Next fireside chat, which is with BorgWarner. As everybody here knows, BorgWarner has long been viewed as a leader in technologies that drive efficiency in vehicles, starting out in internal combustion. In March 2021, the company laid out a plan called Charging Forward, and essentially, the objective was to leverage the company's existing competencies and expand much more aggressively into the EV market. The opportunity is really big. When you look at the content per vehicle for BorgWarner's EV driveline technologies, power electronics, electric motors, gearboxes, battery heaters, it could be over $2,600 per vehicle. When you think about the equivalent in internal combustion, it's around $900 per vehicle. For the company, the plan was to increase EV exposure from 3% of sales, $350 million in 2021 to 25% of sales or four and a half billion dollars by 2025, and then 45% of sales by 2030. That, four and a half billion dollar target included two and a half billion from organic growth at the time and $2 billion from acquisitions. Far, the company has line of sight on $3 billion, from organic, so better than expected, $500 million better than expected. And they have made, $1.3 billion from acquisitions. Essentially on target, maybe ahead. They expect to achieve operating margins for the overall company in excess of 11% in their future state. Obviously, the state is changing a little bit with the new configuration of the business, but that's even while making investments in growth. Additionally, the shift in mix will also be helped by $3 billion-$4 billion of dispositions, and we just saw BorgWarner announce a $3.3 billion spin-off of their Fuel Systems and commercial Fuel Systems, plus Aftermarket business. With that as an introduction, we're really pleased to welcome Kevin Nowlan, BorgWarner's CFO, and Patrick Nolan, Head of Investor Relations. I'll sit over here, just make some room. Maybe just to talk a little bit first about the momentum that you're seeing because something changed, at least from my perspective, looking at the company. In Charging Forward, you laid out a plan to have $4 billion of higher revenue from organic growth between 2021 and 2025, $2.5 billion from the electric vehicles, an implied growth of about 4% growth over market. In 2021, you did 8.5, not four. In 2022, you did 10. That did include about 4 points from pricing. Even ex pricing, better than that four. Then 2023, we're looking at a number that implies at least 8% growth over market. Again, not four. What's happening? If our math is right, are you gonna hit your 2025 targets early? Did something change versus your initial expectations for growth over market? Yeah, I don't think anything's changed in our planning. I mean, we're pleased with the fact that we are demonstrating and delivering growth over market. At the end of the day, growth over market really isn't the underlying objective for the company. It is really about positioning us to be overweight significantly in electrification as we get from where we were a couple of years ago to 2025. For us, the real mile marker is getting to that $4.5 billion of battery electric vehicle. Now, by virtue of the fact that that positions us to be overweight the electric vehicle market, which is the fastest-growing portion of the market, naturally, that should contribute to outgrowth above market. I think what you're seeing now as we come off of, like you said, the 2021 numbers, we were less than $350 million of battery electric vehicle. We progress toward that $ 4.5 billion, you're starting to see the acceleration, and you really see it this year with the $1.5 billion, the $1.8 billion in battery electric vehicle revenue progressing toward what we already have line of sight to, as you mentioned, $4.3 billion in two years. A lot of growth that's coming, and it's coming through effectively as growth above market. I also wanna make sure I mention that embedded in that growth above market too, is the fact that our combustion portfolio is actually performing really well as well. Yeah. Two-thirds of this year's growth is coming from the electrification portfolio, but even if you strip that out, we're still outgrowing the market on the combustion side as well by a few hundred basis points. I want to ask about that because like you said, 8% growth this year, two-thirds of that is coming from EVs. Let's say at 6 percentage points, it implies that your internal combustion business is growing as well. Also implies that your EV business is doubling this year, reaching something like $1.8 billion. It's going to already be a double-digit percentage of the company's revenue. If it's going to get to a little over $4 billion by 2025, that means you've got another $2.5 billion of EV growth over the next two years, which alone implies 700 basis points of growth over market. Pretty good. I'm sort of slow, but deducing that the 400 basis points of growth over market is stale. What's happening here that's driving this internal combustion business to continue growing? Cause the conventional thinking has always been that it's gonna