ボルグワーナー（BWA）2026年第3四半期決算説明会：eProduct売上高が33%増加、EPSガイダンスを上方修正

主要なポイント

• ボルグワーナーが発表した2026年第3四半期の売上高は35億ドルをわずかに下回りました。為替変動およびバッテリー事業の影響を除いた既存事業売上高は5,800万ドル（1.6%）減となり、小型車生産台数の減少におおむね沿った推移となりました。
• 小型車向け電動化製品（eProduct）の売上高は、主に欧州での成長を背景に前年同期比33%増の6億3,000万ドルとなりました。
• 調整後営業利益は3億8,100万ドルとなり、調整後営業利益率は20ベーシスポイント拡大して10.9%となりました。調整後EPSは前年同期比12%増加しました。
• 同社は通期の調整後EPS見通しを従来の5.05〜5.30ドルから5.20〜5.35ドルに上方修正する一方、売上高見通しを140億〜142億ドルへと絞り込みました。
• ボルグワーナーは当四半期中、1億7,500万ドルの自社株買いと3,500万ドルの配当を通じて約2億1,000万ドルを株主に還元しました。2026年の株主還元総額は7億ドルを超えると見込んでいます。
• 経営陣は引き続き2027年のタービン発電機による売上高目標を3億ドルとし、自動車部門では市場平均を上回る緩やかな成長を見込んでいますが、収益拡大に関する詳細な論評は2027年初頭まで発表されない見通しです。

主要財務データ

事業および業績の動向

ボルグワーナーは、業界全体の生産減少やバッテリー販売の減速にもかかわらず、コスト削減策が利益率の拡大に貢献したと述べました。為替影響を除くと、売上高が1億1,200万ドル減少したのに対し、調整後営業利益の減少はわずか600万ドルにとどまりました。

同社は、内燃機関、ハイブリッド、電気自動車（BEV）の各アーキテクチャにわたる9件の新規受注を発表しました。これらには、エンジン制御モジュール、可変容量ターボ（VTG）およびウェイストゲートターボチャージャー、中国でのeモーター、ならびに将来のBEVプログラム向け次世代高電圧インバータが含まれます。

ボルグワーナーはまた、中国の有力完成車メーカー（OEM）からアルミ巻線eモーターの初受注を獲得しました。経営陣によると、この技術は従来の銅線モーターと比較して最高トルクと出力を維持しながら、電線の重量を60%以上、電線コストを80%以上削減できるとのことです。

産業用市場においては、ノースカロライナ州におけるタービン発電機の最終組み立て工場の建設が完了しました。製造設備の設置は12月を予定しており、年内には試運転を開始する計画です。サブシステムのUL認証作業はおおむね完了しており、システムの認証作業が現在進められています。

バッテリーエネルギー貯蔵ソリューションは、引き続き2027年の量産準備完了を目指しています。ボルグワーナーは、NMC（ニッケル・マンガン・コバルト）およびLFP（リン酸鉄リチウム）電池の用途全般で顧客との交渉を進めています。マイクログリッドインバータについては、7社の顧客にサンプルを出荷済みで、2027年初頭のUL認証取得を見込んでおり、最初の主要顧客との間で初期の見積もりプロセスを開始しました。

ボルグワーナーはデータセンター内部で使用される800ボルトの電源装置も開発しました。経営陣は、高電圧、水冷パワーエレクトロニクス、および炭化ケイ素（SiC）技術における自動車分野での専門知識が、産業用電力変換製品に活用されていると説明しました。

業績見通し（ガイダンス）

経営陣は、北米におけるインセンティブの欠如や欧州での需要減退を理由に、バッテリー需要の低迷が前年比の売上成長に対して約170ベーシスポイントの逆風になると見込んでいます。

第4四半期について、経営陣は売上高を約34億3,000万ドルと見込んでおり、これは第1〜第3四半期の平均である約35億5,000万ドルを下回る水準です。同社は、売上減少に伴う限界利益率の低下（デクリメンタル・マージン）を10%台半ば、産業用R&D費用を約1,000万ドルと予想しています。

2027年に向けて、経営陣は最近獲得した案件が量産を開始することで、自動車部門が市場平均を上回る緩やかな成長を果たすと予想しています。また、タービン発電機による3億ドルの売上目標も維持していますが、収益軌道の詳細については2027年初頭に提供するとしています。

