BORGWARNER INC Q3 FY2024 earnings call

• Q3 organic sales were over $3.4 billion, down ~5% year-over-year but modestly outperforming a 6% market decline. Year-to-date, outgrew market by ~270 basis points.
• Adjusted operating margin was 10.1%, 50 basis points higher than last year. Earnings per share were $1.09, $0.11 higher than prior year.
• Secured new foundational and eProduct business awards, including transfer case extensions for a North American OEM, high-voltage coolant heater wins in Asia, and turbochargers for GM's Corvette ZR1.
• Business units aligned with externally reported segments, with Turbos/Thermal and Drivetrain/Morse each ~40% of net sales, and Power Drive Systems ~20%. Regional and customer diversity with each region and major customer groups contributing comparably to net sales.

BorgWarner's net sales breakdown after business unit realignment effective July 1 shows that the Turbos and Thermal Technologies segment and Drivetrain and Morse Systems segment each represent approximately 40% of net sales. These segments generate most sales from foundational products and hold top positions in their market segments. The remaining 20% of net sales comes from the Power Drive Systems business unit (eProducts for hybrid and battery electric vehicles). Regionally, Americas, Europe, and Asia Rest of the World each account for approximately a third of net sales. Sales to Chinese local OEMs, German OEMs in Europe, and North American sales to the Detroit 3 are each comparable, highlighting the company's sales resiliency and diversification across products, customers, and regions.

• Projected 2024 total sales in range of $14.0 billion to $14.2 billion, a reduction from prior guidance due to lower market production and eProduct sales.
• Increased full year margin outlook to 9.8% to 10.0% from 9.6% to 9.8% prior, driven by year-to-date performance and Power Drive Systems restructuring.
• Full year adjusted EPS expected in range of $4.15 to $4.30 per diluted share.
• Expected full year free cash flow in range of $475 million to $575 million, with nearly all deployed to shareholders through buybacks and dividends.

• Potential for OEM program cancellations or delays in EV-related products, which could impact volume expectations.
• Adverse market production changes that could affect sales and margin performance.
• Dependence on key customers and regions, where any significant downturn could impact results.

Q: How should we think about margins from here and potential to beat 2027 target?

A: Craig Aaron mentioned focusing on operational performance, with fourth quarter expected to deliver midpoint guidance around 9.6% margin. Frédéric Lissalde noted focus on 2024 and controlling incremental/decremental, with plans to comment on 2025 later.

Q: Decompose margin swing in 3Q?

A: Craig Aaron said $24 million benefit from ePropulsion volume-related customer recoveries was a one-time item, with ongoing restructuring benefits from Power Drive Systems restructuring announced in July.

Q: Status of battery business build-out and margin profile?

A: Craig Aaron stated battery business revenue in the quarter was ~$200 million, continuing to scale and expected to reach breakeven and above as it scales. Frédéric Lissalde mentioned capacity in North America and Europe is aligned with demand.

Q: Free cash flow deployment and future paradigm?

A: Craig Aaron said $525 million midpoint free cash flow expected to be deployed to shareholders, with plans to comment on 2025 in February.

Q: Impact of OEM EV program cancellations on future recoveries?

A: Frédéric Lissalde stated each case is specific, focusing on modular design and flexibility to manage business depending on market changes.

Q: Hybrid pipeline and regulatory backdrop?

A: Frédéric Lissalde said combustion portfolio is fungible into hybrid powertrains, with eProduct components like inverters and P4 systems applicable to both hybrid and BEV.

Q: Incremental cost controls and productivity?

A: Craig Aaron mentioned focus on cost controls across the business, including restructuring actions, savings, and supply chain productivity, with continued focus in 2025.

Q: Market outlook and growth over market?

A: Frédéric Lissalde said market expected to be down 3% to 3.5% year-over-year, with BorgWarner expecting to outgrow markets through resilient portfolio across propulsion architectures.

Q: Cost actions and structural reductions?

A: Craig Aaron mentioned $20 million to $30 million in Power Drive Systems restructuring in 2024, with target of $100 million by 2026, focusing on growing over market and generating cash.

Q: Competitive advantages and operating leverage in commercial vehicle battery business?

A: Frédéric Lissalde highlighted focus on commercial vehicle trucks and buses, agnostic sales form, capacity in U.S. and Europe, and involvement in software, cybersecurity, pack assembly, and testing. Craig Aaron noted strong incremental performance and focus on mid-teens growth for the battery business.