that would happen a couple of years ago. So our wins cut across a number of types. One is new business, which is very competitive to win it. You need the right technology and the right pricing. Some of it is conquest business. You know, this is something we've been talking about, Dan. And being number one or number two in nearly all of our foundational business, we expect over time we're going to conquest more and more business. The reason for that is the smaller players are not going to be able to stay competitive and keep up with the demands of innovation. If you think about turbochargers, there's still another couple of generations so that you can be a great supplier in that space. So also uplifts are part of those wins, extensions, volume increases. So all the above, and we're participating in all of those types of wins. So we're really pleased with how the foundational business has started to evolve with all that backlog.

Okay, so I think that my next question is to then transition to the PowerGen side. I think there is a view on the part of some that what you're doing in power generation might be a way to offset maybe declines in the core LVP market. It sounds like you're saying that's not the case. There's still growth in the core market. You're just getting it in different ways. And then the power gen is additive. Is that right? That's correct.

So think about our core markets, which are very important to us. We strongly believe in the future of electrification. Okay, electrification is coming. You see it playing out in China under the right environment. It's growing in Europe. It's growing in other markets. It's just not growing here at the moment for a number of reasons, which maybe we'll talk about later. But electrification brings more content opportunities for BorgWarner. So think about our business. We're going to remain strong on the foundational side, and we've got a growing e-product side. Last year, we did $2.6 billion in e-products. So we can complain about the lack of growth, but we've been growing year over year for five years. And now we've got a reasonable size supplier just in our e-products. So I'm really pleased with that. So that's our primary growth engine that we've been working on. In addition, now we're going to market with this turbine generator. So for me, it's a great example of unleashing the power of BorgWarner to enter new market spaces. So it's more cherry on top than it is to replace what we think is our core market. So let's talk about that.

Can you maybe give us a sense how long this was in the works, the turbine generator, the path to success, the challenges you're going to have? I mean, we'll unpack these, but, you know, give us an overall flavor of this opportunity.

So we've been working with our partner, Endeavor, and their subsidiary, TurboCell, for over three years. First, I'll just start with Endeavor. They're a very innovative data center supplier. They've been in the business for over 25 years, so they've got a lot of experience building out data centers, operating data centers. We share the vision of, you know, a cleaner, energy-efficient world, which is really cool. You know, they are coming at it from a data center space. We're coming at it from a mobility space. They're a very innovative partner. As we know now, time to power is a crucial part of data center success. You know, it's water and it's power, and we're able to solve one of those two problems, at least to a smaller degree. So, you know, think about the development cycle of a typical automotive platform. It's two to three years. In this case, we're already three years into this development. By the time we launch, it'll be four, four and a half years. So a little bit longer cycle than typical, but I'm excited because we're leveraging all the core competence of the company to bring this to market. So think about the content of a turbine generator. You got a multi-level turbocharger system in there. high-speed rotating electrics, an inverter, advanced software controls. I mean, these are things BorgWarner has been known for for 20, 30, 40 years. So we're leveraging all of that, even though we're only working with Endeavor on this solution for three-plus years. The other thing I'm really excited about, which we can't emphasize enough, think about bringing automotive scale and competitiveness to the power market. Okay, there's a lot of great power companies out there, but none of them are bringing the automotive scale, the automotive quality, the discipline, the ability to do it successfully like BorgWarner is. And that's a piece we're really excited about. We haven't talked about it as much in the past, but we think that's a game changer.

Okay, so as it relates to the specific offering, and you just touched on it, help us understand, I think the number you gave on your earnings was that 65% of the content is going to be BorgWarner. So help us understand what you're responsible for, what Endeavor is responsible for, and then within that 65%, how much of that is technology that's already in-house that was used for auto and is just being applied differently versus technology you have to go out and acquire or a different supply chain you have to access. Help us understand on that.

