BorgWarner Q1 2024 Earnings Call Transcript

Oh, great. Thanks for taking my questions. You started off very strong here, I think, something like 8% growth over market in Q1. Your margins seem to be in the midpoint of your full year guidance. But the guide for the year is -- has implied sort of growth over market, but actually moderate a bit and maybe at the midpoint, margins wouldn't change. Anything sort of onetime in nature we should be thinking about in Q1 that kind of boosted results? And then any reasons we should be thinking about things moderating a bit as we go through the rest of the year?

Okay. That sounds good. Slide eight was pretty helpful. Maybe if you could talk a little about your plug-in -- PHEV opportunity. The content there, how much of your sales today are there? And have you seen any change yet, I guess, quite early on interest in that given the EPA rules seem to be more favorable towards PHEV?

Got it. And have you seen any interest in PHEV improve? Or is it still just too early?

Makes sense. Thanks for taking my question.

I just wanted to follow up on that question that Colin asked on hybrids. Is there any increase in schedules that you're seeing for hybrids at the moment? I know you said -- you mentioned 40% of the eProducts is -- the $1.9 billion is on the hybrid side, and you're not seeing any new activity necessarily, but is there any step-up in schedules for hybrids at the moment that you're seeing that might provide some upside there?

Okay. And then a second question. There's a -- I mean you debate whether it's stalling, whether it's short term, whether it's long term on EVs. But the reality is some of your customers, particularly in China and Europe are heading in that direction, maybe less so in the U.S. than we may have thought. I'm just curious, as you think about your investment, whether it be on the R&D side or the capital invested side, do you have the ability to pull back and maybe spend at a slightly more measured pace, or is it just because there's such a push in China and Europe that you can't pull back and there's nothing you can really -- you do here other than service your clients as best you can and try to cut costs to keep it down as much as possible. And maybe you could comment on really what you might think about doing on the R&D side and then also sort of on the capex or capacity add side?

And on the capacity side, is there any way to potentially be a little bit more capital efficient? Or is that possible? And I would certainly box you into a powertrain tech company across the board. That's where I'd box you, Fred. Didn't mean to put you in one direction or the other.

Great. Thank you very much

Maybe in the quarter, you could just break out what was the split of revenue between eProducts and foundational? And then foundational, I assume, is still putting up pretty solid growth of the market. Maybe you could just talk about some of the dynamics driving that, please?

Yes. Within the growth over market, do you have a sense of what the growth of the market was for foundational and what regions or products were driving that?

And the outgrowth within foundational was -- any sense on where that was?

Great. Okay, and then a second question on margins. And I know you've noted that you're aiming for mid- to high teens incrementals across the business. But maybe if you could just give us a sense of within some of the foundational product, is it possible that we actually are seeing higher incremental margin simply because there's less R&D that you've incurred, less application engineering, more that you are leveraging, getting a sense whether there is some split in that contribution margin between eProduct versus foundational.

Okay. Thank you.

Craig, after the dividend and the repurchases you've done year-to-date, kind of leads me around $250 million, $300 million in deployable free cash flow based off of the guide for the year. And I think we would certainly say that shares are trading below intrinsic value. So how are you thinking about the pace of buybacks for the rest of the year? Is this going to be more ratable? Or are you remaining opportunistic?

Okay. Helpful. And then good to get the housekeeping on eProduct sales in the first quarter. Just can you give us some guideposts, even getting to the midpoint of guide for the year around how you're thinking about the cadence of ramp? I know you have some capacity coming online for battery. But is this a fairly ratable ramp? Is it really heavily weighted to 3Q or 4Q, any particular quarter? Can you just help us think through how the ramp should proceed over the course of the year?

Thanks very much for taking the questions.

Fred, I know you sort of already touched on plug-ins a little bit in the Q&A. In your comments, you also sort of talked about turbos and other sort of core BorgWarner technology that can help with what's seemingly an increasingly choppy powertrain transition. But presumably, your customers would need to do at least some engineering, and it's going to take time to sort of have a greater adoption. So what are -- what's the conversations like with customers on some of the traditional sort of core foundational products? And how quickly can we really see potentially greater levels of adoption there?

Yes, yes, yes.