リスクおよび注視事項

• 経営陣は、2027年の需要を評価するにあたり、金利上昇や車両の購買力（アフォーダビリティ）低下を業界の逆風と捉えています。
• バッテリーの販売は、北米におけるインセンティブの不足や欧州での需要伸び悩みにより、引き続き圧力を受けています。
• ボルグワーナーは電子部品コストにおけるインフレ上昇に直面していますが、経営陣は2026年への影響を自社の収益管理フレームワーク内で制御できると見込んでいます。
• 現在の政治情勢が、一部のデータセンター関連プログラムの契約締結を遅らせている可能性があります。経営陣はこれを短期的問題である可能性が高いとし、長期的需要に変化はないと述べています。
• 同社は2026年の中国の小型車生産台数が6%〜8%減少すると予想していますが、中国の有力完成車メーカーによる輸出拡大によって一部相殺されるとみています。
• 産業分野での事業拡大は、認証の獲得、顧客による検証、量産立ち上げ、および現在展開中の見積もり交渉の正式受注への結実にかかっています。

アナリスト質疑応答の要点

産業分野における売上高の見通し：経営陣は、タービン発電機の受注残および見積もり活動は依然として好調であり、複数のハイパースケーラーとの交渉が進んでいると述べました。ただし、2027年の目標として挙げた3億ドルを超えた後の収益曲線について語るには、時期尚早であるとしています。

データセンターにおける事業機会：顧客との議論は、信頼性、稼働時間、効率性、排出量、市場投入スピードに焦点を当てています。ボルグワーナーは、同社の自動車製造およびサプライヤーとしての機能を活用することで、開発期間を一部の産業用競合他社が必要とする期間の約半分にあたる約18〜24ヶ月に短縮できると考えています。

パワートレインのポートフォリオ：経営陣は、自社のポートフォリオが内燃機関、ハイブリッド、電気自動車の各アーキテクチャにおいてレジリエンス（適応力）を備えていると説明しました。欧州の電動化が足元のeProductの成長を牽引したほか、最近のeモーターの受注獲得により、中国市場での同社のポジションが強化されました。

中国市場への露出（エクスポージャー）：ボルグワーナーの中国における完成車メーカー（OEM）ビジネスの約70%は大手6〜7社との取引であり、その多くは主要な輸出企業です。同社はまた、欧州や南米におけるこれらメーカーの現地化への取り組みも支援しています。

資本配分：ボルグワーナーの総レバレッジ目標は2.0倍ですが、現在は1.5倍となっています。同社は、2026年に見込まれるフリーキャッシュフローの約70%を自社株買いや配当を通じて株主に還元する予定であり、規律あるM&Aの機会も引き続き模索しています。

産業分野の利益率：経営陣は、マイクログリッドインバータの初期投入年における利益率（コンバージョン率）がタービン発電機と同様に10%台半ばになると見込んでおり、生産規模の拡大やサプライチェーンの効率化に伴い、さらなる改善の余地があるとしています。

決算説明会トランスクリプト全文

決算説明会の完全なトランスクリプト

経営陣による説明

Operator

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. [Operator Instructions]

I would now like to turn the conference over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Patrick Nolan

Thank you, Nick. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on our home page and our Investor Relations home page. With regard to our Investor Relations calendar, we will be attending multiple investor conferences between now and our next earnings release. Please see the Events section of our Investor Relations home page 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 noncomparable 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 weighted for our geographic exposure. Please note that we have posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion.

With that, I'm happy to turn the call over to Joe.

Joseph Fadool

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 5. I want to begin by thanking our employees, customers and suppliers for all of their trust and efforts and continued support. In the quarter, we achieved sales of just under $3.5 billion. Excluding the decline in our Battery Energy Systems 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 eProduct 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 9 new business awards across our foundational and eProducts portfolios. These wins represent only a portion of the awards secured during the quarter and highlight the strength of our foundational and eProduct 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 floating 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 9 product awards that demonstrate both the competitiveness of our technology and our ability to support our customers' powertrain needs in key markets. First, BorgWarner 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 business awards with a global powertrain technology leader, including one contract for our variable turbine geometry turbocharger and two contracts for our waste turbocharger. The technologies will be used on a 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, BorgWarner has secured its first business award for its new aluminum wire eMotor 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 our auxiliary drive applications. The technology combines aluminum conductors, with BorgWarner's hairpin winding expertise to deliver significant weight and cost benefits.