cannibalize at some point, and the industry is gonna shift to rely more on EV to achieve CO2 targets and things like that. Yeah. I mean, I think the strength of the combustion portfolio, we've obviously delivered growth above market for a long time, even before we got into the world of electrification. If you look at the combustion-based product portfolio, it's really focused on making engines more efficient. Yeah. You know, when people think of combustion vehicles, they think of a pure combustion vehicle, but they don't think of the advanced hybrids as well, which require more fuel-efficient engines. Those need things like turbos and VCT and GDI and all the products that we bring to market. We're seeing pretty broad-based growth across that portfolio still as we look at this wave of not just combustion continuing, but of the hybrid vehicles ramping up as well. It's not that the automakers are sort of foregoing further improvement internal combustion and just focusing on EV. They actually have to improve internal combustion as well in order to hit those targets. For the hybrid vehicles, they do. In order to have an effective hybrid, you really have to downsize the engine. Okay. Otherwise, there's no point in having an advanced hybrid vehicle. How do you do that? You do that with some of the technologies that we bring to market. Okay. I'd like to ask you about the EV acquisitions that you've made. I think we all understand the rationale behind power electronics, electric motors, gearboxes. Really good fit with what we've known to be the competencies of BorgWarner in the past, in driveline. Even battery cooling looks like there's some competencies that BorgWarner had before. What about battery packs and electric vehicle chargers? How big are those going to be for you, and what are the competitive moats in those businesses? What makes you feel like those are good businesses that fit really well in BorgWarner? You wanna start with that? Yeah, I'll start that. Maybe I'll start with the AKASOL side. AKASOL is related to our e-business in the sense of they're customers that we already work with in large part. Remember, we are already in the CV and off-highway business today, and that's really where AKASOL is gonna play. We see when you think about where the market opportunity is in the battery pack business for the supply base, we think it's more in the CV and off-highway side versus light vehicle. When we think about the technology they bring, really interesting power density, really interesting the fact that they can do all the different form factors in terms of battery packs. You can see that in the quality of the customer base they have. You have Daimler Truck, Volvo. We've announced a couple of other acquisitions. You see that business within the $4.3 billion that you referenced earlier, AKASOL is about $1 billion in revenue by 2025 versus when we initially announced the acquisition, we thought that would be closer to 2030. We're seeing increased demand for that product, and I think it speaks to the technology and the pull that we're seeing from our customers. On the charging side, I would say that fits with our strategy when our CEO Fred will often refer to managing the flow of electrons for electric vehicles. We viewed the stationary charging as a natural extension of that. We already had a small business in the charging business that came along with the Sevcon acquisition that we executed, I think, back in 2017. We decided to build onto that business. SSE is pending. We had Rhombus earlier this year, earlier last year, excuse me. We think that's a significant market opportunity. We think just the hardware side is about a $18 billion market opportunity for the company. Those products effectively need to get more automotive grade, for lack of a better phrase. They need to be more functional. They need to work more percent of the time. We think there's significant overlap with hardware expertise that we already have. The inverter is a big component in that charger. The thermal management capabilities, we already have that. The controls capabilities that we have within BorgWarner. All those can be applied to those charging technologies. It's power electronics that then makes sense for you to apply that know-how into the charging infrastructure. What's the competitive landscape like in that business, and what are the competitive moats like in that business? It's early days for us. It's a small part of that M&A revenue, but we think there's an opportunity to really differentiate the product going forward from a quality standpoint and a performance standpoint. I think it's the inverter, I think it's the thermal controls capabilities and the overall ECU and computer controls that we can leverage their existing portfolio. Just given the growth that we're seeing in electric vehicles for you, I feel like the 25% target is a stale number. You might even hit that number in 2024. Have you sort of thought about what the new trajectory will be, what your latest objectives are in light of the spend and in light of the better growth that you're