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 third 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 1 on your telephone. If you would like to withdraw your question, press star 2. If you are using a speakerphone, please pick up the handset before asking your question. I would now like to turn the conference over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Nick. Good morning, everyone. Thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, boardwarner.com, also on our homepage and our Investor Relations homepage. With regard to our Investor Relations calendar, we will be attending multiple investor conferences between now and our next earnings release. Please see the events section of our investor relations homepage for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods. When you hear us say adjusted, that means excluding non-comparable items. When you hear us say organic, that means excluding the impact of FX. 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 waited for our geographic exposure. Please note that we've posted today's earnings call presentation to the IR page for our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Joe.

Thank you, Pat, and good morning, everyone. I'm pleased to share our results for the third 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 just under $3.5 billion, excluding the decline in our battery energy system segment Our organic net sales were down modestly year over year, or roughly in line with the decline in global market production. Importantly, our light vehicle e-product sales were up 33%, primarily due to European growth. Our adjusted operating margin and adjusted earnings per share performance was strong in the quarter. The company continued to operate at a very high level, and delivered 20 basis points of adjusted margin expansion and 12% adjusted earnings per share growth, despite a declining production environment. This solid 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 third quarter. Today, I'll highlight nine new business awards across our foundational and e-products portfolios. These wins represent only a portion of the awards secured during the quarter and highlight the strength of our foundational and e-product portfolio and the need for our products across combustion, hybrid, and electrified architectures. Additionally, I believe the sustained level of award activity that we've seen over the last several quarters underscores the strength of our technology-focused portfolio and our deep customer relationships. Equally exciting is the progress we made in the quarter in taking meaningful steps to advance our product readiness and accelerate our quoting activity across our data center and other industrial markets portfolio. I will share a more detailed update in a few moments. Lastly, We remain focused on the efficient deployment of capital to drive shareholder value. In the quarter, we returned approximately $210 million, or over 100% of our third quarter free cash flow, to shareholders through share repurchases and the payment of our quarterly cash dividend. Including our currently planned fourth quarter repurchases, We expect to return over $700 million to shareholders in 2026. Looking back on our year-to-date performance, I'm very proud of our team and our results. Once again, we executed at a very high level, which I believe positions us well to achieve our full-year sales, margin, free cash flow, and increased EPS guidance. Next, I'd like to highlight nine product awards that demonstrate both the competitiveness of our technology and our ability to support our customers' powertrain needs in key markets. First, FordWarner will supply engine control modules for a new internal combustion engine pickup truck platform for one of our long-standing global OEM customers. The new high-volume contract extends the company's existing customer relationship. Securing the strategic ECU program maintains BorgWarner's electronics leadership and extends our engagement with this longtime partner through 2034. Next, BorgWarner has secured three separate conquest business awards with a global powertrain technology leader. including one contract for our variable turbine geometry turbocharger and two contracts for our wastegate turbocharger. The technologies will be used on the customer's light vehicle gasoline platforms in both South America and Europe. I believe these awards reflect the strength of our offering, including our competitive solutions and technical expertise. Next. BoardWarner has secured its first business award for its new aluminum wire e-motor technology from a major Chinese OEM, marking the technology's introduction to the market. This product will be used in hybrid vehicles across multiple applications, including generator and traction motors for auxiliary drive applications. The