So the 65%, when we talk about that, just to frame it properly, 65% of that content we are developing and producing internally. So in addition to the new site we're investing in in North Carolina, we have four other locations around the globe where we're leveraging their competence, their footprint, their know-how. So it's things like turbochargers, motors, inverters, advanced controls, and thermal management. Those are the things that we're leveraging our AutoCore to bring into this product. So the competence is there. The application is different. So there is some invention along the way, and we've got a lot of IP in this new product, which helps create some moat to it. But when you think about the other 35%, we're still the design source, but we're asking our supply base to supply the parts. So we're 100% in control of what we call the turbine generator. Then we ship that to Endeavor. They finish the packaging with one of their other partners. They add some more material to it, and then it's a complete unit.

And we're talking about how large is the application, two megawatt plus applications. What does a typical product look like or unit that you would sell?

So they're packing and shipping in as small as a one megawatt system. So if you only need one megawatt, they'll be able to serve that piece of the market. But you can scale these up. So that's another beautiful part of this is they can serve an entire data center farm if you need them to. That flexibility also extends to, we can serve as backup power, we can serve as primary power. So we've got the flexibility between those two. And then these things can be lifted from one site to another if you want, you know, let's say we're used as bridge power, meaning the utility is not ready to serve that market yet. We can be there for a period of time, and then airlifted somewhere else to another data center to serve that data center. So a lot of flexibility built in, and when we talk to some of Endeavor's customers, you know, they're sharing with us, hey, we really value some of the things you guys are doing.

Okay, and then as far as Endeavor, you know, and you said you've been working with them now for a few years already, and you gave some sense within the product itself who's doing what. Who's handling the go-to-market? How broad is their potential customer set? Maybe just give people a better sense of Endeavor and where they sit in this situation, their relationship with hyperscalers, etc.

So Endeavor is the face to the customer. They're the ones with the 25 years of experience building data centers. We are providing, and that includes the service and the install. We're providing really what I call the content, right? We're providing the complete turbine generator system. We are technical support. We're going to provide all the service parts as needed over the lifetime of these things. So think about it. All the hardware, you know, we're the majority of the supplier there. But they're interfacing with the hyperscalers and the edge customers as they normally would as a data center designer and provider. So that's the split of the business. Again, it's a great partnership because we need them for the entry into the channel. But we're providing a lot of the technology and product into the final assembly.

And your sense of how this product will compare to maybe some of the other PowerGen players being the larger players like a Cat or Cummins or even maybe guys that are newer guys that are trying to generac or, you know, how does it compare versus others? What's your sense?

So one reason we feel very good is, you know, we don't see a direct competitor for what we're doing. Those names you mentioned, all valuable companies. We supply some of them turbochargers today. But, you know, you think about the diesel, their backup power. They don't serve the primary power. And it's very expensive backup power. You know, they only run on diesel for the most part. There's a few natural gas entrants now, but it's a very expensive uptime for that. The larger turbine players, you know, the time to power is much longer. They don't have the resiliency we have. You know, in data centers, you have loads coming in, loads getting dumped on a regular basis, and our system is able to handle that beautifully. The time to power is much shorter, so 45 seconds to start up a turbine generator, a Bort Warner turbine generator. We conserve a variety of fuels, so natural gas, diesel, in the future, hydrogen. Many of the players don't have that variability. And then finally, it's the scalability of this thing. Like I mentioned, you can serve a one-megawatt system and even outside of data centers. These can be used for backup power for hospitals or for hotels or island nations. Oil and gas is another great potential application here. So we just think the flexibility, the total cost of ownership is very attractive, and that's what the hyperscalers are also feeding back to us.

And maybe one last one on this. So $300 million next year, you said two gigawatts of capacity. Maybe what subset of the two gigawatts of capacity does next year's revenue represent? And what's the line of sight for there being demand to the capacity that you have?

