BorgWarner - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered resilient execution: net sales $3.64B (+1.0% YoY), adjusted operating margin 10.3%, adjusted EPS $1.21; light-vehicle eProduct sales rose 31% YoY, offsetting foundational production softness and a 40 bps net tariff headwind.
• Guidance raised across the board: FY25 net sales to $14.0–$14.4B (from $13.6–$14.2B), adjusted operating margin to 10.1–10.3% (from 9.6–10.2%), adjusted EPS to $4.45–$4.65 (from $4.00–$4.45), FCF to $700–$800M (from $650–$750M).
• Capital returns accelerated: dividend hiked 55% to $0.17/share and buyback authorization increased to $1B through 2028; ~$108M repurchased in Q2, >$130M returned including dividends.
• Estimate context: Q2 adjusted EPS and revenue were above S&P Global consensus; EBITDA was below consensus due to tariff timing and mix; management expects tariff recoveries in H2 to mitigate Q2 headwind (approx. $15M).
• Stock narrative catalysts: stronger eProduct growth and margin consistency (fifth straight quarter ≥10% adjusted margin), plus tangible capital return raise and improved FY outlook.

What Went Well and What Went Wrong

What Went Well

• “Our light vehicle e-product sales increased 31% year-over-year,” significantly outgrowing hybrid/BEV production growth and supporting mix and margins.
• Adjusted operating margin of 10.3% despite a net 40 bps tariff headwind; “This also represents the fifth quarter in a row with a margin at or above 10%”.
• Capital return actions underscore confidence: “We returned over $130 million to shareholders… increased our quarterly cash dividend per share by 55% and… share repurchase authorization to $1 billion”.

What Went Wrong

• Battery & Charging Systems (BCS) contracted: Q2 segment sales fell to $159M (–$34M YoY) and remained loss-making (segment AOI –$12M) as customer demand softened, especially in North America.
• Foundational segments (TTT, DMS) tracked negative organic growth YoY given weaker combustion production: TTT –4.2% organic, DMS –2.5% organic in Q2.
• GAAP EPS declined YoY to $1.03 from $1.39 on higher restructuring, accelerated depreciation and other non-comparable items; adjusted EPS up just ~2% YoY mainly on share count.

Transcript

Operator (participant)

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. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question during this time, simply press star one on your telephone. If you would like to withdraw your question, press star two. If you are using a speaker phone, please pick up the handset before asking your question. 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.

Patrick Nolan (VP of Investor Relations)

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 homepage and our Investor Relations homepage. 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 performs 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 non-comparable items. When you hear us say adjusted, that means excluding non-comparable 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.

Joe Fadool (President and CEO)

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 five. 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 e-product 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 system 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 nine new business awards across both foundational and e-products, 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 billion. These actions demonstrate our confidence in the long-term cash-generating ability of our business and our focus on driving shareholder value through a balanced capital allocation approach. As I look back on the first half of 2025, I'm very proud of our team and our results. As Craig will detail, our first half financial performance was strong and enabled us to increase our sales, margin, EPS, and free cash flow guidance for the year. I'm equally pleased with the strong award activity we secured in the first half of 2025, which we believe supports our focus on long-term profitable growth. Now, let's look at some of the new foundational product awards on slide six.

First, BorgWarner has secured two significant turbocharger conquest business wins for a major global OEM's next-generation vehicles in Europe and North America. The company will supply its proven wastegate gasoline turbocharger for use in next-generation compact and light commercial vehicles in Europe. Production is scheduled to begin in August 2027. In addition, BorgWarner has also been awarded a high-performance turbocharger program for our North American engine platform, with production planned to start in September 2028. These awards underscore our ability to win in highly contested markets by offering reliable, cost-effective solutions and long-term supply commitments. Second, BorgWarner has secured a business win with a major East Asian OEM to supply turbochargers for their 1.6-liter engine, supporting primarily hybrid electric vehicle (SUV) applications.

This win builds on BorgWarner's strong 18-year partnership supplying turbochargers to this customer and underscores our commitment to delivering high-performance, efficient turbocharging solutions that support the customer's HEV growth strategy. Production is scheduled to begin in 2027. Third, BorgWarner has secured a turbocharger award with a major global OEM for use in a hybrid option for a sports car platform. Production is expected to begin in 2028. I'm excited to see demand for our foundational products, particularly turbochargers, remaining strong around the globe. These awards reflect our strategic focus on supporting global OEMs with combustion engine technologies while others exit the space. I also believe the conquest and hybrid awards speak to our technology leadership in turbochargers. Now, let's look at some of the new e-product awards on slide seven.