seeing there? I think we're still very much focused on, hey, get to that $4.5 billion in 2025, and we still have a long way to go to get there. I mean, $1.5 billion-$1.8 billion this year, and we've still got to launch a lot of product between now and 2025. That is our focus before we start talking about what's next. Clearly, we have line of sight to getting to that level. Now we're as part of getting to $4.5 billion, what we are really focused on is making sure that we're overweight EV. You know, where we stack up relative to that 25%, I'm not sure if we're ahead of schedule necessarily so much as, hey, getting to that $4.5 billion we think positions us there. I would say one of the headwinds I think that we're managing and monitoring as we go toward that 25% is our combustion business has actually performed really well. When you do just math of our overweight position, it's the combination of how the EV business is doing, but it's also how your combustion business is doing as well. Mm-hmm. Ultimately, we are expecting to get to $4.5 billion, but I think just as importantly for us is getting to that 25%. There is a little bit of a headwind that we've had because of the combustion business. Yeah. Not saying that we're not gonna hit that number because we feel good about delivering on the 25%, but just something to keep in mind. Okay. Are you working on any additional dispositions at this point, or is this essentially you're done with what the plan was through 2025? Yeah, for what we wanted to accomplish through 2025, I think with the execution of the Water Valley disposition from a little over a year ago, plus the spin-off that we announced with PHINIA here for later this year, we'll have accomplished that objective. That, I think, covers our objectives of what we wanted to do through 2025. Portfolio management is a living, breathing process, so we'll continue to go through that and assess the right portfolio composition for the company over the long term, but nothing else at the moment that I think we need to do in the next couple years. We'll continue to monitor that. Okay. I wanna transition to margins a little bit. Adjusting for the way you're presenting margins now, you had a 12.5% margin in 2019. A little bit over 10% in 2020, 10.9% in 2021, around 10% last year. First half of the year was weaker than the back half, obviously. Can you talk a little bit about the puts and takes as we look out to 2023 now? Your guidance implies kind of flat margins versus the second half run rate I'm talking about. It looked like in the short term, your operating leverage was being offset a bit by EV investment. What was also interesting was that you were the only supplier that didn't really say, "Well, we've got a lot of like another tranche of inflation that we've gotta deal with." Can you maybe just talk us through what some of the headwinds and tailwinds are and why inflationary pressure is not affecting BorgWarner? Okay. You want me to focus just on 2023, or did you want me to go through any of that history there? Well, if it provides some context for 2022, that would be helpful. Okay. Yeah. Maybe the brief history going from 2019 to 2022 and then walk into 2023. I mean, your numbers are right. I mean, walk into 2020, we obviously had COVID, and COVID had a big headwind on everybody's business. I mean, Q2, I think we were a break-even margin, so it wasn't even about being double digit. It was zero, right? We recovered from COVID as we were exiting 2020, but it was a big headwind for the full year. We also acquired Delphi in the back half of the year, and we knew net of synergies, Delphi was gonna be a, about a point of headwind in margin just based on the composition of that business. Mm-hmm. As we went into 2021, you know, we started to get the full year effect of Delphi, and business was recovering. We were delivering on synergies, and we started to see the margin improvement. Mm-hmm. We were also getting the benefit of some of the restructuring initiatives that we had announced back in 2020. You saw 2021 margin ramp up to the 10.9% level. Mm-hmm. Twenty twenty-two, you saw a step back of 80 basis points, 10.9 drop into 10.1. Fundamentally, you have two headwinds that hit us last year. One was the inflationary environment, which material costs from our suppliers net of recoveries from customers was about an $80 million headwind, I think it was. About 50- 60 basis points of margin. The second headwind was we made the intentional decision to lean forward on investing in our e-products related R&D. We added $150 million, 58% increase in 2022 to our e-products related R&D. That was about a point of margin. You know, X those two things, we would have been in the 11.5 range. We had the hit from inflation. It's real. The other was a conscious decision to invest for the future. As you jump into 2023, what's effectively underlying our guide is pretty simple. It's that, hey, we're generating a lot of incremental revenue this year. We expect to convert on that in the mid-teens before the incremental R&D investments we wanna make on the electrification