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F500-2020_312_BorgWarner

Headquartered in Auburn Hills, Mich., BorgWarner is an automotive industry components and parts supplier best known for powertrain products such as transmissions and clutches. It also makes and sells turbochargers and four-wheel drive system components.

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Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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BorgWarner is one of the world’s largest suppliers of drivetrain components, whether they be turbochargers for combustion engines or 800-volt silicon carbide inverters used in electric vehicles. The company actively manages its portfolio, requiring businesses to demonstrate they can achieve a minimum 15% return on capital. As a result, the board decided to shut down its once-promising EV charging business. The company is closely associated with the Indianapolis 500, with its name gracing the trophy since 1936.

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BorgWarner (BWA): Company Profile, Stock Price, News, Rankings

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BorgWarner

borgwarner

Good morning. My name is Nick, and I will be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner 2026 second quarter results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero. After today's presentation, there will be an opportunity to ask questions. If you would like 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 speakerphone, please pick up the handset before asking your question. 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, Nick. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It is posted on our website, borgwarner.com, both on our homepage and on our investor relations homepage. With regards 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. In addition, during today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture about the core business platforms and for comparison purposes with prior periods. 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 organic change in our adjusted operating income divided by the organic change in our sales. We will also refer to our growth compared to our market. When you hear us say market, that means the change in light vehicle production weighted for our geographic exposure. Please note that we 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. With that, I am happy to turn the call over to Joe.

Thank you, Pat, and good morning, everyone. I am pleased to share our results for the second quarter of 2026 and provide an overall company update starting on slide five. I want to begin by thanking our employees, customers, and suppliers for all of their trust, efforts, and continued support. In the quarter, we achieved sales of over $3.6 billion. Excluding the decline in our Battery Energy Systems segment, our organic net sales were up modestly year-over-year, outperforming the decline in market production, primarily due to strong North American transfer case volumes. Our adjusted operating margin, adjusted earnings per share, and cash flow performance was strong in the quarter. The company continued to operate at a very high level and delivered 100 basis points of adjusted margin expansion and 17% of earnings per share growth in a relatively flat year-over-year sales environment.

This outstanding result was once again driven by our focus on cost controls across our business. I'm excited to report that our strong award activity continued into the second quarter. Today, I'll highlight seven new business awards across our foundational and e-products portfolios. These wins represent only a portion of the awards secured during the quarter, but I believe they underscore the strength of our technology-focused portfolio, our deep customer relationships, and the global demand for our efficient powertrain technologies around the globe. Equally exciting is the progress we've made in the quarter in taking meaningful steps in our product readiness across our data center and other industrial markets portfolio. I will share a detailed update in a few moments. Lastly, we remain focused on efficient deployment of capital to drive shareholder value.

In the quarter, we returned approximately $134 million to shareholders through share repurchases and payment of a cash dividend. Additionally, our Board of Directors approved a $1 billion increase to our current share repurchase authorization, increasing our authorization to $1.35 billion, or approximately 10% of BorgWarner's market cap. 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 second quarter and the first half of 2026, I'm very proud of our team and our results.

Once again, we executed at a very high level, which I believe puts the company in strong position to achieve our full-year sales, margin, EPS, and free cash flow guidance. Our strong first half performance has also allowed the company to increase our second half 2026 industrial R&D investment to accelerate our product readiness. We are doing this while delivering on our full year 2026 financial commitments. Turning to slide six, I'd like to highlight seven recent product awards that demonstrate both the competitiveness of our technology and our ability to support our customers' powertrain needs in key markets. Let's start with our foundational product awards. First, BorgWarner has been awarded a new eTurbo program with a major European OEM for an advanced hybrid passenger car application, further strengthening BorgWarner's leading position in electrified boosting technologies. Production is scheduled to begin in 2029.

I believe BorgWarner's eTurbo innovation and leadership remains a core technology underpinning the industrial power generation product line, leveraging our automotive scale to disrupt the data center market. Second, BorgWarner has secured new business with a Chinese OEM to supply our torque-on-demand transfer case with mechanical lock for a newly developed full-size SUV in China. We have built a 20-year relationship with this customer, and we're proud to continue supplying our all-wheel drive technology for their newest SUV. Start of production is planned for the fourth quarter of 2026. Third, BorgWarner continues to expand its variable cam timing business with new program awards in Europe and China. These programs include a program life extension and significant volume increase for a leading European premium OEM's V6 engine family, and a complex win for a major Chinese OEM's 1.5 L turbocharged gasoline engine family, replacing the previous incumbent supplier.

