Good morning. My name is Rocco, and I will be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner 2025 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. 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, Rocco. 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, both on our home page and our Investor Relations home page. With regard to our Investor Relations calendar, we will be attending investor conferences between now and our next earnings release. Please see the Events 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 how the core business performed and for comparison purposes with 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 incremental margin performance. Our incremental margin is defined as the change in our adjusted operating income divided by the change in organic sales. 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. Finally, please note that we have posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion today. With that, I'm excited to turn the call over to Joe.

Thank you, Pat, and good morning, everyone. I'm very pleased to share our results for the second quarter of 2025 and provide an overall company update, starting on Slide 5. I wish to begin by thanking our employees, our customers and suppliers for all of their trust, efforts during this quarter and for their continued support. Our sales performance was supported by a 31% increase in light vehicle eProduct sales. This growth was well ahead of the high teens increase in global hybrid and BEV production in the quarter. Our organic sales were relatively flat year-over-year, which was in line with our market. However, excluding the decline in our CV battery and charging systems segment, our organic sales were up modestly year-over-year. I'm excited to report that the strong award activity we saw in the first quarter continued into the second quarter. Today, I will share 9 new business awards across both foundational and eProducts, which are a sampling of the awards that we secured during the quarter. We believe these awards will illustrate the strength of our portfolio and the demand for efficient powertrain technology around the globe. Our adjusted operating margin performance was strong in the second quarter, coming in at 10.3%, which includes a 40 basis point tariff headwind. This strong underlying operational performance was once again driven by our focus on cost controls across our business and turning those earnings into free cash flow. Lastly, we remain focused on the efficient deployment of our capital to drive shareholder value. In the quarter, we returned over $130 million to shareholders through share repurchases and payment of our cash dividend. Additionally, our Board of Directors approved both a 55% increase in our quarterly cash dividend per share and an increase in our current share repurchase authorization to $1…

Thank you, Joe, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our second quarter results. First, we reported just over $3.6 billion in sales, which was relatively flat year-over-year, excluding foreign exchange. This performance was in line with our market production in the quarter. Importantly, our light vehicle eProduct sales increased 31% year-over-year, driven by strong growth in Europe and in Asia. Second, we had strong adjusted operating margin performance in the quarter at 10.3%. This performance was achieved despite $15 million or a 40 basis point net tariff headwind in the quarter, which we expect to recover from our customers during the second half of the year. This also represents the fifth quarter in a row with a margin at or above 10%, which demonstrates the consistency of our operating performance. Third, we had strong free cash flow in the quarter of $507 million, which was a 71% increase from a year ago. Now let's turn to Slide 10 for a look at our year-over-year sales walk for the second quarter. Last year's Q2 sales were just over $3.6 billion. You can see that the weakening U.S. dollar drove a year-over-year increase in sales of $66 million. Then you can see a slight decrease in organic sales, which was primarily impacted by a decline in foundational industry production and lower battery and charging sales. This was partially offset by a 31% increase in our light vehicle eProduct sales. The sum of all this was just over $3.6 billion of sales in Q2. Turning to Slide 11. You can see our earnings and cash flow performance for the quarter. Our second quarter adjusted operating income was $373 million, equating to a strong 10.3% adjusted operating margin. This performance includes a…

Thank you, Greg. Rocco, we're ready to open it up for questions.

[Operator Instructions] And today's first question comes from Joseph Spak at UBS.

I just wanted to start, I guess, on organic growth. Craig, as you mentioned, sort of it was basically kept the same. The tariff impact was lowered and the production was raised. So the outgrowth, if we back out the tariff is like a little bit better than flat versus maybe a little bit better than 1% prior. So I just wanted to understand what you're seeing on that front.

Yes. Joe, first, it's important to note that our quarterly outgrowth can be a bit volatile. So we think it's more useful to look at outgrowth on an annual basis. But with that being said, we did see a headwind from our lower battery sales, and that was mostly in North America, but to a lesser degree in Europe. That was driven by customer demand. If we exclude the BCS segment, our organic sales increased modestly, implying an outgrowth of 100 basis points. The main driver of that was a 31% increase in our light vehicle eProduct sales, which is a continuation of what we saw in the first quarter.