side this year, which is another $60 million-$70 million. That's why our margin guide is about 10%-10.4%. To your other question on why aren't we talking a lot about inflation this year. Mm-hmm. Embedded in our guide is that the way we exited last year is the way that we'll be operating this year, both from the supplier cost side and the customer side. Remember, as we negotiated agreements with our customers last year, the agreements, whether we cut them in Q2, Q3, or Q4, provided as pricing coverage to offset the inflationary environment for the full year, except for that $80 million headwind that we absorbed in our P&L. As we head into 2023, we expect that we're gonna be operating at roughly the same levels of where we were exiting last year. We're not expecting a material difference full year over full year between the supplier costs and customer recoveries because we think we're exiting the year where we're entering the new year. The incremental spending that you've got this year, obviously mitigating on R&D, mitigating some of the upside, does that business actually become more accretive to margins as we look out to 2024 and 2025? In other words, the uptick, most of the uptick in R&D is in the rearview mirror? I think that's right. I mean, I think we've hit the inflection point of the electrification business from a profitability perspective as we exit 2022 and into the beginning of 2023. We accelerated all that e-products related R&D into 2022, $150 million of additional eR&D, a 58% increase. As you look to 2023, the pace of the growth is slowing in the e-products R&D. Why is that? It's not because the opportunities aren't there. It's because we're starting to be able to leverage the existing base of our R&D to support future programs. As engineer A rolls off of program one that's launching next year, engineer A can now support the next program. We don't have to hire a new engineer. We're starting to see some of that scale benefit come into the P&L as we look ahead. Pace of growth in eR&D is slowing. Pace of revenue ramp up is accelerating right now. EV is gonna be a billion and a half to $1.8 billion this year and growing to $4.3 billion in the next two years. Lot of growth still coming with eR&D growth slowing to the point that it becomes accretive to our margin profile. Mm-hmm. I think you'll start to see that when you see, as we've talked about in the past and continue to expect, as we exit 2023 into the beginning of 2024, we expect electrification to be breakeven. In the electrification business, one of the really... You've become a real dominant player in power electronics. You've talked about doing 2.3 million inverters by 2025, 2 million electric motors. Who's using your power electronics and who's using these motors and gearboxes, and what kind of market share and competitive landscape are you expecting for that business? Yeah. The 2.3, it's actually 2.4 now on the pure EV side. Remember, when you factor in the hybrid inverters, which are substantially the same product. If you're talking about a dual inverter for hybrid, very similar price point, very similar technology deployment. 3.1 million inverters, 2 million motors. On the inverter side, we think we're actually the number one non-captive inverter supplier by 2025, and the customer base is really diverse. Since we announced the acquisition of Delphi, we've disclosed, I think, 13 inverter programs on our earnings calls each quarter. If you look at where do those programs break down, it's pretty evenly diverse, almost a third, a third, a third, North America, Europe, and Asia. It's a pretty diverse customer base, and that's not all of them. pretty wide swath of customers, and you can kinda run the math when you have that volume, pick your assumption for what you think the EV market's gonna be in that period of time, and you can see it's a pretty strong position. You made a number of assumptions for outsourcing and insourcing back in when you laid out the Charging Forward plan. Two-thirds of gearboxes, I think you thought would be in-house, 40% of motors and 20% of inverters, and obviously that means 80% of inverters would be outsourced. Just considering the pressure on OEMs to lower costs and other pressures that they're seeing with labor, is there any changes to the way you were sort of projecting things would play out versus the way that things are playing out in any of those areas? Yeah. I mean, I would say the insourcing versus outsourcing discussion is something that we're not really talking about a lot internally anymore. When you think about the amount of business that we've secured, right now our focus is really on executing and delivering that revenue. If you were to ask us near term where we're gonna fall on that $1.5 billion-$1.8 billion guidance this year, if we can get the components, that's the biggest gating factor. Same thing when you think about that AKASOL revenue for 2025, it's really can we get the capacity up and running? I know there's a lot of discussion about insourcing versus outsourcing, but given the book of business we