First, BorgWarner has secured an award to supply its dual inverter with a major Chinese OEM to support its hybrid vehicle lineup. The project is scheduled to begin mass production by the end of this year. In China's rapidly evolving NEV market, BorgWarner remains committed to supporting our customers with innovative and high-quality electrification solutions. This award is a great example. Second, BorgWarner has secured an electric motor business with a major Chinese OEM. The award features a platform-based design enabling compatibility across a full range of NEV applications, including battery electric and hybrid models, with production expected to begin in 2026. We are pleased to see continued progress in our electric motor business in China. Next, BorgWarner has secured contracts with two major global OEMs to supply high-voltage coolant heater technology for plug-in hybrid electric vehicle platforms.

The first win expands our technology into several of our customers' light vehicle PHEV platforms, including a pickup truck. The second win is with an existing heater customer, which will now be expanded into several PHEV platforms. Both programs are expected to begin production in 2028. Securing these contracts further validates our technology leadership and expertise in battery and cabin heating. Lastly, BorgWarner has secured a new program for our electric cross-differential technology for a leading Chinese OEM's electric vehicles in China. By dynamically controlling power distribution between the wheels, eXD technology improves handling and traction capabilities. Now, let's turn to slide eight and touch on our balanced capital allocation approach. Over the last two quarters, I've been asked about our capital allocation discipline. My view is we need to follow a capital allocation strategy that is focused on delivering sustained shareholder value.

As we look back over the last five years, we have followed a balanced approach with just under 50% of our capital being deployed to shareholders through share repurchases and dividends, and just over 50% supporting technology-focused acquisitions. As I think about the next several years, I expect to see our balanced approach continue. We plan to focus on accretive inorganic investments and a consistent return of cash to shareholders. Since 2020, we have returned more than $3.5 billion of capital to our shareholders. I believe that today's announcements to increase our quarterly dividend and buyback authorization show our commitment to returning cash to shareholders in a disciplined and consistent manner. As we move forward, we expect to continue to invest organically and inorganically to support our growth. You should expect us to continue to be active as it relates to accretive M&A while still returning capital to our shareholders.

Next, let's turn to slide nine and discuss how we plan to continue to assess our M&A opportunities. When we think about M&A, there are three criteria we're using to evaluate inorganic opportunities. First, an inorganic investment must have strong industrial logic. It must link to the many core competencies BorgWarner has developed throughout decades of innovation and product leadership. The second criteria is that we want to see near-term earnings accretion. We believe our product portfolio is strong and well-positioned for outgrowth, and as a result, potential M&A should not be driven purely by strategic rationale. Rather, we expect our future M&A to increase BorgWarner's long-term earnings power. Finally, we need to ensure we pay a fair price for the asset. It's critical that we run multiple DCF scenarios, given the complex regional markets and customers we serve.

Over the past few quarters, Craig and I have assessed a number of opportunities and have frankly passed because they didn't meet the hurdles I just spoke about. I'm really pleased with the discipline we've followed to date, and I'm confident in our screening process going forward. To summarize, the takeaways from today are the following. First, BorgWarner's second quarter results were strong. We saw a 31% increase in our light vehicle e-products business and delivered strong margin, free cash flow, and EPS performance. This was despite net tariff cost headwinds, reflecting our continued focus on cost controls. Second, we secured multiple new business awards in the quarter across our entire portfolio, which we believe demonstrates the continued need for efficient powertrain technology across combustion, hybrid, and electric architectures.

Finally, we took meaningful steps to return capital to shareholders during the quarter, with over $130 million returned through our cash dividend and share repurchases. Additionally, increases to our cash dividend rate and share repurchase authorization demonstrate our commitment to following a disciplined approach of consistently returning cash to shareholders. Overall, I believe our year-to-date results illustrate the strength of our team, our product portfolio, and the long-term earnings power of our business. I'm excited to continue our positive momentum into the second half of 2025. With that, I'll turn the call over to Craig.