Okay. And Craig, obviously, great job sort of managing to the incrementals. You talked about continuing to manage to that. And I think in the past, you talked about on the foundational side, right, if things continue to go down, you'd look to restructuring or some pricing actions. But I'm curious on the other side, just given not what's a still mid- to long-term sort of trajectory towards electrification, but certainly, a lot of volatility on the programs within that. Is there an opportunity -- not this year because it's probably locked, but is there an opportunity as you think about eR&D for next year to maybe push some of that? Or is there even a pricing opportunity on some of the eProducts stuff if the volumes don't hit certain thresholds?

One follow-up on the decrementals, I guess, in -- well, I guess the battery stuff is not in eProducts. So never mind. Yeah. Thank you.

Just a quick one here and then one follow-up. Can you maybe tell us the percentage of your orders from those Chinese domestics? And how that compares to the percentage of anticipated recognized revenue from that same group for 2024?

Correct, yes.

Okay. Great. And then just on a more granular note, can you maybe quantify the exposure you have to some of those newer growers in China, the BYDs, Xpengs, Xiaomis of the world?

Thank you very much

Great. So first, maybe following on that question from China. I'm interested in, I guess, hearing your opinion regarding the degree to which China, that market can serve as maybe foreshadowing or a harbinger of the way the rest of the world will evolve. Obviously, China has been moving much more quickly toward electrification. There's a lot of dynamism regarding the architectures that those new companies are pursuing. Do you think that China represents the way the rest of the world will eventually evolve? Or do you see those markets sort of trending in different directions with China doing its own thing and the rest of the world doing their own thing?

Okay. Yes. Good. Very clear. Maybe the other question, more of a near-term tactical question, on another call this morning, one of your peers noted particularly over the last couple of weeks or several weeks in the month of April, some real volatility and generally downward adjustments to production schedules at the OEMs. Have you seen anything similar to that? I know that your overall market projections haven't changed versus last quarter, but anything you'd be willing to say regarding near term or back-half production schedules would be helpful.

Great. Thanks guys

Just back to the eProduct, based on the first quarter's performance and the visibility into the year. Can you just speak to AKASOL's Battery Systems revenue? I believe this business guidance, called for $700 million to $800 million in revenue. Just curious if there are any moving pieces tied to this within the eProduct range? And can you clarify what portion of this year's eProducts sales attributes to hybrid?

That's helpful. And then just as we think about foundational profitability versus eProduct the rest of the year, and I think this touches on Colin's question regarding margin cadence given that the first quarter was squarely in line with your full year range. As your eProducts revenue improves sequentially through the remainder of the year, is it safe to assume that the margin loss rate also improves? And so my question, if that's true. My question is, why would the foundational profitability degrade through the year if the full year guidance range is the right number, if that makes sense?

First, looking at the segments. Just hoping you can maybe unpack the top line strength that you saw year-over-year in Drivetrain and Battery Systems? This quarter sounded like that was foundation related in large part, maybe just sustainability of that strength in the margin, they've stepped up nicely sequentially, especially as well. I don't know if there's anything specific to point to.

Got it. And then for my follow-up, maybe a bigger picture question, Fred. And just thinking about eProduct net engineering requirements going forward, both as you think about on a gross basis and ePropulsion margins going forward here now you can improve those margins. But I'm also wondering, just given some increases in uncertainty in the West, if you can push for more engineering recoveries as you book business or building structures to pay for more of that engineering?

I think that a part of BorgWarner's customer value proposition for eProducts has been that utilizing BorgWarner's power electronics products can be a more efficient way for OEMs to do business. I'm curious if you think that played a role in some of the wins you were able to announce today. And given the challenges that a lot of the OEMs are dealing with in BEVs and a lot of the price competition, might that be an opportunity for your bookings to outperform some of the broader market trends if some of these customers do need to find ways to be more efficient?

And on eProducts, the company reiterated the $2.5 billion to $2.8 billion eProducts revenue outlook for this year. Of course, we've seen a lot of volatility in light vehicle BEV plans. And so as we've seen that, I'm hoping to better understand, do you think that the 2025 outlook that you've previously communicated in eProducts of $4.5 billion to $5 billion. Is that something you still see as achievable? And as you think about the revenue ramp and what -- maybe for 2025, maybe you could also touch on how you're thinking about eProducts profitability not only this year but into 2025?