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 in mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. [Operator Instructions]. 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 prepare us in purposes for prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A 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 waited 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, the [Indiscernible] 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 [Indiscernible] 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 delivering a near double-digit operating margin for the full year. And we still expect full-year free cash flow to be amongst 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, and delaying our project challenging forward. In fact, we estimate that more than 90% of that target is…

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 declined 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 and small gasoline turbochargers and fuel injection products. In China, we also outperformed the market driven by the resilience in the form of 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…

Thank you, Kevin. I'm not really excited to share an update of our progress towards our project challenging forward targets on Slide 13. As evidenced by our program announcements over the past several quarters, including the 2 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, challenging 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. [Operator Instructions]. 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 sort of 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 Q4 or Q3, but as you step into Q4, our implicit guidance 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 there's going to be 3 or 4 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 it's -- 2025, as far as we see it is going to be the inflection point, the volume in 2025, who is starting production in 2023, 2024, 2025, it's 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 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 So, slide 13, it's pretty impressive that you are this far long in your goal. I'm just curious, you're typically around the power train. we'd think about solid 4 or 5 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 4 to 5 plus years, we're now looking at like 2 to 3 plus years. So, there's a whole lot more than my pile in here.

Yes. John, I think you are around 3. It's pretty much what we have in electronics between award and start of production. In some cases, since we have allowance breadth of product, and very modular design, in some cases we can be faster than that. But I think a good proxy, John would be 3 years from booking to SOP.

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, got $1.5 billion roughly in balance sheet, you generated $6700 million this year, assume your next year is no worse, but maybe better. We're looking at north -- well north of $2 billion of cash plus are going to sell a billion dollars of EVIES business, presuming you get something for that. We're probably going to be approaching $2.5 billion of cash on the balance sheet in the next 12 months, that's a pretty heavy load. How do you think about -- in a good way, how do you think about allocating that capital to the organic business, the acquisitions or directly back to shareholders? It just seems like that's going to give you a lot of dry powder to potentially make some pretty 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 complete -- ultimately, 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 the 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 dollar you're talking about selling by 2022, I mean, that's a pretty direct statement. Is this stuff in process, it is just a matter of timing that your kind of almost lock the motor at this port at this point?

I mean, there's a couple of dispositions that I'd say we are actively in progress. In fact, when you look at 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, were moved 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, 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. And especially they value add that BorgWarner brings you may -- You have a comment in there that you're talking about custom silicon, proprietary integrated circuit development. Is that custom silicon and 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 clear one of the many prior electronic suppliers, like SiC, silicon carbide. And they're really just looking for a Tier-1 that packages and ship 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 relationship 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. As far as -- do you want to take the margin?

I think on the margin, even looking at the two programs that Fred presented today, we look at those types of programs on 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. We -- 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 whatever we quote, and in the world of electric vehicle, we have the same discipline -- absolutely the same discipline.

So, what is the key value add more of 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, better innovation. And also, 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 putting, 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 companies, 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 challenging stations. We also think that the future is fast challenging may and that very packs in there. And we're looking at -- and that using the value that we can add to the market, this is something we're looking at right now.

And then as it relates to the step-up of a $100 million in R&D that you're expecting for next year, and understanding, it sounds like 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, I think, to understand the trajectory because by 2025, presumably your ID intensity will have significantly declined to achieve those target margins.

Absolutely. I think I would refer you to the slide that we had provided back at our Investor Day because I think 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 it $300 million or $400 million of EV revenue. But we're investing -- of that $725 million of R&D this year, around a 1/3 of that 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 on its own, some of those R&D Investment. 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. And you can see as we laid out in the Investor Day that by the time you get to call it 2024 - ish time frame is when we start to cross and you start to see profitability on a standalone basis as the, contribution margin on an incremental sales start to overtake the R&D investments that we're making. And I would say 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 you stop the growth, you never fully offset the 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 be -- and I realize it's early here, but what type of incremental margins might we be able to expect on any volume recovery? And I think when we add up to items listed here, seems like 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 right now 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 incremented -- 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, incremental go back to a more normalized wherein the high-teens tends to be where we operate from a pure incremental perspective.

All-in that could lead to incremental 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 that, 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, which is the same way that turbos are the signature products in a nice world. If we're making the Inverter versus Turbo comparison, maybe you can just give us a sense where Turbos clearly, you have a very concentrated position, what type of competitive environment you anticipate for inverters that you talked about earlier? And how would that compare to motors and drive units? And then maybe you could also just give us a sense, I assume that given, historically, turbos -- we'll call it like a quarter or a third of revenue, you probably allocated disproportionate resources and certainly deservedly so. How are you thinking about allocating resources to inverters internally versus other products? Is this going to get disproportionate attention just given this is going to be your signature product in the future?