Craig Aaron (EVP and CFO)

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 e-product 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. 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 e-product sales. The sum of all this was just over $3.6 billion of sales in Q2. Turn 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 40 basis point headwind from tariff costs. That compares to adjusted operating income from continuing operations of $376 million, or a 10.4% adjusted operating margin from a year ago. On a comparable basis, adjusted operating income decreased $8 million on $31 million of lower sales. We believe this is great performance when considering our results include $15 million of net tariff costs in the quarter, which we expect to recover from our customers in the second half of the year. Our adjusted EPS from continuing operations was up $0.02 compared to a year ago as a result of the impact of our share repurchases during 2024 and the second quarter of 2025.

Finally, free cash flow from continuing operations was a generation of $507 million, which was up $210 million from a year ago as a result of strong working capital and capital expenditure performance. Now, let's take a look at our full-year outlook on slide 12. We are now projecting total 2025 sales in the range of $14.0 billion-$14.4 billion, which is an increase from our prior guidance of $13.6 billion-$14.2 billion. This increase is due to stronger foreign currencies and a higher market production outlook, partially offset by expected lower tariff cost recoveries as gross tariff costs are tracking below our prior estimate. Now, let's review our year-over-year sales walk. Starting with foreign currencies, our guidance now assumes an expected full-year sales benefit of $140 million compared to 2024.

However, this is a sales tailwind of $300 million versus our prior guidance, primarily due to the strengthening of the euro and Korean won versus the U.S. dollar. Within our 2025 guidance, our full-year end market assumption has been increased to down 0.5%-2.5% versus down 2%-4% previously. This improvement is driven by stronger industry production that we saw during the second quarter and a modestly improved production outlook in the second half of 2025 compared to our prior outlook. Within this guidance, we expect a tailwind from tariff-related recoveries of up to 1% of sales, as this is a pass-through recovery of our costs from our customers. This is a decrease from our prior estimate of recoveries of up to 1.6% of sales, as our gross tariff costs are tracking below our prior estimate.

Additionally, we expect the company's full-year sales outgrowth to be approximately 100 basis points-150 basis points. Based on these assumptions, we expect our 2025 organic sales change to be down 1.5% to up 1% year-over-year. Now, let's switch to margin. We are increasing our full-year adjusted operating margin to be in the range of 10.1%-10.3% compared to our previous guidance range of 9.6%-10.2%. This revised guidance now assumes 10 basis points of dilution from tariffs. We view this as strong underlying performance supported by our solid first half operational execution, which we fully expect to continue for the remainder of 2025. Based on this sales and margin outlook, we're expecting full-year adjusted EPS in the range of $4.45-$4.65 per diluted share, which is an 8% increase versus our prior guidance.

We're increasing our full-year free cash flow guidance to a range of $700 million-$800 million, which is a $50 million increase from our prior guidance. With that, that's our 2025 outlook. Now, let's turn to slide 13 and discuss our recently increased dividend and share repurchase authorization. Starting with our dividend, our Board of Directors has declared a 55% increase in BorgWarner's quarterly cash dividend per share. Based on the company's current share count, this quarterly dividend represents an annualized distribution to BorgWarner stockholders of approximately $145 million. Turning to our share repurchases, as Joe highlighted in his opening remarks, we repurchased approximately $108 million in BorgWarner stock during the second quarter, which brings our share repurchases since 2020 to more than $1.1 billion. Our Board of Directors approved an increase in our share repurchase authorization of up to $641 million over the next three years.

When combined with the $359 million remaining under our prior authorization, management has the ability to repurchase up to $1 billion of the company's outstanding shares for a 30% increase from our prior authorization. I believe both of these actions demonstrate the confidence we have in the long-term strength of our business and our focus on driving shareholder value through a balanced capital allocation approach. Let me summarize my financial remarks. Overall, we were very pleased with our second quarter results. Our margin and free cash flow performance were solid despite the net headwinds from tariff costs in the quarter. Our strong second quarter performance, lower projected tariff headwinds, and improving second half outlook allowed us to increase our sales, our margin, EPS, and free cash flow guidance. We returned over $130 million of cash to shareholders in the quarter through our share repurchases and dividends.

On top of that, our Board of Directors increased our quarterly cash dividend by 55% and increased our share repurchase authorization to $1 billion, which we believe demonstrates our confidence in the long-term cash-generating ability of our business. As I look to the balance of the year, we're focused on, first, continuing to outperform market production by 100 basis points-150 basis points. Second, we now expect margins to be flat to up 20 basis points year-over-year despite tariff headwinds and an expected decline in market production volumes. Finally, we expect to have another year of strong free cash flow of $750 million at the midpoint of our guidance. Our team's strong execution and effective management of tariff headwinds have allowed the company to continue focusing on improving our long-term positioning and creating value for our shareholders. We continue to embrace the importance of a balanced capital allocation approach.