Yeah, so the capacity, sure, the capacity doesn't really align to the $300 million. Think about the $300 million, that's our initial SOP and ramp-up year, okay? But we wouldn't install two gigawatts if we weren't pretty confident that we can fill that. So I can't answer your question directly. But beyond the two gigawatt, you know, we see enough demand and backlog that we're considering decisions in the near future. Do we expand beyond that? And not just in this market. We're seeing demand in Europe. We're seeing demand in other countries like India. this is a solution that works globally. So for us, you know, we're super excited, but we're hyper-focused on the initial launch. You know, I think Craig and I, we were just in North Carolina yesterday to spend time with the team, see the new site, see the testing and the progress we're making, and the progress is tremendous. So I'm feeling really good about our ability to launch and secure that $300 million, in, and that's what we're super focused on right now.

Great. Let's pivot maybe to the margin dynamics, because I think the margins last year, this year, are a very interesting part of the story here, that even with a tougher growth environment, not only have we seen margins hold in, but actually expand. And now the outlook this year, this is with incremental R&D and spend. So maybe just give us a sense of the levers that you've already pulled. and how much more runway there is on margins in spite of what's been a tougher growth environment the last couple of years?

Yeah, Joe and I are really focused on growing the earnings power of BoardWarner. That's our ultimate goal. That's really what we've been doing the last few years. And margin has been a big story as part of that. So when you think about our margin progression over the last two years, up 110 basis points over a two-year period, 60 basis points last year, 50 basis points the year before the main drivers is cost controls, you know, so focused on restructuring, productivity, supply chain savings is a big, big part of it. Lower cost of poor quality has also been a big part of it. So really proud of the progression. As we move to 2026, we see another 10 to 20 basis points of margin expansion focused on cost controls again, while we also invest in the future with a turbine generator that Joe just mentioned, plus the 30-plus awards that we've announced publicly, we're supporting those launches as well. And that's what great companies do. They support the growth objectives as we move to 27 and forward. At the same time, we're able to expand margins. That's what we're focused on doing.

Your R&D profile this year versus past years, is it elevated?

No, it's similar. It's at a similar level.

Okay. So it's spend in some areas offset by maybe saves in other areas. That's how it nets out. Commercial recoveries, maybe give us a flavor for how significant it was in 25 and what's in 26.

Sure. So we mentioned in our fourth quarter call that we had a sizable recovery that went through our PDS segment. It had about 100 basis points of impact on our margin profile in the fourth quarter. But as you think about our jump off point, our jump off point from 25 to 26 is 10.7%. That's inclusive of that recovery. And what we're guiding to is 10.8 at the midpoint, 10.9 at the high point. So it's important that we jump off the inclusion of that. So we need to continue to overcome that. And our goal, again, and the earnings profile of the company, that means margin expansion, that means EPS expansion, and it means including that recovery that we saw in 2025.

And then maybe last question before we go back to some of the other ARS questions. The path to getting to break even in battery and power drive, is it purely volume at this point, or are there other levers on restructuring beyond what you've already done?

So when you think about the battery business, Joe mentioned it earlier, but visibility from a sales perspective is a little bit challenging right now, but we're happy with the cost structure actions that we've taken over the last year. So restructuring, we restructured that business, we've moved our break-even point to much lower, and we do see growth opportunities down the road. You know, energy is a big driver going forward, and we see applications for that business outside of automotive. And so the team's really looking at those opportunities. And as those growth opportunities come into our P&L, we have high confidence that we can capitalize on that growth. For PowerDrive Systems, we announced a restructuring 18 months ago, and one of the items that Joe and I were really looking at as it relates to that business last year is we need to grow, but also we need to convert in the mid-teens. And when you look at that business, they grew 31% year-over-year on the light vehicle E side of their portfolio, and if you look at the results, they converted in the mid-teens. That was an important data point for us. As we look at 2026, we expect that light vehicle e-products portfolio to grow into low double digits, and we fully expect them to convert on that growth in the mid-teens. So we feel good about that business, but we're also always looking at the cost structure to make sure we're as competitive as we can be as we move forward.