Okay. Yes, I was talking about in the guidance. So is that battery also the headwind for the full year?

Yes, it continues to be -- that's correct. It continues to be a headwind for us. So on a full year basis, we expect that declining revenue in the BCS segment to be approximately 100 basis points to the full year outgrowth. And then there's another 60 basis points associated with tariff costs and associated recoveries. The rest of the outgrowth changes are relatively minor.

Okay. That makes sense. And then just on the capital allocation, I'm just sort of wondering, I guess, how you're thinking about comfortable cash levels because you -- last year, you bought back $425 million, $325 million in the back half. But cash is like meaningfully higher now than what it was at that time when you bought back that amount. So I just want to understand how -- I'm not asking you to sort of be unprudent with it, but like how should we think about how you're going to deploy or return that cash or deploy it inorganically from a timing perspective?

Yes. First, I'd say we're really happy with our results in the quarter. Really strong free cash flow generation, $0.5 billion in the quarter. Teams around the globe are doing a fantastic job. As Joe and I mentioned in our scripts, we're focused on a disciplined and consistent return of cash to investors. I think that's exactly what you saw in the second quarter. We returned $130 million to our shareholders between our cash dividend and our share repurchases. As we look at the back half of the year, we're focused on that discipline and consistency. So when you think about Q3 and Q4, obviously, we're going to increase our dividend, which is what we shared with you, that 55% increase. We also increased our authorization to $1 billion. That gives Joe and I a lot of flexibility. As you think about Q3 and Q4, we're going to pay that dividend at 55% increase. And we're also going to repurchase shares. You should think about it as a similar level in Q3 and Q4 as you saw in Q2.

Okay. And is there a minimum cash level you're targeting now?

We've always communicated our liquidity target is 20% of sales. We're a bit higher than that currently, and that's why you saw us return some cash to shareholders in the second quarter.

And our next question today comes from Colin Langan with Wells Fargo.

Congrats on a good quarter. When I look at guidance, it's quite an impressive conversion implied prior to current guidance. I think sales at the midpoint is up $200 million and the EBIT is up 54%. It's a high 20% conversion. And then on top of that, a lot of the improvement in the sales guide is actually FX, which you would think would convert at a lower margin. So what is driving this really high conversion within your guidance?

Yes. Maybe, Colin, why don't I walk you through our sales guidance, and I'll walk you through our income guidance. So when you walk our sales guidance, our prior guidance, our April guidance, we are at $13.9 billion at the midpoint. Our current guidance is $14.2 billion. When you look at the drivers of that increase, industry production increase is 1.5%. That's about a $250 million benefit. FX impact, $300 million, which is what I mentioned in my script. Then we have tariff recoveries coming down 1.6% in our prior guide to 1%. That's an $80 million headwind. And then our battery outgrowth coming down. That's about $100 million, as Joe indicated. That's what gets us to $14.2 billion. When you think about the margin profile going from 9.9% at the midpoint to 10.2%, a couple of items there. We're converting at the mid- teens, which is what you would expect on higher revenue. FX is converting about $0.10 on the dollar, which is typical for us. Then what's coming through is our Q2 outperformance. Great job by the teams, and that's coming through our guide. Basically, everything else is rounding. That's what gets us that 30 basis points improvement guide to guide.

Got it. That's very helpful. And you highlighted the eProducts up 31%. It was up 47% in Q1. I mean, how should we think about the pace through the rest of the year? I thought your original comments were that might moderate after Q1. It looks like it's still remaining very strong. Do the comps get a lot tougher? Or should we continue to expect really high double-digit growth?

Yes. Our goal, Colin, is to outgrow the market, right? So leveraging our portfolio, continue to win business, be #1 or #2 in nearly every product. So the goal hasn't unchanged. If you look at the first half of the year, the growth in that eProduct side for light vehicle was in that 39% range versus a market that grew 21%. So we're really happy with that outgrowth. We think the teams are doing a really great job, and we've reflected all we know in our updated guide.

And our next question today comes from Dan Levy with Barclays.