These awards underscore the long-term competitiveness of our VCT portfolio across both hybrid and combustion engines. Switching now to our recent e-product awards. First, BorgWarner has secured a new integrated drive module award with a global OEM. This iDM features BorgWarner's latest three-in-one integrated coaxial drive system, combining an advanced e-motor, gearbox, and fully integrated Gen4 inverter in a compact high-performance package. I believe this award reflects BorgWarner's continued commitment to delivering advanced electrified drive solutions through the strength of our global technology portfolio and localized capabilities. Production is expected to begin in 2027. Second, BorgWarner has secured a major extension of two high-volume, high-voltage inverter programs with a major European OEM. These awards cover updated inverter designs for both plug-in hybrid and 800 V battery electric vehicle applications, building on a trusted partnership in power electronics.

I believe that extending several high-volume programs at the same time confirms BorgWarner's leading position in power electronics and the strength of our technology, in-house expertise, and customer focus. Evolving our inverters generation by generation together with our customers for both hybrid and fully electric applications is how we build trusted long-term partnerships with the world's leading OEMs. Production is expected to begin in 2029. Importantly, all the e-product awards I just highlighted include BorgWarner's inverter technology and it speaks to the world-class technology leadership and scale BorgWarner has as high-powered inverters. This expertise has been developed over decades of engineering effort and represents our product leadership in this area. Our automotive inverter competence is another great example of a world-class technology that BorgWarner can use as we continue to advance our product readiness to capture additional growth vectors outside of our core automotive markets.

As I will discuss in a moment, the world is in need for more power, and our highly efficient inverter is a solution that solves this growing problem. Next, on slide seven, I would like to discuss the acceleration of our product readiness across our data center and other industrial markets portfolio. Let's discuss with an update on our turbine generator launch progress. I am very pleased with the advancements that we have made over the past quarter. First, I am excited to share that our testing has confirmed that we have achieved CARB-level emission standards. I view this as an important milestone as we continue to expect our turbine generator to provide a lower emission solution relative to competing technologies. Our UL compliance process continues to progress well. UL component certification is expected to start in September, and our component-level evidence books have already been submitted.

Construction of the final assembly plant is quickly moving forward, with the footprint largely complete. We expect our capital equipment installation to begin in the third quarter, and overall, I am excited and pleased with the team's progress, which will position us well to meet the strong interest that we continue to see from end customers, including multiple hyperscalers. Turning next to our Battery Energy Storage Systems. Our energy storage solutions are intended to support a range of use cases in data center environments. We continue to position our Battery Energy Storage solutions to support data center, AI, and mechanical loads. Our product scope spans the entire energy power time requirement spectrum, offering high energy, long duration, and/or high power short-duration solutions. We are working to widen our portfolio, which includes DC blocks, uninterruptible power supplies, high-powered racks, and controls. Our solutions are modular, scalable, and cell chemistry independent.

Customer validation and UL compliance is advancing, and we expect to be production-ready in 2027. Our quoting activity for our Battery Energy Storage Systems continues, and I look forward to providing you with additional updates later this year. Turning to our microgrid inverter offerings. Initial customer feedback has been extremely positive. We believe that we have the right value proposition, including U.S. manufacturing and supply chain. Our automotive supply chain is increasingly being viewed as a differentiator, and our decades-long experience in highly engineered, high-voltage, power dense, and liquid-cooled power electronics is recognized and confirmed by potential customers. Four customers now have BorgWarner samples, and discussions with other potential customers are underway. With feedback already received, we are quickly moving to develop Gen2 designs.

While we continue to see the move toward 800 V supporting our entry into this market, we have now begun to develop a high-power portfolio spanning applications ranging from 400 V-1,500 V as we see potential for volumes across this spectrum. I look forward to progressing toward customer quoting later this year. To summarize, I believe there are three key takeaways from today's call. First, BorgWarner's second quarter results were outstanding. Our sales remained strong at over $3.6 billion. Our adjusted operating margin expanded 100 basis points, and adjusted EPS grew by 17% to the second quarter of 2025. Additionally, we increased our full year adjusted EPS guidance, reflecting our continued focus on growing the earnings power of the company.

Second, we announced seven new business awards across our portfolio in the quarter, which we believe further demonstrates our focus on product leadership and the need for our highly engineered solutions across combustion, hybrid, and BEV architectures. Third, we further improved our product readiness across our data center and other industrial markets portfolio. We see strong customer demand and are confident that our mechanical and electronic core competencies will enable us to successfully capture growth outside of our core automotive market. This confidence in our strong first half 2026 performance has allowed us to increase our second half industrial R&D spending to further accelerate our industrial product readiness. Finally, we took meaningful steps to return capital to shareholders during the second quarter with approximately $134 million returned through our cash dividend and share repurchases.