Compared with a conventional copper wire motor, the aluminum wire solution maintains peak torque and peak power while reducing wire weight by more than 60% and reducing wire costs by more than 80%. We are proud to introduce BorgWarner's aluminum wire eMotor technology to the market and to further strengthen our long-standing relationship with this customer.

Next, BorgWarner has secured three eMotor business awards in China for a range of electrified and hybrid vehicle programs, the new business broadens the company's customer base and expand the application of its eMotor 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, BorgWarner 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 BorgWarner's position as a leading provider of advanced power electronic solutions for electric vehicles. I believe this business reflects the confidence customers place in BorgWarner's power electronics expertise and our ability to deliver innovative, high-performance electrification solutions.

Next, on Slide 7, I would like to discuss how we are improving our product readiness and accelerating our floating 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 installations 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 UO 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 and further offerings. We have now shipped BorgWarner 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 microgrid inverter. 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, BorgWarner's third quarter results were strong. Our light vehicle eProduct 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 9 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. At the same time, we saw accelerating folding 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 share repurchases. 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.

Craig Aaron

Thank you, Joe, and good morning, everyone. I'm excited to share the details of our third quarter financials by turning to Slide 8 for a look at our year-over-year sales book. 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 that 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 eProduct 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.

Turning to 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 or 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 $0.15 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 4 quarters. And finally, we generated free cash flow of $195 million in the third quarter, which helped 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 narrow 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 billion to $14.2 billion compared with our previous guidance of 14.0 billion to 14.3 billion. Starting with foreign currencies, our guidance now assumes an expected full year sales benefit of $250 million compared with 2025 due to the strengthening of the euro and the renminbi versus the U.S. dollar. This benefit is modestly higher than our previous guidance. We expect our weighted end market 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 comprise over 80% of our sales performed broadly in line with our weighted light vehicle market, consistent with our performance through the first 3 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 margins. 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 million to $15 million industrial R&D investment to support our long-term profitable growth.

I believe this performance shows our commitment to drive a 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 outlook.

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 eProduct sales were $630 million in the quarter or a 33% increase compared with a year ago. We achieved a 20 basis point 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 Board Warner team's ability to deliver strong financial results and a declining production environment. As we look 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 million to $15 million investments 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 reward shareholders [indiscernible] 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 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.

Patrick Nolan

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

Operator

[Operator Instructions] The first question will come from Chris McNally with Evercore.

質疑応答

Chris McNally

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 use 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 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 have more clarity of sort of the shape of that travel, the $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 6 months? Or is that too hard to say at this point because there are so many moving pieces?

Joseph Fadool

Yes. Chris, this is Joe. So 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, our hiring to support the start of 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.

Chris McNally

Okay. Perfect. And my follow-up is basically around the sort of the second derivative of your customers was in power gen. Any comments if you're seeing any issues from your data center partners around any of the sort of industry timing permitting delays that we're kind of 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?

Joseph Fadool

Yes. So as we stated, the quoting activity is very strong. We generally see some of the current political environment is possibly slowing the finalization of some of the program awards or program agreements. But overall, the activity is there and the work up on these final agreements remains really high. So we see this as probably a very short-term issue. We're looking beyond them in terms. Long term, we don't see any change in the demand.

Operator

The next question will come from Dan Levy with Barclays.

Dan Levy

Maybe we can 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. So guidance this year and then just on the launch of the backlog next year.

Joseph Fadool

Yes. 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. From a margin perspective, we expect to decrement in the mid-teens on the 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 or things that we're watching. With that said, our goals for BorgWarner remain the same. 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 2 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 BorgWarner.

Dan Levy

Great. My second question is on the microgrid inverter where I think you've put out a couple of updates here on your 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 multiyear 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 even how much of the silicon carbide is sort of an unlock of that if at all?

Joseph Fadool

So -- great question. We're first of all, really excited about the fast progress our team is making on the 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, as a reminder, we use both silicon and silicon carbide technology. And some of the more advanced EVs are using 800 fold as, 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 inverter. 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 operating, power gen, 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 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 of silicon and silicon carbide.

Operator

The next question will come from Joseph Spak with UBS.