technology combines aluminum conductors with BoardWarner's We are proud to introduce BoardWarner's aluminum wire e-motor technology to the market. and to further strengthen our long-standing relationship with this customer. Next, 4Warner has secured three e-motor business awards in China for a range of electrified and hybrid vehicle programs. The new business broadens the company's customer base and expands the application of its e-motor technologies in the Chinese market. I believe that the breadth of these programs demonstrates our ability to address diverse application requirements through strong product performance, cost optimization, and localized manufacturing. And lastly, 4Warner has secured a Next Generation High Voltage Inverter Award for future battery electric vehicle programs with a global OEM. The award builds on an existing electrification partnership and further strengthens BoardWarner's position as a leading provider of advanced power electronic solutions for electric vehicles. I believe this business reflects the confidence customers place in BoardWarner's power electronics expertise and our ability to deliver innovative, high-performance electrification solutions. Next, on slide seven. I would like to discuss how we are improving our product readiness and accelerating our quoting activity across our data center and other industrial markets portfolio. Let's start with an update on our turbine generator launch progress. I'm very pleased with the advancements we've made over the past quarter. Our partner is planning to expand external demonstrations of the turbine generator system during the fourth quarter due to strong customer interest. Our UL compliance process continues to progress well. The UL certification process of the subsystems is now largely complete, and system UL certification is underway. The construction of the final assembly plant in North Carolina has now been completed, and manufacturing floor and capital installation are expected in December. As a result, we expect to begin production trials by year end. Overall, I'm very excited and pleased with the team's progress, which will position us well to meet the strong customer interest that we continue to see, including multiple hyperscalers. Turning next to our battery energy storage system, our energy storage solutions are intended to support a range of use cases and data center and other industrial environments, and we continue to assess new potential applications. Customer validation and our UL compliance processes are advancing well. In addition, we are getting solid engagement with multiple customers across both NMC and LFP cell applications. We continue to expect that we will be production ready in 2027. Now, turning to our microgrid inverter offerings. We have now shipped four Warner samples to seven customers and engagement with other potential customers are underway. We expect to complete UL certification of our microgrid inverter in early 2027. Customer reaction has continued to remain very positive. For example, our inverter system efficiency testing is ahead of peers based on customer feedback. Customers believe we have the right value proposition, including U.S. manufacturing. Additionally, our high voltage and power-dense liquid-cooled power electronics expertise is seen as a competitive advantage as we continue to advance our product readiness. We are also continuing to expand our power electronics portfolio for both data center and industrial applications. We've developed an 800-volt power supply unit, or PSU, and showcased it at the recent Data Center World Power Industry event in Dallas, Texas in the third quarter. Lastly, I'm proud to report that we have begun the initial quoting process with our first major customer for our micro rhythm bird. Overall, I view all of these steps as great signs of increased customer engagement and our right to win in this high growth market. To summarize, I believe there are four key takeaways from today's call. First, For Warner's third quarter results were strong. Our light vehicle e-product sales increased 33%. Our adjusted operating margin expanded 20 basis points and adjusted EPS grew 12% compared with the third quarter of 2025. Additionally, we increased our full year EPS guidance, reflecting our continued focus on growing the earnings power of the company. Second, we announced nine 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 portfolios. At the same time, we saw accelerating quoting activity. I continue to believe that our mechanical and electronic core competencies will enable us to successfully capture multiple growth factors outside of our core automotive market. And finally, we took meaningful steps to return capital to shareholders during the third quarter, with approximately $210 million returned to our cash dividend