A lot of questions in your question. So first, very happy with the inverter positioning. And as I alluded to in my prepared remark, we think we're going to be the number 1 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 the ramp up in R&D is 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 does a high content per vehicle, but we're very successful with systems 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's not a 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 the products that are outsourced by our customers by the vast majority because it's very products complex to do. It requires a lot of scales in their electronics and lot of vertical integration. And so we're very successful with that. On motors, we are embedding our own motors in our iDM 's, we're also selling standalone motors. I would say that the market in motors is still more fragmented, that the competitors in inverters, that is becoming more and more concentrated. That's what I would tell you if I hope I covered most of your question.

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 that you mentioned expecting additional at least modest LVP growth and then still assessing like, the gross over-markets outlook. Could you provide us a little bit more color around your early thinking? I would think modest LVP gross is probably quite a bit more conservative than IHS maybe, or even what we've heard from some of the automakers that have spoken so far. And then on the growth of the market side, to what extent some of the growth that you saw this year -- I guess, what would be a cause for this coming out of next year's growth?

Yes. So, look, a couple of things on the outlook for next year, obviously still early days and we're still operating in a very volatile environment, as evidenced by the fact that we still got $300 million revenue range on our Q4 revenue outlook. And so that just gives you an indication as to the volatility in the environment. And 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 volume -- market volumes coming. So, our expectation is that there's going to be continuing impact of the 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 from a year-over-year production perspective. 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. is pretty challenging to project right now. But we don't see necessarily an end in the near-term in terms of some of the supply chain disruptions. Which might be a little bit different than some others who are guiding you to a much more rapid recovery. In terms of the outgrowth, it starts with what was your outgrowth in 2021 and how much of that might have been effectively a pull-forward or a benefit you would've otherwise expected over the couple of years. So, the fact that we outgrew the market based on our guidance or expect to outgrow the market by 10% in 2021. That's obviously not a normal outgrowth for this Company. We're happy with it, but it suggests to us that knowing that we normally grow in the mid-single-digit range, or at least half for the last number of years that some of that may had been a pull forward of things we would've otherwise expected in 2022. But 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 we expect to -- this as the new base from which we grow. So still in the middle of the assessment, but that wouldn't be a bad thing. It would just be that [Indiscernible] 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. I mean, it tells you the strength of what we've been able to accomplish this year. And 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 of these ICE revenue by the end of next year, can you provide a framework of how to think about potential implication on margin, like is it typically business that would be at average margins or below margin? And then more broadly as the combustion engine revenues may be declining over time while obviously going fast and electric vehicle side, how do you plan on managing the impact of profitability from essentially a declining, very profitable business, either organically or through disposal? And then obviously the gross in EV, which is at least initially doesn't necessarily have the scale for that.

So, the margin profile of the businesses and products that we would consider for disposition, it depends. I'd say some probably have below average, Company average margins, some might not. They might have at or even above the 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 that 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 or strong 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. So, 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, that we would be in the double-digit margin range on a go-forward basis that contemplates to dispositions. And it also contemplates the impact of growing the EV portfolio. And the one thing you have to keep in mind when we talk about the growth in the portfolio. The impact on our P&L is already in our results today. It's already there 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, well, it's a negative margin business and I'm 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 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 and inverter awards specifically, was described as a high-voltage program. And 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 to just trying to impact the breadth of your competitive edge through the lens of this specific award and this previous one question, we've gotten this morning?

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

All EV. Okay. Great. I will take that. Follow-up question, wondering Fred, to what extent is there the potential for award activity to not only sustain an 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. In other words, we're just now served on the front end of the 12 months to 18-month window that you had originally outlined for rewards for the combined Company. 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 $2.3 billion, very happy about that. From an inorganic standpoint, AKASOL, as we mentioned in the past, represents about 1/4 of the inorganic sales underlying project charging forward, and we have a few, 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 happening. We are on track for disposition overall. We are on track versus what we presented to you 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 of the comments made on growth over market. You keep saying pull forward, but how much -- it would seem to me that part of the better growth over mark this year is more mix-related, right? Because you're comparing a dollar value to a unit number. And the units that were made this year tended to be probably have higher dollar content. So I'm curious if you could add -- if you have an estimate of how much of that was just mix-related and then moving to '22, I get the tough comps. I think what people are trying to understand is that going to be -- 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 in terms of the growth over my -- it's a combination of those things. It's absolutely a fair comment that is some of this potentially mix. And that's mix of product, mix of customer, absolutely that's potentially a piece of the equation and that's what we're assessing right now. And I think that undoubtedly had some impact on Q3 where we delivered over 13% growth, if you just look at the quarter in isolation growth over market on a year-over-year basis. We're in the process of assessing what do we think 2022 looks like and versus that 10%. 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 a question of, are we back to normal growth rates that we've delivered over the last few years? Or that we have projected before? Or is there any headwind relative to that based on, the really strong outgrowth in backlog we delivered this year. In the middle of that assessment right now.