Additionally, the $1 billion increase to our share repurchase authorization and $1.35 billion total authorization demonstrates our commitment to following a disciplined approach of consistently returning cash to shareholders to create value. 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 2026. With that, I will turn the call over to Craig.

Thank you, Joe, and good morning, everyone. I am excited to share the details of our second quarter financials by turning to slide eight for a look at our year-over-year sales monitor. Last year, Q2 sales were just over $3.6 billion. In the second quarter of this year, stronger foreign currency drove a year-over-year increase in sales of $54 million. You can see the sales headwind from our battery business, which drove a year-over-year decrease in sales of $62 million. The remaining organic sales increase of $18 million, 0.5%, was modestly ahead of the decline in light vehicle market production for the quarter. This increase was primarily driven by transfer case outgrowth in North America. Ultimately, sales were relatively flat year-over-year and remained strong at over $3.6 billion. Turning to slide nine, you can see our earnings and cash flow performance for the quarter.

Our second quarter adjusted operating income was $413 million, equating to a strong 11.3% adjusted operating margin. That compares to adjusted operating income of $373 million, or a 10.3% adjusted operating margin from a year ago. The exit of our charging business in 2025 increased operating income by $7 million year-over-year. Excluding this benefit and FX impacts, adjusted operating income increased $28 million on $44 million of lower sales. This strong year-over-year performance benefited from ongoing cost reduction actions that our teams continue to take across our business. Equally exciting was every business unit expanded operating margins in the quarter and lower corporate costs provided an additional tailwind to our strong results.

Our adjusted EPS was up $0.21, or 17%, compared to a year ago as a result of higher adjusted operating income and the impact of approximately $650 million in share repurchases, or approximately 5% of our market capitalization over the past four quarters. Finally, we generated free cash flow of $492 million in the second quarter, which supported $250 million in share repurchases and $70 million in dividend payments in the first half of 2026. I believe this once again demonstrates our focus on creating value with our consistent and strong free cash flows. Now, let us turn to slide 10 and take a look at our full year 2026 outlook. We are maintaining our full year sales, adjusted operating margin, and free cash flow guidance.

However, we are increasing our full year adjusted EPS guidance based on our share repurchases in the first half of 2026. We continue to project total 2026 sales in the range of $14.0 billion-$14.3 billion compared to $14.3 billion in 2025. Starting with foreign currencies, our guidance now assumes an expected full year sales benefit of $175 million compared to 2025 due to the strengthening of the euro and the renminbi versus the U.S. dollar. This benefit is modestly lower than our previous guidance. We continue to expect our weighted end markets to be flat to down 3% for the year. We expect our light vehicle business, which comprises over 80% of our sales, to perform broadly in line with our weighted light vehicle market, consistent with how we performed in the first half of 2026.

However, we expect a sales decline in our battery business due to the lack of North American incentives and weaker European demand. We now expect this decline to represent roughly 170 basis point headwind to our year-over-year sales growth. Based on these assumptions, we expect our 2026 organic sales change to be down 3.5% to down 1.5% year-over-year, which is roughly in line with our market and consistent with our previous outlook. Now, let's switch to margin. We continue to expect our full year adjusted operating margin to be in the range of 10.7%-10.9%, compared to our 2025 adjusted operating margin of 10.7%. On a year-over-year basis, we expect the exit of our charging business to drive a 10 basis point improvement in adjusted operating margin.

Excluding this benefit, the low end of our margin outlook contemplates the business delivering a full year decimal conversion in the low double digits. At the high end, our outlook assumes we largely offset the impact of the organic sales decline through further cost controls, similar to what we delivered in the first half of 2026. Our strong first half performance is enabling the company to increase our planned industrial R&D spending while maintaining our full year adjusted operating margins and guidance per limit. We continue to see strong customer interest in our growing industrial portfolio and believe BorgWarner's mechanical and electronic powertrain core competencies fit extremely well to serve the needs of a high-power industrial market. Given these factors, we are leaning forward and accelerating our R&D spending on these products by investing an incremental $10 million-$15 million to support our future growth.

This is a great testament of the BorgWarner team's ability to execute at a high level in the short-term to support our long-term sustainable sales growth in a growing market. Importantly, we are making this R&D investment while maintaining our full-year margin guidance. Based on this sales and margin outlook, we are now expecting full-year adjusted EPS in the range of $5.05-$5.30 per diluted share, which is an increase compared to our initial guidance range of $5-$5.20 per diluted share. This increase is primarily due to the share repurchases completed during the first half of 2026. The midpoint of this adjusted EPS guidance represents approximately a 5% increase versus our 2025 adjusted EPS, and once again demonstrates our focus on consistently driving earnings expansion despite lower industry production.