Maybe just wanted to double-click on one of Colin's questions. And just specifically in the quarter, if you could talk about the performance because you had a $7 million year-over-year EBIT benefit on a $31 million sales decline. And I think that was actually off of a tough comp on margins. So maybe you could just talk about some of the strength that you saw in the second quarter on the performance side and maybe what can be extrapolated from there?

Sure. So when we think about the second quarter, we really capitalized on that extra growth, that higher revenue value in the quarter coming in at over $3.6 billion. You saw that on the PDS front. They did an incredible job of converting that growth into income. And then it's a continuation of what you've seen in the last several quarters, really focused on cost controls across the business. Think about productivity, restructuring, supply chain savings, all going through our P&L. On top of that, we've had a 20% reduction of cost of poor quality, things like warranty, expedited freight, scrap, all coming down and all of that led to that great performance in the second quarter.

Okay. And then maybe as a second question, if we could double-click on the 2 foundational segments. We've now had -- I recognize that on a growth over market basis, the numbers may actually be okay. But we've now had a number of quarters where the organic growth is tracking negatively. And I guess the question is, what is the path here? I know you're winning business, but what is the path here for the organic growth to get to a point where it's positive again? Is there opportunity, especially in North America with some of the easing regulations that we could see a pickup in penetration rates of some of the technologies. But what's the path to getting these 2 segments back to some sort of positive growth?

Yes. Maybe first, I'll just ground us with -- on the combustion market, that's down 4% in the quarter. So that's a little bit our starting point. Now irrespective of the business unit, we want to outgrow across all the businesses. So TTT, DMS, which is our primary combustion businesses, their goal is to outperform the market of C and H. That's the way we view it. So when I step back a minute and I look at the number of hybrid RFQs, I look at the number of extensions on combustion businesses and I look at the eProduct growth across Europe and Asia, we're really confident with the portfolio we have and the competitiveness of our products. So I'm optimistic that we'll continue to see outgrowth over the next years.

And could this be at a point where you'll actually see -- even with sort of the weak starting point, it will get you to positive organic growth?

Can you clarify the question?

You're starting -- I recognize the starting point is weaker, but is there enough outgrowth that it actually could get you to a positive organic growth opportunity with some of these award wins?

Okay. Got it. So we can't really predict the underlying market. The demand has been flat over the last few years, as you know. But that would be an additional pickup. If those end markets pick up, then that outgrowth will be even more meaningful and our incrementals, I think, will flow through to the bottom line even stronger. So what we're focused on is really outgrowing our end markets. And for the combustion businesses, that means the C and H segments. And for the eProducts, it's the hybrid and BEV. What we're really excited about is the potential for these advanced hybrids. And we're starting to see a lot more RFQ flow. And as we announced in the second quarter, we're winning quite a bit of new programs in the hybrid space. So that's good for BorgWarner.

And our next question today comes from Chris McNally at Evercore.

Great results. I'm curious about -- if I look at the year-over-year walk, it seems like there's a $15 million tariff timing. And I don't really care about the timing. I think you guys have been clear. A lot of these negotiations, you get paid a month or something later. But I'm curious where the $15 million drag occurred because when we look at your margins, we're seeing really strong ICE margins on the 2 divisions. The EV losses are coming down. So if I look at TTT, it's 15.7% first half, Drivetrain, 18%. So I'm just curious if the $15 million is in any of the ICE businesses, we may be mismodeling some of your margins going forward on core ICE going as I think on a multiyear basis. So -- just curious if you could give a little bit of detail where that $15 million lag was because it helps us with the underlying margins.

Yes. Thanks, Chris. The majority of those costs, those tariff costs are in the combustion business units, so DMS and TTT. And it's really just great cost controls from those businesses. So again, we focused on productivity, restructuring, supply chain savings, cost support quality. Those businesses were able to effectively offset a lot of that tariff headwind in the quarter. Great job by those teams. But that's where you see the impact of tariffs primarily is in the combustion businesses.