The increase in our share repurchase authorization and cash dividend are simply additional examples of our commitment to that approach. By continuing to focus on near-term execution, growing the long-term earnings power of the company through organic and inorganic investments, and following a balanced deployment of our capital, we believe BorgWarner will create significant shareholder value for years to come. With that, I'd like to turn the call back over to Pat.

Patrick Nolan (VP of Investor Relations)

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

Operator (participant)

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, press star one on your telephone keypad. If you're using a speaker phone, please pick up the handset before asking your question. To withdraw your question, please press star two. In the interest of time, please limit yourself to one question and one follow-up question. At this time, we will pause momentarily to assemble our Q&A roster. Today's first question comes from Joseph Spak at UBS. Please go ahead.

Joseph Spak (Managing Director)

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

Craig Aaron (EVP and CFO)

Yeah. Hi, Joe. First, it's important to note that our quarterly outgrowth can be a bit volatile. We think it's more useful to look at outgrowth on an annual basis. With that being said, we did see a headwind from our lower battery sales, and that was mostly in North America, to a lesser degree in Europe. That was driven by customer demand. If we exclude the BCF 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 e-product sales, which is a continuation of what we saw in the first quarter.

Joseph Spak (Managing Director)

Okay. Yeah, I was talking about in the guidance. Is that battery also the headwind for the full year?

Craig Aaron (EVP and CFO)

Yeah, it continues to be.

Joseph Spak (Managing Director)

Is it going to be higher?

Craig Aaron (EVP and CFO)

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

Joseph Spak (Managing Director)

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

Craig Aaron (EVP and CFO)

Yeah. First, I'd say we're really happy with our results in the quarter. Really strong free cash flow generation, half a billion dollars 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. 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, that 55% increase. 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.

Joseph Spak (Managing Director)

Is there a minimum cash level you're targeting now?

Craig Aaron (EVP and CFO)

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

Joseph Spak (Managing Director)

Thank you.

Craig Aaron (EVP and CFO)

Thank you.

Operator (participant)

Our next question today comes from Colin Langan with Wells Fargo. Please go ahead.

Colin Langan (Autmotive and Mobility Analyst)

Oh, great. Thanks for taking my questions and 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 million. That's a high 20% conversion. A lot of the improvement in the sales guide is actually FX, which you would think would convert at a lower margin. What is driving this really high conversion within your guidance?

Craig Aaron (EVP and CFO)

Yeah. Maybe, Colin, why don't I walk you through our sales guidance and I'll walk you through our income guidance. When you walk our sales guidance, our prior guidance, our April guidance, we were 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 increases 1.5%. That's about a $250 million benefit. FX impacts $300 million, which is what I mentioned in my script. We have tariff recoveries coming down from 1.6% in our prior guide to 1%. That's an $80 million headwind. Our battery outgrowth coming down is 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 that higher revenue.

FX is converting about $0.10 on the dollar, which is typical for us. What's coming through is our Q2 outperformance. Great job by the teams. That's coming through our guide. Basically, everything else is rounding. That's what gets us that 30 basis points improvement, guide to guide.

Colin Langan (Autmotive and Mobility Analyst)

Got it. That's very helpful. You highlighted the e-products 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, you know, really high double-digit growth?

Craig Aaron (EVP and CFO)

Yeah. Our goal, Colin, is to outgrow the market, right? Leveraging our portfolio, continue to win business, be number one or number two in nearly every product. The goal hasn't unchanged. You know, if you look at the first half of the year, the growth in that e-product side for light vehicle was in that 39% range versus a market that grew 21%. We're really happy with that outgrowth. We think the teams are doing a really great job. You know, we've reflected all we know in our updated guide.

Colin Langan (Autmotive and Mobility Analyst)

Got it. All right. Thanks for taking my questions.

Craig Aaron (EVP and CFO)

Thank you, Colin.

Operator (participant)

Thank you. Our next question today comes from Dan Levy with Barclays. Please go ahead.

Dan Levy (Senior Equity Research Analyst)

Hi. Thank you for taking the questions. Maybe just wanted to double-click on one of Colin's questions. 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. I think that was actually off of a tough comp on margins. Maybe you could just talk about some of the strength that you saw in the second quarter on the performance side and what can be extrapolated from there.