Finally, we continue to expect full year free cash flow to be in the range of $900 million-$1.1 billion, building off a strong 2025. With that, that's our 2026 outlook. Now, let's turn to slide 11 and discuss our recently increased share repurchase authorization. As Joe highlighted in his opening remarks, we repurchased approximately $100 million in BorgWarner stock during the second quarter. This takes our share repurchases over the last four quarters to approximately $650 million and leaves $350 million remaining under our prior share repurchase authorization. Our Board of Directors approved an increase of up to $1 billion through 2029. When combined with the $350 million remaining under our prior authorization, management has the ability to repurchase up to $1.35 billion of the company's outstanding shares, or just over 10% of our current market cap.

I believe this authorization increase demonstrates the confidence we have in the long-term cash generating strength of our business and our focus on driving shareholder value through a balanced capital allocation approach that rewards shareholders. Let me summarize my financial remarks. Overall, we were very pleased with our second quarter results. Our light vehicle sales performance was modestly stronger than industry production. We achieved a 100-basis point adjusted operating margin improvement and a 17% adjusted earnings per share increase on relatively flat reported sales. Our strong free cash flow performance supported a cash return of approximately $134 million to shareholders in the quarter. Our Q2 performance once again demonstrates the BorgWarner team's ability to deliver strong financial results in a declining production environment. We believe this increased share repurchase authorization by our Board of Directors demonstrates our long-term confidence in the cash generating ability of our business.

As we look ahead to the balance of 2026, we intend to remain focused on expanding the earnings power of the company. At the midpoint of our guidance, we expect another year of adjusted operating margin expansion and adjusted earnings per share growth despite our expectations that market volumes and battery sales will decline in 2026 and an incremental $10 million-$15 million investment in industrial R&D to accelerate our long-term sales growth. Finally, with another year of anticipated strong free cash flow of $1 billion at the midpoint of our guidance, we expect to continue to deploy capital in a balanced approach that rewards shareholders. 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 many years to come.

With that, I'd like to turn the call back over to Pat.

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

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 are using a speakerphone, 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'll pause momentarily to assemble our Q&A roster. The first question will come from Chris McNally with Evercore. Please go ahead.

Thanks, team. Joe, could you maybe provide a little more color on some of the quoting progress you discussed in the AI initiatives? I think in particular, maybe you could give a really quick 101 on the Borg/Endeavor TurboCell relationship. I think, given most of us are keeping Claude kind of busy mapping out the different public entities such as Edged, which was also recently in the news. One of the questions I think that would be a great to answer is, will Borg announce every smaller DC win within the relationship, or is it likely to batch them together as they become material? And then a follow-up.

Yeah. Hi, Chris. As I mentioned in the remarks, we're really pleased with the progress we've made in the second quarter. We remain on track, starting with the TG. As you know, we're launching that next year in 2027. A couple of data points here on that business. First of all, the customer interest remains really strong, including multiple hyperscalers. As you know, Endeavor, that is their value in this relationship. So we're really pleased with that. We achieved the CARB-level emissions, which is really a differentiator for us compared to what's out there. The UL compliance is in process. So from where I stand, we're on track to deliver. With regard to the Endeavor relationship, it continues to grow and get stronger as time passes on. We won't decide, do we announce every individual event?

We try to share the important events and milestones with the investors. With the recent news on Endeavor and their partner, Koch, we're also aware of it. It's not unusual that these financial partners are constantly out raising money for the data center growth, which is out there. But we don't think it materially changes anything between us and our relationship with Endeavor. Partnership's stronger than ever. We see a great fit between our companies and also how we see the future of the world. If anything, this adds credibility to Endeavor. It adds credibility to their Edged data center business, that they're a fantastic player, and we're just happy to be partnered with them.

That's great. Agree. I think the hyperscale wins obviously would be material by themselves. Then just the quick follow-up is on the BESS side. You reiterated start of production 2027. The quoting continues. I think you even shared in your prepared remarks more to share later this year, which is great, and I imagine aligns with RFP timing. Is there any order of magnitude for what a typical contract or win size may be that you could give sort of rule of thumb? I know no contract is the same, but anything rule of thumb, because we're trying to start to think about what an average contract would be there.