have, we're really focused on actually delivering that revenue, and it's not a big focus for us anymore, to be honest. Okay. Do we have a mic? We just gotta get a mic over to you. I don't know if it was in this meeting or the sideline meeting, but Jim Farley said, "I would love to do inverters, silicon carbide inverters." What would be your cost advantage given your scale doing millions of inverters relative to someone like Ford trying to do it themselves? How much can you save them? Well, I mean, I think you can. Not only do we have the history that we do in inverter, the fact that by 2025 we're gonna be selling more than 3 million of them, the scale benefits we have in that are significant. The technology benefits we have by working with multiple OEMs around different parts of the world, that we're not just doing one type of inverter, we're not doing just silicon carbide, we're doing 400 volt silicon all the way up to 800 volt silicon carbide and mix of products in between. I think there's a scale benefit, and I also think there's a technology benefit by the fact of being exposed to all these different programs. The history that we have through the Delphi acquisition there. Like order of magnitude, you know, thinking about how much of it is just raw material, you know. Can you save them 20%? Is it 40%? Like, what's the ballpark? Yeah, I don't, I don't think in this forum we wanna kinda get into that kind of percentage. Okay. I wanna ask a bit about the SpinCo, because obviously if somebody owns BorgWarner today, they own PHINIA, they own both. The revenue of PHINIA would be just under three and a half billion this year, EBIT about $450, EBITDA maybe around $600 million before corporate costs. Can we see a scenario in which obviously there are corporate costs that are gonna come in? Is there a scenario here where the organic growth as we look out to 2024, it provides enough leverage to sort of offset that incremental corporate cost? We're just trying to think about what kind of profitability we should be thinking about that business, number one. Number two, maybe more importantly, do you have any concerns about where that business will trade? You know, just thinking about, there aren't really many peers, but, we could throw out Tenneco before they were acquired by Apollo, trading at 3.5- 4x EBITDA. They had an aftermarket business, they had, you know, other businesses there, and nothing is apples and apples. How do you sort of think about what that actually means as an independent company, from a trading perspective and valuation and how the market will kinda treat that? I'll preface my remarks by saying we're planning on having investor days for both companies as we approach the spin-off date. At that point, we'll give a lot more detail on the financial profile of the businesses. I think when you look at PHINIA, what it is, I mean, it's a double-digit margin business today. It's a business that we expect to be moderately leveraged, just as we would expect to have BorgWarner moderately leveraged on a go-forward basis. It's a business that has a very different exposure than a lot of automotives. I mean, it's got a big commercial vehicle exposure. It's got a big aftermarket exposure. It has the opportunity to play in hydrogen combustion based on some of the, this week's announcements out of the EU. That's pretty interesting in terms of what that could mean on trucking in Europe. I think there's a lot of interesting opportunities for that business on a go-forward basis as a company that's already financially strong. I think we're pretty excited about the prospects for how that business will be treated as an independent standalone company, and one that's not constrained by me or others in BorgWarner trying to execute its own strategies. We are very much focused on electrification and making investments in electrification. The fuel systems and aftermarket business, PHINIA, has aspirations to do other things which don't align with that. I feel like we're gonna constrain their ability to go execute on their strategies, and the ability to let them go operate as an independent, publicly traded company pursuing those strategies as an already financially strong company, I think is a good place for them to be and a good thing as a public company. Is there a growth over market for that business, just at a high level? I think we'll have to, we'll have to see as we go forward. But we know there's opportunities for them in aftermarket, in the commercial vehicle space, in hydrogen combustion, maybe consolidation opportunities. There's different things that that business could be, but I think the new CEO there, Brady Ericson, who was just announced earlier this week, I'm sure he'll talk a lot more about the outlook for that business when we get to the investor day. Okay. Any other questions from the audience? I guess, just maybe another question. I guess if you were to put your portfolio manager hat on, do you think that PHINIA is an independent public company five years from now? Does it look similar to what it is today? Do you think that they get