BORGWARNER INC Q4 FY2024 earnings call

• BorgWarner delivered strong 2024 results with adjusted operating margin above 10% and free cash flow of $729 million.
• Secured multiple new product awards for both foundational and e-products, demonstrating product leadership.
• Strong product portfolio resilient to propulsion mix changes, strong market share positions, financial strength, long-term customer relationships, and decentralized operating model are key drivers of value.
• Strategic focus areas for 2025 include outgrowing industry production, building upon product portfolio through organic and inorganic investments, and driving enhanced financial performance.

In 2024, BorgWarner delivered approximately $14 billion in sales, relatively flat versus 2023. The industry production for the full year was down approximately 3%. The adjusted operating margin was strong, coming in above 10% for the full year and 10.2% in the fourth quarter. Full-year adjusted earnings per share grew by 15%, and free cash flow was $729 million. For the fourth quarter, sales were just over $3.4 billion, down approximately 2% versus the prior year excluding FX and M&A. Market production in the quarter was down approximately 4%, but BorgWarner saw sales outgrowth of approximately 220 basis points. The adjusted operating margin in the quarter was 10.2%, driven by solid operational performance, cost controls, and restructuring actions.

• Projected 2025 total sales in the range of $13.4 billion to $14 billion.
• Expected full-year adjusted operating margin in the range of 10.0% to 10.2%.
• Anticipated adjusted EPS in the range of $4.05 to $4.40 per diluted share.
• Full-year free cash flow expected to be in the range of $650 million to $750 million.
• Expected to outperform market production by 100 to 300 basis points despite headwinds from battery cell prices and BEV program delays.

• Industry volume headwinds due to potential tariffs and market fluctuations.
• Delay of BEV adoption in parts of the Western world impacting certain business units.
• Impact of battery cell price declines affecting revenue and margins.

Q: Good morning, everybody, and Fred, congratulations. Look forward to visiting you in Burgundy. It'd be a lot of fun, hopefully. And, Joe, I apologize. You're gonna have to deal with us now. But thank you. First question, the portfolio that is well balanced almost in whichever direction powertrains go seems like a very good way to be positioned, and you're set there. Just curious as you look at sort of the short-term swings that we're seeing in programs, stuff like Ford canceling the three-row EV last year, when those shifts happen very quickly, how well do you think the portfolio is hedged? And do you think you pick up those lost sales with something like the Explorer, the ICE version, or something like that? How quickly did that get balanced out? And maybe sort of, with that, is that one of the key drivers of why we're seeing this $100 million variance in inorganic sales, or what else is driving that $600 million organic variance?

A: Yes. Hi, John. So you look at the RFQs outside of China, they have been slowing a little bit, and we've seen some delays or cancellations. On the other side, we see more RFQs for foundational products, and those usually result in higher volumes of our existing products we're serving a customer with, or it might be extensions because they've delayed an EV truck or SUV. So we're in a great position to take advantage of that and also be ready when they launch those new programs on EVs in the markets.

Q: Okay. And that $100 million organic variance in the 2025 outlook, is that being driven by deltas in volume or program shifts? What's the key driver of that variance?

A: So for the outlook, or let's say the 2024 results, as you know, we outgrew those markets in that 2% to 3% range. As we look forward, we continue to expect that outgrowth as Craig had mentioned, in 2025.

Q: Okay. And then just maybe one quick follow-up, if you could just remind us what your China exposure is right now with domestics versus international players and where you think that's gonna land in 2025 and how much it may shift towards the domestics in the next few years?

A: Specifically in China?

Q: In China specifically, yes.

A: Yes. So as you know, China is about 20% of our global sales. And in China, 75% of our total sales are with the Chinese OEMs. So we're very well positioned with them as they grow in their domestic market and in support of their strong export. One other thing I mentioned, 90% of that business is on NEV with those domestic OEMs. So we're in a great position.