Yeah. I wouldn't say there's any type of rule of thumb. Every data center project is bespoke. What we find is important is that our TG and TurboCell solution, our battery business, and our power conversion all play a very important role in these future data centers. Any award in the battery space with a hyperscaler obviously would be substantial. We continue to see a strong pipeline of quoting. We're progressing our product offering here. In fact, we're expanding the range of products that we're offering. I'm really pleased with the progress we're making here, and we'll likely share more updates later this year.

The next question will come from Colin Langan with Wells Fargo. Please go ahead.

Oh, great. Thanks for taking my questions. Just to follow up on the turbine generator, I think in the past you had commented that you'd consider announcing adding more capacity in the second half of this year. Is that still the plan? I mean, any thoughts on the need to add more capacity given the customer interest? If you do decide, how quickly can that new capacity come online?

Yeah. Hi, Colin. We do continue to see strong demand, as we had mentioned, so we're really encouraged by that. As we've shared with you, we do anticipate we're going to have to make a decision in the second half of this year on capacity and also decide is that capacity going to serve this market or maybe a different market, which we're also active with our partner Endeavor in. So no decisions made yet, but I am encouraged by the demand side of the equation. So more to come.

Just one question on the results today. I mean, if I look at your sales were up just $10 million, EBITDA up $40 million. That's quite a strong conversion. Even if I take batteries out, it's up $40 million on $70 million in sales. What is driving this extremely high sort of or strong conversion on growth? I think you mentioned strong cost controls can possibly continue in the second half would be the upper end of guidance. What are those cost controls and why wouldn't they continue since you have a couple quarters of that under your belt?

Thanks, Colin, for the question. It was great execution on all fronts across our business. 11.3% margin in the quarter, up 100 basis points. When you break down that 100 basis point improvement year-over-year, 60 basis points came from strong performance from our foundational businesses, TTT and DMS. Great job by those teams. We had 20 basis points from enhancement through BES, the restructuring actions that they've taken in 2025 and 2026, as well as the exit of the charging business. Then the final 20 basis points came from strong cost controls. What I was most excited about was we expanded margins every business unit, and I was equally happy that corporate provided a nice tailwind. So it was just strong execution across the board.

Got it. All right, thanks for taking my question.

The next question will come from Luke Junk with Baird. Please go ahead.

Good morning. Joe, curious to double-click on one of your comments in the script around inverter efficiency. Just hoping you could speak a little more to what you see as the company's moat inverter efficiency, especially potential future applications that could stem from that. Do you have an ambition to expand the portfolio further there? In terms of scope, maybe if you could just remind us also of some of the markers for efficiency that you outlined at the 2023 Investor Day. I think you had outlined a path to kind of industry-leading levels for automotive. Thank you.

Yeah. So thanks for that question, Luke. When you think about efficiency, why is that important? Especially on the industrial side, power is the constraint, so any improvement in efficiency is important. We continue to see efficiency gains as we develop next-gen inverters. Sometimes that comes from the silicon and silicon carbide technology. Often it comes from our proprietary power module, which we produce and develop ourselves. A lot of that just has to do with how you cool the device as you're driving a lot of power through it. So efficiency numbers from generation to generation, they tend to vary. But similar to the fuel economy improvements, you tend to see a few basis points or even a few hundred basis points at times with major steps forward.

Yeah. Then just in terms of the investment scope, I think if I think microgrid inverter, there certainly could be other places in the gray space or even getting more into the transformation of power. Just how should we think about the scope of opportunities that you might be looking at in inverter-type things?

Our leading product to the market is likely going to be a microgrid tie type of inverter. So tying together power gen with all the other power sources and possibly even the grid, which of course, is outside the building. So that's what we're leading with, but we see other possible opportunities here. So on the grid tie, we've started to expand our range. We were leading with 800 V, and it's likely that will be the first award, but we've expanded the range from 400 V to 1,500 V. Then secondly, our team's evaluating other opportunities in the gray space and inside the building. As you know, with the next generation NVIDIA chipsets, there's a high demand for power at the rack level, and this plays very well into the work we do on the automotive side.

For my follow-up, Joe, could you just maybe give us some additional color on the new products on your website that you briefly touched on in the script, things like UPS, battery backup units, and similar? Is this sort of what the incremental R&D that you're putting in the back half of the year is pointing to? Thank you.

Those incremental products are some of the examples when we talk about expanding the portfolio, whether it's energy storage, like you mentioned on battery backup or some of the new power conversion products, which I just mentioned. Those are the areas where the $10 million-$15 million incremental R&D are to support. We're really excited about that. A year ago, we weren't even talking about these products, and if you can imagine the progress our teams have made, especially in the first and second quarter, I'm just extremely pleased with that. So excited to see what comes with this additional investment.