and Sherry Purchases.

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 as we close out the year and look ahead to 2027. With that, I'll turn the call over to Craig.

Thank you, Joe, and good morning, everyone. I'm excited to share the details of our third quarter financials by turning to slide eight for a look at our year-over-year sales. Last year's Q3 sales were just under $3.6 billion. In the third quarter, stronger foreign currencies drove a year-over-year increase in sales of $8 million. Then you can see the sales headwind from our battery business, which drove a year-over-year decrease in sales of $54 million. The remaining organic sales decrease of 58 million, or 1.6%, was roughly in line with the decline in light vehicle market production for the quarter. Importantly, our light vehicle e-product sales were 630 million in the quarter, or a 33% increase compared with a year ago, primarily due to strength in Europe. Some of these items resulted in under $3.5 billion of net sales in the third quarter. During slide 9, you can see our earnings and cash flow performance for the quarter. Our third quarter adjusted operating income was $381 million, equating to a strong 10.9% adjusted operating margin. That compares to adjusted operating income of $385 million. for a 10.7% adjusted operating margin from a year ago. Excluding FX impacts, adjusted operating income decreased 6 million on 112 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. Our adjusted EPS. was up 15 cents or 12% compared with a year ago from lower taxes and the impact of approximately 725 million in share repurchases or approximately 6% of the company's current market capitalization over the past four quarters. And finally, we generated free cash flow of 195 million in the third quarter which helps support $175 million in share repurchases and $35 million in dividend payments. I believe this once again demonstrates our focus on creating value with our consistent and our strong free cash flow. Now, let's turn to slide 10 and take a look at our full year 2026 outlook. We are modestly adjusting the high end of our full year sales outlook based on a narrowing of our industry production expectations. However, we are maintaining our full year adjusted operating margin range despite the lower production environment based on our strong year-to-date results. Additionally, we are increasing our adjusted EPS guidance due to the impact of our third quarter and planned fourth quarter share repurchases. and a lower full-year effective tax rate outlook. We currently project total 2026 sales in the range of 14.0 to 14.2 billion compared with our previous guidance of 14.0 to 14.3 billion. Starting with foreign currencies, our guidance now assumes an expected full-year sales benefit of 250 million compared with 2025 to the strengthening of the euro in the renminbi versus the US dollar. This benefit is modestly higher than our previous guidance. We expect our weighted end markets to be down 1% to 2% for the year, which is a narrower range than our previous flat to down 3% assumption. We expect our light vehicle business, which comprises over 80% of our sales perform broadly in line with our weighted light vehicle market, consistent with our performance through the first three quarters 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 expect this decline to represent roughly a 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 4% to down 2.5% year-over-year. Now, let's switch to margin. We continue to expect our full-year adjusted operating margin to be in the range of 10.7% to 10.9% compared with our 2025 adjusted operating margin of 10.7%. At the midpoint of this guidance, we expect to expand margins on a year-over-year basis despite a lower production environment, sales headwinds from our battery business, and a 10 to 15 million industrial R&D investment to support our long-term profitable growth. I believe this performance shows our commitment to driving superior short-term business performance while also ensuring we position the company for profitable growth for years to come. Based on this sales and margin outlook, we are increasing our expected full-year adjusted EPS in the range of $5.20 to $5.35 per diluted share from our previous guidance of $5.05 to $5.30 per diluted share. This $0.10 per share increase at the midpoint of our guidance is driven by our third quarter and currently planned fourth quarter share repurchases and a decline in our full-year effective tax rate. The midpoint of this adjusted EPS guidance represents approximately a 7% increase over our 2025 adjusted EPS and once again demonstrates our focus on consistently driving the earnings power of the company despite lower industry production And finally, we continue to expect full-year free cash flow to be in the range of $900 million to $1.1 billion, building off a strong 2025. With that, that's our 2026 album. So let me summarize my financial remarks. Overall, we were very pleased with our third quarter results. Our light vehicle sales performance was roughly in line with industry production. However, our light vehicle e-product sales were $630 million in the quarter, or a 33% increase compared with a year ago. We achieved a 20 basis points adjusted operating margin improvement and a 12% increase to adjusted earnings per share on relatively flat reported sales. And our strong free cash flow supported a cash return of approximately $210 million to our shareholders during the quarter. Q3 performance once again demonstrated the BoardWarner team's ability to deliver strong financial results in a declining production environment. As we look to the balance of 2026, we intend to remain focused on expanding the earnings power of the company. At the midpoint of our 2026 guidance, we expect another year of adjusted operating margin expansion and adjusted earnings per share growth, Despite our expectation that market volumes and battery sales will decline and an incremental 10 to 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 manner that rewards shareholders. and deliver on our 2026 financial commitments. And I'm equally excited by our efforts to grow our technology-focused portfolio in automotive and other adjacent markets. 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 disciplined and balanced approach to deploying capital, we believe BoardWarner 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 Gray, 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 1 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 2. 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 so much, good morning team. So look, congrats on another good quarter in tough times and really do appreciate the continued color on progress of all the industrial initiatives. Maybe if I could play the buy side muse for just a second. There's clearly lots of excitement around where these three industrial businesses can grow in the coming years. It's going to take some time, 2030 for round numbers to get to some of the The bigger numbers that we've all sort of projected out and the direction of travel, I think your comments, the interest, the quoting, the engagement, all moving forward. I wanted to see if you could maybe give us some idea about when we'd have more clarity of sort of the shape of that travel, that $300 million in 2027, Rev, what that could become in 28, for example. Is that the type of certainty you think will come over the next six months, or is that Is that too hard to say at this point because there's too many moving pieces?

Yeah. Hi, Chris. This is Joe. So, you know, first of all, I would say we're really pleased with the progress we're making in the quarter. I mentioned some of the highlights. One additional thing, you know, our hiring to support the startup production is also in line with expectations. So I'm really pleased with the progress. We continue to see the backlog and demand for this turbine generator to be very strong. We won't be giving you any kind of color until we get into early 2027. We'll do our best to provide you a little bit more shape of the curve, as you call it, but it's a little bit too early for that.

Okay. My follower is basically around the second derivative of your customers within PowerGen. Any comments if you're seeing any issues from your data center partners around any of the industry timing, permitting delays that we're broadly hearing about within data center build-outs across the U.S.? Is that in any way affecting negotiations or Is that something that's not an issue for you guys?