Joseph Spak

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 used to really talk about how you've immunize 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 product growth in Europe this quarter, but then you also sort of mentioned some foundational product clients in China. So I guess maybe you can just sort of refresh us your thinking about how you see that balance between foundational and eProduct mix impacting BorgWarner's auto business over the coming years? And maybe if you even could talk about it by Europe versus China?

Joseph Fadool

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 eProduct business. Really pleased with the 33% increase year-over-year in eProduct 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 P&L. A couple of other good examples.

You've probably noticed a lot of eMotor awards over the last 12 months, including some of the new technology like aluminum wire wound motors. This is just clear evidence that BorgWarner is a leader in this space. Many of those are in China where the music has been playing for quite some time on both hybrids and EVs. So 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 heat product sales side.

Joseph Spak

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

Joseph Fadool

That's true. Not only the portfolio. Just as a reminder, we have probably the most adverse 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 borer technology riding along. So -- yes, we think we're in a great position to capitalize on the growth as it comes.

Joseph Spak

Okay. On the power gen side, I know you mentioned sort of multiple hyperscale engagements. And then to the earlier question, you sort of talked about some maybe like near-term noise on some of some of the policulization, if you will. There's also sort of been industry noise around Neo clouds 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 classify the hyperscaler engagement?

Joseph Fadool

Yes. I wouldn't say we see any specific challenge with some of the issues that we hear around the Neo cloud players. I mean as many people know, the Neo clouds are strictly focused AI data centers versus 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 Neo 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.

Operator

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

Emmanuel Rosner

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 3 quarters of the year rate at 15% decremental but then there's also $10 million in higher R&D. Now -- in recent 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 particular about the investments needed and in the fourth quarter that sort of like make you call it out?

Craig Aaron

No, nothing is changing. So 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. We -- due to recoveries in Q4 were 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, call it 4-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 million 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 of the incremental R&D.

Emmanuel Rosner

Okay. Understood. And then turning to some of your non-auto 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 business. It feels like for the other 2 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.

Joseph Fadool

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 great 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 few awards.

Operator

The next question will come from Tom Narayan with RBC.

Gautam Narayan

I note 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 fair? And then I have a follow-up.

Joseph Fadool

So the -- if I go back a little bit, we do have a signed agreement with Endeavor. They are 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 on-site visits from the hyperscalers, and that continues. So we're really, I would say, encouraged by the continued support here. So from our standpoint, we're probably more bullish now than we were 3 months ago because we're making progress against our plan. But as we stated, we'll be able to give you a little more color as we get into early next year.

Gautam Narayan

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. that's picking up a lot of growth there. And then if I could just sneak in, how you think about debt paydown versus tax and you guys did a big pay down in Q3 and your gross leverage around 2x? Just curious what your target leverage is, how you think about the step feed-out.

Joseph Fadool

Sure. I can take the hybrid question. So the immediate hybrid growth you see in the market, mainly from the Japanese players, where BorgWarner 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.

Craig Aaron

Okay. 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 2.0x. Right now, we're at 1.5x. But when you think about the debt tender, it was EPS accretive, 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 when you take a big step back, we're excited about $1 billion of free 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.

Operator

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

James Picariello

just focus on the Power Drive segment. The EBIT loss was only $5 million very strong growth, which was called out already. But did the quarter have any onetime recovery benefit at all? Or are we getting close to a breakeven run rate here at $700 million plus in quarterly sales? Because I assume the $5 million of additional R&D commitment at the Power Drive segment as well, you confirm?

Joseph Fadool

Yes. Thanks, 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 eProducts growth, again, primarily in Europe, it was 32%. So outstanding growth. We were able to capitalize that, convert at an incremental conversion of about $0.24 from 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 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, continue to capitalize on that. Our objective for that business unit remains the same, convert in the mid-teens on a year-over-year basis, and we're on track to do that this year.

James Picariello

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 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 cover all three product categories that you're trying to enter. So -- just curious if you have -- I'm just wondering if you have any thoughts to share on what the implications and timing might look like for that

Joseph Fadool

Yes, 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. 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. We're going to produce these electronics in the U.S. But besides the FIA 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 7 customers.

I'll let Craig answer the margin profile.