The next question will come from Joseph Spak with UBS. Please go ahead.

Thanks. Good morning, everyone. You came in about almost $40 million higher this quarter. You are raising R&D sort of by $10 million-$15 million, so the other in OI is basically flat for the full year. The other $25 million-$30 million, is that just some higher costs? Maybe you could just talk about that. Then just with this higher level of R&D, should we think of this as a more sustained pace into the future, or is it something of a pull forward because you see some of these emerging opportunities that you alluded to in your prepared remarks?

Yeah, thanks for the question. I think it would be helpful to walk you first half to second half revenue and then operating income or margin. When you think about sales, sales in the first half came in just under $7.2 billion. The midpoint of our guide puts us right around $7 billion from a top-line perspective. We have three headwinds, first half to second half. First is the battery decline, that is about $60 million. FX is a headwind, it is about $80 million, and the rest is industry production. We are assuming modest decline in industry production, about 1%. That again takes us to $7 billion in revenue at the midpoint. On those lower revenues, we are decrementing at 15%. I will call it mid-teens. Then we are leaning forward with that $10 million-$15 million in industrial R&D.

If you were to exclude that step up in R&D, our margin would be at 10.8%. That is effectively in line with the first half. If you include industrial R&D at the midpoint, we are at 10.6%. From our perspective, this makes a lot of sense, and we are excited to invest that extra $10 million-$15 million to enhance our portfolio.

Joe, I can answer the question of sustained investment. From my standpoint, these opportunities are what is driving the R&D investment. As we continue to see more opportunities in the industrial space, we are going to go after them. These products, keep in mind, they take probably 18-24 months to develop in general. When we start investing, you can expect to have some level of sustained spending. But I think we know that BorgWarner is pretty efficient with how we spend our R&D, and it is, in this case, focused on really attractive growth.

Joe, maybe just one other comment. We've got to step back and think about we're executing in the short-term. We're still expanding margins, we're still expanding EPS, we're still generating a significant amount of free cash flow. At the same time, we're investing in our long-term in a high growth market. It's a great time to be at BorgWarner, I think.

Yeah, absolutely. The second question, maybe just sort of turning back to the automotive business. One of the things that has clearly come a little bit more into focus is some of the vehicles being exported from China, and similarly, some of the maybe European luxury programs into China. Can you remind us what you think your exposure is to China export business as a percent of your overall China business? Have you seen any impact from some reduced demand of, let's say, legacy European vehicles in China?

So maybe to frame that a bit. China is about 20% of BorgWarner's global sales. We don't break out global versus export. Quite frankly, we don't know when they're exporting a vehicle or not, so that's not something we really break out. What we are feeling good about is that position, that strong position we have in China has led to some tailwinds as they export more to the other markets. The Chinese OEMs had an amazing first half in terms of export, and we don't see any reason why that won't continue. With regard to the European luxury car makers, we really don't see a big issue in mix. A lot of that just comes down to our customer diversity. When a few are up, others are down. Most of that tends to just kind of wash out. So that's what we see at this point.

The next question will come from Andrew Percoco with Morgan Stanley. Please go ahead.

Great. Thanks for taking the question. I want to come back to some of the comments you made on the turbine generator product and the hyperscaler interest that you're seeing. Can you just provide some context on whether they're looking at this product on a primary power basis or a backup power basis? Also if you can provide any insight in terms of if the economics look any different from your perspective on your side on whether or not they end up using it prime versus backup.

Yeah. Hi, Andrew. Our turbine generator can serve in both primary and backup. In fact, when we started this project a few years ago, we thought the majority of applications would be in backup. I would say in the last 12 months, that's swapped, and we see more of them in prime use. I think that just speaks to the speed to compute and the shortage of power generation in general. This TurboCell unit using BorgWarner TG serves equally well in both of those, with very low emissions, lower noise than some of our competitors. The speed to market is really important, so we're excited about it. In terms of the economics, I would just say overall, we're very pleased with the terms and the agreement that we have with Endeavor across all of these cases.

Okay. That's helpful. You mentioned time to power obviously being probably more important at this point than just cost of power. As you scale up production in 2027, what's your targeted order to delivery conversion timeline? What are you trying to advertise to the customers that are talking to you about taking delivery of this product?

Yeah. We've announced that we're installing 2 GW of capacity, and in the initial year, which is next year, about $300 million of revenue. We are quoting through Endeavor lead times to deliver these units. I would say it's another advantage we have in the system. Think about it this way. We're standing up a materially automotive production and supply chain in an environment that's probably not used to that type of speed. We feel this is also a competitive advantage for us. The order time is well within the lead times of our capacity and the capacity of our suppliers.