Yeah, so as we stated, the coding activity is very strong. You know, we generally see some of the current political environment as possibly slowing the finalization of some of the, you know, program awards or program agreements. But overall, the activity is there, and the workup on these final agreements remains really high. So, you know, we see this as probably a very short-term issue. We're looking beyond the midterms. Long term we don't see any change in the demand. Perfect. Thanks so much.

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

Hi, good morning. Thank you for taking the question. Maybe we could just start with just the near term and the trimmed revenue outlook. And maybe we could just project that into 2027. I believe your prior commentary was for some outgrowth or some modest outgrowth on the core automotive business as you have all of this business launching. I want to confirm that's still the case. Guidance this year and then, you know, just on the launch of the backlog next year.

Yeah, so maybe I'll talk about Q4 and then we can touch on 2027. So when you look at Q4, and I'll walk it from our average for Q1 through Q3, revenue Q1 through Q3 on average was about $3.55 billion. As we look at Q4, we see it being closer to $3.43 billion. So down about $123 million. That's really a reflection of industry production in the quarter. From a margin perspective, we expect to decrement in the mid-teens on that lower revenue, and then we have $10 million industrial R&D in the fourth quarter. So that's how you get to the midpoint of our guide. As we think about 2027 and the top line, I'd say right now as we sit here today, we do see some industry headwinds. A couple of those are just higher interest rate environment, vehicle affordability are things that we're watching. With that said, our goals for BoardWarner remain the same. You know, what we expect as we move into 2027 from the top line perspective is we expect to see modest growth over market as it relates to our automotive business. We've won a lot of awards over the last two years and we expect to see some of those wins in our P&L as we move to 2027. and then we expect to see $300 million of turbine generator revenue. So excited to get to 2027 and see an upswing in our top line for World War I.

Great. Thank you. My second question is on the microgrid inverter where I think you put out a couple of updates here on You're starting quoting and you're shipping more testing samples to additional customers. And I think this maybe also pairs with, we saw some news about entering into a multi-year supply agreement with one of the silicon carbide suppliers. And we know that your core inverter technology, there's a significant technology mode. So maybe you can just help us understand How large the potential opportunity here and the technology moat that you have and maybe just weave in, you know, how much the silicon carbide is sort of an unlock of that if at all?

So, great question. You know, we're, first of all, really excited about the fast progress our team is making on these inverter products. If you think about a year ago, we weren't even talking about these products. So to see where that business is poised right now is really exciting. It is true that we're leveraging heavily the light vehicle technology. So in light vehicles, a reminder, we use both silicon and silicon carbide technology, and some of the more advanced EVs are using 800-fold as the, let's just call it the architecture across the car. This is exactly what we are leveraging to bring more efficiency, more competitiveness into these microgrid inverters. So the fit is very strong between light vehicle and industrial. And if you step back a little bit, if you look at the three product family offerings, PowerGen, Power Conversion, Energy Storage, this is a family of products that can play on their own, but there's also a lot of system synergy between them. The name of the game with the speed to compute is making it more efficient, lower carbon, and the more efficient it is, that means less power is lost and can be used for compute. So we're excited about how we're leveraging that into the space. And yes, we're going to reuse many of the automotive suppliers, including the folks that supply us silicon and silicon carbide.

Great.

Thank you.

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

Thanks, everyone. And thanks for some of that preliminary color for 27. I guess I wanted to maybe pick up a little bit there and really not on 27 specifically, but just over the midterm. Because, you know, you used to really talk about how you've immunized the portfolio against PowerTrain a lot. And you still mentioned it, right? But it's been a little bit quieter on that front, I'd say, over the past year. But now we've obviously seen some acceleration in electrified PowerTrains, particularly in Europe. And you did highlight e-product growth in Europe this quarter, but then you also mentioned some foundational product clients in China. So I guess maybe you could just sort of refresh your thinking about how you see that that balance between foundational and e-product mix impacting BorgWarner's auto business over the coming years. And maybe if you even could talk about it by Europe versus China.

Sure. Thanks, Joe. So let me start with our portfolio, which is highly resilient. When you look across the portfolio, we're a market leader in all of our foundational products. We have a fast-growing and scaling e-product business. Really pleased with the 33% increase year-over-year in e-product sales, which is really evidence of all the hard work our teams have been putting in and those business awards are starting to pull through. Now, as Craig mentioned, that's primarily in Europe, which kind of makes sense. If you look at the increased penetration of hybrids and EVs in Europe, That is where the growth is at the moment. So we're starting to see that play through our, you know, a couple of other good examples. You've probably noticed a lot of e-motor awards over the last 12 months, including some of the new technology like aluminum wire wound motors. This is just clear evidence that GoldWarner is a leader in this space. Many of those are in China where the music has been playing for quite some time, both hybrids and EVs. So, you know, from our standpoint, our portfolio is positioned well. The regions are playing out a little bit differently when it comes to adoption of EVs. But as you see EVs accelerate, you can see that it's driving some increased sales in the e-product sales side.