Look, that's -- I mean, that's why I was curious that kind of -- that was my suspicion. Because just remind us, is this a fair assumption? You talked about the mid-teens incremental and decremental, right, which we think about incrementals for EV as it comes from losses to positive and decrementals we used to think about for ICE. But if we get to a point where the ICE business is only declined on a production basis, 3%, 4%, 5% and you're trying to outgrow that, as you discussed, by low single-digits, is it fair to say that we may just have a flattish foundational business and so that you're going to try to hold margins essentially flattish there as well? I mean, obviously, you can't predict those. But in those assumptions, there is a scenario where you keep ICE foundational revenue flat, right?

Yes. Chris, maybe I'll just back us up to 2 points. One, as we've stated, we want to leverage growth across the portfolio. So for the combustion businesses, where we're #1 or #2, that means looking at how do we grow market share, how do we continue to bring new features into those products like turbochargers, capitalizing on the increasing penetration, which we anticipate for variable cam timing and turbos. So it all starts with really leveraging the entire portfolio. And then for Craig and I, what's really important is that we drive financial performance. And that means not only growing the top line, but expanding margins across the company.

And our next question comes from Emmanuel Rosner with Wolfe Research.

First question is coming back to the growth of the market. So I realize in looking at it on a full year basis, 100 to 250 basis points, but you got some tariff recoveries, you got some headwinds from the batteries. Can you just remind us what your longer-term framework is or target is for growth of the market? And essentially, where are we in some of these battery headwinds process, but also what will be the drivers of acceleration?

Yes. So first, I just want to acknowledge the headwind that our battery business is creating. Again, that's about 100 basis point headwind. Then we had another 60 basis points on tariffs and tariff recovery. Overall, we expect to outperform and outgrow the markets across the portfolio. So recently, we've been in that low single-digit last few years, and we've got goals that are higher than that. So for us, it's just important that we identify and win those businesses across the entire portfolio. And we're starting to do that. I think if I just point to the Q2 announcements, we shared just 9 of the wins that we've had. Our teams have done a great job to really identify and win those businesses that mean a lot to the top line. So I'm really pleased with that.

I guess that's my question. The -- how would you sort of see these temporary headwinds play out, I guess, for -- in future periods? And then to what extent does the booked business that you already have support some sort of growth of market acceleration as we look beyond sort of like this year's guidance?

Yes. We're not going to provide, let's say, a long-term target. But again, just back to the battery side, those headwinds, which if you look at the full year forecast, it's about $100 million versus our last guide. And we continue to see some volatility in the short term. I would say longer term, I'm very bullish on our battery business. We believe that energy storage and more efficient energy conversion is really a great trend in the market. And so longer term, we can expect that battery business to bring quite a bit of value to the company.

Okay. And then I guess focusing on those wins that you highlighted for the quarter, it was very noticeable that almost every single one of them is actually some variation of hybrid powertrain. And maybe that's just the ones that you're showcasing here not of many more. But is this sort of like a function of the direction the market is going? Or is it a function of what -- where you have the highest win rates? Or is this just sort of like a small sample? All these wins seem to be somehow in the hybrid powertrain.

Yes. I think if you look at the first half activity of this year compared to a year ago, the amount of RFQ and RFI activity is significantly higher. So that's the good news. I think the OEMs have really begun to get some clarity on their cycle plans and how they want to react to some of the market dynamics and potential regulation changes. And as you could see in the quarter, we're winning across all the segments and across all of our product lines. So what we're really pleased about is it's not contained within just one segment. You referenced hybrid, which we're really happy about because if we think about the content of a hybrid vehicle and advanced plug-in, let's say, we can serve it with both the combustion side of the portfolio and the eProduct side. So we're actually pleased to see more advanced hybrids in the RFQ flow.

And our next question today comes from Luke Junk with Baird.

Joe, maybe on capital allocation with the M&A side of the house. Just be curious to double-click on your comments that potential acquisitions wouldn't be driven. I think you used the word purely by strategic rationale. It sounds like you're widening out the aperture for deals a little bit. Just hoping to better understand that to start.