And then just Fred maybe a bigger picture is obviously really good to see the traction towards that $2.5 billion number in '25. But I'm curious because it seems like the pace of BEV announcements and penetration are only increasing and forecasts are moving up, which is clearly helping you in that opportunity. But does this change -- does this is meaningfully change the mix of BEV relative to ICE that you are leveraging laid out in '25, I think it was originally still don't like 15% BEV. And I guess the question is, is the mix of ICE decelerating a little bit faster as BEV accelerates faster?

Joe, I think in 2025, we still think that our assumptions are accurate. If you remember, back in March, in our Investor Day, talked about 30% of BEV market in light vehicle in 2030. I think we might be on the low side. The market might be higher than 30% BEV. Remember, our target in 2030 was 45% BEV. But I don't think 2025 is going to move meaningfully. 2030 might be north of 30%, actually, might be north of what we thought back in March. And you are right, the pace of BEV volume is accelerating and the pace of requests for sourcing is accelerating too. And the volumes of what we are booking, they are in the several hundreds of thousands of pounds, right. 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 Cleaveland 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 do you might expect to see in 2022 and then combined with that outside of commodities, you've incurred a bunch of other non-material costs. I wonder if you could frame for us the potential commercial recoveries that you could expect and if that could be meaningful, offset to the commodity headwinds.

In terms of the commodity headwind, remember this year we're effectively got embedded in our guidance a net commodity headwind of about $80 million to $90 million for the full year. And as I mentioned, Q4 supposed to be up $30 million to $40 million of that. So the bulk of the commodity headwind we've experienced has been in the back half of the year as opposed to the front half of the year. We started to see it little bit in Q1, but it really started to accelerate in Q2 and in Q3 and Q4. In Q3, $24 million, in Q4, $30 million to $40 million. And so 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. That's what I would say, given where we stand at this point, those are the planning assumptions that we're using but it remains to be seen where we actually end up. In terms of the other costs, TBD, those are embedded in the P&L today in terms of our guide, because of the impact on us. I think the biggest impact though, is what we're seeing 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 of that. Just given the wide range of the fourth quarter revenue guidance. I'm wondering if maybe it started off a little rockier than previously expected or anything you could 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 [Indiscernible] key, but surprise do happen where our schedules are in place, ready to ship, and the customers 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, your comments in the next year. Could you remind us of the pass-through timing and opportunity as we start thinking about first half 2022? I believe you have about 60% capacity rate typically on purchases, but just any color there would be helpful.

Our typical pass-through, when you look at the blend of all the pass-through mechanisms, we have contractually as it relates to steel, aluminum, nickel, copper, the things that we're most exposed to, the contractual pass - throughs are about 50% on a fully blended basis. A couple of things to note about that. When we talk about the net commodity headwind that we've disclosed $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, roughly. And so 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%, I'd say today. The second thing I would just note is when you get into more sustained inflationary environments of such a high degree like we're seeing there, it's not uncommon to see suppliers having conversations across the industry with customers about what to do beyond the So, contractual pass-through mechanism. So the 50% than what we're experiencing to-date is really the contractual piece and we'll see how long the inflationary environment last 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, maybe if you could talk about, kind of your outgrowth in the quarter, and any color on how you're thinking about the fourth-quarter contribution from your commercial vehicle exposure would be great.

Our commercial vehicle is still running in that low teens caught around 13% of our total portfolio. So not a material changes as you look out, whether it's the balance of this year, as we think about where we are going to be next year. The things that move the needle would be at this point, anything that we do on an acquisition front. Obviously, AKASOL is really focused on the commercial vehicle and industrial space. And so, as they ramp up over the coming years, we'll get a tailwind from that in terms of a mix percentage perspective. But we're continuing to operate in that low-teens range in terms of a 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.