Okay, thank you. So it sounds like your big picture view is that, you know, that sort of balance between the two is still sort of, you're sort of indifferent from, at least from a sales perspective, as to sort of how that'll play out. You think the portfolio properly protects you?

That's true. Not only the portfolio, just as a reminder, we have probably the most diverse customer portfolio of anybody in the powertrain space. So We think that positions us well. Even as some of the Chinese OEMs have been growing, we've been seeing some benefit from that as they export more to other markets like in Europe, because a lot of those vehicles have more technology riding along. So, yes, we think we're in a great position to capitalize on the growth as it comes.

Okay. On the PowerGen side, I know you mentioned sort of multiple hyperscale or engagements, and then to the earlier question, you sort of talked about some maybe like near-term noise on some of the politicalization, if you will. There's also sort of been industry noise around neoclouds and their ability to fund and capital. And I'm curious if you could sort of just talk about that subset of opportunity, whether there's been any interest shift there or you would sort of classify it as similar to sort of how you classified the hyperscaler engagement.

Yeah, I wouldn't say we see any specific challenge with some of the issues we hear around the neocloud players. I mean, as many people know, the neoclouds are strictly focused on AI data centers versus, you know, our products, they serve all types of data centers. So edge data centers, co-locators, in addition to the hyperscaler data centers. Some of which are handled on their own, some of which go through Neal Cloud players, but there's many players out there. And if I step back, I don't see any change in the demand for our products. If anything, we continue to see an increase in a lot of the quoting activity. So pretty optimistic about the future here.

Thank you. The next question will come from Emmanuel Rosner with Wolf Research. Please go ahead.

Great, thank you so much. Just a quick follow-up on your Q4 math there. Not looking to nitpick, just sort of to better understand the framework, but I think you were talking about 140 million lower revenue versus the first three quarters of the year rate at 15% decremental, but then there's also 10 million in higher R&D. Now, in recent past, past couple of years, so you've sort of prided yourself a lot to being able to incorporate all these investments within sort of like the regular incremental and decremental. Is there anything, is the framework changing or is there anything in particular about the investments needed in the fourth quarter that sort of like makes you call it out?

No, nothing's changing. So, you know, when you go back to our July discussion and guide, I'd say the second half is playing out as we expected. Came in a little bit better in Q3. Due to recoveries in Q4, we're being impacted by some industrial R&D, but I would say overall the second half is playing out just like we expected. Just to refine some of your numbers, Emmanuel, $120 million is the revenue decline versus our Q1 through Q3 average to Q4. so down called four-ish percent. Again, you're right, we expect to decrement in the mid-teens. And as we talked about in our July call, we expected 10 to 15 million in incremental industrial R&D in the back half of the year. We saw 5 million of that in Q3, we expect 10 million in Q4, and it's to support the floating activity that Joe spoke about. We're really bullish about that business and we're happy to support it with some incremental R&D.

Okay, understood. and then turning to some of your non-autos business, could you provide us a framework on how to think about the size of the inverter opportunity, just either what are sort of like the average content per vehicle that you're starting to quote or what is like the normal or range of sizes of businesses. It feels like for the other two projects we have actually A little bit of a framework around what capacity installed is or what available battery capacity is. For this one, it's a little bit earlier stages, so curious if you can help us there.

Sure. So it is earlier stage, and what we're really focused on right now is our first and second business awards, upon which we'd be happy to provide you more color on the TAM for those products. I think what's exciting this quarter, what we announced, is a new product that we're developing, this power supply unit, which actually goes inside of the data center. The microgrid is outside, which they call the grid space, and the PSU is inside, typically right next to the computer servers. So we're excited about that expanded TAM, and we'll provide you more color after we win our first fuel awards. Got it. Thank you.

The next question will come from Tom Narayan with RBC. Please go ahead.

Thanks for taking the question. I know that you said we're going to get more detail on the 300 million launch year turbine generator system sales. Just curious if we could get any color on these active discussions kind of potentially signed contracts. Just in terms of the progress there, I know you talked about hiring, but anything more concrete on how those discussions are faring and then I'll follow up.