Q: Oh, great. Thanks for taking my questions and congrats, Fred, on your retirement. It's been a pretty impressive pivot to e-powertrains under your leadership. On e-powertrains, any color on how e-products should perform this year? I noticed the battery side was a bit weaker sequentially, and I think there's some slowing in North America you've indicated. Should we start seeing help? I know Europe with regulations, there should be a light vehicle bounce there. Likely some increase in the US. Does that start showing up in maybe the second half? Or how should we think about that?

A: So Colin, we are growing year over year in the e-product business. It is softened a little bit mainly due to the battery business, which you referenced. The way we, I guess, you want to think about it is we are flat year over year in battery sales. When it comes to units, the revenue was down a little bit mainly due to cell pricing, which is bringing the overall revenue down. But overall, it's, you know, greater than a $600 million business. We really like that Akasol business we bought, and it's ahead of where we purchased it despite a lot of the turmoil and despite the lower cell pricing.

Q: Hi. Thanks for taking my question. Just curious, with regard to the products that you manufacture and the extent to which they are installed on products in Mexico versus, you know, brought across the US border. And then what any preliminary conversations with automakers might look like in terms of the pass-through of any potential tariff costs. Thank you.

A: Yeah. Ryan, let me take that one. So I'll start by saying we generally produce in the same regions as our customers produce. But when we look at 2024, and the amount of imported material and value to the US, it was about $875 million. When you break that down, about half of it originated in Mexico, 10% of it originated in Canada, and 5% originated in China. Ultimately, there's a lot of news going on right now. We're going to continue to watch that. But ultimately, if there's an impact to BorgWarner, we're going to need to find a way to share that with our customers and our suppliers. That's how we're thinking about it.

Q: Good morning. Thanks for taking the questions and my congratulations. Maybe starting with the outgrowth, hoping you could just help us understand at least directionally what that assumes for e-products and PowerDrive. I guess I'm looking specifically in Europe where you had a big launch here in 2024 and in China relative to what are, of course, continued tailwinds around NEV adoption overall? And I guess any offsets we should be thinking beyond what you've already mentioned in any distinct book of business in either Geo as well? Thank you.

A: Yeah. Hi, Luke. So we see EV adoption increasing year over year in all the markets. When we think about our segments, one of the things we did last July, as you recall, we organized into four operating segments to give better transparency in how each of those businesses are performing. So we think that's going to be a good indicator of how the businesses are performing in terms of outgrowth.

Q: Thanks. And, Fred, again, my congrats as well. Enjoy. Just maybe one on the guidance, just a little bit more color. I just want to understand, like, that is what you're saying that, you know, that North America weighted down 3% to 4%. I think if we look at some third parties, it's closer to down 2%. Is that delta sort of the, you know, I guess, conservatism you're sort of putting in for maybe some disruption as to what could happen if tariffs come in? I just want to be clear on that. And then I don't think I heard, I turned a little bit late, I don't think I heard sort of any, you know, e-products overall. I know you have the new segments, but any sort of e-products sort of expectations for this year? Is there any color you can provide there just so we could sort of, you know, track, I guess, performance relative to some of the underlying market dynamics?

A: Yeah. So starting with some color on the market, we formulate our industry forecast internally. And directionally for the last few years, we've been fairly accurate. You know, when we think about the global markets, maybe we can break it down a little bit. So that minus 1% to minus 3%, starting with North America, down 3% to 4%. As you know, there's a lot of inventory in the system. We've also baked in a little bit of headwinds pending tariffs that may come. In Europe, 4% to 6% down due to signs of both the backlog and economic headwinds that they're seeing. China is a brighter spot. They're flat to down 1%. So that's a little bit of color on your first question. Yeah. I'll jump in with sales. So I reported 2024 sales a little over $2.3 billion for e-products. As we move forward, you'll see disclosure in our 10-Qs breaking out e-products from foundational. And so you'll see that as we move forward.

Q: Thank you for taking the questions and congrats, Fred. I wanted to ask about eRev. You've obviously had quite a bit of success in China with that. How are those conversations going in the US and Europe? And do you think the volumes there could, you know, in three or four years, be similar?