You're talking about potentially less than six months from when someone places an order to when you can deliver it. Is that a fair way to think about it once you have capacity?

Yeah. I would say we haven't really disclosed our lead times, and we're not going to talk about that. I would say the main focus right now is on launching the unit in 2026, and we'll share more as we get into 2027 as we answer your questions.

Okay. Thank you. I'll take the rest offline. Appreciate it.

The next question will come from James Picariello with BNP Paribas. Please go ahead.

Hey, good morning, everybody. I know Koch Industries has already been mentioned amid the recent news flow of Koch potentially looking to sell its stake in Edged at a $15 billion valuation, maybe. My question is, I know it is all speculation at this point, but within the contractual relationship you have with Edged by way of TurboCell, are there any change in control triggers involved, anything that could affect the $300+ million in revenue that you have slated for next year? Thanks.

Yeah. There is nothing in our agreement that triggers change in control. You have to keep in mind that there are several Edged legal entities. The one that we directly deal with is 100% owned by Endeavor. That is not what is being spoken about. It is more about what we understand, how Koch can raise additional money to support the growth that is coming. Again, we do not see this as a material issue. We are just excited to be partnered with Endeavor and their Edged business unit, and we just think it adds great credibility to what they are doing if partners like Koch and others are out there raising money to fund their projects.

Yeah. No, for sure. Totally agree. On Battery Systems, losses through the first half only totaled $4 million. I know there are charging exit and battery plant consolidation savings in play, but if we scrub for those, the underlying performance is still far and away better than the company's targeted mid-teens incremental. Can you just shed some light on what is driving that and just directionally how we should be thinking about the first half to second half bridge for this particular segment? Thanks.

Sure. Really pleased with BES and their performance. They have taken a lot of restructuring actions both in 2025 and continue to take actions in 2026 to get that cost structure right. On top of that, you mentioned it, we have the benefit of the exit of our charging business last year that is benefiting our financials this year. Ultimately, as you walk from first half to second half, we would expect to manage it in that mid-teens incremental conversion to us that success, and that is what we are focused on executing.

The next question will come from Emmanuel Rosner with Wolfe Research. Please go ahead.

Hi, guys. Good morning. My first question, you've been obviously announcing a real significant amount of awards pretty consistently every quarter, another sort of like seven today. Any way to help us frame what this could do for your growth over market on a go-forward basis and the timing of it? Can we expect it to be already positive in 2027? And where could you trend sort of like over time as you launch a lot of these businesses?

Sure. So what I am pleased with, and you've referenced it, is this booking strength that we've had over the last two years, and it's been across all of our product lines. I do expect these bookings to support an improvement in our objective in outgrowth across portfolio in 2027. And then, of course, we announced the $300 million of new growth associated with the industrial business. So overall, Craig and I are pleased with the progress we're making, and we'll share more early next year on 2027.

But if it started even longer term without being specific on 2027, does that enable you to go back to historical levels of growth over market?

Yeah. So Emmanuel, what we've clearly stated is Craig and I are not pleased with the current outgrowth that the company is witnessing, and that is why we adjusted the strategy to drive growth across the entire portfolio. As you can probably imagine, these strong bookings that we've had over the last two years, they take time to come to production. But we're clearly expecting that they're going to improve the outgrowth of the company. As those volumes move through launch and into peak volumes, we are anticipating those improvements will continue to come. So we'll share more in 2027, but I think that probably gives you a good idea of where we're headed.

Yeah. No, thank you. Then on the industrial side, can you help us dimension the inverter size of the opportunity for you? Not so much in terms of addressable markets, but more in terms of how much capacity you're planning to have, right? Because for the turbines, we kind of know the initial capacity that's put in the ground. On the energy storage side, I think your capacity is essentially the available one from some of your battery pack earlier investments. So we kind of have an order of size, but I'm not super clear on the inverter side what you have in terms of facilities, in terms of investment and capacity.

We haven't announced any capacity availability or what we plan to install. Frankly, we're going to move to quoting at the end of this year. That will be what we'll use to kind of gauge how do we leverage the existing capacity investment versus where we may need new capacity. One of the things we're really excited about with, especially our grid-tie inverters is their majority is designed in the U.S. We make plans of U.S. manufacturing even. So we've got a lot of opportunity on that product line, but it's early days in terms of quoting, and I'm sure we'll be in a position to share more in 2027.

The next question will come from Dan Levy with Barclays. Please go ahead.