So we, if I go back a little bit, we do have a signed agreement with Endeavor. They're our go-to-market partner on this and their role in this beyond some of the IP they carry is mainly the customer intimacy and serving the customers directly. So as we stated, the backlog and the quoting activity is an open book. Our teams operate as more or less one team here so that we can see the activity. They're the ones that coordinate the onsite visits from the hyperscalers, and that continues. So we're really, I would say, encouraged by the continued support here. So, you know, from our standpoint, we're probably more bullish now than we were three months ago because we're making progress against our plan. But as we stated, you know, we'll be able to give it a little more color as we get into early next year.

Got it. And thanks for the commentary on Europe and the EV growth and how that's impacting. Just curious if You're seeing a benefit on the hybrid side in the U.S. You know, that's picking up a lot of growth there. And then if I could just sneak in how you think about that pay down versus fax, and you guys did a big pay down in Q3, and your gross leverage around, I think, two times. Just curious what your target leverage is and how you think about this debt pay down thing.

Sure, I can take the hybrid question. So the immediate hybrid growth you see in the market, mainly from the Japanese players, where BoardWarner is strong is on these advanced hybrids. So plug-ins, for example, range extenders, which are some of the awards we've won but haven't come to market yet in North America.

And I can take the tender one. Really pleased with the execution of our debt tender in the third quarter. Our gross net leverage target is 2.0 times. Right now we're at one and a half times, but when you think about the debt tender, it was EPS accreted, it was NPV positive. We're using every lever at our disposal to grow the earnings power of the company, and this is a great example of that. As you think about share repurchases, really pleased with our execution in the third quarter. 175 million in shares repurchased. We expect the same level in Q4 and we take a big step back. We're excited about a billion dollars of pre-cash flow generated again in 2026 and we're on target to distribute 70% of that to shareholders between share repurchases and dividends. Love the balance, love the discipline that the team is executing against and we're excited to wrap up the year.

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

Hey, good morning, everybody. Good morning. Hi, James. Just to focus on the power drive segment, the EBIT loss was only $5 million on very strong growth, which was called out already. But did the quarter have any one-time recovery benefit at all, or are we getting close to a Thank you, James. I'll start with the top line.

As we both mentioned, really pleased with the growth in that business unit quarter over quarter. It was about 20% on a reported basis. So when you look at light vehicle heat products growth, again, primarily in Europe, It was 32%. So outstanding growth. We were able to capitalize that convert at an incremental conversion of about 24 cents on the dollar. So that was great to see. There was a volume recovery in that Q3 figure. And if you go back to last year, we had a volume recovery in Q4. So just another data point between Q3 and Q4. As we look forward for that business, we expect to see about 20% growth this year. coming up 30% growth last year. So we really like the trajectory of that business, and we're excited to get into 2027 and continue to capitalize on that. Our objective for that business unit remains the same, converting the mid-teens on a year-over-year basis, and we're on track to do that this year.

Got it. That's helpful. And then my follow-on, my two quick follow-ons, as we think about the company's microgrid inverter development, I know it's early, but you guys are actively quoting the product. Any sense for what the margin profile could be, similar to the confidence in turbine generators immediately contributing at a mid-teens margin profile? Are there any parameters to think about a future microgrid inverter award? And can you help us clarify The U.S. ban of foreign sourced equipment for the electric grid because it sounds as though the products listed within the executive order, you know, cover all three product categories that you're trying to enter. So just curious if you have, just wondering if you have any thoughts to share on what the implications and timing might look like for that ban.

Yeah, this is Joe. Maybe I can start with the executive orders. So it is true there were some orders issued and some of the scope of those orders has grown throughout the year. We're still getting clarification on those orders, you know, from us. It doesn't matter if those orders are there or not. It would provide a nice tailwind since We're a U.S.-based company, and we're going to produce these electronics in the U.S. But besides the FIAC executive order, our products are still extremely innovative, competitive, and provide a lot of value to our customers based on the feedback we're getting from the seven customers. I'll let Craig answer the margin profile.

Yeah, so James, I mean, we're obviously in the quoting phase, but I think the way to think about microgrid is very similar to the TGE. What we said for next year is we expect mid-teens conversion on that first year of launch. We expect some inefficiency in the process as we build out that plant, as we gain supply chain savings and higher OEE coming off our lines. So I would expect the same thing as we get to year one launch of the microgrid, but we believe that there's upside potential as we move forward off of that mid-teens and coronal base.