Craig Aaron (EVP and CFO)

Sure. Yeah. 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. It's a continuation of what you've seen 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. All of that led to that great performance in the second quarter.

Dan Levy (Senior Equity Research Analyst)

Okay. Thank you. Maybe as a second question, if we could double-click on the two foundational segments. I recognize that on a growth-over-market basis, the numbers may actually be okay. We've now had a number of quarters where the organic growth is tracking negatively. 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? What's the path to getting these two segments back to some sort of positive growth?

Joe Fadool (President and CEO)

Yeah. Maybe first, I'll just ground us with on the combustion market. That's down 4% in the quarter. That's a little bit our starting point. Now, irrespective of the business unit, we want to outgrow across all the businesses. 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. 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 e-product growth across Europe and Asia, you know, we're really confident with the portfolio we have and the competitiveness of our products. I'm optimistic that we'll continue to see outgrowth over the next years.

Dan Levy (Senior Equity Research Analyst)

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

Craig Aaron (EVP and CFO)

Can you clarify the question?

Dan Levy (Senior Equity Research Analyst)

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?

Joe Fadool (President and CEO)

Okay. Got it. We can't really predict the underlying market. You know, 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. Our incrementals, I think, will flow through to the bottom line even stronger. What we're focused on is really outgrowing our end markets. For the combustion businesses, that means the C and H segments. For the e-products, it's the hybrid and BEV. What we're really excited about is the potential for these advanced hybrids. 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. That's good for BorgWarner.

Dan Levy (Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our next question today comes from Chris McNally at Evercore. Please go ahead.

Chris McNally (Head of Global Auto and Mobility Research)

Thanks so much, team. Great, 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. I don't really care about the timing. I think you guys have been clear. It's, you know, a lot of these in negotiations, you get paid a month or something later. 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 two divisions. The EV losses are coming down. If I look at [Triple T], it's 15.7% first half. Drivetrain, 18%. 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, you know, as I think on a multi-year basis.

Just curious if you can give a little bit of detail where that $15 million lag was because it helps us with the underlying margins.

Joe Fadool (President and CEO)

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

Chris McNally (Head of Global Auto and Mobility Research)

Wow. I mean, that's why I was curious. That was my suspicion. Just remind us, is this a fair assumption? You've 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. If we get to a point where the ICE business is only declining on a production basis, you know, 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 that you're going to try to hold margins essentially flattish there as well? Obviously, you can't predict those. In those assumptions, there is a scenario where you keep ICE foundational revenue flat, right?

Joe Fadool (President and CEO)

Yeah. Hi, Chris. Maybe I'll just back us up to, you know, two points. One, as we've stated, we want to leverage growth across the portfolio. For the combustion businesses where we're number one or number two, 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. It all starts with really leveraging the entire portfolio. For Craig and I, what's really important is that we drive financial performance. That means not only growing the top line, but expanding margins across the company.

Chris McNally (Head of Global Auto and Mobility Research)

Okay. Excellent. I appreciate all the detail on the turbo wins. Thanks so much, team.

Joe Fadool (President and CEO)

Thank you.

Colin Langan (Autmotive and Mobility Analyst)

Thanks, Chris.

Operator (participant)

Our next question comes from Emmanuel Rosner with Wolfe Research. Please go ahead.

Emmanuel Rosner (Senior Autos and Auto Technology Analyst)

Thank you so much. First question is, coming back to the growth of a market. I realized in looking at it on a 40-year basis, under 250 basis point, 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 a market? Essentially, where are we in some of these battery headwinds process, but also, what will be the drivers of acceleration?

Joe Fadool (President and CEO)

Yeah. First, I just want to acknowledge the headwind that our battery business is creating. Again, that's about a 100 basis point headwind. We had another 60 basis points on tariffs and tariff recovery. Overall, we expect to outperform and outgrow the markets across the portfolio. Recently, we've been in that low single digit the last few years, and we've got goals that are higher than that. For us, it's just important that we identify and win those businesses across the entire portfolio. We're starting to do that. I think if I just point to the Q2 announcements, we shared just nine 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. I'm really pleased with that.

Emmanuel Rosner (Senior Autos and Auto Technology Analyst)

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

Joe Fadool (President and CEO)

Yeah. We're not going to provide, let's say, a long-term target. Again, just back to the battery side, you know, those headwinds, which if you look at the full-year forecast, it's about $100 million versus our last guide. 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 markets. Longer term, we can expect that battery business to bring quite a bit of value to the company.