Yes. No, thanks for the question. I mean we still remain active in this space. And I just want to reiterate, first, inorganic investments, they need to be leveraging our core competence. So we have a lot of core competence we've built over decades. And so we're looking for strong industrial logic to start with. Of course, we talk about near-term earnings accretion. That's important and not overpaying for the asset. I wouldn't read in too much to the comment around strategic. We've done a lot of work over the last 5 or 6 years, making some acquisitions to pivot our portfolio. And some of those were money-losing acquisitions. But if I look today, Craig and I are really pleased with our portfolio. So we're in a different place, a better place. And for us, tightening up the criteria around future acquisitions is really important. At the end of the day, we want to drive expanded shareholder value and more earnings. So for us, that's the priority.

Got it. And then for my follow-up, Joe, or Craig, maybe this be for both of you. Just curious to get your thoughts on the Power Drive margins from here. And I guess I'm thinking specifically around China impacts, clearly, a very important eProduct market in terms of power drive. And we know cycle times are getting faster and faster there. You showed us the inverter award this quarter that's actually going to launch before year-end. And I'm just trying to understand how that cycle time and the engineering side of the house in terms of maybe more off-the-shelf, less customization, how that impacts the margins in that business, engineering intensity and driving towards a mid- teens type incremental?

Yes. So I'll cover the margin side of it. So when you think about what's our goal in all of our businesses, but including PDS, convert in the mid-teens -- convert to the mid-teens, that's exactly what we're focused on. And when you look at our performance in PDS in Q1 and Q2, that's exactly what you saw. We converted to the mid-teens on that extra growth Joe mentioned it, 38% year-over-year light vehicle eProducts growth and what do we do. We convert in the mid-teens. It gives Joe and I a lot of confidence that we have that capital, that cost structure right, and we're seeing that through our P&L. So great work by the PDS team.

I would just add that in China specifically, we enjoy lower overhead costs. Actually, the speed to market that the OEMs demand results in lower R&D costs. These aren't 3- and 4-year development programs. They're much shorter, sometimes even less than 12 months, like some of the wins we announced. So that results in lower overhead. And one of the reasons we can go quick to market, some of the OEMs are more open to take things off the shelf with just minor tweaks -- we're also able to reuse capital. Our eProduct business is pretty significant in China, and we're building scale there quite rapidly. So for us, we want to continue to win there, and it's a really important market.

And our next question today comes from James Picariello with BNP Paribas.

Just with respect to your latest restructuring actions, what's the progress report on the battery consolidation savings, getting $15 million this year, another $5 million next year. And as we think about that segment, and I know we kind of touched on this, but if the battery business doesn't show stabilization from here, and of course, we'd be interested in your assessment on that. But are there other actions you could take for that business to go beyond the 15% decremental, the mid-teens decremental if battery revenue were to continue to slide in out years?

Yes. Maybe I'll start with a little bit the broader view. So as we referenced, the headwinds we're seeing about $100 million this year compared to our prior guide. We're just going to have to continue to look at the market. It's volatile right now, and we'll manage accordingly. I'm really happy with the actions our teams have taken. We did not sit and wait. They move quickly. And if I just reference Q2 sales for a minute, the business is slightly EBITDA positive and cash flow breakeven. Therefore, we think we have it well positioned to profitably grow as the demand picks up, and we believe in the long-term outlook for this business.

Okay. And then focusing on the Power Drive segment as my follow-up, we're seeing really nice first half inflection, core sales up 25% to 30%. Just how should we be thinking about the second half relative to the strength we're seeing? I mean, I know you don't provide segment level guidance, but curious if you could share any thoughts on whether the second half revenue should sustain similar momentum or if there's any timing of program roll-off or roll on to consider?

Yes, it's obviously dependent on production levels in the second half of the year. Our focus as a team is outgrow industry production. Again, for that side of the business, it's hybrid plus electric production and convert that growth into income in the mid-teens. So that's how you should think about it and you can make your assumptions on industry production in the second half of the year.

And just on the hybrid, are you starting to see more quoting on more RFQ activity on the hybrid side for new programs?

Definitely. When we talk about advanced hybrids, so plug-ins, range extended hybrids, we definitely see much higher RFQ flow than we did a year ago.

With that, I'd like to thank you all for your questions today. If you have any follow-ups, feel free to reach out to me or my team. Rocco, you can go ahead and conclude today's call.

Thank you. This concludes the BorgWarner 2025 Second Quarter Results Conference Call. You may now disconnect your lines.