Got it. Thank you.

The next question will come from Mark Delaney with Goldman Sachs. Please go ahead.

Yes, good morning. Thank you very much for taking the questions. The input cost environment has been very challenging for several companies in the automotive industry so far this quarter. Recognize the good margins that BoardWarner was able to put up and guide you for this year, but can you talk a little bit more on what you're seeing in terms of input costs and as you start to look into I'm not sure if you're starting to see input costs rising to an extent that maybe you haven't seen yet in 26 but may become more problematic in 27 and perhaps could create more challenging incrementals as you try and deal with that next year.

Thanks, Mark. We are seeing some inflation, especially on the electronics side of our business in 2026. The good news is the teams are doing a fantastic job, and we think we can manage it within our incremental conversion for this year. As we go into next year, we're going to watch it really closely. To the extent that we do experience those higher costs, we're going to manage them just like we have in the past, whether it's been previous inflationary environments, tariffs, et cetera. We're not going to get caught in between our supplier and our customers, and we'll manage it appropriately. But right now, we are seeing a bit higher inflation costs on the electronic side of our businesses.

Understood. Thanks for that. My other question was on capital allocation and a fair amount of discussion already around the free cash flow generation of the business and your plans around how much you want to return to shareholders. Could you also touch on the potential for M&A? I know the company has previously articulated several key criteria any deal would need to meet. Any update around the funnel and the likelihood of deals being completed over the near to medium term? Thanks.

Hi, Mark. We still remain active, seeing M&A as a lever for us to expand the earnings power of the company. As we've stated in the past, you know, you can count on Craig and I for a very disciplined approach. And those three criteria as a reminder, you know, we want to leverage our core. So what are we really good at? It needs to make industrial logic. The second is we're looking for near-term accretion to any asset. and then finally, we don't wanna overpay. We wanna value the asset properly. It's these criteria that sets quite a high bar for us, but I would say we've opened our aperture. We're looking inside automotive, we're looking outside automotive. What I'm really pleased about is we're applying the same discipline that we have in our operational business to our M&A side of the business. And sometimes the best decisions are the assets you don't purchase. So I'm pleased with the pipeline, but of course, we will move on something that fits those three criteria. Thank you.

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

Hey, good morning, guys. Thanks for taking the question. Maybe just to come back to the turbine generator, I know a lot's already been discussed, but it's clear that based on your discussions and your presentation that the customer interest has definitely picked up, which obviously makes sense given the environment that we're in. But I'm just curious if you could just maybe provide a little bit more insight into or information into What the dialogue is with those customers? What are they asking you? What do they want to see? Obviously, the power shortfall is very well advertised, but when they're looking at your technology specifically, I'm just curious if you could provide a little bit of insight in terms of what they're asking most frequently. Is it efficiency? Is it durability? If you could just kind of bring us into those conversations a little bit, I think that'd be really helpful. Thank you.

Hi, Andrew. A little bit of color on the TG first, then maybe I can even touch on some of the other products. So, you know, many of the visits we receive at our Arden R&D facility, especially the hyperscalers, you know, these are engineer to engineer discussions. So the customers are focused on, you know, first, are we able to meet the requirements that we've set for ourselves and that they may have? How are we managing the tolerances and the built-in quality and robustness? Uptime is a big topic, of course, for any kind of stationary power. So reliability is important. And then, of course, they want to understand the efficiency and emission profile of these. What's really important to the hyperscalers is a sustainable solution that puts out lower carbon than diesel and other solutions. So these are typically the dialogues that we are having with them, and they're very deep, and we're pouring over drawings and specifications. More recently, we're looking at test results. We're seeing the units perform, including at some third-party sites, which Endeavor organizes those visits. As we look beyond TG, we talk about battery and inverter. For battery, we have a really built-in advantage with this capacity that's installed. So we're not using all that capacity for the CV and eBus market. So we're able to get to market quickly with that because there are some constraints on energy storage in the market. And then on the inverter, it has a lot to do with the technology and the conversion efficiency. This is a big deal because the more efficient that inverter is, the less power they need to drive the data center. I would say the last thing which applies to all three, speed to market is everything right now. And we know that having this automotive mindset where we can stand up manufacturing, leverage our supply base, we can get to market in 18 to 24 months typically, which is about half the time some of the industrial competitors.