Craig Aaron

Yes. 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 TG 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 get we gain supply chain savings and higher OE coming off our lines. So I would expect the same thing as we get to year 1 launch in microgrid. But we believe that there's upside potential as we move forward up from that 18 incremental base.

Operator

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

Mark Delaney

The input cost environment has been very challenging for several companies in the automotive industry so far this quarter. Recognize the good margins that BorgWarner was able to put up and guide to 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 2027, 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 to deal with that next year?

Joseph Fadool

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 both higher cost we're going to manage them just like we have in the past, whether it's been previous inflation area environment, tariffs, et cetera. We're not going to get caught in between our suppliers and our customers, and we'll manage it appropriately. But right now, we are seeing a bit higher inflation cost on the electronics side of our business.

Mark Delaney

Understood. 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 we need to meet? Any update around the funnel and the likelihood of deals being completed over the near to medium term?

Joseph Fadool

Mark, we still remain active. Seen M&A as a lever for us to expand the earnings power of the company. As we've stated in the past, you can count on Craig and I for a very disciplined approach. And those three criteria of a reminder, we want to leverage our core. So what are we really good at? I need to make industrial logic. The second is we're looking for near-term accretion to any asset. And then finally, we don't want to overpay. We want to bag 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.

Operator

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

Andrew Percoco

Maybe just to come back to the turbine generator, I know a lot has 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? Like what are they asking you? What do they want to see? Obviously, like 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 their 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 would be really helpful.

Joseph Fadool

Andrew, a little bit of color on the TG first, and maybe I can even touch on some of the other eProducts. So many of the visits we received at our Arden R&D facility, especially the hyperscalers, these are engineered discussions. So the customers are focused on, 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 a mission profile of these. What's really important to hyperscalers is a sustainable solution that is a lower carbon diesel and other solutions. So these are typically the dialogues that we are having with them, and they're very deep and reporting overdrawing specifications. More recently, we're looking at test results. We're seeing the units perform, including some third-party sites, which endeavor organizes those visits.

As we look beyond TG, when we talk about battery and further. For battery, we have 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 very 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 of some of the industrial competitors.

Andrew Percoco

That's super helpful. I appreciate that. And maybe just a follow-up on energy storage. One of your competitors who reported recently on energy storage, there was 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 a much more lucrative or higher margin than maybe expected a few months ago. I know you're just maybe an earlier stage kind of quoting or negotiations there. But when you corroborate that? Like are you seeing a more favorable maybe pricing environment on the energy storage side than you maybe anticipated a few months ago?

Joseph Fadool

Yes. I don't know if Craig to comment on that. What I would say is there is very strong demand for energy storage and we're focused on leveraging the capacity we have. So 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.

Operator

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

Alexander Perry

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?

Joseph Fadool

Yes, 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 in 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 goal will remain the same. We'd like to see growth over market in our automotive business, at least modest growth over market we'd like to see $300 million in PC revenue, and we'd like to see mid-teens conversion at 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.

Alexander Perry

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?

Craig Aaron

Yes. So 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 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 6 or 7 OEs, and most of them are the export champions. So we're feeling pretty good about where we're positioned there. And including as they start to move to localized in some of these other markets, you talk about Europe, you're talking 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 win in the long term.

Operator

We have time for one final question, and that question comes from Rajat Gupta with JPMorgan.

Rajat Gupta

Just wanted to follow up from the last question. The recent news around restricting exports from China on hybrids system. I'm curious like how does that net out for board? Presumably, I would -- if it seemed like it would be a net positive, detecting some of our legacy European customers on the content there. But curious to get your thoughts on if that actually plays out, how it would impact your growth profile in those regions? And I have a quick follow-up.

Joseph Fadool

Rajat, so our customer diversity is one of our strengths. So what we tend to see is when one customer loses another customer wins and you really hear us talk about customer mix. I'm going to 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.

Rajat Gupta

If I look at just like content on your exports from China to Europe versus just a hybrid content within Europe. Is there a material difference there that we should think about if this turns out to be a more long-term move to restrict exports?

Joseph Fadool

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

Rajat Gupta

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

Joseph Fadool

Sure. So from a market perspective, there is some growth globally, about 3% in EV overall. Most of that is plan 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.

Patrick Nolan

With that, I'd like to thank you all for your questions today. They follows, feel free to reach out to me or my team. With that, Nick, you can go ahead and conclude today's call.

Operator

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