Emmanuel Rosner (Senior Autos and Auto Technology Analyst)

Okay. Thanks. I guess focusing on those wins that you highlighted for the quarter, it was very noticeable that, you know, almost every single one of them is actually some variation of hybrid powertrain. Maybe that's just the ones that you're showcasing here, you know, out of many more. Is this sort of like a function of the direction the market is going, or is it a function of where you have the highest win rates, or is this just sort of like a small sample? You know, all these wins seem to be somehow in the hybrid powertrains.

Joe Fadool (President and CEO)

Yeah. 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. 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. As you could see in the quarter, we're winning across all the segments and across all of our product lines. 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 e-product side. We're actually pleased to see more advanced hybrids in the RFQ flow.

Emmanuel Rosner (Senior Autos and Auto Technology Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Our next question today comes from Luke Junk with Baird. Please go ahead.

Luke Junk (Senior Analyst - Vehicle Technology and Mobility)

Good morning. Thanks for taking the questions. Joe, maybe on capital allocation with the M&A side of the house, just be curious to double-click on your comment that potential acquisitions wouldn't be driven, I think you used the word, purely by strategic rationale. Sounds like you're widening up the aperture for deals a little bit. Just hoping to better understand that to start. Thank you.

Joe Fadool (President and CEO)

Yeah. No, thanks for the question. I mean, we still remain active in the space. I just want to reiterate, you know, first, inorganic investments, they need to be leveraging our core competence. We have a lot of core competence we've built over decades, and 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 assets. I wouldn't read in too much to the comment around strategic. We've done a lot of work over the last five or six years making some acquisitions to pivot our portfolio, and some of those were money-losing acquisitions. If I look today, Craig and I are really pleased with our portfolio. We're in a different place, a better place. 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. For us, that's a priority.

Luke Junk (Senior Analyst - Vehicle Technology and Mobility)

Got it. For my follow-up, Joe or Craig, maybe this question could be for both of you. Just curious to get your thoughts on the power drive margins from here. I guess I'm thinking specifically around China impacts, clearly a very important e-product market in terms of power drive. 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. 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. Thank you.

Craig Aaron (EVP and CFO)

Yeah. I'll cover the margin side of it. When you think about what's our goal in all of our businesses, but including PDS, it's convert in the mid-teens, convert in the mid-teens. That's exactly what we're focused on. When you look at our performance in PDS in Q1 and Q2, that's exactly what you saw. We converted in the mid-teens on that extra growth. Joe mentioned it, 38% year-over-year light vehicle e-products growth. What did we do? We converted 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. 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 three and four-year development programs.

They're much shorter, sometimes even less than 12 months, like some of the wins we announced. That results in lower overhead. 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 e-product business is pretty significant in China, and we're building scale there quite rapidly. For us, we want to continue to win there, and it's a really important market.

Luke Junk (Senior Analyst - Vehicle Technology and Mobility)

Good stuff. Thank you.

Operator (participant)

Thank you. Our next question today comes from James Picariello with BNP Paribas. Please go ahead.

James Picariello (Senior Automotive Analyst)

Hey, good morning, everybody. Just with respect to your latest restructuring actions, what's the progress report on the battery consolidation savings, you know, getting $15 million this year, another $5 million next year? As we think about that segment, and I know we kind of touched on this, if the battery business doesn't show stabilization from here, we'd be interested in your assessment on that. 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 that year? Thanks.

Joe Fadool (President and CEO)

Yeah. Maybe I'll start with a little bit of the broader view. 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 moved quickly. If I just reference Q2 sales for a minute, the business is slightly EBITDA positive and cash flow break-even. 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.

James Picariello (Senior Automotive Analyst)

Okay. Focusing on the power drive segment as my follow-up, right, we're seeing really nice first half inflection, core sales up 25%-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 I'm curious if you could share any thoughts on whether the second half revenue should sustain the similar momentum or if there's any timing of program rolloff or roll-on to consider. Thanks.

Joe Fadool (President and CEO)

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

James Picariello (Senior Automotive Analyst)

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

Joe Fadool (President and CEO)

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.

James Picariello (Senior Automotive Analyst)

Thank you.

Patrick Nolan (VP of Investor Relations)

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.

Operator (participant)

Thank you. This concludes the BorgWarner 2025 second quarter results conference call. You may now disconnect your lines.