Great. Why don't we get to ARS question number three? We'll get through the rest of these and then a couple wrap-up questions. Number three, okay. Through cycle EPS growth for BorgWarner. And this is relative, you start the clock, please. Relative to peers, so other autos. You're painting a good growth picture, so I can only extrapolate that it will be a better EPS growth with share buybacks and whatnot. Okay, so above, in line, split, okay. Next, question number four. You can start the clock. Maybe while that's going on, a word on sort of the capital allocation story, where you sit today?

Sure. So really pleased with our actions from 2025, just to recap some of what Joe said earlier. You know, $1.2 billion in free cash flow, record free cash flow year for the company, up 66% year over year. And we deployed $630 million of that free cash flow to shareholders through dividends and buyback. We increased our dividend 55%. We got great support from our board, and we repurchased half a billion dollars in shares last year. As we go into this year, we expect a billion dollars of cash, free cash flow at the midpoint of our guide, and we've already indicated that we'll buy back $100 million in the first quarter. What Joe and I are always balancing, and it's a constant conversation, is we need to create value with our cash, and we're going to do that in multiple ways. We're going to continue to buy back shares, but we also have to look at the inorganic opportunities that are in front of us that drive EPS accretion. And so that's a constant conversation that we're balancing, but pleased with our actions in 2025, and we're going to follow the same playbook as we move into 2026. Okay, so balance.

Okay, good question number five. All right, multiple. I'll point out here the market is like 20 times, so I think you're low double digits right now. I like number five.

Five and six. Six, five and six.

Okay, I will point out to the folks that say that your stock is expensive that you're still trading at a depressed multiple versus the market. And then number six, most significant share price headwind for BorgWarner. And I think the message here is, you know, I mean, it's all of these points, but you're focused on the growth and the margins combined.

Folks, any questions? All right.

Okay. Maybe just, you know, I'll wrap with a couple here. Maybe you could just talk about where the bidding is for PowerDrive, you know, what the pipeline looks like after this reset that we've seen. So you guided to, I think, with low double-digit growth in PowerDrive this year, what that pipeline looks like.

Yeah, I think it's first important to kind of go back a few years and look how far that team's come. You know, in 2021, that was a $700 million-ish business. business, it's grown 20% a year and is now a $2.6 billion business. So we're making great progress in that business. Many of the awards we won last year were also on the e-product side. And we've learned a lot. I think that's really important for folks to know. We've learned a lot about what this market's going to look like, who the winners and losers are likely going to be. So our teams have done a great job to reposition some of our quoting. We've also redeployed a lot of the existing capital structure. As Craig mentioned last year, that's one of the reasons our CapEx was down. We were moving around existing investment to serve some of that future growth. So we feel good about the backlog. Of course, there's always risk in your backlog, right? Every OEM feels they're going to win more market share. But we've also gotten smarter about how we discount volumes, discounts, certain OEMs. So from our view, we're in a really good spot because the foundational business has never been stronger. Just as a reminder, we're number one or number two in every one of those products. We want a lot of new business there. The e-product side is scaling very nicely. We plan to be a market leader in all of those products. So from our point of view, we're in a much better balanced situation and environment than we were four or five years

ago. And maybe final, just on the M&A bolt-on side, is there any capability that you need to acquire to properly meet the PowerGen opportunity? So the short answer is no. We are looking at M&A

through the lens of three strict criteria. One is we want to leverage the core competence of the company. That's very important. So industrial logic needs to make a lot of sense. The second is, you know, near-term accretion. So we love our portfolio. We're in a much better position than we were five years ago. Can we enhance it? Can we build on it? Can we add to it? But we want it to be near-term accretive. And then finally, we don't want to overpay for anything. So it needs to be properly valued. We've passed on a number of deals that didn't meet those three criteria. So, you know, we still remain active in M&A. But I would say we've raised the bar in terms of our decision-making. And if we don't do something on the M&A space, as Craig mentioned, we're going to return shareholder value in other ways like buybacks.

Okay, great. Call it there. Go, Craig, Pat. All right, thank you.