consolidated or they consolidate and it looks very different in five years than it does today? I don't know. I don't know what it'll look like in five years. I think the prospects for that business as a standalone public company are really good because they have some interesting opportunities out there given the strength of the financial profile they'll have on day one, both from an income statement and balance sheet perspective, and given the diversity of their exposure. Globally, commercial vehicle aftermarket in particular, I think there's some interesting opportunities out there for them, and then you've got the hydrogen combustion aspect for them as well. Yeah. which really syncs up nicely with their gasoline direct injection portfolio. Most likely, were it not for where the capital markets were, you had been having these discussions about a divestiture. You said before with private equity with the various sources, it might have wound up as sort of a different outcome, and it may again wind up as a different outcome. I guess you'd acknowledge that, right? Just based on where what happened preceding to that decision to spin- off the company. I mean, it's always possible. You know, we're, you know, we're always gonna look for a value-maximizing transaction for the company and the shareholders. Yeah. I would tell you, we feel really good about the fact that we're headed down this Spin path and giving this company the ability to be a separate standalone publicly traded company. Mm-hmm. From the BorgWarner standpoint, keep in mind, now is the right time for us, too. You're starting to really see that inflection point, as Kevin talked about, in the EV profitability path. Yeah. Now is the time to effect this to allow not only PHINIA to pursue its strategies, but allow us now as the EV business approaches break even and then into profitability, that now allows us to focus more on that growth path in EV in a profitable way. Can you share anything about the capital structure that we should be anticipating for the two new entities? How should we maybe bracket the right level of leverage? Not yet. We'll talk about that more at the investor days, but I think we've been trying to signal with the use of the term moderately leveraged what we're really signaling about the path for both companies. This isn't a situation like you've seen in other spin-offs in this industry or other industries where you take a company, you saddle it up with a bunch of liabilities, and you spin it off. This is truly about creating two separate standalone businesses that have the balance sheet and the income statements to pursue their own respective strategies and be successful doing it. Well, you've been pretty disciplined as far as leverage for the companies. I wouldn't expect you to do something extreme. Which business? How do you think about the appropriate level of leverage at each, and which one merits more or less relative to one another? Yeah. There's a lot of things that go into that. We'll detail that more at investor day. Okay. All right. I'm not gonna give much more detail than that other than the, I think moderately leveraged. One last question. Thanks a lot for squeezing me in. Just, on the air management business and just the margins on that, what's kind of the outlook? What are the puts and takes on margins? You know, kind of a high margin business, but just how should we think about that in the next few years? You know, not really guiding on the margins of the business, but that business has done a good job sustaining its strong margin profile. I think it ended last year 15%-ish, you know. It's been a good margin business for us and, you know, with a good chunk of that segment coming in the combustion space, its focus is really on margin management. I think we'll continue to watch for that business to manage a strong margin profile going forward. I guess just to put it another way, you know, in the past, it's actually pushed past 16%. Is there a reason why it couldn't do that? Not, you know, not necessarily looking for it now or tomorrow, but is there a reason why it wouldn't? Is there some kind of price pressure or structurally, you know, materials issues or anything like that? I mean, we're definitely focused on managing the margin profile of that business, particularly on the combustion side, but there's also electrification investments that go on on that segment. Our charging business, our DC fast charging business is in that segment. Our high voltage coolant heaters are in that segment. Our eFan business is in that segment. The battery cooling technology award we announced last week is in that segment. There's a lot of EV awards already in business underlying that segment that we're growing and investing in that are part of that 15% margin. When we talk about that e-products related R&D, the 150 step-up last year, the 60- 70 this year, piece of it's happening in that segment. Great. I think we're out of time. Kevin, Pat, I really appreciate you guys spending the time with us. This was great. Thank you so much for hosting us. Thanks, Kevin.