That's super helpful. Appreciate that. And maybe just a follow up on energy storage. You know, one of your competitors who reported recently on energy storage, there's a pretty significant kind of about face in terms of what they're thinking on pricing or just the pricing environment that they're seeing within data centers being much more lucrative or higher margin than maybe expected a few months ago. I know you're just, you know, maybe an earlier stage kind of quoting or negotiations there, but can you corroborate that? Are you seeing a more favorable maybe pricing environment on the energy storage side than you maybe anticipated a few months ago?

Yeah, I don't know if we're ready to comment on that. What I would say is, you know, there is very strong demand for energy storage, and we're focused on leveraging the capacity we have. So, you know, I think our team is focused on our first win and making sure we can bring that to the market. We can probably provide you a little bit of color next year as we get into 2027. Got it.

Thanks so much.

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

Hi. Thanks for taking my questions here. So I just wanted to follow up on some of the key bridge items for next year that we should be thinking about on the cost side. Are there specific initiatives that you have in place that could help offset some of these cost pressures and the commodity headwinds that you're seeing? And then the incremental industrial R&D investment that you incurred this year, is that something we should be thinking about continuing going forward? Thanks.

Yeah, Alex, I would say This year is a great example of what BorgWarner can do in a down production environment. We're expanding margins year over year, inclusive of that industrial R&D, and things like supply chain savings, productivity, and our plants are great examples of what the teams have been executing to achieve that result. As we move into next year, we're going to continue to focus on those same things, and our goals remain the same. We'd like to see growth over market in our automotive business, at least modest growth over markets. We'd like to see $300 million in TG revenue and we'd like to see mid-teens conversion and extra growth. So we're really excited to move from a no-growth environment to a growth environment and really see what we can accomplish as a company.

Really helpful. And then my follow-up is just on China. Could you talk through your outlook for the region a bit more? It looks like you took your production outlook down there, but how are you positioned with some of the OEMs that are having higher export volumes and any signs of the China market improving? Thanks.

Yes, I'll take that one. In China, we expect the overall market to be down between 6% and 8% this year, although we do see higher export volumes despite that. So, you know, from our book of business in China, we've been there over 30 years. We have a great mix of customers there. 70% of our China OEM business there, in fact, is with the leading six or seven OEs. and most of them are the export champions. So, you know, we're feeling pretty good about where we're positioned there and including as they start to move to localize in some of these other markets, you talk about Europe, you talk about South America, we're highly engaged with them to support some of their localization efforts. So we see it as a win in the short term and also a win in the long term.

Perfect. That's really helpful. Best of luck going forward. Thank you. Thank you.

We have time for one final question, and that question comes from Rajat Gupta with JP Morgan. Please go ahead.

Great. Thanks for squeezing me in here. Just wanted to follow up from the last question. You know, the recent news around, you know, restricting exports from China on hybrids, you know, a quota system. I'm curious, like, how does that net out for board? You know, presumably, I would, you know, it would seem like it would be a net positive, you know, protecting some of your legacy, European customers and the content there. We're curious to get your thoughts on if that actually plays out, you know, how it would, you know, impact your growth profile in those regions and have a quick follow up.

Hi, Raja. So, you know, our customer diversity is one of our strengths. So, you know, what we tend to see is when one customer loses, another customer wins, and you rarely hear us talk about customer mix on the call for that reason. So, we'll have to see how it plays out, but I don't anticipate this is something we're going to be highlighting in the future.

But if I look at just like content on, you know, your exports from China into Europe versus, you know, just the hybrid content within Europe, you know, is there a material difference there that we should think about, you know, if this turns out to be a more long-term, you know, move to restrict exports?

Yeah, I would say on comparable vehicles, there's no difference.

Understood. And just this quickly on commercial, not a lot of talk about that on the call. You know, we've seen some interferers report, you know, see pretty healthy growth in their commercial business and, you know, kind of offsetting some of the light vehicle industry weakness. Just any update on that would be helpful in any preliminary view on 27, you know, on that end market. Thanks.

Sure. So from a market perspective, you know, there is some growth globally, about 3%. in CV overall. Most labs led out of North America with about 11% growth. Ex-battery business, we do see about mid-single digit sales growth there. It's a little bit too early to comment in 2027, but we'll be able to give you some more color when we get there.

That's it. Great. Thanks for the questions and good luck.

Thank you.

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. With that, Nick, you can go ahead and conclude today's call.

Thank you. This concludes the BorgWarner 2026 Third Quarter Results Conference call. You may now disconnect.