Hi. Thank you. I wanted to start with a question on capital allocation. I know that you, in your release, issued a new $1 billion buyback authorization to even buy back a fair amount of stock. How are you thinking about your capital allocation program in light of this new growth opportunity that you have, in light of a multiple that is better? I know you've talked about stepping up the spend a little bit, but that seems fairly modest. Is there more that can be done on accelerating spend, be it R&D or CapEx, that would then accelerate the growth opportunity? Is there any M&A that can be done? Just how are you thinking about spending accelerating the industrial opportunity?

Yeah. Thanks, Dan. As I step back, what are Joe and I, what are we focused on? We're focused on growing the earnings power of the company, and we want to create value with our cash. That's the ultimate goal. We're always balancing inorganic opportunities, organic opportunities, share repurchases. We review it every quarter to make sure that we're creating value quarter after quarter. When I take a look back over the past year, we repurchased $650 million. That's 5% of our market cap. That was success for us over the past four quarters. We're excited that we have the flexibility from our Board of Directors with another $1.35 billion. That represents 10% of our market cap approximately. It gives us a lot of flexibility.

I think it also shows the confidence we have in the future cash-generating ability of our business. Ultimately, our goal is to drive the earnings power of the company, and we are going to use every lever at our disposal to do just that.

Maybe to add a little bit, we will always prioritize these organic investments as we see growth opportunities both on the R&D side and the CapEx side.

From a tech perspective on the new growth opportunities, do you have everything you need in-house, or is there something you still need to acquire to sort of beef up the portfolio from a tech perspective?

I think we are moving from a position of strength. When I look at our portfolio, especially that we have invested and grown over the last 10 years, these three new product lines for industrial are able to leverage a lot of that competence now. There may be opportunities through inorganic growth that we want to continue to strengthen the current portfolio or improve a market position. In terms of M&A, we are sticking to the three criteria, which again is leverage the core competence of the company as the first priority. The second is making sure it is near-term accretive, and then third, that we do not overpay and we pay a fair value for any asset. We continue to look inside mobility and outside, but I would say we have really raised the hurdle in terms of any decision we are going to make.

Okay. Thank you. As a follow-up, wanted to ask about your battery storage opportunity. From some of the other players, we have heard a lot about the importance of having access to domestic LFP supply, which gives you the right chemistry, but also gives you ITC and PTC compliance. It looks here like your focus in battery storage is more on data centers. I know you have talked about being chemistry agnostic, but to what extent does having access to LFP matter, and to what extent does PTC and ITC eligibility matter as you are building out the business case for battery storage?

I think the way to see our energy storage, first is a lot of leverage the existing technology and capacity we have in, especially in our Seneca plant. That is our first priority. But we have always, and we continue to work with other cell types and cell supply manufacturers. LFP is included in that. Sodium-ion is included in that. I think it is one of the great advantages of being cell agnostic, is we have a lot of competence in how to integrate these cells, package them, control them, install BMS, and ship them as a unit. We do anticipate that we will require some of those other cell technologies on a go-forward basis, and we continue to invest in how we bring those to market and with which partner.

The next question will be coming from Alex Perry with Bank of America. Please go ahead.

Hi. Thanks for taking our questions here. For the core auto business, I wanted to follow up. You have the organic sales that slightly lowered the low end of the range of production. Can you just talk to us what you're seeing in schedules? Particularly, I wanted to circle back on China. It's been a more challenging market for most of the supplier group so far. Maybe talk to us what you're seeing in customer schedules there and maybe versus Europe and North America. Thanks.

Yeah. Starting on a global level, production range has largely remained unchanged in our view. We still see schedules holding up as we expected. I would say there are some small regional changes. China likely to be down 4%-7%. Europe down slightly. A little bit wider range, I would say, in North America, between up 1.5% and down 2.5%-3%. There is a little bit of volatility still, especially on the past car side, but overall, not big changes. I think what people are recognizing is the strength of the Chinese OEMs exporting from China. They had very strong exports in the first half. If you play that forward, you can imagine they're going to be exporting anywhere from, I don't know, 9 million-11 million units, which would be a big year-over-year increase.

For us, it doesn't change much. We're very strong with these leading Chinese OEMs, and our customer diversity more or less washes out some of those mix issues that maybe others see in their business.

Really helpful. Then just another follow-up on the power gen. Any sort of sense on how fast you can scale the power gen sales with the existing capacity? I think you're sort of earmarking $300 million for next year. What can that scale to over time? Then any sort of helper sense in sizing the EBIT contribution as we start to build out our models here?

BorgWarner (BWA) Q2 2026 Earnings Call Transcript

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