A: So we have seen some success on eRevs in China, as you mentioned. I would say the other regions are starting to look at eRevs as a way to, especially in the truck market, meet all the requirements for our customers, but also provide, you know, better overall fuel economy and emission reduction. So we don't see it in big volumes just yet, but we do see it as an emerging option architecture for the customers to meet their emission requirements.

Q: Thank you. My first question is on the CapEx outlook. Can you provide a little more context around the lower CapEx budget and to what extent this extra free cash flow would go, you know, towards buybacks versus something else?

A: Yes. So let me address CapEx. When you go back a few years, our CapEx was in kind of the mid-5s as a percent of sales, 5.5%, 5.4%. We saw this year come down to below 5%. Our guidance as we look at it this year is maintaining that around the high 4s, low 5s as a percentage of sales. So that's how you should think about it. From a buyback perspective, we have not announced any specific plans. So I wanted to address that a little bit. You know, when we step back and think about buybacks as a company, we've deployed a lot of cash to shareholders, about $3.4 billion since 2020. So we've deployed a lot of cash to our shareholders. I want to step back and talk about our goal. Our goal as a company is to really focus on earnings and cash flow, grow earnings and cash flow over time. And as we think about buybacks for this year, we're going to use the full power of BorgWarner to focus on earnings growth, to focus on full cash and cash flow growth. As we continue throughout the year, we'll look at this lever as an item to pull, and we'll look at it appropriately as we move forward. That's how we're thinking about buybacks this year.

Q: Hi, good morning. Thanks for taking questions, and Fred, congratulations to you. Wanted to first just start with a follow-up on that last question there. PowerDrive was disappointing or soft in 2024. Maybe you can give us a flavor for what turns around in that business. And maybe you could just comment or remind us why Asia, in PowerDrive, was as soft as it was despite EV in China doing as well as it did.

A: Yeah. Maybe I'll start on the year-over-year performance. So we were down a little over $200 million in sales. When you think about that, that was really on the foundational side of their portfolio as a customer program. When you look at the e-side of the portfolio, it was actually relatively flat. There was just volatility in the market. I'll let Joe comment on going forward.

Q: Right. So as we look forward in 2025, we're in the middle of launching a number of new products and platforms. So that's what's really bringing the additional growth on the PowerDrive side of the business.

Q: And how much of that is China?

A: Yes, we don't break out specifically China, but let's say that they're a strong, they've got a strong position in the overall market. Let Pat maybe cover that in a follow-up.

Q: Okay. Thank you. And then as a follow-up, wanted to just understand the EBIT bridge. And maybe we could just compare versus 2024 because on organic revenue, flat or down slightly, you still had EBIT up some $60 million. Now in 2025, you know, you've talked about restructuring benefits for e-product. And I would presume there's going to be some pricing benefits for programs that you've tooled for, but the volume is never appreciated. So why aren't we seeing maybe a little more margin benefit given these?

A: Yeah. So let me walk through the guide. When you start with last year's sales of $14.1 billion, the midpoint of our guide is $13.7 billion. And when you look at the difference and exclude foreign exchange, again, that $410 million, we're basically slightly up about 40 basis points against the market backdrop that we expect is down 2%. So that's where you get about our 250 basis points of outgrowth. As you look at our EBIT line, we're maintaining 10.1% on that relatively flat sales. As we look at the low end of the guide, we're basically decrementing at 10%. At the high end, in the mid-teens. So we feel really good about the performance that you're seeing in the guide. That's how we're thinking about it. It does incorporate the savings year over year from our e-product restructuring.

Q: And what was unique in 2024 that is not repeating in 2025 that you had such strong incrementals?

A: I think when you look at our performance in 2024, we really focused on restructuring savings. We focused on cost controls across the business, including GSM and productivity. And we're maintaining that as we look into this year. And so we feel really good with where we landed in 2024 and this outlook for 2025. We're going to keep our focus on cost controls as we move forward.